SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
_____________________ to _____________________
Commission file number 000-22611
Compu-DAWN, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 11-3344575
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
77 Spruce Street, Cedarhurst, NY 11516
(Address of Principal Executive Offices) (Zip Code)
(516) 374-6700
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($.01 par value per share)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
As of February 28, 1999, the aggregate market value of the shares held by
non-affiliates was approximately $13,875,345.
The issuer's revenues for the fiscal year ended December 31, 1998 were
$1,248,489.
APPLICABLE ONLY TO CORPORATE REGISTRANTS.
The number of shares outstanding of each of the issuer's classes of common
equity as of February 28, 1999 is 3,428,269 shares of Common Stock, $.01 par
value per share.
Transitional Small Business Disclosure Format (check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
<TABLE>
<CAPTION>
Page No. INDEX
<S> <C>
Forward Looking Statements ............................................................................. 1
PART I
Item 1. Description of Business......................................................................1
Item 2. Description of Property.....................................................................31
Item 3. Legal Proceedings...........................................................................31
Item 4. Submission of Matters to a Vote of Security Holders.........................................32
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................................34
Item 6. Management's Discussion and Analysis or Plan of Operation...................................36
Item 7. Financial Statements........................................................................44
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................44
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........................................45
Item 10. Executive Compensation......................................................................50
Item 11. Security Ownership of Certain Beneficial Owners and Management..............................55
Item 12. Certain Relationships and Related Transactions..............................................56
PART IV
Item 13. Exhibits and Reports on Form 8-K............................................................58
Signatures
</TABLE>
<PAGE>
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and is subject to the safe harbor created by that act. The Company
cautions readers that certain important factors may affect the Company's actual
results and could cause such results to differ materially from any
forward-looking statements which may be deemed to have been made in this Annual
Report or which are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in this Annual Report that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," or "continue" or the
negative variations thereof or comparable terminology are intended to identify
forward-looking statements. Factors which may affect the Company's results
include, but are not limited to, the risks and uncertainties associated with
multi-level network marketing, the Internet and Internet-related technology and
products, new technology developments, developments and regulation in the
telecommunications industry, the competitive environment within the Internet and
telecommunications industries, the level of spending by law enforcement and
public safety agencies for computer application software and hardware, the
competitive environment within the public safety technology industry, the
ability of the Company to expand its operations, the level of costs incurred in
connection with the Company's planned expansion efforts, the financial strength
of the Company's customers and suppliers, unascertainable risks related to
possible unspecified acquisitions, the competence required and experience of
management, the risk of loss of management and personnel, economic conditions,
and the risks and uncertainties inherent in litigation. The Company is also
subject to other risks detailed herein or detailed from time to time in the
Company's Securities and Exchange Commission ("SEC") filings. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, including, without limitation, the disclosures made
under the caption "Management's Discussion and Analysis or Plan of Operation" in
Item 6 of this Annual Report. All references to a fiscal year are to the
Company's fiscal year which ends December 31.
PART I
Item 1. Description of Business
The Company is engaged in two lines of business. In one, the Company,
through its wholly owned subsidiary, e.TV Commerce, Inc. ("e.TV"), operates in
the Internet, e-commerce and telecommunications business (the "e.TV Business"),
marketing products and services primarily using a person to person sales
approach with the services of commissioned sales representatives in a
multi-level referral network marketing organization. Key services and products
in this line of business include the following:
1
<PAGE>
- Interactive advanced digital tv set-top boxes which
enable the consumer to access the Internet through
the consumer's tv set over a telephone line, conduct
electronic commerce through e.TV's own e-commerce
shopping mall, and access a variety of different
software applications through network computing
capabilities;
- Sales of long distance telephone service;
- Sales of Internet access service;
- On-line shopping;
- Pagers and paging service; and
- Web page design.
In its other line of business, 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 "Public Safety Software Business"). The Company's
public safety customers are primarily located in New York State. See Item 1
"Description of Business -Public Safety Software Business Description - Public
Safety Software Customers."
The Company's Board of Directors has determined that the
Company's efforts should be focused on the e.TV Business. Accordingly, the
Company is currently seeking to sell the Public Safety Software Business.
History and Recent Developments
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.
In October 1996, the Company successfully completed the sale
of 77 units, each unit consisting of a $10,000 Promissory Note (the "Bridge
Note") and a Common Share Purchase Warrant (the "Bridge Warrant") to acquire
5,600 Common Shares of the Company (the "Bridge Financing Transaction") (Bridge
Warrants to acquire 42,000 Common Shares were canceled subsequent to the closing
of the Bridge Financing Transaction.)
The Bridge Warrants are exercisable at a price of $3.00 per
share. Each of the Bridge Notes was paid upon the closing of the Company's
initial public offering (the "IPO"), which was successfully completed in June
1997, as discussed below. The terms of the Bridge Warrants provide for a five
year exercise period expiring in June 2002; however, the Company, the
underwriter of the Company's IPO, and the Bridge Warrant holders have agreed
that the Bridge Warrants will not be exercised or transferred, and the
underlying Common Shares will not be transferred, until June 1999.
In June 1997, the Company, successfully completed an IPO of
its Common Shares.
2
<PAGE>
The Company sold 1,380,000 Common Shares (including 180,000 shares pursuant to
the underwriter's over- allotment option) at a price of $5.00 per share for
aggregate net proceeds, after expenses, of $5,625,874. A portion of the proceeds
realized from this offering was used to repay promissory notes aggregating
$770,000 to the bridge lenders as described above. See Item 5 "Market for the
Registrant's Common Stock and Related Stockholder Matters - Use of Proceeds from
Initial Public Offering" for a discussion of the use of proceeds from the IPO
through December 31, 1998.
On June 5, 1998, pursuant to a Securities Purchase Agreement
among the Company, JNC Strategic Fund Ltd. ("Strategic") and JNC Opportunity
Fund Ltd. (together with Strategic, the "Purchasers"), dated as of May 31, 1998
(the "Securities Purchase Agreement"), the Company issued to the respective
Purchasers (i) units, consisting of, in the aggregate, 327,103 Common Shares
(the "Issued Shares") and five-year warrants to acquire 32,710 Common Shares,
for an aggregate purchase price of $1,750,000 (or an effective purchase price of
$5.35 per Issued Share, assuming no value is attributed to the warrants), and
(ii) units, consisting of, in the aggregate, 3,250 Series A Preferred Shares and
five-year warrants to acquire 57,497 Common Shares, for an aggregate purchase
price of $3,250,000. Each of the Series A Preferred Shares has a face amount of
$1,000 and no value was attributed to the warrants.
On September 26, 1998, pursuant to a Securities Exchange
Agreement between the Company and Strategic, the Company issued to Strategic
1,750 Series B Preferred Shares in exchange for the Issued Shares. Each of the
Series B Preferred Shares has a face amount of $1,000.
Subject to certain limitations discussed below, the Series A
Preferred Shares are convertible into Common Shares, 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 Certificate of
Designations, Preferences and Rights of the Series A Preferred Shares (the
"Series A Certificate of Designation"); however, the conversion price cannot be
less than $5.00 per share, subject to adjustment as provided for in the Series A
Certificate of Designation. The Series A Preferred Shares rank 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 Shares in accordance with the provisions of the Series A Certificate
of Designation). The holders of the Series A Preferred Shares are not entitled
to receive any dividends thereon; however, a 5% premium is payable in connection
with any conversion, redemption or liquidation. The holders of the Series A
Preferred Shares have no voting rights except as otherwise provided by law or in
the Series A Certificate of Designation.
Subject to certain limitations discussed below, the Series B
Preferred Shares are convertible into Common Shares at a conversion price of
$5.35 per share, subject to adjustment as provided for in the Certificate of
Designations, Preferences and Rights of the Series B Preferred Shares (the
"Series B Certificate of Designation"). Based on such conversion price, the
number of
3
<PAGE>
Common Shares issuable upon conversion of the Series B Preferred Shares is
327,103. The Series B Preferred Shares rank prior to the Company's Common Shares
to the extent of $.01 per share, prior to any class or series of capital stock
of the Company thereafter created (unless agreed otherwise by the holders of the
Series B Preferred Shares in accordance with the provisions of the Series B
Certificate of Designation) and junior to the Series A Preferred Shares. The
holders of the Series B Preferred Shares are not entitled to receive any
dividends thereon; however, in the event the Board of Directors of the Company
shall declare a dividend with respect to the Common Shares, the holders of the
Series B Preferred Shares shall be entitled to a dividend amount based on the
number of Common Shares into which the Series B Preferred Shares are
convertible. The holders of the Series B Preferred Shares have no voting rights
except as otherwise provided by law or in the Series B Certificate of
Designation.
The warrants to acquire, in the aggregate, 90,207 Common
Shares (the "Warrants") are exercisable at a price of $8.025 per share, subject
to adjustment as provided for in the Warrants.
Notwithstanding the foregoing, pursuant to the terms of the
Series A Certificate of Designation, the Series B Certificate of Designation and
the Warrants, the Series A Preferred Shares, the Series B Preferred Shares and
the Warrants are currently convertible or exercisable by any holder only to the
extent that the number of Common Shares thereby issuable, together with the
number of Common Shares owned by such holder and its affiliates (but not
including Common Shares underlying unconverted Series A Preferred Shares and
Series B Preferred Shares or unexercised portions of the Warrants) would not
exceed 4.99% of the then outstanding Common Shares as determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended. Such
restriction is subject to waiver by the respective security holder upon not less
than 61 days notice. In addition, neither the Series A Preferred Shares nor the
Series B Preferred Shares are convertible into Common Shares to the extent such
conversion would violate the rules of the National Association of Securities
Dealers, Inc. See Item 6 - "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources."
As of February 28, 1999, 1,575 Series A Preferred Shares and
270 Series B Preferred Shares had been converted into 315,000 and 50,467 Common
Shares, respectively, and no warrants had been exercised.
On January 8, 1999, e.TV acquired certain assets of LocalNet
Communications, Inc. ("LocalNet"), a Jacksonville, Florida-based corporation.
The LocalNet assets were acquired pursuant to a peaceful surrender to satisfy
$750,000 in principal of a $1,800,000 secured loan previously made by the
Company to LocalNet pursuant to a Loan and Security Agreement (the "Loan and
Security Agreement) dated as of October 6, 1998 and as amended as of October 23,
1998 and as of November 12, 1998 (the "Loan"). The Loan was secured by all of
the assets of LocalNet. Since the peaceful surrender, through e.TV, the Company
has engaged in the e.TV Business and has sought to enter into contractual
relationships in connection therewith. To date, not all of such relationships
have been contractually established and no assurances can be given in this
regard. See Item 1 - "Description of Business - e.TV Business Description."
4
<PAGE>
e.TV Business Description
e.TV General
The Company, through e.TV, operates in the Internet,
e-commerce and telecommunications business (the "e.TV Business"), marketing and
selling its products and services primarily using a person to person sales
approach with the services of commissioned sales representatives in a
multi-level referral network marketing organization. e. TV's key services and
products include:
- Interactive advanced digital tv set-top boxes which
enable the consumer to access the Internet through
the consumer's tv set over a telephone line, conduct
electronic commerce through e.TV's own e-commerce
shopping mall, use e-mail, and access a variety of
different software applications through network
computing capabilities;
- Sales of long distance telephone service;
- Sales of Internet access service;
- On line shopping;
- Pagers and paging service; and
- Web page design.
e.TV Industry Background
E-commerce. Businesses and consumers are continuing to adapt
the Internet into the mainstream. Internet commerce, or e-commerce, is
increasingly becoming a significant application of the Internet, as consumers
and businesses are using the Internet more and more to find information and
purchase and sell a vast array of products and services. Despite ongoing
concerns regarding security and fraud, Internet users have broadly accepted this
medium as a viable commercial vehicle. Independent market research indicates
that annual e-commerce sales to the retail market are expected to grow from $7.1
billion in 1998 to $41.1 billion in 2002. Furthermore, the research indicates
that, by the year 2002, appliances such as tv set-top boxes are expected to
account for 43% of e-commerce capable device sales, and will eventually replace
the personal computer as the principal means to e- commerce. It is anticipated
that consumers will substitute the living room for the home office as the home
shopping center, making e-commerce a more recreational and convenient experience
for people of all ages and income levels.
Telecommunications Services. The present long distance
telecommunications marketplace was principally shaped by the 1984 divestiture by
AT&T of its 22 Bell Operating Companies ("BOCs") in accordance with the
Modification of Final Judgment agreed to by AT&T and the Department of Justice
in 1982. The Telecommunications Act of 1996 (the "1996 Act") has further
accelerated the development of local and long distance competition.
In 1981, AT&T removed tariff restrictions that prohibited
resale and sharing of
5
<PAGE>
message telecommunications service and wide area telephone service. This led to
an explosion of new entrants into the long distance telecommunications business,
primarily as resellers.
As a result of the Modification of Final Judgment in 1982, the
United States was divided into geographic areas known as Local Access Transport
Areas ("LATAs"), the BOCs were organized into seven separate regions, and seven
Regional Holding Companies ("RBOCs") were created. The local exchange carriers
("LECs"), which include the BOCs and independent LECs, provide local telephone
service, local access services and short-haul toll service. Interexchange
carriers ("IXCs") and certain independent local exchange carriers provide long
distance service between LATAs (interLATA traffic) and within LATAs.
Conversely, the BOCs were given the right to handle intraLATA
service, but were prohibited from the interLATA market. Such differentiation was
substantially modified by the 1996 Act.
The Modification of Final Judgment also required the BOCs to
provide all IXCs with access to their local telephone exchange facilities which
is "equal in type, quality and price" to that provided to AT&T. This was
accomplished through the filing of access tariffs at the Federal Communications
Commission (the "FCC") and at state public utilities commissions. Under these
access tariffs, all IXCs, including AT&T, pay charges to the LECs for access to
local telephone lines at both the originating and terminating ends of all long
distance calls. Access charges represent the single largest component of most
IXCs' cost of service. The BOCs, and subsequently all other LECs, also were
required to conduct a presubscription process allowing business and residential
consumers to select their long distance carriers. The 1996 Act continues these
equal access obligations.
Equally significant, the Company believes that the 1996 Act,
as well as recent actions on both the federal and state levels, will eventually
open up the local exchange, and to the extent not already mandated, the
intraLATA market, to full competition. As a result of the 1996 Act, all states
are required to adopt rules establishing local competition and defining how the
LECs are to open up their networks to their competitors.
The long distance service industry is highly competitive and
is dominated by three carriers, AT&T, MCI/Worldcom and Sprint. The remainder of
the market share is held by several large regional long distance companies, some
with national capabilities such as Excelcom Inc. ("ExcelCom"), Frontier
Communications Services, Inc., Cable & Wireless Communications, Inc., and LCI
International, Inc., and by several hundred smaller companies.
The Company currently acts as a sales distributor (through its
network of independent representatives) to UniDial Incorporated ("UniDial") and
has entered into a distributor agreement with E.Comtel, LLC ("E.Comtel") with
respect to telecommunications services. See Item 1 "Description of Business -
e.TV Business Description - e.TV Principal Suppliers Telecommunications
Services" and Item 1 - "Description of Business - e.TV Business Description -
6
<PAGE>
e.TV Products and Services - Long Distance Telephone Service."
The Company believes that the opportunity to market and sell
long distance telephone services on behalf of resellers is increasing because of
consumer and business use of telecommunications products and services such as
facsimiles, sending of data and e-commerce, a reduction of service rates, and an
increase in opportunities available for long distance telephone service
providers and resellers resulting from regulatory changes.
e.TV Products and Services
The Company markets and sells a range of technology and
communications- related products and services. These include a tv set-top box,
long distance telephone services offered by certified resellers, Internet access
services, online shopping, web page design, wireless PCS telephone service
through nationally recognized vendors, alphanumeric pager services of certain
providers, a virtual office service for its independent sales representatives,
and travel services through an alliance with a travel agency.
TV Set-Top Box. e.TV's interactive digital tv set-top box,
known as e.TV On-Line(TM), connects to a standard television set and a standard
telephone jack. The tv set-top box, along with Internet access service, gives
the user access to the Internet and e-mail. A standard printer can be attached
to a port on the tv set-top box. The system includes the e.TV On-Line(TM) tv
set-top box, a smart card which contains the user's name, local dial-up
information and password, a wireless keyboard which includes a wireless mouse,
and a universal remote control which allows the user to switch between the tv
set and the tv set-top box and navigate the Internet using a wireless mouse as
part of the remote control as well. The smart card is programmed by e.TV prior
to shipment. The tv set-top box accesses the Company's own website whenever it
is first turned on. From e.TV's website, the user is linked to e.TV's on-line
shopping mall if the user desires to make on-line purchases. If a user purchases
goods on e.TV's online shopping mall, the Company earns a commission from the
vendor on the sale and certain qualified representatives in the referral network
organization will receive residual compensation. The tv set-top box will allow
the user to access other websites and the world wide web. Representatives can
also use the tv set-top box to make presentations, sign up new representatives,
get customer service questions answered and receive information, sales
assistance and forms from the Company.
Long Distance Telephone Service. e.TV currently acts as the
sales agent in the United States for UniDial (currently a reseller of
MCI/WorldCom) and in Canada for Virtec (a reseller of AT&T Network Services for
long distance service and PageNet for paging services). e.TV has also entered
into a distributor agreement with E.Comtel, a reseller of long distance
services, but, to date, has not received any orders pursuant thereto and no
assurances can be given that any will be received. See Item 1- "Description of
Business Description - e.TV Business Description - Marketing and Distribution
System - Placing and Shipping Orders" and Item 1 - "Description of Business -
e.TV Business Description - e.TV Principal Suppliers - Telecommunications
Services."
7
<PAGE>
Internet Access Service. The private label Internet access
services sold by e.TV are provided by StarNet, Inc. ("StarNet"), which is an
Internet service provider and a reseller of GTE wholesale access services. The
StarNet Internet access services allows e.TV's customers who subscribe for the
service to access the Internet through 1,000 points of presence locations
("POPs") all over the United States. The Company receives Internet access on a
wholesale basis from StarNet, which currently owns and operates its national
Mega POP(TM) access network, currently one of the largest access networks in the
United States. The Company can activate and manage its customers' Internet
access accounts destined for the networks of StarNet or GTE Internetworking
Incorporated ("GTE") (as a result of a separate StarNet/GTE agreement) via
StarNet's Mega POP(TM) real-time account management system. Through a single
interface provided by StarNet to the Company, the Company can activate, modify
or deactivate Internet access accounts, all in real time, provisioned for either
StarNet's or GTE's network. Currently, the StarNet Internet access services are
subscribed to by e.TV's customers on a monthly basis at the time they purchase a
tv set-top box system. e.TV has recently developed a cd-rom version which is
utilized with a personal computer. See Item 1 "Description of Business - e.TV
Business Description - e.TV Principal Suppliers - Internet Access Services."
Online Shopping Mall. e.TV's on-line shopping mall allows
retailers to extend their reach for customers beyond their doors. Consumers can
use e.TV's shopping mall to conveniently research and purchase a variety of
products from their homes or offices. Companies can become vendors on e.TV's
online shopping mall for a prepaid annual or monthly subscription fee. When the
user clicks on the e.TV on-line shopping mall and requests information about a
certain product, the user is directed to subscribing vendors which sell the
desired product. When a user purchases products from a vendor on the on-line
shopping mall, the vendor pays e.TV a commission. A portion of the purchase
price goes into the commissionable volume to pay residual compensation to
certain qualified representatives in e.TV's referral network; the remainder goes
into a bonus pool to representatives at the levels of Director and above, and to
e.TV. The subscription fee is automatically charged to a vendor's credit card.
If a vendor cancels its subscription before an annual subscription period
expires, e.TV generally refunds the unused portion of the subscription fee. The
vendors include Office Max, K-tel Music and Video, Publisher's Clearinghouse ,
eToys, Barnes and Noble, Fashion Mall, J. Crew, egift.com, Amazon.com and more.
Storefront Builder Web Pages. e.TV markets and sells web
pages. e.TV's customer chooses the design of its web page based on a brochure
provided by e.TV. The customer fills out an order form with the web page
specifications and sends it to e.TV. The cost of the web page varies depending
on the number of pages and the graphics the consumer desires. e.TV subcontracts
the construction of the web pages to an unaffiliated third party. In addition to
the web page itself, the web page owner can choose to have his website hotlinked
to e.TV's website for a monthly fee which varies depending on the number of
pages of the customer's website.
Travel Services. e.TV has an alliance with a travel agency
which provides travel services to e.TV representatives and customers.
8
<PAGE>
Televox Virtual Office System. e.TV's virtual office system is
designed to assist its sales representatives in administering their
representativeships and maximizing their potential in growth and development of
their representativeships and their respective network organizations. The
Televox system is used through a standard touch tone telephone using the keypad
to access information and provides voice messaging and the ability to filter
messages or parts of messages to various levels of an organization.
Representatives are not required but are encouraged to subscribe for and use the
Televox system. Representatives pay a monthly fee to use the Televox system.
Sales Aids and Business Supplies. e.TV sells to its
representatives a variety of sales aids including videos, audio tapes, flip
charts, presentation folders, overhead slides, product order forms, e.TV
apparel, business cards and pens, among other things.
e.TV Principal Suppliers
TV set - top box. e.TV's tv set-top box system is manufactured
for the Company by Boca Research, Inc. ("Boca Research"), based in Boca Raton,
Florida, pursuant to an agreement which contains a two-year commitment and
excludes Boca Research from selling the tv set-top box to other multi-level
network marketing companies in the Internet, e-commerce and telecommunications
business, provided e.TV maintains minimum order levels. Boca Research may sell
the product to competitors who do not use a multi-level marketing system to
market products. The Company anticipates, but cannot assure, it will meet the
minimum order levels in the foreseeable future. If it does not, Boca Research
will not be excluded from selling the tv set-top box to such restricted
competitors. The Company does not believe the loss of the limited exclusivity or
the loss of Boca Research as a vendor would have a material adverse effect on
the Company and that alternative sources of supply are available. If the
supplier were to change, however, e.TV may experience a delay of approximately
90 days in replenishing inventory, which, if inventory levels are low, could
delay the filling of orders. Furthermore, the Company cannot assure that, if an
alternative supplier is sought, it will be able to engage a supplier on terms as
favorable as those between e.TV and Boca Research.
Telecommunications Services. e.TV currently markets and sells
long distance telephone services resold by UniDial. Subscription for UniDial's
services are sent by customers to e.TV, which in turn sends them to UniDial.
UniDial invoices the customers for services. UniDial pays e.TV a commission on
accounts of customers enrolled by e.TV for UniDial. These commissions are being
paid monthly. Although no written agreement is in place which governs their
relationship, e.TV is currently operating as a distributor of UniDial long
distance services and the parties are negotiating the terms of a formal
agreement. No assurances can be given that any such agreement will be entered
into. The Company does not believe that the loss of UniDial as a vendor to its
customers would have a material adverse effect on the Company.
The Company, through its wholly owned subsidiary, ETEL
Communications Corp., is also a party to a distributor agreement with E.Comtel,
a certified reseller of telecommunications services for nationally recognized
telecommunications providers. The agreement provides that the
9
<PAGE>
Company is E.Comtel's exclusive distributor to provision telecommunications
products and services which currently utilize AT&T as its backbone network
carrier. Currently, these include long distance telephone services. The Company,
through e.TV's multi-level referral network marketing system, markets and sells
such long distance services. The agreement is for an initial term of two years
and automatically renews unless terminated upon 90 days prior notice. The
agreement may be terminated earlier because of a breach. Under the agreement,
E.Comtel provides training and support to the Company, and will invoice and
provide customer service to the Company's customers and maintain all records
relative to the administration of the customers' telecommunications services
provided by E.Comtel. E. Comtel has the right to reject customers which may be
approved by the Company. E.Comtel shall pay the Company commissions on a monthly
basis for the sales of services resold by E.Comtel. The Company is responsible
to pay E.Comtel any amounts not collected by E-Comtel because of bad debts or
fraudulent calling claims. This includes any invoice which is not paid for 65
days. However, if the invoice is eventually paid, E.Comtel will reimburse the
Company and pay the appropriate commissions. The Company pays a monthly fee to
E.Comtel for administrative services relating to billing. The Company has agreed
that it will have a minimum of 34,000 customers signed up for the long distance
services by September 1999. If such minimum is not met, the commission paid by
E.Comtel to the Company will be adjusted downward relative to the shortfall
until the minimum is met. To date, the Company has not received any orders
pursuant to the E.Comtel distributor agreement, and no assurances can be given
that any will be received.
The distributor agreement contemplates the grant to the
Company of an option to purchase the equity of E.Comtel for $500,000, comprised
of either Common Shares of the Company valued at $250,000 and $250,000 in cash,
or $500,000 in cash, at the Company's option or in certain circumstances. If any
such option is exercised, the Company and the equity holders of E.Comtel will
enter into an agreement which, among other things, will be subject to any
regulatory and stockholder approval if required, and the Company's satisfactory
due diligence of E.Comtel. The consummation of any such option would result in
the Company being certified to directly resell telecommunications services in
all states in the United States.
Internet Access Services. StarNet has agreed to provide e.TV
customers with Internet access services pursuant to a one-year agreement, which
is automatically extended for successive 60 day periods unless 60 days prior
written notice to terminate is given by either party prior to the end of the
initial term or any extension term. The agreement does not limit e.TV from
directing its customers to other Internet access providers. During the term of
this agreement, the Company is required to do a reasonable amount of marketing
to potential customers regarding StarNet's Internet access services. StarNet is
restricted from contacting e.TV's customers without e.TV's permission. StarNet
has agreed to provide e.TV's Internet customers with unlimited dial-up access to
the Internet, with idle time cut off if customers do not make use of their
Internet connection for a minimum of ten minutes. StarNet provides all technical
support services to e.TV relevant to connection of e.TV's customer to access to
the Internet. e.TV addresses all customer inquiries and is responsible for
technical support services relevant to any software provided by e.TV to its
customers. e.TV pays StarNet a set fee for each customer for the first three
months of the agreement
10
<PAGE>
and, after that, the greater of a flat monthly fee or a set fee per customer if
there are more than a certain number of customers. e.TV is responsible for all
billings and collections, and is responsible for all costs and expenses incurred
by StarNet in connection with its services.
e.TV is obligated to pay StarNet even if e.TV fails to bill,
or collect fees from, a customer. e.TV may, however, refund monies to its
customers if StarNet fails to provide to the customer uninterrupted access to
the Internet for less than 97% of the total available time for connection to the
Internet during a given calendar month. Any such refund will be deducted from
monies due from e.TV to StarNet. e.TV may provide Internet access for their
customers via any of the agreed upon GTE locations. A customer's connection to
the GTE system may be achieved through StarNet's MegaPOP(TM) Account Manager
Interface or the Company's own server.
This agreement is not exclusive to either party. The Company
and StarNet each have agreed not to solicit business from the other's customers
during the term of the agreement and for one year afterwards. The Company
believes that the loss of StarNet as a supplier would not have a material
adverse effect on the Company and that other Internet access providers are
available. However, the Company cannot assure that it will be able to enter into
a relationship with another Internet access service provider on terms as those
provided for in favorable as the StarNet agreement.
Paging. e.TV is able to offer to its sales representatives and
customers through Media Solutions Corporation, a nationwide network for wireless
numeric paging services. Underlying carriers and providers for the network
include GTE, Southwestern Bell Mobile Systems, Ameritech Cellular, Alltel,
WorldCom and Bell South Cellular. Coverage is in more than 2,000 communities or
90% of the U.S. population with total nationwide frequency bandwith. Coverage is
also offered in Canada, Mexico, Central America, and the Caribbean. In addition
to cost effective local paging services, Media Solutions Corporation offers a
wide variety of options including voice mail, 800 service, and OmniRoam which
allows the subscriber to change at will the city where he or she is paged,
essentially giving the subscriber full North American coverage at a fraction of
the cost of regional or nationwide service.
Back Office Operations and Administrative Support. The Company
receives back office administrative support services from Atlantic Teleservices
LP ("Atlantic Teleservices"). Atlantic Teleservices processes sales orders and
sales representative applications, provides customer and representative support
telephone services, and administers service relationships between e.TV's
customers and service vendors. e.TV pays Atlantic Teleservices an hourly fee per
employee allocated by Atlantic Teleservices to e.TV operations, with a minimum
commitment of $9,000 per month. This arrangement is not exclusive to e.TV, and
e.TV may engage other back office and administrative support providers or
undertake such operations itself. Pursuant to an oral understanding, the
relationship between Atlantic Teleservices and the Company may be terminated by
either party upon 60 days notice. Currently, the Company believes it is more
cost effective to maintain the arrangement with Atlantic Teleservices than to
engage the support staff and infrastructure to conduct back office
administration itself. However, the Company plans to study these economies as
the e.TV Business develops and to determine the most cost effective structure
11
<PAGE>
for the future. The Company anticipates that its capital cost to set up e.TV's
own administrative and back office infrastructure would be approximately
$1,000,000. The Company does not believe that the loss of Atlantic Teleservices'
services would have a material adverse effect in the long term; however, it
could cause a material disruption to the e.TV Business in the short term until a
replacement could be found or e.TV develops its own infrastructure. e.TV
currently occupies its Jacksonville, Florida offices pursuant to an oral
understanding with Atlantic Teleservices; the parties are negotiating the terms
of a license agreement in this regard. No assurances can be given that such
license agreement will be entered into. See Item 2- "Description of Property."
e.TV Marketing and Distribution System
--------------------------------------
Introduction
e. TV markets its products through a multi-level referral
network marketing system of independent sales representatives (the
"Representatives") exclusively. e.TV's network marketing system encourages
Representatives to sell the Company's products and services, and recruit and
develop their own sales organizations of people with whom they have an ongoing
relationship.
The Company believes that network marketing is an effective
vehicle to distribute e.TV's products and services, and the services of others
which e.TV sells, because of the following:
- a consumer can be educated about a product in person by a
Representative, which is more direct than the use of media and
print advertisements;
- direct sales allow for actual testing of certain of the
products by a potential consumer when their capabilities are
demonstrated by a Representative;
- the impact of Representative and consumer testimonials is
enhanced; and
- as compared to other marketing and distribution methods,
Representatives can give customers higher levels of service
and attention by, among other things, following up on sales
to ensure proper product usage and customer satisfaction,
and to encourage repeat purchases.
Although e.TV's Representatives sell products and services on
behalf of e.TV, they are not required to purchase any inventory. Orders are
passed on to e.TV which ships out the products, or arranges for the consumer to
receive the subscribed for services. See Item 1 "Description of Business - e.TV
Business Description - e.TV Marketing and Distribution System Placing and
Shipping Orders."
e.TV relies on Representatives to sponsor new Representatives.
The sponsoring of new Representatives creates multiple levels in the network
marketing structure. Persons whom a Representative sponsors are referred to as
"downline" Representatives. If downline Representatives also sponsor, they
create additional levels in the structure, but their downline Representatives
remain part of the same downline network as their original sponsoring
Representatives with one genealogy. Each downline Representative shares in the
Customer Acquisition Bonus and Residual Payouts, up
12
<PAGE>
to seven levels. A Representative can have several downlines if he or she
sponsors several Representatives as they in turn sponsor Representatives and so
on. A Representative's downline is known as the Representative's organization.
Compensation is paid to the Representatives out of a certain
portion of the revenues the Company receives from sales of a product or
services. This amount is the commissionable volume. Each of the products and
services carries a specified number of points, or PCA Points. Commissionable
volume is based on the number of PCA Points per product or service. PCA Points
are based upon a product's wholesale cost, net of any point of sale taxes. As a
Representative's sales increase and as he or she successfully develops his or
her organization, he or she will graduate to higher level positions in the
network and will be entitled to a higher percentage of commissions. Depending
upon the products or services provided, e.TV's compensation plan can result in
commissions to Representatives aggregating up to 15% of a product's or service's
retail selling price. e.TV's compensation plan allows an individual the
opportunity to develop a business, the success of which is based upon
that individual's level of commitment, time, enthusiasm, personal skills,
contacts, and motivation. For many, a Representativeship is a very small
business, in which products and services may be purchased by the individual
for personal consumption or sales are made to relatively few customers. For
others, a Representativeship becomes a full-time occupation.
e.TV's revenue is directly dependent upon the efforts of its
Representatives. Growth in sales volume requires an increase in the productivity
of Representatives and/or growth in the total number of Representatives. There
can be no assurance that the productivity or number of Representatives will be
sustained at current levels or increased in the future. Furthermore, the Company
estimates that approximately 77 Representatives comprised of e.TV's Regional
Marketing Director and National Marketing Director levels, together with their
extensive downline networks, could account for substantially all of e.TV's
revenue. Consequently, the loss of such a high-level Representative or another
key Representative, together with a group of leading Representatives in such
Representative's downlines, or the loss of a significant number of
Representatives for any reason, could adversely affect the Company's results of
operations.
Sponsoring of Representatives
Sponsoring activities are not required of Representatives.
However, because of the financial incentives provided to those who succeed in
building a Representative network that consumes and sells products, the Company
believes that most of its Representatives attempt, with varying degrees of
effort and success, to sponsor additional Representatives. Generally,
Representatives approach friends, family members and acquaintances to become
Representatives or invite them to sales meetings or conventions where Company
products and services are presented and where the compensation structure is
explained. People are often attracted to become Representatives after using
e.TV's products and services.
Representatives have flexibility in how they present e.TV's
business and opportunities provided they abide by e.TV's policies and
procedures. Representatives may purchase
13
<PAGE>
a variety of sales and presentation aids from e.TV to help them with their sales
and sponsorship activities.
When a sponsored person decides to become a Representative, he
or she enters into a standard independent Representative agreement with e.TV
which obligates the potential Representative to abide by e.TV's policies and
procedures. The potential Representatives will also purchase a starter's kit.
See Item 1 - "Description of Business - e.TV Business Description - e.TV
Marketing and Distribution System - Rules Affecting Distributors."
Referral Network Structure
Representative Levels and Compensation. e.TV's multi-level
referral network marketing sales organization is comprised of several levels,
starting with one of the optional levels of Customer Representative, Sales
Representative or Area Representative, as the new Representative chooses, and
graduating to the earned levels of Director, Executive, Regional Marketing
Director and then National Marketing Director. Each earned position is attained
based upon the performance of an individual and his or her downlines.
Representatives qualify for compensation once they attain a
certain volume of sales. They remain qualified by maintaining a certain level of
sales. Representatives graduate to higher levels as their volume of sales
increase and the volume of sales in their downlines increase. Representatives
and their downlines must also maintain higher sales levels for the
Representatives to remain at each earned level.
Customer Representatives are entitled to receive retail
residual compensation based on his or her personal consumption or sales. Sales
Representatives and Area Representatives can earn retail residual compensation
and organizational residual compensation, while Area Representatives can also
qualify for retail customer acquisition and management bonuses, and to
participate in the Company's total compensation plan for Representatives.
Retail residuals are paid to Representatives from the
commissionable volume on products and services sold to customers of the
Representatives or consumed by the Representative, and on-line purchases made
through e.TV's on-line shopping mall. Residual compensation from services sold
or on-line purchases by customers or Representatives continue for as long as
that customer continues to use the services sold by the Company or shop on-line
through e.TV's on-line shopping mall. Organizational residuals are paid from
commissionable volume from all personal billing volume of all Representatives in
a Representative's downlines and from all products and services sold on each
level in the downlines, up to seven levels.
Area Representatives, Directors, Executives, Regional
Marketing Directors and National Marketing Directors are entitled to retail
residuals, organizational residuals and retail customer bonuses. Additionally,
if they successfully complete the Company's optional one-day Certified Trainers
Course, they are entitled to participate in the Trainer and Adviser Bonus
Program.
14
<PAGE>
The Company believes that it currently has approximately
18,000 Representatives made up of approximately the following:
- 150 Customer Representatives
- 8,500 Sales Representatives
- 8,000 Area Representatives
- 1,000 Directors
- 250 Executives
- 60 Regional Marketing Directors
- 15 National Marketing Directors
Since the Company has only recently entered the e.TV Business,
it is unable to determine how many of the Representatives listed above are
actively acting as such. The Company believes that it will be better able to
determine the number of Representatives beginning in July 1999 when it intends
to solicit renewal fees from such persons.
Compression. Compression occurs when a Representative fails to
attain, or maintain after a one month grace period, the required qualification
standards for his or her level. In that event, the compensation the
Representative would have earned at that level is paid to the first qualified
Representative above him or her. If there is no qualified Representative above
the non-qualifying Representative, e.TV has a dynamic compression process which
recycles the unallocated compensation through the compensation plan and pays the
Representative closest in volume one additional level of compensation. This
process keeps compensation in the field, limiting or eventually eliminating
breakage, a process by which unclaimed compensation would be forfeited to e.TV.
Training and Support
Training is provided by sponsoring Representatives to new
Representatives, and by the Company to all Representatives either through formal
training sessions, telephone helplines or sales and presentation aids. e.TV's
goal is to train the Representatives to effectively build and assist a large
organization, in depth in customer acquisition and retention.
Area Representatives are required by the Company's policies
and procedures to ensure that new Representatives are properly trained with
respect to the Company's policies and procedures, product line and services
offered, sound business practices and sales strategies. Area Representatives are
encouraged to do this by maintaining ongoing contact, communication and
management supervision of his or her sales organization by newsletters,
correspondence, meetings, e-mail and the like.
The Company has set up a comprehensive and ongoing training
program that allows Representatives and their respective sales organizations to
participate in regional and national
15
<PAGE>
training. Additionally, the Company sponsors weekly live telephone conference
calls for Representatives, who may participate by dialing into the conference
call.
Representatives are encouraged to participate in a one-day
e.TV University Certified Trainer Course which is given by Representatives who
have successfully sold e.TV's products and services and built Representative
organizations, so that the Representatives will be able to present uniform,
accurate messages at business briefing presentations, local and regional
training, conference calls and in Representative recruitment. The Certified
Trainer Course costs $249. Representatives are eligible for trainer bonuses and,
if at the Executive level or above, advisor bonuses, when they successfully
complete the Certified Trainer Course and help in the training and qualification
of Representatives. Certified Trainers are encouraged to repeat the course as a
refresher as many times as possible for a fee of $15 per session.
e.TV currently provides telephone support to its
Representatives Monday through Friday from 9:00 a.m. to 6:00 p.m., eastern time,
from its Jacksonville, Florida offices. The Company expects to increase this
time to 9:00 p.m., eastern time, in the near future.
Rules Affecting Distributors.
The Company's standard Representative agreement and policies
and procedures manual contained in every starter package or training, management
and support package outline the scope of permissible Representative marketing
activities. e.TV's Representative rules and guidelines are designed to provide
Representatives with maximum flexibility and opportunity within the bounds of
governmental regulations regarding network marketing. Representatives are
independent contractors and are thus prohibited from representing themselves as
agents or employees of e.TV or the Company. Representatives are obligated to
present e.TV's products and business opportunities ethically and professionally.
Representatives agree that the presentation of the e.TV business opportunity
must be truthful and realistic and consistent with, and limited to, the product
claims made in literature distributed by e.TV. Representatives must represent
that the opportunities are based on sales of e.TV products and services, that
Representatives will not be successful merely by recruiting other
Representatives without regard to sales to the ultimate consumer, and that a
Representative can expect to be successful only through hard work and
substantial efforts. Representatives are prohibited from making false or
misleading income projections or implying that any level of income is guaranteed
or easy to achieve. Representatives can promote their businesses in any legal
matter consistent with e.TV's policies and procedures. However, Representatives
may not use endorsements or logos of the Company or e.TV in any advertising or
promotional format, except in materials approved or supplied by e.TV. The
Company offers a variety of sales aids, including items such as brochures,
product catalogs, videotapes and other accessories which the Representative may
purchase and use in promoting his or her business.
The Company systematically reviews alleged reports of
Representative misbehavior. If the Company determines that a Representative has
violated any of the Representative policies or procedures, it may either
terminate the Representative's rights completely or impose sanctions such
16
<PAGE>
as warnings or probation.
Placing and Shipping Orders
When a Representative sells products to a consumer or
purchases products or services for personal consumption, an order form is filled
out and the order form is either mailed to e.TV with credit card information, a
money order, or check, or faxed to e.TV with credit card information.
The Company fills all orders for products other than cellular
telephones and pagers from its Jacksonville, Florida offices. Orders are usually
processed within 24 hours after receipt. Orders are shipped to be received
within five to ten days after an order is received. Overnight or two-day
shipment is available. Representatives will be notified if items are not in
stock and the item will be placed on back order and shipped when available.
Cellular telephones, prepaid cellular products and pagers are provided to the
customer by the vendor providing the cellular telephone service.
Consumers and Representatives subscribe for services in
various manners, depending on the service. Generally, the consumer or
Representative fills out a form indicating his or her subscription to the
service and it is sent to e.TV. With respect to long distance telephone service,
the consumer or Representative verifies in writing his or her desire to be
switched from the former long distance service to the new long distance service.
e.TV enters the information into the system and passes the subscription
information to the long distance service provider who bills the consumer
monthly. e.TV receives a commission from the long distance service provider each
month. See Item 1 - "Description of Business - e.TV Business Description - e.TV
Principal Suppliers."
e.TV administers and bills its customers monthly for Internet
access services. Televox, e.TV's virtual office product for Representatives, is
billed directly by the vendor, on a monthly basis, as are cellular products and
pagers.
e.TV Customers
--------------
e.TV markets its products and services to the general public
through a multi-level referral network marketing system. e.TV's Representatives
are generally also customers of the Company's products and services and many of
those who are not Representatives when they buy products and services sold by
e.TV become Representatives. Currently, e.TV's customers are located throughout
the United States, Canada and Puerto Rico, and the Company intends to expand its
network marketing system into other international markets. See Item 1
"Description of Business - e.TV Business Description - e.TV Marketing and
Distribution System."
e.TV Competition
----------------
Long Distance Telephone and Internet Access Products and
Services. The markets for telecommunications and Internet products and services
are intensely competitive. e.TV competes
17
<PAGE>
directly with companies that manufacture and sell personal computers and web tv
products and providers of long distance telephone services and Internet access.
e.TV competes with other companies in the long distance telephone service and
Internet access industries by emphasizing the value and premium quality of
e.TV's products and the convenience and opportunities of e.TV's multilevel
network marketing and distribution system.
Many of e.TV's competitors have much greater name recognition
and financial resources than e.TV. In addition, long distance telephone
services, Internet access products and services and personal computers can be
purchased in a wide variety of channels of distribution. While e.TV believes
that consumers appreciate the convenience of ordering products and services from
home through a sales person, the buying habits of many consumers accustomed to
purchasing products through traditional retail channels are difficult to change.
e.TV's product offerings in each product category are also relatively small
compared to the wide variety of products offered by many other
telecommunications companies and hardware and software manufacturers. There can
be no assurance that e.TV's business and results of operations will not be
affected materially by market conditions and competition in the future.
Network Marketing Companies. The Company also competes with
other direct selling organizations, some of which have a longer operating
history, higher visibility, name recognition and financial resources, including
Amway Corporation and its affiliates, Big Planet, ExcelCom, Nu-Skin Enterprises
Inc. and Prepaid Legal Services Inc. The Company competes for new
Representatives on the basis of its financial compensation plan and its premium
quality products and services. The Company envisions the entry of many more
direct selling organizations into the marketplace as this channel of marketing
and distribution expands over the next several years. The Company has been
advised that certain large, well-financed companies are planning to launch
direct selling enterprises which will compete with e.TV in certain of its
product lines. There can be no assurance that e.TV will be able to successfully
meet the challenges posed by this increased competition.
e.TV Intellectual Property
--------------------------
Applications have been submitted by the Company to the U.S.
Patent and Trademark Office for three trademarks - "e.TV Commerce(TM),"
"e.TV-On-Line(TM)" and "e.TV-Shop(TM)."
e.TV Government Regulation
--------------------------
Direct Selling Activities. Direct selling activities are
regulated by various governmental agencies. These laws and regulations are
generally intended to prevent fraudulent or deceptive schemes, often referred to
as "pyramid" or "chain sales" schemes, that promise quick rewards for little or
no effort, require high entry costs, use high pressure recruiting methods and/or
do not involve legitimate products. The Company believes that its method of
distribution is in compliance in all material respects with the laws and
regulations relating to direct selling activities of the jurisdictions in which
the Company currently operates.
18
<PAGE>
Telecommunications. The telecommunications industry is
regulated by the FCC and the public utility commissions of the states, known as
PUCs. As discussed under Item 1 "Description of Business - e.TV Business
Description - Industry Background," the 1996 Act and actions of the Department
of Justice and PUCs may affect local and long distance telephone service
opportunities. If opportunities are restricted, e.TV could face increasing
competition for customers who purchase long distance telephone services.
Additionally the FCC has adopted rules to protect consumers
from abuses by carriers such as "slamming". Slamming is the term used to
describe any practice that changes a telephone subscriber's preferred telephone
company to another without the subscriber's knowledge or explicit consent.
Slamming is the FCC's largest area of telephone-related complaints.
In December 1998, the FCC adopted new anti-slamming rules
which will take effect in April 1999. Under the new rules, any carrier that a
consumer calls to report being slammed must inform the consumer that he or she
is not required to pay any slamming charges incurred for the first 30 days after
the unauthorized switch. If the consumer fails to notice that he or she was
slammed and has already paid the bill of the slamming carrier, the unauthorized
carrier is required to remit those payments to the authorized carrier. After
receiving that amount, the authorized carrier is to issue the consumer a refund
or a credit of any amount that he or she paid in excess of the charges they
would have paid to the authorized carrier.
The FCC's new rules also strengthen the verification
procedures used by carriers to confirm telephone carrier switches. In addition,
the FCC adopted procedures to regulate "freezes", which are services offered by
local telephone carrier to place a freeze on his or her account. Generally no
carrier will be able to make changes to that account unless and until a consumer
expressly agrees to lift the freeze.
FCC rules require a long distance company to obtain a
customer's authorization in order to change his or her long distance service.
There are three acceptable methods to verify carrier changes: a consumer
signature on an authorization form, known as a Letter of Agency; an electronic
authorization, usually resulting from a customer-initiated call to a toll-free
number; and verification by an independent third party. These verification
methods also apply to carrier switches that result from in-bound calls, thus
providing consumers who initiate calls to carriers the same protection given to
consumers who receive telemarketing calls. The FCC also applied the verification
rules to all changes made in telecommunications carriers, including local
carriers. In addition, the verification methods apply to requests for preferred
carrier freezes. Solicitations for preferred carrier freezes must be clear and
explain to the consumer how such a freeze may be lifted. Although preferred
carrier freezes may protect consumers against slamming, the freezes may also be
subject to anticompetitive abuses. The new rules are intended to address these
concerns in a manner that protects consumer choice. The FCC verification methods
do not preempt state law; states must use these verification methods at a
minimum but may add additional verification procedures for intrastate carrier
changes.
19
<PAGE>
e.TV sells telecommunication services of resellers to e.TV's
customers through its multi-level referral network sales organization of
independent Representatives. e.TV's policies and procedures provide mechanisms
for Representatives to obtain consumer authorization and verification to switch
telephone services from one carrier to another to prevent slamming. However,
since the Representatives are independent contractors, the Company does not have
supervisory control over their sales methods and the Company could be exposed to
slamming claims and penalties for actions of the Representatives.
Canadian Regulation. The Company's activities in Canada are
subject to both Federal and provincial regulation. At the Canadian Federal
level, Industry Canada must approve marketing plans before operations are begun,
and may also contact the Canadian Attorney General's Office if marketing plans
are not thereafter conducted in compliance with its regulations. In addition,
the Minister of Consumer and Corporate Affairs Canada enforces the Competition
Act, which addresses misrepresentations, exaggerated compensation or product
performance claims, and pyramid-scheme issues.
Provincial rules and regulations, which are similar to laws
and regulations enacted by individual states in the U.S., frequently parallel
those of the Canadian Federal government. The Canadian provinces, however, may
also impose bonding and registration requirements that are absent at the Federal
level.
Public Safety Software Business Description
Public Safety Software General
------------------------------
The Company is currently engaged in the business of designing,
developing, licensing, installing and servicing computer application software
systems for law enforcement and public safety agencies. The Company's software
systems, based around the advanced records management system, include
computer-aided dispatching ("CAD"), computer interfacing with local, state and
national crime information databases, advanced wireless mobile on-line
communications computing ("AMO") (utilizing radio frequency), automatic vehicle
location ("AVL") (employing dynamic map displays), records management, and
photo-imaging database systems. These modules may be integrated and licensed as
a package, or may be licensed individually.
Certain of these applications utilize telecommunications and
GPS (global positioning satellite) technology, other infrastructure, and
hardware provided by third parties. The third party providers of such technology
and infrastructure, with respect to a particular customer's system, vary
depending on the location of the customer and whether or not the customer has a
business relationship with a third party provider. Accordingly, the Company is
not dependent on any particular third party's technology or infrastructure for
its software systems to function. These third parties are typically major CDPDs
(cellular digital packet data providers) such as AT&T Wireless Data, Inc. ("AT&T
Wireless"), Bell Atlantic Corporation ("Bell Atlantic"), and GTE Mobilnet
Service Corp. ("GTE MobilNet"), or dedicated radio frequency data network
providers such as RAM
20
<PAGE>
Mobile Data USA Limited Partnership ("RAM Mobile Data") and Motorola Inc.
("Motorola"). The Company's AMO system requires computer hardware and services
from third party providers, and interfaces with dedicated radio frequencies
owned by the Company's customers which require special radio equipment provided
by companies such as Motorola and Dataradio Corp. The Company's customers may
purchase such technology, infrastructure, services and hardware directly from
these providers, and, with respect to radio equipment, through authorized
dealers as well.
The Company's software is compatible with virtually all
operating systems. The Company has installed its systems in more than 60
agencies, primarily law enforcement agencies located in the state of New York.
Recently the Company acquired an account in Arkansas and Georgia. The Company
provides a full range of product support and maintenance services, both on-site
and by remote connection.
The Company's Board of Directors has determined that the
Company's efforts should be focused on the e.TV Business and, accordingly, is
currently seeking to sell the Public Safety Software Business.
Public Safety Software Industry Background
------------------------------------------
The goal of law enforcement and public safety agencies is to
maximize the safety and improve the quality of life of people and communities.
The effectiveness of a law enforcement or public safety agency is dependent on
its personnel and resources. Such effectiveness is enhanced by maximizing the
patrol time of agency personnel, and the availability of timely, accurate and
reliable information. This allows services to be provided in an efficient,
cost-effective manner. Computer technology is an important tool for providing
information to law enforcement and public safety personnel, reducing
administrative time and streamlining procedures, to support an agency's
strategic and operational goals.
Generally, a law enforcement or public safety agency's
strategy is not geared to one overall plan for an entire community, but is based
on several individual plans addressing the unique needs of the neighborhoods
that comprise that community. Agencies need the ability to maximize their
resources, customize information, analyze crime information by sector, district
and area, and analyze repeat call areas that tax agencies' resources.
Additionally, agencies have a need to respond to incidents and 911 calls as
rapidly, efficiently and cost effectively as possible.
Computer technology has been developed for the public safety
market to address these needs. CAD systems, integrated with enhanced 911
("E911") systems, allow a dispatcher to retrieve information about the 911
caller, and the location and the individuals involved in the incident being
reported. Mobile wireless communication systems in vehicles provide agency
personnel in the field with the ability to receive information regarding an
incident and the people involved, such as location, "mug shots" and photographs,
and arrest and booking data. Such systems also enable such personnel to go
"on-line" with the agency's database, and with other vehicles, in real time.
Wireless communication systems also provide personnel with the capability to
file reports from
21
<PAGE>
their vehicles instead of having to return to the station. This increases
personnel time and visibility in the community. AVL system technology provides a
dispatcher with the capability of immediately identifying the location of the
most appropriate vehicle to investigate an incident, significantly shortening
response time. Without an AVL system, a dispatcher has to alert the vehicles in
the field of an incident and then wait, as they report their location and/or
availability, before determining which vehicle would be the most appropriate to
respond to an incident. Information sharing technology allows agencies to link
their databases to local, state and national crime databases to access
information for more in-depth and efficient investigation of incidents. Records
management and photograph imaging systems for law enforcement agencies make
arrest and booking procedures and incident investigations more efficient, while
similar systems for fire and EMS departments contribute to the efficient
deployment of firefighting and emergency equipment and investigation of
incidents. Without a computerized records management system, records and reports
would need to be handwritten or typed, and physically stored in various filing
cabinets, file rooms, or on microfilm or microfiche. In such form, such reports
are comparatively error prone, and may be misplaced or unavailable, which makes
retrieval difficult and time consuming. Computerized records systems allow for
easy entry and retrieval, and increased productivity, enabling agency personnel
to spend more time "on the beat" in the community.
In essence, the foregoing computer technology enables law
enforcement and public safety agencies to allocate and utilize resources and
manpower hours to maximize their goal of public safety.
Public Safety Software Development of Technology
------------------------------------------------
The Company's overall technology has been developed and
enhanced over approximately a nine year period. Its current versions, developed
over the past two years, include Windows-based applications with graphical user
interfaces and operate on Windows 95/NT. The Company's technology is not
patented or covered by any registered copyrights; however, the Company believes
that its software programs have copyright protection under common law. The
Company does not license any technology from third parties other than technology
for certain operating software. The Company undertakes research and development
to enhance existing, technology and products. See Item 1 - "Description of
Business - Public Safety Software Business Description - Public Safety Software
Research and Development" for a discussion of the Company's research and
development activities.
Public Safety Software Products and Services
--------------------------------------------
Products
The Company's software products consist of CAD systems,
computer interface systems which connect the customer's computer system to
local, state and national crime information databases, AMO communication systems
utilizing radio frequency, AVL systems employing dynamic map displays, records
management systems, and photo-imaging database systems. Certain
22
<PAGE>
of the Company's software systems also interface with and utilize space
satellite technology, telecommunications technology, computer hardware and other
infrastructure provided by third parties. The Company's software is compatible
with virtually all operating systems, utilizing a variety of software, including
Windows(R) and Unix(R). The Company's software also allows linkage of its
products to mainframe systems and is adaptable to both small and large hardware
systems.
The Company markets its products to law enforcement agencies
under the ALECS 2000(TM) (Advanced Law Enforcement Computer System) product line
and to fire and EMS departments under its AFFECT(TM) (Advanced Firefighter
Computer Technology) product line.
The Company licenses its software to customers in modules
pursuant to a perpetual license. Customers may acquire all the modules as an
integrated "total solution" package, or any of the modules individually, on a
stand alone basis or as an addition to, or as a replacement for, an existing
system. The software modules licensed from the Company can be integrated with
the customer's other software systems. The Company's "total solution" package of
integrated modules maximizes efficiency since data entered into one module will
be available in all modules in real time. A hybrid network comprised of certain
of the Company's modules and other software systems may require data to be
entered into the Company modules and other software systems separately.
The price to the customer of the Company's products, whether a
"total solution" package or individual modules, varies depending on several
factors, including the need for, and existence of, communication infrastructure
in the customer's jurisdiction (such as radio towers necessary for AMO radio
frequency modules), volume of use of telecommunications systems (such as
telephone lines and radio cells), and the customer's computer hardware
requirements to implement the software system.
The Company's ALECS 2000(TM) product line for law enforcement
and its AFFECT(TM) product line for fire and EMS are similar in many respects.
Both address the reporting of incidents, the dispatch of resources and the
deployment of personnel.
In May 1997, the Company received the 1997 Long Island
Software Awards ("LISA") software product of the year award for its ALECS
2000(TM) software. The Company competed with 15 finalists for this award
including, among others, Long Island Lighting Company (now known as LIPA)
("LILCO"), Henry Schein, Inc., Life Sciences Associates, Lightstone Group, and
Quantum Research and Technologies, Inc. The 1997 LISA was sponsored by the Long
Island Research Institute, State University of New York at Stony Brook, Cheyenne
Software, Inc., Computer Associates, Inc., LILCO, Renaissance Technologies and
Symbol Technologies, Inc., among others.
The Company's modules are described below.
Computer-Aided Dispatching - CAD and AVL. The Company's CAD
system, under both the ALECS 2000(TM) and AFFECT(TM) product lines, integrates
several software and
23
<PAGE>
communications technologies, such as E911 dispatch systems, mapping software
integrated with global positioning systems for vehicle tracking, and geo-based
mapping systems, which include street addresses and intersections,
longitude/latitude, and other information to identify the locations and
addresses of incidents. The integration of these systems with the Company's CAD
software provides to police and other public safety agencies the capability to
respond rapidly and efficiently to incidents, and streamlines record management,
enhancing productivity and accuracy of record keeping.
The CAD system allows the dispatcher receiving the E911 call
to immediately identify the caller's telephone number, the related address, and
the name of the telephone number owner (unless the call is made from a cellular
phone). The CAD system enables the dispatcher to access any records maintained
in the agency's database relative to that person or the location of the incident
(e.g. gun permit issued, prior domestic violence or prank calls) as well as in
local, state and national crime information databases.
Once a decision is made to dispatch a vehicle to an incident,
a record is created and the location of the incident appears on a
computer-generated map of the area. Using AVL software, which links the
customer's system and a receiver in each of the customer's vehicles to GPSs
(global positioning satellites), the map also shows the position of vehicles "in
the field" which are available to respond to the incident. The dispatcher can
then select the closest available vehicle to respond to the incident and can
observe the movement of that vehicle as it responds to the call.
Wireless Mobile Data Communications System - AMO. The Company
markets a wireless AMO data communications system which permits "on-line" real
time access between vehicles in the field and the central database, between the
central database and local, state or national databases, crime information
centers and other centralized computer records, and between vehicles. The
Company's AMO system employs radio frequency networks (i.e. private radio
networks, public radio networks, and cellular and short range spread spectrum
technology) to provide complete communication and access from the vehicle to the
central databases as well as vehicle to vehicle. The Company's AMO system allows
the agency's personnel to log onto the customer's central database directly from
their vehicles and have access to all information in such central database.
Additionally, the AMO technology provides capability for the agency's personnel
to input information into the agency's database directly from their vehicles,
and transfer or access information from vehicle to vehicle. AMO employs "text to
voice" technology which converts data received by the vehicles' systems from
text into voice data, and, by voice recognition, converts voice commands into
text to be sent to the dispatcher. This enhances the safety of vehicle operators
since they can receive and give information without having to divert their
attention to read a computer screen or input information by keyboard.
Furthermore, the main police, fire and EMS radio channels are not employed and
remain available.
AMO, through the use of photo imaging technology, allows "mug
shots" to be rapidly made available at a crime or incident scene, or the
personnel at the scene can create a permanent computer photograph record of the
accident or crime scene and transmit it directly into the agency's
24
<PAGE>
central database or to other vehicles.
The Company has sold AMO systems to several municipalities and
has successfully installed such AMO systems in Onondaga County (New York) for
its E911 department which covers multiple agencies such as police, fire and EMS
departments, the Putnam County (New York) Sheriff's Department, the Johnson City
Police Department (in Broome County, New York), the Glens Falls Police
Department (in Warren County, New York), the Johnstown Police Department (in
Fulton County, New York), the City of Lockport (in Niagara County, New York),
the City of Port Jervis (in Westchester County, New York) and the Long Beach,
Garden City and Malverne Police Departments (in Nassau County, New York). See
Item 1 - "Description of Business - Public Safety Software Business Description
- - - Public Safety Software Customers."
Records Management. The Company's records management systems
for law enforcement and other public safety agencies offers a wide range of
options and flexibility to fit an agency's needs and budget. The ALECS 2000(TM)
records management system processes data from the incident report through
prosecution, and is made up of component sub-modular units, including a records
management system, a photograph/"mug shot" imaging system, a parking violation
system, and a false alarm billing system. The AFFECT(TM) records management
system processes data from the incident report through closing the
investigation, and also provides information such as the location of resources,
including, without limitation, hydrants and secondary sources of water (such as
ponds, lakes, rivers, and seawater access), foam and other chemical fire
extinguishing material, hoses and jaws-of-life.
As discussed above, the Company's records management systems
obviate the need for handwritten or typed reports and physical filing systems
which are cumbersome, comparatively error prone, and make for difficult and time
consuming information retrieval.
Local Court Records Management and Sheriff's Records
Management. The Company's products also include records management systems which
are specifically designed for local courts and sheriff departments. The local
court records management system records summonses, tracks fines payable and
enters the appropriate dates on court calendars. The sheriff's records
management system provides several functions through the following sub-modules:
civil warrants/attachment records management, pistol permit records management,
photo imaging/booking for county jails, property records management, jewelry
recovery and pawn shop records management, and police academy records
management. One of the goals of this technology is to streamline procedures and
allow for more efficient allocation of resources and manpower hours.
Services
Installation and Training. System installation is an integral
part of the Company's services. The Company's installation procedure commences
with an in-depth consultation with the customer to determine the appropriate
modules needed to meet the customer's particular requirements within budgetary
parameters. Once the customer's needs have been identified, the
25
<PAGE>
Company provides customized system design and file creation. The Company then
implements the system, undertakes system start-up and provides training for the
customer's personnel in the operation of the Company's software products.
Customer training is conducted either at the customer's site or at a remote
location, and can range up to several days, depending on the customer's
particular system.
Consulting. The Company provides consulting services to public
safety departments, in addition to custom installation. Consulting can include
the design of a new module for a department. Customers pay a weekly, daily or
hourly fee for these services.
Support and Maintenance. The Company provides
post-installation system software maintenance and training support for all of
its software products. The Company's systems support teams, which include
communications and software technicians and program developers, are available to
assist customers via telephone access, 24 hours a day, seven days a week, 52
weeks a year, and provide on-site support, pursuant to a software maintenance
agreement. Software updates and enhancements to the modules are included under
maintenance contracts. Customers pay the Company a set monthly service fee
(currently ranging between 1% and 2% of the installation contract value) which
is dependent on the extent and complexity of the customer's system. Currently,
the Company has maintenance agreements with all of its customers. During the
fiscal years ended December 31, 1997 and 1998, support and maintenance income
represented approximately 53% and 28%, respectively, of the Company's revenues.
Public Safety Software Research and Development
-----------------------------------------------
Since the Company's IPO, the Company has spent approximately
$1,700,000 on product enhancement and development, including, without
limitation, development and beta-testing the V-CAD technology, development of
graphical user interface technology (which converts text- driven systems to a
more user-friendly menu-driven system), and Structured Query Language (SQL).
By utilizing Structured Query Language in conjunction with the Company's
database and the operating system software used by the Company, any field of
data can now be used as an analysis tool. The data structure provides for the
ability to use any of the information from reported crimes, such as time-of-day
or crime type, and submit a specialized query, which will result in a customized
search for a specific report.
Public Safety Software Intellectual Property Rights and Licenses
----------------------------------------------------------------
The Company's software system products are based on
approximately 3,000 interdependent software application programs and system
utility modules, including software developed for creating applications of the
modules. The Company's technology is not patented and the Company has not
obtained, or applied for, copyright registration for any of its software.
Although the registration of a copyright in the United States copyright office
provides a rebuttable presumption of the copyright's validity, such registration
is not required to make a copyright legally effective, and the Company believes
that its software programs have copyright protection.
26
<PAGE>
The Company believes that it takes at least two to three
months of training for a programmer to grasp the complete structure of the
Company's software. The Company requires that employees sign an agreement of
nondisclosure and assignment of development rights. While large software vendors
often institute lawsuits to protect software property rights against infringers,
the Company believes that, in its case, the complexity and total system
integration of the Company's products best protects its trade secrets. There can
be no assurance that the intellectual property and contractual rights on which
the Company relies to protect its intellectual property and confidential and
proprietary information will provide it with meaningful protections.
The Company utilizes certain operating system software
(written in the "Open M" computer programming language and owned by
Intersystems, Inc. ("Intersystems")), in the development of its software
systems. The Company uses such operating system software pursuant to a perpetual
license that allows the Company to use such software to create its software
modules, and, in some cases, to "bundle" such operating system software with its
own software as part of its software products. The Company pays Intersystems a
monthly fee to sublicense such operating software (based on the number of
product units in which Intersystem's operating system software is included), and
an annual fee to use such operating software to create software (based on the
number of product units for which the third party's operating system software is
used to create). The termination of this license could have a material adverse
effect on the Company's ability to produce and deliver its software products on
a timely basis. If such license is terminated, the Company would be required to
license alternative operating system software. The Company believes alternative
operating system software written in different versions of the "M" computer
programming language is owned by, and currently available from, other sources.
However, the Company would have to revise its software to make it compatible
with such alternative operating system software, which the Company believes
would result in production and delivery delays of approximately three to six
months.
Public Safety Software Sales and Marketing
------------------------------------------
According to the National Directory of Fire Chiefs and
Emergency Department (1993) and the National Directory of Law Enforcement
Administration (1996), the national law enforcement and public safety market is
estimated to have more than 18,000 law enforcement agencies and more than 35,000
fire departments. Based on management's exposure to the marketplace, the Company
believes that the majority of such agencies currently have limited or no
computerization of their law enforcement and public safety activities. The
Company believes that mobile wireless computer communications, computer-aided
dispatching, integrated mapping and photo-imaging technology have not been
marketed extensively to a majority of these agencies.
The Company's marketing strategy primarily relies on direct
marketing efforts by one salaried salesperson and a number of independent
representatives who represent the Company outside of the New York metropolitan
area.
Direct Marketing. The Company currently participates to a
limited extent in public
27
<PAGE>
safety conferences and trade shows, holds regional seminars and presents and
conducts demonstrations. However, as indicated above, the recent redirection of
business focus from the public safety area to e-commerce and telecommunications
has resulted in a substantial reduction of marketing efforts (direct and
otherwise) related to public safety software and systems.
Current Customers. Generally, once a system is designed and
installed for a customer, there is little repeat business other than maintenance
and support, and the provision of software enhancements or updates. Accordingly,
the Company's sales efforts to current customers for add-on products is minimal.
Subcontracting and Strategic Business Alliance Opportunities.
The Company has sought to create strategic business alliances and subcontractor
relationships with large system integrators and public network providers in
order to have the resources needed to establish a presence in the "large size"
market segment (i.e. departments or agencies with more than 200 sworn officers
or personnel). The purpose of the strategic business alliances has been to
establish a relationship between the Company and large system integrators or
public network providers (each an "Alliance Partner") whereby the Company and
the Alliance Partner would cooperate and complement each other's efforts in
identifying, proposing and marketing their own products and services and
integrated systems to public safety customers. The strategic business alliance
which the Company has sought to establish typically provides for the Company and
its Alliance Partner to agree upon a particular teaming arrangement (with each
party assuming defined roles and responsibilities in order to more effectively
compete for future business opportunities and programs), and, with respect to
mutually agreed projects, to jointly market and support each other's services
without soliciting services or products from other sources or offering services
and products to other contractors. Strategic business alliances are currently in
place with AT&T (which expires in February 2000 and is automatically renewable
for successive one year terms) and Alpine Software Incorporated (which expires
in March 2001), and subcontractor relationships have been established with Data
General (which is terminable by either party upon 30 days prior notice) and
Unisys Corporation (which expires May 29, 1999, but automatically renews and is
cancellable at that time by either party upon 60 days prior written notice). The
Company has also sought subcontractor relationships with system integrators and
network providers including International Business Machines Corp. ("IBM") (with
which the Company has acted as a subcontractor in the past, as described below),
Bell Atlantic, Motorola and RAM Mobile Data. No significant revenues have been
derived to date from the Company's established strategic alliances (which set
forth the relationship of the parties in the event of a system installation and
do not relate to any particular customer contracts) and no assurances can be
given that the Company will derive revenues therefrom. In addition, no
assurances can be given that the Company will enter into any other business
alliance or subcontractor relationships.
The Company monitors state and local governmental announcements
of officially published requests for proposals ("RFPs") to find business
alliance or subcontracting opportunities. The selection of the appropriate large
system integrator by the Company as a potential business alliance partner or
prime contractor often depends on the specifications in the RFP. The Company
28
<PAGE>
has sought to contact large system integrators in order to demonstrate the
Company's product capabilities and to establish a credible presence for
participating in "large size" market segment projects.
Public Safety Software Customers
--------------------------------
The Company has installed various modules of its public safety
software systems for, and provides maintenance and support services to,
approximately 61 customers, 57 of which are law enforcement agencies and four of
which are county-wide systems including police, fire and EMS departments. The
following customers accounted for the following percentages of public safety
software sales for the year ended December 31, 1997: Chemung County (New York),
12.6%; and the Malverne Police Department (Nassau County, New York), 10.2%. No
other customer accounted for 10% or more of the Company's public safety software
sales during such period. The following customers accounted for the following
percentages of public safety software sales for the year ended December 31,
1998: Putnam County Sheriff, 27.6%; and Westchester County, 10.9%. No other
customer accounted for 10% or more of the Company's public safety software sales
during such period. The Company does not rely on past customers for future
revenues from sales and installations of public safety software systems.
Typically, a customer will procure a public safety software
system from the Company under a perpetual license, pursuant to which the Company
will be paid a percentage of the license fee at the time the contract is entered
into, and then will receive further installments as certain performance
milestones are met, until completion of the contract. After the contract is
completed, any further revenues from that customer are usually derived from a
maintenance and support contract. From time to time, however, the Company may
receive additional contracts from an existing customer for add-on modules.
The length of time that it takes to complete a systems
installation contract varies (generally from three to twelve months), depending
on the nature and complexity of the system and the customer's internal
procurement procedures. During the period of time that installments are being
paid, the customer, or a small number of customers with contracts in progress,
may account for a significant percentage of the Company's revenues. However,
once those contracts are completed, such customers will no longer represent a
material portion of the Company's future revenues. Accordingly, the Company does
not rely on such customers for a continuing revenue stream and the Company does
not believe that the make-up of its current significant customers is material to
an understanding of the Company's future business prospects.
The following two examples are illustrative of the diverse
application of the Company's products and services: (i) The Onondaga County
Police Department utilizes an AMO application, designed, developed and installed
by the Company, which links over 700 police, fire and EMS vehicles. For this
project, the Company was retained by IBM as a subcontractor to design, develop,
install and service all the required AMO software. The project included
integration by the Company of IBM and Digital Equipment Corp. hardware which
already contained application
29
<PAGE>
software provided by other subcontractors for both records management and
computer-aided dispatch; and (ii) The Company, as prime contractor, designed,
developed and installed a "total solution" system for the Putnam County
Sheriff's Office, a comparatively small agency of seven vehicles. The system
consisted of a records management system, a CAD system and an AMO system.
Public Safety Software Competition
----------------------------------
The Company faces competition in the "small size" market
segment (which the Company views as departments or agencies with 20 or fewer
sworn officers or personnel) and the "medium size" market segment (which the
Company views as departments or agencies with 21 to 200 sworn officers or
personnel) from companies such as NewWorld Systems, Pamet Systems, Inc. and
Software Corporation of America. Although such competitors have significantly
greater financial, technical and other resources than those of the Company, the
Company feels that it has been able to compete in such market due to its "total
solution" system integration technology and local presence, the Company having
installed systems in over 50 "small size" and "medium size" law enforcement
agencies in the state of New York.
The Company believes that more intense competition exists in
the "large size" market segment in which the system price ranges widely (between
$1 million and $100 million) depending on the size of the customer and the
complexity of the system (as compared to the Company's typical sale in the
"small size" and "medium size" market segments, which historically has ranged
between $25,000 and $350,000). The "large size" market is dominated by software
vendors, such as PRC Public Safety, Inc. and Systemhouse, Ltd., and large system
integrators such as IBM, Andersen Consulting, Electronic Data Systems and Harris
Corporation. In order to penetrate the "large size" market segment, the Company
has pursued strategic business alliances or subcontracting relationships with
large systems integrators having greater financial resources and name
recognition than the Company.
The Company further believes that large software companies,
communication equipment companies and computer hardware companies are currently
not concentrating their resources on the law enforcement and public safety
market because of that market's special requirements for secure radio operations
and the particular applications and expertise needed to meet those special
requirements. Additionally, most "large size" agencies have a general need for
highly specific customized systems and systems integration. Generally, such
companies that do have an interest in pursuing the law enforcement and public
safety markets look for a business partner, like the Company, that has the
necessary expertise to design and install law enforcement and public safety
systems.
Employees
The Company has engaged the services of Payroll Transfers, Inc.
("PTI"), a professional employer organization, to manage all payroll
administration, human resource
30
<PAGE>
management and workers' compensation matters. The Company believes that by so
doing it is able to apply its resources to the revenue-producing areas of
business. For the above services, the Company's financial exposure is less than
0.75% of gross payroll over statutory requirements. As a result of this
relationship, the Company's employees are co-employees of the Company and PTI.
The Company currently has 30 full-time employees. Twenty-three
employees are dedicated to the e.TV Business and include executive, sales and
marketing, operational and administrative personnel. This does not include
e.TV's Representatives who are independent contractors. Seven employees are
dedicated to the Public Safety Software Business and include four software
developers/programmers, one project manager, one sales person, and one executive
and administrative staff member. The Company also has two part-time public
safety industry consultants. Management believes that its relations with its
employees are satisfactory.
Item 2. Description of Property
The Company's executive offices are located at 77 Spruce
Street, Cedarhurst, New York where it leases approximately 5,000 square feet of
space. The premises are held pursuant to a five year double net lease that
expires in September 2001 and provides for a base annual rental of approximately
$85,000.
e.TV's offices are located at 12735 Gran Bay Parkway West,
Building 200, Jacksonville, Florida and consist of approximately 10,000 square
feet of space. e.TV occupies the space on a month-to-month basis pursuant to an
oral understanding that provides for termination upon 60 days notice by either
party. The Company dose not pay for the use of the space; however, the Company
does pay for administration and back office services. The Company anticipates
that, if the month-to-month understanding terminates, e.TV will seek comparable
space in the Jacksonville, Florida area. If e.TV relocates, it will not be able
to obtain premises on comparable terms as the current arrangement. Additionally,
although e.TV anticipates it will be able to obtain alternative space, it can
give no assurance that such space will be available to its specifications at the
time of a move. See Item 1 - "Description of Business - e.TV Business
Description - e.TV Principal Suppliers - Back Office Operations and
Administrative Support."
The Company believes that its premises are adequate for its
needs for the foreseeable future.
Item 3. Legal Proceedings
In March 1999, an action was instituted in the Supreme Court
of the State of New York, Nassau County, by Rugby National Corp. ("Rugby"),
Harvey Weinstein ("Weinstein") and Credomarka National Corp. ("Credomarka")
against the Company, Rugby Acquisition Corp. ("RAC"), a wholly owned subsidiary
of the Company, and Mark Honigsfeld, Chief Executive Officer of the Company.
31
<PAGE>
In the complaint, the plaintiffs allege, among other things,
that (i) the Company willfully failed without good cause to consummate the
Agreement and Plan of Merger among Rugby, Weinstein, Compu-DAWN and RAC dated
April 22, 1998 (the "Merger Agreement") pursuant to which, among other things,
RAC and Rugby were to merge; (ii) Rugby's business was allegedly damaged after
the Company consummated a $5,000,000 private placement (the "Private Placement")
(see Item 6- "Management's Discussion and Analysis or Plan of Operation") and
subsequently terminated the Merger Agreement; (iii) the Company's alleged breach
of the Merger Agreement was a breach under a certain Loan and Security Agreement
between the Company, as lender, and Rugby, as borrower (the "Loan and Security
Agreement"), which was entered into contemporaneously with the Merger Agreement;
and (iv) Mr. Honigsfeld falsely induced Rugby and Weinstein to give their
consent to the Private Placement. The plaintiffs are claiming damages in the
aggregate amount of $6,000,000, and are seeking a declaratory judgment that (i)
the Loan and Security Agreement and related pledge agreements are unenforceable,
and (ii) the collateral securing Rugby's obligations for the loans made pursuant
to the Loan and Security Agreement be returned.
The Company and Mr. Honigsfeld believe that they have
meritorious defenses to all of the plaintiffs claims. As previously reported in
the Company's Current Report on Form 8-K for an event dated September 1, 1998,
the Company terminated the Merger Agreement in accordance with its terms based
on the lack of fulfillment of the conditions to the Company's obligation to
close. The Merger Agreement contains a $1,000,000 liquidated damage provision as
the sole and exclusive remedy if the Company failed to consummate the
transactions contemplated by the Merger Agreement and each and every condition
to the Company's obligation to close had been satisfied in a timely manner.
Rugby remains in default under the Loan and Security Agreement.
The Company intends, and Mr. Honigsfeld has advised the
Company that he intends, to vigorously defend this action and each will consider
pursuing counterclaims they may have against the plaintiffs. Due to the inherent
uncertainties in litigation, the Company cannot predict nor guarantee the
outcome of this litigation.
Item 4. Submission of Matters to a Vote of Security Holders
At an annual meeting of stockholders held on November 2, 1998,
the stockholders of the Company elected William D. Rizzardi and Alfred Luciani
as Class I Directors and Mark Honigsfeld and Harold Lazarus, Ph.D. as Class II
Directors and approved the issuance of Common Shares underlying the Company's
Series A Preferred Shares and Series B Preferred Shares. The number of votes
with regard to the foregoing was as follows:
32
<PAGE>
<TABLE>
<CAPTION>
(i) Election of Directors
Voted for Proxy Withheld in
Nominee Class Election Vote for Election
- - ------- ----- -------- -----------------
<S> <C> <C> <C>
William D. Rizzardi Class I Director 2,672,169 0
Alfred Luciani Class I Director 2,672,169 0
Mark Honigsfeld Class II Director 2,672,169 0
Harold Lazarus, Ph.D. Class II Director 2,672,169 0
(ii) Approval of Issuance of Common Shares Underlying
Series A Preferred Shares and Series B Preferred Shares
For: 1,340,641 Against: 67,525 Abstain: 11,675
</TABLE>
33
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Market Information
Upon completion of the Company's IPO on June 10, 1997, the
Company's Common Shares began trading under the symbol "CODI" on the Nasdaq
SmallCap Market. On March 5, 1999, the Company changed its symbol to "ETVC".
Prior to June 10, 1997 there was no public trading market for the Company's
securities. The following table sets forth, for the periods indicated, the range
of high and low bid prices of the Company's Common Shares as furnished by The
Nasdaq Stock Market, Inc. The quotations set forth below reflect interdealer
prices without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
High Low
--- ----
<S> <C> <C>
1997
----
Second Quarter (1) ............................................ $ 6.19 $ 5.00
Third Quarter ............................................. $ 6.13 $ 5.25
Fourth Quarter................................................. $ 9.25 $ 5.38
High Low
---- ---
1998
----
First Quarter ............................................... $ 9.75 $ 5.81
Second Quarter ............................................... $ 15.13 $ 4.50
Third Quarter ............................................. $ 6.25 $ 1.00
Fourth Quarter................................................. $ 6.50 $ 1.13
</TABLE>
- - ------------
(1) Commencing on June 10, 1997, the effective date of the Company's IPO.
Holders
The Company has been advised by its transfer agent (American
Stock Transfer & Trust Co.) that the approximate number of record holders of the
Common Shares as of February 28, 1999 was 36. The Company has been advised by
Automatic Data Processing, Inc. that there are approximately 2,000 beneficial
owners of its Common Shares.
Dividend Policy
Holders of the Company's Common Shares are entitled to
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. The Company has not declared or paid any dividends
in the past and does not currently anticipate declaring or paying any dividends
in the foreseeable future. The Company intends to retain earnings, if any, to
finance the development and expansion of its business. Future dividend policy
will be subject to the discretion
34
<PAGE>
of the Board of Directors and will be contingent upon future earnings, if any,
the Company's financial condition, capital requirements, general business
conditions, and other factors. Therefore, there can be no assurance that any
dividends of any kind will ever be paid.
Recent Sales of Unregistered Securities
In addition to the sales of unregistered securities disclosed
in the Company's Form 10-QSB for the period ended June 30, 1998, the Company
sold the following unregistered securities during the period covered by this
report.
As of October 20, 1998, the Company issued 10,000 Common
Shares to David Loewenstein as an inducement to enter into a one-year Consulting
Agreement, pursuant to which Mr. Loewenstein agreed to provide the Company
advisory services related to the telecommunications industry and the Company's
operations in such industry. In consideration for his services, pursuant to the
Company's 1996 Stock Option Plan, Mr. Loewenstein was also granted five-year
options to purchase 50,000 Common Shares.
On December 11, 1998, the Company issued 26,250 Common Shares
to JNC Strategic Fund Ltd. ("Strategic") and 48,750 Common Shares to JNC
Opportunity Fund Ltd. ("Opportunity") in consideration for the agreement by
Strategic and Opportunity to extend the deadline for the Company to file a
registration statement covering the resale of Common Shares or underlying the
Series A Preferred Shares, Series B Preferred Shares and warrants held, by
Strategic and Opportunity.
These transactions were private transactions not involving a
public offering and were exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof. The Company determined that
Loewenstein, Opportunity and Strategic were sophisticated investors. Such
issuances of Common Shares was without the use of an underwriter, and the
certificates evidencing such Common Shares bear restrictive legends permitting
the transfer thereof only upon registration of such securities or pursuant to an
exemption under the Securities Act. The Company's registration statement
covering the resale of the Common Shares owned, or underlying the Series A
Preferred Shares, Series B Preferred Shares and Warrants held, by Strategic and
Opportunity was declared effective by the SEC on December 15, 1998.
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.
35
<PAGE>
The following is a breakdown of the Company's use of the
proceeds from, and expenses incurred in connection with, the offering through
December 31, 1998:
Offering:
---------
Gross proceeds (including over-allotment) $6,900,000
Underwriting discounts and commissions (1) (690,000)
Expenses paid directly to underwriter (322,500)
Other expenses (1) (261,626)
------------
Net proceeds $5,625,874
==========
Use of Proceeds Through December 31, 1998:
------------------------------------------
Product enhancement and development (1)(3) $ 1,720,000
Repayment of indebtedness (2) 770,000
Marketing and advertising (1)(3) 430,000
Hiring/training personnel (1)(3) 140,000
Equipment purchases (1)(3) 225,000
Working capital(3)(4) 2,340,874
---------
$ 5,625,874
===========
----------
(1) Paid directly to persons other than directors or officers of the
Company or their associates, or persons owning 10% 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% or more of
any class of equity securities of the Company, or affiliates of the
Company.
(3) Approximate.
(4) Used for general operating activities.
As of December 31, 1998, all proceeds from the IPO had been
utilized.
Item 6. Management's Discussion and Analysis or Plan of Operation
Introduction
The Company was incorporated in the State of New York on
March 31, 1983 under
36
<PAGE>
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.
Prior to January 1999, the Company was engaged solely 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 predominantly in the
State of New York.
During 1998, the Company generated revenues from the granting
of non-exclusive, non-transferable and non-assignable licenses to use software
it has developed, through fixed price contracts. Revenues from such fixed price
contracts are recognized using the percentage of completion method of
accounting. The Company retains title to the software and warrants that it will
provide technical support and repair any defects in the software at no charge.
The warranty period for each contract is negotiated individually, with the
periods ranging from 90 days to three years. To date, repair costs have been
minimal and, therefore, the Company has not had to establish a reserve for
warranty costs.
The Company also provides post-contract, customer support to
licensees of its software. Revenues from such services are recognized ratably
over the period of performance. Fees billed and/or received prior to performance
of services are reflected as deferred revenues.
The Company's revenues, expenses and operating results have
varied considerably in the past and are likely to vary in the future.
Fluctuations in revenues depend on a number of factors, some of which are beyond
the Company's control. These factors include, among other things, the timing of
contracts, delays in customer acceptance of the Company's software products and
competition.
See below as regards the surrender of assets by LocalNet to
e.TV and the Company's entry into the telecommunications and Internet services
marketing business.
Results of Operations
Revenues
Total revenues for the year ended December 31, 1998 were
$1,248,489 as compared to $591,375 for the prior year, an increase of $657,114
or 111%. This increase was a result of a $622,000 increase in software sales and
an increase in maintenance revenues of approximately $35,000.
Costs and Expenses
Total costs and expenses decreased when comparing 1998 to 1997
to $2,899,697 from $3,537,773.
Programming costs and expenses increased to approximately
$460,000 for 1998 from
37
<PAGE>
approximately $407,000 for 1997. This increase primarily encompasses salaries
and wages that are related to the Company's main computer programming system.
General and administrative costs decreased from approximately $2,195,000 to
approximately $1,924,000 when comparing 1998 to 1997. This decrease was
primarily related to a decrease in sales salaries due to an overall reduction in
the Company's sales force. Research and development costs decreased
significantly from 1997 to 1998, approximately $936,000 to approximately
$516,000, since, during 1998, the Company did not focus on the design or
production of new products, but instead concentrated on enhancing and
maintaining existing products.
The Company's operating loss for 1998 was $1,651,208 as
compared to $2,946,398 for 1997, an improvement of $1,295,190, due to the
increase in revenues and decrease in costs described above.
Other Income and Development
Interest and other income for 1998 aggregated approximately
$332,000 as compared to approximately $120,000 for 1997. This increase was due
to the increase in cash which resulted from the Company's private offering of
preferred stock in June 1998, as described below, and consulting fees earned in
connection with LocalNet, also described below.
In 1997, the Company fully amortized approximately $1,588,000
of deferred financing costs which resulted in overall interest expense of
$1,610,505. For 1998, interest costs aggregated only $17,459. In 1998, the
Company entered into and then terminated a potential investment transaction (see
below). The Company expensed a loss due to this terminated transaction of
$296,952. Also in 1998, the Company loaned $1,900,000 to LocalNet, an
unaffiliated Florida corporation. In a transaction which occurred subsequent to
the Company's year end, LocalNet surrendered certain of its assets to e.TV in
satisfaction of $750,000 of the aforementioned loan, with the balance of
$1,150,000 being treated as uncollectible (see discussion below). Accordingly,
the Company has determined that this uncollectible portion of the loan is
impaired and has expensed this amount in 1998.
Net Loss
For the year ended December 31, 1998, the Company had a net
loss of $2,783,552, or $.95 per share. For the year ended December 31, 1997, the
Company had a net loss of $4,436,745, or $1.95 per share. The explanations for
these losses are included in the above discussions.
Liquidity and Capital Resources
In January 1997, the Company entered into a secured credit
facility loan agreement (the "Credit Agreement") with Mark Honigsfeld, Chief
Executive Officer and then Chairman of the Board of the Company, pursuant to
which the Company borrowed $200,000. The Company and Mr.
38
<PAGE>
Honigsfeld agreed to convert this loan into 40,000 Common Shares (an effective
conversion price of $5.00 per share) upon the closing of the IPO. In April 1997,
the Company and Mr. Honigsfeld amended the Credit Agreement to provide for a new
line of credit of $500,000. In May 1997, the Company borrowed an additional
$200,000 under the Credit Agreement of which $50,000 is outstanding at December
31, 1998 ($150,000 was outstanding at December 31, 1997). The repayment of up to
$200,000 under the Credit Agreement is secured by a first priority security
interest in all the assets owned by the Company.
In June 1997, the Company successfully 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.
At December 31, 1998, the Company had cash and marketable
securities of $4,378,000, accounts receivable of $319,000, a current ratio of
13.8 to 1 and a net worth of $5,298,000. At December 31, 1997, the Company had
cash of $3,081,000, accounts receivable of $72,000, a current ratio of 8.3 to 1
and net worth of $3,206,000. The overall improvement from 1997 to 1998 is the
result of a private offering of preferred stock (which is described below), net
of the losses incurred during 1998 as described above.
In June 1998, the Company completed a private placement of
securities. The Company sold 3,250 units (consisting, in the aggregate, of 3,250
Series A Preferred Shares and warrants to acquire 57,497 Common Shares) at a
price of $1,000 per unit and 1,750 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. The Common Shares were subsequently exchanged for
1,750 Series B Preferred Shares. From this private placement, the Company
realized net proceeds of approximately $4,723,000.
Cash Flows
For the years ended December 31, 1998 and 1997, cash utilized
by operating activities was $1,278,214 and $2,311,314, respectively. The primary
reasons for the decrease in cash used for operating activities were an increase
in cash collected from customers and an increase in interest and other income
mentioned previously.
For the year ended December 31, 1997, $135,205 of cash was
utilized by investing activities, primarily for fixed asset purchases. For 1998,
the Company used $3,913,517 of cash in this category. During the current year,
the Company purchased $2,000,000 of marketable securities, using the net
proceeds from the private Preferred Stock offering, and loaned LocalNet
$1,900,000 (See "Subsequent Event" below).
In 1997, the Company generated cash from financing activities
of $5,241,275, principally as a result of the completion of the IPO offering.
For 1998, the Company generated cash of $4,638,878 in this category, principally
due to the completion of the private offering.
39
<PAGE>
Termination of Potential Investment Transaction
On April 22, 1998, the Company entered into an agreement (the
"Merger Agreement") to acquire an indirect 50% beneficial interest in
Press-Loto, a Russian company which claimed to have the right to operate the
first national on-line lottery in Russia pursuant to a license (the "Lottery
License") from the Russian Ministry of Finance to the Union of Journalists of
Russia (the "Union"). The Merger Agreement provided that, at the time of the
closing, 40% of Press-Loto was to be owned by the Union and its charity with a
private group holding a minority interest. The transaction was structured as a
merger (the "Merger"), pursuant to which Rugby Acquisition Corp., a wholly-owned
subsidiary of the Company, was to merge into Rugby National Corp. ("Rugby") with
Rugby as the surviving entity and a wholly-owned subsidiary of the Company. At
the time of closing, Rugby was to directly own 50% of Press-Loto.
On September 1, 1998, the Company issued a press release
announcing that it had terminated the Merger Agreement due to the lack of
fulfillment of the conditions to its obligation to close.
See Note 14 of Notes to Financial Statements regarding
subsequent litigation concerning this matter.
Subsequent Event
During 1998, and the first few days of 1999, the Company
loaned an aggregate of $1,900,000 to LocalNet, an unaffiliated Florida
corporation in the telecommunications and Internet services marketing business.
These loans were originally due in one year, bearing interest of 12% per annum
and were secured by a collateral interest in all of LocalNet's tangible and
intangible assets and a pledge of the common stock of LocalNet owned by its
Chairman of the Board and its Chief Executive Officer.
On January 7, 1999, the Company assigned its interest in this
loan to e.TV. On January 8, 1999, following a default, LocalNet peacefully
surrendered the assets representing the collateral underlying this loan. The
fair value of the assets at the time of surrender was determined to be
approximately $750,000. Accordingly, the Company has written down the loan
receivable by $1,150,000, in order to reflect this receivable at its fair value.
Through e.TV, the Company began operations in various
businesses similar to that of LocalNet in January 1999.
Backlog
The Company's backlog of software contracts for its Public
Safety Software Business as of March 25, 1999 aggregated approximately $875,000
(including one year maintenance fees).
40
<PAGE>
These contracts when completed (usually within six months to one year) are
expected to generate approximately $157,000 of additional annual maintenance
revenue following the completion of the warranty and initial maintenance
periods.
Other
The Company believes that the net proceeds from the private
placement and funds expected to be generated from operations will be sufficient
for working capital purposes for at least the ensuing 12 month period.
Year 2000 Issues
The Year 2000 ("Y2K") problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
which could result in miscalculations or system failures. The Company has
instituted a Y2K compliance program, the objective of which is to determine and
assess the risks of the Y2K issue, and plan and institute mitigating actions to
minimize those risks. The Company's standard for compliance requires that, for a
computer system or business process to be Y2K compliant, it must be designed to
operate without error in date and date-related data prior to, on and after
January 1, 2000. The Company expects to be fully Y2K compliant with respect to
all significant business systems prior to May 31, 1999.
The Company's Y2K plan consists of four phases: (1) assessment
and analysis of "mission critical" systems and equipment; (2) remediation of
systems and equipment, through strategies that include the enhancement of new
and existing systems, upgrades to operating systems already covered by
maintenance agreements and modifications to existing systems; (3) testing of
systems and equipment; and (4) contingency planning which will address possible
adverse scenarios and the potential financial impact to the Company's results of
operations, liquidity or financial position.
Public Safety Business
With regard to information technology systems ("IT systems"),
the first three steps of this plan, assessment, remediation, and testing, are
complete, and the Company is currently in the contingency planning phase for all
IT systems and equipment. The remediation program consisted largely of updating
all software and operating systems with the purchase of the latest
"off-the-shelf" versions of such items. Management believes that all of the
Company's public safety IT systems and equipment have been remediated.
Assessment, remediation and testing were all performed by the
Company's staff, at a cost that is not believed by the Company's management to
be material. Y2K costs are expensed as incurred.
41
<PAGE>
An inventory and assessment of all non-IT systems (items
containing embedded chips, such as elevators, electronic door locks, telephones,
etc.) is being undertaken. The great majority of these non-IT systems are not
believed to be potential sources of significant disruption, although the
contingency plans (described below) will address non-IT Y2K failure as well as
IT systems failure.
e.TV Business
The great majority of the IT systems that the Company uses in
connection with its e.TV Business is contained in one software package, which
package enables the Company to run its network marketing operations. Management
has identified this software package as the single most important group of IT
systems used in the e.TV Business which must be made Y2K compliant. Remediation
of these systems was accomplished by the supplier of the software package, which
has also given written certification to the Company of the package's Y2K
compliance.
In addition to the network marketing operations software,
there are several smaller IT systems. These are provided by Atlantic
Teleservices, the company which also provides the facility from which the e.TV
Business activities are operated. Management of the Company believes that these
smaller IT systems, as well as the various non-IT items under Atlantic
Teleservices' control, do not, either singly or in the aggregate, represent a
material Y2K compliance issue. Remediation of these items, if necessary, will
have to be accomplished by Atlantic Teleservices. Management has requested
assurances from Atlantic Teleservices that the IT and the non-IT aspects of the
facility will be Y2K compliant in a timely fashion. Management's contingency
plan will address both IT and non-IT non-compliance.
Contingency Plans
The Company's management is in the process of developing a
"worst-case scenario" with respect to Y2K non-compliance and to develop
contingency plans designed to minimize the effects of such scenario. Although
management believes that it is very unlikely that any of these worst-case
scenarios will occur, contingency plans will be developed and will address both
IT system and non-IT system failure.
Public Safety Business. Management believes that all of its IT
systems are currently compliant, and that there are no third party suppliers or
customers whose IT system Y2K non-compliance will affect its own operations.
However, management is aware that some of the public safety agencies to whom it
has sold and installed systems may be using other systems, and/or components,
that interface with the Company's products and which may not be Y2K complaint.
The use of such other systems and/or components may disrupt or even completely
disable an agency's entire IT system, or significant parts thereof.
Notwithstanding that any such event would have no direct bearing on the
Company's operations, the Company is alerting its customers to the possibility
of this problem and suggesting that they test all aspects - both hardware and
software of their systems.
42
<PAGE>
The only non-IT system whose Y2K non-compliance could
materially affect the Company's public safety business is its telephone system.
The Company's contingency plan, which is in place currently, consists of the
availability of multiple wireless phones and the ability to switch incoming
lines from its PBX system to standard analog phones.
e.TV Business. In the event of Y2K- related computer failure,
there could be material adverse effects on both the Company's internal
operations and to its customer-support operations. The Company could be unable
to support its customer base because its computer system would not be
functioning. In such event, the Company plans to use one of its backup
computers, which will have its clock set back a year at some time prior to
December 31, 1999. This plan will be activated if the Company's remote support
systems do not function past January 1, 2000. In addition, management has begun
to formulate a contingency plan to address the consequences of Y2K-related IT
failure to its own operations. This plan will include the printing out of hard
copies of all records contained in the systems package for the network marketing
operation, and the implementation of manual processing systems, to the extent
feasible. Management expects this plan to be fully formulated and in place by
June 30, 1999.
In terms of non-IT and third-party Y2K non-compliance, the
worst-case scenario for the Company's e.TV Business would involve the loss of
electricity and telephone lines simultaneously. The loss of telephone lines by
itself would not present a significant disruption, due to the fact that the
Company has telephone lines that are not routed through its PBX system, and also
has multiple wireless telephones which would be available in such situation; in
addition, in the event the PBX system stops functioning altogether, the Company
has the capacity to remove incoming lines to standard analog telephones. The
Company has both wireless and land line telephone service suppliers, so that
management believes that the complete loss of telephone communications is
unlikely. A much more significant potential problem is the loss of electricity,
due to the fact that the Company has no alternate supplier. If the electrical
system fails but the Company has access to telecommunications, it would be able
to supply its customers with telephone support and limited direct system
support. If, however, both the telephone and electrical systems were not
functional at the same time, the Company would not be able to function for an
indeterminate period of time.
The Company intends to request assurances of Y2K readiness
from its telephone and electrical suppliers. However, management has been
informed that some suppliers have either declined to provide the requested
assurances, or have limited the scope of assurances that they are willing to
give. If suppliers of services that are critical to the Company's operations
were to experience business disruptions as a result of their lack of Y2K
readiness, their problems could have a material adverse effect on the financial
position and results of operations of the Company. The impact of a failure of
readiness by critical suppliers cannot be estimated with confidence, and the
effectiveness of contingency plans to mitigate the effect of any such failure is
largely untested. Management cannot provide an assurance that there will be no
material adverse effects to the financial condition or results of operations of
the Company as a result of Y2K issues.
43
<PAGE>
Forward Looking Statements
Except for historical information contained herein, the
matters set forth above contain forward looking statements that involve certain
risks and uncertainties that could cause actual results to differ from those in
the forward looking statements. Potential risks and uncertainties include such
factors set forth on page 1 of this Annual Report on Form 10-KSB under "Forward
Looking Statements."
Item 7. Financial Statements
The audited financial statements of the Company as at December
31, 1998 and 1997 and for the years then ended are included in this Annual
Report on Form 10-KSB following Item 13 hereof.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
44
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers.
The names and ages of, and the positions held by, the
executive officers and directors of the Company are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class of
Name Age Positions Held Directorship
- - ---- --- -------------- ------------
Robert E. (Teddy) Turner, IV 35 Chairman of the Board and Director III
of the Company, Director of e.TV
Mark Honigsfeld 44 Chief Executive Officer, II
President, Secretary and Director of
the Company; Chief Executive
Officer, Secretary, Treasurer and
Director of e.TV
Rudy C. Theale, Jr. 24 Executive Vice President and Director II
of the Company; President and
Director of e.TV
Louis Libin 39 Chief Technology Officer, Senior III
Executive Vice President and Director of
the Company; Senior Executive Vice
President and Director of e.TV
Harold Lazarus, Ph.D. 71 Director of the Company II
Faith Griffin 49 Director of the Company I
Christopher Liston 38 Director of the Company; Vice I
President of Business Development of e.TV
David Greenspan 33 Chief Financial Officer of the Company; -
Chief Financial Officer and Treasurer of e.TV
</TABLE>
45
<PAGE>
Robert E. (Teddy) Turner, IV
Mr. Turner joined the Company in January 1999 as Chairman of the Board. He
was elected as a director of the Company in March 1999. Mr. Turner was the
founder of, and served from December 1997 until September 1998 as Chairman of
the Board and President of, Zekko Corp. ("Zekko"). Zekko operated predominantly
in the areas of technology acquisition, development and marketing. From October
1996 until December 1997, Mr. Turner served as the President of Turner
Telecommunication, an organization which concentrated in the acquisition and
development of telecommunication products. Mr. Turner specialized in the
research and analysis of potential telecommunication product acquisitions. From
June 1993 until October 1996, Mr. Turner was a manager with Turner Home
Entertainment, a domestic home video company where he was responsible for the
Southeastern United States sales and promotional divisions. Mr. Turner has been
a director of All Seasons Vehicles, Inc., a publicly traded manufacturer of
track driven all season vehicles, since April 1997, and Chairman of the Board of
U.S. Bison Co., an Atlanta, Georgia- based bison ranching company. Mr. Turner
sits on the Boards of several foundations including The Turner Foundation, Inc.,
Jane Smith Turner Foundation, and the Georgia Chapter of Juvenile Diabetes
Foundation. He also sits on the Board of Trustees of St. Mary's College of
Maryland. Mr. Turner holds a Bachelor of Science Degree in Business
Administration from the Citidel.
Mark Honigsfeld
Mr. Honigsfeld joined the Company as Chairman of the Board, Secretary and a
director in August 1996 and, effective October 1, 1996, he was elected Chief
Executive Officer of the Company. In January 1999, he was elected President of
the Company and the Chief Executive Officer, Treasurer and Secretary and a
director of e.TV. In 1978, Mr. Honigsfeld founded Facelifters Home Systems, Inc.
("FACE"), a cabinet manufacturing and installation company for which he served
as Chief Executive Officer and Chairman of the Board until April 25, 1996. On
such date, FACE, a publicly-traded company, was acquired by a New York Stock
Exchange company in a transaction valued at approximately $70 million to FACE's
stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder, Chief Executive Officer and Chairman of
the Board, Mr. Honigsfeld was directly involved in the planning and development
of almost all areas of FACE's business, including corporate finance, public
offerings, investor relations, mergers and acquisitions, licensing, product
design and engineering, sales and marketing, manufacturing, field installation,
customer service, management information services and management training. Prior
to the sale transaction, FACE had approximately 600 employees and associates
representing its products and services at 28 locations in 14 states,
approximately 135 telemarketing personnel, 180 direct sellers, 120 manufacturing
employees and 165 supervisory, management and administrative personnel. In
addition, FACE had working arrangements with approximately 175 independent
contracting companies nationwide. Mr. Honigsfeld holds a Bachelor of Science
Degree in Industrial Arts, magna cum laude, and a Master of Science Degree in
Industrial Arts, with honors, from City College of the City University of New
York.
46
<PAGE>
Rudy C. Theale, Jr.
Mr. Theale has served as Executive Vice President of the Company and
President and a director of e.TV since January 1999. He was elected a director
of the Company in March 1999. Mr. Theale is primarily responsible for sales and
marketing operations at e.TV. Mr. Theale has served as President and a director
of LocalNet since April 1997, where he has been primarily responsible for sales
and marketing efforts, and the general oversight of daily operations. From
February 1996 until January 1997, Mr. Theale served as President of SDI, Inc.
where he was primarily responsible for sales and marketing management as well as
the general oversight of daily operations.
Louis Libin
Mr. Libin has served as Chief Technology Officer and a director of the
Company since January 1997. In January 1999, Mr. Libin was elected Senior
Executive Vice President of the Company and Senior Executive Vice President and
a director of e.TV. Since 1989, Mr. Libin has represented the United States on
satellite and transmission issues at the International Telecommunications Union
(the "ITU") in Geneva, Switzerland. Mr. Libin has also been Chairman of the
Expert Group On Broadcast Interactive Services of the ITU since 1991. From 1987
to 1997, Mr. Libin served as the Director of Technology (specializing in
broadcast transmission systems) for the General Electric Corporation ("GE") and
the National Broadcasting Corporation. From 1995 to 1997, Mr. Libin also served
as Assistant Secretary of all of GE's wholly-owned subsidiaries that are
involved in broadcast media, with the responsibility for technical developments
and all Federal Communications Commission (the "FCC") issues and licenses. From
1983 to 1986, Mr. Libin was a project manager for Radio Corporation of America
("RCA") until RCA's acquisition by GE. From 1981 to 1982, Mr. Libin was employed
by the Loral Corporation as an electronic design engineer where he designed
radio frequency systems for the United States military. From 1980 to 1981, Mr.
Libin was a design engineer for the Chryon Corporation, a computer graphics
company. From 1979 to 1980, he worked for Burroughs Computer Systems, Inc. (now
part of Unisys) as a field engineer. Additionally, since 1988, Mr. Libin has
acted as a consultant and advisor to the FCC in connection with the planning of
communications systems and logistics for major events in the United States and
abroad, including political conventions, presidential inaugurations, and the
1996 Summer Olympics in Atlanta. Mr. Libin is an active member of the National
Society of Professional Engineers and the Association of Federal Communications
Consulting Engineers. He also sits on the Engineering Advisory Board of the
National Association of Broadcasters. Mr. Libin received a B.S.E.E. Degree in
Electrical Engineering from the Pratt Institute and completed his graduate
studies in optical electronics at M.I.T.'s Executive Program in 1991. Mr. Libin
has planned and managed telecommunications projects in the United States and in
Europe. Mr. Libin was responsible for the planning and implementation of a new
television and telecommunications network in New Zealand in 1990. Mr. Libin has
also provided expert consulting on satellite issues in certain of the republics
of the former Soviet Union. Mr. Libin was also instrumental in the development
of the new transmission technology and the algorithms for software modeling of
the new North American digital terrestrial television system which was approved
by the FCC in 1996. Since January 1999,
47
<PAGE>
Mr. Libin has served as a director of NetWolves Corp., a publicly traded Tampa,
Florida-based computer manufacturer. Mr. Libin has published numerous scientific
papers on radio frequency and telecommunications.
Harold Lazarus, Ph.D
Dr. Lazarus joined the Company as a director in March 1997. Dr. Lazarus has
been a Professor of Management at the Hofstra University Frank G. Zarb School of
Business (the "Hofstra Business School") since 1980. From 1973 to 1980, Dr.
Lazarus served as Dean of the Hofstra Business School. Dr. Lazarus is an
organization development consultant who lectures in Europe, Asia, North America
and South America on leadership, time management, total quality management,
managing change, effective meetings, problem solving, decision making, mission
statements, management by objectives, and communications. Dr. Lazarus was
Professor of Management at the New York University Leonard N. Stern School of
Business for ten years, and he also taught at Columbia University Graduate
School of Business and Harvard University Business School. Dr. Lazarus has
served on several boards of directors of public companies in the past, including
FACE, Ideal Toy Corporation, Superior Surgical Manufacturing Company, Stage II
Apparel Corporation, and Graham-Field Health Products, Inc. Dr. Lazarus has
published seven books and 65 articles on business management. He also chairs the
board of Phi Beta Kappa Alumni of Long Island (New York). Dr. Lazarus received a
Masters of Science Degree and a Doctor of Philosophy Degree in Management and
Marketing from Columbia University.
Faith Griffin
Ms. Griffin was elected a director of the Company in March 1999. Ms.
Griffin has over 25 years of broad based investment banking experience with a
special concentration in private and public offerings and merger and acquisition
advisory for small and medium sized companies. During 1998 and through January
1999, Ms. Griffin acted as a financial advisor and investment banking consultant
to the Company. From 1996 to September 1998, Ms. Griffin served as a managing
director of Laidlaw Global Securities, Inc. in the corporate finance division,
where she was responsible for new business development, merger and acquisition
advisory assignments, private placements and public equity offerings. From 1990
until 1996, Ms. Griffin served as a Senior Vice President in the Corporate
Finance Division of Josephthal Lyon & Ross, Inc. Ms. Griffin holds a Bachelor of
Arts Degree in Mathematics from Franklin L. Marshall College, and a Master of
Business Administration from New York University Graduate School of Finance.
Christopher Liston
Mr. Liston has served as Vice President of Business Development of e.TV
since January 1999 and was elected a director of the Company in March 1999.
Since December 1998, he has been the Vice President, Business Development of
LocalNet. From May 1993 to September 1998, Mr. Liston was a Vice President of
Osprey Capital, Inc., an investment banking company. Mr. Liston received a
Bachelor of Arts Degree in Political Science from the College of Charleston in
48
<PAGE>
South Carolina.
David Greenspan
Mr. Greenspan has served as Chief Financial Officer of the
Company since December 1998 and as Chief Financial Officer and Treasurer of e.TV
since January 1999. From December 1997 until February 1999, Mr. Greenspan served
as Chief Financial Officer and a director of LocalNet. From March 1997 to
December 1997, Mr. Greenspan served as the Chief Operating Officer of PGA Tour
Radio Network, a national sport broadcasting company based in Atlanta, Georgia.
From August 1996 to March 1997, he was the Vice President, Business Affairs of
Turner Media Consultants, a broadcast consulting company. From March 1994 to
August 1996, Mr. Greenspan served as a project manager for Atlanta Olympic
Broadcasting, with responsibility for planning and coordinating all television
and radio operations for the 1996 Summer Olympic games. Mr. Greenspan holds a
Bachelor of Science Degree in Accounting from Troy State University in Alabama.
The Company's Certificate of Incorporation provides for three
classes of directors, each having a three year term. Each director will hold
office until the next annual meeting of stockholders during the year in which
the term of his class of directorship expires and until his successor is elected
and qualified. The terms of the Class I, Class II and Class III directorships
expire at the Company's annual meetings in 2000, 2001 and 1999, respectively.
Executive officers serve at the pleasure of the Board of Directors.
There is no family relationship among any of the Company's
executive officers and directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended
("Section 16"), requires that reports of beneficial ownership of capital stock
and changes in such ownership be filed with the Securities and Exchange
Commission (the "SEC") by Section 16 "reporting persons," including directors,
certain officers, holders of more than 10% of the outstanding Common Shares and
certain trusts of which reporting persons are trustees. The Company is required
to disclose in this Annual Report on Form 10-KSB each reporting person whom it
knows to have failed to file any required reports under Section 16 on a timely
basis during the fiscal year ended December 31, 1998.
To the Company's knowledge, based solely on a review of copies
of Forms 3, 4 and 5 furnished to it and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, the
Company's officers, directors and 10% stockholders complied with all Section
16(a) filing requirements applicable to them except that Messrs. Honigsfeld,
Libin, Lazarus, Luciani and Rizzardi failed to file a Form 5, due on February
14, 1999, with respect to the receipt of certain stock options from the Company
during 1998, Mr. Libin filed a Form 4 (reporting one transaction) for September
1998 11 days late, and Mr. Greenspan filed his Form 3, due on
49
<PAGE>
January 4, 1999, 15 days late.
Item 10. Executive Compensation
The following table provides summary information concerning
cash and certain other compensation paid or accrued by the Company to, or on
behalf of, Mr. Honigsfeld, the Company's Chief Executive Officer and President,
and Mr. Libin, the Company's Chief Technology Officer and Senior Executive Vice
President, during the last three fiscal years. Mr. Honigsfeld was elected Chief
Executive Officer and President in October 1996 and January 1999, respectively.
Mr. Libin was elected Chief Technology Officer and Senior Executive Vice
President in January 1997 and January 1999, respectively. No other executive
officer of the Company had a combined salary and bonus in excess of $100,000 for
the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Name and Other Annual Restricted Stock Securities LTI All Other
Principal Position Year Salary Bonus Compensation Award(s) Underlying Options Payout Compensation
- - ------------------ ---- ------ ------ ------------ --------- ------------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Honigsfeld(2) 1998 $251,847 - - - 125,000 - -
Chief Executive Officer, 1997 $250,000 - - - 100,000 - -
President and 1996 $62,500(3) - - - 233,000 - -
Secretary
Louis Libin 1998 $223,699 - - - 65,000(4) - -
Chief Technology 1997 $178,651 - - - 100,000 - -
Officer and Senior 1996 - - - - - - -
Executive Vice-President
- - --------------------
</TABLE>
(1) Dong Lew, who served as the Company's President, Treasurer and a
director until his retirement in April 1998 is not included as a named
executive officer. He received salary of $39,650 in 1998 and $216,000
in consideration for the termination of his Employment Agreement in
April 1998.
(2) Mr. Honigsfeld was elected Chief Executive Officer of the Company and
was entitled to compensation effective as of October 1, 1996. He served
as Chairman of the Board from August 1996 until January 8, 1999 and was
elected President of the Company effective January 8, 1999.
(3) Represents accrued and unpaid salary relating to 1996 (based on a
salary of $250,000 per annum) which was converted into 12,500 Common
Shares upon the closing of the IPO.
(4) Includes 50,000 options granted to replace options to purchase a like
number of Common Shares which were canceled in order to effectuate a
repricing. See Item 10 - "Executive
50
<PAGE>
Compensation - Report on Repricing of Options."
Each non-employee director of the Company is entitled to
receive a director's fee of $1,000 per meeting (other than telephonic meetings
for which the fee is $500), and options to purchase 5,000 Common Shares of the
Company each year, which options will be exercisable for a period of ten years
from the date of grant, at an exercise price equal to the market price of the
Company's Common Shares on the date of the grant. Additionally, each
non-employee director is reimbursed for reasonable out-of-pocket expenses
incurred in attending meetings of the Board of Directors of the Company. The
members of the Board of Directors meet regularly, as needed.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1998
Number of Common Percentage of Total
Shares Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
----- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Mark Honigsfeld 125,000(1) 25.3% $5.00 October 21, 2008
Louis Libin 65,000(2) 13.1% $5.00 October 21, 2008
- - ---------------
</TABLE>
(1) These options were initially granted in 1998 at an exercise price of
$7.00 per share and later repriced to $5.00 per share pursuant to a
cancellation and regrant. See Item 10 - "Executive Compensation -
Report on Repricing of Options."
(2) Of such options, (a) 15,000 were initially granted in 1998 at an
exercise price of $7.00 per share and later repriced to $5.00 per share
pursuant to a cancellation and regrant and (b) the other 50,000 were
granted to replace options to purchase a like amount of Common Shares
which were cancelled in order to effectuate a repricing. See Item 10
"Executive Compensation - Report on Repricing of Options."
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR
ENDED DECEMBER 31, 1998 AND FISCAL YEAR-END OPTION VALUES
Number of Shares
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options
Shares Acquired Value December 31, 1998 at December 31, 1998
Name on Exercise Realized Exercisable/Unexercisable Exercisable /Unexercisable
- - ---- ----------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Mark Honigsfeld - - 225,000 / 0 $396,875/$0
Louis Libin - - 33,334/81,666 $62,501/$138,124
</TABLE>
51
<PAGE>
Employment Contracts, and Termination of Employment and Change-in-Control
Arrangements
Employment Agreements
---------------------
Mark Honigsfeld
The Company is a party to an Employment Agreement with Mark
Honigsfeld for a term of three years commencing as of October 1, 1996, subject
to continuing, annual, automatic one-year extensions, unless either the Company
or Mr. Honigsfeld notifies the other, at least 90 days prior to any annual
anniversary date, of its or his desire not to extend the term thereof. The
Employment Agreement also provides for earlier termination as discussed below.
Pursuant to his Employment Agreement, Mr. Honigsfeld serves as Chief Executive
Officer and President of the Company.
The Employment Agreement provides for base annual compensation
of $250,000. In addition to such base compensation, effective January 8, 1999,
Mr. Honigsfeld is entitled to receive a bonus, the details of which have not yet
been determined, which will allow Mr. Honigsfeld to earn a bonus of up to 50% of
his salary in each year, based on performance thresholds. Additionally,
effective January 8, 1999, Mr. Honigsfeld was issued options to purchase 200,000
Common Shares. The options will vest over a period of three years and are
exercisable at a price of $5.82 per share, the market price as determined under
the Company's 1996 Stock Option Plan. Furthermore, effective January 8, 1999,
Mr. Honigsfeld was included as a participant in the Company's 1999 Restricted
Stock Rights Grant Plan which is described below.
Mr. Honigsfeld is also entitled to receive an expense
allowance of up to $500 per month and an automobile allowance in the amount of
$1,000 per month as well as reimbursement of accountable customary business
expenses.
The Employment Agreement provides that, notwithstanding the
rolling three-year term thereof, it may be terminated prior to the expiration
date under the following circumstances: (i) death; (ii) total disability (as
provided for in the Employment Agreement); (iii) termination by the Company for
"cause" (as defined in the Employment Agreement); (iv) termination by the
Company at any time upon written notice to Mr. Honigsfeld; (v) termination by
Mr. Honigsfeld upon 30 days written notice to the Company; (vi) termination by
Mr. Honigsfeld at any time for "good reason" (as defined in the Employment
Agreement); or (vii) termination by the Company at any time within 12 months
after a "change in control" (as defined in the Employment Agreement).
Additionally, the Employment Agreement allows Mr. Honigsfeld to devote up to 10%
of his working time to other endeavors that are not in competition with the
Company.
The Employment Agreement provides for compensation under
certain circumstances upon termination of employment (in addition to accrued but
unpaid compensation) as follows: (i) in the event of Mr. Honigsfeld's death, his
estate or spouse shall be entitled to receive an amount
52
<PAGE>
equal to his monthly salary as of the date of death multiplied by the number of
full years that he was an employee of the Company or a subsidiary or a
predecessor in interest thereof; (ii) in the event of termination of the
Employment Agreement due to disability, Mr. Honigsfeld shall be entitled to
receive an amount equal to his monthly salary as of the date of termination of
the Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary or a predecessor in interest thereof
(but, in no event, would he be entitled to an amount equal to less than six
months of salary); and (iii) in the event of termination of employment by the
Company following a "change of control" or for any reason other than death,
disability or "cause," or in the event of termination of an Employment Agreement
by Mr. Honigsfeld for "good reason," he shall be entitled to receive his full
salary for the unexpired term of such agreement, without mitigation of damages
based upon employment obtained elsewhere.
The Employment Agreement provides for a restriction on the
solicitation of customers of the Company for a period of two years following
termination thereof, and a covenant not to compete with the Company for a period
of six months following termination of employment for cause.
Louis Libin
Effective January 6, 1997, the Company and Louis Libin entered into a
three-year Employment Agreement which provides for a salary of $200,000,
$225,000 and $250,000 per annum in the first, second and third years,
respectively. Additionally, Mr. Libin's Employment Agreement allows him to
devote up to one day each week to other endeavors that are not in competition
with the Company. Other terms of Mr. Libin's Employment Agreement generally
conform in structure to the material provisions of Mr. Honigsfeld's, such as
with respect to renewal, benefits, restrictive covenants and termination.
Mr. Libin has waived the increase in salary in the third year and,
accordingly, his salary for the 12 month period beginning on March 1, 1999 has
remained at $225,000. Additionally, effective January 8, 1999, Mr. Libin is
entitled to a bonus upon the same terms and conditions as for Mr. Honigsfeld.
Effective January 8, 1999, Mr. Libin was also granted options to purchase
200,000 Common Shares upon the same terms and conditions as those granted to Mr.
Honigsfeld. Additionally he was included at such time as a participant in the
Company's 1999 Restricted Stock Rights Grant Plan.
Robert E. (Teddy) Turner, IV
Effective January 8, 1999, the Company and Robert E. (Teddy) Turner, IV
entered into a three-year Employment Agreement pursuant to which Mr. Turner
serves as the Company's Chairman of the Board. Such employment agreement
provides for a salary of $208,000 per annum. Mr. Turner's employment agreement
does not require Mr. Turner to devote all of his time to the Company's business
and allows him to participate in other activities which do not prevent Mr.
Turner from fulfilling his obligations to the Company. In addition to salary,
Mr. Turner is entitled
53
<PAGE>
to receive a sales and marketing bonus upon the same terms and conditions as the
bonus for Mr. Honigsfeld. Mr. Turner was also issued options to purchase 200,000
Common Shares upon the same terms and conditions as those granted to Mr.
Honigsfeld. Additionally, he was included as a participant in the Company's 1999
Restricted Stock Rights Grant Plan. Other terms of Mr. Turner's Employment
Agreement conform in structure to the material provisions of Mr. Honigsfeld's,
such as with respect to renewal, benefits, restrictive covenants and
termination, without any requirement to mitigate any damages.
Rudy C. Theale, Jr.
Effective January 8, 1999, the Company and Rudy C. Theale, Jr. entered into
a three- year Employment Agreement pursuant to which Mr. Theale serves as
Executive Vice President of the Company and President of e.TV on a full-time
basis. Such Employment Agreement provides for a salary of $208,000 per annum. In
addition to salary, Mr. Theale is entitled to receive a sales and marketing
bonus upon the same terms and conditions as the bonus for Mr. Honigsfeld. Mr.
Theale was also issued options to purchase 650,000 Common Shares upon the same
terms and conditions as those granted to Mr. Honigsfeld. Additionally, he was
included as a participant in the Company's 1999 Restricted Stock Rights Grant
Plan. Other terms of Mr. Theale's Employment Agreement conform in structure to
the material provisions of Mr. Honigsfeld's, such as with respect to renewal,
benefits, restrictive covenants and termination.
Restricted Stock Rights Grant Plan
----------------------------------
Effective January 8, 1999, the Company adopted a 1999 Restricted Stock
Rights Grant Plan (the "Rights Plan"). The Rights Plan provides for the issuance
of up to 2,000,000 Common Shares to the Rights Plan participants based on a
formula which provides for the participants to share up to 2,000,000 Common
Shares (the "Performance Shares") if the Company generates up to $10,000,000 in
earnings before taxes by December 31, 2001, including making up losses during
the years 1999 through 2001, if any. If the Company earns less than $10,000,000
before taxes during such period, the number of Performance Shares will be pro
rated based on one share for each $5.00 in earnings before taxes. The Rights
Plan participants include Mark Honigsfeld, Rudy C. Theale, Jr., Robert E.
(Teddy) Turner, IV, Louis Libin, David Greenspan, Christopher Liston and Paul
Danner and any other person who is employed by or is providing services to the
Company or its subsidiaries and who is elected as a participant by the above
named initial participants. The participants will be issued the Performance
Shares based on their respective pro rata ownership of the Company's securities
on the date the Rights Plan was adopted. However, each participant must be
employed by or providing services to the Company or its subsidiaries in
connection with the e.TV Business on December 31, 2001 in order to receive any
Performance Shares. In addition, the issuance of the Performance Shares is
subject to, among other things, any consent or approval of any regulatory body
or the stockholders of the Company, if such consents or approvals are necessary.
54
<PAGE>
Report on Repricing of Options
------------------------------
At a meeting of the Board of Directors held on September 18, 1998, the
Board of Directors approved the repricing of certain existing stock options,
including options covering an aggregate of 190,000 Common Shares held by Messrs.
Honigsfeld and Libin and options covering 34,700 Common Shares held by other
persons. The Board discussed that the purpose of granting options to employees
was to provide incentive for the employees to align their interest with the
stockholders of the Company as well as to engender employee loyalty to the
Company. It was noted that many of the options were granted at a time when the
price of the Company's Common Shares was substantially higher than the current
market price at such date, and that those options currently did not and would
not provide incentive to those employees to remain with the Company if they
received competing offers for their services. The Board determined that the
current options which were granted to employees at exercise prices above $5.00
per share should be cancelled and new options issued at an exercise price of
$5.00 per share, which was the floor for the conversion of the Series A
Preferred Shares issued in the Company's Private Placement to Strategic and
Opportunity as well as the Company's initial public offering price.
The Board determined that the repricing of such options would be
effectuated, subject to the consent of the affected stock option holders, by the
cancellation of all stock options granted pursuant to the Company's 1996 Stock
Option Plan which have exercise prices above $5.00 per share and the replacement
of such options with substantially similar options at an exercise price of $5.00
per share.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, to the knowledge of the Company based
solely upon records available to it, certain information as of February 28, 1999
regarding the beneficial ownership of the Company's Common Shares (i) by each
person who the Company believes to be the beneficial owner of more than 5% of
its outstanding Common Shares, (ii) by each current director, (iii) by each
person listed in the Summary Compensation Table under "Executive Compensation"
and (iv) by all current executive officers and directors as a group:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address
of Beneficial Owner Number Percent
- - ------------------- ------ -------
Mark Honigsfeld 873,200(1) 23.7%
77 Spruce Street
Cedarhurst, New York
Louis Libin 100,000(2) 2.9%
77 Spruce Street
Cedarhurst, New York
55
<PAGE>
Robert E. (Teddy) Turner, IV 30,000(3) *
12735 Gran Bay Parkway
Jacksonville, Florida
Rudy C. Theale, Jr. 25,000(4) *
12735 Gran Bay Parkway
Jacksonville, Florida
Christopher Liston 10,000(4) *
12735 Gran Bay Parkway
Jacksonville, Florida
Harold Lazarus 5,000(5) *
134 Hofstra University
Hempstead, New York
Faith Griffin 0 -
264 Oak Ridge Avenue
Summit, New Jersey
All executive officers and directors
as a group (8 persons) 1,048,200(1)(2) 27.6%
(3)(4)(5)
- - -------------------
</TABLE>
* Represents less than 1%.
(1) Represents (i) 423,200 shares held by the Mark Honigsfeld Living Trust
(the "Honigsfeld Trust") whose sole beneficiary is Mr. Honigsfeld's
wife; Mr. Honigsfeld, the settlor and trustee of the trust, has the
right to terminate the Honigsfeld Trust and receive the shares; (ii)
200,000 shares held by the Mardee Charity Fund Foundation, a private
charitable foundation of which Mr. Honigsfeld and his wife are the sole
trustees; (iii) 225,000 shares issuable upon the exercise of currently
exercisable options; and (iv) 25,000 shares issuable upon the exercise
of options which are exercisable within 60 days.
(2) Includes (i) 50,000 shares issuable upon the exercise of currently
exercisable options; and (ii) 25,000 issuable upon the exercise of
options which are exercisable within 60 days.
(3) Includes 25,000 shares issuable upon the exercise of options which are
exercisable within 60 days.
(4) Represents shares issuable upon the exercise of options which are
exercisable within 60 days.
(5) Represents shares issuable upon the exercise of currently exercisable
options.
Item 12. Certain Relationships and Related Transactions
In January 1997, the Company entered into a secured Credit Agreement with
Mr. Honigsfeld pursuant to which the Company initially borrowed $200,000. In
April 1997, the
56
<PAGE>
Company and Mr. Honigsfeld amended the Credit Agreement to provide for an
additional line of credit of $500,000. Outstanding principal under the Credit
Agreement bears interest at the rate of 10% per annum. The repayment of up to
$200,000 under the Credit Agreement is secured by a first priority security
interest in all the assets of the Company. The Company entered into the Credit
Agreement because it required additional financing to fund the Company's working
capital needs and no other sources of financing were available at that time. In
May 1997, the Company borrowed an additional $200,000 under the Credit
Agreement. Contemporaneously with the closing of the IPO, $200,000 of
indebtedness was converted into 40,000 Common Shares pursuant to an agreement
between the Company and Mr. Honigsfeld. As of December 31, 1998, $50,000 in
principal was outstanding under the Credit Agreement. In 1997 and 1998, the
Company paid Mr. Honigsfeld an aggregate of $9,316 and $11,250, respectively, in
interest under the Credit Agreement. The Company believes that the terms of the
Credit Agreement are commercially reasonable and are at least as favorable to
the Company as it could have obtained from an unrelated third party. The Credit
Agreement was approved by, among others, all the disinterested directors of the
Company.
On December 22, 1998, the Company elected David Greenspan as Chief
Financial Officer. At that time Mr. Greenspan was, and he continued to serve
until his resignation on February 12, 1999 as, the Chief Financial Officer and a
director of LocalNet. Other than the Loan and Security Agreement and Peaceful
Surrender Agreement, the Company has not had any relationship with LocalNet. See
Item 1 - "Description of Business - History and Recent Developments" and Item 6
- - - "Management's Discussion and Analysis or Plan of Operation - Subsequent
Event."
To the extent that the Company may enter into any agreements with related
parties in the future (of which none are presently contemplated), the Board of
Directors of the Company has determined that the terms of such agreements must
be commercially reasonable and no less favorable to the Company than it could
obtain from unrelated third parties. Additionally, the Board of Directors of the
Company has further determined that such agreements must be approved by a
majority of the disinterested directors of the Company.
57
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits Description of Exhibit
- - --- -------- ----------------------
2 Agreement of Merger between the Company and Coastal
Computer Systems, Inc., a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 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.**
3.3 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock, filed with the
Secretary of State of the State of Delaware on September 2,
1998. ***
3.4 Amended and Restated By-Laws of the Company.
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
10.1 Restated and Amended Employment Agreement dated as of
October 1, 1996 between the Company and Mark Honigsfeld.*
10.2 Form of Warrant between the Company and each of the Bridge
Lenders.*
10.3 1996 Stock Option Plan.*
10.4 Lease dated October 1, 1996 between Summit Equities Corp.
and the Company.*
10.5 Credit Agreement dated January 20, 1997 between the Company
and Mark
Honigsfeld.*
10.6 Form of Promissory from the Company to Mark Honigsfeld
relating to amounts borrowed under the Credit
Agreement.****
10.7 Form of Indemnification Agreement between the Company and
the Company's directors and officers.*
58
<PAGE>
10.8 Employment Agreement dated January 6, 1997 between the
Company and Louis Libin.*
10.9 Amended and Restated Credit Agreement dated April 30, 1997
between the Company and Mark Honigsfeld.*
10.10 Mobile Data Services Business Agreement dated as of
November 15, 1996 between the Company and GTE Mobilnet
Service Corp.*
10.11 Wireless Data Channels Program Agreement dated as of
February 19, 1997 between the Company and AT&T Wireless
Data, Inc.*
10.12 Master Supplier Agreement dated as of March 3, 1997 between
the Company and Data General Corporation.*
10.13 Agreement between the Company (executed on September 3,
1997) and Computer Associates International, Inc. (executed
on January 2, 1998).****
10.14 Termination Agreement dated as of March 17, 1998 between
the Company and Dong Lew.**
10.15 Business Alliance Agreement dated March 25, 1998 between
the Company and Alpine Software Incorporated. ****
10.16 Agreement and Plan of Merger dated as of April 22, 1998
among the Company, Rugby Acquisition Corp., Rugby National
Corp. and Harvey Weinstein.**
10.17 Loan and Security Agreement dated as of April 22, 1998
between the Company and Rugby National Corp. **
10.18 Stock Purchase Agreement dated as of May 31, 1998 between
the Company, and JNC Opportunity Fund Ltd. and JNC
Strategic Fund Ltd. **
10.19 Registration Rights Agreement dated as of May 31, 1998
between the Company, and JNC Opportunity Fund Ltd. and JNC
Strategic Fund Ltd. **
10.20 Securities Exchange Agreement between the Company and JNC
Strategic Fund Ltd. dated September 25, 1998. ***
10.21 Registration Rights Agreement Amendment dated as of
September 25, 1998 between the Company and JNC Opportunity
Fund Ltd. and JNC Strategic Fund Ltd. ***
59
<PAGE>
10.22 Loan and Security Agreement dated as of October 6, 1998
between the Company and LocalNet Communications, Inc.
10.23 Amendment No. 1 to Loan and Security Agreement dated as of
October 23, 1998 between the Company and LocalNet
Communications, Inc.
10.24 Amendment No. 2 to Loan and Security Agreement dated as of
November 12, 1998 between the Company and LocalNet
Communications, Inc.
10.25 Peaceful Surrender Agreement dated January 8, 1999 between
e.TV Commerce, Inc. and LocalNet Communications, Inc. *****
10.26 Amendment to Restated and Amended Employment Agreement
dated as of January 8, 1999 between the Company and Mark
Honigsfeld.
10.27 Amendment No. 1 to Employment Agreement dated as of
January 8, 1999 between the Company and Louis Libin.
10.28 Employment Agreement dated as of January 8, 1999 between
the Company, e.TV Commerce, Inc. and Robert E. (Teddy)
Turner, IV.
10.29 Employment Agreement dated as of January 8, 1999 between
the Company, e.TV Commerce, Inc. and Rudy C. Theale, Jr.
10.30 1999 Restricted Stock Rights Grant Plan.
10.31 Agreement dated February 4, 1999 between e.TV Commerce,
Inc. and Boca Research, Inc.
10.32 Wholesale Service Agreement dated December 17, 1998 between
e.TV Commerce, Inc. and StarNet, Inc.
11 Computation of Earnings Per Common Share
23 Consent of Lazar, Levine & Felix LLP, independent auditors.
27 Financial Data Schedule.
--------------------------
* Previously filed as on exhibit to the Company's Registration
Statement of Form SB-2, Registration No. 333-18667.
** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended June 30, 1998.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the period ended September 30, 1998.
60
<PAGE>
****Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997. *****Previously filed
as an exhibit to the Company's Current Report on Form 8-K for an event
dated January 8, 1999.
(b) Current Reports on Form 8-K
---------------------------
A Current Report on Form 8-K was filed by the Company during
the last quarter of the fiscal year ended December 31, 1998 as follows:
Date of Event: November 18, 1998
Items Reported: 5 and 7
61
<PAGE>
Compu-DAWN, Inc.
REPORT ON EXAMINATION OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
- INDEX TO FINANCIAL STATEMENTS -
Page
-------
<S> <C>
Independent Auditors' Report F - 2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 F - 3
Statements of Operations for the Years Ended December 31, 1998 and 1997 F - 4
Statement of Shareholders' Equity for the Two Years in the Period Ended December 31, 1998 F - 5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F - 6
Notes to Financial Statements F - 8
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York
We have audited the accompanying balance sheets of Compu-DAWN, Inc. as of
December 31, 1998 and 1997 and the statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compu-DAWN, Inc. as of December
31, 1998 and 1997 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Lazar Levine & Felix LLP
------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
February 25, 1999
except for Note 14, the
date of which is
March 4, 1999
F - 2
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
BALANCE SHEETS
- ASSETS (Note 7) -
December 31,
1998 1997
-------------- ------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash (Note 2b) $ 2,528,400 $3,081,253
Marketable securities (Note 2c) 1,850,000 -
Accounts receivable, net of allowances for doubtful accounts of $13,635
for 1998 and 1997 (Note 2b) 319,392 72,454
Prepaid expenses 68,272 121,802
Loan receivable (Note 3) 736,318 -
Income tax refund receivable (Note 12) - 29,868
-------------- ------------
TOTAL CURRENT ASSETS 5,502,382 3,305,377
------------- -----------
FIXED ASSETS (Notes 2d, 4 and 5) 218,374 278,737
-------------- ------------
OTHER ASSETS:
Deferred compensation (Note 9) - 98,270
Security deposits 21,525 21,525
-------------- ------------
21,525 119,795
$ 5,742,281 $3,703,909
============ ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 169,519 $ 278,722
Deferred revenue (Note 2e) 173,953 12,000
Note payable - officer (Note 7) 50,000 100,000
Capitalized lease payable - current (Note 5) 6,662 5,771
-------------- -------------
TOTAL CURRENT LIABILITIES 400,134 396,493
-------------- ------------
NON-CURRENT LIABILITIES:
Note payable - officer (Note 7) - 50,000
Capitalized lease payable (Note 5) 15,779 22,440
Deferred rent liability (Note 13a) 28,448 29,402
-------------- -------------
44,227 101,842
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 14)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Preferred stock, $.01 par value; 1,000,000 shares authorized:
Series A Convertible Preferred; 3,250 shares issued and outstanding for 1998 33 -
Series B Convertible Preferred; 1,750 shares issued and outstanding for 1998 17 -
Common stock, $.01 par value, 20,000,000 shares authorized, 3,265,448 and 2,838,450
shares issued for 1998 and 1997, respectively 32,654 28,385
Additional paid-in capital 13,661,649 8,061,443
Retained earnings (deficit) (7,620,721) (4,837,169)
Accumulated other comprehensive income (loss) (Note 2k) (150,000) -
-------------- ---------------
5,923,632 3,252,659
Less: treasury stock, 340,044 and 8,561 shares at cost, for 1998 and 1997,
respectively (625,712) (47,085)
-------------- -------------
5,297,920 3,205,574
$ 5,742,281 $3,703,909
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
1998 1997
---- ----
REVENUES (Notes 2e and 10):
<S> <C> <C>
Software sales $ 900,398 $ 277,986
Maintenance income 348,091 313,389
------------- ------------
1,248,489 591,375
------------ ------------
COSTS AND EXPENSES:
Programming costs and expenses 459,875 406,563
General and administrative expenses (Note 2g) 1,924,034 2,195,406
Research and development (Note 2f) 515,788 935,804
------------- ------------
2,899,697 3,537,773
LOSS FROM OPERATIONS (1,651,208) (2,946,398)
------------ -----------
OTHER INCOME (EXPENSES):
Interest and other income 332,067 120,158
Interest expense and financing costs (Note 6) (17,459) (1,610,505)
Loss due to terminated investment transaction (Note 11) (296,952) -
Write-off of impaired loan (Note 3) (1,150,000) -
------------ ---------------
(1,132,344) (1,490,347)
LOSS BEFORE PROVISION (CREDIT) FOR INCOME TAXES (2,783,552) (4,436,745)
Provision (credit) for income taxes (Notes 2h and 12) - -
--------------- --------------
NET LOSS $(2,783,552) $(4,436,745)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE (Note 2i) $(0.95) $(1.95)
======= ======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 2i) 2,937,724 2,270,047
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
Additional Retained Other Total
Preferred Stock Common Stock Paid-in Earnings Comprehensive Treasury Shareholders'
Shares Amount Shares Amount Capital (Deficit) Income (Loss) Stock Equity (Deficit)
------ ------ ------ ------ ------- --------- ------------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 - $ - 986,700 $ 9,867 $1,670,258 $(400,424) $ - $ - $ 1,279,701
Options issued below fair
value - - - - 374,500 - - - 374,500
Exercise of stock options - - 408,750 4,088 122,297 - - - 126,385
Treasury stock, 8,561 shares
at cost - - - - - - - (47,085) (47,085)
Conversion of debt - - 40,000 400 199,600 - - - 200,000
Conversion of accrued
compensation - - 23,000 230 114,770 - - - 115,000
Initial public offering - - 1,380,000 13,800 5,612,074 - - - 5,625,874
Cancellation of options - - - - (32,056) - - - (32,056)
Net loss - - - - - (4,436,745) - - (4,436,745)
---- ----- --------- -------- ----------- ----------- ------ ------ ------------
Balance at December 31, 1997 - - 2,838,450 28,385 8,061,443 (4,837,169) - (47,085) 3,205,574
Exercise of stock options - - 24,895 248 68,339 - - (47,085) 21,502
Private offering of shares -
Preferred Series A and Common 3,250 33 327,103 3,271 4,719,842 - - - 4,723,146
Exchange of 327,103 common
shares for Preferred Series B 1,750 17 - - 531,525 - - (531,542) -
Shares issued for professional
fees - - 75,000 750 280,500 - - - 281,250
Unrealized loss on investment - - - - - - (150,000) - (150,000)
Net loss - - - - - (2,783,552) - - (2,783,552)
------- ----- ---------- -------- --------- ----------- --------- --------- -----------
BALANCE AT DECEMBER 31, 1998 5,000 $50 3,265,448 $32,654 $13,661,649 $(7,620,721) $(150,000) $(625,712) $ 5,297,920
===== === ========= ======= =========== ============ ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 1 of 2
------------------------
For the Year Ended
December 31,
<S> <C> <C>
1998 1997
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 1,163,504 $ 628,198
Cash paid to suppliers and employees (2,791,082) (3,028,563)
Interest paid (17,459) (22,105)
Interest and other income received 336,955 111,156
Income tax refund received 29,868 -
------------- -------------
Net cash (utilized) by operating activities (1,278,214) (2,311,314)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans and advances (1,886,318) -
Principal repayments of officer's loan - 69,247
Purchase of fixed assets (27,199) (204,452)
Purchase of marketable securities (2,000,000) -
------------ -------------
Net cash (utilized) by investing activities (3,913,517) (135,205)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan received from officer - 400,000
Repayment of officer's loan (100,000) (50,000)
Repayment of promissory notes - (770,000)
Payments for common stock and options acquired - (34,710)
Payments of capital lease obligations (5,770) (9,189)
Net proceeds from sale of shares 4,723,146 5,625,874
Proceeds from exercise of stock options 21,502 79,300
-------------- -------------
Net cash provided by financing activities 4,638,878 5,241,275
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (552,853) 2,794,756
Cash and cash equivalents, at beginning of year 3,081,253 286,497
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,528,400 $3,081,253
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 6
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
STATEMENTS OF CASH FLOWS Page 2 of 2
------------------------
For the Year Ended
December 31,
<S> <C> <C>
1998 1997
-------- -------
RECONCILIATION OF NET LOSS TO NET CASH (UTILIZED) BY
OPERATING ACTIVITIES:
Net loss $(2,783,552) $(4,436,745)
Adjustments to reconcile net loss to net cash (utilized) by operating activities:
Allowance for doubtful accounts - 19,000
Depreciation and amortization 82,674 64,529
Write off of impaired loan 1,150,000 -
Deferred rent liability (954) 6,287
Compensatory stock 379,520 278,230
Financing charge - 1,588,400
Loss on disposal of fixed assets 4,888 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (246,938) 8,556
Decrease in prepaid expenses 53,530 36,805
Decrease in tax refund receivable 29,868 6,136
(Decrease) increase in accounts payable and accrued expenses (109,203) 133,588
Increase (decrease) in deferred revenue 161,953 (16,100)
------------ -------------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES $(1,278,214) $(2,311,314)
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
(a) During 1997, an officer of the Company converted $200,000 of a loan
payable to him into 40,000 shares of common stock.
(b) During 1997, two officers of the Company converted $115,000 of accrued
compensation into 23,000 shares of common stock.
The accompanying notes are an integral part of these
financial statements.
F - 7
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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.
Subsequent to the year end, through a newly formed subsidiary,
e.TV Commerce, Inc., the Company began operations in the
internet, e-commerce and telecommunications business (see Note
3).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with
generally accepted accounting principles. Outlined below are
those policies which are considered particularly significant.
(a) Use of Estimates:
In preparing financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
(b) Concentration of Credit Risk /Fair Value:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash
investments and accounts receivable.
The Company maintains, at times, deposits in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial
institutions and feels the Company's risk is negligible.
Management believes that concentrations of credit risk with
respect to accounts receivable are limited due to the Company's
methods of progress billings and collections.
As of December 31, 1998 and 1997, the fair value of cash and
cash equivalents, receivables, obligations under accounts
payable and debt instruments approximate the carrying value.
F - 8
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Marketable Securities:
At December 31, 1998, marketable securities have been
categorized as available for sale and, as a result, are stated
at fair value in accordance with "Statement of Financial
Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Unrealized gains and losses are
included in shareholders' equity as other comprehensive income
(loss).
(d) Fixed Assets:
Fixed assets are recorded at cost. Depreciation of fixed assets
is provided on a straight-line basis as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Motor vehicles 5 years
Maintenance and repairs are expensed as incurred. Leasehold
improvements are amortized over the useful life of the asset or
the lease, whichever is shorter. Capital leases are amortized
over the term of the respective leases or the useful lives of
the related assets, whichever is shorter.
Depreciation and amortization expense for the years ended
December 31, 1998 and 1997 aggregated $82,674 and $64,529,
respectively.
(e) Revenue Recognition:
The Company generates revenues from the granting of
non-exclusive, non-transferable and non- assignable licenses to
use software it has developed, through fixed price contracts.
Revenues from such fixed price contracts are recognized using
the percentage of completion method of accounting. The Company
retains title to the software and warranties that it will
provide technical support and repair any defects in the software
at no charge. The warranty period for each contract is
negotiated individually, for periods ranging from 90 days to
three years. To date, repair costs have been minimal and
therefore the Company has not established a reserve for such
warranty costs.
In addition, the Company provides post-contract customer support
to licensees of its software. Revenues from such services are
recognized ratably over the period of performance. Fees billed
and/or received prior to performance of services are reflected
as deferred revenue.
(f) Software Development Costs:
The Company reflects costs incurred in establishing the
technological feasibility of a computer software product to be
leased or sold, as research and development costs, and expenses
such costs in the period incurred. Research and development
costs for the years ended December 31, 1998 and 1997 aggregated
$515,788 and $935,804, respectively.
F - 9
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(f) Software Development Costs (continued):
After technological feasibility has been established, all costs
incurred on the software product are to be capitalized and
amortized on a product by product basis. Capitalization of
computer software costs is discontinued when the product is
available to be sold or leased.
To date, the Company has only sold or leased software which has
been developed for specific customers. As such, all costs
incurred have been expensed as research and development costs.
Costs associated with post-contract customer support
(maintenance) are charged to expense when related revenue is
recognized or when those costs are incurred, whichever occurs
first.
(g) Advertising Costs:
Advertising costs, which are included in general and
administrative expenses, are expensed as incurred. For the
years ended December 31, 1998 and 1997, advertising costs
aggregated $19,449 and $131,868, respectively.
(h) Income Taxes:
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, and to
net operating loss and tax credit carryforwards, measured by
enacted tax rates for years in which taxes are expected to be
paid or recovered.
Deferred taxes are provided for temporary differences between
financial and tax accounting, principally for differences in
the basis of fixed assets, allowance for doubtful accounts and
other nondeductible expenses, as well as for net operating loss
carryforwards.
See also Note 12.
(i) Earnings Per Share:
In 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 replaced the
previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share, respectively.
Unlike the previously reported primary earnings per share,
basic earnings per share excludes the dilutive effects of stock
options. Diluted earnings per share is similar to the
previously reported fully diluted earnings per share. Earnings
per share amounts for all periods presented have been
calculated in accordance with the requirements of SFAS No. 128.
(j) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash
equivalents.
F - 10
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(k) Comprehensive Income:
Effective January 1, 1997, the Company adopted Statement of
Financing Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130"), which establishes new rules
for the reporting and display of comprehensive income and its
components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities to be included in other
comprehensive income.
The components of comprehensive income were as follows:
<TABLE>
<S> <C> <C>
1998 1997
------------ -----------
Net income (loss) $(2,783,552) $(4,436,745)
Unrealized holding losses on marketable securities (150,000) -
------------ ------------
Comprehensive income (loss) $(2,933,552) $(4,436,745)
=========== ===========
</TABLE>
(l) Operating Segments:
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued effective for
fiscal years ending after December 15, 1998. The statement
allows for early adoption. The Company does not believe that,
as of December 31, 1998, it operated in more than one
identifiable segment. See Note 3 regarding new business.
(m) Impact of the Year 2000 Issue:
The Year 2000 ("Y2K") issue is the result of computer programs
being written using a two-digit format rather than four to
define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This
could potentially result in a system failure or miscalculations
causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send
invoices, or engage in other similar normal business
activities.
The Company's accounting software was purchased "off-the-shelf"
and the Company intends to timely update such software by
purchasing Y2K compliant software and hardware from retail
vendors at reasonable cost. Software developed and marketed by
the Company is already Y2K compliant. Other companies upon
whose services the Company depends have not yet been contacted
to determine whether such companies' systems are Y2K compliant.
If the systems of such companies are not Y2K compliant, there
could be a material adverse effect on the Company's financial
condition or results of operations.
F -11
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - LOAN RECEIVABLE:
Through December 1998, the Company loaned an aggregate of
$1,900,000 to LocalNet Communications, Inc. ("LocalNet"), an
unaffiliated Florida corporation in the telecommunications and
internet services marketing business. LocalNet signed 12%,
secured promissory notes due in one year, at which time all
interest and principal is payable. The notes are secured by a
collateral interest in all of LocalNet's tangible and
intangible assets and a pledge of the common stock owned by its
Chief Executive Officer and the Chairman of its Board, which
represents a 63.1% ownership interest in LocalNet, in the
aggregate.
On January 7, 1999, subsequent to the balance sheet date, the
Company assigned its interest in this loan to e.TV Commerce,
Inc., a newly-formed subsidiary. On January 8, 1999, LocalNet
peacefully surrendered the assets representing the collateral
underlying this loan. The fair value of the assets at the time
of surrender was determined to be approximately $750,000.
Accordingly, the Company has written down the loan receivable
by $1,150,000, in order to reflect this receivable at its fair
value.
Through e.TV Commerce, Inc., the Company began operations in
various businesses similar to that of LocalNet in January 1999,
subsequent to the balance sheet date.
NOTE 4 - FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
December 31,
<S> <C> <C>
1998 1997
---- ----
Computer equipment $339,336 $312,136
Furniture and fixtures 28,495 28,495
Motor vehicles - 12,597
Leasehold improvements 65,581 65,581
Assets under capitalized leases 41,484 41,484
---------- ----------
474,896 460,293
Less: accumulated depreciation and amortization 256,522 181,556
--------- ---------
$218,374 $278,737
</TABLE>
NOTE 5 - CAPITALIZED LEASE OBLIGATIONS:
The Company has entered into various capital leases for
furniture, fixtures and equipment which expire in years through
2001. The assets and liability under these capital leases are
recorded at the lower of the present value of the minimum lease
payments or the fair market value of the assets. The assets are
depreciated over their estimated useful lives. Depreciation of
assets under capital leases for the years ended December 31,
1998 and 1997 aggregated $9,349 for each year.
F - 12
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - CAPITALIZED LEASE OBLIGATIONS (Continued):
Minimum future lease payments under capital leases as of
December 31, 1998 are as follows:
1999 $ 9,474
2000 9,474
2001 8,684
---------
Total minimum lease payments 27,632
Less: amount representing interest 5,191
-----
$22,441
=======
NOTE 6 - DEBT OFFERING:
In October 1996, the Company successfully completed the sale of
77 units in a private offering, each unit consisting of a
$10,000 principal amount 12% promissory note ("bridge note")
and a redeemable stock purchase warrant to acquire 5,600 shares
of the Company's common stock for aggregate gross proceeds of
$770,000. The warrants were exercisable at a price of $.50 per
share only upon the successful completion of an Initial Public
Offering ("IPO") of the Company's common stock.
In accordance with APB No. 14, the proceeds of debt issued with
stock purchase warrants should be allocated based on the fair
values of the debt without the warrants and of the warrants
themselves when issued. Accordingly, the Company reflected
deferred financing costs and additional paid-in capital based
upon the difference between the deemed fair value of the
warrants ($4.00) and the warrant exercise price.
Financing costs, which represent costs incurred in connection
with this private offering, are to be charged to operations as
additional interest expense over the term of the bridge notes.
In April 1997, the holders of the bridge notes agreed to (i)
increase the exercise price of the five year warrants issued to
them from $.50 per warrant to $3.00 per warrant and (ii)
increase the holding period of these warrants from six months
to two years from the effective date of the IPO.
In June 1997, the Company successfully completed its IPO (see
Note 8) and repaid these promissory notes. In connection with
this repayment, the Company fully amortized deferred financing
costs originally capitalized in connection with the notes. This
amount has been reflected as a non-recurring charge in the
statement of operations.
F - 13
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - NOTE PAYABLE - OFFICER:
In April 1997, the Chairman of the Board of the Company agreed
to convert a $200,000 loan payable to him by the Company into
common shares at a conversion price of $5.00 per share (the IPO
price) upon the consummation of such IPO. In addition, this
officer agreed to provide a $500,000 credit line to the Company
for a period of two years, secured by all assets of the
Company. As of December 31, 1998 and 1997, the balance
outstanding under this credit line was $50,000 and $150,000,
respectively which amount is payable in quarterly installments
of $25,000 plus interest at 10% per annum. For the years ended
December 31, 1998 and 1997, the interest expense relating to
these loans aggregated $10,208 and $11,191.
NOTE 8 - CAPITAL STOCK AND EQUIVALENTS:
In October 1996, simultaneously with its reincorporation in the
State of Delaware, (see Note 1) the Company increased its
authorized capital to 20,000,000 shares of common stock, $.01
par value, and 1,000,000 shares of preferred stock, $.01 par
value. The Company also effected a stock split of its issued
and outstanding common stock on a 325 for 1 basis, resulting in
1,157,000 shares. This stock split was reflected retroactively
in the financial statements and accordingly, all references to
the number of common shares issued and outstanding were
restated.
During April 1997, options were exercised to purchase 408,750
shares of common stock for which the Company received $79,300
in cash proceeds and 8,561 shares of Company common stock with
a fair market value of $47,085.
In April 1997, two officers (the President and the Chairman of
the Board) agreed to convert $115,000 of accrued compensation
into common shares at a conversion price of $5.00 per share
(the IPO price), such conversion to occur upon the consummation
of the IPO.
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.
On June 5, 1998, the Company completed a private offering of
its securities, whereby it sold to the purchasers the
following:
(a) 3,250 shares of the Company's Series A convertible
preferred stock, par value $.01 per share (the
"Series A Preferred Stock"), which shares are
convertible into Common Shares of the Company
(maximum of 650,000 shares, subject to adjustment
under certain circumstances);
(b) 327,103 Common Shares of the Company; and
(c) warrants to acquire an aggregate of 90,207 Common
Shares at an exercise price of $8.025 per share,
subject to adjustment under certain circumstances.
F -14
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - CAPITAL STOCK AND EQUIVALENTS (Continued):
The aggregate purchase price for the foregoing securities was
$5,000,000; net proceeds from this private placement aggregated
approximately $4,723,000.
On September 26, 1998, pursuant to a Securities Exchange
Agreement between the Company and the purchasers, the Company
issued to the purchasers 1,750 shares of Series B convertible
preferred stock, par value $.01 per share (the "Series B
Preferred Shares"), in exchange for the 327,103 shares of
common stock previously issued. Subject to certain adjustments,
the Series B Preferred Shares (1,750) are convertible into
327,103 common shares.
During 1998, options were exercised to acquire 24,895 shares of
common stock, for which the Company received $21,502 in cash
proceeds and 4,380 shares of Company common stock with a fair
market value of $47,085.
NOTE 9 - STOCK OPTIONS:
In October 1996, the Company established a Stock Option Plan
under which options (including non-statutory options) to
purchase up to 2,000,000 shares may be granted to eligible
persons. As of December 31, 1996, the Company had granted
options to purchase an aggregate of 491,950 shares of common
stock at prices ranging from $.30 to $4.00, aggregating
$221,485. In connection therewith the Company recorded deferred
compensation (measured as the excess of the fair value of the
underlying stock over the exercise price of the option at date
of grant) of $37,000. During 1997, prior to the consummation of
the IPO, the Company granted additional options to purchase an
aggregate of 187,250 shares of common stock at an exercise
price of $3.00 aggregating $561,750, and recorded additional
deferred compensation costs of $374,500. Deferred compensation
costs are being amortized over the vesting period of the
related options. Amortization of such costs for the years ended
December 31, 1998 and 1997 aggregated $98,270 and $278,230,
respectively.
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation expense is recognized.
F - 15
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - STOCK OPTIONS (Continued):
Pro forma information regarding net income and earnings per
share is required by Statement 123, and has been determined as
if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 1998 and 1997, respectively:
risk-free interest rates of 5% and 6.1%; dividend yields of
1.5% and 2.6%; volatility factors of the expected market price
of the Company's common stock of 60% and 65%; and a
weighted-average expected life of the options of seven years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options vesting
period. The Company's pro forma information follows:
1998 1997
--------------- ------------
Net loss:
As reported $(2,783,552) $(4,436,745)
Pro forma (3,140,736) (4,883,470)
Basic loss per share:
As reported $(0.95) $(1.95)
Pro forma (1.07) (2.15)
F -16
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - STOCK OPTIONS (Continued):
A summary of stock option activity, and related information for
the two years in the period ended December 31, 1998 follows:
<S> <C> <C>
Weighted
Average
Exercise
Options Price
------- -----
Outstanding, December 31, 1996 491,950 0.45
Granted 278,311 4.04
Exercised (410,417) 0.32
Canceled (55,000) 1.69
---------
Outstanding, December 31, 1997 304,844 3.69
Granted 490,100 5.82
Exercised (24,895) 2.76
Canceled (265,083) 6.56
--------
Outstanding, December 31, 1998 504,966 4.22
========
Weighted average fair value of options granted during the
year ended:
December 31, 1997 $7.67
December 31, 1998 $4.31
Options exercisable:
December 31, 1997 49,533
December 31, 1998 320,919
</TABLE>
Exercise prices for options outstanding as of December 31, 1998
ranged from $.50 to $5.00 per share. The weighted-average
remaining contractual life of these options is seven years.
In 1997, the Company established the 1997 Qualified Employee
Stock Purchase Plan which provides for the grant of up to a
total of 250,000 options intended to qualify as employee
incentive stock options. The exercise price of options granted
under this plan shall be the lesser of 85% of fair market value
of the Company's common shares at date of grant or 85% of the
fair market value on the exercise date. In December 1997, this
plan was amended to commence on January 1, 1999.
F - 17
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - STOCK OPTIONS (Continued):
Effective January 8, 1999, subsequent to the balance sheet date,
the Company adopted its 1999 Restricted Stock Rights Grant Plan
(the "Rights Plan"). The Rights Plan provides for the issuance of
up to 2,000,000 common shares to the Rights Plan participants
based on a formula which provides for the participants to share
up to 2,000,000 common shares (the "Performance Shares") if the
Company generates up to $10,000,000 in earnings before taxes by
December 31, 2001, including making up any losses during the
years 1999 through 2001, if any. If the Company earns less than
$10,000,000, the number of Performance Shares will be pro rated
based on one share for each $5.00 in earnings before taxes. The
Rights Plan participants include certain officers and employees
and any other person who is employed by or is providing services
to the Company or its subsidiaries and who is elected as a
participant by an initial participant. The participants will be
issued the Performance Shares based on their respective pro rata
ownership of the Company's securities on the date the Rights Plan
was adopted. However, each participant must be employed by or
providing services to the Company or its subsidiaries in
connection with the e.TV business on December 31, 2001 in order
to receive any Performance Shares. In addition, the issuance of
the Performance Shares is subject to, among other things, any
consent or approval of any regulatory body or the stockholders of
the Company, if such consents or approvals are necessary.
NOTE 10 - ECONOMIC DEPENDENCY:
To date, the Company's revenues have been materially dependent on
a limited number of customers. The nature of the Company's
business (see Note 1) is such that during any individual
accounting period it will license its software products to a
limited number of significant customers. In addition, revenues
from the Company's products are primarily from the public safety
and law enforcement markets.
Also, the Company currently relies on a limited number of (two or
three) software licensors of its main computer operating system.
The Company cannot assure that if any of these licenses are
terminated, it will be able to replace those licenses on a timely
basis.
NOTE 11 - TERMINATION OF INVESTMENT TRANSACTION:
On April 22, 1998, the Company entered into an agreement to
acquire an indirect 50% beneficial interest in Press-Loto, a
Russian company which claimed to have the right to operate the
first national on-line lottery in Russia pursuant to a license
from the Russian Ministry of Finance to the Union of Journalists
of Russia (the "Union"). The agreement provided that, at the
closing, 40% of Press- Loto was to be owned by the Union and its
charity with a private group holding a minority interest.
F - 18
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - TERMINATION OF INVESTMENT TRANSACTION (Continued):
On September 1, 1998 the Company issued a press release
announcing that it had terminated the Merger Agreement due to the
lack of fulfillment of the conditions of its obligation to close.
In accordance with the termination of the agreement, the Company
has written off all costs incurred regarding this transaction
during the current period, aggregating approximately $297,000.
See also Note 14 re: Subsequent Litigation.
NOTE 12 - INCOME TAXES:
The Company has net operating loss carryforwards as of December
31, 1998, of approximately $7,100,000 ($4,400,000 at December 31,
1997), which may be applied against future taxable income, and
which expire in various years beginning after 2011. Since there
is no assurance that the Company will generate future taxable
income to utilize the deferred tax asset resulting from its net
operating loss carryforwards, the Company has not recognized this
asset.
NOTE 13 - COMMITMENTS:
(a) In October 1996, the Company entered into a lease, for its
current executive offices, which provides for base annual rental
of $85,000. This lease, which is for an initial term of five
years, has scheduled annual increases, and can be renewed for an
additional five year period. The total amount of the base rent
payments is being charged to expenses using the straight-line
method over the term of the lease. The Company has recorded a
deferred credit to reflect the excess of rent expense over cash
payments since the inception of this lease. Previously, the
Company was occupying space pursuant to a lease which expired in
March 1997. Rent expense for the years ended December 31, 1998
and 1997 aggregated $78,354 and $99,770, respectively.
At December 31, 1998, future minimum rentals are as follows:
1999 $ 87,975
2000 93,075
2001 72,675
----------
Total $253,725
========
(b) The Company also leases certain types of equipment under
operating leases which expire at various dates through 1999.
Lease payments, which are charged to operations, aggregate
approximately $1,100 per month.
F - 19
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 13 - COMMITMENTS (Continued):
(c) Effective October 1, 1996, the Company entered into a three-year
employment agreement with the Chief Executive Officer of the
Company. This agreement provides for annual compensation of
$250,000 and a performance bonus based on a fixed formula.
Subsequent to the balance sheet date, this officers' employment
agreement was amended to terminate the existing bonus
compensation terms. This officer will be entitled to a
performance based bonus, the details of which have not yet been
determined. In addition to the above, this officer was granted
200,000 common stock purchase options and was included in the
Company's new 1999 Stock Rights Grant Plan (see Note 9).
Effective October 1, 1996, the Company entered into a three-year
employment agreement with its President and Chief Operating
Officer. This agreement provided for annual compensation of
$125,000 and a signing bonus of $15,000. In December 1997, the
Company entered into negotiations with this officer with regards
to a proposed termination of his employment agreement. Under the
termination agreement executed on March 17, 1998, this officer
received severance pay of approximately $216,000 and agreed to
sell a substantial portion of his equity share holdings in the
Company pursuant to the Company's Registration Statement on Form
S-8 and Rule 144 promulgated under the Securities Act of 1933, as
amended and/or to the current Chairman and Chief Executive
Officer and/or his designee.
In January 1997, the Company entered into a three-year employment
agreement with an employee to serve as the Company's Chief
Technology Officer. Such agreement provides for an annual base
salary of $200,000, $225,000 and $250,000 in the first, second
and third years, respectively. For the 12 month period beginning
March 1, 1999, this officer waived his increase and his salary
will remain at the $225,000 level. Other terms of this employment
agreement generally conform in structure to the material
provisions of the employment agreement for the Chief Executive
Officer as described above, including the 1999 Stock Rights Grant
Plan.
Subsequent to the balance sheet date, and in connection with e.TV
Commerce, Inc. (see Note 3) the Company entered into three year
employment agreements with a new Chairman of the Board of
Directors of the Company and an individual who will serve as the
Company's Executive Vice President and President of e.TV
Commerce, Inc. Each of these agreements provide for a salary of
$208,000 per annum, an issuance of options for 200,000 and
650,000 common shares, respectively and bonuses all on terms
similar to those of the Chief Executive Officer, as described
above. These two officers were also included in the 1999 Stock
Rights Grant Plan (see Note 9).
F - 20
<PAGE>
Compu-DAWN, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 14 - SUBSEQUENT LITIGATION:
In connection with the termination of a potential investment
transaction (see Note 11), on March 4, 1999 (subsequent to the
balance sheet date), the Company became aware of an action
brought in the Supreme Court of the State of New York, Nassau
County. The plaintiffs, Rugby National Corp., ("Rugby"), Harvey
Weinstein and Credomarka National Corp., have filed a complaint
against the Company and the Company's Chief Executive Officer,
alleging that the Company wilfully failed, without good cause, to
consummate a plan of merger agreement dated April 22, 1998. The
complaint states that Rugby's business was allegedly damaged
after the Company consummated a $5,000,000 private placement and
subsequently terminated the merger agreement, and that the
Company's chief executive officer falsely induced Rugby and
Weinstein to give their consent to the private placement. The
plaintiffs are claiming damages of $6,000,000.
Counsel to the Company has stated that no discovery has yet been
conducted and that due to the inherent uncertainties in
litigation in general, they cannot predict or guarantee the
outcome of this litigation at this time.
The Company believes it has meritorious defenses and intends to
vigorously defend this action.
F - 21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPU-DAWN, INC.
March 31, 1999 By:/s/ Mark Honigsfeld
Mark Honigsfeld, Chief Executive Officer,
President and Secretary
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
- - --------- -------- ----
/s/ Robert E. Turner, IV Chairman of the Board March 31, 1999
- - ------------------------------- and Director
Robert E. Turner, IV
/s/ Mark Honigsfeld Chief Executive Officer, March 31, 1999
- - ------------------------------- President, Secretary and
Mark Honigsfeld Director (Principal
Executive Officer)
/s/ Louis Libin Senior Executive March 31, 1999
- - -------------------------------
Louis Libin Vice President and Director
/s/ Rudy C. Theale, Jr. Executive Vice President March 31, 1999
- - ------------------------------- and Director
Rudy C. Theale, Jr.
/s/ Harold Lazarus, Ph.D Director March 31, 1999
- - -------------------------------
Harold Lazarus, Ph.D
/s/ Christopher Liston Director March 31, 1999
- - ------------------------------
Christopher Liston
/s/ Faith Griffin Director March 31, 1999
- - ------------------------------
Faith Griffin
/s/ David Greenspan Chief Financial Officer March 31, 1999
- - ------------------------------ (Principal Financial and
David Greenspan Accounting Officer)
</TABLE>
62
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
COMPU-DAWN, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. - The registered office shall be established
and maintained at c/o United Corporate Services, Inc., 15 East North Street,
Dover, Delaware 19901 and United Corporate Services, Inc. shall be the
registered agent of this corporation in charge thereof.
SECTION 2. OTHER OFFICES. - The corporation may have other offices, either
within or without the State of Delaware, at such place or places as the Board of
Directors may from time to time appoint or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. - Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of meeting. To be properly
brought before an annual meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by, at the direction of or upon
authority granted by the Board of Directors, (b) otherwise brought before the
meeting by, at the direction of or upon authority granted by the Board of
Directors, or (c) subject to Article VII hereof, otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that, in the event that less than 70 days' notice of the date
of the meeting is given to stockholders and public disclosure of the meeting
date, pursuant to a press release, is either not made or is made less than 70
days prior to the meeting date, then notice by the stockholder to be timely must
be so received not later than the close of business on the tenth day following
the earlier of (a) the day on which such notice of the date of the annual
meeting was mailed to stockholders or (b) the day on which any such public
disclosure was made.
A stockholder's notice to the Secretary must set forth as to each matter
the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting, and
the reasons for conducting such business at the annual
1
<PAGE>
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the By-Laws to the contrary, but subject to Article II, Section 8 hereof, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this Section 1. The Chairman of an annual meeting shall,
if the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 1, and, if he should so determine, he shall so declare to the meeting,
and any such business not properly brought before the meeting shall not be
transacted.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors and
they may transact such other corporate business as shall be stated in the notice
of the meeting.
SECTION 2. SPECIAL MEETINGS. - Special meetings of stockholders for any
purpose or purposes may be called by the President or the Chairman of the Board
of the corporation and such meetings may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting.
SECTION 3. VOTING. - Except as otherwise provided in the Certificate of
Incorporation, each stockholder entitled to vote in accordance with the terms of
the Certificate of Incorporation and in accordance with the provisions of these
By-Laws shall be entitled to one vote, in person or by proxy, for each share of
stock entitled to vote held by such stockholder, but no proxy shall be voted
after three years from its date unless such proxy provides for a longer period.
If the Certificate of Incorporation provides for more or less than one vote for
any share, on any matter, every reference in these By-Laws to a majority or
other proposition of stock shall refer to such majority or other proportion of
the votes of such stock. Upon the demand of any stockholder, the vote for
directors and the vote upon any question before the meeting, shall be by ballot.
All elections for directors shall be decided by plurality vote; all other
questions shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
2
<PAGE>
SECTION 4. QUORUM . - Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote the meeting.
SECTION 5. NOTICE OF MEETINGS. - Written notice, stating the place, date
and time of the meeting, and in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote thereat at his address as it appears on the records of the
corporation, not less than ten nor more than sixty days before the date of the
meeting. No business other than that stated in the notice shall be transacted at
any meeting without the unanimous consent of all the stockholders entitled to
vote thereat.
SECTION 6. ACTION WITHOUT MEETING. - Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM. - The number of directors shall be fixed from
time to time by the Board of Directors of the corporation. The directors shall
be elected as provided below and each director shall be elected to serve until
his successor shall be elected and shall qualify. A director need not be a
stockholder.
Unless otherwise provided in the Certificate of Incorporation, directors
shall be elected in three classes. The number of directors in each class shall
be fixed from time to time by the Board of Directors of the corporation;
provided, however that the number of directors in any class shall not exceed the
number of directors in any other class by more than one. The initial term
3
<PAGE>
of office of the first class of directors shall expire at the first annual
meeting of stockholders after their election, the initial term of office of the
second class of directors shall expire at the second annual meeting of
stockholders after their election and the initial term of office of the third
class of directors shall expire at the third annual meeting of stockholders
after their election. At each annual meeting of stockholders after 1999, the
directors elected to succeed those whose terms have expired shall be identified
as being of the same class as the directors they succeed and shall be elected to
hold office until the third succeeding annual meeting of stockholders after
their election. Notwithstanding the foregoing, however, each director shall hold
office until his successor shall have been duly elected and qualified, unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
If the number of directors is changed, any increase or decrease in
directors shall be apportioned among the classes so as to maintain all classes
as equal in number as possible, and any additional director elected to any class
shall hold office for a term which shall coincide with the term of the other
directors in such class. No increase in the number of directors shall shorten
the term of any incumbent director.
Any vacancy occurring in the Board of Directors caused by the death,
resignation, or removal of a director, and any newly created directorship
resulting from an increase in the number of directors, may be filled by a
majority of the directors then in office, although less than a quorum. Each
director chosen to fill a vacancy or newly created directorship shall hold
office until the next election of the class for which such director shall have
been chosen and until his successor shall be duly elected and qualified.
Notwithstanding the foregoing paragraphs of this Section, whenever the
holders of any preferred stock issued by the corporation shall have the right,
voting as a class or otherwise, to elect directors, the then authorized number
of directors of the corporation shall be increased by the number of the
additional directors so to be elected, and the holders of such preferred stock
shall be entitled, as a class or otherwise, to elect such additional directors.
Any directors so elected shall hold office until the next annual meeting of
stockholders or until their rights to hold such office shall terminate pursuant
to the provisions of such preferred stock, whichever is earlier.
SECTION 2. RESIGNATIONS. - Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing, and
shall take effect at the time specified therein, and if no time be specified, at
the time of its receipt by the President or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES - If the office of any director, member of a committee
or other officer becomes vacant, the remaining directors in office, though less
than a quorum by a majority vote, may appoint any qualified person to fill such
vacancy, who shall hold office for the unexpired term and until his successor
shall be duly chosen.
4
<PAGE>
SECTION 4. REMOVAL. - Any director or directors may be removed either for
or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote at an
election of directors (notwithstanding the classification of the Board into
members having staggered terms), at a special meeting of the stockholders called
for the purpose and the vacancies thus created may be filled, at the meeting
held for the purpose of removal, by the affirmative vote of a majority in
interest of the stockholders entitled to vote, except that any director elected
by the holders of preferred stock may only be removed by the holders of a
majority of the shares of that class or series thereof entitled to vote at an
election of such director.
SECTION 5. INCREASE OF NUMBER. - The number of directors may be increased
by amendment of these By-Laws by the affirmative vote of a majority of the
directors, though less than a quorum, or, by the affirmative vote of a majority
in interest of the stockholders, at the annual meeting or at a special meeting
called for that purpose, and by like vote the additional directors may be chosen
at such meeting to hold office until the next annual election and until their
successors are elected and qualify.
SECTION 6. POWERS. - The Board of Directors shall exercise all of the
powers of the corporation except such as are by law, or by the Certificate of
Incorporation of the corporation or by these By-Laws conferred upon or reserved
to the stockholders.
SECTION 7. COMMITTEES. - The Board of Directors may designate one or more
committees, each committee to consist of two or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member or
such committee or committees, the member or members thereof present at any such
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, or in these By-Laws, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power of authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the corporation; and unless the resolution, these By-Laws, or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
SECTION 8. MEETINGS. - The newly elected Board of Directors may hold their
first meeting for the purpose of organization and the transaction of business,
if a quorum be present,
5
<PAGE>
immediately after the annual meeting of the stockholders; or the time and place
of such meeting may be fixed by consent, in writing, of all the directors.
Unless restricted by the Certificate of Incorporation or elsewhere in these
By-laws, members of the Board of Directors or any committee designated by such
Board may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at such meeting.
Regular meetings of the Board of Directors may be scheduled by a resolution
adopted by the Board. The Chairman of the Board or the President or Secretary
may call, and if requested by any two directors, must call a special meeting of
the Board and give five days' notice by mail, or 24 hours notice personally or
by telephone, telecopier or e-mail to each director. The Board of Directors may
hold an annual meeting, without notice, immediately after the annual meeting of
Stockholders.
SECTION 9. QUORUM. - A majority of the directors shall constitute a quorum
for the transaction of business. If at any meeting of the board there shall be
less than a quorum present, a majority of those present may adjourn the meeting
from time to time until a quorum is obtained, and no further notice thereof need
be given other than by announcement at the meeting which shall be so adjourned.
SECTION 10. COMPENSATION. - Directors shall not receive any stated salary
for their services as directors or as members of committees, but by resolution
of the board a fixed fee and expenses of attendance may be allowed for
attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
SECTION 11. ACTION WITHOUT MEETING. - Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting, if prior to such action a written consent
thereto is signed by all members of the board, or of such committee as the case
may be, and such written consent is filed with the minutes of proceedings of the
board or committee.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. - The officers of the corporation shall be a
President, a Treasurer, and a Secretary, all of whom shall be elected by the
Board of Directors and who shall hold office until their successors are elected
and qualified. In addition, the Board of Directors may elect a Chairman, a Chief
Executive Officer, a Chief Financial Officer, a Chief Operating Officer, one or
more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers as
they may deem proper. None of the officers of the corporation need be directors.
The officers shall be elected at
6
<PAGE>
the first meeting of the Board of Directors after each annual meeting. More than
two offices may be held by the same person.
SECTION 2. OTHER OFFICERS AND AGENTS. - The Board of Directors may appoint
such other officers and agents as it may deem advisable, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
SECTION 3. CHAIRMAN. - The Chairman of the Board of Directors, if one be
elected, shall preside at all meetings of the Board of Directors and he shall
have and perform such other duties as from time to time may be assigned to him
by the Board of Directors.
SECTION 4. PRESIDENT. - Unless a chief executive officer or other officer
is elected and has been assigned the powers and the duties of supervision and
management by the Board of Directors, the President shall be the chief executive
officer of the corporation and shall have the general powers and duties of
supervision and management usually vested in the office of President of a
corporation, subject to the control of the Board of Directors. Except as the
Board of Directors shall authorize the execution thereof in some other manner,
he shall execute bonds, mortgages and other contracts in behalf of the
corporation, and shall cause the seal to be affixed to any instrument requiring
it and when so affixed the seal shall be attested by the signature of the
Secretary or the Treasurer or Assistant Secretary or an Assistant Treasurer.
SECTION 5. VICE-PRESIDENT. - Each Vice-President shall have such powers and
shall perform such duties as shall be assigned to him by the directors.
SECTION 6. TREASURER. - The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
corporation in such depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation as may be ordered
by the Board of Directors, or the President, taking proper vouchers for such
disbursements. He shall render to the President and Board of Directors at the
regular meetings of the Board of Directors, or whenever they may request it, an
account of all his transactions as Treasurer and of the financial condition of
the corporation. If required by the Board of Directors, he shall give the
corporation a bond for the faithful discharge of his duties in such amount and
with such surety as the board shall prescribe.
SECTION 7. SECRETARY. - The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by the law or by these By-Laws, and in case of his absence or refusal
or neglect so to do, any such notice may be given by any person thereunto
directed by the President, or by the directors, or stockholders, upon whose
requisition the meeting is called as provided in these By-Laws. He shall record
all the proceedings
7
<PAGE>
of the meetings of the corporation and of the directors in a book to be kept for
that purpose, and shall perform such other duties as may be assigned to him by
the directors or the President. He shall have the custody of the seal of the
corporation and shall affix the same to all instruments requiring it, when
authorized by the directors or the President, and attest the same.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. - Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK. - A certificate of stock, signed by the
Chairman or Vice-Chairman of the Board of Directors, if they be elected,
President or Vice-President, and the Treasurer or an Assistant Treasurer, or
Secretary or Assistant Secretary, shall be issued to each stockholder certifying
the number of shares owned by him in the corporation. When such certificates are
countersigned (1) by a transfer agent other than the corporation or its
employee, or, (2) by a registrar other than the corporation or its employee, the
signatures of such officers may be facsimiles.
SECTION 2. LOST CERTIFICATES. - A new certificate of stock may be issued in
the place of any certificate theretofore issued by the corporation, alleged to
have been lost or destroyed, and the directors may, in their discretion, require
the owner of the lost or destroyed certificate, or his legal representatives, to
give the corporation a bond, in such sum as they may direct, not exceeding
double the value of the stock, to indemnify the corporation against any claim
that may be made against it on account of the alleged loss of any such
certificate, or the issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES. - The shares of stock of the corporation
shall be transferrable only upon its books by the holders thereof in person or
by their duly authorized attorneys or legal representatives, and upon such
transfer the old certificate shall be surrendered to the corporation by the
delivery thereof to the person in charge of the stock and transfer books and
ledgers, or to such other person as the directors may designate, by whom they
shall be canceled, and new certificates shall thereupon be issued. A record
shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
SECTION 4. STOCKHOLDERS RECORD DATE. - (a) In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the board of directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of
8
<PAGE>
directors. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
b) In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record is adopted by the board of directors.
(c) In order that the corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted.
SECTION 5. DIVIDENDS. - Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
SECTION 6. SEAL. - The corporate seal shall be circular in form and shall
contain the name of the corporation, the year of its creation and the words
"Corporate Seal, Delaware, 1996". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
SECTION 7. FISCAL YEAR. - The fiscal year of the corporation shall be
determined by resolution of the Board of Directors.
SECTION 8. CHECKS. - All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
corporation shall be signed by such officer or officers, agent or agents of the
corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE. - Whenever any notice is required
by these By-Laws to be given, personal notice is not meant unless expressly so
stated, and any notice so required shall be deemed to be sufficient if given by
depositing the same in the United States mail, postage, prepaid, addressed to
the person entitled thereto at his address as it appears on the records of the
corporation, and such notice shall be deemed to have been given on the day of
such mailing. Stockholders not entitled to vote shall not be entitled to receive
notice of any meetings except as otherwise provided by Statute.
9
<PAGE>
Whenever any notice whatever is required to be given under the provisions
of any law, or under the provisions of the Certificate of Incorporation of the
corporation of these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered or repealed and By-Laws may be made at any
annual meeting of the stockholders or at any special meeting thereof if notice
of the proposed alteration or repeal of By-Law or By-Laws to be made be
contained in the notice of such special meeting, by the affirmative vote of a
majority of the stock issued and outstanding and entitled to vote thereat, or by
the affirmative vote of a majority of the Board of Directors, at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors, if notice of the proposed alteration or repeal of By-Law or By-Laws
to be made, be contained in the notice of such special meeting.
ARTICLE VII
INDEMNIFICATION
No director shall be liable to the corporation or any of its stockholders
for monetary damages for breach of fiduciary duty as a director, except with
respect to (1) a breach of the director's duty of loyalty to the corporation or
its stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) liability which may be
specifically defined by law or (4) a transaction from which the director derived
an improper personal benefit, it being the intention of the foregoing provision
to eliminate the liability of the corporation's directors to the corporation or
its stockholders to the fullest extent permitted by law. The corporation shall
indemnify to the fullest extent permitted by law each person that such law
grants the corporation the power to indemnify.
ARTICLE VIII
NOTICE AND QUALIFICATION OF STOCKHOLDER
NOMINEES TO BOARD
Only persons who are nominated in accordance with the procedures set forth
in this Article VIII shall be qualified for election as directors. Nominations
of persons for election to the Board of Directors of the corporation may be made
at a meeting of stockholders by or at the direction of the Board of Directors or
by any stockholder of the corporation entitled to vote for the election of
Directors at the meeting who complies with the procedures set forth in this
Article VIII. In order for persons nominated to the Board of Directors, other
than those persons nominated by or at the direction of the Board of Directors,
to be qualified to serve on the Board of Directors, such nomination shall be
made pursuant to timely notice in writing to the Secretary of the corporation.
To be timely, a stockholder's notice must be received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however,
10
<PAGE>
that, in the event that less than 70 days' notice of the date of the meeting is
given to stockholders and public disclosure of the meeting date, pursuant to a
press release, is either not made or is made less than 70 days prior to the
meeting date, then notice by the stockholder to be timely must be so received
not later than the close of business on the tenth day following the earlier of
(a) the day on which such notice of the date of the meeting was mailed to
stockholders or (b) the day on which such public disclosure was made.
A stockholder's notice to the Secretary must set forth (a) as to each
person whom the Stockholder proposes to nominate for election or re-election as
a director (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitation of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended from time to time
(including, without limitation, such documentation as is required by Regulation
14A to confirm that such person is a bona fide nominee); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
corporation's books, of such stockholder and (ii) the class and number of shares
of the corporation which are beneficially owned by such stockholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. No person shall be qualified for
election as a Director of the corporation unless nominated in accordance with
the procedures set forth in this Article VIII. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with procedures prescribed by the By-Laws,
and, if he should so determine, he shall so declare to the meeting, and the
defective nomination shall be disregarded.
11
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated and effective
as of the 6 day of October, 1998 by and between Compu-DAWN, Inc., a Delaware
corporation ("Lender"), and LocalNet Communications, Inc., a Florida corporation
("Borrower").
R E C I T A L S
WHEREAS, Lender for adequate and bargained for consideration agrees to
advance monies to Borrower under the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the respective representations,
warranties, agreements and covenants in this Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and subject to the conditions contained in this Agreement, the
parties, intending to be legally bound, hereby agree as follows:
SECTION 1
DEFINITIONS
1.1 Specific Definitions. The following definitions shall apply:
(a) "Account Debtors" shall mean Borrower's customers and all other
persons who are obligated or indebted to Borrower in any manner, whether
directly or indirectly, primarily or secondarily, contingently or otherwise,
with respect to Accounts.
(b) "Accounts" shall mean all accounts, accounts receivable, monies and
debt obligations in any form owing to Borrower (whether arising in connection
with contracts, contract rights, instruments, general intangibles or chattel
paper) arising out of the rendition of services by Borrower whether or not
earned by performance; all deposit accounts, credit insurance, guaranties,
letters of credit, advices of credit and other security for any of the above;
Borrower's Books relating to any of the foregoing, and without limiting the
foregoing, the "Accounts" shall mean "Accounts" under the Uniform Commercial
Code.
(c) "Advance" shall mean an advance of loan proceeds constituting all
or a part of the Loan.
(d) "Borrower's Books" shall mean Borrower's books and records
including, but not limited to: minute books; ledgers; records indicating,
summarizing or evidencing Borrower's assets, liabilities and the Accounts; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disk or tape files, printouts, runs and other
computer-prepared information and the equipment containing such information.
(e) "Closing Date" shall mean the date hereof.
1
<PAGE>
(f) "Collateral" shall mean and include any and all tangible and
intangible assets, including without limitation all of Borrower's right, title
and interest in local and long distance revenues earned, and received by, or due
to, Borrower from Unidial Incorporated as well as all of Borrower's right, title
and interest in Internet service revenues earned, and received by, the Borrower
from Earthlink Network, Inc. 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.
(g) "Distribution" shall mean, with respect to any shares of capital
stock or any Warrant or right to acquire shares of capital stock or any other
security: (i) the retirement, redemption, purchase or other acquisition,
directly or indirectly, for value by the issuer of any such security, except to
the extent that the consideration therefor consists of shares of stock; (ii) the
declaration or (without duplication) payment of any dividend in cash, directly
or indirectly, on or with respect to any such security; (iii) any investment in
the holder of five percent (5%) or more of any such security if a purpose of
such investment is to avoid characterization of the transaction as a
Distribution; and (iv) any other cash payment constituting a distribution under
applicable laws with respect to such security.
(h) "Event of Default" shall have the meaning specified in Section 11
hereof.
(i) "GAAP" means generally accepted accounting principles set forth in
the opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and/or in statements of the Financial Accounting
Standards Board, consistently applied.
(j) Indebtedness means, (i) indebtedness for borrowed money of for the
deferred purchase price of property or services in respect of which Borrower is
liable, contingently or otherwise, as obligor or otherwise or any commitment by
which Borrower assures a creditor against loss, including contingent
reimbursement obligations with respect to letters of credit, (ii) indebtedness
guaranteed in any manner by Borrower including guarantees in the form of an
agreement to repurchase or reimburse, (iii) obligations under leases which shall
have been or should be, in accordance with GAAP, recorded as capital in respect
of which obligations Borrower is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations assures a creditor
against loss, and (iv) any unfunded obligation of Borrower to any benefit plan
or multi-employer plan.
(k) "Lender Expenses" shall mean: (i) all costs or expenses (including,
without limitation, taxes and insurance premiums) required to be paid by
Borrower under this Agreement or under any of the other Loan Documents that are
paid or advanced by Lender; (ii) filing, recording, publication and search fees
paid or incurred by Lender in connection with Lender's transactions with
Borrower; (iii) costs and expenses incurred by Lender to correct any Event of
Default or enforce any provision of the Loan Documents or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, and preparing
for sale or advertising to sell the Collateral, whether or not a sale is
consummated, in any such case only after the occurrence of an Event of Default;
(iv) costs and expenses of suit incurred by Lender in enforcing or defending the
Loan Documents or any portion
2
<PAGE>
thereof; (v) costs and expenses incurred by Lender to convert any data submitted
to Lender by Borrower to an acceptable form; and (vi) Lender's reasonable
attorney fees and expenses incurred (before or after execution of this
Agreement) in advising Lender with respect to, or in structuring, drafting,
reviewing, negotiating, amending, terminating, enforcing, defending or otherwise
concerning, the Loan Documents or any portion thereof, irrespective of whether
suit is brought.
(l) "Lien" shall mean any security interest, mortgage, pledge,
assignment, lien or other encumbrance of any kind, including any interest of a
vendor under a conditional sale contract or consignment and any interest of a
lessor under a capital lease.
(m) "Loan" shall mean each loan or any other loan or loans made by
Lender to Borrower pursuant to this Agreement.
(n) "Loan Documents" shall mean: (i) this Agreement; (ii) the Secured
Promissory Note; (iii) the Pledge Agreement; (iv) and any other agreements or
documents hereafter delivered to secure repayment of the Loan; (iv) any other
certificates, documents, instruments, or financing statements delivered by
Borrower to Lender pursuant to the terms of this Agreement.
(o) "Note" shall mean the Secured Promissory Note executed by Borrower
pursuant to the terms of this Agreement.
(p) "Obligations" shall mean any and all indebtedness, obligations,
liabilities, 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 tortuous, 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.
(q) "Permitted Liens" shall mean: (i) Liens for property taxes and
assessments or governmental charges or levies and Liens securing claims or
demands of mechanics and materialmen, provided that payment thereof is not yet
due or is being contested as permitted in this Agreement; (ii) Liens of or
resulting from any judgment or award, the time for the appeal or petition for
rehearing of which has not expired, or in respect of which Borrower is in good
faith prosecuting an appeal or proceeding for a review and in respect of which a
stay of execution pending such appeal or proceeding for review has been secured;
(iii) Liens and priority claims incidental to the conduct of business or the
ownership of properties and assets (including warehouse's and attorney's Liens
and statutory landlord's Liens); deposits, pledges or Liens to secure the
performance of bids, tenders, or trade contracts, or to secure statutory
obligations; and surety or appeal bonds or other Liens of like general nature
incurred in the ordinary course of business and not in connection with the
borrowing of money; provided that in each case the obligation secured is not
overdue or, if overdue, is being contested in good faith by appropriate actions
or proceedings; and further provided that any such warehouse's or statutory
landlord's Liens have been subordinated to the Liens of Lender in a manner
satisfactory to Lender; and (iv) Liens existing on the date of this Agreement
that secure Indebtedness of Borrower outstanding on such date and that have been
disclosed to Lender;
3
<PAGE>
(r) "Proceeds" shall mean all proceeds of the Collateral and documents
covering Collateral; all property received wholly or partly in trade or exchange
for Collateral; and all revenues, profits and proceeds arising from the sale,
encumbrance, collection or any other temporary or permanent disposition of the
Collateral or any interest therein.
(s) "Subordinate Obligations" shall mean all Indebtedness of Borrower
subordinated to the Obligations pursuant to subordination and/or intercreditor
agreements (the "Subordination Agreements") in form satisfactory to Lender,
including, without limitation the Indebtedness set forth on Schedule 1.1(s)
attached hereto.
(t) 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")
shall have the meanings therein stated.
1.2 Generally Accepted Accounting Principles and Uniform Commercial
Code. All financial terms used in this Agreement, other than those defined in
this Section 1, have the meanings accorded to them under GAAP. All other terms
used in this Agreement, other than those defined in this Section 1, have the
meanings accorded to them in the New York Uniform Commercial Code.
1.3 Construction.
(a) Unless the context of this Agreement clearly requires otherwise,
the plural includes the singular, the singular includes the plural, the part
includes the whole, "including" is not limiting, and "or" has the inclusive
meaning of the phrase "and/or." The words "hereof," "hereby," "hereunder" and
other similar terms in this Agreement refer to this Agreement as a whole and not
exclusively to any particular provision of this Agreement.
(b) Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Lender or Borrower, whether under any
rule of construction or otherwise. On the contrary, this Agreement has been
reviewed by each of the parties and its counsel and shall be construed and
interpreted according to the ordinary meaning of the words used so as to
accomplish the purposes and intentions of all parties hereto fairly.
SECTION 2
LOAN
2.1 The Loan.
(a) Subject to the terms and conditions and relying on the
representations and warranties set forth herein and further subject to the
provisions of Section 2.1(b) hereof, Lender agrees to make Advances as a Loan to
Borrower from time to time during the period commencing on the Closing Date and
terminating twelve months from the Closing Date in the aggregate amount of up to
Five Hundred Thousand Dollars ($500,000) (the "Amount").
4
<PAGE>
(b) Notwithstanding the provisions of Section 2.1(a), Lender shall only
be required to Advance to Borrower from time to time an aggregate amount equal
to an aggregate of other loans, advances or investments (collectively the "Other
Financing Proceeds") received by the Borrower or its escrow agent from other
persons on terms and conditions acceptable to the Lender, provided the Lender
has received evidence acceptable to it that the Borrower or its escrow agent has
received such Other Financing Proceeds, it being agreed that a letter from [Name
of Firm], stating that it has received and is holding [amount] of Other
Financing Proceeds on behalf of the Borrower and that there are no conditions to
[Name of Firm] releasing the Other Financing Proceeds to the Borrower other than
the delivery of the Advances by the Lender to the Borrower in accordance with
the terms of this Agreement, shall be deemed to be acceptable evidence for the
purposes hereof.
2.2 Note. The Loan made by the Lender under this Agreement shall be
evidenced by, and repaid with interest in accordance with, the terms of the Note
in substantially the form attached as Schedule "2.2" duly completed, in the
original principal amount equal to the Amount, dated the Closing Date, payable
to the Lender and maturing as to principal on September __, 1999. The principal
amount of Advances received by the Borrower shall be recorded in its books and
records of original entry, which recordations shall be conclusive as to the
outstanding balance of and other information related to the Loan.
2.3 Use of Proceeds. The proceeds of the Loan shall be used by Borrower
for the business purpose(s) set forth in Schedule "2.3."
2.4 Term of Agreement; Prepayment. The term of this Agreement is twelve
(12) months from the Closing Date.
2.5 Interest on the Loan. The Loan shall bear simple interest at the
rate of twelve percent (12%) . Interest shall be calculated on the basis of a
year of three hundred sixty (360) days, but for the actual number of days
elapsed. Interest shall be accrued and paid together with the principal amount
when such principal is due, whether on the Due Date (as that term is defined in
the Note) or as a result of acceleration.
2.6 Conditions to the Closing. Lender's obligation to make the initial
Advance (the "Initial Advance") of the Loan proceeds hereunder is subject to
Lender's determination that Borrower, as of the Closing Date, has substantially
satisfied the following conditions precedent:
(a) The representations and warranties set forth in this Agreement and
in the other Loan Documents shall be true and correct on and as of the Closing
Date, and Borrower shall have performed all obligations which were to have been
performed by it hereunder.
(b) Lender shall have received each of the following, in form and
substance satisfactory to Lender:
(i) certified copies of all corporate (including stockholder,
if required) action taken by Borrower to authorize (A) the borrowings hereunder
and (B) the execution, delivery and
5
<PAGE>
performance in accordance with their respective terms of this Agreement, the
Loan Documents and any other documents executed in connection with this
Agreement;
(ii) a certificate of incumbency with respect to the officers
of Borrower authorized to execute and deliver this Agreement and the Loan
Documents;
(iii) copies of the Certificate of Incorporation and By-Laws
of Borrower, as restated or amended to the date of the making of the Initial
Advance, certified, with respect to the Certificate of Incorporation, by the
appropriate authority in the jurisdiction of incorporation, and, with respect to
the By-Laws, by an appropriate officer of Borrower;
(iv) certificates of good standing for Borrower from the
appropriate authority in the jurisdiction of incorporation, and in each other
jurisdiction in which the Borrower is qualified to do business;
(v) duly executed copies of the Note and the other Loan
Documents;
(vi) a signed copy of the opinion of Robert E. Meshel, P.C.,
counsel for Borrower, dated the date of the Initial Advance, in the form
attached hereto as Exhibit 2.6(b)(vi)
(vii) acknowledgment copies of the filing of all UCC and
similar state financing statements filed in connection with the perfection of
Lender's security interest in the Collateral;
(viii) a UCC search report and similar state reports
confirming that there are no liens on the Collateral other than those granted
hereby any Permitted Loans; and
(ix) certificates of insurance and loss payable clauses
covering the Collateral and meeting the requirements of paragraph 10.16.
(x) Subordination Agreements from the persons set forth on
Schedule 1.1(s) attached hereto.
(c) The intended uses of the Advance shall be in strict conformity with
a budget to be agreed upon between Lender and Borrower (the "Budget").
2.7 Conditions to Advances. 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:
(a) All of the representations and warranties of Borrower made under
this Agreement and each other Loan 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 to be performed or complied with by Borrower, and Lender
shall have
6
<PAGE>
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.
(b) The corporate actions of Borrower referred to in Section 2.6(b)(i)
hereof shall remain in full force and effect, the incumbency of officers shall
be as stated in the certificates of incumbency delivered pursuant to Section
2.6(b)(ii) hereof or as subsequently modified and reflected in a certificate of
incumbency delivered to Lender, the respective Certificates of Incorporation and
ByLaws delivered pursuant to Section 2.6(b)(iii) hereof shall remain unmodified,
Borrower shall remain in good standing in each jurisdiction of incorporation 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.
(c) 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.
(d) There shall not be any litigation, investigation or proceeding of
or before any court, arbitrator or authority pending or threatened against
Lender or Borrower 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.
(e) 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").
(f) Borrower shall not have suffered a material adverse change in its
business, operations or financial condition from that reflected in the Financial
Statements of Borrower delivered to Lender or otherwise.
(g) Lender shall have received such additional supporting documents,
certificates and assurances as Lender shall reasonable require which shall be
satisfactory to Lender in form and substance.
(h) That the repayment of certain indebtedness to the Borrower, and the
rights of the creditors relating to certain indebtedness by Borrower in the
aggregate amount of $290,000 as of August 31, 1998, as represented in the
Borrower's draft balance sheet of that date furnished by the Borrower to the
Lender prior to the date hereof, and more particularly described on Schedule
2.7(h) attached hereto, shall have been subordinated in all respects to the
rights of the Lender hereunder and under the other Loan Documents upon terms and
conditions reasonably satisfactory to the Lender
7
<PAGE>
and the Lender shall have received Subordination Agreements from such creditors
pursuant to Section 2.6(b)(x).
(i) Lender shall have received evidence reasonably acceptable to it (as
described in Section 2.1(b) hereof) that Borrower and/or its escrow agent has
received Other Financing Proceeds in the aggregate amount at least equal to the
aggregate amount to the Advances made and to be made.
2.8 Disbursement of Advances. 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.
2.9 One Loan. 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.
SECTION 3
SECURITY INTEREST
3.1 Grant of Security Interest. In order to secure prompt payment and
performance of all Obligations, Borrower hereby grants to Lender a valid,
binding and continuing first-priority pledge and security interest in all of the
Collateral whether now owned or existing or hereafter acquired or arising and
regardless of where located, subject only to Permitted Liens. This security
interest in the Collateral shall attach to all Collateral without further action
on the part of Lender or Borrower. The Collateral shall be subject only to
Permitted Liens together with such third-party consents, lien waivers and
estoppel certificates as Lender shall reasonably require.
3.2 Pledge of Securities. As additional security to insure prompt
payment and performance of all Obligations, Rudy C. Theale, Jr., the Chief
Executive Officer of the Borrower, has agreed to pledge his equity interest in
the Borrower as more particularly set forth under the terms and conditions of
the "Pledge Agreement."
SECTION 4
SPECIFIC REPRESENTATIONS
4.1 Name of Borrower. The exact name of the Borrower is LocalNet
Communications, Inc.
4.2 Mergers and Consolidations. No entity has merged into any of
Borrower or been consolidated with Borrower.
8
<PAGE>
4.3 Purchase of Assets. The Borrower has not sold any of its assets
except in the ordinary course of business.
4.4 Change of Name or Identity. Borrower shall not change its name,
business structure or identity or use a new trade name without prior
notification to Lender or merge into or consolidate with any other entity.
SECTION 5
PROVISIONS CONCERNING ACCOUNTS
5.1 Office and Records of Borrower. Borrower's chief executive offices
are located at: 12735 Gran Bay Parkway West, Building 200, Jacksonville, Florida
32241. Borrower has not at any time within the past month maintained their chief
executive office or their records with respect to the Accounts at any other
location (other than at 6440 Atlantic Boulevard, Jacksonville, Florida 32211),
and shall not do so hereafter except with thirty (30) days prior written notice
to Lender.
5.2 Representations. Borrower represents and warrants that the Accounts
securing this Loan at the time of Closing: (a) will be owned solely by Borrower;
(b) will be for a liquidated amount maturing as stated in Borrower's books; (c)
will be a bona fide existing obligation created by the rendition of services to
those customers set forth in Schedule "3.1;" and (d) will not be subject to any
known deduction, offset, counterclaim, return privilege, or other condition,
except as reflected on Borrower's Books. Borrower shall neither redate any
invoices or reissue new invoices in full or partial satisfaction of old
invoices. Allowances, if any, as between Borrower and the customers set forth in
Schedule "3.1" will be on the same basis and in accordance with the usual
customary practices of Borrower as they exist on the date of this Agreement.
5.3 Lender's Rights. Any officer, employee or agent of Lender shall
have the right, at any reasonable time or times hereafter, in the name of Lender
or its nominee (including Borrower), to verify the validity, amount or any other
matter relating to any Accounts by mail, telephone or otherwise; and all
reasonable costs thereof shall be payable by Borrower to Lender. Lender, or its
designee may at any time after default by Borrower hereunder notify the
customers set forth in Schedule "3.1" has been assigned to Lender or of Lender's
security interest therein and after an Event of Default by Borrower hereunder
collect the same directly and charge all reasonable collection costs and
expenses to Borrower's account.
5.4 Disclaimer of Liability. Lender shall not be liable to Borrower or
any third person for the correctness, validity or genuineness of any checks,
instruments, or similar documents released or endorsed to Borrower by Lender
(which shall automatically be deemed to be without recourse to Lender in any
event) or for the existence, character, quantity, quality, condition, value or
delivery of any goods purporting to be represented by any such documents; and
Lender, by accepting a Lien on the Collateral or by releasing any Collateral to
Borrower, shall not be deemed to have assumed any obligation or liability to any
supplier or creditor of Borrower or to any other third party. Borrower agrees to
indemnify and defend Lender and hold it harmless in respect to any claim or
proceeding arising out of any matter referred to in this Section 5.4.
9
<PAGE>
5.5 Post-Default Rights. If an Event of Default has occurred and is
continuing hereunder, no discount, credit or allowance shall be granted or
permitted by Borrower to any Account Debtor; provided, however, that,
notwithstanding the existence of an Event of Default: (i) Borrower may continue
to invoice and bill the customers set forth in Schedule "3.1" under discount,
credit and allowance arrangements that Borrower maintained in the ordinary
course of business prior to such Event of Default occurring; and (ii) Account
Debtors may, during the continuance of an Event of Default, utilize discount,
credit and allowance arrangements that Borrower extended to them in the ordinary
course of business. Lender may, after an Event of Default, settle or adjust
disputes and claims directly with Account Debtors for amounts and upon terms
that Lender considers advisable, and in such cases, Lender will credit
Borrower's account with only the net amounts received by Lender in payment of
such disputed Accounts, after deducting all Lender Expenses incurred in
connection therewith.
5.6 Year 2000. The Borrower will not incur any Year 2000 liability (as
that term is hereafter defined) which will result in a material adverse affect
on the Borrower, its business, financial condition or its prospects. "Year 2000
Liability" means any cost, expense, liability or obligation (actual, potential,
contingent or otherwise) of the Borrower arising out of the failure or inability
of any software, hardware, or systems (whether owned or used by the Borrower and
its any of its vendors, customers or other third parties) to correctly (i)
process, provide and receive date data within and between the years 1999 and
2000 and (ii) account for all required leap year calculations for the year 2000.
SECTION 6
PROVISIONS CONCERNING CONTRACTS
6.1 Contracts.
(a) Schedule "6.1(a)" is a true and complete list of all material
contracts and agreements to which Borrower is a party with respect to the
Collateral or Account Debtors.
(b) Borrower shall not amend, modify or supplement any contract or
agreement included in the Collateral or waive any provision thereof other than
in accordance with Borrower's standard business practice, nor shall such
standard business practice be materially changed without Lender's consent, which
shall not be unreasonably withheld.
(c) Borrower shall remain liable to perform all of its duties and
obligations under any contracts and agreements included in the Collateral to the
same extent as if this Agreement had not been executed; and Lender shall not
have any obligation or liability under such contracts and agreements by reason
of this Agreement or otherwise.
10
<PAGE>
(d) Borrower need not pay any amount due under any contract or
agreement nor otherwise perform any action required under the terms of any such
contract or agreement, if such payment or performance is being contested in good
faith by appropriate proceedings promptly initiated and diligently conducted, if
Lender is notified in advance of such contest, and if Borrower establishes any
reserve or other appropriate provision required by GAAP and deposits with Lender
cash or an acceptable bond reasonably requested by Lender.
SECTION 7
OTHER PROVISIONS CONCERNING COLLATERAL
7.1 Further Assurances. Borrower shall execute and deliver to Lender,
concurrent with Borrower's execution of this Agreement and at any time or times
hereafter at the request of Lender, all financing statements, continuation
financing statements, security agreements, chattel mortgages, assignments,
endorsements of certificates of title, applications for titles, affidavits,
reports, notices, schedules of Accounts, letters of authority and all other
documents Lender may reasonably request, in form satisfactory to Lender, to
perfect and maintain perfected Lender's Liens in the Collateral and in order to
consummate fully all of the transactions contemplated under the Loan Documents.
Borrower hereby irrevocably makes, constitutes and appoints Lender (and any of
Lender's officers, employees or agents designated by Lender) as Borrower's true
and lawful attorney with power to sign the name of Borrower on any of the
above-described documents or on any other similar documents that need to be
executed, recorded or filed in order to perfect or continue to be perfected
Lender's Liens in the Collateral. Lender shall provide Borrower with written
notice prior to signing the Borrower's name on the documents referred to in this
Section.
7.2 Lender's Duty of Care. Lender shall have no duty of care with
respect to the Collateral except that Lender shall exercise reasonable care with
respect to the Collateral in Lender's custody. Lender shall be deemed to have
exercised reasonable care if such property is accorded treatment substantially
equal to that which Lender accords its own property or if Lender takes such
action with respect to the Collateral as Borrower shall request to or agree in
writing; provided, however, that neither failure to comply with any such request
nor any omission to do any such act requested by Borrower shall be deemed a
failure to exercise reasonable are. Lender's failure to take steps to preserve
rights against any parties or property shall not be deemed to be failure to
exercise reasonable care with respect to the Collateral in Lender's custody.
7.3 Lender Expenses. If Borrower fails, as required by the terms
hereof, (i) to pay any monies (whether taxes, assessments, insurance premiums or
otherwise) due the third persons or entities, (ii) to make any deposits or
furnish any required proof of payment or deposit, or (iii) to discharge any Lien
not permitted hereby, then Lender may, to the extent that it determines that
such failure by Borrower could have a material adverse effect on Lender's
interests in the Collateral, in its discretion and without prior notice to
Borrower, make payment of the same or any part thereof. Any amounts paid or
deposited by Lender shall constitute Lender Expenses, shall become part of the
Obligations, shall bear interest at a fluctuating rate equal to the Prime Rate
plus one percent (1%), and shall be secured by the Collateral. Any payments made
by Lender shall not constitute (a) an agreement by Lender to make similar
payments in the future, or (b) a waiver by Lender of any
11
<PAGE>
Event of Default under this Agreement. Lender need not inquire as to, or contest
the validity of, any such expense, tax, security interest, encumbrance or Lien
and the receipt of the usual official notice for the payment of moneys to a
governmental entity shall be conclusive evidence that the same was validly due
and owing.
7.4 Inspection of Records. During usual business hours, upon at least
twenty-four (24) hours advance notice via fax and telephone, Lender shall have
the right to inspect Borrower's books and records in order to verify the amount
or condition of, or any other matter relating to, the Collateral and Borrower's
financial condition and to copy and make extracts therefrom; subject always to a
confidentiality undertaking by the Lender.
7.5 Waivers. Except as specifically provided for herein, Borrower
waives demand, protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension or renewal of any or all commercial
paper, accounts, documents, instruments, chattel paper and guaranties at any
time held by Lender on which Borrower may in any way be liable.
SECTION 8
REPRESENTATIONS AND WARRANTIES OF BORROWER
As of the date hereof Borrower hereby warrants and represents to Lender
the following:
8.1 Corporate Status. Borrower is a corporation validly existing and in
good standing under the laws of the State of Florida. It is qualified and
licensed to do business and is in good standing in any state in which the
conduct of its business or its ownership of property requires that it be so
qualified or licensed, and has the power and authority (corporate or otherwise)
to execute and carry out the terms of the Loan Documents to which it is a party,
to own its assets and to carry on its business as currently conducted.
8.2 Authorization. The execution, delivery, and performance by Borrower
of this Agreement and each other Loan Document(s) have been duly authorized by
all necessary corporate action. Borrower has duly executed and delivered this
Agreement and each other Loan Document(s) to which it is a party, and each of
them constitutes a valid and binding obligation of Borrower, as applicable,
enforceable according to its terms except as such enforceability may be limited
by equitable principles and by bankruptcy, insolvency or similar laws affecting
the rights of creditors generally.
8.3 No Breach. The execution, delivery and performance by Borrower of
this Agreement and the Loan Document(s) to which it is a party (a) will not
contravene any law or any governmental rule or order binding on the Collateral;
(b) will not violate any provision of the Articles of Incorporation or Bylaws,
as applicable, of Borrower; (c) will not violate any agreement or instrument by
which Borrower is bound; (d) do not require any notice to consent by any
governmental authority; and (e) will not result in the creation of a Lien on any
assets of Borrower except the Lien to Lender granted herein.
12
<PAGE>
8.4 Taxes. All assessments and taxes, whether real, personal or
otherwise, due or payable by or imposed, levied or assessed against Borrower or
any of its property have been paid in full before delinquency or before the
expiration of any extension period; and Borrower has made due and timely payment
or deposit of all federal, state and local taxes, assessments or contributions
required of it by law, except only for items that Borrower is currently
contesting diligently and in good faith and that have been fully disclosed in
writing to Lender or that Borrower has reserved against its financial
statements.
8.5 Litigation and Proceedings. Except as set forth in Schedule "8.5"
attached hereto there are no outstanding judgments against Borrower or any of
its assets and there are no actions or proceedings pending by or against
Borrower before any Court or administrative agency. Borrower has no knowledge or
belief of any pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower.
8.6 Business. All of Borrower's franchises, authorizations, patents,
trademarks, copyrights and other rights used to conduct its business are all in
full force and effect and are not in known conflict with the rights of others.
Borrower is not a party to or subject to any agreement or restriction that is so
unusual or burdensome that it might have a material adverse effect on Borrower's
business, properties or prospects.
8.7 Laws and Agreements. Borrower is in compliance with all material
agreements applicable to it, including obligations to contribute to any employee
benefit plan or pension regulated by ERISA. Borrower is in material compliance
with all laws applicable to it.
8.8 Ownership of Collateral. Prior to the Lender making any Loan as set
forth herein, the Borrower will be the sole owner of, and have good and
marketable title to the Collateral pledged as security for such Loan.
8.9 No Conflict. The granting of a security interest in the Collateral
to the Lender will not violate the terms or provisions of any loan document or
any other agreement to which the Borrower then is a party or by which it is
bound.
8.10 Security Interest. After giving effect to the Loan contemplated by
this Agreement, the Lender will be the holder of a valid perfected first
priority security interest in the Collateral, subject to the provisions of an
Intercreditor Agreement among the Lender, [Beacon] and the Borrower of even date
herewith. The Collateral pledged to the Lender will be free and clear of all
Liens, except Permitted Liens and the Accounts pledged to the Lender in
connection with the Loan as part of the Collateral will be free and clear of all
Liens.
8.11 Origination of Accounts. Each Account will have been originated by
the Borrower in the ordinary course of its business in accordance with the
Borrower's regular credit approval process and does not contravene any laws,
rules or regulations applicable thereto. No pledged Account will have been
selected on any basis which would have any adverse effect on the Lender.
13
<PAGE>
8.12 Legality. The Collateral and the shares of Common Stock pledged in
the companion "Pledge Agreement" are not subject to the laws of, any
jurisdiction whose laws would make the terms hereof or any transaction
contemplated hereby unlawful.
8.13 Consents. No consent or approval is required for the pledging of
the Collateral to the Lender pursuant to the terms of this Agreement, except for
such consents or approvals as have been obtained.
8.14 Financial Condition. All financial statements and information
relating to Borrower that have been or may hereafter be delivered by Borrower to
Lender are, to Borrower's best knowledge and belief, accurate and complete, they
present the Borrower's financial condition fairly and they have been prepared in
accordance with GAAP. Borrower has no material obligations or liabilities of any
kind not disclosed in that financial information, and there has been no material
adverse change in the financial condition of Borrower since the date of the most
recent financial statements submitted to Lender.
8.15 Solvency. After giving effect to the transactions contemplated
hereby and by the other Loan Documents Borrower now has sufficient capital to
carry on the business in which it is now engaged, is solvent and is able to pay
its debts as they mature.
SECTION 9
REPRESENTATIONS AND WARRANTIES OF LENDER
9.1 Organization, Power and Authority. Lender is duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the requisite corporate power and authority to carry on its business as
it is not being conducted.
9.2 Due Authorization; Binding Obligation. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action. This Agreement is a valid and binding obligation of Lender
enforceable in accordance with its terms. Neither the execution and delivery of
this Agreement, nor the consummation of the transactions contemplated by this
Agreement will not conflict with or violate any provisions of the Securities Act
of 1933 and/or the Securities Exchange Act of 1934, and/or any related
Securities and Exchange Commission Rules, and/or Rules of the National
Association of Securities Dealers, and/or the Articles of Incorporation or
By-Laws of Lender, or of any law, ordinance or regulation or any decree or order
of any Court or administrative or other governmental body which is either
applicable to, binding upon or enforceable against it; result in any breach of
or default under a material mortgage, contract, agreement, indenture, will,
trust or other instrument which is either binding upon or enforceable against
Lender or its assets; violate any legally protected right of any individual or
entity or give to any individual or entity a right or claim; or impair or in any
way limit any governmental or official license, approval, permit or
authorization.
SECTION 10
14
<PAGE>
COVENANTS
10.1 Encumbrance of Collateral. Borrower shall not create, incur,
assume or permit to exist any Lien on the Collateral now owned or hereafter
acquired by Borrower, except for Liens to Lender and Permitted Liens under the
terms of this Agreement.
10.2 Assignability. Borrower shall not sell, assign, or transfer the
Collateral now owned or hereafter acquired by Borrower during the term of this
Agreement.
10.3 Business. Borrower shall engage primarily in business of the same
general character as that now conducted by Borrower.
10.4 Condition and Repair. Borrower shall maintain in good repair and
working order all properties used in their business and form time to time shall
make all appropriate repairs and replacements thereof.
10.5 Taxes. Borrower shall file all tax and information returns and
reports required by all taxing authorities and pay all taxes, assessments and
other governmental charges imposed upon it or any of its assets or in respect of
any of its franchises, business, income or profits before any penalty or
interest accrues thereon, and all claims (including, without limitation, claims
for labor, services, materials and supplies) for sums that have become due and
payable and that by law have or might become a Lien or charge upon any of its
assets, provided that (unless any material item or property would be lost,
forfeited or materially impaired as a result thereof) no such charge or claim
need be paid if it is being contested in good faith by appropriate proceedings
promptly initiated and diligently conducted, if Lender is notified in advance of
such contest, and if Borrower establishes any reserve or other appropriate
provision required by GAAP. Borrower shall make timely payment or deposit of all
FICA payments and withholding taxes required of it by applicable laws and will,
upon request, furnish Lender with proof satisfactory to Lender indicating that
Borrower has made such payments or deposits.
10.6 Accounting System. Borrower at all times hereafter shall maintain
a standard and modern system of accounting books and records in accordance with
GAAP, with ledger and account cards or computer tapes, disks, printouts and
records that contain information pertaining to the Collateral that may from time
to time be requested by Lender. Borrower will provide reasonable protection
against loss of or damage to books of record and account. Borrower shall not
modify or change its method of accounting or enter into any agreement hereafter
with any third-party accounting firm or service bureau for the preparation or
storage of Borrower's accounting records without said accounting firm's or
service bureau's agreeing to provide to Lender information regarding the
collateral and Borrower's financial condition.
10.7 Quarterly Financial Statements. Borrower shall furnish Lender as
soon as practicable but in no event later than forty-five (45) days after the
end of each of the first three (3) quarterly fiscal periods of each fiscal year
with unaudited quarterly financial statements in form and substance as required
by Lender, including a balance sheet, an income statement and a statement of
15
<PAGE>
cash flows, prepared in accordance with GAAP together with a certificate
executed by the chief financial or accounting officer of Borrower stating that
the financial statements fairly represent the financial condition of Borrower as
of the date and for the periods covered and that as of the date of such
certificate there has not been any violation of any provision of this Agreement
or the happening of any Event of Default or unmatured default hereunder.
10.8 Annual Financial Statements. Borrower shall furnish Lender as soon
as practicable but in no event later than ninety (90) days after the close of
each fiscal year with audited annual financial statements, which financial
statements shall be prepared in accordance with GAAP and shall be certified
without qualification by an independent certified public accounting firm
satisfactory to Lender. With all financial statements, Borrower will also
deliver a certificate of its chief financial or accounting officer attesting
that no Event of Default or unmatured default under the Agreement has occurred
and is continuing.
10.9 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.
10.10 Corporate Existence. Borrower will maintain its corporate
existence and the quali fication and good standing of Borrower in all
jurisdictions in which such qualification and good standing are necessary in
order for Borrower to conduct its businesses and own its properties.
10.11 Compliance with Laws and Regulations. Borrower will comply, in
all material respects with all laws, statutes, rules, regulations, ordinances,
judgments, writs, decrees, and orders of any governmental body applicable to
Borrower and Borrower will not fail to obtain (and will not allow to lapse) any
license, permit or other authorization which may be or become necessary in order
for Borrower to conduct its business, own its properties, and perform its
Obligations under this Agreement, the Note or the other Loan Documents.
10.12 Tax Obligations.
(a) Borrower shall 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 payable by Borrower, 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; provided that Borrower
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.
(b) 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
16
<PAGE>
(the "Taxing Authority") to assert a deficiency with respect to it, 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, take all reasonable actions necessary to contest such claimed
deficiency and shall appoint outside tax counsel 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).
10.13 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 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.
10.14 Labor Relations. Borrower will notify Lender promptly upon
learning of any labor dispute to which Borrower may be a party and which
involves any group of employees or independent sales representatives of
Borrower.
10.15 Insurance. Borrower will 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):
(a) all worker's compensation or similar insurance as may be
required under the laws of any jurisdiction;
(b) 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;
(c) insurance against loss or damage by fire, theft,
pilferage, explosion, spoilage or other casualty, with a replacement value and
agreed amount endorsement; and
(d) 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.
The insurance specified in the foregoing clauses (b), (c) and (d) shall be
maintained with respect to Borrower and the Collateral in such form and in such
amounts as Lender may from time to time
17
<PAGE>
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 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, 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.
10.16 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.
10.17 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 (a) claims by or on behalf of any brokers, finders or investment
bankers made with respect to the transactions contemplated by this Agreement;
(b) the execution or consummation of this Agreement, the Note or the other Loan
Documents; (c) the operation or maintenance of any of the Collateral; or (d) 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. 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. The indemnities and
assumptions of liabilities and obligations herein provided for shall continue in
full force and effect notwithstanding the termination of this Agreement.
10.18 Notice of Default. Promptly after becoming aware of (a) the
existence of (i) any Event of Default hereunder on the part of Borrower, (ii)
any default by Borrower in the fulfillment of any of the terms, covenants,
provisions or conditions of this Agreement or any of the Loan Documents or (iii)
any default under any material note, indenture, loan agreement, mortgage, lease,
deed or similar agreement or material contract to which Borrower is a party or
by which it or its assets or property may be bound or affected; or (b) any
indebtedness of Borrower 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 (c) any
litigation, suit or administrative proceeding affecting
18
<PAGE>
Borrower 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 $25,000 in each instance or $175,000 in the aggregate,
then in each case a certificate of an authorized financial officer of Borrower
describing the nature and status of such matters and what action Borrower is
taking or proposes to take with respect thereto.
10.19 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, a certificate of the chief
financial officer of Borrower setting forth the details of such material adverse
change and stating what action Borrower has taken or proposes to take with
respect thereto.
10.20 Other Information. Borrower shall promptly furnish Lender such
other information respecting the condition or operations, financial or
otherwise, of Borrower, 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.
10.21 Working Capital Ratio. Borrower shall, at all times during the
term of this Agreement and during the period that any amounts are outstanding
under the Note, maintain a minimum ratio of Current Assets (as that is defined
under GAAP) to Current Liabilities (as that term is defined under GAAP) of at
least 1 to 1.
10.22 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, in any other line of business
without the prior written consent of Lender. Borrower shall not
change its name, identity or structure or operate its business
under any other name.
(b) Transaction with Affiliates; Fees. Except for the transactions
contemplated hereby and by the other Loan Documents, Borrower
will not 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, 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, any Lien upon
or with respect to their respective assets or properties, whether
now owned or hereafter acquired, or
19
<PAGE>
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, any dividends, 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.
(e) Compensation. Borrower will not pay any bonus, grant any option,
provide any perquisites to, or pay any other compensation to, any
officer, director, or employee or sales representative which is
not provided for in an employment or other agreement with such
person or is inconsistent with past practice. Additionally, the
Borrower will not amend any employment or other agreement with
any officer, director, employee or sales representative which
provides for extraordinary compensation in type or amount which
is inconsistent with past practice.
(f) Amendments. Borrower will not request, permit or consent to any
amendment to its 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. Borrower shall not 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 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 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, 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. Borrower will not, 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, 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 or entity.
20
<PAGE>
SECTION 11
EVENTS OF DEFAULT
11.1 Event of Default. An Event of Default shall be deemed to exist if
any of the following events shall have occurred and be continuing:
(a) Borrower fails to make any payment of principal or interest or any
other payment on the Note on the Due Date, and such failure shall continue
uncured after written notice by Lender for seven (7) business days;
(b) Borrower fails to observe or perform any covenant, condition or
agreement to be observed or performed pursuant to the terms hereof, any other
Loan Document or any loan or lease agreement with respect to Indebtedness to
which it is a party and such failure is not cured as soon as reasonably
practicable and in any event within fifteen (15) days after written notice
thereof by Lender; provided, however, if such failure is susceptible or cure,
but to cure will take longer than fifteen (15) days and provided further that
Borrower is diligently working to cure the default, the cure period pay exceed
fifteen (15) days but in no event shall it exceed sixty (60) days;
(c) A Court enters a decree or order for relief in respect of Borrower
in an involuntary case under any applicable bankruptcy, insolvency, or other
similar law then in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, or sequestrator (or other similar official) of Borrower or
for any substantial part of its property, or orders the windup or liquidation of
Borrower's affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency, or similar law is filed against Borrower and is pending
for sixty (60) days without dismissal;
(d) Borrower commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law then in effect, makes any general
assignment for the benefit of creditors, fails generally to pay, or admits in
writing its inability to pay, its debts as such debts become due, becomes
insolvent or takes corporate action in furtherance of any of the foregoing;
(e) Final judgment for the payment of money on any claim in excess of
Twenty Five Thousand Dollars ($25,000) is rendered against Borrower and remains
undischarged for thirty (30) days during which execution is not effectively
stayed;
(f) The Pledgor of the Loan revokes or attempts to revoke his pledge,
or becomes the subject of an insolvency proceeding of the type described in
clauses (c) or (d) above with respect to Borrower or fails to observe or perform
any covenant, condition or agreement to be performed under any Loan Document to
which it is a party;
(g) Borrower makes any payment on account of any Subordinate
Obligations, other than payments specifically permitted by the terms of such
subordination of this Agreement;
21
<PAGE>
(h) Any person holding any Subordinate Obligations becomes the subject
of any proceeding resulting in a final adjudication that the subordination
arrangement is terminated, or terminates the subordination arrangement.
(i) The Collateral or any part thereof is sold, agreed to be sold,
conveyed or allocated by operation of law or otherwise;
(j) Borrower is enjoined, restrained or in any way prevented by Court
order from continuing to conduct all or any material part of its business
affairs;
(k) A judgment or other claim in excess of Twenty Five Thousand Dollars
($25,000) becomes a Lien upon any or all of Borrower's assets, other than a
Permitted Lien;
(l) A notice of Lien, levy or assessment in excess of Twenty Five
Thousand Dollars ($25,000) is filed of record with respect to any or all of
Borrower's assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal or other government
authority; or any tax or debt owing at any time hereafter to any one or more of
such entities becomes a Lien upon any or all of Borrower's assets and the same
is not paid on the payment date thereof, except to the extent such tax or debt
is being contested by Borrower as permitted in Section 8.4; or
(m) There is a material impairment of the value of the Collateral or
priority of Lender's Liens on the Collateral.
(n) If any warranty, representation or statement of fact made herein or
furnished to Lender at any time by or on behalf of any of the Borrower or
Pledgor proves to have been false or misleading in any material respect when
made or furnished;
(o) If the Borrower shall execute or file a certificate or other
instrument evidencing the legal change of name without furnishing Lender at
least ten (10) days' prior written notice thereof;
(p) In the event the Borrower shall be dissolved;
(q) the Borrower shall fail to maintain its corporate existence in good
standing;
(r) If the Borrower shall 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;
(s) If the Borrower shall voluntarily or otherwise suspend or interrupt
the transaction of its usual business for ten (10) business days other than by
reason of strikes.
11.2 Transfer of Collateral. Upon and during the continuation of an
Event of Default, at its discretion, Lender may, whether or not any of the
Obligations be due, in its name or in the name of Borrower or otherwise, notify
any account debtor or the obligor on any instrument to make
22
<PAGE>
payment to Lender, demand, sue for, collect or receive any money or property at
any time payable or receivable on account of or in exchange for, or make any
commercially reasonable compromise or settlement deemed desirable by Lender with
respect to, any of the Collateral, but shall be under no obligation to do so,
and/or Lender may extend the time of payment, arrange for payment in
installments, or otherwise modify the terms of the Collateral on commercially
reasonable terms, or release any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of,
Borrower. At any time, Lender may assign, transfer and/or deliver to any
transferee of any of the Obligations any or all of the Collateral, and
thereafter Lender shall be fully discharged from all responsibility with respect
to the Collateral so assigned, transferred and/or delivered. Such transferee
shall be vested with all the powers and rights of Lender hereunder with respect
to such Collateral, but Lender shall retain all rights and powers hereby given
with respect to any of the Collateral not so assigned, transferred or delivered.
SECTION 12
REMEDIES
12.1 Specific Remedies. Upon the occurrence of any Event of Default or
at any time thereafter Lender may declare the Loan to be due and payable
immediately upon notice, whereupon they shall immediately become due and payable
without presentment, demand, or protest of any kind, all of which are hereby
expressly waived by Borrower 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 relating to Security
Interests in Accounts and otherwise, in any jurisdiction in which enforcement is
sought, all such rights and remedies being cumulative and not exclusive:
(a) Lender may set off against the Loan, the Collateral and/or the
shares of Common Stock pledged under the companion Pledge Agreement, and all
balances, credits, deposits, accounts, or moneys of Borrower then or thereafter
held with Lender, including amounts represented by certificates of deposit.
(b) Lender may pay, purchase, contest or compromise any encumbrance,
charge or Lien that, in the opinion of Lender, appears to be prior or superior
to its Lien and pay all reasonable expenses incurred in connection therewith.
(c) Lender may: (i) notify the Account Debtors set forth in Schedule
"3.1" to make payment on Accounts directly to Lender; (ii) settle, adjust,
compromise, extend or renew Accounts in a commercially reasonable manner,
whether before or after legal proceedings to collect such Accounts have
commenced; (iii) prepare and file any bankruptcy proofs of claim or similar
documents against any Account Debtor; (iv) prepare and file any notice,
assignment, satisfaction, or release of Lien, UCC termination statement or any
similar document; (v) sell or assign Accounts, individually or in bulk, upon
such terms, for such amounts, and at such time or times in a commercially
reasonable manner; and (vi) complete the performance required of Borrower under
any contract or agreement to which Borrower is a party and out of which Accounts
arise or may arise.
23
<PAGE>
(d) 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.
(e) 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
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.
(f) Lender may apply the cash proceeds actually received from any sale
or other disposition to the expenses of selling, 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 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.
24
<PAGE>
12.2 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.
SECTION 13
MISCELLANEOUS
13.1 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 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.
13.2 Delay and Waiver. No delay or omission to exercise any right shall
impair any such right or be a waiver thereof, but any such right may be
exercised from time to time and as often as
25
<PAGE>
may be deemed expedient 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. A waiver on one occasion shall be limited to that particular
occasion.
13.3 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.
13.4 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.
13.5 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 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.
13.6 Complete Agreement. This Agreement, the Schedules and the
companion Loan Documents are the complete understanding of the parties hereto
and supersede all previous understandings relating to the subject matter hereof.
This Agreement may be amended only by an instrument in writing that explicitly
states that it amends this Agreement and is signed by the party against whom
enforcement of the amendment is sought. This Agreement may be executed in
counterparts, each of which will be an original and all of which will constitute
a single Agreement.
26
<PAGE>
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.
13.7 Severability; Headings. If any part of this Agreement or the
application thereof to any Person or circumstance is held invalid, the remainder
of this Agreement shall not be affected thereby. The Section headings herein are
included for convenience only and shall not be deemed to be a part of this
Agreement.
13.8 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the respective legal representatives, successors and assigns of
the parties hereto; however, Borrower may not assign any of its rights or
delegate any of its Obligations hereunder. Lender (and any subsequent assignee)
may transfer and assign this Agreement and deliver the collateral to the
assignee, who shall thereupon have all of the rights of Lender; and Lender (or
such subsequent assignee who in turn assigns as aforesaid) shall then be
relieved and discharged of any responsibility or liability with respect to his
Agreement and said Collateral.
13.9 Notices. Any notices under or pursuant to this Agreement shall be
deemed duly sent when delivered in hand or when mailed by registered or
certified mail, return receipt requested, or when delivered by courier or when
transmitted by telex, telecopy, or similar electronic medium to the following
addresses:
If to Borrower: LocalNet Communications, Inc.
12735 Gran Bay Parkway West, Building 200
Jacksonville, Florida 32241
Telephone: (904) 680-6690
Telecopier: (904) 680-6642
Attention: Rudy C. Theale, Jr., CEO
With a copy to:
Robert E. Meshel, P.C.
601 California Street, Suite 1900
San Francisco, California 94108
Telephone: (415) 956-2436
27
<PAGE>
Telecopier: (415) 956-4971
Attention: Robert E. Meshel, Esq.
If to Lender:
Compu-DAWN, Inc.
77 Spruce Street
Cedarhurst, New York 11516
Telephone: (516) 374-6700
Telecopier: (516) 374-9410
Attention: Mark Honigsfeld, CEO
With a copy to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Telephone: (516) 296-7000
Telecopier: (516) 296-7111
Attention: Fred Skolnik, Esq. and
Gavin C. Grusd, Esq.
Either party may change such address by sending notice of the change to
the other party; such change of address shall be effective only upon actual
receipt of the notice by the other party.
13.10 Governing Law. All acts and transactions hereunder and the rights
and obligations of the parties hereto shall be governed, construed and
interpreted in accordance with the laws of the State of New York, without giving
effect to conflicts of law principles.
13.11 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 or the other Loan Documents.
13.12 Publicity. Borrower will not issue any report, statement, release
or other public announcement (in the case of a verbal announcement Lender shall
approve the script of such
28
<PAGE>
announcement) pertaining to the matters contemplated by this Agreement or
otherwise disclose the terms hereof without the prior written consent of Lender.
IN WITNESS WHEREOF, Borrower and Lender have executed this Agreement by
their duly authorized officers as of the date first above written.
LENDER:
ATTEST: Compu-DAWN, Inc.
By: /s/ Mark Honigsfeld
-----------------------------------------
Mark Honigsfeld, Chief Executive Officer
BORROWER:
ATTEST: LocalNet Communications, Inc.
By: /s/ Rudy C. Theale, Jr.
------------------------------------------
Rudy C. Theale, Jr.,Chief Executive Officer
29
<PAGE>
SCHEDULE 1.1 (s)
SUBORDINATE OBLIGATIONS
1. Name Amount
---- ------
Rudy C. Theale $140,000
Robert E. Turner IV 100,000
Robert E. Meshel 50,000
2. Boca Research, Inc. shall subordinate its security interest in the
assets of the Borrower to the security interest of the Lender.
30
<PAGE>
SCHEDULE 2.2
12% ONE (1) YEAR SECURED PROMISSORY NOTE
See attached.
31
<PAGE>
SCHEDULE 2.3
USE OF PROCEEDS
Proceeds will be used for the purposes listed on the attached schedule.
32
<PAGE>
SCHEDULE 2.6 (b)(iv)
FORM OF OPINION
See attached.
33
<PAGE>
SCHEDULE 2.7 (h)
INDEBTEDNESS TO BE SUBORDINATED
See Schedule 1.1(s)(1).
34
<PAGE>
SCHEDULE 6.1(a).
MATERIAL CONTRACTS AND AGREEMENTS
See attached.
35
<PAGE>
SCHEDULE 8.5
OUTSTANDING CLAIMS/LITIGATION
None.
36
<PAGE>
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 1 to Loan and Security Agreement dated and
effective as of the 23rd day of October 1998 (the "Amendment") by and between
Compu-DAWN, Inc., a Delaware Corporation ("Lender") and LocalNet Communications,
Inc., a Florida corporation ("Borrower").
RECITALS
WHEREAS, Lender and Borrower entered into a Loan and Security
Agreement dated October 6, 1998 (the "Loan and Security Agreement") pursuant to
which Lender agreed to loan up to $500,000 to Borrower.
WHEREAS, Borrower desires to borrow from Lender and Lender
desires to loan to Borrower up to an additional amount of $500,000 or an
aggregate of up to $1,000,000 in principal.
WHEREAS, Lender and Borrower desire to amend the Loan and
Security Agreement upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the respective
representations, warranties, agreements and covenants in this Amendment, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and subject to the conditions contained in this Amendment,
the parties intending to be legally bound, hereby agree as follows:
SECTION 1
DEFINITIONS
1. Capitalized terms used but not defined herein, shall have been meaning
ascribed to them in the Loan and Security Agreement.
SECTION 2
AMENDMENTS
2.1 Section 1.1(m) of the Loan and Security Agreement is amended in its
entirety to read as follows: ""Loan" shall mean each loan or any other loan
or loans made by Lender to Borrower pursuant to this Agreement as amended."
2.2 Section 1.1 (n)(ii) of the Loan and Security Agreement is amended to
replace the word "Note" for the phrase "Secured Promissory Note."
1
<PAGE>
2.3 Section 1.1(o) of the Loan and Security Agreement is amended in its
entirety to read as follows: " "Notes" shall mean (A) The $500,000 Secured
Promissory Note dated October 6, 1998 executed by Borrower pursuant to the
terms of the Loan and Security Agreement and (B) the $500,000 Secured
Promissory Note of even date (the "Second Note") executed by Borrower
pursuant to the terms of the Loan and Security Agreement as amended hereby,
collectively and singly.
2.4 The amount provided for in Section 2.1 of the Loan and Security Agreement
is amended to read One Million Dollars ($1,000,000) and the defined term
"Amount" shall mean such $1,000,000.
2.5 The date "September __, 1999" in section 2.2 of the Loan and Security
Agreement is amended to October 6, 1999."
2.6 Section 3.2 of the Loan and Security Agreement is amended in its entirety
to read as follows:
"Pledge of Securities. As additional security to ensure prompt
payment and performance of all Obligations, Rudy C. Theale,
Jr., the Chief Executive Officer of the Borrower, and Robert
E. Turner, IV (collectively, the "Pledgors"), have each agreed
to pledge his respective equity interest in the Borrower as
more particularly set forth under the terms and conditions of
the Pledge Agreement."
2.7 Section 5.5 of the Loan and Security Agreement is amended to change the
reference to Schedule 3.1 therein to Schedule 5.5, which Schedule 5.5 is
attached hereto.
2.8 Section 8.10 of the Loan and Security Agreement is amended to eliminate the
phrase ", subject to the provisions of an Intercreditor Agreement among the
Lender, [Beacon] and the Borrower of even date herewith."
2.9 Section 11.1(b) of the Loan and Security Agreement shall be amended to add
the phrase "or any other agreement between Lender and Borrower" between the
phrases "other Loan Document" and "or any loan or lease" in the second line
of Section 11.1 (b).
2.10 In Section 12.1 (a) of the Loan and Security Agreement is amended such that
the phrase the "companion Pledge Agreement" means the Pledge Agreements of
the Pledgors jointly and severally.
2.11 Section 12.1 (c) of the Loan and Security Agreement shall be amended such
that reference therein to Schedule 3.1 shall be Schedule 12.1(c), which
Schedule 12.1(c) is attached hereto.
2
<PAGE>
SECTION 3
ADDITIONAL CONDITIONS TO ADVANCES
3.1 In addition to the conditions set forth in Sections 2.6 and 2.7 of the Loan
and Security Agreement, Lender's obligation to make each Advance on or
after the date hereof is conditioned upon, and is subject to, the
fulfillment of each of the following conditions. Lender shall have received
each of the following, in form and substance satisfactory to Lender:
(a) The duly executed copy of the Second Note.
(b) An amendment to the Boca Research, Inc. ("Boca") Subordination
Agreement pursuant to which Boca agrees to subordinate any security
interest it may have in the Collateral to Compu-DAWN's security
interest in such Collateral to the extent of the principal amount of
at least $1,000,000 (plus any amount which Lender is required to pay
to Boca pursuant to a guaranty under a Tripartite Agreement between
Lender, Borrower and Boca of even date) plus interest accrued thereon
plus any costs incurred by the Lender in the collection of such
amounts.
(c) A duly executed Pledge Agreement from Robert E. Turner, IV, along with
all of the certificates representing his capital stock in Borrower
together with a stock power executed in blank, which stock
certificates and stock power shall be delivered to the escrow agent
named in such Pledge Agreement (the Escrow Agent") pursuant to the
terms of such Pledge Agreement.
(d) A duly executed Amendment No. 1 to the Pledge Agreement between Rudy
C. Theale and Lender, together with a stock power relating to his
stock certificates representing his pledged LocalNet Common Shares,
which stock certificates were previously delivered to the Escrow Agent
pursuant to the terms of such Pledge Agreement.
(e) A Consulting Agreement between Borrower and Lender pursuant to which,
among other things, Compu-DAWN will act as Borrower's exclusive agent
to negotiate agreements between Borrowers and certain
telecommunication services providers and Borrower will guarantee
certain payments by certain telecommunication providers to Lender.
(f) Certified copy of all corporate (including stockholder, if required),
action taken by Borrower to authorize (a) this Amendment to the Loan
and Security Agreement, (b) the Borrowings pursuant to this Amendment
and (c) the execution, delivery and performance in accordance with the
respective terms of this Amendment and any other document execution in
connection with this Amendment.
3
<PAGE>
(g) An agreement between UniDial Incorporated ("UniDial") and Lender
providing for UniDial to pay Compu-DAWN an amount equal to five
percent (5%) of the amount upon which commissions payable by UniDial
to Borrower under an Agent's Agent between UniDial and Borrower is
determined.
[Rest of Page is Intentionally Left Blank. Signature Page follows]
4
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this
Amendment by the duly authorized officers as of the date first above written.
LENDER:
ATTEST: Compu-DAWN, Inc.
_____________________________ By: /s/ Mark Honigsfeld
------------------------------------
Mark Honigsfeld
Chief Executive Officer
BORROWER:
ATTEST: LocalNet Communications, Inc.
By:/s/ Rudy C. Theale, Jr.
- - ----------------- ------------------------------------
Rudy C. Theale, Jr.
Chief Executive Officer
5
<PAGE>
Schedule 5.5
All Account Debtors of Borrower
<PAGE>
Schedule 12.1 (c)
See Schedule 5.5
<PAGE>
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 2 to Loan and Security Agreement dated and effective as of
the 12th day of November 1998 (the "Amendment No. 2") by and between Compu-DAWN,
Inc., a Delaware Corporation ("Lender") and LocalNet Communications, Inc., a
Florida corporation ("Borrower").
RECITALS
WHEREAS, Lender and Borrower entered into a Loan and Security Agreement
dated October 6, 1998 (the "Loan and Security Agreement") pursuant to which
Lender agreed to loan up to $500,000 to Borrower.
WHEREAS, Lender and Borrower entered into Amendment No. 1 to the Loan and
Security Agreement dated October 23, 1998 ("Amendment No. 1") pursuant to which,
among other things, Lender agreed to loan Borrower up to a further $500,000 for
an aggregate loan of up to $1,000,000.
WHEREAS, Borrower desires to borrow from Lender and Lender desires to loan
to Borrower an additional amount of up to $800,000, or an aggregate loan of up
to $1,800,000 in principal, of which $1,000,000 of such aggregate amount may be
convertible into securities of the Borrower upon terms and conditions set forth
herein.
WHEREAS, Lender and Borrower desire to amend the Loan and Security
Agreement as amended by Amendment No. 1 upon the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the respective representations,
warranties, agreements and covenants in this Amendment, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and subject to the conditions contained in this Amendment, the
parties intending to be legally bound, hereby agree as follows:
SECTION 1
DEFINITIONS
1. Capitalized terms used but not defined herein, shall have been meaning
ascribed to them in the Loan and Security Agreement. The term "Security and Loan
Agreement" herein shall include Amendment No. 1, unless the context requires
otherwise.
1
<PAGE>
SECTION 2
SECTION AMENDMENTS
2.1 Section 1.1(o) of the Loan and Security Agreement is amended in its
entirety to read as follows: " "Notes" shall mean (A) The $500,000 Secured
Promissory Note dated October 6, 1998 executed by Borrower pursuant to the terms
of the Loan and Security Agreement, (B) the $500,000 Secured Promissory Note
dated October 23, 1998 (the "Second Note") executed by Borrower pursuant to the
terms of the Loan and Security Agreement as amended by Amendment No. 1, and (C)
the $800,000 Secured Promissory Note of even date (the "Third Note") executed by
Borrower pursuant to the terms of the Loan and Security Agreement as amended
hereby, collectively and singly.
2.2 The amount provided for in Section 2.1 of the Loan and Security
Agreement is amended to read One Million Eight Hundred Thousand Dollars
($1,800,000) and the defined term "Amount" shall mean such $1,800,000.
SECTION 3
ADDITIONAL CONDITIONS TO ADVANCES
3.1 In addition to the conditions set forth in Sections 2.6 and 2.7 of the
Loan and Security Agreement and Section 3 of Amendment No. 1, Lender's
obligation to make each Advance on or after the date hereof is conditioned upon,
and is subject to, the fulfillment of each of the following conditions. Lender
shall have received each of the following, in form and substance satisfactory to
Lender:
(a) The duly executed copy of the Third Note.
(b) An amendment to the Boca Research, Inc. ("Boca") Subordination
Agreement pursuant to which Boca agrees to subordinate any security
interest it may have in the Collateral to Compu-DAWN's security interest in
such Collateral to the extent of the principal amount of at least
$1,800,000 (plus any amount which Lender is required to pay to Boca
pursuant to a guaranty under a Tripartite Agreement between Lender,
Borrower and Boca dated October 28, 1998) plus interest accrued thereon
plus any costs incurred by the Lender in the collection of such amounts.
(c) Certified copy of all corporate (including stockholder, if
required), action taken by Borrower to authorize (a) this Amendment No. 2
(b) the Borrowings pursuant to this Amendment No. 2 and (c) the execution,
delivery and performance by Borrower in accordance with the respective
terms of this Amendment No. 2 and any other document executed in connection
with this Amendment No. 2.
2
<PAGE>
SECTION 4
CONVERSION OF NOTES
4.1 Conversion at the Option of the Holder. The Borrower or holder of the
Note(s) (for the purposes of Sections 4,5 and 6 hereof each the "Holder") may,
at any time and from time to time on or after the date hereof, convert (a
"Conversion") up to $1,000,000 of the principal amount of the Note(s) to the
extent unpaid at the time of conversion (the "Conversion Principal Amount") into
a number of fully paid and nonassessable shares of Common Stock equal to forty
percent (40%) of the Borrower's capital stock on a fully diluted basis if the
entire Conversion Principal Amount is converted, or a pro rata amount of such
number of shares of Common Stock if less than the entire Conversion Principal
Amount is converted, and the Conversion Price shall be fixed accordingly to
effectuate the foregoing.
4.2 Mechanics of Conversion. In order to effect Conversion, the Holder
shall: (x) fax (or otherwise deliver) a copy of a fully executed notice of
conversion in, or substantially in, the form attached hereto as Exhibit 4.2 (the
"Notice of Conversion") to the Borrower and (y) surrender to the Borrower
therewith or as soon as practicable thereafter the Note(s) or a notice that the
Note(s) has been lost, stolen or destroyed. The Borrower shall not be obligated
to issue shares of Common Stock upon a conversion unless either the Note(s) is
delivered to Borrower as provided above, or the Holder notifies the Borrower
that such Note(s) has been lost, stolen or destroyed.
4.3 Delivery of Common Stock Upon Conversion. Upon the surrender of the
Note(s) accompanying or following the delivery of a Notice of Conversion and
provided that the Holder has complied with the provisions of Section 4.2(x)
hereof, the Borrower shall, issue and deliver to the Holder (x) stock
certificates representing that number of shares of Common Stock issuable upon
conversion of the Conversion Principal Amount being converted and (y) a new Note
representing the portion of the Conversion Principal Amount not being converted,
if any.
4.4 Taxes. The Borrower 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 Conversion Principal Amount.
4.5 No Fractional Shares. If any conversion of Conversion Principal Amount
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 Conversion Principal Amount shall be the next
higher whole number of shares if such fractional share is one-half of a share or
more and the next lower whole number of shares if such fractional share is less
than one-half of a share.
3
<PAGE>
SECTION 5
RESERVATION OF SHARES OF COMMON STOCK
5.1 The Borrower shall reserve the number of shares of the authorized but
unissued shares of Common Stock for issuance upon conversion of the entire
Conversion Principal Amount 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 Conversion Principal Amount at the then current Conversion Price.
SECTION 6
ADJUSTMENTS TO THE CONVERSION PRICE.
6.1 The Conversion Price shall be subject to adjustment from time to time
as follows:
(a) Stock Splits, Stock Dividends, Etc. If at any time on or after the
date hereof, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of
Common Stock is decreased by a reverse stock split, combination or
reclassification of shares, or other similar event, the Conversion
Price shall be proportionately increased.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time after
the date hereof, 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 Borrower with any other entity (other
than a merger in which the Borrower is the surviving or continuing
entity and its capital stock is unchanged), (iii) any sale or transfer
of all or substantially all of the assets of the Borrower, 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 Holder 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 had such Corporate Change not taken place, and in any such
case, appropriate provisions shall be made with respect to the rights
and interests of the Holder to the end that the provisions hereof
shall thereafter be applicable, as nearly as may be practicable in
relation to any shares of stock or securities thereafter
4
<PAGE>
deliverable upon the conversion of the Note(s).
(c) Adjustment Due to Distribution. If, at any time after the date hereof,
the Borrower 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 Borrower'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 Holder
shall be entitled, upon any conversion of the Conversion Principal
Amount after the date of record for determining stockholders entitled
to such Distribution, to receive the amount of such assets which would
have been payable to the Holder with respect to the shares of Common
Stock issuable upon such conversion had such Holder been the Holder of
such shares of Common Stock on the record date for the determination
of stockholders entitled to such Distribution.
(d) Purchase Rights. If, at any time after the date hereof, the Borrower
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
Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could
have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of the Conversion Principal
Amount immediately before the date on which a record is taken for the
grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock are
to be determined for the grant, issue or sale of such Purchase Rights.
(e) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Section 6, the
Borrower, at the Borrower's expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is
based. The Borrower shall, upon the written request at any time of the
Holder, furnish to the Holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time
would be received upon conversion of the Conversion Principal Amount.
5
<PAGE>
SECTION 7
RIGHT TO MAINTAIN PERCENTAGE INTEREST
7.1 Subject to the terms and conditions specified in this Section 7.1, the
Borrower hereby grants to the Holder a right to maintain the Holder's percentage
ownership interest in the Borrower with respect to future sales by the Borrower
of its New Securities (as hereinafter defined).
Each time the Borrower proposes to offer any New Securities (subject to the
terms and provisions of the Loan and Security Agreement), the Borrower shall
concurrently make an offering of additional shares of such New Securities to the
Holder in accordance with the following provisions:
(a) The Borrower shall deliver a notice ("Notice") to the Holder stating
(i) its bona fide intention to offer or issue such New Securities,
(ii) the number of such New Securities to be offered, (iii) the price,
if any, for which it proposes to offer such New Securities, (iv) if
known, the names and addresses of the proposed offerees, (v) the
additional number of such New Securities that are concurrently being
offered to the Holder, which shall be the number of such New
Securities required for the Holder to maintain its fully-diluted
percentage equity interest in the Borrower (the "Offered Securities"),
and (vi) the date (not less than 10 days from the date of the Notice)
by which the Borrower requests that the Holder acknowledges the Notice
or notify the Borrower that the Notice fails to comply with the
requirements of this Section 7.1(the "Notice Acknowledgment Date").
(b) Within 20 calendar days after the Holder acknowledges to the Borrower
in writing that the Notice complies with the requirements of this
Section 7.1, the Holder may elect to purchase or obtain, at the price
and on the terms specified in the Notice, up to that portion of the
Offered Securities which equals the proportion that the number of
shares of Common Stock Deemed Outstanding (as hereinafter defined)
then held by the Holder bears to the total number of shares of Common
Stock Deemed Outstanding. On or before the Notice Acknowledgment Date,
the Holder shall either deliver such acknowledgment to the Borrower or
notify the Borrower that the Notice fails to comply with the
requirements of this Section 7.1.
(c) For purposes hereof, the term "New Securities" shall mean any shares
of capital stock of the Borrower, or securities (including, without
limitation, options or warrants) convertible into or exchangeable or
exercisable for, any class or series of the Borrower's capital stock.
(d) For the purposes hereof the term "Common Stock Deemed Outstanding"
shall mean the sum of the number of shares of Common Stock then
6
<PAGE>
outstanding plus the number of shares of Common Stock then obtainable
pursuant to (i) any options or warrants or purchase rights to purchase
shares of Common Stock, (ii) rights to subscribe for shares of Common
Stock, (iii) securities by their terms convertible into or
exchangeable for shares of Common Stock, and (iv) options or warrants
to purchase or rights to subscribe for such convertible or
exchangeable securities;
SECTION 8
EXPENSES
The Borrower shall pay $10,000 to Lender to cover the Lender's, costs,
expenses and disbursements (including, without limitation, Lender's legal fees)
incurred in connection with this transaction. Such amount may be deducted by
Lender from the amounts to be loaned under this Amendment No. 2.
SECTION 9
FULL FORCE AND EFFECT
9.1 All the other terms and provisions of the Loan and Security Agreement
shall continue in full force and effect.
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment No. 2
by the duly authorized officers as of the date first above written.
LENDER:
ATTEST: Compu-DAWN, Inc.
_____________________________ By:/s/ Mark Honigsfeld
----------------------------------------
Mark Honigsfeld
Chief Executive Officer
BORROWER:
ATTEST: LocalNet Communications, Inc.
_____________________________ By:/s/ Rudy C. Theale, Jr.
----------------------------------------
Rudy C. Theale, Jr.
Chief Executive Officer
7
<PAGE>
Exhibit 4.2
NOTE CONVERSION FORM
The undersigned hereby elects to convert $______________ of Conversion
Principal Amount of the LocalNet Communications, Inc. (the "Borrower") 12%
Secured Promissory Note to Compu-DAWN, Inc. dated _________________ into
________ shares of Common Stock of the Borrower (the "Shares"), at a Conversion
Price of $_____________ per share.
The undersigned represents and warrants that the Shares purchased by it are
being acquired for its own account, for investment purposes and not with a view
to any distribution within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"). The undersigned will not sell, assign, mortgage, pledge,
hypothecate, transfer or otherwise dispose of any of the Shares 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) the Borrower has received a written opinion of
his counsel that, after an investigation of the relevant facts, such counsel is
of the opinion that such proposed sale, assignment, mortgage, pledge,
hypothecation, transfer or disposition does not require registration under the
Securities Act or any state securities law.
The undersigned understands that the issuance of the Shares is not being
registered under the Securities Act and the Shares must be held indefinitely
unless they are subsequently registered thereunder or an exemption from such
registration is available.
The undersigned represents and warrants further that (i) it is either an
"accredited investor," as such term is defined in Rule 501(a) promulgated under
the Securities Act, or, either alone or with its purchaser representative, has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the acquisition of the Shares;
(ii) it is able to bear the economic risks of an investment in the Shares,
including, without limitation, the risk of the loss of part or all of its
investment and the inability to sell or transfer the Shares for an indefinite
period of time; (iii) it has adequate financial means of providing for current
needs and contingencies and has no need for liquidity in his investment in the
Shares; and (iv) it does not have an overall commitment to investments which are
not readily marketable that is excessive in proportion to net worth and an
investment in the Shares will not cause such overall commitment to become
excessive.
The undersigned acknowledges that the following restrictive legend will be
placed on any instrument, certificate or other document evidencing the Shares:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933. These shares have
been acquired for investment and not for distribution. They may
not be sold, assigned, mortgaged, pledged, hypothecated,
transferred or otherwise disposed of without an effective
registration statement for such shares under the Securities Act
of 1933 or an opinion of counsel for the
8
<PAGE>
Borrower that registration is not required under such Act."
Dated:________________
------------------------------
Name of Holder
------------------------------
Signature of authorized signor
------------------------------
Name of signor
-------------------------------
Title of signor
9
<PAGE>
AMENDMENT TO RESTATED AND AMENDED EMPLOYMENT AGREEMENT
This amendment (the "Amendment") dated as of January 8, 1999 (the
"Effective Date") to the Restated and Amended Employment Agreement dated March
4, 1997 (the "Employment Agreement") by and between Compu-DAWN, Inc., a Delaware
corporation (the "Company") and Mark Honigsfeld (the "Executive").
R E C I T A L S
WHEREAS, the parties hereto entered into the Employment Agreement on March
4, 1997.
WHEREAS, the parties desire to amend the bonus provisions of the Employment
Agreement in their entirety as set forth herein and that all other terms of the
Employment Agreement shall continue in full force and effect as amended hereby.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized terms not defined herein shall have the
meanings ascribed to them in the Employment Agreement.
2. Elimination of Certain Provisions The terms and provisions of Sections
1.4(b), 1.4(c) and 1.4(d) of the Employment Agreement are hereby
eliminated and shall have no further application, force and effect.
3. Additional Terms and Provisions. The following terms and provisions
are hereby added to the Employment Agreement:
3.1 Additional Positions. In addition to all his other positions with the
Company, the Executive shall serve as President of the Company and Chief
Executive Officer and Secretary of e.TV Commerce, Inc., the Company's wholly
owned subsidiary, during the term of the Employment Agreement as amended by this
Amendment.
3.2 Bonus. In addition to the Salary set forth in Section 1.4(a) of the
Employment Agreement, the Executive shall be entitled to receive a bonus (the
"Bonus") to be determined by the mutual agreement of the Company and the
Executive which, among other things, will allow the Executive to earn such a
Bonus of up to fifty percent (50%) of the Executive's Salary each year, based on
certain performance thresholds. The Company and the Executive shall use best
efforts to determine and memorialize the terms of the Bonus within thirty (30)
days hereof.
3.3 Options. The Company shall grant to the Executive common stock purchase
options to purchase the number of shares of common stock of the Company upon the
terms and conditions set forth in the stock option agreement attached hereto as
Exhibit 3.3.
<PAGE>
3.4 1999 Stock Rights Grant Plan. The Executive shall be a participant in
the Company's 1999 Stock Rights Grant Plan (the "Rights Plan"). The Executive's
right to be a participant in the Rights Plan and the terms of his participation
in the Rights Plan shall be governed by the terms and provisions of the Rights
Plan.
4. Miscellaneous.
4.1 Severability. If any provision contained in this Amendment is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
4.2 Waiver, Modification, and Integration. The waiver by any party hereto
of a breach of any provision of this Amendment shall not operate or be construed
as a waiver of any subsequent breach by any party. The Employment Agreement as
amended by this Amendment (collectively the "Agreement") contains the entire
agreement of the parties concerning employment and supersedes all prior and
contemporaneous representations, understandings and agreements, either oral or
in writing, between the parties hereto with respect to the employment of the
Executive by the Company and all such prior or contemporaneous representations,
understandings and agreements, both oral and written, are hereby terminated. The
terms of this Agreement may not be modified, altered or amended except by
written agreement of the Executive and the Company, subject to the prior
approval of the Board of Directors of the Company.
4.3 Counterpart Execution. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
Effective Date.
COMPU-DAWN, INC.
BY:/s/ Louis Libin
-----------------------------
Louis Libin, Senior Executive
Vice President
EXECUTIVE:
/s/ Mark Honigsfeld
---------------------------------
MARK HONIGSFELD
<PAGE>
AMENDMENT TO RESTATED AND AMENDED EMPLOYMENT AGREEMENT
This amendment (the "Amendment") dated as of January 8, 1999 (the
"Effective Date") to the Restated and Amended Employment Agreement dated January
6, 1997 (the "Employment Agreement") by and between Compu-DAWN, Inc., a Delaware
corporation (the "Company") and Louis Libin (the "Executive").
R E C I T A L S
WHEREAS, the parties hereto entered into the Employment Agreement on
January 6, 1997.
WHEREAS, the parties desire to amend the bonus provisions of the Employment
Agreement in their entirety as set forth herein and that all other terms of the
Employment Agreement shall continue in full force and effect as amended hereby.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized terms not defined herein shall have the
meanings ascribed to them in the Employment Agreement.
2. Elimination of Certain Provisions The terms and provisions of Sections
1.4(b), 1.4(c) and 1.4(d) of the Employment Agreement are hereby
eliminated and shall have no further application, force and effect.
3. Additional Terms and Provisions. The following terms and provisions
are hereby added to the Employment Agreement:
3.1 Waiver of Salary Increase. It is hereby agreed that as a result of the
Executive's waiver of salary increase pursuant to the Executive's waiver dated
January 4, 1999, the Executive's salary shall be $225,000 per annum for the
eight (8) month period ending December 31, 1999.
3.2 Bonus. In addition to the Salary set forth in Section 1.4(a) of the
Employment Agreement, the Executive shall be entitled to receive a bonus (the
"Bonus") to be determined by the mutual agreement of the Company and the
Executive which, among other things, will allow the Executive to earn such a
Bonus of up to fifty percent (50%) of the Executive's Salary each year, based on
certain performance thresholds. The Company and the Executive shall use best
efforts to determine and memorialize the terms of the Bonus within thirty (30)
days hereof.
3.3 Options. The Company shall grant to the Executive common stock purchase
options to purchase the number of shares of common stock of the Company upon the
terms and conditions set forth in the stock option agreement attached hereto as
Exhibit 3.3.
<PAGE>
3.4 1999 Stock Rights Grant Plan. The Executive shall be a participant in
the Company's 1999 Stock Rights Grant Plan (the "Rights Plan"). The Executive's
right to be a participant in the Rights Plan and the terms of his participation
in the Rights Plan shall be governed by the terms and provisions of the Rights
Plan.
4. Miscellaneous.
4.1 Severability. If any provision contained in this Amendment is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
4.2 Waiver, Modification, and Integration. The waiver by any party hereto
of a breach of any provision of this Amendment shall not operate or be construed
as a waiver of any subsequent breach by any party. The Employment Agreement as
amended by this Amendment (collectively the "Agreement") contains the entire
agreement of the parties concerning employment and supersedes all prior and
contemporaneous representations, understandings and agreements, either oral or
in writing, between the parties hereto with respect to the employment of the
Executive by the Company and all such prior or contemporaneous representations,
understandings and agreements, both oral and written, are hereby terminated. The
terms of this Agreement may not be modified, altered or amended except by
written agreement of the Executive and the Company, subject to the prior
approval of the Board of Directors of the Company.
4.3 Counterpart Execution. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
Effective Date.
COMPU-DAWN, INC.
BY:/s/ Mark Honigsfeld
-----------------------------
Mark Honigsfeld
Chief Executive Officer
EXECUTIVE:
/s/ Louis Libin
--------------------------------
LOUIS LIBIN
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") by and between COMPU-DAWN, INC., a
Delaware corporation ("Compu-DAWN") and e. TV Commerce Inc., a Delaware
Corporation ("e.TV, and together with Compu-DAWN, the "Company") with offices at
77 Spruce Street, Cedarhurst, New York 11516, and R.E. Turner IV, residing at
the address set forth in Section 3.1 ("Executive") is made and entered as of
January 8, 1999, ("Effective Date").
RECITALS
WHEREAS the Company wishes to employ the Executive, and the Executive is
willing to accept such employment for the Company upon the terms and conditions
hereafter set forth.
NOW THEREFORE, in consideration of the premises and of the respective
covenants and agreements contained herein, the parties hereto agree as follows:
1.1 Engagement. The Company hereby employs the Executive as Chairman of the
Board of Compu-DAWN and as a member of the Company's strategic management team
upon the terms and conditions set forth in this Agreement. If elected to the
Board of Directors of Compu-DAWN and e.TV, the Executive will also serve on the
Board of Directors of Compu-DAWN and e.TV, subject to the terms and conditions
set forth in this Agreement.
1.2 Duties of Executive. As a member of the Company's strategic management
team, the Executive will generally promote the interest of the Company in
accordance with the parameters set forth herein, and participate with other
management executives of the Company to analyze and develop the Company's
business plans and strategies, including the determination of the products and
services to be offered by the Company. As Chairman of the Board of Compu-DAWN,
the Executive may call, and will preside at, meetings of the Board of Directors
in accordance with the Bylaws of Compu-DAWN. The Executive will make himself
reasonably available to act as the Company's spokesperson to the Company's
independent representative sales force, the Company's investors and the public
at large, in each case in such manner as shall be appropriate under the relevant
circumstances.
The Executive shall have the right not to participate or be quoted in press
releases, public statements and comments (jointly and collectively referred to
as "Public Communications") which are materially inaccurate or misleading under,
or do not comply with, applicable state and federal securities laws including,
but not limited to, the Private Securities Litigation Reform Act of 1995 (with
respect to shareholders, lenders or investors) and applicable state and federal
laws and regulations with respect to the sales of business opportunities,
multi-level marketing and similar laws and regulations, and/or he has not had
the opportunity to consult with the Company's legal counsel which is experienced
in federal and state securities laws and regulations, with respect to the
1
<PAGE>
preparation and legal review of the Public Communication. The foregoing
notwithstanding, the Executive may not invoke any failure or inability to
consult with counsel as a reason not to participate, or be quoted, in a Public
Communication if he has not initiated contact with such counsel's office within
24 hours after the Company requests that he make, or be quoted in, a public
communication.
In addition to and not by limitation of all rights to be indemnified,
defended and held harmless pursuant to the Company's indemnification obligations
under the Company's rules, policies, Bylaws and director and officer liability
insurance coverage, the Company shall indemnify, defend and hold the Executive
harmless from any and all claims and liabilities arising from Public
Communications, whether or not made by him, unless made recklessly or in bad
faith, in connection with his carrying out his responsibilities hereunder.
Notwithstanding any provision of this Agreement to the contrary, the
Executive's rights and legal or fiduciary duties to the Company and its
shareholders as a member of the Company's Board of Directors, under applicable
laws and the Articles and Bylaws of the Company, shall take precedence over any
other duty or responsibility which may otherwise be deemed expressed or implied
under this Agreement, and no action or omission by the Executive in exercising
such rights or carrying our such legal or fiduciary duties shall constitute a
default under this Agreement.
In connection with his duties hereunder the Executive agrees to devote,
best efforts, abilities, knowledge and experience to the faithful performance of
the duties, responsibilities, and authorities within the scope of the parameters
stated above. Notwithstanding the preceding, the Executive shall not engage in
any activity or perform services for any other entity which shall prevent the
Executive from fulfilling his obligations to the Company hereunder. The Company
acknowledges that the Executive has duties, responsibilities and interests
outside the scope of this Employment Agreement, and except as otherwise provided
herein, the Executive is not restricted in pursuing such other duties,
responsibilities and interests.
1.3 Term. This Agreement shall become effective as of the Effective Date
and shall continue in force and effect until December 31, 2001, unless sooner
terminated as provided in Section 1.6 hereof. This Agreement shall automatically
renew for additional one (1) year periods unless either party has given at least
sixty (60) days prior written notice of their intention not to renew.
1.4 Compensation. The Company (either by Compu-DAWN or e.TV) shall pay the
Executive, as full compensation for services rendered by the Executive under the
Agreement, as follows:
(a) Base Salary. The Company shall pay the Executive a base salary of
TWO HUNDRED EIGHT THOUSAND DOLLARS ($208,000.00) per year, or such higher
salary as may be determined from time to time during the term hereof either
in accordance with the provisions of
2
<PAGE>
Section 1.4(b) hereof or by the Board of Directors of Compu-DAWN in its
sole discretion, prorated for any partial period of employment ("Salary").
Such Salary shall be paid by the Company (either by Compu-DAWN or e.TV) to
the Executive in twenty-six (26) equal installments in accordance with the
regular payroll payment dates of the Company or in such installments and on
such days during the month as the Company and the Executive shall mutually
determine. In the event this agreement renews automatically as provided in
paragraph 1.2 hereof increases in base salary will be a minimum of the
cumulative annual average increase for the prior year as stated in the
consumer price index all urban consumers Jacksonville, Florida Area
publicized by the U.S. Department of Commerce. If such index is terminated
or no longer in existence use of a comparable index will be accepted.
(b) Bonus. In addition to the Salary set forth in Section 1.4(a)
hereof, the Executive shall be entitled to receive a sales and marketing
bonus (the "Bonus") to be determined by the mutual agreement of the
Compu-DAWN and the Executive which, among other things, will allow the
Executive to earn such a Bonus of up to fifty percent (50%) of the
Executive's Salary each year, based on certain performance thresholds. The
Company and the Executive shall use best efforts to determine and
memorialize the terms of the Bonus within thirty (30) days hereof.
1.5 Employment Benefits. In addition to the Salary and the Bonus payable to
the Executive hereunder, the Executive shall be entitled to the following
benefits upon satisfaction by the Executive of the eligibility requirements
therefor, subject to the following limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this
Agreement is terminated pursuant to the provisions of Section 1.6(b) hereof
and provided that Executive has been employed on a full time basis for a
minimum of three (3) months, the Executive shall be paid sick leave
benefits for a period of up to three (3) months at his then prevailing
Salary rate during his absence due to illness or other incapacity, reduced
by the amount, if any, of worker's compensation, social security
entitlement, or disability benefits, if any, under the Company's group
disability insurance plan, if any.
(b) Life Insurance;" Key Man" Life Insurance. The Company, at its own
expense, shall provide the Executive, subject to the Executive passing any
physical examination required by the Company's insurance company, life
insurance benefits under and consistent with any group term life insurance
plan which Compu-DAWN, at its election, may adopt. Any such life insurance
coverage shall be upon terms and conditions comparable to the coverage, if
any, provided other executive officers of the Company, and provided
further, however, that the Company shall not be obligated to incur a
premium of more than $1,000 per year for any such coverage. In addition,
the Company may obtain "key man" life insurance upon the life of the
Executive in an amount determined by Compu-DAWN in its sole discretion. The
Executive shall fully cooperate in obtaining said life insurance, including
submitting to any physical examination. With respect to such life
insurance, the Executive shall be treated by the Company no differently
than Mark Honigsfeld.
3
<PAGE>
(c) Hospitalization, Accident, Major Medical and Dental Insurance. The
Company, at its own expense, shall provide the Executive (and all
dependents of the Executive at the request of the Executive) with group
hospitalization, group accident, major medical, and dental insurance in
amounts of coverage comparable to the coverage, if any, provided other
executive officers of the Company.
(d) Intentionally Left Blank.
(e) Working Facilities; Travel. During the term of this Agreement, the
Company shall provide at its expense, adequate office space, furniture,
equipment, supplies, and personnel (including professional, clerical,
support and other personnel) as shall be suitable in the opinion of the
Chief Executive Officer of the Company to the Executive's position and
adequate for the Executive's use in performing his duties and
responsibilities under this Agreement. The Executive shall be based at
e.TV's office at 12775 Gran Bay Parkway West, Building 200, Jacksonville,
Florida or any successor office in the Jacksonville Florida area, and he
shall be required to travel to the Company's offices at 77 Spruce Street,
Cedarhurst, New York and to meet with customers and attend conferences,
conventions and the like from time to time in order for him to carry out
his duties hereunder.
(f) Automobile Allowance. During the term of this Agreement, the
Company shall provide the Executive with a monthly automobile allowance of
one thousand dollars ($1,000). Any allowance due the Executive pursuant to
the preceding provisions of this paragraph shall be paid by the Company
concurrently with payroll.
(g) Upon signing this Agreement in connection with the Executive
becoming Chairman of the Board of Compu-DAWN and a Director of the Company,
Compu-DAWN shall grant to the Executive common Stock purchase options to
purchase the number of shares of common stock of Compu-DAWN upon the terms
and conditions set forth in the stock option agreement attached hereto as
Exhibit 1.5(g).
1.6 Termination. This Agreement and the Executive's employment hereunder
may be terminated without any breach of this Agreement at any time during the
term hereof only by reason of and in accordance with the following provisions:
(a) Death. If the Executive dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically
terminate as of the date of the Executive's death, and the Company shall
have no further liability hereunder to the Executive or his estate except
to the extent set forth in Section 1.7(a) hereof.
(b) Disability. If, during the term of this Agreement, the Executive
shall be prevented from performing his duties hereunder by reason of
becoming totally disabled as hereinafter defined for six (6) months out of
twelve (12) month period, then the Company may terminate this Agreement
immediately upon written notice to the Executive
4
<PAGE>
without any further liability hereunder to the Executive except as set
forth in Section 1.7(b) hereof. For purposes of this Agreement, the
Executive shall be deemed to have become disabled when (i) he either
receives "disability benefits" under (a) Social Security, or (b) the
Companys disability plan, if any (whether funded with insurance or
self-funded by the Company), or (ii) the Board of Directors of the Company,
upon the written report of a qualified physician (after complete
examination of the Executive) designated by the Board of Directors of
Compu-DAWN or its insurers, shall have determined that the Executive has
become physically and/or mentally incapable of performing his duties under
this Agreement.
(c) Termination by the Company for Cause. Prior to the expiration of
the term of this Agreement, the Company may discharge the Executive for
cause and terminate this Agreement immediately upon written notice to the
Executive without any further liability hereunder to the Executive or his
estate, except to the extent set forth in Section 1.7(c) hereof. For
purposes of this Agreement, a "discharge for cause" shall mean termination
of the Executive upon written notice to the Executive limited, however, to
one or more of the following reasons:
(1) Misappropriation or embezzlement by the Executive in
connection with the Company as determined by the affirmative unanimous
vote of the Board of Directors of Compu-DAWN other than the Executive;
(2) Gross mismanagement or willful neglect of the Executive's
duties as determined by the affirmative unanimous vote of the Board of
Directors of Compu-DAWN (other than the Executive) after notice to the
Executive of the particular details thereof and a period of thirty
(30) days thereafter within which to cure such act or acts of
mismanagement or neglect, and the failure of the Executive to cure
such act or acts within such thirty (30) day period;
(3) Indictment and conviction of a felony; or
(4) Willful and unauthorized disclosure of Trade Secrets (as
defined in Section 1.8 hereof) of the Company as determined by the
affirmative unanimous vote of the Board of Directors of the Company,
other than the Executives.
(d) Termination by the Company with Notice. The Company may terminate
this Agreement, for a reason other than as set forth in subparagraphs (a),
(b), (c) or (f) of this Section 1.6 at any time immediately upon written
notice to the Executive without any further liability hereunder to the
Executive except to the extent set forth in Section 1.7(d) hereof.
(e) Termination by the Executive for Good Reason. The Executive may
terminate this Agreement at any time for Good Reason (as hereinafter
defined)
5
<PAGE>
in which event the Company shall have no further liability hereunder to the
Executive except to the extent set forth in Section 1.7(e) hereof. For
purposes of this Agreement, the term "Good Reason" shall mean, without the
Executive's express written consent, the occurrence of any the following
circumstances (which changes shall constitute a "Change"):
(1) The assignment to the Executive of any duties inconsistent in
any material respect (unless in the nature of a promotion) with the
Executive's position in the Company immediately prior to such Change
(including, but not limited to, the Executive's status, offices and
titles), or a significant adverse alteration or diminution in the
nature or status of the Executive's authority, duties or
responsibilities from those in effect immediately prior to such
Change, other than an isolated, insubstantial and inadvertent action
that is fully corrected within thirty (30) days after receipt of
written notice from the Executive;
(2) Any material failure by the Company to comply with any of the
provisions of Section 1.4 or 1.5 of this Agreement, other than an
isolated, insubstantial and inadvertent action that is fully corrected
within thirty (30) days after receipt of written notice from the
Executive;
(3) The Company's requiring the Executive to be based anywhere
other than within a reasonable travel distance from Jacksonville,
Florida, except as provided in Section 1.5(e) hereof and except for
travel reasonably required of the Executive in the performance of the
Executive's duties on behalf of the Company;
(4) The failure of the Company to obtain an agreement,
satisfactory to the Executive, from any and all successors to assume
and agree to perform this Agreement, as contemplated in Section 1.9
hereof;
(5) Any failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30)
days after notice of such noncompliance has been given by the
Executive to the Company;
(6) A "Change in Control" (as that term is defined in Section
1.6(f) hereof) of the Company has occurred; or
(7) If the Company changes its business direction such that the
primary focus of its business is not in the e-commerce,
telecommunications or internet industries or the multi-level marketing
of the products and services of such industries, and the Executive
resigns as Chairman of the Board of Compu-DAWN or provides notice that
he wishes to terminate this Agreement.
6
<PAGE>
During a period of six (6) months immediately following any such
termination of this Agreement by the Executive, the Executive agrees
to provide such consulting services to the Company as it may
reasonably request, at such time or times within such period as may be
mutually agreed upon between the Company and the Executive. The
Executive shall be compensated for any such consulting services at a
daily rate equal to one thirtieth (1/30) of the monthly Salary paid to
the Executive at the time of the Executive's resignation from the
Company, plus reimbursement for any reasonable out-of-pocket expenses
incurred by the Executive in rendering such consulting services.
(f) Termination upon Change in Control. The Company may terminate this
Agreement at any time within twelve (12) months after a Change in Control
(as hereinafter defined) immediately upon written notice to the Executive
without any further liability hereunder to the Executive except to the
extent set forth in Section 1.7(e) hereof. For purposes of this Agreement,
the terms "Change of Control" shall mean, except in connection with, or in
relation to, a capital raising transaction:
(1) The transfer, through one transaction or a series of related
transactions, either directly or indirectly, or through one or more
intermediaries, of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934) of 25% or
more of either the then outstanding shares of common stock or the
combined voting power of Compu-DAWN's then outstanding voting
securities entitled to vote generally in the election of directors, or
the last of any series of transfers that results in the transfer of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of 25% or more of either
the then outstanding shares of common stock or the combined voting
power of Compu-DAWN's then outstanding voting securities entitled to
vote generally in the election of directors;
(2) Approval by the shareholders of Compu-DAWN of a merger or
consolidation, with respect to which persons who were the shareholders
of Compu-DAWN immediately prior to such merger or consolidation do
not, immediately thereafter, own more than 50% of the combined voting
power entitled to vote generally in the election of directors of the
merged or consolidated company's then outstanding voting securities,
or a liquidation or dissolution of the Company or the sale of all or
substantially all of the assets of the Company;
(3) The transfer, through one transaction or a series of related
transactions, of more than 50% of the assets of the Company, or the
last of any series of transfers that results in the transfer of more
than 50% of the assets of the Company. For purposes of this paragraph,
the determination of what constitutes more than 50% of the assets of
the Company shall be determined based on the most recent financial
statement prepared by the Company's independent accountants; or
7
<PAGE>
(4) During any calendar year, individuals who at the beginning of
such year constituted the Board of Compu-DAWN and any new director or
directors whose election by the Board was approved by a vote of a
majority of the directors then still in office who either were
directors at the beginning of the year or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority thereof provided, however, that this provision
will not be triggered in the event the Executive votes or causes other
stockholders to vote their shares to cause said change to the
directorship of the Company.
1.7 Compensation upon Termination.
(a) Death. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6 (a) hereof due to the
death of the Executive, the Company shall have no further obligation to the
Executive or his estate, except to pay to the Executive's spouse, or if he
leaves no spouse, to the estate of the Executive (provided, however, that
the Executive, with the written consent of the Executive's spouse, if any,
may affirmatively designate a beneficiary other than his spouse or estate):
(i) any accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits, which have
accrued as of the date of death, but were then unpaid or unused, (ii) any
accrued, but unpaid, Bonus but without accelerating the bonus payment date,
and (iii) an amount equal to the difference between (a) the full monthly
Salary payable hereunder as of the date of death of the Executive for a
period consisting of that number of months equal to one (1) month
multiplied by the number of full years that the Executive was an employee
of the Company or a subsidiary or a predecessor in interest thereof, and
(b) the monthly payment, if any, payable to the Executive under the
Company's salary continuation plan, if any, for the corresponding month
during the period set forth in clause (iii)(a) above. Any amount due the
Executive under clause (i) of this paragraph shall be paid in a lump sum in
cash within thirty (30) days after the death of the Executive, and any
amount due the Executive under clause (ii) of this paragraph shall be paid
in accordance with the Discretionary Bonus Resolution; provided, however,
that any unpaid Earnings Annual Bonus shall be paid to the Executive within
thirty (30) days after the Company's audited financial statements for the
fiscal year is made available by the Company's auditors for which such
Bonus is due.
(b) Disability. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6(b) hereof due to the
Disability of the Executive, the Company shall be relieved of all of its
obligations under this Agreement, except to pay the Executive (i) any
accrued, but unpaid Salary and any authorized but unreimbursed business
expenses, (ii) any accrued, but unpaid, Bonus but without accelerating the
bonus payment date, and (iii) an amount equal to the difference between (a)
the full monthly Salary payable hereunder as of the date of termination of
the Executive's employment hereunder for a period consisting of that number
of months equal to one (1) month multiplied by the number of full years
that the Executive was an employee of the Company or a subsidiary or
predecessor in interest thereof, and subject to a minimum of three (3)
months (b) the monthly
8
<PAGE>
payment, if any, payable to the Executive under the Company's salary
continuation plan and/or disability plan, if any, for the corresponding
month during the period set forth in clause (iii)(a) above. The provisions
of the preceding sentence shall not affect the Executive's rights to
receive payments under the Company's disability insurance plan, if any. Any
amount due the Executive under clause (i) of this paragraph shall be paid
in a lump sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder, any amount due the Executive under clause
(ii) of this paragraph shall be paid within thirty (30) days after the
Company's audited financial statements for the fiscal year is made
available by the Company's auditors for which such Bonus is due, and any
amount due the Executive under clause (iii) of this paragraph shall be paid
in accordance with the Company's regular payroll periods during the period
set forth in clause (iii).
(c) Cause. In the event the Executive's employment hereunder is
terminated by the Company for Cause pursuant to the provisions of Section
1.6(c) hereof, the Company shall have no further obligation to the
Executive under this Agreement except to pay the Executive (i) any accrued,
but unpaid, Salary and any authorized but unreimbursed business expenses,
and (ii) any accrued, but unpaid, Bonus, but without accelerating the bonus
payment date. Any amount due the Executive under clause (i) of this
paragraph shall be paid in a lump sum in cash within thirty (30) days after
the termination of the Executive's employment hereunder, and any amount due
the Executive under clause (ii) of this Paragraph shall be paid within
thirty (30) days after the Company's audited financial statements for the
fiscal year is made available by the Company's auditors for which such
Bonus is due.
(d) Termination by the Company other than for Cause. In the event the
Executive's employment hereunder is terminated by the Company pursuant to
the provisions of Section 1.6(d) hereof, the Executive shall be entitled to
receive (i) any accrued, but unpaid Salary and any authorized but
unreimbursed business expenses, (ii) any accrued, but unpaid, Bonus, and
(iii) an amount equal to One Hundred (100%) percent of the full monthly
Salary payable hereunder for the unexpired term of the Agreement. Any
amount due the Executive under clause (i) of this paragraph shall be paid
in a lump sum in cash within thirty (30) days after the termination of the
Executive's employment thereunder, any amount due the Executive under
clause (ii) of this paragraph shall be paid to the Executive within thirty
(30) days after the Company's audited financial statements for the fiscal
year is made available by the Company's auditors for which such Bonus is
due, and any amount due the Executive under clause (iii) of this paragraph
shall be paid in accordance with the Company's regular payroll periods
during the period set forth in clause (iii).
(e) Termination by the Executive for Good Reason or by the Company
After Change in Control. In the event this Agreement is terminated by the
Executive pursuant to the provisions of Section 1.6(e) hereof, or by the
Company pursuant to Section 1.6(f) hereof, the Executive shall be entitled
to receive (i) any accrued, but unpaid, Salary and any authorized but
unreimbursed business expenses, (ii) any accrued, but unpaid Bonus, and
(iii) an amount
9
<PAGE>
equal to One Hundred (100%) percent of the full monthly Salary payable
hereunder for the unexpired term of the Agreement. Any amount due the
Executive under clause (i) of this paragraph shall be paid in a lump sum in
cash within thirty (30) days after the termination of the Executive's
employment hereunder, any amount due the Executive under clause (ii) of
this paragraph shall be paid within thirty (30) days after the Company's
audited financial statements for the fiscal year is made available by the
Company's auditors for which such Bonus is due and (iii) any amount due the
Executive under clause (iii) of this paragraph (A) in the event this
Agreement is terminated pursuant to Section 1.6(e) shall be paid in
accordance with the Company's regular payroll periods during the period set
forth in clause (iii), and (B) in the event this Agreement is terminated by
the Company pursuant to Section 1.6(f) shall be paid in a lump sum in cash
within ninety (90) days after the termination of the Executive's employment
hereunder. In addition, in the event this Agreement is terminated by the
Executive pursuant to the provisions of Section 1.6(e) hereof, or by the
Company pursuant to Section 1.6(f) hereof, the Company at its expense shall
continue to provide the Executive with the benefits set forth in Section
1.5(b) relating to term life insurance, 1.5(c) and 1.5(f) above for the
unexpired term of this Agreement; provided, however, if the Executive
received such benefits from a source other than the Company during the
aforesaid period, then the Company shall continue to provide the benefits
set forth in Sections 1.5(b) relating to term life insurance, 1.5(c) and
1.5(f) hereof, or provide the Executive with the equivalent of such
benefits if the Company is precluded from providing such actual benefits,
only to the extent the Executive does not receive such benefits in their
entirety from such other source.
(f) Termination of Obligations of the Company Upon Payment of
Compensation. Upon payment of the amount, if any, due the Executive
pursuant to the preceding provisions of this Section, the Company shall
have no further obligation to the Executive under this Agreement.
1.8 Protective Covenants. The Executive recognizes that his employment by
the Company is one of the highest trust and confidence because (i) the Executive
will become fully familiar with all aspects of the Company's business and that
of its subsidiaries during the period of his employment with the Company, and
(ii) certain information of which the Executive will gain knowledge during his
employment is proprietary and confidential information which is of special and
peculiar value to the Company or its subsidiaries (the "Proprietary
Information"). If any such Proprietary Information were imparted to or became
known by any person, including the Executive, engaging in a business in
competition with that of the Company or its subsidiaries, hardship, loss and
irreparable injury and damage could result to the Company or its subsidiaries,
the measurement of which would be difficult if not impossible to ascertain. The
Executive acknowledges that any and all Proprietary Information shall be the
sole and absolute property of the Company in perpetuity, that the Executive
shall promptly disclose such Proprietary Information to the Company, and the
Executive shall have no right, title or interest therein or to receive
additional monies therefor. The Executive shall provide reasonable assistance to
the Company in developing and protecting all such Proprietary Information and
obtaining patents on such Proprietary Information deemed patentable by the
10
<PAGE>
Company. The Executive further acknowledges that the Company or its subsidiaries
has developed unique skills, concepts, sales presentations, marketing programs,
marketing strategy, business practices, methods of operation, trademarks,
licenses, technical information, Proprietary Information, computer software
programs, tapes and discuss concerning its operations systems, customer lists,
customer leads, documents identifying past, present and future customers, hiring
and training methods, investment policies, financial and other confidential and
proprietary information concerning its operations and expansion plans ("Trade
Secrets"), including, without limitation, such Trade Secrets acquired from
LocalNet Communications, Inc., a Florida corporation ("LocalNet") pursuant to a
Peaceful Surrender Agreement of even date between e.TV and LocalNet. Therefore,
the Executive agrees that it is necessary for the Company to protect its
business and that of its subsidiaries from such damage, and the Executive
further agrees that the following covenants constitute a reasonable and
appropriate means, consistent with the best interest of both the Executive and
the Company, to protect the Company or its subsidiaries against such damage and
shall apply to and be binding upon the Executive as provided herein:
(a) Trade Secrets. The Executive recognizes that his position with the
Company is one of the highest trust and confidence by reason of the
Executive's access to and contact with certain Trade Secrets of the Company
and its subsidiaries. The Executive agrees and covenants to use his best
efforts and exercise utmost diligence to protect and safeguard the Trade
Secrets of the Company and its subsidiaries. The Executive further agrees
and covenants that, except as may be required by the Company in connection
with this Agreement, or with the prior written consent of the Company, the
Executive shall not, either during the term of this Agreement or
thereafter, directly or indirectly, use for the Executive's own benefit or
for the benefit of another, or disclose, disseminate, or distribute to
another, any Trade Secret (whether or not acquired, learned, obtained, or
developed by the Executive alone or in conjunction with others) of the
Company or its subsidiaries or of others with whom the Company or its
subsidiaries has a business relationship. All memoranda, notes, records,
drawings, documents, or other writings whatsoever made, compiled, acquired,
or received by the Executive during the term of this Agreement, arising out
of, in connection with, or related to any activity or business of the
Company or its subsidiaries, including, but not limited to, the customers,
suppliers, or others with whom the Company or its subsidiaries has a
business relationship, the arrangements of the Company or its subsidiaries
with such parties, and the pricing and expansion policies and strategy of
the Company or its subsidiaries, are, and shall continue to be, the sole
and exclusive property of the Company or its subsidiaries, are, and shall
continue to be, the sole and exclusive property of the Company or its
subsidiaries, as applicable, and shall, together with all copies thereof
and all advertising literature, to be returned and delivered to the Company
by the within five (5) days of the termination of this Agreement, or at any
time upon the Company's demand.
(b) Inventions as Sole Property of Company. Executive agrees promptly
to disclose to the Company any and all inventions, ideas, discoveries,
improvements, trade secrets, formulas, techniques, processes, developments,
know how, and writings or other
11
<PAGE>
materials, whether or not patentable and whether or not reduced to
practice, conceived, made or learned by the Executive during the period of
his/her employment, either alone or jointly with others, which relate to
the Company's business of developing, and selling through a multi-level
market sales network using independent representatives, e-commerce,
telecommunications and internet products and services (such inventions,
ideas, discoveries, improvements, trade secrets, formulas, techniques,
processes, developments know-how, and writings or other materials being
hereinafter collectively referred to as the "Inventions"). Executive
acknowledges and agrees that all the Inventions (including all rights of
copyright therein) shall be the sole property of the Company or any other
entity designated by it, and the Executive hereby assigns to the Company
his/her entire right and interest in and to all the Inventions. The Company
or any other entity designated by it shall be the sole owner of all
domestic and foreign rights pertaining to the Inventions.
(c) Restriction on Soliciting Certain Persons of the Company and its
Subsidiaries. The Executive covenants that during the term of this
Agreement and for a period of twenty-four (24) months following the
termination of this Agreement, he will not, either directly or indirectly,
(i) disclose or otherwise make known to any person or entity the names and
addresses of any of the customers, suppliers, vendors, sales
representatives, distributors, employees, or consultants of the Company, or
(ii) call on, solicit, or take away, or attempt to call on, solicit or take
away any of the customers, suppliers, vendors, sales representatives,
distributors, employees, or consultants of the Company, or its subsidiaries
with whom he became acquainted during his employment with the Company,
either for himself or for any other person, firm, corporation or other
entity.
(d) Covenant Not to Compete. The Executive hereby covenants and agrees
that during the term of this Agreement and for a period of twelve (12)
months following the termination, of his employment hereunder, he will not
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder (other than through ownership of public
traded capital stock of a corporation which represent less than five
percent (5%) of the outstanding capital stock of such corporation),
corporate officer, director, investor, financier or in any other individual
or representative capacity, engage or participate in any business during
the term of this Agreement and as of the date of termination of the
Executive's employment hereunder which is directly competitive with the
business of the Company or any of its subsidiaries in the areas of
e-commerce, telecommunications and internet services and products and
multi-level marketing as of such date.
(e) Survival of Covenants. Each covenant of the Executive set forth in
this Section 1.8 shall survive the termination of this Agreement and shall
be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of the
Executive against the Company whether predicated on this Agreement or
otherwise shall not constitute a defense to the enforcement by the Company
of said covenant.
12
<PAGE>
(f) Remedies. In the event of breach or threatened breach by the
Executive of any provision of this Section 1.8, the Company shall be
entitled to relief by temporary restraining order, temporary injunction, or
permanent injunction or otherwise, in addition to other legal and equitable
relief to which it may be entitled, including any and all monetary damages
which the Company may incur as a result of said breach, violation or
threatened breach or violation. The Company may pursue any remedy available
to it concurrently or consecutively in any order as to any breach,
violation, or threatened breach or violation, and the pursuit of one of
such remedies at any time will not be deemed an election of remedies or
waiver of the right to pursue any other of such remedies as to such breach,
violation, or threatened breach or violation, or as to any other breach
violation, or threatened breach or violation.
However, in the event the Company commences an action and does not
prevail, the Company shall pay the Executive all reasonable legal costs and
expenses in connection with the defense or any action brought by the
Company against him.
1.9 Merger or Acquisition. In the event the Company should consolidate, or
merge into another corporation, or transfer all or substantially all of its
assets to another entity, or divide its assets among a number of entities, this
Agreement shall continue in full force and effect. The Company will require any
and all successors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to expressly assume and agree pursuant to an appropriate
written assumption agreement to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such successor shall be a breach of this
Agreement and shall entitle the Executive to terminate his employment and this
Agreement for Good Reason. As used in this Agreement, the term "Company" shall
mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the assumption agreement
provided for in this Section 1.9 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
1.10 Reimbursement of Employee Expenses. The Executive is authorized to
incur ordinary, necessary and reasonable expenses in connection with the
performance of his duties and responsibilities under this Agreement and for the
promotion of the business and activities of the Company during the term hereof,
including, without limitation, expenses for necessary travel and necessary
travel and entertainment and other items of expenses required in the normal and
routine course of the Executive's employment hereunder. The Company will
reimburse the Executive from time to time of at least $500.00 per month incurred
which will cover miscellaneous expenses of the Executive incidental to the
performance of his duties hereunder. Additionally, the Company will reimburse
the Executive from time to time for all such expenses above $500.00 in the
aggregate each month provided that the Executive presents to the Company with
respect thereto:
13
<PAGE>
(a) An accounting in which the Executive recorded at or near the time
each expenditure was made; (i) the amount of the expenditures, (ii) the
time, place and designation of the type of entertainment and travel or
other expenses, or the date and description of the gift (gifts made to one
individual are not to exceed a total of Twenty-Five and No/100 Dollars
($25.00) in any taxable year); (iii) the business reason for the
expenditure and the nature of the business benefit derived or expected to
be derived as the result of the expenditure; and (iv) the names,
occupations, addresses and other information concerning each person who was
entertained or given a gift sufficient to establish the business
relationship to the Company; and
(b) Documentary evidence (such as receipts or paid bills) which state
sufficient information to establish the amount, date, place and essential
character of the expenditure, for such expenditure (i) of Twenty-Five and
No/100 Dollars ($25.00) or more except for transportation charges if not
readily available) and (ii) for lodging or traveling away from home.
1.11 Executive's Securities Law Covenants. The Executive covenants that he
will comply with all securities laws, rules and regulations pertaining to his
employment hereunder, to the extent any such laws, rules and regulations
applies, including, without limitation, filing all reports required by Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
complying with Section 16(b) of the Exchange Act relating to short swing
profits, and refraining on using "insider information" or disclosing same to any
third party who is not the Company's retained counsel, accountants or investment
bankers, or who is not bound by a confidentiality agreement with the Company,
except if any of the forgoing is demonstrably inadvertent by the Executive and
does not have a material adverse affect on the Company's business, reputation,
financial condition, investor or public relations, creditor, customer or
supplier relations, or relationships with other contracting parties, or
independent sales representative relations. Additionally, the Executive will, at
the request of the Company, provide the Company with all information regarding
the Executive on a timely basis which is reasonably required by Compu-DAWN to
complete it's reports and statements required by the Exchange Act, or to
complete any registration statement or amendments thereto which Compu-DAWN files
or plans to file with the Securities and Exchange Commission.
2.1 Post Termination Transition Period. Following the termination or
expiration of this Agreement for any reason whatsoever, there shall be a
reasonable transition period (the "Transition Period") during which the Company
will take steps to disassociate itself from the name and the likeness of the
Executive. During the Transition Period the Company shall use diligent efforts
to revise any letterhead, brochures, sales and marketing literature, public
relations materials, web sites or the like, whether printed or electronic, to
remove the name, picture and likeness of the Executive therefrom, unless the
Executive gives his prior written consent to the contrary. During the Transition
Period, subject to the foregoing sentence, the Company may use the Executive's
name, picture and likeness in existing materials, consistent with then past
practice, provided such use is not misleading, or disparaging or damaging to the
Executive. Following the Transition Period, the Company shall not use the name,
picture or likeness of the Executive without the Executive's prior
14
<PAGE>
written consent, except as may be required by law, rule or regulation
(including, without limitation, federal and state securities laws) or in an
historical context. During such Transition Period, to the extent that the
Executive is called upon by the Company to assist the Company in making the
afordescribed transition, the Executive shall be compensated for any such
services on a per diem basis at a daily rate equal to one thirtieth (1/30) of
the monthly Salary paid to the Executive at the time of the Executive's
termination from the Company, plus reimbursement for any reasonable
out-of-pocket expenses incurred by the Executive in rendering such services.
3.1 Covenants of Compu-DAWN. Within ten (10) days following the execution
and delivery of this Agreement Compu-DAWN shall use its best efforts to cause
the Board of Directors to expand the Board of Directors to seven (7), and shall
cause the following persons to continue to serve as directors or to be elected
by the incumbent directors to fill vacancies caused by the increase in the size
of the Board of Directors or the resignation of certain current directors, as
the case may be, and subject to their respective consent to so serve, effective
upon Compu-DAWN's compliance Rule 14 f-1 promulgated under the Exchange Act
("Rule 14f-1"): Mark Honigsfeld, Louis Libin, Rudy C. Theale, Jr., R.E. Turner
IV, one person designated by Messrs. Honigsfeld and Libin, one person designated
by Messrs. Theale and Turner, and one person mutually agreed to by Messrs.
Honigsfeld, Libin, Theale and Turner. Compu-DAWN shall use best efforts to
comply with Rule 14f-1 within thirty (30) days following the date hereof,
subject to the persons who are contemplated to become new directors of
Compu-DAWN as provided above furnishing Compu- DAWN, within fifteen (15) days of
the date hereof with the information required by Compu- DAWN to accurately
complete the statement required to comply with Rule 14f-1. In that regard,
Compu-DAWN has sent, or will send within seven (7) days of the date hereof, to
the Executive, a Director and Officer Questionnaire designed to elicit the
required information for the information statement required by Rule 14f-1.
This covenant is subject to the stockholder's and Board of Directors rights
and duties to remove any director for cause pursuant to law, or Compu-DAWN's
certificate of incorporation and bylaws and to fulfill the directors fiduciary
duties. This covenant shall expire following the next Annual Meeting of
Stockholders of Compu-DAWN at which elections for the class of directors
including any of Messrs. Honigsfeld, Libin, Theale or Turner are to be held,
with respect to each of them.
GENERAL PROVISIONS
4.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follows:
15
<PAGE>
If to the Executive:
204 Clatterbridge Road
Ponte Vedra Beach, Florida 32082
If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
ATTN: Mark Honigsfeld,
Chairman of the Board
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
4.2 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
4.3 Waiver, Modification, and Integration. The waiver by any party hereto
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach by any party. This instrument contains the
entire agreement of the parties concerning employment and supersedes all prior
and contemporaneous representations, understandings and agreements, either oral
or in writing, between the parties hereto with respect to the employment of the
Executive by the Company and all such prior or contemporaneous representations,
understandings and agreements, both oral and written, are hereby terminated
provided, however that the terms and conditions of that separate Confidential
Proprietary Information Agreement entered into by and between the Company and
the Executive shall control with respect to the subject matter thereof. The
terms of this Agreement may not be modified, altered or amended except by
written agreement of the Executive and the Company, subject to the prior
approval of the Board of Directors of the Company.
4.4 Binding Effect. This Agreement shall be binding and effective upon the
Company and its successors and permitted assigns, and upon the Executive, his
heirs and representatives.
4.5 Choice of Law and Venue. The parties agree that this Agreement is made
and entered into in Nassau County, New York and shall be governed by and
construed in accordance with the laws of the State of New York.
16
<PAGE>
4.6 Representation of Executive. The Executive hereby represents and
warrants to the Company that he has not previously assumed any obligations
inconsistent with those contained in this Agreement. The Executive further
represents and warrants to the Company that the Executive has entered into this
Agreement pursuant to his own initiative and that the Company did not induce the
Executive to execute this Agreement in contravention of any existing
commitments. The Executive acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of the Executive.
4.7 Independent Counsel. The Company has been represented by CERTILMAN
BALIN ADLER & HYMAN, LLP. The Executive has been represented by BRANT, MOORE,
MACDONALD & WELLS, P.A. Each has made his or its own determination with respect
to counsel without coercion from the other. Each has thoroughly reviewed the
provisions of this Agreement and all matters concerning the consulting with the
benefit of independent counsel.
4.8 Arbitration Any controversy or claim arising out of or relating to this
Agreement shall be settled by binding arbitration in Nassau County, New York
under the rules of the American Arbitration Association. Judgment upon the award
may be entered in any court having jurisdiction. Arbitrator(s) may not award the
prevailing party in such arbitration attorney's fees, expenses and costs of
arbitration, except as otherwise provided with respect to restrictive covenants
set forth in Section 1.8(f).
4.9 Counterpart Execution; Originals. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.
[Rest of Page Intentionally Left Blank. Signatures are on the Following
Page.]
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written effective as of the Effective Date.
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
----------------------
MARK HONIGSFELD
Chief Executive Officer
e.TV COMMERCE, INC.
By: /s/ Mark Honigsfeld
-----------------------
EXECUTIVE:
/s/ R.E. Turner, IV
--------------------------
18
<PAGE>
Mark Honigsfeld and Louis Libin hereby each agree that he will vote in
favor of the matters set forth in Section 2.1 of the Employment Agreement dated
January 8, 1999 between Compu-DAWN, Inc. and e.TV Commerce, Inc. and Robert E.
Turner IV.
/s/ Mark Honigsfeld
----------------------------
Mark Honigsfeld
/s/ Louis Libin
----------------------------
Louis Libin
19
<PAGE>
EXHIBIT 1.5(g)
FORM OF STOCK OPTION AGREEMENT
See attached.
20
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") by and between COMPU-DAWN, INC., a
Delaware corporation ("Compu-DAWN") and e. TV Commerce Inc., a Delaware
Corporation ("e.TV, and together with Compu-DAWN, the "Company") with offices at
77 Spruce Street, Cedarhurst, New York 11516, and Rudy C. Theale, Jr., residing
at the address set forth in Section 3.1 ("Executive") is made and entered as of
January 8, 1999, ("Effective Date").
RECITALS
WHEREAS the Company wishes to employ the Executive, and the Executive is
willing to accept such employment for the Company on a full time basis upon the
terms and conditions hereafter set forth.
NOW THEREFORE, in consideration of the premises and of the respective
covenants and agreements contained herein, the parties hereto agree as follows:
1.1 Retention. The Company hereby retains the Executive as Executive Vice
President of Compu-DAWN and President of e.TV for and during the term hereof.
The Executive hereby accepts employment under the terms and conditions set forth
in this Agreement.
1.2 Duties of Executive. The Executive shall perform in the capacity
described in Section 1.1 hereof on a full-time basis and shall have such duties,
responsibilities, and authorities as are designated for such offices pursuant to
the Bylaws, as amended, of the Company, and as may be reasonably assigned to him
from time to time by the Chief Executive Officer of the Company. The Executive
agrees to devote his full time during normal business hours, best efforts,
abilities, knowledge and experience to the faithful performance of the duties,
responsibilities, and authorities which may be reasonably assigned to him and
which are consistent with his executive offices under Section 1.1 of this
Agreement. Notwithstanding the preceding, the Executive may, without being in
violation of his obligations hereunder, (i) serve on corporate, civic or
charitable boards or committees which are not engaged in business in the
computer software, radio or telecommunications industries, provided, however,
the Executive may serve on boards or committees otherwise prohibited hereunder
as director of a trade or business association related to the computer software,
radio or telecommunications industries with the prior written consent of the
Chief Executive Officer, (ii) invest the Executive's personal assets in such
form or manner as will not require any material services by the Executive in the
operation of the entities in which such investments are made, provided the
Executive shall use his best efforts to pursue such activities in such a manner
so that such activities shall not prevent the Executive from fulfilling his
obligations to the Company hereunder, and provided further, the Executive shall
resolve any conflict between his obligations to the Company and his obligations
to any other entity in which the Executive has a financial interest in favor of
the Company.
1
<PAGE>
1.3 Term. This Agreement shall become effective as of the Effective Date
and shall continue in force and effect until December 31, 2001, unless sooner
terminated as provided in Section 1.6 hereof. This Agreement shall automatically
renew for additional one (1) year periods unless either party has given at least
sixty (60) days prior written notice of their intention not to renew.
1.4 Compensation. The Company (either by Compu-DAWN or e.TV) shall pay the
Executive, as full compensation for services rendered by the Executive under the
Agreement, as follows:
(a) Base Salary. The Company shall pay the Executive a base salary of
TWO HUNDRED EIGHT THOUSAND DOLLARS ($208,000.00) per year, or such higher
salary as may be determined from time to time during the term hereof either
in accordance with the provisions of Section 1.4(b) hereof or by the Board
of Directors of Compu-DAWN in its sole discretion, prorated for any partial
period of employment ("Salary"). Such Salary shall be paid by the Company
(either by Compu-DAWN or e.TV) to the Executive in twenty-six (26) equal
installments in accordance with the regular payroll payment dates of the
Company or in such installments and on such days during the month as the
Company and the Executive shall mutually determine. In the event this
agreement renews automatically as provided in paragraph 1.2 hereof
increases in base salary will be a minimum of the cumulative annual average
increase for the prior year as stated in the consumer price index all urban
consumers Jacksonville, Florida Area publicized by the U.S. Department of
Commerce. If such index is terminated or no longer in existence use of a
comparable index will be accepted.
(b) Bonus. In addition to the Salary set forth in Section 1.4(a)
hereof, the Executive shall be entitled to receive a sales and marketing
bonus (the "Bonus") to be determined by the mutual agreement of the
Compu-DAWN and the Executive which, among other things, will allow the
Executive to earn such a Bonus of up to fifty percent (50%) of the
Executive's Salary each year, based on certain performance thresholds.
1.5 Employment Benefits. In addition to the Salary, the signing bonus and
the Bonus, payable to the Executive hereunder, the Executive shall be entitled
to the following benefits upon satisfaction by the Executive of the eligibility
requirements therefor, subject to the following limitations:
(a) Sick Leave Benefits and Disability Insurance. Unless this
Agreement is terminated pursuant to the provisions of Section 1.6(b) hereof
and provided that Executive has been employed on a full time basis for a
minimum of three (3) months, the Executive shall be paid sick leave
benefits for a period of up to three (3) months at his then prevailing
Salary rate during his absence due to illness or other incapacity, reduced
by the amount, if any, of worker's compensation, social security
entitlement, or disability benefits, if any, under the Company's group
disability insurance plan, if any.
2
<PAGE>
(b) Life Insurance;" Key Man" Life Insurance. The Company, at its own
expense, shall provide the Executive, subject to the Executive passing any
physical examination required by the Company's insurance company, life
insurance benefits under and consistent with any group term life insurance
plan which Compu-DAWN, at its election, may adopt. Any such life insurance
coverage shall be upon terms and conditions comparable to the coverage, if
any, provided other executive officers of the Company, and provided
further, however, that the Company shall not be obligated to incur a
premium of more than $1,000 per year for any such coverage. In addition,
the Company may obtain "key man" life insurance upon the life of the
Executive in an amount determined by Compu-DAWN in its sole discretion. The
Executive shall fully cooperate in obtaining said life insurance, including
submitting to any physical examination.
(c) Hospitalization, Accident, Major Medical and Dental Insurance. The
Company, at its own expense, shall provide the Executive (and all
dependents of the Executive at the request of the Executive) with group
hospitalization, group accident, major medical, and dental insurance in
amounts of coverage comparable to the coverage, if any, provided other
executive officers of the Company.
(d) Vacations. The Executive shall be entitled to a reasonable paid
vacation of not less that ten (10) business days each year during the term
of this Agreement, exclusive of national and religious holidays and
weekends, which vacation shall be taken by the Executive in accordance with
the business requirements of the Company at the time and its personnel
policies then in effect relative to this subject.
(e) Working Facilities; Travel. During the term of this Agreement, the
Company shall provide at its expense, adequate office space, furniture,
equipment, supplies, and personnel (including professional, clerical,
support and other personnel) as shall be suitable in the opinion of the
Chief Executive Officer of the Company to the Executive's position and
adequate for the Executive's use in performing his duties and
responsibilities under this Agreement. The Executive shall be based at
e.TV's office at 12775 Gran Bay Parkway West, Building 200, Jacksonville,
Florida or any successor office in the Jacksonville Florida area, and he
shall be required to travel to the Company's offices at 77 Spruce Street,
Cedarhurst, New York and to meet with customers and attend conferences,
conventions and the like from time to time in order for him to carry out
his duties hereunder.
(f) Automobile Allowance. During the term of this Agreement, the
Company shall provide the Executive with a monthly automobile allowance of
one thousand dollars ($1,000). Any allowance due the Executive pursuant to
the preceding provisions of this paragraph shall be paid by the Company
concurrently with payroll.
(g) Signing Bonus. Upon signing this Agreement in connection with the
Executive becoming Executive Vice President of Compu-DAWN and President of
e.TV and a
3
<PAGE>
Director of the Company, Compu-DAWN shall pay to the Executive Twenty Five
Thousand Dollars ($25,000) in cash as a signing bonus, subject to any
federal, state and local withholding tax requirements.
(h) Upon signing this Agreement in connection with the Executive
becoming Executive Vice President of Compu-DAWN and President of e.TV and a
Director of the Company, Compu-DAWN shall grant to the Executive common
Stock purchase options to purchase the number of shares of common stock of
Compu-DAWN upon the terms and conditions set forth in the stock option
agreement attached hereto as Exhibit 1.5(h).
1.6 Termination. This Agreement and the Executive's employment hereunder
may be terminated without any breach of this Agreement at any time during the
term hereof only by reason of and in accordance with the following provisions:
(a) Death. If the Executive dies during the term of this Agreement and
while in the employ of the Company, this Agreement shall automatically
terminate as of the date of the Executive's death, and the Company shall
have no further liability hereunder to the Executive or his estate except
to the extent set forth in Section 1.7(a) hereof.
(b) Disability. If, during the term of this Agreement, the Executive
shall be prevented from performing his duties hereunder by reason of
becoming totally disabled as hereinafter defined for six (6) months out of
twelve (12) month period, then the Company may terminate this Agreement
immediately upon written notice to the Executive without any further
liability hereunder to the Executive except as set forth in Section 1.7(b)
hereof. For purposes of this Agreement, the Executive shall be deemed to
have become disabled when (i) he either receives "disability benefits"
under (a) Social Security, or (b) the Companys disability plan, if any
(whether funded with insurance or self-funded by the Company), or (ii) the
Board of Directors of the Company, upon the written report of a qualified
physician (after complete examination of the Executive) designated by the
Board of Directors of Compu-DAWN or its insurers, shall have determined
that the Executive has become physically and/or mentally incapable of
performing his duties under this Agreement.
(c) Termination by the Company for Cause. Prior to the expiration of
the term of this Agreement, the Company may discharge the Executive for
cause and terminate this Agreement immediately upon written notice to the
Executive without any further liability hereunder to the Executive or his
estate, except to the extent set forth in Section 1.7(c) hereof. For
purposes of this Agreement, a "discharge for cause" shall mean termination
of the Executive upon written notice to the Executive limited, however, to
one or more of the following reasons:
(1) Misappropriation or embezzlement by the Executive in
connection with the Company as determined by the affirmative unanimous
vote of the
4
<PAGE>
Board of Directors of Compu-DAWN other than the Executive;
(2) Gross mismanagement or willful neglect of the Executive's
duties as determined by the affirmative unanimous vote of the Board of
Directors of Compu-DAWN (other than the Executive) after notice to the
Executive of the particular details thereof and a period of thirty
(30) days thereafter within which to cure such act or acts of
mismanagement or neglect, and the failure of the Executive to cure
such act or acts within such thirty (30) day period;
(3) Indictment and conviction of a felony; or
(4) Willful and unauthorized disclosure of Trade Secrets (as
defined in Section 1.8 hereof) of the Company as determined by the
affirmative unanimous vote of the Board of Directors of the Company,
other than the Executives.
(d) Termination by the Company with Notice. The Company may terminate
this Agreement, for a reason other than as set forth in subparagraphs (a),
(b), (c) or (g) of this Section 1.6 at any time immediately upon written
notice to the Executive without any further liability hereunder to the
Executive except to the extent set forth in Section 1.7(d) hereof.
(e) Termination by the Executive for Good Reason. The Executive may
terminate this Agreement at any time for Good Reason (as hereinafter
defined) in which event the Company shall have no further liability
hereunder to the Executive except to the extent set forth in Section 1.7(f)
hereof. For purposes of this Agreement, the term "Good Reason" shall mean,
without the Executive's express written consent, the occurrence of any the
following circumstances (which changes shall constitute a "Change"):
(1) The assignment to the Executive of any duties inconsistent in
any material respect (unless in the nature of a promotion) with the
Executive's position in the Company immediately prior to such Change
(including, but not limited to, the Executive's status, offices and
titles), or a significant adverse alteration or diminution in the
nature or status of the Executive's authority, duties or
responsibilities from those in effect immediately prior to such
Change, other than an isolated, insubstantial and inadvertent action
that is fully corrected within thirty (30) days after receipt of
written notice from the Executive;
(2) Any material failure by the Company to comply with any of the
provisions of Section 1.4 or 1.5 of this Agreement, other than an
isolated, insubstantial and inadvertent action that is fully corrected
within thirty (30) days after receipt of written notice from the
Executive;
5
<PAGE>
(3) The Company's requiring the Executive to be based anywhere
other than within a reasonable travel distance from Jacksonville,
Florida, except as provided in Section 1.5(e) hereof and except for
travel reasonably required of the Executive in the performance of the
Executive's duties on behalf of the Company;
(4) The failure of the Company to obtain an agreement,
satisfactory to the Executive, from any and all successors to assume
and agree to perform this Agreement, as contemplated in Section 1.9
hereof; or
(5) Any failure by the Company to comply with any material
provision of this Agreement that has not been cured within thirty (30)
days after notice of such noncompliance has been given by the
Executive to the Company.
During a period of six (6) months immediately following any such
termination of this Agreement by the Executive, the Executive agrees to
provide such consulting services to the Company as it may reasonably
request, at such time or times within such period as may be mutually agreed
upon between the Company and the Executive. The Executive shall be
compensated for any such consulting services at a daily rate equal to one
thirtieth (1/30) of the monthly Salary paid to the Executive at the time of
the Executive's resignation from the Company, plus reimbursement for any
reasonable out-of-pocket expenses incurred by the Executive in rendering
such consulting services.
(f) Termination upon Change in Control. The Company may terminate this
Agreement at any time within twelve (12) months after a Change in Control
(as hereinafter defined) immediately upon written notice to the Executive
without any further liability hereunder to the Executive except to the
extent set forth in Section 1.7(f) hereof. For purposes of this Agreement,
the terms "Change of Control" shall mean, except in connection with, or in
relation to, a capital raising transaction:
(1) The transfer, through one transaction or a series of related
transactions, either directly or indirectly, or through one or more
intermediaries, of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934) of 25% or
more of either the then outstanding shares of common stock or the
combined voting power of Compu-DAWN's then outstanding voting
securities entitled to vote generally in the election of directors, or
the last of any series of transfers that results in the transfer of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934) of 25% or more of either
the then outstanding shares of common stock or the combined voting
power of Compu-DAWN's then outstanding voting securities entitled to
vote generally in the election of directors;
6
<PAGE>
(2) Approval by the shareholders of Compu-DAWN of a merger or
consolidation, with respect to which persons who were the shareholders
of Compu-DAWN immediately prior to such merger or consolidation do
not, immediately thereafter, own more than 50% of the combined voting
power entitled to vote generally in the election of directors of the
merged or consolidated company's then outstanding voting securities,
or a liquidation or dissolution of the Company or the sale of all or
substantially all of the assets of the Company;
(3) The transfer, through one transaction or a series of related
transactions, of more than 50% of the assets of the Company, or the
last of any series of transfers that results in the transfer of more
than 50% of the assets of the Company. For purposes of this paragraph,
the determination of what constitutes more than 50% of the assets of
the Company shall be determined based on the most recent financial
statement prepared by the Company's independent accountants; or
(4) During any calendar year, individuals who at the beginning of
such year constituted the Board of Compu-DAWN and any new director or
directors whose election by the Board was approved by a vote of a
majority of the directors then still in office who either were
directors at the beginning of the year or whose election or nomination
for election was previously so approved, cease for any reason to
constitute a majority thereof provided, however, that this provision
will not be triggered in the event the Executive votes or causes other
stockholders to vote their shares to cause said change to the
directorship of the Company.
1.7 Compensation upon Termination.
(a) Death. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6 (a) hereof due to the
death of the Executive, the Company shall have no further obligation to the
Executive or his estate, except to pay to the Executive's spouse, or if he
leaves no spouse, to the estate of the Executive (provided, however, that
the Executive, with the written consent of the Executive's spouse, if any,
may affirmatively designate a beneficiary other than his spouse or estate):
(i) any accrued, but unpaid, Salary, any authorized but unreimbursed
business expenses, and any vacation or sick leave benefits, which have
accrued as of the date of death, but were then unpaid or unused, (ii) any
accrued, but unpaid, Bonus but without accelerating the bonus payment date,
and (iii) an amount equal to the difference between (a) the full monthly
Salary payable hereunder as of the date of death of the Executive for a
period consisting of that number of months equal to one (1) month
multiplied by the number of full years that the Executive was an employee
of the Company or a subsidiary or a predecessor in interest thereof, and
(b) the monthly payment, if any, payable to the Executive under the
Company's salary continuation plan, if any, for the corresponding month
during the period set forth in clause (iii)(a) above. Any amount due the
Executive under clause (i) of this paragraph shall be paid in a lump sum in
cash within thirty (30) days after the death of the Executive, and any
amount due the Executive under clause (ii) of this paragraph shall be paid
in accordance with the Discretionary Bonus Resolution; provided,
7
<PAGE>
however, that any unpaid Earnings Annual Bonus shall be paid to the
Executive within thirty (30) days after the Company's audited financial
statements for the fiscal year is made available by the Company's auditors
for which such Bonus is due.
(b) Disability. In the event the Executive's employment hereunder is
terminated pursuant to the provisions of Section 1.6(b) hereof due to the
Disability of the Executive, the Company shall be relieved of all of its
obligations under this Agreement, except to pay the Executive (i) any
accrued, but unpaid Salary, any authorized but unreimbursed business
expenses, and any vacation or sick leave benefits which have accrued as of
the date on which such permanent disability is determined, but then remain
unpaid, (ii) any accrued, but unpaid, Bonus but without accelerating the
bonus payment date, and (iii) an amount equal to the difference between (a)
the full monthly Salary payable hereunder as of the date of termination of
the Executive's employment hereunder for a period consisting of that number
of months equal to one (1) month multiplied by the number of full years
that the Executive was an employee of the Company or a subsidiary or
predecessor in interest thereof, and subject to a minimum of three (3)
months (b) the monthly payment, if any, payable to the Executive under the
Company's salary continuation plan and/or disability plan, if any, for the
corresponding month during the period set forth in clause (iii)(a) above.
The provisions of the preceding sentence shall not affect the Executive's
rights to receive payments under the Company's disability insurance plan,
if any. Any amount due the Executive under clause (i) of this paragraph
shall be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder, any amount due the
Executive under clause (ii) of this paragraph shall be paid in accordance
with the Discretionary Bonus Resolution; provided, however, that any unpaid
Earnings Annual Bonus shall be paid to the Executive within thirty (30)
days after the Company's audited financial statements for the fiscal year
is made available by the Company's auditors for which such Bonus is due,
and any amount due the Executive under clause (iii) of this paragraph shall
be paid in accordance with the Company's regular payroll periods during the
period set forth in clause (iii).
(c) Cause. In the event the Executive's employment hereunder is
terminated by the Company for Cause pursuant to the provisions of Section
1.6(c) hereof, the Company shall have no further obligation to the
Executive under this Agreement except to pay the Executive (i) any accrued,
but unpaid, Salary, any authorized but unreimbursed business expenses, and
any vacation or sick leave benefits, which have accrued as of the date of
termination of this Agreement, but were then unpaid or unused, and (ii) any
accrued, but unpaid, Bonus, but without accelerating the bonus payment
date. Any amount due the Executive under clause (i) of this paragraph shall
be paid in a lump sum in cash within thirty (30) days after the termination
of the Executive's employment hereunder, and any amount due the Executive
under clause (ii) of this Paragraph shall be paid within thirty (30) days
after the Company's audited financial statements for the fiscal year is
made available by the Company's auditors for which such Bonus is due.
8
<PAGE>
(d) Termination by the Company with Notice. In the event the
Executive's employment hereunder is terminated by the Company pursuant to
the provisions of Section 1.6(d) hereof, the Executive shall be entitled to
receive (i) any accrued, but unpaid, Salary, any authorized but
unreimbursed business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of the Agreement, but were
then unpaid or unused, (ii) any accrued, but unpaid, Bonus, and (iii) the
full monthly Salary payable hereunder for the unexpired term of the
Agreement subject to mitigation in the event the Executive has sought or
obtained employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of section 1.6(d) hereof. Any amount
due the Executive under clauses (i), (ii) and (iii) of this paragraph
(other than for any Bonus) shall be paid in a lump sum in cash within
thirty (30) days after the termination of the Executive's employment
thereunder; provided, however, that any unpaid Bonus shall be paid to the
Executive within thirty (30) days after the Company's audited financial
statements for the fiscal year is made available by the Company's auditors
for which such Bonus is due.
(e) Termination by the Executive with Notice. In the event the
Executive's employment hereunder is terminated by the Executive pursuant to
the provisions of Section 1.6(e) hereof, the Executive shall be entitled to
receive (i) any accrued, but unpaid, Salary, any authorized but
unreimbursed business expenses, and any vacation or sick leave benefits
which have accrued as of the date of termination of this Agreement, but
were then unpaid or unused, and (ii) any accrued, but unpaid, Bonus. Any
amount due the Executive under clause (i) of this paragraph shall be paid
in a lump sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder, and any amount due the Executive under
clause (ii) of this paragraph shall be paid to the Executive within ninety
(90) days after the end of the Company's taxable year for which such Bonus
is due. In addition, the Company may, at its option, cancel and terminate
any and all of the Executive's unexercised stock options, if any.
(f) Termination by the Executive for Good Reason.
(1) Prior to Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof prior to the occurrence of a Change of Control, the
Executive shall be entitled to receive (i) any accrued, but unpaid,
Salary, any authorized but unreimbursed business expenses, and any
vacation or sick leave benefits which have accrued as of the date of
termination of the Agreement, but were then unpaid or unused, (ii) any
accrued, but unpaid Bonus, and (iii) an amount equal to One Hundred
(100%) percent of the full monthly Salary payable hereunder for the
unexpired term of the Agreement whether or not the Executive has
sought or obtained employment elsewhere after the termination of the
Executive's employment. Any amount due the Executive under clauses
(i), (ii) and (iii) of this paragraph (other than for any Bonus) shall
be paid in a lump sum in cash within thirty (30) days after the
termination of the Executive's employment hereunder; provided,
however, that any unpaid Bonus shall be paid to the Executive within
thirty (30) days after the Company's audited financial statements for
the fiscal year is made available by the Company's auditors for which
such Bonus is due. In addition, in the event this Agreement is
terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof prior to
9
<PAGE>
the occurrence of a Change of Control, the Company at its expense
shall continue to provide the Executive with the benefits set forth in
Section 1.5(b), 1.5(c) 1.5(f) and 1.5(h) above for the unexpired term
of this Agreement whether or not the Executive has sought or obtained
employment elsewhere after the termination of the Executive's
employment pursuant to the provisions of Section 1.6(f) hereof;
provided, however, if the Executive obtains employment elsewhere
during the aforesaid period, then the Company shall continue to
provide the benefits set forth in Sections 1.5(b), 1.5(c), 1.5(f) and
1.5(h) hereof only to the extent the Executive does not receive such
benefits in their entirety from the Executive's then current employer.
(2) After Change of Control. In the event this Agreement is
terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof after the occurrence of a Change of Control, the
executive shall be entitled to receive (i) any accrued, but unpaid,
Salary, any authorized but unreimbursed business expenses and any
vacation or sick leave benefits which have accrued as of the date of
termination of the Agreement, but were then unpaid or unused, (ii) any
or accrued but unpaid Bonus, and (iii) an amount equal to One Hundred
(100%) percent of the full monthly Salary payable hereunder for the
unexpired term of the Agreement whether or not the Executive has
sought or obtained employment elsewhere after the termination of the
Executive's employment pursuant to the provisions of section 1.6(f)
hereof. Any amount due the Executive under clauses (i), (ii) and (iii)
of this paragraph (other than for any Bonus) shall be paid in a lump
sum in cash within thirty (30) days after the termination of the
Executive's employment hereunder; provided, however, than any unpaid
Bonus and shall be paid to the Executive within thirty (30) days after
the Company's audited financial statements for the fiscal year is made
available by the Company's auditors relating to the fiscal year for
which such Bonus is due. In addition, in the event this Agreement is
terminated by the Executive pursuant to the provisions of Section
1.6(f) hereof after the occurrence of a Change of Control, the Company
at its expense shall continue to provide the Executive with the
benefits set forth in Section 1.5(b), 1.5(c), 1.5 (f) and 1.5(h) above
for the unexpired term of this Agreement whether or not the Executive
has sought or obtained employment elsewhere after the termination of
the Executive's employment; provided, however, if the Executive
obtains employment elsewhere during the aforesaid period, then the
Company shall continue to provide the benefits set forth in Sections
1.5(b), 1.5(c), 1.5(f) and 1.5(h) hereof only to the extent the
Executive does not receive such benefits in their entirety from the
Executive's current employer.
(g) Termination by the Company After Change of Control. In the event
this Agreement is terminated by the Company pursuant to the provisions of
Section 1.6(g) hereof after the occurrence of a Change of Control, the
Executive shall be entitled to receive (i) any accrued, but unpaid, Salary,
any authorized but unreimbursed business expenses, and any vacation or sick
leave benefits which have accrued as of the date of termination of the
Agreement, but were then unpaid or unused, (ii) any accrued, but unpaid,
Bonus and (iii) an amount equal to One Hundred (100%) percent of the full
monthly Salary payable hereunder for the unexpired term of the Agreement
whether or not the Executive has sought or obtained employment elsewhere
after the termination of the Executive's employment pursuant to the
10
<PAGE>
provisions of Section 1.6 (g) hereof. Any amount due the Executive under
clause (i) of this paragraph shall be paid in a lump sum in cash within
thirty (30) days after the termination of the Executive's employment
hereunder, any amount due to the Executive under clause (ii) of this
paragraph shall be paid to the Executive within thirty (30) days after the
Company's audited financial statements for the fiscal year is made
available by the Company's auditors for which such Bonus is due, and any
amount due the Executive under clause (iii) of this paragraph shall be paid
in a lump sum in cash within ninety (90) days after the termination of the
Executive's employment hereunder. In addition, in the event this Agreement
is terminated by the Company pursuant to the provisions of Section 1.6(g)
hereof after the occurrence of a Change of Control, the Company at its
expense shall continue to provide the Executive with the benefits set forth
in Sections 1.5(b), 1.5(c), 1.5(f) and 1.5(h) above for the unexpired term
of this Agreement whether or not the Executive has sought or obtained
employment elsewhere after the termination of the Executive's employment
pursuant to the provisions of Section 1.6(g) hereof; provided, however, if
the Executive obtains employment elsewhere during the aforesaid period,
then the Company shall continue to provide the benefits set forth in
Sections 1.5(b), 1.5(c), 1.5 (f) and 1.5(h) hereof only to the extent the
Executive does not receive such benefits in their entirety from the
Executive's then current employer.
(h) Termination of Obligations of the Company Upon Payment of
Compensation. Upon payment of the amount, if any, due the Executive
pursuant to the preceding provisions of this Section, the Company shall
have no further obligation to the Executive under this Agreement.
1.8 Protective Covenants. The Executive recognizes that his employment by
the Company is one of the highest trust and confidence because (i) the Executive
will become fully familiar with all aspects of the Company's business and that
of its subsidiaries during the period of his employment with the Company, and
(ii) certain information of which the Executive will gain knowledge during his
employment is proprietary and confidential information which is of special and
peculiar value to the Company or its subsidiaries (the "Proprietary
Information"). If any such Proprietary Information were imparted to or became
known by any person, including the Executive, engaging in a business in
competition with that of the Company or its subsidiaries, hardship, loss and
irreparable injury and damage could result to the Company or its subsidiaries,
the measurement of which would be difficult if not impossible to ascertain. The
Executive acknowledges that any and all Proprietary Information shall be the
sole and absolute property of the Company in perpetuity, that the Executive
shall promptly disclose such Proprietary Information to the Company, and the
Executive shall have no right, title or interest therein or to receive
additional monies therefor, regardless of whether development occurred during
working hours or any other time during the term of the Executive's employment
with the Company. The Executive shall assist the Company in obtaining patents on
all such Proprietary Information deemed patentable by the Company and shall
execute all documents necessary to obtain such patents and to vest the Company
with full and extensive title to the patents and to protect the patents against
infringement by others. The Executive agrees that any patent application filed
by the Executive within one (1) year after a
11
<PAGE>
termination of the Executive's employment with the Company shall be conclusively
presumed to relate to an invention made during the term of the Executive's
employment with the Company. The Executive further acknowledges that the Company
or its subsidiaries has developed unique skills, concepts, sales presentations,
marketing programs, marketing strategy, business practices, methods of
operation, trademarks, licenses, technical information, Proprietary Information,
computer software programs, tapes and discuss concerning its operations systems,
customer lists, customer leads, documents identifying past, present and future
customers, hiring and training methods, investment policies, financial and other
confidential and proprietary information concerning its operations and expansion
plans ("Trade Secrets"). Therefore, the Executive agrees that it is necessary
for the Company to protect its business and that of its subsidiaries from such
damage, and the Executive further agrees that the following covenants constitute
a reasonable and appropriate means, consistent with the best interest of both
the Executive and the Company, to protect the Company or its subsidiaries
against such damage and shall apply to and be binding upon the Executive as
provided herein:
(a) Trade Secrets. The Executive recognizes that his position with the
Company is one of the highest trust and confidence by reason of the
Executive's access to and contact with certain Trade Secrets of the Company
and its subsidiaries. The Executive agrees and covenants to use his best
efforts and exercise utmost diligence to protect and safeguard the Trade
Secrets of the Company and its subsidiaries. The Executive further agrees
and covenants that, except as may be required by the Company in connection
with this Agreement, or with the prior written consent of the Company, the
Executive shall not, either during the term of this Agreement or
thereafter, directly or indirectly, use for the Executive's own benefit or
for the benefit of another, or disclose, disseminate, or distribute to
another, any Trade Secret (whether or not acquired, learned, obtained, or
developed by the Executive alone or in conjunction with others) of the
Company or its subsidiaries or of others with whom the Company or its
subsidiaries has a business relationship. All memoranda, notes, records,
drawings, documents, or other writings whatsoever made, compiled, acquired,
or received by the Executive during the term of this Agreement, arising out
of, in connection with, or related to any activity or business of the
Company or its subsidiaries, including, but not limited to, the customers,
suppliers, or others with whom the Company or its subsidiaries has a
business relationship, the arrangements of the Company or its subsidiaries
with such parties, and the pricing and expansion policies and strategy of
the Company or its subsidiaries, are, and shall continue to be, the sole
and exclusive property of the Company or its subsidiaries, are, and shall
continue to be, the sole and exclusive property of the Company or its
subsidiaries, as applicable, and shall, together with all copies thereof
and all advertising literature, to be returned and delivered to the Company
by the within five (5) days of the termination of this Agreement, or at any
time upon the Company's demand.
(b) Inventions as Sole Property of Company. Executive agrees promptly
to disclose to the Company any and all inventions, ideas, discoveries,
improvements, trade secrets, formulas, techniques, processes, developments,
know how, and writings or other materials, whether or not patentable and
whether or not reduced to practice, conceived, made or
12
<PAGE>
learned by the Executive during the period of his/her employment, either
alone or jointly with others, which relate to or result from the actual or
anticipated business, work, research or investigations of the Company, or
which result, to any extent, from use of the Company's premises or property
(such inventions, ideas, discoveries, improvements, trade secrets,
formulas, techniques, processes, developments know-how, and writings or
other materials being hereinafter collectively referred to as the
"Inventions"). Executive acknowledges and agrees that all the Inventions
(including all rights of copyright therein) shall be the sole property of
the Company or any other entity designated by it, and the Executive hereby
assigns to the Company his/her entire right and interest in and to all the
Inventions. The Company or any other entity designated by it shall be the
sole owner of all domestic and foreign rights pertaining to the Inventions.
Executive further agrees as to all the Inventions to assist the Company in
every way (at the Company's expense) to obtain and from time to time
enforce patents on the Inventions in any and all countries, and to execute
all instruments and do all other things reasonable necessary or appropriate
to vest more fully in the Company all right, title and interest in and to
such Inventions. To that end, by way of illustration but not limitation,
Executive will testify in any suit or other proceeding involving any of the
Inventions, execute all documents which the Company reasonably determines
to be necessary or convenient for use in applying for and obtaining patents
thereon and enforcing same, and execute all necessary assignments thereof
to the Company or persons designated by it. Executive's obligation to
assist the Company in perfecting its rights to the Inventions shall
continue beyond the termination for the time actually spent by Executive at
the Company's request on such assistance. The Executive shall be
compensated for any such services at a daily rate equal to one thirtieth
(1/30) of the monthly Salary paid to the Executive at the time of the
Executive's termination from the Company, plus reimbursement for any
reasonable out-of-pocket expenses incurred by the Executive in rendering
such services. All inventions, if any, which Executive made prior to
his/her employment by the Company are excluded from the scope of this
Agreement. As a matter of record, Executive has set forth on Exhibit A
attached hereto a complete list of all inventions, discoveries,
improvements, writings or other materials relating to the Company's
business which have been made by Executive prior to his/her employment with
the Company. Executive represents and covenants that such list is complete.
(c) Restriction on Soliciting Certain Persons of the Company and its
Subsidiaries. The Executive covenants that during the term of this
Agreement and for a periodof twenty-four (24) months following the
termination of this Agreement, he will not, either directly or indirectly,
(i) disclose or otherwise make known to any person or entity the names and
addresses of any of the customers, suppliers, vendors, sales
representatives, distributors, employees, or consultants of the Company, or
(ii) call on, solicit, or take away, or attempt to call on, solicit or take
away any of the customers, suppliers, vendors, sales representatives,
distributors, employees, or consultants of the Company, or its subsidiaries
with whom he became acquainted during his employment with the Company,
either for himself or for any other person, firm, corporation or other
entity.
13
<PAGE>
(d) Covenant Not to Compete. The Executive hereby covenants and agrees
that during the term of this Agreement and for a period of twelve (12)
months following the termination, of his employment hereunder, he will not
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, shareholder (other than through ownership of public
traded capital stock of a corporation which represent less than five
percent (5%) of the outstanding capital stock of such corporation),
corporate officer, director, investor, financier or in any other individual
or representative capacity, engage or participate in any business of the
Company or any of its subsidiaries during the term of this Agreement and as
of the date of termination of the Executive's employment hereunder which is
directly competitive with the business of the Company or any of its
subsidiaries as of such date.
(e) Survival of Covenants. Each covenant of the Executive set forth in
this Section 1.8 shall survive the termination of this Agreement and shall
be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of the
Executive against the Company whether predicated on this Agreement or
otherwise shall not constitute a defense to the enforcement by the Company
of said covenant.
(f) Remedies. In the event of breach or threatened breach by the
Executive of any provision of this Section 1.8, the Company shall be
entitled to relief by temporary restraining order, temporary injunction, or
permanent injunction or otherwise, in addition to other legal and equitable
relief to which it may be entitled, including any and all monetary damages
which the Company may incur as a result of said breach, violation or
threatened breach or violation. The Company may pursue any remedy available
to it concurrently or consecutively in any order as to any breach,
violation, or threatened breach or violation, and the pursuit of one of
such remedies at any time will not be deemed an election of remedies or
waiver of the right to pursue any other of such remedies as to such breach,
violation, or threatened breach or violation, or as to any other breach
violation, or threatened breach or violation.
However, in the event the Company commences an action and does not
prevail, the Company shall pay the Executive all reasonable legal costs and
expenses in connection with the defense or any action brought by the
Company against him.
1.9 Merger or Acquisition. In the event the Company should consolidate, or
merge into another corporation, or transfer all or substantially all of its
assets to another entity, or divide its assets among a number of entities, this
Agreement shall continue in full force and effect. The Company will require any
and all successors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, to expressly assume and agree pursuant to an appropriate
written assumption agreement to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such successor shall be a breach of this
Agreement and shall entitle the Executive to terminate his employment and
14
<PAGE>
this Agreement for Good Reason. As used in this Agreement, the term "Company"
shall mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which executes and delivers the assumption agreement
provided for in this Section 1.9 or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
1.10 Reimbursement of Employee Expenses. The Executive is authorized to
incur ordinary, necessary and reasonable expenses in connection with the
performance of his duties and responsibilities under this Agreement and for the
promotion of the business and activities of the Company during the term hereof,
including, without limitation, expenses for necessary travel and necessary
travel and entertainment and other items of expenses required in the normal and
routine course of the Executive's employment hereunder. The Company will
reimburse the Executive from time to time for all such business expenses of at
least $500.00 per month incurred pursuant to and in conformity with the
provisions of this Section provided that the Executive presents to the Company
with respect to all expenses above $500.00 in the aggregate each month:
(a) An accounting in which the Executive recorded at or near the time
each expenditure was made; (i) the amount of the expenditures, (ii) the
time, place and designation of the type of entertainment and travel or
other expenses, or the date and description of the gift (gifts made to one
individual are not to exceed a total of Twenty-Five and No/100 Dollars
($25.00) in any taxable year); (iii) the business reason for the
expenditure and the nature of the business benefit derived or expected to
be derived as the result of the expenditure; and (iv) the names,
occupations, addresses and other information concerning each person who was
entertained or given a gift sufficient to establish the business
relationship to the Company; and
(b) Documentary evidence (such as receipts or paid bills) which state
sufficient information to establish the amount, date, place and essential
character of the expenditure, for such expenditure (i) of Twenty-Five and
No/100 Dollars ($25.00) or more except for transportation charges if not
readily available) and (ii) for lodging or traveling away from home.
2.1 Covenants of Compu-DAWN. Within ten (10) days following the execution
and delivery of this Agreement Compu-DAWN shall use its best efforts to cause
the Board of Directors to expand the Board of Directors to seven (7) and shall
cause the following persons to continue to serve as directors or to be elected
by the incumbent directors to fill vacancies caused by the increase in the size
of the Board of Directors or the resignation of certain current directors, as
the case may be, and subject to their respective consent to so serve: Mark
Honigsfeld, Louis Libin, Rudy C. Theale, Jr., R.E. Turner IV, one person
designated by Messrs. Honigsfeld and Libin, one person designated by Messrs.
Theale and Turner, and one person mutually agreed to by Messrs. Honigsfeld,
Libin, Theale and Turner.
This covenant is subject to the stockholder's and Board of Directors rights
and duties to remove any director for cause pursuant to law, or Compu-DAWN's
certificate of incorporation and bylaws and to fulfill the directors fiduciary
duties. This covenant shall expire
15
<PAGE>
following the next Annual Meeting of Stockholders of Compu-DAWN at which
elections for the class of directors including any of Messrs. Honigsfeld, Libin,
Theale or Turner are to be held, with respect to each of them.
GENERAL PROVISIONS
3.1 Notices. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or on the date deposited in a
receptacle maintained by the United States Postal Service for such purpose,
postage prepaid, by certified mail, return receipt requested, addressed to the
respective parties as follows:
If to the Executive:
12 Hopson Road
Jacksonville Beach, Florida 32250
If to the Company:
Compu-Dawn, Inc.
77 Spruce Street
Cedarhurst, New York 11516
ATTN: Mark Honigsfeld,
Chairman of the Board
Either party hereto may designate a different address by providing written
notice of such new address to the other party hereto.
3.2 Severability. If any provision contained in this Agreement is
determined to be void, illegal or unenforceable, in whole or in part, then the
other provisions contained herein shall remain in full force and effect as if
the provision which was determined to be void, illegal, or unenforceable had not
been contained herein.
3.3 Waiver, Modification, and Integration. The waiver by any party hereto
of a breach of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach by any party. This instrument contains the
entire agreement of the parties concerning employment and supersedes all prior
and contemporaneous representations, understandings and agreements, either oral
or in writing, between the parties hereto with respect to the employment of the
Executive by the Company and all such prior or contemporaneous representations,
understandings and agreements, both oral and written, are hereby terminated
provided, however that the terms and conditions of that separate Confidential
Proprietary Information Agreement entered into by and between the Company and
the Executive shall control with respect to the subject matter thereof. The
terms of this
16
<PAGE>
Agreement may not be modified, altered or amended except by written agreement of
the Executive and the Company, subject to the prior approval of the Board of
Directors of the Company.
3.4 Binding Effect. This Agreement shall be binding and effective upon the
Company and its successors and permitted assigns, and upon the Executive, his
heirs and representatives.
3.5 Choice of Law and Venue. The parties agree that this Agreement is made
and entered into in Nassau County, New York and shall be governed by and
construed in accordance with the laws of the State of New York.
3.6 Representation of Executive. The Executive hereby represents and
warrants to the Company that he has not previously assumed any obligations
inconsistent with those contained in this Agreement. The Executive further
represents and warrants to the Company that the Executive has entered into this
Agreement pursuant to his own initiative and that the Company did not induce the
Executive to execute this Agreement in contravention of any existing
commitments. The Executive acknowledges that the Company has entered into this
Agreement in reliance upon the foregoing representations of the Executive.
3.7 Independent Counsel. The Company has been represented by CERTILMAN
BALIN ADLER & HYMAN, LLP. The Executive has been represented by ROBERT E.
MESHEL, P.C. Each has made his or its own determination with respect to counsel
without coercion from the other. Each has thoroughly reviewed the provisions of
this Agreement and all matters concerning the consulting with the benefit of
independent counsel.
3.8 Arbitration Any controversy or claim arising out of or relating to this
Agreement shall be settled by binding arbitration in Nassau County, New York
under the rules of the American Arbitration Association. Judgment upon the award
may be entered in any court having jurisdiction. Arbitrator(s) may not award the
prevailing party in such arbitration attorney's fees, expenses and costs of
arbitration.
3.9 Counterpart Execution. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written effective as of the Effective Date.
COMPU-DAWN, INC.
By:/s/ Mark Honigsfeld
------------------------
MARK HONIGSFELD,
Chief Executive Officer
e.TV COMMERCE, INC.
By: /s/ Mark Honigsfeld
-------------------------
EXECUTIVE:
/s/ Rudy C. Theale
--------------------------
Rudy C. Theale,
President e.TV Commerce, Inc.
Executive V.P. Compu-DAWN, Inc.
<PAGE>
Mark Honigsfeld and Louis Libin hereby each agree that he will vote in
favor of the matters set forth in Section 2.1 of the Employment Agreement dated
January 8, 1999 between Compu-DAWN, Inc. and e.TV Commerce, Inc. and Rudy C.
Theale, Jr.
/s/ Mark Honigsfeld
----------------------------
Mark Honigsfeld
/s/ Louis Libin
----------------------------
Louis Libin
<PAGE>
EXHIBIT 1.5(h)
FORM OF STOCK OPTION AGREEMENT
See attached.
<PAGE>
COMPU-DAWN, INC.
1999 RESTRICTED STOCK RIGHTS GRANT PLAN
1. Purpose. The Compu-DAWN, Inc. 1999 Restricted Stock Rights Grant Plan
(the "Plan") is intended to advance the interests of Compu-DAWN, Inc., a
Delaware corporation (the "Company"), by encouraging and enabling certain
officers and key employees of the Company and its subsidiaries, upon whose
judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, to acquire and retain a proprietary interest
in the Company by ownership of its stock.
2. Definitions. For purposes of the Plan, the following terms shall have
the indicated meanings unless the context clearly indicates otherwise:
"Peaceful Surrender Agreement" means that certain Peaceful Surrender
Agreement dated January 8, 1999 between e.TV and LocalNet Communications, Inc.,
a Florida corporation ("LocalNet").
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as it may be amended from
time to time.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
"Debtor Business " shall have the meaning ascribed to it in the Peaceful
Surrender Agreement.
"e.TV " shall mean e.TV Commerce, Inc., a Delaware corporation which is a
wholly owned subsidiary of the Company.
"Effective Date" means the date hereof.
"Fair Market Value" of the Shares means the closing price for Compu-DAWN's
shares of Common Stock on the business day immediately preceding the date of the
Vesting Time. The closing price for such day shall be the last sale price or, in
case no last sale information is available for such day, the average of the last
reported bid and asked prices for such day, in either case on the principal
national securities exchange on which Compu-DAWN's shares of Common Stock are
listed or admitted to trading, or if not listed or admitted to trading on such
exchange, as reported by NASDAQ for such day, or, if Compu-DAWN's shares of
Common Stock are not listed on NASDAQ, as reported by the NASD OTC Electronic
Bulletin Board (the "Bulletin Board") for such day, or, if not listed on the
Bulletin Board, the average of the highest reported bid and lowest
<PAGE>
reported asked prices as reported by the National Quotation Bureau, LLC, or
other similar organization if such organization is no longer reporting such
information, for such day, or if none of the foregoing is so available, Fair
Market Value for such day shall be determined in good faith by the Board of
Directors of Compu-DAWN.
"Grant" means a grant of rights to receive Shares to a Participant pursuant
to the Plan.
"Lock Up Period " means the period commencing on the date hereof and ending
on the second anniversary date hereof.
"Parent" means a parent corporation of the Company as defined in section
424(e) of the Code.
"Participant" means a Performance Group Member, provided such Performance
Group Member is employed by, or is providing services to the Company or its
subsidiary in connection with the operation of the Debtor Business at the
Vesting Time.
"Plan" means this Compu-DAWN, Inc. 1999 Restricted Stock Rights Grant Plan.
"Shares" means shares of Common Stock which are issued to a Participant
pursuant to a Grant under the Plan.
"Standard Restrictions" means those restrictions set forth in Section 8(b)
hereof.
"Subsidiary" means a subsidiary corporation of the Company, as defined in
Section 424(f) of the Code.
"Vesting Time" means December 31, 2001.
3. Administration of the Plan. The Plan shall be administered by the Board.
The Board shall have full and final authority in its discretion, subject to the
provisions of the Plan, (a) to determine the Participants, the time or times at
which Grants shall be made and the number of Shares so granted; (b) to construe
and interpret the Plan; (c) to determine the terms, restrictions and provisions
of the respective Grants, which need not be identical, including, but without
limitation, restrictions on Shares granted and the amount and terms of the
purchase price, if any, of Shares granted; and (d) to make all other
determinations and take all other actions deemed necessary or advisable for the
proper administration of the Plan. All such actions and determinations shall be
conclusively binding for all purposes and upon all persons.
4. Number of Shares Subject to the Plan. The total number of Shares
available for Grants under the Plan may not exceed in the aggregate 2,000,000,
subject to adjustment upon occurrence of any of the events indicated in Section
6 hereof (the "Total Share Amount"). The Shares to be delivered under the Grants
may consist, in whole or in part, of authorized but unissued
2
<PAGE>
Common Stock or treasury Common Stock not reserved for any other purpose.
5. Lapsed Grants. If a Grant, or any portion thereof, is forfeited for any
reason, any Shares forfeited shall be available again for the making of a later
Grant hereunder.
6. Adjustment in Capitalization. In the event of any change in the
outstanding shares of Common Stock that occurs after the Effective Date by
reason of a stock dividend, stock split, reorganization, reclassification,
recapitalization, merger, consolidation, combination, exchange of shares, or
other similar change, then the aggregate number and class of shares or other
securities that may be issued or transferred pursuant to the Plan, and the
provisions, terms and conditions of each outstanding Grant affected thereby,
shall be adjusted appropriately by the Board or the Committee, whose
determination shall be conclusive.
7. Eligibility and Participation. Grantees of Grants shall be the following
Participants (collectively, the "Performance Group"): Mark Honigsfeld, Rudy C.
Theale, Jr., Robert E. Turner IV, Louis Libin, David Greenspan, Paul Danner,
Chris Liston, and any other person who is employed by or who is providing
services to the Company, its Parent or its subsidiaries in connection with the
Debtor Business who is elected to the Performance Group by a majority in Company
beneficial stock ownership (including each of their respective affiliated trusts
or other trust or estate planning vehicles or family members for the
Participant's trust or estate planning purposes (the "Applicable Affiliates").
8. Grants of Restricted Stock.
(a) Grant of Restricted Stock. The Company hereby grants to the
Participants and shall grant to future Participants the right to receive,
effective at the Vesting Time a number of Shares based on the following
formula:
N = (EBT / $10,000,000) X (PO / Total Share Amount) X (T / 36)
where
N = The number of Shares each Participant is entitled to receive at the
Vesting Time.
EBT = Net operating earnings before taxes of the Company, without giving
effect to the issuance of the Shares hereunder, over a period of three
fiscal years commencing January 1, 1999 and ending on December 31, 2001,
including making up any losses for any fiscal year during such period, of
up to $10,000,000.
PO = Each Performance Group Member's (including Applicable Affiliates) pro
rata beneficial ownership of Company Common Shares (including Common Shares
underlying options or warrants or other convertible securities) or on the
Effective Date in relation to all Compu-DAWN Common Shares owned by the
Performance Group (including Applicable
3
<PAGE>
Affiliates) as a whole.
T = The number of months during the period commencing on January 1, 1999
and ending at the Vesting Time that a Performance Group Member has been
employed by, or has provided services to, the Company or e.TV (and/or
LocalNet prior to the date hereof).
(Based upon the foregoing formula, one Company share will be issued at the
Vesting Time for each $5.00 of EBT)
(b) Standard Restrictions. In addition to any other applicable
provisions hereof, the following restrictions in this Section 8(b) (the
"Standard Restrictions") shall apply to the Grants hereunder:
(i) No Shares may be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated until, and to the extent that,
such Shares are vested, and the Lock Up Period has expired.
(ii) Shares issuable by the Company pursuant to rights granted
pursuant to a Grant are non-vested at the time the Grant is made, but
shall, unless earlier forfeited hereunder, vest at the Vesting Time.
(iii) Certificates represents the Shares issuable hereunder shall
bear legends required by the Company relating to restrictions on
transfers pursuant to the Securities Act of 1933, as amended,
applicable state securities laws and during the Lock Up Period.
The foregoing notwithstanding, a Participant shall forfeit his right to receive
all Shares not previously vested, if any, at such time as the Participant is no
longer employed by, or rendering services to, the Company or a Parent or
Subsidiary in connection with the operation of the Debtor Business.
(c) No Fractions. No fractions of Shares will be issued under the
Plan. Fractions of one-half or more will be rounded up to the next higher
whole number and fractions of less than one-half will be rounded down to
the next lower whole number.
9. Conditions to Grants. The making of any Grant and the issuance of any
Shares to a Participant shall be subject to the condition that:
(a) if at any time the Company shall determine in its discretion that
the satisfaction of withholding tax or other withholding liabilities, or
that the listing, registration, or qualification of any Shares otherwise
deliverable hereunder upon any securities exchange or under any state or
federal law, or that the consent or approval of any regulatory body or the
stockholders of the Company, is necessary or desirable as a condition of,
or in connection with, the delivery or purchase of Shares pursuant hereto,
then in any such event, such Grant or such issuance of Shares
4
<PAGE>
shall not be effective unless such withholding, listing, registration,
qualification, consent, or approval shall have been effected or obtained
free of any conditions not acceptable to the Company.
(b) Each Participant shall deliver to the Company such investment
representations as the Company may reasonably require in order for the
Shares to be issued to such Participant without registration, pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
10. Amendment, Suspension, and Termination of Plan. The Board may at any
time suspend or terminate the Plan or any portion thereof or may amend it from
time to time in such respects as the Board may deem advisable in order that the
Grants granted hereunder may conform to any change in the law or in any other
respects which the Board may deem to be in the best interests of the Company. No
Grants may be made during any suspension or after the termination of the Plan.
Except as provided in the Plan, no amendment, suspension, or termination of the
Plan shall, without the Participant's consent, alter or impair any of the rights
or obligations under any Grant granted to such Participant under the Plan.
11. Tax Withholding. The Board may, in its sole discretion, (a) require a
Participant to remit to the Company a cash amount sufficient to satisfy, in
whole or in part, any federal, state and local withholding tax requirements
prior to the delivery of any certificate for vested Shares pursuant to a Grant
hereunder; (b) require a Participant to satisfy, in whole or in part, any such
withholding tax requirements by having the Company, upon any delivery of vested
Shares, withhold from such Shares that number of full Shares having a Fair
Market Value equal to the amount or portion of the amount required or permitted
to be withheld; or (c) satisfy such withholding requirements through another
lawful method.
12. Code Section 83(b) Elections. Each Participant making an election
pursuant to Section 83(b) of the Code (if Code Section 83(b) has application
with respect to the Grant's made hereunder) shall, upon the making of such
election, promptly provide a copy of such election to the Company.
13. Employment. Nothing in this Plan shall interfere with or limit in any
way the right of the Company or any Parent or Subsidiary to terminate any
Participant's employment or consulting or advisory arrangement at any time, nor
confer upon any Participant any right to continue in the employ of, or render
consulting or advisory services to, the Company or any Parent or Subsidiary.
14. Effective Date of the Plan. The effective date of the Plan is the
Effective Date, which is after the date of its adoption by the Board.
15. Term. No Grants may be made under the Plan after the Vesting Time. The
provisions of the Plan shall, however, continue to apply as to any Grants of
rights made prior to or on such date.
Dated: January 8, 1999
5
<PAGE>
AGREEMENT
THIS AGREEMENT is made and entered into this 4th day of February, 1999, by
and between COMPU-DAWN, INC., hereinafter referred to as "Compu-Dawn," and BOCA
RESEARCH, INC., hereinafter referred to as "BRI."
W I T N E S S E T H : WHEREAS, e-TV COMMERCE, INC. ("e-TV"), a wholly owned
subsidiary and assignee of Compu-Dawn, has acquired the operating and other
assets of LocalNet Communications, Inc. ("LocalNet") pursuant to a peaceful
surrender Agreement in satisfaction of a portion of the principal of a senior
secured loan to LocalNet; and
WHEREAS, Compu-Dawn and e-TV, in order to develop and operate its business
with the assets acquired from LocalNet, desires to commence and continue
commerce with BRI and to obtain exclusivity rights being the same as that which
BRI heretofore provided LocalNet, subject to Compu-Dawn and/or e-TV maintaining
an exclusive source of supply of its set top box products from BRI.
NOW, THEREFORE, in consideration for BRI extending the exclusivity terms as
described in this Agreement, BRI's agreeing to continue to commence and engage
in commerce with Compu-Dawn and e-TV and other good and valuable consideration,
the adequacy of which is hereby acknowledged, the parties hereby agree as
follows:
1. Compu-Dawn shall, within five (5) days following the date of this
Agreement, issue to BRI, at no cost to BRI, fully paid-up common stock in
Compu-Dawn in two (2) tranches, the terms relative to each being hereinafter
described:
A. 91,363 shares (the "Tranche 1 Shares")
B. 26,087 shares (the "Tranche 2 Shares") valued at $5.75 per share
(the "Tranche 2 Shares Price").
C. Compu-Dawn shall retain a call on all shares issued pursuant to
both tranches at a price equal to $5.00 per share for the Tranche 1 Shares,
and the Tranche 2 Shares Price for the Tranche 2 Shares; provided that such
call may only be exercised in its entirety as to all shares held by BRI.
2. Tranche 1 Shares Terms and Conditions. All Tranche 1 Shares shall be
unregistered stock and may only be publicly sold pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act")
or pursuant to an effective, current registration statement under the Securities
Act. BRI shall be granted piggyback registration rights with respect to the
Tranche 1 Shares as set forth in Section 9. Compu-Dawn shall at all times retain
a call on such Tranche 1 Shares held by BRI prior to their public sale on the
open market at a price equal to $5.00 per share. Upon the expiration of one (1)
year from the date of
<PAGE>
this Agreement, BRI shall be entitled to sell such shares as it deems
appropriate in the open market, pursuant to Rule 144.
Notwithstanding the foregoing, BRI agrees that at such time as BRI shall
have obtained net proceeds from the sale of any Tranche 1 Shares in an amount
equal to $456,814.17, BRI shall provide Compu-Dawn written notice thereof, and
ten (10) days after providing such notice (the "Election Notice Period"), either
(I) shall endorse over and deliver to Compu-Dawn remaining Tranche 1 Shares
which BRI shall possess, or (ii) if Compu-Dawn elects in writing prior to the
expiration of the Election Notice Period, BRI shall continue to sell the Tranche
1 Shares publicly and deliver the net proceeds from such sale above such
$456,814.17 to Compu-Dawn.
3. Tranche 2 Shares Terms and Conditions. All Tranche 2 Shares shall be
unregistered and may be publicly sold pursuant to Rule 144 or pursuant to an
effective, current registration statement. Compu-Dawn shall, at all times,
provide BRI with full piggyback registration rights with respect to the Tranche
2 Shares as set forth in Section 9.
4. Exclusivity. Provided that LocalNet Communications, Inc. shall execute a
full release and consent in form as attached hereto as Exhibit "A," BRI hereby
agrees not to manufacture the set top box product (the "Product") for any
multilevel marketing company which is engaged primarily in the business of
reselling local and/or long distance telephone services or Internet access
services upon the following terms and conditions:
(a) Exclusivity shall not apply to BRI's sale of approximately 40,000
units of the Product on a one-time basis to a competitor of Compu-Dawn set
forth on Schedule 4(a) attached hereto, provided that such Product is
without Citrix-type enhancements which make the Product network capable.
(b) The Exclusivity shall be conditioned upon Compu-Dawn ordering and
accepting delivery from BRI of no fewer than 36,000 units of the Product
during the first twelve (12) months following the date of this Agreement,
of which at least 8,000 of said units must be ordered and delivery accepted
within the first six (6) months of this Agreement.
(c) During the second twelve (12) months following the execution of
this Agreement, such Exclusivity shall continue, provided that Compu-Dawn
shall have ordered and accepted delivery of no fewer than 80,000 units of
Product from BRI, with such units being ordered and delivery accepted at
the rate of 20,000 units per quarter; provided, however, that in the event
Compu-Dawn shall fail to meet such minimum 20,000 unit per quarter
commitment, Compu-Dawn shall have the right to cure such deficiency during
the immediate next quarter.
(d) The Exclusivity shall terminate upon the earlier of (a)
Compu-Dawn's failure to meet its commitment as set forth above as well as
all of its obligations to BRI (including payments) as provided for in this
Agreement, or (b) two (2) years from the date of this Agreement.
<PAGE>
(e) Provided that Exclusivity shall remain in effect at the expiration
of two (2) years from the date of this Agreement, the parties agree to
negotiate in good faith for the extension of the Exclusivity, subject to
the parties' mutual agreement as to acceptable minimum volume commitments
by Compu-Dawn, considering then prevailing market conditions.
5. Legend. The Certificate(s) representing Tranche 1 Shares and Tranche 2
Shares (collectively the "Common Shares") shall bear a legend that the Common
Shares are subject to this Agreement in a form acceptable to Compu-Dawn, in
addition to any other legends thereon.
6. Release. BRI hereby releases and forever discharges Compu-Dawn, its
parent, subsidiaries (including, without limitation, e.TV), affiliates, related
companies, stockholders, directors, officers, employees, agents, attorneys,
successors, and assigns (collectively, the "Compu-Dawn Releasees") from all
liabilities, actions, causes of action, suits, claims, debt damages and demands
whatsoever, whether known or unknown, at law or in equity, whether statutory or
common law, whether federal, state, local, or otherwise, which against the
Compu- Dawn Releasees, BRI, its successors and assigns ever had, now have or
hereafter can, shall or may, have for, upon, or by reason of, or arising out of,
its relationship with LocalNet or in connection with, or related to, the
Peaceful Surrender Agreement, at any time up to and including the date hereof,
excluding, however, Compu-Dawn's obligation for the guarantee of any payments to
BRI owed by LocalNet which were expressly guaranteed by Compu-Dawn.
7. BRI Representations and Warranties. BRI, hereby represents and warrants
to Compu-Dawn:
(a) Status. It is a corporation duly authorized, validly existing and
in good standing under the laws of its state of incorporation and it has
qualified to do business as a foreign limited partnership in the
jurisdictions, if any, outside of such state, in which it does business and
is required to so qualify;
(b) Performance. It has full corporate power and authority to execute
and deliver this Agreement and to perform the duties and responsibilities
contemplated hereby;
(c) Authorization. The execution, delivery and performance of this
Agreement has been duly authorized by its directors and no other corporate
approvals are necessary;
(d) No Conflict of Violation. that neither the execution of this
Agreement nor performance hereunder will (i) violate, conflict with or
result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under the terms, conditions or provisions of its limited
partnership agreement or any contract, agreement or other instrument or
obligation to which it is a party, or by which it may be bound, or (ii)
violate any order, judgment, writ, injunction or decree applicable to it.
<PAGE>
(e) Investment Representations. With respect to the issuance of the
Common Shares:
i) BRI represents and warrants that the common Shares
are being acquired for its own account, for investment
purposes and not with a view to any distribution. BRI will not
sell, assign, mortgage, pledge, hypothecate, transfer or
otherwise dispose of any of the common Shares unless (A) 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 (B)
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, mortgage,
pledge, hypothecation, transfer or disposition does not
require registration under the Securities Act.
(ii) BRI represents and warrants further that (A) it
is either an "accredited investor," as such term is defined in
Rule 501(a) promulgated under the Securities Act, or, either
alone or with its purchaser representative, has such knowledge
and experience in financial and business matters that it is
capable of evaluating the merits and risks of the acquisition
of the Common Shares; (B) it is able to bear the economic
risks of an investment in the Common Shares, including,
without limitation, the risk of the loss of part or all of its
investment and the inability to sell or transfer the Common
Shares for an indefinite period of time; (C) it has adequate
financial means of providing for current needs and
contingencies and has no need for liquidity in its investment
in the Common Shares; and (D) it does not have an overall
commitment to investments which are not readily marketable
that is excessive in proportion to net worth and an investment
in the Common Shares will not cause such overall commitment to
become excessive.
(iii) BRI has obtained and reviewed Compu-Dawn's
reports filed under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act") including, without limitation,
Compu-Dawn's Annual Report on Form 10-KSB for the year ended
December 31, 1997, Quarterly Reports, on Form 10-QSB for the
periods ended March 31, June 30, and September 30, 1998 and
Current Reports on Form 8-K for events dated April 22, April
23, June 8, September 1, September 25, and November 18, 1998
and has been afforded the opportunity to obtain such
information with regard to the Compu-Dawn it has requested to
evaluate the merits and risks of BRI's investment in the
Common Shares.
(f) BRI acknowledges that a restrictive legend will be placed on any
instrument, certificate or other document evidencing the Common Shares in,
or substantially in, the following form:
<PAGE>
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 and may not be
sold, transferred, pledged, hypothecated or otherwise disposed
of in the absence of (i) an effective registration statement
for such securities under said act or (ii) an opinion of
Company counsel that such registration is not required."
(g) BRI acknowledges that Compu-Dawn will be relying upon the
foregoing with regard to the issuance of the Common Shares to BRI and any
subsequent transfer of the Common Shares by BRI and agrees to advise
Compu-Dawn in writing in the event of any change in any of the foregoing.
8. Compu-Dawn Representations and Warranties. Compu-Dawn hereby represents
and warrants to BRI:
(a) Status. It is a corporation duly organized validly existing and in
good standing under the laws of the state of its incorporation and it has
qualified to do business as a foreign corporation in the jurisdictions, if
any, outside of such state, in which it does business and is required to so
qualify;
(b) Performance. It has full corporate power and authority to execute
and deliver this Agreement and to perform the duties and responsibilities
contemplated hereby;
(c) Authority. The execution, delivery and performance of this
Agreement has been duly authorized by its Board of Directors and no other
corporate approvals are necessary;
(d) No Conflict Violation. That neither the execution of this
Agreement nor performance hereunder will (i) violate, conflict with or
result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under the terms, conditions or provisions of its Certificate of
Incorporation or By-Laws or any contract, agreement or other instrument or
obligation to which it is a party, or by which it may be bound, or (ii)
violate any order, judgment, writ, injunction or decree applicable to it.
(e) Issuance of Common Shares. Upon issuance of the Common Shares as
provided herein, such Common Shares shall be duly authorized, validly
issued, fully paid and non-assessable Common Shares of Compu-Dawn.
9. Piggy-back Registration Rights
(a) Compu-Dawn Obligations.
(i) Registration. If at any time after the date hereof
Compu-Dawn shall file with the Securities and Exchange
Commission (the "SEC")
<PAGE>
a registration statement (a "Registration Statement") under
the Securities Act 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 business or equity securities issuable in connection with
stock option or other employee benefit plans), Compu-Dawn
shall send to BRI written notice of such determination and, if
within fifteen (15) days after the date of such notice, BRI
shall so request in writing, Compu-Dawn shall include in such
Registration Statement all or any part of the Common Shares
BRI 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 of Common Shares 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 Compu-Dawn shall be
obligated to include in such Registration Statement only such
limited portion of the as the underwriter shall permit
(limited to zero if necessary). If an offering in connection
with which is entitled to registration under this Section
9(a)(i) is an underwritten offering, then BRI shall, unless
otherwise agreed by Compu-Dawn, offer and sell such Common
Shares 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 Common
Shares included in such underwritten offering.
(ii) Amendments and Supplements; Maintain
Effectiveness. Compu-Dawn 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 for a period of six (6) months following the effective
date thereof (the ARegistration Period@), except during any
Disclosure Delay Period (as defined in Section 9(a)(iii)),
and, during such period, comply with the provisions of the
Securities Act with respect to the disposition of all Common
Shares covered by the Registration Statement until such time
as all of such Common Shares have been disposed of in
accordance with the intended methods of disposition by BRI
thereof as set forth in the Registration Statement.
(iii) Disclosure Delay Period. If, at any time prior
to the expiration of the Registration Period, in the good
faith reasonable judgment of Compu-Dawn's Board of Directors,
the disposition of Common Shares would require the premature
disclosure of material non-public information which may
reasonably be expected to have an adverse effect on
Compu-Dawn, then Compu-Dawn shall not be required to
<PAGE>
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 (A) the date on
which such material information is disclosed to the public or
ceases to be material or (B) subject to Section 9(a)(iv)
hereof, up to ninety (90) calendar days after the date on
which Compu-Dawn provides a notice to BRI under Section
9(a)(iv) 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.
(iv) Notice of Disclosure Delay Period. Compu-Dawn
will give prompt written notice, to BRI of each Disclosure
Delay Period. BRI agrees that, upon receipt of such notice
prior to BRI's disposition of all such Common Shares will
forthwith discontinue disposition of such Common Shares
pursuant to the Registration Statement, and will not deliver
any prospectus forming a part thereof in connection with any
sale of such Common Shares until the expiration of such
Disclosure Delay Period. Notwithstanding anything in this
Section 9 to the contrary, there shall not be more than an
aggregate of One Hundred Eighty (180) calendar days in any
twelve (12) month period during which Compu-Dawn is in a
Disclosure Delay Period.
(v) Copies of Filings and Correspondence. Compu-Dawn
shall furnish to BRI if its Common Shares are included for
resale in the Registration Statement (A) promptly after the
same is prepared and publicly distributed, filed with the SEC,
or received by Compu-Dawn, one copy of the Registration
Statement and any amendment thereto, each preliminary
prospectus and prospectus and each amendment or supplement
thereto, and each item of correspondence from the SEC or the
staff of the SEC which comments upon or requests information
relating to BRI and/or the Common Shares (including, without
limitation, the resale and plan of distribution hereof), in
each case relating to such Registration Statement (other than
any portion, if any, thereof which contains information for
which Compu-Dawn has sought confidential treatment), (B) 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 (C)
such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and
such other documents as such BRI may reasonably request in
order to facilitate the disposition of the Common Shares by
BRI.
<PAGE>
(vi) Blue Sky. Compu-Dawn shall use its best efforts
to (A) register and qualify the Common Shares covered by the
Registration Statement under such other securities or "blue
sky" laws of such jurisdictions in the United States as BRI
reasonably requests, (B) 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, (C) take
such other actions as may be necessary to maintain such
registrations and qualifications in effect at all times during
the Registration Period, and (D) take all other actions
reasonably necessary or advisable to qualify the Common Shares
for sale in such jurisdictions; provided, however, that
Compu-Dawn 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 9(a)(vi), (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 Compu- Dawn undue expense
or burden, or (E) make any change in its charter or bylaws,
which in each case the Board of Directors of Compu-Dawn
determines to be contrary to the best interests of Compu-Dawn
and its stockholders.
(vii) Events Affecting Prospectus. As promptly as
practicable after becoming aware of such event, Compu-Dawn
shall notify BRI of the happening of any event, of which
Compu-Dawn 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
if such Registration Statement is supplemented or amended to
correct such untrue statement or omission, to deliver such
number as BRI may reasonably request.
(viii) Notification of Amendment or Supplement.
Compu-Dawn shall, as promptly as practical after becoming
aware of such event described in Section 9(vii), notify BRI 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 BRI as BRI may reasonably request).
(ix) Review by BRI's Counsel. Compu-Dawn shall permit
a single firm of counsel designated by BRI to review the
Registration Statement and all amendments and supplements
thereto a reasonable period of time prior to their filing with
the SEC.
<PAGE>
(x) BRI's Due Diligence; Confidentiality of
Compu-Dawn Information. Compu-Dawn shall make available for
inspection by (A) BRI, (B) one firm of attorneys and one firm
of accountants or other agents retained by BRI (collectively,
the "Inspectors") all pertinent financial and other records,
and pertinent corporate documents and properties of Compu-Dawn
(collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause
Compu-Dawn's officers, directors and employees to supply all
information which BRI 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 BRI) of any Record or other information which
Compu-Dawn determines in good faith to be confidential, and of
which determination the Inspector 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.
Compu-Dawn shall not be required to disclose any confidential
information in such Records to any Inspector until and unless
such Inspector shall have entered into a confidentiality
agreements with Compu-Dawn with respect thereto, substantially
in the form of this Section9(a)(x). BRI 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 Compu-Dawn and
allow Compu-Dawn, 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 BRI's ability to sell Common Shares
in a manner which is otherwise consistent with applicable laws
and regulations.
(xi) Confidentiality of BRI Information. Compu-Dawn
shall hold in confidence and not make any disclosure of
information concerning BRI provided to Compu-Dawn unless (A)
disclosure of such information is necessary to comply with
federal or state securities laws, (B) the disclosure of such
information is necessary to avoid or correct a misstatement or
omission in any Registration Statement, (C) the release of
such information is ordered pursuant to a subpoena or other
order from a court or governmental body of competent
jurisdiction, (D) such information has been made generally
available to the public other than by disclosure in violation
of this or any other agreement, or (E) BRI consents to the
form and content of any such disclosure. Compu-Dawn agrees
that it shall, upon learning that disclosure of such
information concerning BRI is sought in or by a court or
governmental body of competent jurisdiction
<PAGE>
or through other means, give prompt notice to BRI prior to
making such disclosure, and allow BRI, at its expense, to
undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, such information.
(xii) Compliance with Laws. Compu-Dawn 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.)
(b) Obligations of BRI. In connection with a registration of the
Common Shares BRI shall have the following obligations:
(i) BRI Information. It shall be a condition
precedent to the obligations of Compu-Dawn to complete the
registration pursuant to Section 9 that BRI shall furnish to
Compu-Dawn such information regarding itself, the Common
Shares and the intended method of disposition of the as shall
be required to effect the registration of such Registrable
Securities and shall execute such documents in connection with
such registration as Compu-Dawn may reasonably request. At
least five (5) business days prior to the first anticipated
filing date of the Registration Statement, Compu-Dawn shall
notify BRI of the information Compu-Dawn requires from BRI.
(ii) Cooperation. BRI, agrees to cooperate with
Compu-Dawn as requested by Compu-Dawn in connection with the
preparation and filing of the Registration Statement
hereunder, unless BRI does not include any of the Common
Shares in the Registration Statement.
(iii) Underwritten Offering. In the event BRI
determines to engage the services of an underwriter, BRI
agrees to 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 managing underwriter of
such offering and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of
the Common Shares.
(iv) No Disposition of Common Shares. BRI agrees
that, upon receipt of any notice from Compu-Dawn of the
happening of any event of the kind described in Sections
9(a)(vii) or 9(a)(viii), BRI will immediately discontinue
disposition of Common Shares pursuant to the Registration
Statement covering the resale of such Registrable Securities
until BRI's receipt of the copies of the supplemented or
amended prospectus
<PAGE>
contemplated by Sections 9(a)(vii) or 9(a)(viii) and, if so
directed by Compu-Dawn, BRI shall deliver to Compu-Dawn or
destroy (and deliver to Compu-Dawn a certificate of
destruction) all copies in BRI's possession, of the prospectus
covering such Common Shares current at the time of receipt of
such notice.
(v) Method of Underwritten Distribution. BRI may not
participate in any underwritten distribution of the Common
Shares unless BRI (A) agrees to sell the Common Shares on the
basis provided in any underwriting arrangements in usual and
customary form entered into by Compu-Dawn, (B) completes, in a
manner reasonably acceptable to Compu-Dawn, and executes all
questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the
terms of such underwriting arrangements, and (C) agrees to pay
its pro rata share of all underwriting discounts and
commissions and any expenses in excess of those payable by
Compu- Dawn pursuant to Section 9(c) below.
(c) Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications, relating to one (1)
Registration Statement pursuant to Section 9, except that if a portion
of BRI Shares are not permitted to be included in one (1) Registration
Statement by an underwriter as provided in Section 9(a)(i), then
relating to the least number of Registration Statements which will
cover the resale of all the Common Shares, including all registration,
listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for Compu-Dawn hereof, shall be
borne by Compu-Dawn.
(d) Indemnification. In the event any Common Shares are included
for resale in a Registration Statement under this Agreement:
(i) Compu-Dawn Indemnification. To the extent
permitted by law, Compu-Dawn will indemnify, hold harmless and
defend (A) BRI and (B) the directors, officers, partners,
members, employees, agents and each person who controls BRI
within the meaning of Section 15 of the Securities Act or
Section 20 of 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:
(A) 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, (B) any untrue statement
<PAGE>
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 Compu-Dawn files
any amendment thereof or supplement thereto with the SEC) 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 (C) any violation or alleged
violation by Compu-Dawn 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
Common Shares (the matters in the foregoing clauses (A)
through (C) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 9(d)(iii) with respect to
the number of legal counsel, Compu-Dawn shall reimburse BRI
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 9(d)(i):
(A) 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 Compu-Dawn by such
Indemnified Person expressly for use in the Registration
Statement or any such amendment thereof or supplement thereto;
(B) shall not apply to amounts paid in settlement of any Claim
if such settlement is effected without the prior written
consent of Compu-Dawn; and (C) 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 Compu-Dawn pursuant to Section 9(a)(v) 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 Common Shares by BRI. Notwithstanding anything
to the contrary contained herein, the indemnification
agreement contained in this Section 9(d)(i) 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.
<PAGE>
(ii) BRI Indemnification. In connection with any
Registration Statement in which BRI is participating, BRI
agrees to indemnify, hold harmless and defend, to the same
extent and in the same manner set forth in Section 9(d)(i),
Compu-Dawn, each of its directors, each of its officers who
signs the Registration Statement, its employees, agents and
each person, if any, who controls Compu-Dawn 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 Compu-Dawn by
BRI expressly for use in connection with such Registration
Statement, and subject to Section 9(d)(iii), BRI 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 9(d)(ii) shall not apply
to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of BRI, which
consent shall not be unreasonably withheld. 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 Common Shares by BRI.
(iii) Promptly after receipt by an Indemnified Person
or Indemnified Party under this Section 9(d) 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 9(d), 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, 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 reasonable 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
<PAGE>
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 BRI, if BRI or any
Indemnified Person is entitled to indemnification hereunder,
or by Compu-Dawn, if Compu-Dawn or an Indemnified Party 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 9(d), except to the extent that the indemnifying
party is actually prejudiced in its ability to defend such
action. The indemnification required by this Section 9(d)
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.
(e) 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 9(d) to
the fullest extent permitted by law; provided, however, that no
contribution shall be made under circumstances where the indemnifying
party would not have been liable for indemnification under the fault
standards set forth in Section 9(d).
(f) Exemption from Registration. The provisions of Section 9(a)
through (e) notwithstanding, Compu-Dawn shall have no obligation to
register the resale of the Common Shares to the extent the Common
Shares may be resold without registration without violating Section 5
of the Securities Act pursuant to Rule 144 promulgated thereunder or
any other exemption or exception from registration under the
Securities Act.
10. Third Party Beneficiary. It is agreed that e.TV is a third party
beneficiary of this Agreement and may enforce any of Compu-Dawn's rights
hereunder.
11. Successors and Assigns. All terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective legal representatives, successors and assigns,
provided however, BRI may not assign this Agreement without the prior
written consent of Compu-Dawn.
<PAGE>
12. Notices. Any notice, delivery or other communication required or
permitted hereunder shall be deemed to have been duly made or given for all
purposes when in writing and delivered by hand or sent by certified mail,
return receipt requested, postage prepaid, telecopier, overnight mail, or
nationally recognized overnight courier, addressed as follows:
If to Compu-Dawn:
77 Spruce Street
Cedarhurst, New York 11516
Attention: Mark Honigsfeld, 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: Gavin C. Grusd, Esq.
Telecopier Number: (516) 296-7111
If to BRI:
Boca Research, Inc.
Attention: Anthony F. Zalenski
1377 Clint Moore Road
Boca Raton, FL 33487
Telecopier Number: (561) 997-6227, ext. 216
With a copy to:
Spinner, Dittman, Federspiel & Dowling
Attn: Robert W. Federspiel, Esq.
501 E. Atlantic Avenue
Delray Beach, FL 33487
Telecopier Number: (561)276-5489
or such other address as shall be furnished in writing by any such party in the
manner provided hereby, and any notice or communication given pursuant to the
provisions hereof shall be deemed to have been given as of the date delivered or
so mailed or transmitted.
13. Governing Law, Jurisdiction. The interpretation and construction of
this Escrow Agreement and all matters relating hereto shall be governed by the
laws of the State of New York, excluding choice of law rules thereof. Any
federal court in and
<PAGE>
for the Eastern District of New York and the Supreme Court of the State of New
York in, and for Nassau County shall have jurisdiction over any action relating
to this Agreement.
14. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and only to the extent such provision shall be held to be
invalid or unenforceable and shall not in any way affect the validity or
enforceability of the other provisions hereof, all of which provisions are
hereby declared severable, and this Agreement shall be carried out as if such
invalid or unenforceable provision or portion thereof was not embodied herein.
15. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties in respect of the subject matter hereof and
supersedes all prior and contemporaneous agreements, arrangements and
understandings relating to the subject matter hereof.
16. Modification. This Agreement may be amended only by a written
instrument executed by the party sought to be charged.
17. Waivers. No waiver by any party of any provision of this Agreement,
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 provision or
any other provision hereof.
18. Counterparts. This Agreement may be executed in counterparts, all of
which taken together shall constitute one agreement.
19. Captions. The section captions used herein are for reference purposes
only, and shall not in any way affect the meaning or interpretation of this
Agreement.
20. Facsimile Signatures. Signatures hereon which are transmitted by
facsimile shall be deemed original signatures.
21. Waiver of Jury Trial. COMPU-DAWN AND BRI ACKNOWLEDGE THAT THE RIGHT TO
A TRIAL BY JURY IS A CONSTITUTIONAL RIGHT, BUT THAT THE RIGHT MAY BE WAIVED.
COMPU-DAWN AND BRI EACH KNOWINGLY, VOLUNTARILY, IRREVOCABLY AND WITHOUT
COERCION, WAIVE ALL RIGHTS TO TRIAL BY JURY OF ALL DISPUTES BETWEEN THEM.
NEITHER COMPU-DAWN NOR BRI SHALL BE DEEMED TO HAVE GIVEN UP THIS WAIVER OF JURY
TRIAL UNLESS THE PARTY CLAIMING THAT THIS WAIVER HAS BEEN RELINQUISHED HAS A
WRITTEN INSTRUMENT SIGNED BY THE OTHER PARTY STATING THAT THIS WAIVER HAS BEEN
GIVEN UP. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO TRIAL BY THE COURT.
<PAGE>
22. Public Announcement. Compu-Dawn and BRI shall cooperate with each other
on a mutual best efforts basis to draft a public announcement relating to the
transaction contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
Witnesses: COMPU-DAWN, INC.
/s/ Gina Shaughnessy
- - --------------------------------- By: /s/ Mark Honigsfeld
-----------------------------
BOCA RESEARCH, INC.
/s/ Carla Hosterman
- - --------------------------------- By:/s/ Anthony Zalenski
------------------------------
/s/ Roberta L. Bynag
- - ---------------------------------
<PAGE>
EXHIBIT A
CONSENT
LocalNet Communications, Inc. hereby acknowledges and agrees that all
obligations of Boca Research, Inc. to refrain from manufacturing the products
which were the subject of that certain Exclusive Manufacturing and Marketing
Agreement dated March 18, 1998, between the parties as provided for in Section
1.3 therein and as further modified under the Tripartite Agreement between the
parties dated October 28, 1998, are hereby terminated, and LocalNet hereby
consents to the entry by Boca Research, Inc. into the attached Agreement with
Compu-Dawn, Inc., granting such rights of exclusivity as provided for therein.
LOCALNET COMMUNICATIONS, INC.
By: /s/ David Greenspan
-----------------------
<PAGE>
SCHEDULE 4(a)
Big Planet
<PAGE>
MegaPOP(TM) Wholesale Service Agreement
This Agreement, made and entered into this 17th day of December, 1999
(hereinafter referred to as "date of this Agreement") by and between StarNet,
Inc., a corporation having it's principal place of business at 579 First Bank
Drive, Suite 100, Palatine, IL 60067 (hereinafter "SNI") and
Compu-DAWN, Inc. a corporation having it's principal place of business at 77
Spruce Street Cedarhurst, NY 11716 (hereinafter "ISP").
Mutually agreed contract is reassignable to any new entity that replaces the
corporation herein.
WITNESSETH
Whereas, ISP is in the business of providing various services on the worldwide
computer network known as the Internet and of providing support for various
advertising and telemarketing sales forces;
Whereas, SNI is in the business of providing various services to third parties
on the Internet, including but not limited to providing access to the Internet,
including but not limited to providing access to the Internet for individuals
and business entities;
Whereas, ISP desires a provider of access to the Internet for its customers and
clients;
Whereas, SNI desires to provide access to the Internet for customers and clients
of ISP;
Whereas, the parties hereto are desirous of setting forth, in writing, terms and
conditions, under which ISP shall direct their customers to SNI for service and
SNI shall provide such customers with access to the Internet;
Now therefore, in consideration of the premises set forth in the foregoing
recitals, which are hereby made a part thereof and incorporated herein by
reference, and further, of the mutual promises, covenants, agreements,
conditions, terms and acknowledgrnents contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ISP and SNI hereby agree as follows:
ARTICLE ONE - DURATION
1.1. TERM.
Except as otherwise provided herein and subject to earlier termination
hereof in accordance with the terms of this Agreement, the "initial term"
of this Agreement shall be one (1) year from the date hereof.
<PAGE>
1.2. EXTENSION.
This Agreement shall be automatically extended beyond the initial term
unless earlier terminated as otherwise provided in this Agreement or
unless either party provides written notice of termination to the other
as set forth immediately hereinbelow. A written notice of termination
must be provided by one party to the other no later than sixty (60) days
prior to the expiration of the initial term, and hereafter on no less
than sixty (60) days prior written notice. Hereinafter, the Initial term
and any extension thereof shall sometimes collectively be referred to as
the "term of this Agreement".
ARTICLE TWO - DUTIES AND RESPONSIBILITIES OF ISP
2.1. CUSTOMERS.
ISP shall not be limited to directing all of it's customers to SNI for
purposes of providing access to the Internet under the terms and
conditions of this Agreement.
2.2. ADVERTISING AND PROMOTION.
ISP shall solely be responsible for and shall incur reasonable expense in
connection with advertising and promotional activities designed
specifically to generate customers who are interested in access to the
Internet.
2.3. SIGN UP.
ISP shall document and maintain information pertaining to each customer
who has committed to the Internet services to be provided by SNI under
the terms of this Agreement. The pertinent information, specifically the
following: 1. ISP assigned (12) digit PPP logon name, 2. ISP assigned PPP
password, 3. PPP account activation / deactivation symbol, and 4. The
preferred MegaPOP(TM) dial-up location for the specific customer, shall
be forwarded to SNI by ISP, via electronic file transfer to a
pre-determined SNI authentication server, in a pre-determined format, to
SNI for activation on the SNI system for eventual service.
2.4. TERMS AND CONDITIONS.
ISP shall make such warranties, and representations and may limit its
liability to any customer, in such terms, conditions and limitations
substantially identical to those set forth in existing ISP customer
liabilities.
2.5. CUSTOMER CONTACT.
SNI shall not contact an ISP customer without prior written permission of
ISP whose permission shall not be unreasonably withheld.
2.6. ISP PPP ACCOUNT NAMES.
ISP shall assign and be responsible for the assignment of ISP PPP account
names. Account names shall be defined within the twelve (12) digit
account name definition whereas the preceding four (4) digits of the ISP
PPP account name will be defined as the four (4) digit
<PAGE>
code assigned exclusively to ISP. The succeeding eight (8) digits in the
ISP PPP account name will be assigned and managed by ISP. ISP agrees to
limit the assignment of ISP PPP account names to one ISP PPP account name
per PPP account assigned.
2.7. PPP ACCOUNT PASSWORDS.
ISP shall be responsible for the assignment and maintenance of all ISP
PPP account passwords.
ARTICLE THREE - DUTIES AND RESPONSIBILITIES OF SNI
3.1. TO ISP.
Within (1) business day after the execution of this agreement by the
parties hereto, SNI shall provide to ISP the following:
(a) complete PPP access to the Internet for all ISP customers described
within this Agreement.
(b) complete 2 B Channel ISDN access to the
Internet for all ISP customers described within this Agreement.
3.2. TO THE CUSTOMERS.
Within one (1) business day of receipt of notice from ISP of an
electronic delivery of customer access information, SNI shall perform,
cause to be performed, or provide, as the case may be, the following:
(a) SNI shall establish a new PPP account for each customer delivered to
SNI, via electronic file transfer, with access to all SNI MegaPOP(TM) PPP
dial-up servers;
(b) For each customer, SNI shall provide unlimited dial-up access to the
Internet through SNI PPP dial-up servers. ISP understands that their
customers will be subject to a minimum of 10 minute idle time cutoff,
whereas each connected customer will lose their connection in the event
they do not make use of their connection for a minimum period of 10
minutes.
3.3. BUSY SIGNAL CONDITION(S).
SNI will make every reasonable effort to maintain a user to modem ratio,
on a city to city basis, equal to or less than 10:1. In the event the
user to modem ratio exceeds 10:1, SNI must take immediate action to
remedy this situation within 30 days. In the event the user to modem
ratio does not reduce to less than 10.1 in the allotted 30 day period,
ISP may make claims for the reduction of their monthly MegaPOP(TM)
invoices for the affected service month, following the 30 day period, for
up to 25% of their total service invoice. ISP must itemize the total
number of affected customers using the MegaPOP(TM) services in the
affected city.
<PAGE>
ARTICLE FOUR - TECHNICAL SUPPORT AND CUSTOMER INQUIRIES
4.1. SERVICES OF SNI.
SNI shall perform technical support services, to ISP, solely relevant to
connection of a customer to access to the internet, including but not
limited to the customer's modem, but excluding any services relevant to
the ISP provided customer software. All of said services shall be
performed by SNI during its normal and regular business hours.
4.2. SERVICES OF ISP.
ISP shall address any and all customer inquiries of any nature whatsoever
and shall perform any and all technical support services relevant to the
ISP software provided to its customers.
ARTICLE FIVE - PAYMENT
5.1. AMOUNT.
ISP shall make payment to SNI in the amount, described in Addendum A
"MegaPOP(TM) Price Schedule", per customer per month for each ISP
customer that SNI provides PPP access to the Internet under the terms of
this Agreement. Payment shall be made to SNI on or before the 10th day of
each succeeding calendar month. Payment in full shall be made to SNI, as
provided hereinabove, notwithstanding customer connection to or
termination from the Internet at any time during the preceding calendar
month.
SNI shall provide written notice to ISP, for any changes in the Addendum
A "MegaPOP(TM) Price Schedule", with a minimum sixty (60) day notice
prior to the effectivity of such changes, for all existing recurring fee
services.
5.2. BILLING AND COLLECTION.
ISP shall provide all services of billing and collection and shall be
responsible for all costs and expenses incurred in connection with
services rendered by SNI under the terms of this Agreement.
5.3. FAILURE TO BILL OR COLLECT.
ISP shall make payment to SNI, as described under the terms of this
Agreement, notwithstanding ISP's failure to bill or collect from an ISP
customer for services provided by SNI, under the terms of this Agreement.
5.4. REFUND.
ISP may utilize its reasonable discretion in making a determination
whether monies should be refunded to an ISP customer as a result of
"ineffective services" provided by SNI to a customer under the terms of
this Agreement. "Ineffective services" of SNI shall be defined as the
failure by SNI to provide customers with uninterrupted access to the
Internet for a cumulative time period of less than ninety-seven percent
(97%) of the total available time for connection to the internet during a
given calendar month. "Total time available for
<PAGE>
connection to the Internet" shall be determined by multiplying the number
of days in the calendar month by twenty four (24) hours. The log-in
history of SNI's user access logs which shall be recorded by SNI on one
of their servers shall be used to determine service interruptions. Any
such refund provided to an ISP customer, due to the described ineffective
service shall be taken from the payment owed to SNI by ISP for the
successive calendar month.
5.5. AMOUNT CALCULATION FOR CUSTOMERS ADDED.
ISP may provide internet access for their customers via any MegaPOP(TM)
access location. Access Authentication, enabling a customer's connection
to the MegaPOP(TM) system, may be achieved through the MegaPOP(TM)
Account Manager Interface or the ISP's own Authentication Server. ISP
reserves the right to activate and manage their accounts via their own
Authentication Server instead of the MegaPOP(TM) Account Manager
Interface Authentication Server.
(A) ISP agrees to pay SNI the full amount for each customer account
successfully added to the SNI system through the MegaPOP(TM)
Account Manager Interface, within each preceding month, for each
customer account activated from the first (1st) day of the
calendar month through the last day of the calendar month.
(B) ISP agrees to pay SNI the full amount for each of their
customers who have signed onto the MegaPOP(TM) system for any
period of time between 12:00AM on the first (1st) day of the
calendar month through the 11:59:59 PM on the last day of the
calendar month, and who are not activated within the MegaPOP(TM)
Account Manager Interface Authentication Server. These ISP
accounts may gain access to the MegaPOP(TM) system via the
Authentication Server under the direct control and ownership of
the ISP.
5.6. AMOUNT OF CALCULATION FOR CUSTOMERS DELETED.
(Item 5.6. applies only to those accounts activated and managed within
the MegaPOP(TM) Account Manager Interface Authentication Server.) ISP
agrees to pay SNI the full amount for each customer deleted from the
MegaPOP(TM) Account Manager Interface Authentication Server during a
calendar month for customers deleted on or after the first (1st) day of
the calendar month.
5.7. AMOUNT CALCULATION FOR ISDN ONLINE TIME
Charges for online time for ISDN accounts will be calculated based upon a
monthly start point of 12:00:00AM on the 1st day of a month, and ending
with 11:59:59PM on the last calendar day of the same month. ISDN Online
time billing will be rounded down to the nearest minute, and charged in
one minute increments. ISDN Online time will be billed after 150 hours of
online time, per month. All MegaPOP ISDN service is offered at 128K, 2 B
Channel service. Online time is calculated using the total single channel
time, divided by two (2). Monthly online free time, per B Channel, is 150
hours, for a total of 300 channel hours. ISP agrees to pay the agreed
upon hourly rate, for all it's customer's online time, exceeding 150 free
hours per month, per ISP ISDN customer. ISDN online time will
<PAGE>
be determined using SNI's log-on accounting server log files. Online time
disputes will be resolved only through the examination of SNI's log-on
accounting server log files. SNI's log-on accounting server log files
will be available to the ISP in the event a dispute occurs.
ARTICLE SIX - NON-EXCLUSIVITY
6.1 ISP and SNI agree to the terms of this Agreement with the understanding
that both ISP and SNI can and may offer similar services to the market as
competitors. ISP and SNI agree to the terms of this Agreement with the
understanding that the right to offer PPP accounts to the market is
nonexclusive and mutually competitive.
ARTICLE SEVEN - NON-SOLICITATION
7.1 ISP and SNI, each to the other, hereby agree that during the term of this
Agreement and for a period of sixty (60) days after termination of this
Agreement, neither party shall solicit any business from any customer(s)
of the other party.
ARTICLE EIGHT - COVENANT NOT TO COMPETE
8.1. STARNET PERSONNEL.
Unless otherwise agreed to by the parties in writing, SNI shall not hire,
employ or engage in any manner the services of any employee, servant,
director, or shareholder of ISP during the term of this Agreement.
ARTICLE NINE - LIMITATION OF LIABILITY
9.1. CONTRACT.
Neither SNI, nor any of its agents, contractors, technicians, or any tier
shall be liable to ISP or an other person or organization in contract for
any general, special, indirect, incidental, or consequential damage
whatsoever, including but not limited to, any lost data, lost time or
other system related damages, damage or loss of property or equipment,
loss of profits or revenues, cost of capital, etc., which arises out of
or is in connection with the services of SNI covered or furnished within
the terms of this Agreement.
9.2. TORT.
Neither SNI nor any of its agents, contractors, technicians or any tier
shall be liable to ISP or any other person or organization for any damage
whatsoever in tort (whether based in negligence, willful conduct or
strict liability) for any act or omission by ISP or any of its servants,
employees, or agents or for any use (other than its own intended
purpose), tampering, or illegal use of the by the customers which arises
out of or is in connection with the services of SNI covered by the terms
of Agreement.
<PAGE>
9.3. The remedies of ISP set forth herein are exclusive and the total cumulative
liability of SNI and any of its agents, contractors, technicians, and any
tier with respect to this Agreement, or any thing done in connection
herewith such as performance or breach hereof, or from installation,
configuration, startup / initialization, programming, or any other services
of SNI covered by or furnished under the terms of this Agreement, in tort
(including negligence or strict liability), or otherwise, shall not exceed
the monthly service fee payable to SNI on which such liability is based.
ARTICLE TEN - INDEMNIFICATION
10.1 Notwithstanding anything to the contrary herein contained, each party
agrees to indemnify and hold the other harmless against any and all
liability, loss, claim, judgment, damage and expense (including without
limitation attorney's fees and costs of litigation) incurred or suffered by
the indemnified party as the result of negligence, willful misconduct, or
breach of any terms of this Agreement by the indemnifying party, including
but not limited to claims, liabilities, losses, damage, judgment and
expense which arise out of alleged injury or death of any person or damage
to property of every kind and description. The indemnifying party will not
be responsible for any compromise or settlement made without its written
consent, which consent will not be unreasonably withheld. Each party shall
promptly notify the other in writing of any claim for which its obligated
under this indemnity and for which it may seek indemnification from the
other. The indemnifying party shall have the right to sue the defense of
any such claim. Both parties shall confer as to and agree on the legal
counsel(s) to be selected in such defense.
ARTICLE ELEVEN - NONDISCLOSURE
11.1. GENERAL.
Both parties agree not to disclose to any third party any proprietary or
confidential information obtained from the other during the negotiation or
performance of this Agreement while the Agreement is in force and for five
years thereafter, including any and all technology and trade secrets now
existing or arising in the future, price, schedules and customer lists.
ARTICLE TWELVE - REMEDIES FOR BREACH
12.1. Except as otherwise limited by Article Nine, if either party breaches any
of the terms and provisions of this Agreement on its part to be performed,
whether such breach pertains to a default in payment or otherwise, the
non-breaching party shall have the right, if it so elects, to serve upon
the breaching party a written notice of its intention to terminate this
agreement this Agreement and the nature of the breach.
<PAGE>
(a) The breaching party shall thereupon have a period of thirty (30)
days, after written notice as such has been served, within which to
remedy the breach.
(b) If the breaching party fails to duly remedy the breach, then up on
the expiration of the thirty (30) days this Agreement and any rights
herein granted shall in all respects cease and terminate, and the
breaching party shall have no further rights hereunder.
(c) Notwithstanding such termination, each party's rights arising out of
this Agreement or in connection therewith or existing prior thereto shall
nevertheless continue in full force and effect, including such party's
right to sue for damages caused to the them by the other party's breach
and failure to cure the same within the aforementioned time period.
12.2. Nothing in this Agreement shall bar either party's right to seek specific
performance of the provisions of this Agreement and injunctive relief
against threatened conduct that will cause it loss or damages under
customary equity rules, including applicable rules for obtaining
restraining orders and preliminary injunctions. Both parties agree that
the non- breaching party may seek such injunctive relief in addition to
such further or relief as may be available at equity by law.
12.3. If a claim for amounts owed by either party is asserted in any judicial
proceeding, or if either party is required to enforce this Agreement in a
judicial or arbitration proceeding, the party prevailing in such
proceeding shall be entitled to reimbursement of its costs and expenses,
including but not limited to, reasonable accounting, attorney's and
attorney assistant fees.
ARTICLE THIRTEEN - TERMINATION
13.1 GENERAL.
Unless otherwise agreed to in writing by ISP and SNI and except as maybe
otherwise provided herein, this Agreement shall automatically terminate
upon the occurrence of any of the following events:
(a) a party files for bankruptcy, or is or becomes insolvent or is
declared insolvent or bankrupt, or makes an assignment or another
arrangement for the benefit of its creditors or is involuntarily the
subject of a bankruptcy filing;
(b) a party has all or any substantial portion of its equity or assets
expropriated by any governmental authorities;
(c) a party is dissolved or liquidated; or
(d) a party disposes of substantially all of its assets.
13.2. DEACTIVATION OF CUSTOMERS.
Upon termination of this Agreement and by no later than the end of the
month succeeding
<PAGE>
the calendar month in which this Agreement has been terminated, SNI shall
deactivate all ISP PPP accounts, thereby terminating an ISP customer's
access to the Internet, and SNI shall be entitled to all payments from
ISP in accordance with the terms of this Agreement up to and including
the date of deactivation.
13.3. TERMINATION PENALTY
ISP's Termination of this Agreement, prior to the agreed upon termination
date as described in article 1.1. of this Agreement, will result in a
penalty payment calculated according to the following formula:
Number of Remaining Months of Agreement X Average Monthly Usage Fees for
Prior Months of Agreement
ISP agrees to pay this amount in the event of ISP's Termination of this
Agreement prior to the agreed termination date described in article 1.1.
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
in duplicate as of the date set forth hereinbelow.
STARNET, INC.
An Illinois Corporation
By: /s/ Russ W. Intravartolo Date: December 17, 1998
------------------------------------
Signature and Title
ISP
By: /s/ Louis Libin Date: December 17, 1998
-----------------------------------
Signature and Title
Chief Technology Officer,
Senior Vice President
<PAGE>
Addendum to MegaPOP/Compu-DAWN Agreement
Dated 12/15/1998
This contract is contingent upon the represetnation by MegaPOP that
there is an agreement in place with GTE for use of all GTE Pops.
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Year Ended
December 31,
1998 1997
------------- -------------
<S> <C> <C>
NET (LOSS) $(2,783,552) $(4,436,745)
=========== ===========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 2,937,724 1,556,587
Assumed conversion of cheap options and warrants - 713,460
------------ -----------
2,937,724 2,270,047
BASIC EARNINGS (LOSS) PER COMMON SHARE $(0.95) $(1.95)
====== ======
</TABLE>
- Exhibit 11 -
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference, in the Registration
Statement #333-65303 on Form S-3 and the Registration Statement #333-39327 on
Form S-8, of our report dated February 25, 1999 (except as to Note 14 which is
dated March 4, 1999) which appears on page F-2 of the annual report on Form
10-KSB of Compu-DAWN, Inc. for the year ended December 31, 1998.
/s/ Lazar Levine & Felix LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
March 26, 1999
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Compu-DAWN, Inc.
EXHIBIT 27
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
The schedule contains summary financial information extracted from the
consolidated financial statements for the year ended December 31, 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
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,528,400
<SECURITIES> 1,850,000
<RECEIVABLES> 333,027
<ALLOWANCES> 13,635
<INVENTORY> 0
<CURRENT-ASSETS> 5,502,382
<PP&E> 474,896
<DEPRECIATION> 256,522
<TOTAL-ASSETS> 5,742,281
<CURRENT-LIABILITIES> 400,134
<BONDS> 44,227
0
50
<COMMON> 32,654
<OTHER-SE> 5,265,216
<TOTAL-LIABILITY-AND-EQUITY> 5,742,281
<SALES> 1,248,489
<TOTAL-REVENUES> 1,248,489
<CGS> 0
<TOTAL-COSTS> 2,899,967
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,150,000
<INTEREST-EXPENSE> 17,459
<INCOME-PRETAX> (2,783,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,783,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,783,552)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
