FOR INFORMATIONAL PURPOSES ONLY /NOT A SOLICATION
CONFIDENTIAL TERM SHEET
COMPLIANCE SYSTEMS CORPORATION
Up to 600,000 shares of Non Voting Class B Common Stock
Maximum Offering Amount: $750,000
THIS CONFIDENTIAL TERM SHEET (THIS "TERM SHEET") RELATES TO THE OFFERING
("OFFERING") OF UP TO 600,000 SHARES OF CLASS B COMMON STOCK BY COMPLIANCE
SYSTEMS CORPORATION, A DELAWARE COMPANY, AT A PURCHASE PRICE EQUAL TO $1.25 PER
SHARE. THE COMPANY WAS RECENTLY FORMED IN ANTICIPATION OF A CORPORATE
REORGANIZATION PURSUANT TO WHICH IT WILL BECOME THE HOLDING COMPANY FOR FOUR
WHOLLY-OWNED SUBSIDIARIES: CALL COMPLIANCE.COM, INC., A DELAWARE CORPORATION,
AND CALL COMPLIANCE, INC., AMS NETWORK INC. AND JASMIN COMMUNICATIONS, INC.,
EACH A NEW YORK CORPORATION (COLLECTIVELY THE "SUBSIDIARIES"). HEREINAFTER THE
COMPANY AND THE SUBSIDIARIES SHALL COLLECTIVELY BE REFERRED TO AS THE "COMPANY.
THERE IS NO MINIMUM AMOUNT OF SHARES OF CLASS B COMMON STOCK WHICH MUST BE
SUBSCRIBED FOR IN ORDER TO CLOSE ANY PURCHASE; ALL NET PROCEEDS FROM SALES OF
CLASS B COMMON STOCK WILL BE PAID OVER DIRECTLY TO THE COMPANY AS AND WHEN
RECEIVED.
THE CLASS B COMMON STOCK OFFERED HEREBY IS SPECULATIVE, AND AN INVESTMENT IN THE
CLASS B COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. INVESTORS MUST BE PREPARED
TO BEAR THE ECONOMIC RISK OF THEIR INVESTMENT FOR AN INDEFINITE PERIOD AND BE
ABLE TO WITHSTAND A TOTAL LOSS OF THEIR INVESTMENT. THE COMPANY HAS ELECTED TO
BE TREATED AS AN "S" CORPORATION UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED, AND PLANS TO FILE SUCH ELECTION IN THOSE JURISDICTIONS IN WHICH IT DOES
BUSINESS, AS MAY BE PERMITTED. INVESTORS SHOULD UNDERSTAND AND BE ADVISED WITH
RESPECT TO THE TAX CONSEQUENCES OF A PURCHASE OF THE CLASS B COMMON STOCK. FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE CLASS B COMMON STOCK, SEE SECTION I OF THE SUBSCRIPTION
AGREEMENT ANNEXED HERETO AS EXHIBIT "A."
TO DATE, THE COMPANY AND EACH OF THE SUBSIDIARIES HAS PRIMARILY BEEN INVOLVED IN
START-UP AND DEVELOPMENT ACTIVITIES AND NONE OF SUCH ENTITIES HAS GENERATED
SUFFICIENT REVENUES TO SATISFY ONGOING OPERATING EXPENSES AND DEBT SERVICE
OBLIGATIONS AND, ACCORDINGLY, IS CURRENTLY OPERATING AT A LOSS. THERE CAN BE NO
ASSURANCE THAT ANY REVENUES GENERATED BY OUR BUSINESS WILL BE SUFFICIENT TO
SUPPORT THE COMPANY'S PLANNED DEVELOPMENT AND GROWTH ACTIVITIES AND DEBT SERVICE
OBLIGATIONS. ACCORDINGLY, WE MAY FIND IT NECESSARY TO RAISE ADDITIONAL CAPITAL,
OF WHICH THERE CAN BE NO ASSURANCE.
THERE IS NO PUBLIC MARKET FOR ANY OF THE SECURITIES OF THE COMPANY, AND IT IS
NOT EXPECTED THAT THERE WILL BE A MARKET IN THE FORESEEABLE FUTURE FOR THE
RESALE OF THE CLASS B COMMON STOCK OFFERED HEREBY. THE CLASS B COMMON STOCK IS
BEING OFFERED AND SOLD IN A PRIVATE PLACEMENT PURSUANT TO REGULATION D
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND HAS NOT BEEN REGISTERED UNDER THE ACT OR UNDER THE SECURITIES LAWS OF ANY
STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND/OR SUCH STATE LAWS PURSUANT TO
REGISTRATION THEREUNDER OR EXEMPTION THEREFROM. IN ADDITION, ANY TRANSFER OF THE
CLASS B COMMON STOCK REQUIRES THE COMPANY'S PRIOR WRITTEN CONSENT. THIS TERM
SHEET CONSTITUTES AN OFFER ONLY TO THE PERSON NAMED ABOVE, AND ONLY IF SAID
PERSON MEETS THE SUITABILITY STANDARDS SET FORTH IN THIS CONFIDENTIAL TERM
SHEET. SEE "INVESTOR SUITABILITY STANDARDS."
NEITHER THIS TERM SHEET NOR THE SECURITIES OFFERED HEREBY HAS BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS TERM SHEET.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
The date of this Confidential Term Sheet is November 18, 2002
THE RECIPIENT AGREES BY ACCEPTING THIS TERM SHEET THAT ALL INFORMATION
REGARDING THIS OFFERING AND THE INFORMATION CONTAINED HEREIN AND IN ALL RELATED
AND ANCILLARY DOCUMENTS ARE NOT TO BE USED FOR ANY PURPOSE OTHER THAN IN
CONNECTION WITH ITS CONSIDERATION OF A PURCHASE OF THE CLASS B COMMON STOCK,
THAT SUCH INFORMATION IS OF A CONFIDENTIAL NATURE, THAT THE RECIPIENT WILL TREAT
IT IN A CONFIDENTIAL MANNER, AND THAT IT WILL NOT, DIRECTLY OR INDIRECTLY,
DISCLOSE OR PERMIT ITS AFFILIATES OR REPRESENTATIVES TO DISCLOSE ANY OF SUCH
INFORMATION TO ANY OTHER PERSON OR REPRODUCE THIS TERM SHEET, IN WHOLE OR IN
PART, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY.
IN CONNECTION WITH THE OFFERING, NO PERSON HAS BEEN AUTHORIZED TO PROVIDE
ANY INFORMATION WITH RESPECT TO THE COMPANY OR THE CLASS B COMMON STOCK, EXCEPT
THE INFORMATION CONTAINED HEREIN. PROSPECTIVE INVESTORS SHOULD NOT RELY ON ANY
INFORMATION NOT CONTAINED IN THIS TERM SHEET. THIS TERM SHEET PRESENTS
INFORMATION WITH RESPECT TO THE COMPANY AS OF THE DATE HEREOF. THE COMPANY DOES
NOT INTEND TO UPDATE OR OTHERWISE REVISE THIS TERM SHEET FOLLOWING ITS
DISTRIBUTION, AND RECIPIENTS OF THIS TERM SHEET SHOULD NOT EXPECT THE COMPANY TO
DO SO. PROSPECTIVE INVESTORS ARE URGED TO CONDUCT AN INDEPENDENT INVESTIGATION
AND EVALUATION OF THE COMPANY.
THE SECURITIES DESCRIBED HEREIN ARE BEING OFFERED TO A LIMITED NUMBER OF
ACCREDITED INVESTORS, AS DEFINED UNDER THE ACT. AN OFFEREE MAY NOT SOLICIT,
DIRECTLY OR INDIRECTLY (WHETHER THROUGH AN AGENT OR OTHERWISE), THE
PARTICIPATION OF ANY OTHER PERSON OR ENTITY IN THIS OFFERING WITHOUT THE PRIOR
WRITTEN APPROVAL OF THE COMPANY.
THIS TERM SHEET DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE
OR OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED.
PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS TERM SHEET
AS LEGAL OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT AND RELY UPON
ITS OWN COUNSEL, ACCOUNTANT OR BUSINESS ADVISOR AS TO LEGAL, TAX AND RELATED
MATTERS CONCERNING ITS INVESTMENT.
THE COMPANY WILL MAKE AVAILABLE, PRIOR TO THE CONSUMMATION OF THE
OFFERING, TO EACH PROSPECTIVE INVESTOR, ITS PURCHASER REPRESENTATIVE(S), OR
BOTH, THE OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, THE COMPANY
OR A PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND CONDITIONS OF THIS
OFFERING, THE COMPANY OR ANY OTHER RELEVANT MATTERS, AND TO OBTAIN ANY
ADDITIONAL INFORMATION, TO THE EXTENT THAT THE COMPANY POSSESSES SUCH
INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY
TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH HEREIN.
THIS OFFER CAN BE WITHDRAWN AT ANY TIME AND IS SPECIFICALLY MADE SUBJECT
TO THE TERMS DESCRIBED IN THIS TERM SHEET. THE COMPANY RESERVES THE RIGHT TO
REJECT ANY SUBSCRIPTION IN WHOLE OR IN PART OR TO ALLOT TO ANY PROSPECTIVE
INVESTOR LESS THAN THE AMOUNT OF SECURITIES SUBSCRIBED FOR BY SUCH INVESTOR.
THIS OFFERING IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF SECURITIES WHICH
DOES NOT INVOLVE A PUBLIC OFFERING. EACH PURCHASER OF THE SECURITIES OFFERED
HEREBY, IN MAKING ITS PURCHASE, WILL BE DEEMED TO HAVE MADE CERTAIN
ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS AS SET FORTH UNDER "TRANSFER
RESTRICTIONS."
THIS TERM SHEET HAS BEEN PREPARED BY THE COMPANY SOLELY FOR THE BENEFIT OF
INVESTORS INTERESTED IN THE PROPOSED PRIVATE PLACEMENT OF THE SECURITIES AND
CONSTITUTES AN OFFER ONLY IF THE ACCOMPANYING SUBSCRIPTION PURCHASE AGREEMENT IS
DULY EXECUTED AND RETURNED TO THE COMPANY BY THE OFFEREE. DISTRIBUTION OF THIS
TERM SHEET TO ANY PERSON OTHER THAN SUCH OFFEREE AND THOSE PERSONS RETAINED TO
ADVISE SUCH PERSONS WITH RESPECT THERETO IS UNAUTHORIZED, AND ANY REPRODUCTION
OF THIS TERM SHEET, IN WHOLE OR IN PART, OR THE DIVULGENCE OF ANY OF ITS
CONTENTS, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY, IS PROHIBITED.
EACH OFFEREE, BY ACCEPTING DELIVERY OF THIS TERM SHEET, AGREES TO RETURN
IT AND ALL RELATED EXHIBITS AND OTHER DOCUMENTS TO THE COMPANY IF: (i) THE
OFFEREE DOES NOT INTEND TO SUBSCRIBE FOR THE PURCHASE OF CLASS B COMMON STOCK
OFFERED HEREBY; (ii) THE OFFEREE'S SUBSCRIPTION IS NOT ACCEPTED, OR (iii) THE
OFFERING IS TERMINATED.
NASAA UNIFORM LEGEND
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1993,
AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THEIR INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
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2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Term Sheet includes "forward-looking statements" within the
meaning of various provisions of the Securities Act of 1993, as amended (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements, other than statements of historical facts,
included in this Term Sheet that address future activities, events or
developments, including such things as future revenues, product development,
market acceptance, responses from competitors, capital expenditures (including
the amount and nature thereof), business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of our business and
operations, plans, references to future success and other such matters, are
forward-looking statements. These statements are based on certain assumptions
and analyses made by us in light of our experience and our assessment of
historical trends, current conditions and expected future developments as well
as other factors We believe are appropriate in the circumstances. However,
whether actual results will conform to our expectations and predictions is
subject to a number of risks and uncertainties that may cause actual results to
differ materially, including the risks and uncertainties discussed in this Term
Sheet; general economic, market or business conditions; the opportunities (or
lack thereof) that may be presented to and pursued by us; competitive actions by
other companies; changes in laws or regulations; and other factors, many of
which are beyond our control. Consequently, all of the forward-looking
statements made in this Term Sheet are qualified by these cautionary statements
and there can be no assurance that the actual results anticipated by us will be
realized or, even if substantially realized, that they will have the expected
consequences to or effects on us or our business or operations.
PRIVATE PLACEMENT PROCEDURES
We undertake to make available to every investor, during the course
of the transaction and prior to sale, the opportunity to ask questions of and
receive answers from us concerning the terms and conditions of the Offering and
to obtain any appropriate additional information (i) necessary to verify the
accuracy of the information contained in this Term Sheet or any other document
given, or to any statement made by us or any person acting on our behalf, to any
prospective investor or (ii) for any other purpose relevant to a prospective
investment in the securities offered hereby, to the extent We possess such
information or can acquire it without unreasonable effort or expense.
All communications or inquires relating to these materials or to a
possible transaction with us should be directed to:
Compliance Systems Corporation
90 Pratt Oval
Glen Cove, New York 11542
Attn: Dean Garfinkel, Chairman
Telephone: (888) 674-6774
Fax: (516) 676-2420
e-mail: dean@callcompliance.com
3
THE OFFERING
The Company:................... Compliance Systems Corporation ("We" or the
"Company") is a corporation formed in
November 2002 under the laws of the State of
Delaware. We were formed in anticipation of a
corporate reorganization ("Reorganization")
intended to be a tax free incorporation.
Pursuant to the Reorganization, through a
share exchange ("Share Exchange"), We will
become the holding company for three
wholly-owned subsidiaries: Call
Compliance.com, Inc. ("CCC"), a corporation
formed under the laws of Delaware; AMS
Network Inc. ("AMS"), a corporation formed
under the laws of New York; and Jasmin
Communications, Inc. ("Jasmin"), a
corporation formed under the laws of New
York. Concurrent with the Share Exchange, we
will effect a merger ("Merger") pursuant to
which We will become the holding company for
a fourth wholly-owned subsidiary, Pratt Oval
Corporation ("Pratt"), a corporation formed
in November 2002 under the laws of New York,
which will be the successor by merger to Call
Compliance, Inc., a corporation formed under
the laws of New York. Concurrent with the
Merger, Pratt will change its name to "Call
Compliance, Inc." The term "Company" shall
include all operations and assets of all four
Subsidiaries identified above and all
disclosure herein gives effect to the
Reorganization.
Aggregate Amount of the Offering;
Securities Offered:......... Up to 600,000 shares of Class B Common Stock,
$.001 par value per share ("Class B Common
Stock"), of the Company, at a purchase price
of $1.25 per share, reflecting aggregate
gross proceeds of up to $750,000. The Class
B Common Stock has no voting rights.
Subchapter "S" Status
of Company:................. The Company has elected to be treated as an
"S" corporation under the Internal Revenue
Code of 1986, as amended ("Code"), and plans
to file an election those jurisdictions in
which it does business, as permitted. In order
to preserve such "S" election, certain types
of entities are precluded from being
stockholders of an "S" corporation.
Accordingly, prospective investors will not be
permitted to transfer the Class B Common Stock
without the Company's prior written consent.
This is in addition to restrictions on
transferability imposed by applicable Federal
and state securities laws. See "Transfer
Restrictions." In addition, there are certain
tax consequences of being a stockholder of a
"S" corporation. See "Dividend Policy" and
"Income Tax Considerations."
Description of Class A and
Class B Common Stock;
Voting Control:............... Authorized Shares. The Company is authorized
to issue 40,000,000 shares of Common Stock,
$.001 par value per share ("Common Stock"),
consisting of 15 million shares designated as
Class A Common Stock ("Class A Common Stock")
and 25 million shares designated as Class B
Common Stock ("Class B Common Stock").
4
Voting Rights. Only shares of Class A Common
Stock have voting rights. Shares of Class B
Common Stock, including the shares offered by
the Company in this Offering, have no voting
rights.
Following the Reorganization, and before and
after this Offering, on a collective basis,
approximately 97% of the outstanding Class A
Common Stock will be owned by Alison and Dean
Garfinkel and Barry Brookstein, officers,
directors and the principal stockholders of
the Company (hereinafter the "Principal
Stockholders"). Accordingly, the Principal
Stockholders have, and following this Offering
will continue to have, effective control over
the Company and the power to control the
outcome of all matters submitted to the vote
of the Company's stockholders, including the
power to elect the full Board of Directors,
increase the authorized capital, dissolve,
merge or sell the assets of the Company.
Dividends. Holders of Class A Common Stock and
Class B Common Stock shall participate equally
per share in any dividend distribution, to the
extent there are any, without distinction
between classes. The Company has no current
intention to make any dividend distributions
in the foreseeable future. See "Dividend
Policy."
Liquidation. In the event of any liquidation,
dissolution or winding up of the Company, the
holders of Class A Common Stock and Class B
Common Stock shall participate equally per
share in any distribution to stockholders
without distinction between classes.
Repurchase Options:............ Each purchaser of Class B Common Stock in this
Offering will be required to grant to the
Principal Stockholders an option, exercisable
for a term commencing on the subscription date
and ending at the close of business on
December 31, 2007, to purchase in the
aggregate one-half of the Class B Common Stock
purchased in this Offering (300,000 shares in
aggregate, assuming sale of the full 600,000
shares) at a purchase price of $2.50 per
share, subject to adjustment in certain events
("Offering Repurchase Option"). If any
purchaser of Class B Common Stock in this
Offering sells, assigns, hypothecates or
otherwise transfers any of such securities, to
the extent allowable and permitted by the
Company, the transferee shall be required as a
pre-condition to such transfer, to agree to
the terms of the Offering Repurchase Option.
Dean and Alison Garfinkel, officers, directors
and principal stockholders of the Company (the
"Founders"), have been granted an option
exercisable through December 31, 2007 to
purchase from all current holders of Class B
Common Stock an aggregate of 1 million of the
currently outstanding shares of Class B Common
Stock at a purchase price of $.67 per share
("First Repurchase Option"), subject to
adjustment in certain events.
5
Neither the Offering Repurchase Option nor the
First Repurchase Option is exercisable until
the repayment of certain debt. See "Prior
Transactions" and "Repurchase Options."
Securities Outstanding
Prior to Offering:.......... 11,125,003 shares of Common Stock, consisting
of 8,125,003 shares of Class A Common Stock
and 3,000,000 shares of Class B Common Stock.
See "Security Ownership of Certain Beneficial
Owners and Named Management."
Securities Outstanding Giving
Effect to Full Offering:.... 11,725,003 shares of Common Stock, consisting
of 8,125,003 shares of Class A Common Stock
and 3,600,000 shares of Class B Common Stock.
Minimum Subscription:.......... 20,000 shares of Class B Common Stock ($25,000
subscription amount), subject to our right, in
our sole discretion, to accept subscriptions
for fewer shares.
Subscription Procedure;
Payment:.................... In order to purchase the Class B Common Stock
offered hereby, each purchaser must complete
and execute the Subscription Agreement
attached hereto as Exhibit A, and an Investor
Questionnaire which contains, among other
things, investors' representations regarding
their qualification to purchase the Class B
Common Stock, as summarized in the "Investor
Suitability Standards" section below. Each
subscription must also be accompanied by full
payment of the total purchase price for the
Class B Common Stock by check made payable to
"Compliance Systems Corporation."
Offering Period:............... The offering period during which the Company
will accept subscriptions to purchase the
Class B Common Stock (the "Offering Period")
shall commence on the date of this Term Sheet
and shall continue until the earlier of: (i)
the sale of all of the Class B Common Stock,
or (ii) December 31, 2002, unless extended by
us, in our sole discretion, for up to an
additional 60 days (the "Termination Date").
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Payments for Subscriptions;
Cancellation or
Termination of
Offering; Rejection of
Subscriptions:.............. There is no minimum amount of shares of Class
B Common Stock which must be subscribed for in
order to close any purchase in the Offering.
All payments for subscriptions received by the
Company will be deposited into the working
capital account of the Company as and when
received. Payments for subscriptions will be
deposited in an escrow account pending
simultaneous closings with other
subscriptions. See Section I of the
Subscription Agreement.
This Offering is subject to withdrawal,
cancellation or modification by us, at any
time, without notice. In the event of the
cancellation or termination of this Offering,
all subscriptions (and payments therefor)
received subsequent to such cancellation or
termination will be promptly returned to
investors, without interest.
We also reserve the right to reject any
subscription, in whole or in part, if in our
reasonable judgment We deem such action to be
in our best interest. If any prospective
investor's subscription is rejected, the funds
received on account of such subscription, or
the portion thereof rejected, shall promptly
be returned to such prospective investor,
without interest.
Representations and
Warranties:................. The Subscription Agreement contains a number
of representations and warranties that each
purchaser of Class B Common Stock will be
required to make to us including, without
limitation, representations and warranties
relating to a purchaser's status as an
"accredited investor," the investor's
investment intent regarding the purchase of
the Class B Common Stock offered hereby and
the purchaser's legal authority to execute the
Subscription Agreement.
Use of Proceeds:............... We plan to apply the proceeds of this Offering
for certain debt service obligations and all
operating expenses, including but not limited
to, payment of equipment lease obligations,
salaries and other employee and executive
compensation, consulting fees and rent.
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BUSINESS
Through the Subsidiaries, We have developed technology called the Tele
Block(R) Calling Block System (the "Tele Block System") which We believe is the
only product that automatically screens and blocks outbound calls against state,
in-house and third-party "do not call lists" within the network infrastructure
of a participating telephone company. The application of the Tele Block System
is on a national SS7/IP network that requires no additional hardware or software
from the customer or carrier. This allows the system to be accessed by all
carriers, instead of being carrier specific. In December 2001, the United States
Patent and Trademark Office issued us the patent with respect to the Tele Block
System.
In July 2002, We signed an Alliance Agreement and Patent License Agreement
with Illuminet, Inc., a VeriSign Company, with respect to the development and
marketing of the Tele Block System. Although there can be no assurance, we
expect the Tele Block System to be deployed through VeriSign in December 2002,
at which time carrier access will become available permitting VeriSign carrier
customers the ability to subscribe to the service.
To date, through the Subsidiaries, We have principally been engaged in
start-up and development activities with respect to the Tele Block System and
related telecommunications services. We have not generated sufficient revenues
from the Tele Block System to satisfy ongoing operating expenses and debt
service obligations, and, accordingly, we are currently operating at a loss.
Development activities with respect to the Tele Block System began prior to 1996
through certain private entities owned by the Founders ("Predecessor Entities")
who, directly and through the Predecessor Entities, transferred and assigned all
rights related to the Tele Block System and associated telecommunications
services and assets to the Subsidiaries.
The Company was formed under the laws of the State of Delaware on November
7, 2002 in anticipation of the Reorganization, pursuant to which it will become
the parent and holding company for the Subsidiaries. The Company has elected to
be treated as an S Corporation under the Code and plans to file such election in
those jurisdictions in which it does business, as may be permitted.
RISK FACTORS
Prospective purchasers of Class B Common Stock should carefully consider
the risk factors contained in Section I of the Subscription Agreement.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company, and each of our
Subsidiaries, their positions and ages are as follows:
Name Position Age
------------ ------------------- -------
Dean Garfinkel Chairman of the Board of 44
Directors and Secretary
Alison Garfinkel President and Director 36
Barry Brookstein Chief Financial Officer, 61
Treasurer and Director
8
All directors and officers hold office until the next annual meeting of
holders of shares of Class A Common Stock or until their successors are duly
elected and qualify. Each of the Principal Stockholders and an employee of the
Company are the only holders of shares of Class A Common Stock, and accordingly
control the right to elect all of the Company's Directors. Officers are elected
annually by, and serve at the discretion of, the Board of Directors. There are
no familial relationships between or among any officers or directors of the
Company except Dean Garfinkel and Alison Garfinkel who are husband and wife.
Set forth below are brief descriptions of the recent employment and
business experience of our officers and directors:
Dean Garfinkel, 44, has served as Chairman of the Board of Directors and
Secretary of the Company and each of the Subsidiaries since each such entity was
founded. Mr. Garfinkel served as Chief Executive Officer and Director of ASN
Voice & Data Corp. ("ASN"), a telecommunications company he founded in 1991,
which specialized in providing telephone systems for securities brokerage firms.
In the last calendar quarter of 2001, ASN sold its material assets, none of
which had any relation to the Tele Block System, to a third party ("ASN Sale").
Mr. Garfinkel has served as a communications consultant to fortune 500 companies
and other businesses for over 20 years.
Alison Garfinkel, 36, has served as President and Director of the Company
and each of the Subsidiaries since each such entity was founded. Ms. Garfinkel
served as Vice President, Secretary and Director of ASN from 1991 until the ASN
Sale.
Barry Brookstein, 61, has served as and Chief Financial Officer, Treasurer
and Director of the Company and each of the Subsidiaries (other than AMS) since
each such entity was founded. Since 1962, Mr. Brookstein has been in the private
accounting practice. Barry M. Brookstein & Associates Inc. ("Brookstein
Associates") serves as accountant to the Company and each of the Subsidiaries.
Employment Agreements and Executive Compensation
The Company entered into a five-year employment agreements, effective as
of December 1, 2001, with each of Mr. Garfinkel, Ms. Garfinkel and Mr.
Brookstein, pursuant to which Mr. Garfinkel serves as Chairman of the Board of
Directors and Secretary, Ms. Garfinkel serves as President, and Mr. Brookstein
serves as Chief Financial Officer and Treasurer, in each case, of the Company
and each of the Subsidiaries. Under the terms of the respective employment
agreements, Mr. Garfinkel and Ms. Garfinkel each receive a base salary of
$240,000 per year and Mr. Brookstein receives a base salary of $120,000 per year
(each a "Base Salary"). Each officer is entitled to an annual bonus from the
Bonus Pool (as hereinafter defined), the amount to be determined in the sole
discretion of the Company's Board of Directors, and an allowance for an
automobile and related expenses of up to $1,000 per month, also to be determined
in the sole discretion of the Company's Board of Directors. Each employment
agreement provides for health insurance and other standard benefits and contains
certain non-competition prohibitions which require that each officer not engage
in any business activities which directly compete with the business of the
Company while he or she is employed by, or a principal stockholder of, the
Company. Commencing in December 2001, each officer agreed to temporarily defer
one-half of his/her annual Base Salary until such date as shall be determined by
the Company's Board of Directors, in its sole discretion, but in no event later
than January 1, 2004. All deferred amounts shall be paid to each executive in 12
equal monthly payments, commencing on a date to be determined by the Company's
Board of Directors, in its sole discretion; however, all deferred amounts shall
become automatically due and be immediately paid by the Company to each
executive in one lump sum payment upon complete repayment of the New Notes and
the Brookstein Loan (as hereinafter defined). See "Prior Transactions." Each of
Mr. and Ms. Garfinkel's respective employment agreements provide for each of
them to devote their full business time to the activities of the Company. Mr.
Brookstein's employment agreement provides that he devote a portion of his
business time to the activities of the Company, as is required from time to
time.
9
As described above, each Mr. and Ms. Garfinkel's and Mr. Brookstein's
respective employment agreements provide for an annual bonus from the "Bonus
Pool," with the amount of each bonus to be determined in the sole discretion of
the Company's Board of Directors. The Bonus Pool shall be equal to a percentage
of the Company's pre-tax profits after the service of any debt ("Pretax
Earnings") on a calendar year basis, starting with 25% of the first $10 million
in Pretax Earnings, and 10% of any Pretax Earnings in excess of $10 million.
Each of Mr. and Mrs. Garfinkel's and Mr. Brookstein's respective
employment agreements with the Company is guaranteed by each of the
Subsidiaries.
Stock Option Plan
We plan to adopt a stock option or other similar stock-based compensation
plan for our officers, directors, employees and consultants in the future
("Future Plan").
Personal Liability of Directors - Indemnification of Officers and Directors
The Certificate of Incorporation, of the Company, eliminates the personal
liability of our directors to the Company or to our stockholders for monetary
damages for breach of a fiduciary duty as a director. However, such personal
liability is not eliminated in the event a director breaches his/her fiduciary
duty of loyalty to any Company or to its stockholders, when a director has not
acted in good faith, and in certain other events described in paragraph 7 of
subsection (b) of Section 102 of the Delaware Business General Corporation Law.
The Certificate of Incorporation, of the Company also allows us to
indemnify our officers and directors, to the fullest extent permitted by the
provisions of Section 145 of the Delaware General Corporation Law, from and
against any and all expenses, liabilities, or other matters referred to in or
covered by said Section, if the officer or director acted in good faith and in a
manner he/she reasonably believed to be in or not opposed to the best interests
of the Company.
Insofar as indemnification for liabilities arising under the Securities
Act, the Securities and Exchange Commission is of the opinion that such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Conflicts of Interest
From time-to time, the Principal Stockholders have entered into
transactions with the Company, the Predecessor Entities and the Subsidiaries.
None of such transactions have, and in the future will, require the consent of
any independent party.
Mr. Brookstein, the Company's Chief Financial Officer, Treasurer,
director, a principal stockholder of the Company, and a noteholder, through
Brookstein Associates, has served as accountant to the Company, the Predecessor
Entities and Subsidiaries. The Company currently intends to continue to retain
Brookstein Associates in such capacity.
10
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND NAMED MANAGEMENT
The following table sets forth the information as of the date hereof
(giving effect to the Reorganization) regarding beneficial ownership and voting
rights with respect to the Common Stock of the Company by (i) each person (or
group of affiliated persons) who is known by us to beneficially own more than 5%
of the outstanding shares of Common Stock, (ii) each of our directors, (iii)
each of our executive officers, and (iv) all of our executive officers and
directors as a group.
- -------------------------- -------------------- ------------------ ------------------------ -----------------
Ownership Percentage
Shares of -----------------------
Name of ------------------- Assuming the Sale of
- -------------------------- Common Stock Ownership All Class B Common Voting
Beneficial Owner Beneficially Owned Percentage (4) Stock (4) Percentage (5)
- -------------------------- -------------------- ------------------ ------------------------ -----------------
Dean Garfinkel (1) 3,031,251 27.3% 25.9% 36.9%
- -------------------------- -------------------- ------------------ ------------------------ -----------------
Alison Garfinkel (2) 3,031,251 27.3% 25.9% 36.9%
- -------------------------- -------------------- ------------------ ------------------------ -----------------
Barry Brookstein (3) 3,140,626 28.2% 26.8% 23.1%
- -------------------------- -------------------- ------------------ ------------------------ -----------------
All officers and 9,203,128 82.7% 78.5% 96.9%
directors as a group [3]
- -------------------------- -------------------- ------------------ ------------------------ -----------------
Of the 9,203,128 shares of Common Stock owned beneficially by the
Principal Stockholders, 7,875,003 are shares of Class A Common Stock and have
voting rights. There are an additional 250,000 shares of Class A Common Stock
owned by an employee of the Company. All other shares of Common Stock
outstanding, including the Common Stock offered hereby, is Class B Common Stock
and has no voting rights. Accordingly, the Principal Stockholders have effective
control over the Company and the power to control the outcome of all matters
submitted to a vote of the Company's stockholders; they have the power to elect
the full Board of Directors of the Company, increase the authorized capital,
dissolve, merge or sell the assets of the Company, giving them the right to
direct the future of the Company. In addition, the Founders have been granted
the First Repurchase Option by current holders of Class B Common Stock and the
Principal Stockholders will be granted the Offering Repurchase Option by
subscribers in this Offering. See "Repurchase Options."
- ----------
Footnotes on following page.
11
- -----------Footnotes for table on prior page.------------
(1) Consists of (i) 3,000,001 shares of Class A Common Stock and (ii) 31,250
shares of Class B Common Stock held jointly by Mr. Garfinkel and Ms.
Garfinkel as custodian for their minor children. Does not include (i)
shares of Class A Common Stock owned by Mr. Garfinkel's wife, Alison
Garfinkel (see footnote 2 below), as to which Mr. Garfinkel disclaims
beneficial ownership, or (ii) (a) up to 500,000 shares of Class B Common
Stock underlying the First Repurchase Option that Mr. Garfinkel has the
option to purchase (including 62,500 shares of Class B Common Stock from
Mr. Brookstein) and (b) up to 100,000 shares of Class B Common Stock
underlying the Offering Repurchase Option that Mr. Garfinkel has the
option to purchase (assuming the sale of all the 600,000 shares of Class B
Common Stock in this Offering).
(2) Consists of (i) 3,000,001 shares of Class A Common Stock and (ii) 31,250
shares of Class B Common Stock held jointly by Ms. Garfinkel and Mr.
Garfinkel as custodian for their minor children. Does not include (i)
shares of Class A Common Stock owned by Ms. Garfinkel's husband, Dean
Garfinkel, (see footnote 1 above), as to which Ms. Garfinkel disclaims
beneficial ownership, or (ii) (a) up to 500,000 shares of Class B Common
Stock underlying the First Repurchase Option that Ms. Garfinkel has the
option to purchase (including 62,500 shares of Class B Common Stock from
Mr. Brookstein) and (b) up to 100,000 shares of Class B Common Stock
underlying the Offering Repurchase Option that Ms. Garfinkel has the
Option to purchase (assuming the sale of all the 600,000 shares of Class B
Common Stock in this Offering).
(3) Consists of (i) 1,875,001 shares of Class A Common Stock and 1,250,000
shares of Class B Common Stock owned by Mr. Brookstein and (ii) 15,625
shares of Class B Common Stock owned by Mr. Brookstein. as custodian for
his minor children. Does not include (i) up to 100,000 shares of Class B
Common Stock underlying the Offering Repurchase Option that Mr. Brookstein
has the option to purchase (assuming the sale of all the 600,000 shares of
Class B Common Stock in this Offering) or (ii) 15,625 shares of Class B
Common Stock held by Mr. Brookstein's adult children. Also, does not give
effect to 125,000 shares of Class B Common Stock owned by Mr. Brookstein,
which are subject to the First Repurchase Option.
(4) Based on aggregate of 11,125,003 shares of Common Stock outstanding prior
to the Offering and 11,725,003 shares outstanding, giving effect to the
Offering (assuming the sale of all the 600,000 shares of Class B Common
Stock in this Offering). Does not include shares of Common Stock that may
be reserved for issuance under any Future Plan.
(5) Voting percentages after the Offering remain the same as voting percentage
before the Offering since only shares of Class B Common Stock, which have
no voting rights, are being sold in the Offering. Based on aggregate of
8,125,003 shares of voting Class A Common Stock outstanding before and
after this Offering.
12
USE OF PROCEEDS
We estimate that We will receive net proceeds, assuming the sale of all
the 600,000 shares of Class B Common Stock, of approximately $700,000, after
deducting legal fees. However, such number can be significantly less in the
event the full Offering of 600,000 shares of Class B Common Stock is not sold.
We intend to use the net proceeds from the Offering for certain debt obligations
and operating expenses, including but not limited to, payment of equipment lease
obligations, salaries and other employee and executive compensation, consulting
fees and rent.
We cannot anticipate how long the proceeds from the Offering will last or
how much proceeds we will actually raise in this Offering; additional capital
may be required in order to fund our operations. We cannot guarantee that
additional capital will be obtained on terms acceptable to us, if at all.
The foregoing represents our present intentions based upon our present
plans and business conditions. The occurrence of unforeseen events or changed
business conditions, however, could result in the application of the proceeds of
the Offering in a manner other than as described above.
DIVIDEND POLICY
The Company does not have a dividend policy at the present since it does
not intend to distribute any funds in the foreseeable future based on current
results of operations. The Company is currently operating at a loss, by not
generating sufficient revenues to cover operating expenses and its debt service
obligations. Any possible future distributions will depend on the financial
condition and revenues of the Company. The Company will attempt to make
distributions to approximate taxes attributable to stockholders from subchapter
S allocations; however, there is no guaranty that the Company will have the cash
available to do so.
PRIOR TRANSACTIONS
We were formed on November 7, 2002 under the laws of the State of Delaware
in anticipation of the Reorganization pursuant to which we become the holding
company for the Subsidiaries. In connection with the Share Exchange, we will
acquire all the outstanding shares of each of CCC, AMS and Jasmin from each of
their respective stockholders in exchange for shares of the Company's Class B
Common Stock, on a pro rata basis. Pursuant to the Merger, We will become the
holding Company for our wholly-owned Subsidiary, Pratt, the successor by merger
to Call Compliance, Inc. Concurrent with the Merger, Pratt will change its name
to "Call Compliance, Inc."
Development activities with respect to the Tele Block System originally
began prior to 1996 through the Predecessor Entities. The Founders, directly and
through the Predecessor Entities, have transferred and assigned all rights
related to the Tele Block System and associated telecommunications services and
assets to the Subsidiaries.
During the period July 1996 to December 1999, in order to fund development
activities, one of the Predecessor Entities, borrowed an aggregate of $700,000
from three lenders ("First Lenders") in return for granting the First Lenders a
portion of the revenues generated under certain telecommunication contracts
owned by certain of the Predecessor Entities, including certain agreements
relating to the Tele Block System. Mr. Brookstein, an officer, director and
principal stockholder of the Company is an officer, director and principal
stockholder of one of the First Lenders which lent the Company an aggregate of
$300,000. In addition, Mr. Brookstein, as custodian for his minor children, Mr.
Brookstein's adult children and Mr. and Ms. Garfinkel, as custodians for their
minor children, are stockholders of one of the First Lenders which lent the
Company an aggregate of $25,000. Such loans were secured by promissory notes
("Lender's Notes") issued by the Predecessor Entity in the amount of each loan,
13
and various corporate and individual guarantees, including that of the Founders
("Prior Guarantees"). In December 2001, the contracts and related revenue rights
were assigned to CCI, one of the Subsidiaries, in return for CCI assuming the
obligations under the Lender's Notes. At such time, the Lender's Notes were
restructured, with self amortizing principal and 18% interest per annum payable
over five years. Also in December 2001, CCI borrowed an additional $300,000 from
an additional party ("Additional Lender") on the same terms (hereinafter, the
First Lenders and Additional Lender collectively referred to as the "Lenders").
In connection with such loans in the aggregate principal amount of $1 million
("Lender Loans"), the stockholders of each of the Lenders (the "Lender
Stockholders") (including Mr. Brookstein on his own behalf and as custodian for
his minor children, Mr. Brookstein's adult children and Mr. and Ms. Garfinkel,
as custodian for their minor children), were given the right to purchase for
nominal consideration 26.9% of the outstanding Common Stock of each of the
Subsidiaries then existing, as well as any other companies subsequently formed
in connection with the Tele Block System, as in the case of Jasmin, which was
formed in August 2002 ("Lenders' Subsidiary Stock").
From December 2001 through November 2002 ("Note Deferment Period"), CCI
did not make any payments to the Lenders in connection with the Lender Loans. As
of December 1, 2002, the Lender Loans will be further restructured in the form
of new non-negotiable promissory notes due June 1, 2008 ("New Notes") in the
aggregate principal amount of $ 1 million, plus unpaid interest during the Note
Deferment Period in the amount of $ 210,000 ("Deferred Interest"). The interest
rate on the Lender Loans during the Note Deferment Period was increased from 18%
to 21% as compensation to the Lenders for deferring payment of the interest and
principal during such period. Principal on the New Notes will bear interest at
the rate of 21% per annum from December 1, 2002 through May 30, 2003, and
thereafter through May 30, 2008 at the rate of 18% per annum. The New Notes will
be self amortizing with Deferred Interest, principal and interest payments
payable over the five-year term commencing June 1, 2003. The New Notes are
guaranteed by the Company and CCC.
In April 2002, in three separate transactions, one of the Predecessor
Entities sold certain fixtures and equipment which have been, and continue to be
used by the Company, to a leasing company for an aggregate of $200,000 with such
equipment to be leased to CCI pursuant to three lease agreements. Because CCI
was a newly formed company one of the First Lenders entered into the lease
agreements on behalf of CCI. CCI makes the monthly payments under the lease
agreements directly to the Leasor. CCI and the First Lender have entered into an
agreement assigning to CCI the buy-back provisions contained in the leases. Mr.
Brookstein is an officer, director and principal stockholder of such First
Lender.
During the period April 2002 through June 2002, the Founders loaned CCI an
aggregate of $160,500 in the form of a demand promissory note with interest at
the rate of 12% per annum, payable monthly. Of such amounts $30,000 was repaid
in July and August of 2002. This promissory note is guaranteed by the Company
and CCC.
In June 2002, one of the First Lenders lent an additional $75,000 to CCI
as evidenced by a self liquidating promissory note due April 2006, with
principal and interest (at the rate of 24% per annum) payable monthly. Mr.
Brookstein is an officer, director and principal stockholder of such First
Lender. This promissory note is guaranteed by the Company and CCC.
In July 2002, CCI borrowed an aggregate of $500,000 from Mr. Brookstein
("Brookstein Loan"). The Brookstein Loan bears interest at 12% per annum,
payable monthly, and is due on July 1, 2004. Payments under the Brookstein Loan
are current. The Brookstein Loan is guaranteed by the Company and CCC.
Following the Reorganization, the Lender Stockholders will own, in the
aggregate 3 million shares of Class B Common Stock of the Company, reflecting
approximately 26.9% of the Company's outstanding Common Stock, before giving
effect to this Offering, and approximately 25.6%, after giving effect to the
sale of the full 600,000 shares of Class B Common Stock offered in this
Offering. The balance of the Company's outstanding Common Stock (8,125,003
shares of Class A Common Stock) will be owned by the Principal Stockholders and
an employee of the Company, reflecting approximately 73.0% of the Company's
14
outstanding Common Stock, before giving effect to this offering and
approximately 69.3%, after giving effect to the sale of the full 600,000 shares
of Class B Common Stock offered in this Offering. On a collective basis all
current holders of Class A and Class B Common Stock will own approximately 95%
of the Company's Common Stock after this Offering.
In connection with the Reorganization, all of the Prior Guarantees,
including the Founders', will be released.
The Company occupies facilities leased to an unaffiliated entity
controlled by the Founders. The Company intends to enter into a sublease or have
the lease assigned to it at the same rental price paid by such entity.
REPURCHASE OPTIONS
Each of the Founders has been granted the First Repurchase Option
entitling each Founder the right to purchase from each present holder of Class B
Common Stock, at a purchase price of $.67 per share, one-half of the stock held
by each stockholder (500,000 shares for each Founder, or 1 million shares in the
aggregate), with the exception of stock held by Mr. Brookstein, individually, in
which case the option is for 125,000 shares of Class B Common Stock in the
aggregate.
Each of the Principal Stockholders will be granted the Offering Repurchase
Option entitling each Principal Stockholder the right to purchase from each
subscriber in this Offering, at a price of $2.50 per share, one-half of the
shares of Class B Common Stock purchased in this Offering (100,000 shares for
each Principal Stockholder, or 300,000 shares in the aggregate, assuming the
sale of the full 600,000 shares of Class B Common Stock offered in this
Offering).
Each of the First Repurchase Option and Offering Repurchase Option
(hereinafter, any one being referred to as an "Option," or both as the
"Options") may be exercised an unlimited number of times, at any time, in whole
or in part until December 31, 2007 ("Option Term"); however, neither Option may
be exercised until repayment of the New Notes and Brookstein Loan and neither
Option may be exercised on any one occasion to purchase less than 10,000 shares,
or all shares owned by a stockholder, if less than 10,000. The Options are
transferable, in whole or in part, to any third party by each of the Founders in
the case of the First Repurchase Option, and each of the Principal Stockholders,
in the case of the Offering Repurchase Option, but only upon the prior written
consent of the Company's Board of Directors (hereinafter, each Founder,
Principal Stockholder and transferee, as the case may be, referred to as an
"Option Holder" and one or more of such parties as the "Option Holders").
In the event that during the Option Term, to the extent that any part of
either of the Options remains unexercised, the Company effects any stock
dividend, stock split, combination of shares, reclassification, recapitalization
or other similar event affecting its outstanding Class B Common Stock, then the
number and type of securities subject to both Options, and the exercise price
per share, shall be appropriately adjusted so that the Options shall each
thereafter represent the right to purchase, at the same aggregate exercise
price, such number of shares of Class B Common Stock or other securities as have
actually been received by the Option Holder in exchange for or in respect of the
underlying shares of Class B Common Stock.
If any holder of Class B Common Stock sells, assigns, hypothecates or
otherwise transfers any Class B Common Stock, to the extent permitted, the
transferee shall be required, as a condition precedent to agree to the terms of
the applicable Option. All share certificates for Class B Common Stock shall
bear a legend with respect to the applicable Option.
If on the date during the Option Term which is 90 days prior to the
expiration of the Options ("90-day Date"), any Option has not been exercised in
full by the Holder thereof ("Non-Exercising Option Holder"), then during the
immediately succeeding 15-day period, each of the remaining Option Holder(s)
("Remaining Holder(s)") shall have the right to provide notice to the
15
Non-Exercising Option Holder(s) of its intent to exercise any Options remaining
unexercised as of the 90-day Date ("Unexercised Options") on the terms thereof
("Notice"). In the event that a Non-Exercising Option Holder does not exercise
all of the Unexercised Options within 30 days of receipt of the Notice ("Final
Exercise Period"), then the Remaining Holder(s) shall have the automatic and
unrevocable right to exercise any Unexercised Options commencing on the
termination of the Final Exercise Period up through the expiration of the
Options. If there is more than one Remaining Holder, then each Remaining Holder
shall be entitled to exercise one-half of the Unexercised Options, unless
otherwise agreed to between the parties; however, each Remaining Holder must
exercise his share of Unexercised Options during the period ending no later than
the close of business on the fifteenth day immediately following the Final
Exercise Period, but in no event later than 5 business days prior to the
expiration of the Options ("Final Shared Exercise Date"). In such case, if one
of the Remaining Holders does not exercise all of his/her interest in the
Remaining Options prior to the Final Shared Exercise Date, then the one
Remaining Holder shall have the automatic and unrevocable right to exercise any
Unexercised Options until the expiration of the Options.
16
TRANSFER RESTRICTIONS
Offers and Sales of
Securities................... None of such securities may be offered or sold
in the United States by a purchaser in this
Offering except pursuant to an effective
registration statement or in accordance with an
exemption from the registration requirements of
the Securities Act, as set forth below.
Investor Representations and
Restrictions on Resale...... Each purchaser of the Securities hereby will be
deemed to have represented and agreed as
follows:
(1) he or she is acquiring the Securities
for his or her own account or for an account
with respect to which he or she exercises sole
investment discretion, and that he or she is an
accredited investor;
(2) he or she understands that the
securities are being offered only in a
transaction not involving any public offering
within the meaning of the Securities Act, and
that (i) if, after the date of original issuance
of the securities he or she decides to resell,
pledge or otherwise transfer the shares
comprising the Securities, such securities, may
be resold, pledged or transferred only (A)
pursuant to an exemption from registration under
the Securities Act, or (B) pursuant to an
effective registration statement under the
Securities Act, in each case in accordance with
any applicable securities laws of any state of
the United States and (ii) the purchaser will,
and each subsequent holder is required to,
notify any purchaser of such securities from him
or her of the resale restrictions referred to in
(i) above, if then applicable; and
(3) he or she understands that the following
legend will be placed on any certificate
representing the securities offered herein:
"THE SHARES OF STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF THE PRIOR WRITTEN CONSENT OF THE
COMPANY AND AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR AN OPINION OF COUNSEL FOR THE
CORPORATION THAT REGISTRATION THEREOF IS NOT
REQUIRED UNDER THE ACT."
17
INVESTOR SUITABILITY REQUIREMENTS
General....................... An investment in the securities offered hereby
involves significant risks and is suitable only
for persons of adequate financial means who have
no need for liquidity with respect to this
investment and who can bear the economic risk of
a complete loss of their investment. This
Offering is made in reliance on exemptions from
the registration requirements of the Securities
Act, and applicable state securities laws or
regulations.
The suitability standards discussed below
represent minimum suitability standards for
prospective investors. The satisfaction of such
standards by a prospective investor does not
necessarily mean that the securities are a
suitable investment for such prospective
investor. Prospective investors are encouraged
to consult their personal financial advisors to
determine whether an investment in the
securities is appropriate. We may reject
subscriptions for the securities, in whole or in
part, in our absolute discretion.
We will require each investor to represent in
writing, among other things, that (i) by reason
of the investor's business or financial
experience, or that of the investor's
professional advisor, the investor is capable of
evaluating the merits and risks of an investment
in the securities and of protecting its own
interest in connection with the Offering, (ii)
the investor is acquiring the securities for its
own account, for investment only and not with a
view toward the resale or distribution thereof,
(iii) the investor is aware that neither the
Securities not the shares comprising same, have
been registered under the Securities Act or any
state securities laws and that transfer thereof
is restricted by the Securities Act, applicable
state securities laws, and the subscription
agreement to be entered into in connection with
the purchase of the securities, and the investor
is aware of the absence of a market for the
securities, other securities to be received upon
conversion and (iv) such investor meets the
suitability requirements set forth below.
Suitability
Requirements................ Unless otherwise approved by the Company, each
investor must represent in writing that it
qualifies as an "accredited investor," as such
term is defined in Rule 501(a) of Regulation D
promulgates under the Securities Act, and must
demonstrate the basis for such qualification. To
be an accredited investor, an investor must fall
within any of the following categories at the
time of the sale of securities to that investor:
(1) A bank as defined in Section 3(a)(2) of
the Securities Act, or a savings and loan
association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act,
whether acting in its individual or fiduciary
capacity; a broker or dealer registered pursuant
to Section 15 of the Exchange Act; an insurance
18
company as defined in Section 2(13) of the
Securities Act; an investment company registered
under the Investment Company Act of 1940 or a
business development company as defined in
Section 2(a)(48) of that act; a Small Business
Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or
(d) of the Small Business Investment Act to
1958; a plan established and maintained by a
state or its political subdivisions, and
maintained by a state, its political
subdivisions, or any agency or instrumentality
of a state or its political subdivisions, for
the benefit of its employees, if such plan has
total assets in excess of $5,000,000; an
employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974,
if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of that
act, which is either a bank, savings and loan
association, insurance company, or registered
investment advisor, or if the employee benefit
plan has total assets in excess of $5,000,000,
or, if a self-directed plan, with investment
decisions made solely by persons that are
accredited investors;
(2) A private business development company
as defined in Section 202(a)(22) of the
Investment Advisors Act of 1940;
(3) An organization described in Section
501(c)(3) of the Internal Revenue Code, a
corporation, a Massachusetts or similar business
trust, or a partnership, not formed for the
specific purpose of acquiring the securities,
with total assets in excess of $5,000,000;
(4) A director or executive officer of the
Company;
(5) A natural person whose individual net
worth, or joint net worth with that person's
spouse, at the time of such person's purchase of
the securities exceeds $1,000,000;
(6) A natural person who has an individual
income in excess of $200,000 in each of the two
most recent years or joint income with that
person's spouse in excess of $300,000 in each of
those years and has a reasonable expectation of
reaching the same income level in the current
year;
(7) A trust, with total assets in excess of
$5,000,000, not formed for the specific purpose
of acquiring the securities, whose purchase is
directed by a sophisticated person as described
in Rule 506(b)(2)(ii) of Regulation D; and
(8) An entity in which all of the equity
owners are accredited investors (as defined
above).
19
As used in this Term Sheet, the term "net worth"
means the excess of total assets over total
liabilities. In computing net worth for the
purpose of (5) above, the principal residence of
the investor must be valued at cost, including
costs of improvements, or at recently appraised
value by an institutional lender making a
secured loan, net of encumbrances. In
determining income, an investor should add to
the investor's adjusted gross income any amounts
attributable to tax exempt income received,
losses claimed as a limited partner in any
limited partnership, deductions claimed for
depletion, contributions to an IRA or Keogh
retirement plan, alimony payments, and any
amount by which income for long-term capital
gains has been reduced in arriving at adjusted
gross income.
In order to meet the conditions for exemption
from the registration requirements under the
securities laws of certain jurisdictions,
investors who are residents of such
jurisdictions may be required to meet additional
suitability requirements.
In addition to the suitability standards set
forth above, the Company will assess each
prospective investor to ascertain that such
purchaser's subscription will not impair the
Company's plan to file a sub "S" election.
INCOME TAX CONSIDERATIONS
THIS CONFIDENTIAL TERM SHEET DOES NOT CONSTITUTE INVESTMENT, LEGAL OR TAX
ADVICE WITH RESPECT TO AN INVESTMENT IN THE CLASS B COMMON STOCK OFFERED HEREBY.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH
RESPECT TO THE INCOME TAX ISSUES AND CONSEQUENCES CONCERNING PURCHASING, HOLDING
AND DISPOSING OF THE CLASS B COMMON STOCK OFFERED HEREBY, IN EACH CASE, AS THEY
MAY PERTAIN TO THE PURCHASER'S OWN PERSONAL SITUATION.
20
EXHIBIT A
SUBSCRIPTION AGREEMENT
OPTION AGREEMENT
OPTION AGREEMENT, dated as of the _____ day of December, 2002, between
Dean Garfinkel and Alison Garfinkel, as the option holders (each an "Option
Holder" and together, the "Option Holders"), and the undersigned, as the grantor
("Grantor") , with respect to shares of non-voting Class B Common Stock ("Class
B Common Stock") of Compliance Systems Corporation ("Compliance Systems" or the
"Company"), a company formed under the laws of Delaware.
RECITALS
WHEREAS, the Grantor is a stockholder in Compliance Systems owning that
number of shares of Class B Common Stock set forth on the signature page hereof.
WHEREAS, commencing in December 2001, the Grantor was given a right to
purchase stock in each of three (3) entities known as Call Compliance, Inc.,
Call Compliance.com, Inc., and AMS Network Inc., and any other affiliated
entities subsequently formed with respect to the Tele Block Calling Block(R)
System (collectively, the "Subsidiaries").
WHEREAS, as a condition to becoming a shareholder in each of the
Subsidiaries, and for good and valid consideration, the Grantor agreed to grant
Alison Garfinkel and Dean Garfinkel an option to purchase from Grantor certain
of the Common Stock owned by Grantor in each of the Subsidiaries ("Subsidiary
Options").
WHEREAS, previously, certain entities known as Tele-Serv, Inc., Telmax
Co. Inc., Spirits Management Inc. and PhoneTel New Corp. (certain of which
are affiliated with the Grantor) and Mr. Barry Brookstein, an officer
director and principal stockholder of Compliance Systems and each of the
Subsidiaries, provided loans to Call Compliance, Inc., one of the
Subsidiaries, in an aggregate principal amount of $1.5 million ("Loans").
WHEREAS, the Grantors made it a condition precedent to the exercise of the
Subsidiary Options, that the Loans, including interest thereon, be repaid.
WHEREAS, in December 2002, the Subsidiaries effected a corporate
reorganization pursuant to which each of the Subsidiaries became wholly-owned by
Compliance Systems and accordingly all Common Stock of the Subsidiaries owned by
their respective Grantors were exchanged for Class B Common Stock in Compliance
Systems ("Reorganization").
WHEREAS, this Option Agreement shall reflect the Subsidiary Options, as
reconstituted to give effect to the Reorganization, to purchase such number of
shares of Class B Common Stock of Compliance Systems, as set forth on the
signature page hereof.
NOW, THEREFORE, in consideration of the foregoing promises and the mutual
covenants, agreements, representations and warranties contained herein, the
parties agree as follows:
1. Option. The Grantor hereby grants to Alison Garfinkel and Dean
Garfinkel an option ("Option") to purchase, that number of shares of Class B
Common Stock of Compliance Systems as set forth on the signature page hereof
("Option Shares"), at an exercise price of $.6667 per share, subject to
adjustment as provided in Section 8 herein ("Exercise Price").
2
2. Option Term. The Option may be exercised at any time commencing on the
date that the Loans and interest thereon have been repaid and satisfied in full,
to and including December 31, 2007 ("Expiration Date"), at which time it will
automatically terminate to the extent not exercised in full, or at all (the
"Option Term").
3. Exercise of Option. Each of Dean Garfinkel and Alison Garfinkel (or any
of their respective transferees, as permitted under Section 6 herein) shall have
the right to exercise the Option, to the extent of one-half of the Option
Shares, subject to Section 7 below (each one-half of the Option hereinafter
referred to as "Option Half"). The Option may be exercised by an Option Holder
providing to Grantor (or any transferee thereof, to the extent any such transfer
complies with the requirements of this Agreement, including Section 10
("Permitted Transferee"), at Grantor's address set forth on the signature page
hereof, or any other address as provided to Compliance Systems and the Option
Holders in writing, a Notice of Exercise of Option ("Notice of Exercise"), in
the form of Attachments "A" and "B" hereto, accompanied by one or more certified
checks reflecting the Exercise Price for the number of Options to be exercised
and shares of Class B Common Stock purchased hereunder ("Purchased Shares"). The
Notice of Exercise shall be sent by certified mail, return receipt requested, or
such other manner as shall include a proof of transmittal or delivery. The
Option may be exercised by any Option Holder, an unlimited number of times, at
any time, in whole or in part during the Option Term; however, the Option cannot
be exercised on any one occasion to purchase less than 10,000 shares, or all
shares owned by Grantor (or Permitted Transferee, as hereinafter defined), if
less than 10,000.
4. When Exercise Effective. The exercise of the Option shall be deemed to
have been effected on the close of business in the day of mailing of the Notice
of Exercise ("Purchase Date"), and at such time the Option Holders shall
automatically be deemed the record holder of such Purchased Shares, and the
Grantor (or Permitted Transferee) shall have no rights with respect to such
shares.
5. Delivery on Exercise. Immediately following the Purchase Date (and no
more than 5 business days thereafter), Grantor (or Permitted Transferee), shall
deliver to the Company the stock certificate(s) reflecting the Class B Common
Stock owned by Grantor, accompanied by stock powers endorsed in blank with
respect to the number of Purchased Shares. The Company shall thereafter (i) send
to Grantor (or Permitted Transferee) a stock certificate reflecting the number
of shares of Class B Common Stock continued to be owned by Grantor (or Permitted
Transferee) following the exercise of the Option and (ii) send to each of the
Option Holders, as the case may be, stock certificates reflecting the number of
Purchased Shares. All such stock certificates shall continue to bear applicable
legends as set forth in Section 10 herein, as applicable.
6. Transfer of this Option by Option Holders. The Option is transferable,
in whole or in part, to any third party by each of the Option Holders, but only
upon the prior written consent of the Company's Board of Directors (hereinafter,
each transferee, as the case may be, shall also be referred to as an "Option
Holder").
3
7. Right to Exercise Unexercised Option. If on the date during the Option
Term which is 90 days prior to the Expiration Date of the Option ("90-day
Date"), the Option has not been exercised to the extent of the full Option Half
full by a Option Holder ("Non-Exercising Option Holder"), then during the
immediately succeeding 15-day period the other Option Holder ("Remaining
Holder") shall have the right to provide notice to the Non-Exercising Option
Holder of its intent to exercise any of the Option remaining unexercised as of
the 90-day Date ("Unexercised Options") on the terms hereof ("Notice"). In the
event that the Non-Exercising Option Holder does not exercise all of the
Unexercised Options within 30 days of receipt of the Notice ("Final Exercise
Period"), then the Remaining Holder shall have the automatic and unrevocable
right to exercise any Unexercised Options commencing on the termination of the
Final Exercise Period up through the Expiration Date.
8. Stock Splits, Stock Dividends, Recapitalizations, etc. In the event
that during the Option Term, to the extent that any part of the Option remains
unexercised, the Company effects any stock dividend, stock split, combination of
shares, reclassification, recapitalization or other similar event affecting its
outstanding Class B Common Stock, then the number and type of securities subject
to the Option, and the exercise price per share, shall be appropriately adjusted
so that this Option shall thereafter represent the right to purchase, at the
same aggregate exercise price, such number of shares of Class B Common Stock or
other securities as have actually been received by the Subscriber (or Permitted
Transferee) in exchange for or in respect of the Option Shares.
9. No Rights or Liability as a Stockholder. This Option does not entitle
the Option Holders to any dividend voting rights or other rights as a
stockholder of the Company in respect of the Option Shares.
10. Class B Common Stock. If the Grantor (or Permitted Transferee) sells,
assigns, hypothecates or otherwise transfers any Class B Common Stock, to the
extent permitted, the transferee shall be required, as a condition precedent to
agree to the terms of the Option set forth herein. All share certificates for
Class B Common Stock shall bear a legend with respect to the Option and the
transfer restrictions.
4
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
5
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Louis Potters
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
125,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
62,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
6
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Alan Ilberman
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
187,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
93,750
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
7
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Robert Reiner
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
250,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
125,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
8
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Nettie Hanover Revocable Trust
------------------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
250,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
125,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
9
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Judith Felsen
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
375,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
187,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
10
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Robert Greenspan
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
187,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
93,750
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
11
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Steven Wolfe
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
62,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
31,250
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
12
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Lorraine Chinnici
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
62,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
31,250
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
13
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Jack Karp
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
62,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
31,250
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
14
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Henry Ponzio
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
125,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
62,500
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
15
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Barry Brookstein
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
1,250,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
125,000
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
16
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Barry Brookstein, as custodian
------------------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
15,625
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
7,812
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
17
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Robert Brookstein
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
7,813
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
3,907
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
18
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
---------------------
Signature
Judi LiVigni
---------------------
Printed Name
----------------------------------------------
Address
----------------------------------------------
7,812
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
3,906
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
19
11. Miscellaneous. This Option and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Option is being delivered in the State of New York and shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York (without reference to any principles of the conflicts of
laws). The headings in this Option are for purposes of reference only, and shall
not limit or otherwise affect any of the terms hereof.
Dated as of: December ___, 2002
GRANTOR:
--------------------- ---------------------
Signature Signature
Dean Garfinkel, as custodian Alison Garfinkel, as custodian
---------------------------- ------------------------------
Printed Name Printed Name
----------------------------------------------
Address
----------------------------------------------
31,250
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation Owned
15,625
-----------
Number of shares of Class B Common Stock of Compliance
Systems Corporation underlying Option
OPTIONEES:
- ------------------------
Dean Garfinkel
- ------------------------
Alison Garfinkel
20
Attachment "A" to Option
NOTICE OF EXERCISE OF OPTION
(To be signed only on exercise of Option)
The undersigned, the holders of the within Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder, __________ shares of Compliance Systems Corporation Class B
Common Stock (as defined in the Option), and herewith makes payment of
$__________ therefor.
Alison Garfinkel:
- ----------------------
(Signature)
- ----------------------
- ----------------------
Address
Dated:
- ----------------------------
1
Attachment "B" to Option
NOTICE OF EXERCISE OF OPTION
(To be signed only on exercise of Option)
The undersigned, the holders of the within Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder, __________ shares of Compliance Systems Corporation Class B
Common Stock (as defined in the Option), and herewith makes payment of
$__________ therefor.
Dean Garfinkel:
- ----------------------
(Signature)
- ----------------------
- ----------------------
Address
Dated:
- ----------------------------
2
REPRESENTATION LETTER
The undersigned, currently a holder of Common Stock, no par value, of Call
Compliance, Inc., a company formed under the laws of the State of New York, will
receive shares of Common Stock ("Common Stock") of Compliance Systems
Corporation ("Compliance Systems"), a company organized under the laws of
Delaware, in connection with a merger transaction ("Merger"). For full and valid
considerations, the undersigned hereby represents as follows:
a) The undersigned represents that he is acquiring the Common Stock for
his own account, for investment and not for distribution or resale
to others. The undersigned agrees that he will not sell, assign,
hypothecate or otherwise transfer such securities unless they are
registered under applicable securities laws or unless an exemption
from such registration is available and acknowledges that the
Company will permit the transfer of the Common Stock out of his name
only when his request for transfer is accompanied by an opinion of
counsel reasonably satisfactory to the Company that neither the sale
nor the proposed transfer results or will result in a violation of
applicable Federal and state securities laws.
b) The undersigned acknowledges that Compliance Systems has filed an
election as an "S" corporation under the Internal Revenue Code of
1986, as amended, and plans to file in such other jurisdictions
where it does business, as permitted. The undersigned agrees not to
transfer the Common Stock without the Company's prior written
consent.
c) The undersigned acknowledges that to the extent it is receiving
shares of non-voting Common Stock, designated Class B Common Stock,
in connection with the Merger, a portion of such shares are subject
to an option, the terms of which are set forth in an Option
Agreement ("Option"). If the undersigned sells, assigns,
hypothecates or otherwise transfers any Class B Common Stock, to the
extent permitted, the transferee shall be required, as a condition
precedent to agree to the terms of the Option.
d) The undersigned consents to the placement of a legend on any
certificate or other document evidencing the Common Stock stating
that such shares have not been registered under the Securities Act
of 1933, as amended, and setting forth or referring to the
restrictions on transferability and sale thereof set forth in
subsections (a) and (b) above and subsection (c) above, in the case
of shares of Class B Common Stock.
In Witness Whereof, the undersigned has executed this document as of the
______________ day of __________________, 2002.
----------------------------
Signature
3
WRITTEN CONSENT OF
THE SHAREHOLDERS
OF
CALL COMPLIANCE, INC.
The undersigned, being the shareholders of Call Compliance, Inc., a New
York corporation (hereinafter referred to as the "Corporation"), in accordance
with Section 615 of the Business Corporation Law of the State of New York, do
hereby consent to the adoption of the following resolutions and to the taking of
the actions therein described.
WHEREAS, the Board of Directors of the Company deem it advisable and in
the best interests of the Corporation if the Corporation were to merge into
Pratt Oval Corporation and thereupon effectively cease its existence.
NOW, THEREFORE, IT IS HEREBY,
RESOLVED, that the Agreement and Plan of Merger annexed hereto as Exhibit
"A" (the "Plan of Merger") between the Corporation, Pratt Oval Corporation, a
New York corporation ("Pratt"), and Compliance Systems Corporation, a Delaware
corporation ("CSC"), and all of the transactions contemplated therein are hereby
approved; and it is further
RESOLVED, that the form of Certificate of Merger between the Corporation,
Pratt and CSC, annexed hereto as Exhibit "B" (the "Certificate of Merger"), is
hereby approved; and it was further
RESOLVED, that the Chairman or any other officer of the Corporation is
authorized and empowered, acting for and in the name and on behalf of the
Corporation, to make, execute, acknowledge, verify, issue and deliver all such
further applications, agreements, documents, instruments and certifications,
including the Plan of Merger and the Certificate of Merger, with or without the
corporate seal of the Corporation affixed thereto and attested by the Secretary
or any Assistant Secretary of the Corporation or unattested, and to do or cause
to be done all such acts and things, and to take all such steps, and to make all
such payments and remittances as may in each case be, in the opinion of the
officer taking such action (such opinion to be conclusively evidenced by the
taking of such action by such officer), necessary or desirable in order to carry
out the full intent and purposes of the preceding resolutions.
4
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
____ day of _________ 2002.
SHAREHOLDERS:
- -------------------
Dean Garfinkel
- -------------------
Alison Garfinkel
- -------------------
Barry Brookstein
- -------------------
Stefan Dunigan
- -------------------
Louis Potters
- -------------------
Alan Ilberman
- -------------------
Robert Reiner
- ------------------------------
Nettie Hanover Revocable Trust
- -------------------
Judith Felsen
5
- -------------------
Robert Greenspan
- -------------------
Steven Wolfe
- -------------------
Lorraine Chinnici
- -------------------
Jack Karp
- -------------------
Henry Ponzio
- -------------------------------
Barry Brookstein, as custodian
- -------------------
Robert Brookstein
- -------------------
Judi LiVigni
- -------------------------------
Dean Garfinkel, as custodian
- -------------------------------
Alison Garfinkel, as custodian
6
EXHIBIT A
.. AGREEMENT AND PLAN OF MERGER
Parties
This AGREEMENT AND PLAN OF MERGER ("Agreement") is made as of December __,
2002 between COMPLIANCE SYSTEMS CORPORATION, a Delaware corporation ("Parent"),
CALL COMPLIANCE, INC., a New York corporation (the "Target"), and PRATT OVAL
CORPORATION, a New York corporation (the "Sub").
RECITALS
WHEREAS, the Boards of Directors of the Parent, Target and Sub have
approved the merger of Target into Sub (the "Merger") upon the terms and
conditions set forth herein.
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"), as more particularly
described in Section 368(a)(2)(D).
NOW, THEREFORE, in consideration of the foregoing praises and the mutual
covenants, agreements, representations and warranties contained herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger:
(a) At the Effective Time of the Merger (as defined in Section 1.2) and
subject to the terms and conditions of this Agreement, Target shall be merged
into Sub and the separate existence of Target shall thereupon cease, in
accordance with the applicable provisions of the General Corporation Law of the
State of New York ("NYGCL") and the Business Corporation Law of the State of New
York ("NYBCL") (NYGCL and NYBCL collectively, "NY Law").
(b) Sub will be the surviving corporation in the Merger (sometimes
referred to as "Surviving Corporation") and will continue to be governed by the
laws of the State of New York.
1.2 Effective Time of the Merger: Upon the filing of the Certificate of Merger
by the Secretary of State of New York (the "Effective Time of the Merger"), the
effect of the Merger shall be as provided in the applicable provisions of NY
Law. Except as herein specifically set forth, the identity, existence, purposes,
powers, objects, franchises, privileges, rights and immunities of the Sub shall
continue unaffected and unimpaired by the Merger and the corporate franchises,
existence and rights of the Target shall be merged with and into the Sub, and
the Sub, as the surviving corporation, shall be fully vested therewith. At the
Effective Time of the Merger, the separate existence of the Target shall cease
and, in accordance with the terms of this Agreement, the Sub shall possess all
the rights, privileges, immunities and franchises, of a public, as well as of a
7
private nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all taxes, including
those due and owing and those accrued, and all other causes in action, and all
and every other interest of or belonging to or due to the Sub and the Target
shall be taken and deemed to be transferred to, and vested in, the Sub without
further act or deed; and all property, rights and privileges, powers and
franchises and all and every other interest shall be thereafter as effectually
the property of the Sub as they were of the Sub and the Target; and the title to
any real estate, or interest therein, whether by deed or otherwise, under the
laws of the state of incorporation vested in the Sub and the Target, shall not
revert or be in any way impaired by reason of the Merger. Except as otherwise
provided herein, the Sub shall thenceforth be responsible and liable for all the
liabilities and obligations of the Sub and the Target, and any claim existing,
or action or proceeding pending, by or against the Sub or the Target may be
prosecuted as if the Merger had not taken place, or the Surviving Corporation
may be substituted in their place. Neither the rights of creditors nor any liens
upon the property of the Sub or the Target shall be impaired by the Merger, and
all debts, liabilities and duties of the Sub and the Target shall attach to the
Surviving Corporation, and may be enforced against the Surviving Corporation to
the same extent as if said debts, liabilities and duties had been incurred or
contracted by the Surviving Corporation.
ARTICLE II
THE SURVIVING COMPANY
2.1 Certificate of Incorporation: The Certificate of Incorporation of the Sub as
in effect immediately prior to the Effective Time of the Merger shall be the
Certificate of Incorporation after the Effective Time of the Merger; provided,
however, that the Certificate of Merger shall provide for an amendment to the
Sub's Certificate of Incorporation to change the name of the Sub from "Pratt
Oval Corporation" to "Call Compliance, Inc."
2.2 By-Laws: The By-Laws of Sub then in effect shall remain unchanged until they
shall thereafter be duly amended.
2.3 Board of Directors: The Board of Directors of the Sub shall be the Board of
Directors of the Surviving Corporation after the Effective Time of the Merger.
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion of Target Shares in the Merger: Pursuant to this Agreement, and
at the Effective Time of the Merger, by virtue of the Merger and without any
action on the part of any holder of any capital stock of Target:
(a) all shares of Common Stock, each without par value, of Target
("Target Common Stock") owned by Target shall be cancelled and shall
cease to exist from and after the Effective Time of the Merger;
8
(b) each remaining issued and outstanding share of Target Common Stock
shall be converted into, and become exchangeable for, 20,625 shares
of validly issued, fully paid and nonassessable Common Stock, $0.001
par value per share, of Parent ("Parent Common Stock"). One Hundred
and Thirty (130) shares of Target Common Stock will be converted
into and exchangeable for a total of 2,681,250 shares of Class A
Common Stock of Parent and 48 shares of Target Common Stock will be
converted into and exchangeable for a total of 990,000 shares of
Class B Common Stock of Parent, as reflected on Schedule A annexed
hereto.
3.2 Exchange of Target Common Stock Certificates: From and after the Effective
Time of the Merger, each holder of a certificate of which immediately prior to
the Effective Time of the Merger represented outstanding shares of Target Common
Stock, shall be entitled to receive in exchange therefor, upon surrender of the
shares to Parent, a certificate or certificates representing the number of
shares of Parent Common Stock into which such holder's shares of Target Common
Stock were converted pursuant to Section 3.1 above. Shares of Parent Common
Stock into which shares of Target Common Stock shall be converted in the Merger
shall be deemed to have been issued at the Effective Time of the Merger.
3.3 Status of Sub Shares: At the Effective Time of this Merger, by virtue of
this Merger and without any action on the part of any holder of any capital
stock of Sub, each issued and outstanding share of common stock of Sub shall
continue unchanged and remain outstanding as a share of common stock of Sub.
9
ARTICLE IV
MISCELLANEOUS
4.1 Counterparts: This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
4.2 Governing Law: This Agreement shall be governed by and construed in
accordance with the laws of the state of New York applicable to contracts made
and to be performed entirely within such state, without giving effect to the
conflicts of laws and principles thereof.
4.3 Entire Agreement: This Agreement constitutes the entire understanding of the
parties with respect to the subject matter hereof, and supersedes and nullifies
any and all prior agreements and understandings, whether written or oral between
the parties hereto and/or their representatives or agents.
4.4 Headings: The headings contained in this Agreement are for reference
purposes only and shall not be deemed to be a part of this Agreement or to
affect the meaning or interpretation of this Agreement.
4.5 No Amendments: No provision of this Agreement may be amended, modified or
waived unless such amendment, modification or waiver is agreed to in writing
signed by the party against whom such amendment, modification or waiver is
sought to be enforced. No waiver by a party hereto of any breach by the other
party hereto or of any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the time or at any prior or subsequent time.
4.6 Severability: The invalidity of any provision of this Agreement or portion
of a provision shall not affect the validity of any other provision of this
Agreement or the remaining portion of the applicable provision.
IN WITNESS WHEREOF, each of the undersigned corporations has caused this
Agreement and Plan of Merger to be executed as of the __ day of _________, 2002.
CALL COMPLIANCE, INC.
By:
------------------------------------
Name:
Title:
10
PRATT OVAL CORPORATION
By:
------------------------------------
Name:
Title:
COMPLIANCE SYSTEMS CORPORATION
By:
------------------------------------
Name:
Title:
11
A. SCHEDULE A TO AGREEMENT AND PLAN OF MERGER
- --------------------------------------------------------------------------------
Number of Shares of Number of Compliance
Common Stock Systems Corporation
Shares
- --------------------------------------------------------------------------------
Name of Stockholder In Call Compliance, Inc. issued in Merger(1)
- --------------------------------------------------------------------------------
Alison Garfinkel 48 990,000*
- --------------------------------------------------------------------------------
Dean Garfinkel 48 990,000*
- --------------------------------------------------------------------------------
Barry Brookstein 30 618,750*
- --------------------------------------------------------------------------------
Stefan Dunigan 4 82,500*
- --------------------------------------------------------------------------------
Louis Potters 2 41,250
- --------------------------------------------------------------------------------
Alan Ilberman 3 61,875
- --------------------------------------------------------------------------------
Robert Reiner 4 82,500
- --------------------------------------------------------------------------------
Nettie Hanover Revocable Trust 4 82,500
- --------------------------------------------------------------------------------
Judith Felsen 6 123,750
- --------------------------------------------------------------------------------
Robert Greenspan 3 61,875
- --------------------------------------------------------------------------------
Steven Wolfe 1 20,625
- --------------------------------------------------------------------------------
Lorraine Chinnici 1 20,625
- --------------------------------------------------------------------------------
Jack Karp 1 20,625
- --------------------------------------------------------------------------------
Henry Ponzio 2 41,250
- --------------------------------------------------------------------------------
Barry Brookstein 20 412,500
- --------------------------------------------------------------------------------
Barry Brookstein as custodian 1/4 5,156
- --------------------------------------------------------------------------------
Robert Brookstein 1/8 2,579
- --------------------------------------------------------------------------------
Judi LiVigni 1/8 2,579
- --------------------------------------------------------------------------------
Dean & Alison Garfinkel as 1/2 10,313
custodians
- -------------------------------------------------------------------------------
- ----------
(1) Ratio of 20,625 shares of Compliance Systems Corporation for each share of
Call Compliance, Inc. in connection with Merger. * Reflects Class A Common Stock
having voting rights. All other shares in Compliance Systems Corporation are
shares of Class B Common Stock, having no voting rights.
12
EXHIBIT B
CERTIFICATE OF MERGER
of
CALL COMPLIANCE, INC.
and
PRATT OVAL CORPORATION
into
PRATT OVAL CORPORAITON
(Pursuant to Section 904 of the Business Corporation Law)
It is hereby certified upon behalf of each of the constituent corporations
herein named, as follows:
FIRST: The Board of Directors of each of the constituent corporations has
duly adopted a plan of merger setting forth the terms and conditions of the
merger of said corporations.
SECOND: The name of the constituent corporation which is to be the
surviving corporation, and which is hereinafter sometimes referred to as the
"Surviving Constituent Corporation," is
PRATT OVAL CORPORATION
The date upon which its certificate of incorporation was filed by the Department
of State is November 14, 2002.
THIRD: The name of the other constituent corporation, which is
being merged into the Surviving Constituent Corporation, and which is
hereinafter sometimes referred to as the "Merged Constituent Corporation," is
CALL COMPLIANCE, INC.
The date upon which its certificate of incorporation was filed by the Department
of State is October 30, 2001.
FOURTH: As to each constituent corporation, the designation and number of
outstanding shares of each class and series, the specification of the classes
and series entitled to vote, and the specification of each class and series
entitled to vote as a class on the plan of merger, as follows:
13
Pratt Oval Corporation
Designation of each class and Number of outstanding shares
series of shares of each class
- ------------------------------ ----------------------------
Common Stock, no par value 1 share
The Common Stock is entitled to vote. There are no other class or series of
shares authorized.
Call Compliance, Inc.
Designation of each class and Number of outstanding shares
series of shares of each class
- ------------------------------ ----------------------------
Common Stock, no par value 178 shares
The Common Stock is entitled to vote. There are no other class or series of
shares authorized.
FIFTH: Upon effectiveness of the merger certified herein, the certificate
of incorporation of the Surviving Constituent Corporation shall be, and hereby
is, amended by deleting Article 1 thereof in its entirety and replacing it with
a new Article 1 providing as follows:
"1. The name of the Corporation is:
Call Compliance, Inc."
SIXTH: The merger herein certified was authorized in respect of the
Surviving Constituent Corporation by the written consent of the holders of all
outstanding shares of the corporation entitled to vote on the plan of merger.
SEVENTH: The merger herein certified was authorized in respect of the
Merged Constituent Corporation by the written consent of the holders of all
outstanding shares of the corporation entitled to vote on the plan of merger.
IN WITNESS WHEREOF, I have subscribed this document on the date set forth
below and do hereby affirm, under the penalties of perjury, that the statements
contained therein have been examined by me and are true and correct.
Executed on this __ day of _____________ 2002.
14
PRATT OVAL CORPORATION
Name:
Title:
AND
CALL COMPLIANCE, INC.
Name:
Title:
15
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (the "Agreement") is made and entered into as of the
___ day of December, 2002, by and among the persons identified on Schedule A
hereto ("Subsidiary Shareholders"; each a "Subsidiary Shareholder") reflecting
all of the stockholders of the Subsidiaries (as hereinafter defined) and
Compliance Systems Corporation ("Compliance Systems" or the "Company"), a
company formed under the laws of Delaware.
RECITALS
WHEREAS, the Subsidiary Shareholders are the owners of all of the issued and
outstanding shares of Call Compliance.com, Inc. ("CCC"), AMS Network Inc.
("AMS"), and Jasmin Communications, Inc.("Jasmin") (CCC, AMS and Jasmin,
collectively, the "Subsidiaries").
WHEREAS, Compliance Systems was formed under the laws of the State of
Delaware on November 7, 2002 with authorized capital stock as follows:
40,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"),
consisting of 15,000,000 shares designated as Class A Common Stock ("Class A
Common Stock"), which have voting rights, and 25,000,000 designated as Class B
Common Stock ("Class B Common Stock"), which have no voting rights.
WHEREAS, the Subsidiary Shareholders desire to make capital contributions
to Compliance Systems in exchange for shares of Common Stock of Compliance
Systems. In exchange for such contributions, certain of the Subsidiary
Shareholders who are officers, directors and principal stockholders of each of
the Subsidiaries and Compliance Systems and one employee of such entities shall
receive shares of Class A Voting Stock. The remainder of the Subsidiary
Shareholders will receive shares of Class B Common Stock.
WHEREAS, the Subsidiary Shareholders intend the transaction contemplated
by this Agreement to qualify as a tax-free incorporation under ss.351 of the
Internal Revenue Code, as amended.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE 1
CAPITAL CONTRIBUTION
AND ISSUANCE OF SHARES
1.1 Capital Contribution: Simultaneous with the execution of this Agreement,
each Subsidiary Shareholder is making a capital contribution to Compliance
Systems of all of his or her respective Subsidiary Stock, in the amounts set
forth in Column "I" of Exhibit A. Each Subsidiary Shareholder shall deliver to
Compliance Systems all duly executed stock certificates representing his or her
Subsidiary Shares, together with stock powers executed in blank in the form
annexed as Exhibit B.
16
1.2 Issuance of Compliance Systems' Common Stock. Simultaneous with the
execution of this Agreement and tender of the Subsidiary Stock, Compliance
Systems will issue to the Subsidiary Shareholders Compliance Systems Common
Stock in exchange for the capital contribution described in Section 1.1 above in
the amounts set forth in Column "II" of Exhibit A.
1.3 Representations by Subsidiary Shareholders. In connection with the issuance
of shares of Common Stock of Compliance Systems, each of the Subsidiary
Stockholders hereby makes the following representations:
e) Subsidiary Shareholder acknowledges that that the Common Stock is
being acquired pursuant to an exemption under applicable securities
laws and accordingly represents that he is acquiring such securities
for his own account, for investment and not for distribution or
resale to others. The Subsidiary Shareholder agrees that he will not
sell, assign, hypothecate or otherwise transfer such securities
unless they are registered under applicable securities laws or
unless an exemption from such registration is available and
acknowledges that the Company will permit the transfer of the Common
Stock out of his name only when his request for transfer is
accompanied by an opinion of counsel reasonably satisfactory to the
Company that neither the sale nor the proposed transfer results or
will result in a violation of applicable Federal and state
securities laws.
f) Subsidiary Shareholder acknowledges that the Company has filed an
election as an "S" corporation under the Internal Revenue Code of
1986, as amended, and plans to file in such other jurisdictions
where it does business, as permitted. Subsidiary Shareholder agrees
not to transfer the Common Stock without the Company's prior written
consent.
g) Subsidiary Shareholder acknowledges that to the extent it is
receiving shares of Class B Common Stock in connection herewith, a
portion of such shares are subject to an option ("Option"). If
Subsidiary Shareholder sells, assigns, hypothecates or otherwise
transfers any Class B Common Stock, to the extent permitted, the
transferee shall be required, as a condition precedent to agree to
the terms of the Option.
h) The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Common Stock stating
that such shares have not been registered under the Securities Act
of 1933, as amended, and setting forth or referring to the
restrictions on transferability and sale thereof set forth in
subsections (a) and (b) above and sub section (c) above, in the case
of shares of Class B Common Stock.
17
1. ARTICLE 2
MISCELLANEOUS
2.1 Other Documents. Each of the Subsidiary Shareholders shall execute and
deliver such other and further documents and instruments, and take such other
and further actions, as may be requested of them for the implementation and
consummation of this Agreement and the transactions herein contemplated.
2.2 Parties in Interest. This Agreement shall be binding upon and inure to the
benefit of the Subsidiary Shareholders, and the heirs, personal representatives,
successors and assigns of all of them, but shall not confer, expressly or by
implication, any rights or remedies upon any other party.
2.3 Governing Law. This Agreement is made and shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of New
York.
2.4 Entire Agreement. This Agreement and the Exhibits attached hereto contain
the entire agreement by and among the Subsidiary Shareholders and Compliance
Systems and supersede all prior agreements, understandings and writings between
the parties hereto with respect to the subject matter hereof. Each Subsidiary
Shareholder acknowledges that no representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, which are not
embodied herein or in the Exhibits attached hereto, and that no other agreement,
statement or promise may be relied upon or shall be valid or binding. Neither
this Agreement nor any term hereof may be changed, waived, discharged or
terminated orally. This Agreement may be amended or any term hereof may be
changed, waived, discharged, or terminated by an agreement in writing signed by
the parties hereto.
2.5 Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original but all of which taken together shall constitute but
one and the same document.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
COMPLIANCE SYSTEMS CORPORATION
By:
----------------------------
Dean Garfinkel
Chairman of the Board and
Secretary
18
SUBSIDIARY SHAREHOLDERS:
- -------------------
Dean Garfinkel
- -------------------
Alison Garfinkel
- -------------------
Barry Brookstein
- -------------------
Stefan Dunigan
- -------------------
Louis Potters
- -------------------
Alan Ilberman
- -------------------
Robert Reiner
- ------------------------------
Nettie Hanover Revocable Trust
- -------------------
Judith Felsen
- -------------------
Robert Greenspan
- -------------------
Steven Wolfe
19
- -------------------
Lorraine Chinnici
- -------------------
Jack Karp
- -------------------
Henry Ponzio
- ------------------------------
Barry Brookstein, as custodian
- -------------------
Robert Brookstein
- -------------------
Judi LiVigni
- ------------------------------
Dean Garfinkel, as custodian
- -------------------------------
Alison Garfinkel, as custodian
20
EXHIBIT A
A.
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Dean Garfinkel
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class A
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 3,000,001
- ----------------------------- ----------------------
AMS Network Inc. 48 2,010,001
- ----------------------------- ----------------------
Jasmin Communications, Inc. 48
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
A.
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Alison Garfinkel
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class A
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 3,000,001
- ----------------------------- ----------------------
AMS Network Inc. 48 2,010,001
- ----------------------------- ----------------------
Jasmin Communications, Inc. 48
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
A.
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Barry Brookstein
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class A
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 1,875,001
- ----------------------------- ----------------------
AMS Network Inc. 30 1,256,251
- ----------------------------- ----------------------
Jasmin Communications, Inc. 30
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
A.
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Stefan Dunigan
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class A
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 250,000
- ----------------------------- ----------------------
AMS Network Inc. 4 167,500
- ----------------------------- ----------------------
Jasmin Communications, Inc. 4
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
A.
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Louis Potters
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 125,000
- ----------------------------- ----------------------
AMS Network Inc. 2 83,750
- ----------------------------- ----------------------
Jasmin Communications, Inc. 2
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Alan Ilberman
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 187,500
- ----------------------------- ----------------------
AMS Network Inc. 3 125,625
- ----------------------------- ----------------------
Jasmin Communications, Inc. 3
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Robert Reiner
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 250,000
- ----------------------------- ----------------------
AMS Network Inc. 4 167,500
- ----------------------------- ----------------------
Jasmin Communications, Inc. 4
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Nettie Hanover Revocable Trust
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 250,000
- ----------------------------- ----------------------
AMS Network Inc. 4 167,500
- ----------------------------- ----------------------
Jasmin Communications, Inc. 4
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Judith Felsen
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 375,000
- ----------------------------- ----------------------
AMS Network Inc. 6 251,250
- ----------------------------- ----------------------
Jasmin Communications, Inc. 6
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Robert Greenspan
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 187,500
- ----------------------------- ----------------------
AMS Network Inc. 3 125,625
- ----------------------------- ----------------------
Jasmin Communications, Inc. 3
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Steven Wolfe
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 62,500
- ----------------------------- ----------------------
AMS Network Inc. 1 41,875
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Lorraine Chinnici
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 62,500
- ----------------------------- ----------------------
AMS Network Inc. 1 41,875
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Jack Karp
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 62,500
- ----------------------------- ----------------------
AMS Network Inc. 1 41,875
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Henry Ponzio
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 125,000
- ----------------------------- ----------------------
AMS Network Inc. 2 83,750
- ----------------------------- ----------------------
Jasmin Communications, Inc. 2
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Barry Brookstein
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 125,000
- ----------------------------- ----------------------
AMS Network Inc. 20 837,500
- ----------------------------- ----------------------
Jasmin Communications, Inc. 20
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Barry Brookstein as custodian
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 15,625
- ----------------------------- ----------------------
AMS Network Inc. 1/4 10,468
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1/4
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Robert Brookstein
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 7,813
- ----------------------------- ----------------------
AMS Network Inc. 1/8 5,235
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1/8
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Judi LiVigni
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 7,812
- ----------------------------- ----------------------
AMS Network Inc. 1/8 5,234
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1/8
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
I. Capital Contribution and Issuance of Shares
Name of Subsidiary Shareholder: Dean and Alison Garfinkel as custodians
- ---------------------------------------------------- ---------------------------
I II
- ---------------------------------------------------- ---------------------------
Number of Shares of Class B
Common Stock
Number of Shares of Compliance Systems
Name of Company Contributed Corporation to be Issued
- ----------------------------- ---------------------- ---------------------------
Call Compliance.com, Inc. 31,250
- ----------------------------- ----------------------
AMS Network Inc. 1/2 20,938
- ----------------------------- ----------------------
Jasmin Communications, Inc. 1/2
- ----------------------------- ---------------------- ---------------------------
EXHIBIT A
B. EXHIBIT B
I. Stock Power
FOR VALUE RECEIVED, ______________________, hereby sells, assigns and
transfers unto COMPLIANCE SYSTEMS CORPORATION, a Delaware corporation, ____
shares of common stock, without par value, of
____________________________________, a _____________ corporation, evidenced by
Stock Certificates Numbers ___, ___ and ___, either standing in my name on the
books of said Corporation, or previously assigned and transferred to me, and
does hereby irrevocably constitute and appoint TODTMAN, NACHAMIE, SPIZZ & JOHNS,
P.C. as attorney to transfer the said stock on the books of said Corporation
with full power of substitution in the premises.
Dated: _____________, 2002
---------------------------------
In presence of
- ---------------------------