SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive proxy statement [ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
NUWAVE TECHNOLOGIES, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
<PAGE>
NUWAVE TECHNOLOGIES, INC.
ONE PASSAIC AVENUE
FAIRFIELD, NEW JERSEY 07004
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1998
TO THE STOCKHOLDERS OF NUWAVE TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of NUWAVE Technologies, Inc., a Delaware corporation (the
"Company"), will be held on June 23, 1998 at The Plaza Hotel, Fifth Avenue at
Central Park South, New York, New York 10019, the Edwardian Room, at 9:00 a.m.,
local time, to consider and act upon the following matters:
1. To elect five directors to serve for the ensuing year;
2. To ratify amendments to the Company's 1996 Stock Incentive Plan for
Employees and Consultants ("Employee Stock Option Plan") (a) to increase the
number of shares of common stock available for grant thereunder from 260,000
shares to 1,205,000 shares and (b) to increase the maximum number of shares of
common stock that may be granted to any individual under the Employee Stock
Option Plan during the term thereof from 150,000 shares to 500,000 shares; and
to ratify the grant of stock options to the executive officers of the Company;
3. To ratify amendments to the Company's Non-Employee Director Stock
Option Plan ("Director Stock Option Plan") (a) to increase the number of shares
of common stock available for grant thereunder from 80,000 shares to 235,000
shares and (b) to extend the terms of all stock options to be granted pursuant
to the Director Stock Option Plan from five years from the date of grant to ten
years from the date of grant; and to ratify the grant of stock options to the
directors of the Company; and
4. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Stockholders of record at the close of business on May 26, 1998 will be
entitled to notice of and to vote at the Annual Meeting or any adjournments or
postponements thereof. Accordingly, only holders of record of common stock, par
value $.01 per share ("Common Stock"), of the Company at the close of business
on such date (the "Stockholders") shall be entitled to vote at the Annual
Meeting and any adjournments or postponements thereof. A complete list of
Stockholders is open to the examination of any Stockholder for any purpose
germane to the meeting, during ordinary business hours, at the offices of the
Company located at One Passaic Avenue, Fairfield, New Jersey 07004.
A copy of the Company's Annual Report for the fiscal year ended
December 31, 1997 is enclosed herewith.
All Stockholders are cordially invited to attend the Annual Meeting.
By Order of the Board of Directors,
Fairfield, New Jersey Gerald Zarin
June 5, 1998 President and Chief Executive Officer
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF THE
PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
NUWAVE TECHNOLOGIES, INC.
ONE PASSAIC AVENUE
FAIRFIELD, NEW JERSEY 07004
201-882-8810
-------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 23, 1998
-------------------
TO THE STOCKHOLDERS: June 5, 1998
This Proxy Statement has been prepared and is furnished by the Board of
Directors of NUWAVE Technologies, Inc., a Delaware corporation (the "Company"),
in connection with the solicitation of proxies for the Annual Meeting of
stockholders (including any adjournments or postponements thereof, the "Annual
Meeting") of the Company to be held on June 23, 1998 at The Plaza Hotel, Fifth
Avenue at Central Park South, New York, New York 10019, the Edwardian Room, at
9:00 a.m., local time.
It is anticipated that this Proxy Statement and the accompanying form
of proxy will be mailed to Stockholders (as defined below) on or about June 5,
1998. The Company's Annual Report, including audited financial statements for
the fiscal year ended December 31, 1997, is being mailed or delivered
concurrently with this Proxy Statement. The Annual Report is not to be regarded
as proxy soliciting material.
Only holders of record (the "Stockholders") of the Company's common
stock, $.01 par value (the "Common Stock"), on the books of the Company at the
close of business on May 26, 1998 (the "Record Date"), are entitled to vote at
the Annual Meeting. On that date, there were 7,827,332 issued and outstanding
shares of Common Stock entitled to vote on each matter to be presented at the
Annual Meeting. Each Stockholder is entitled to one vote for each share of
Common Stock registered in that person's name on the books of the Company on the
Record Date on all business to come before the Annual Meeting.
If a Stockholder cannot be present in person at the Annual Meeting, the
Board of Directors of the Company requests such Stockholder to execute and
return the enclosed proxy as soon as possible. The person who signs the proxy
must be either (i) the registered Stockholder of such shares of Common Stock or
(ii) a trustee, executor, administrator, guardian, attorney-in-fact, officer of
a corporation or any other person acting in a fiduciary or representative
capacity on behalf of such registered Stockholder. A Stockholder who has given a
proxy may revoke it at any time before it is voted at the Annual Meeting by
giving written notice of revocation to the Secretary of the Company, by
submitting a proxy bearing a later date, or by attending the Annual Meeting and
voting in person. Any such notice should be sent to NUWAVE Technologies, Inc.,
One Passaic Avenue, Fairfield, New Jersey 07004; Attention: Secretary.
Attendance at the Annual Meeting will not by itself constitute revocation of a
proxy.
The Company is paying all costs of the solicitation of proxies,
including the expenses of printing and mailing to its Stockholders this Proxy
Statement, the accompanying Notice of Annual Meeting of Stockholders, the
enclosed proxy and the Annual Report. The Company will also reimburse brokerage
houses and other custodians, nominees and fiduciaries for their expenses, in
accordance with the regulations of the Securities and Exchange Commission (the
"Commission"), in sending proxies and proxy materials to the beneficial owners
of the Company's Common Stock. Officers or employees of the Company may also
solicit proxies in person, or by mail, telegram or telephone, but such persons
will receive no compensation for such work, other than their normal compensation
as such officers or employees.
2
<PAGE>
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, the Stockholders will consider and vote upon (1)
the election of five directors to hold office until the next annual meeting and
until their respective successors shall have been elected and qualified or until
resignation, removal or death as provided in the Bylaws of the Company; (2) the
ratification of amendments to the 1996 Stock Incentive Plan for Employees and
Consultants (the "Employee Stock Option Plan") (a) to increase the number of
shares of Common Stock available for grant thereunder from 260,000 shares to
1,205,000 shares and (b) to increase the maximum number of shares of Common
Stock that may be granted to any individual under the Employee Stock Option Plan
during the term thereof from 150,000 shares to 500,000 shares; and the
ratification of the grant of stock options to the executive officers of the
Company pursuant to the Employee Stock Option Plan; (3) the ratification of
amendments to the Non-Employee Director Stock Option Plan (the "Director Stock
Option Plan") (a) to increase the number of shares of Common Stock available for
grant thereunder from 80,000 shares to 235,000 shares and (b) to extend the
terms of all stock options to be granted pursuant to the Director Stock Option
Plan from five years from the date of grant to ten years from the date of grant;
and the ratification of the grant of stock options to the directors of the
Company pursuant to the Director Stock Option Plan; and (4) such other matters
as may properly come before the Annual Meeting or any adjournments or
postponements thereof.
VOTE REQUIRED; PROXIES
The presence in person or by proxy of a majority of the shares of
Common Stock outstanding and entitled to vote as of the Record Date is required
for a quorum at the Annual Meeting. If a quorum is present, those nominated
directors receiving a plurality of the votes cast will be elected. Accordingly,
shares not voted in the election of directors (including shares covered by a
proxy as to which authority is withheld to vote for all nominees) and shares not
voted for any particular nominee (including shares covered by a proxy as to
which authority is withheld to vote for only one or less than all of the
identified nominees) will not prevent the election of any of the nominees for
director. For all other matters submitted to Stockholders at the meeting, if a
quorum is present, the affirmative vote of a majority of the shares represented
at the meeting and entitled to vote is required for approval. As a result,
abstention votes will have the effect of a vote against such matters.
Shares of Common Stock which are represented by properly executed
proxies, unless such proxies shall have previously been properly revoked, will
be voted in accordance with the instructions indicated in such proxies. If no
contrary instructions are indicated, such shares will be voted (1) FOR the
election of all of the nominees for director named in this Proxy Statement; (2)
FOR the ratification of the amendments to the Employee Stock Option Plan (a) to
increase the number of shares of Common Stock available for grant thereunder
from 260,000 shares to 1,205,000 shares and (b) to increase the maximum number
of shares of Common Stock that may be granted to any individual under the
Employee Stock Option Plan during the term thereof from 150,000 shares to
500,000 shares; and the ratification of the grant of stock options to the
executive officers of the Company; (3) FOR the ratification of amendments to the
Director Stock Option Plan (a) to increase the number of shares of Common Stock
available for grant thereunder from 80,000 shares to 235,000 shares and (b) to
extend the terms of all stock options to be granted pursuant to the Director
Stock Option Plan from five years from the date of grant to ten years from the
date of grant; and the ratification of the grant of stock options to the
directors of the Company; and (4) in the discretion of the persons named in the
proxies as proxy appointees as to any other matter that may properly come before
the Annual Meeting.
Shares held by brokers and other Stockholder nominees may be voted on
certain matters but not others. This can occur, for example, when the broker or
nominee does not have the discretionary authority to vote shares of Common Stock
and is instructed by the beneficial owner thereof to vote on a particular matter
but is not instructed on other matters. These are known as "non-voted" shares.
Non-voted shares will be counted for purposes of determining whether there is a
quorum at the meeting, but with respect to the matters as to which they are
"non-voted," they will have no effect upon the outcome of the vote thereon.
You are requested, regardless of the number of shares you hold, to sign
the proxy and return it promptly in the enclosed envelope.
3
<PAGE>
PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of five members, all of
whom have been renominated for election at the Annual Meeting. Directors elected
at the Annual Meeting will serve until the next annual meeting of stockholders
and until their respective successors are elected and qualified or until their
death, resignation or removal. In the event that any nominee is unable or
unwilling to serve, discretionary authority is reserved to the persons named in
the accompanying form of proxy to vote for substitute nominees. Management does
not anticipate that such an event will occur. Each director shall be elected by
a plurality of the votes cast.
NOMINEES FOR DIRECTOR
The Company's Board of Directors is set at five persons. The following
five persons have been nominated by the Board of Directors to fill such
positions. All are currently Directors of the Company.
Name Age Position
- ---- --- --------
Gerald Zarin 57 Chairman of the Board of Directors,
Chief Executive Officer and President
Edward Bohn 52 Director
Lyle E. Gramley 71 Director
David Kwong 37 Director
Joseph A. Sarubbi 69 Director
GERALD ZARIN has been a Director and President and Chief Executive
Officer of the Company since July 1995. He has been Chairman of the Board of
Directors since January 28, 1996. From June 1991 until January 1993, Mr. Zarin
was the Chairman, President and Chief Executive Officer of Emerson Radio
Corporation, which designs and sells consumer electronics products. From June
1993 to July 1995, he was President and Chief Executive Officer at AMD
Consulting, Inc., a business consulting firm. From November 1990 to June 1991,
he was President and Chief Executive Officer of JEM, Inc., an importer of fine
furnishings. From August 1987 to October 1990, he was Senior Vice President and
Chief Financial Officer of Horn & Hardart, Inc. Horn & Hardart, Inc. is the
parent company for Hanover House and various other hotels and fast food chains.
From 1976 to 1986, he was President and Chief Executive Officer of Morse
Electro, Inc., which designed and sold consumer electronics products.
EDWARD BOHN has been a Director of the Company since July 1995. From
February 1995 to the present, he has been a Director and Consultant of Jennifer
Convertibles, a furniture distributor. From September 1994 to the present, he
has operated as an independent consultant in financial and operational matters.
From January 1983 to March 1994, Mr. Bohn was employed in various capacities by
Emerson Radio Corporation, which designs and sells consumer electronics
products. From March 1993 to March 1994, he was Senior Vice President-Special
Projects; from March 1991 to March 1993, he was Chief Financial Officer and
Treasurer/Vice President of Finance. Emerson Radio Corporation filed in the
United States Bankruptcy Court, District of New Jersey, for protection under
Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was
discharged on March 31, 1994.
LYLE E. GRAMLEY has been a Director of the Company since December 1995.
He has been employed by the Mortgage Bankers Association in Washington, D.C.
since 1985, as Senior Staff Vice President and Chief Economist from 1985 to
1992, and as a Consulting Economist from 1992 to the present. From 1980 to 1985,
Mr. Gramley was a member of the Board of Governors of the Federal Reserve Board.
4
<PAGE>
DAVID KWONG has been a Director of the Company since July 1995. From
August 1993 to the present, he has been President of Premier Source
International, an importer/exporter of computer memory chips and from August
1993 to the present, he has been Executive Vice President of Prime Technology,
Inc., which performs business development for technology companies. From August
1989 to June 1993, he was Vice President of Advanced Computer Link, Inc., a
computer integration company.
JOSEPH A. SARUBBI has been a Director of the Company since March 1996.
From October 1993 to June 6, 1996, he was a director of The Panda Project, Inc.,
a manufacturer of computers and semiconductor packages. Since April 1988, Mr.
Sarubbi has been a self-employed management and technical consultant to various
technology companies. From February 1986 to April 1988, he was Senior Vice
President of Manufacturing Operations for Tandon Corporation, a computer
manufacturer. From December 1952 to January 1986, Mr. Sarubbi was employed by
IBM in various senior engineering positions.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company are entitled to a fee of
$2,500 per year and $500 per meeting attended (other than telephonic meetings)
for serving on the Board of Directors. Each director is also reimbursed for
expenses incurred in connection with attendance at meetings of the Board of
Directors. For the fiscal year ended December 31, 1997, each of Messrs. Bohn,
Gramley, Kwong and Sarubbi received compensation of $2,500 and $500 for
attendance at one non-telephonic board meeting.
On November 25, 1996, the Board of Directors adopted the Director Stock
Option Plan, which was approved by the stockholders on May 29, 1997. Under the
Director Stock Option Plan, each individual elected, re-elected or continuing as
a non-employee director will automatically receive a stock option for 5,000
shares of Common Stock, with an option exercise price equal to the fair market
value of the Common Stock on the date of grant. 80,000 shares have been reserved
for issuance under the Director Stock Option Plan. Initially, options to
purchase 3,000 shares of Common Stock at an exercise price of $5.75 per share
were granted to each of Messrs. Bohn, Gramley, Kwong and Sarubbi on November 25,
1996 under the Director Stock Option Plan. On May 29, 1997, options to purchase
5,000 shares at an exercise price of $6.75 per share were granted to each of
Messrs. Bohn, Gramley, Kwong and Sarubbi under the Director Stock Option Plan.
In addition, on May 26, 1998, subject to Stockholder approval, options to
purchase 53,000 shares at an exercise price of $3.25 per share were granted to
Mr. Bohn and options to purchase 25,000 shares at an exercise price of $3.25 per
share were granted to each of Messrs. Gramley, Kwong and Sarubbi. See "Proposal
Three--Amendments to the Non-Employee Director Stock Option Plan and Grant of
Stock Options to the Directors." Directors who are also officers or employees of
the Company do not receive any additional compensation for services as a
director. Currently, Mr. Zarin is the only such director. For a description of
Mr. Zarin's compensation as an officer of the Company, see "Compensation of
Executive Officers."
For a description of consulting fees paid to Messrs. Bohn and Sarubbi,
see "Certain Relationships and Related Transactions."
BOARD AND COMMITTEE MEETINGS
The Board of Directors has a standing Audit Committee and a standing
Compensation Committee. Messrs. Kwong, Bohn and Gramley comprise the Audit
Committee of the Board of Directors, which committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the results of the audit engagement, approves
professional services provided by the independent accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees, and reviews the adequacy of the Company's internal
accounting controls.
Messrs. Bohn, Gramley and Zarin comprise the Compensation Committee of
the Board of Directors, which committee makes recommendations to the Board
regarding the executive and employee compensation programs of the Company. See
"Report of Compensation Committee On Executive Compensation."
5
<PAGE>
The Audit Committee met once and the Compensation Committee met twice
during the fiscal year ended December 31, 1997.
The Board of Directors of the Company held four meetings during its
fiscal year ended December 31, 1997. No member of the Board of Directors
attended in 1997 fewer than 75% of the aggregate of (1) the total number of
meetings of the Board of Directors held during the period for which he has been
a director and (2) the total number of meetings held by all committees on which
he served.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" ALL NOMINEES FOR DIRECTOR.
EXECUTIVE OFFICERS
The following table sets forth certain information as of May 26, 1998
regarding the executive officers of the Company:
Name Age Position
- ---- --- --------
Gerald Zarin 57 Chairman of the Board of Directors,
Chief Executive Officer and President
Don Legato 54 Vice President-Sales
Jeremiah F. O'Brien 51 Vice President, Secretary and Chief
Financial Officer
Robert Webb 62 Vice President-Marketing/Technical
Development
For a description of the business experience of Gerald Zarin, see
"Nominees for Director."
DON LEGATO has been the Vice President-Sales of the Company since
February 1997. From April 1994 to February 1997, he was the President of Gale
Group Ltd., Inc., a management consulting firm. From May 1993 to April 1994, he
served as Vice President Sales and Marketing and also as a Director for Applied
Safety Inc., (makers of the "World's First" Retrofit Driver's Side Airbag System
in the United States). From June 1992 to May 1993 he was President of Technology
Solutions Distributing Inc., a computer products distribution company. From
November 1972 to June 1992, he was President and CEO of T.L.D. Limited, Inc., a
manufacturer's representative company representing major electronics and
computer consumer products firm such as Sanyo, Sharp, Sony and Apple Computer.
He also served on Manufacturer's Advisory Councils for several of these
companies.
JEREMIAH O'BRIEN has been Vice President and Secretary of the Company
since July 1995 and Chief Financial Officer since January 1996. From 1983 to
1989, he served as CFO and Executive Vice President for Cardiac Resuscitator
Corporation, a medical electronics manufacturer. From September 1989 through
June 1991, he served as Senior Vice President of Finance for Emerson Computer
Corporation and Emerson Technologies, Inc. (both of which manufacture and sell
electronic components and products). From June 1993 through March 1994, Mr.
O'Brien was Corporate Controller for Andin International, a jewelry
manufacturing company. During the period of July 1991 through July 1995, he also
functioned as an independent consultant in financial matters to various private
corporations.
ROBERT WEBB has been the Vice President-Marketing/Technical Development
of the Company since September 1995. From June 1995 to September 1995 Mr. Webb
acted as an independent consultant to various private corporations. From July
1994 until March 1995 he was Vice President of New Product Development for
Studio Magic, Inc., a company involved in the design and manufacture of computer
video equipment, and served
6
<PAGE>
as a consultant for such company from October 1993 to July 1994 and in April
1995. From October 1973 until October 1993 he was employed by Grass Valley
Tektronix, which produces broadcast television equipment. He served as a special
advisor to the President of Grass Valley Tektronix from February 1993 to
September 1993; he was Division General Manager-Graphics Systems from November
1990 to February 1993 and held various executive positions prior to that time.
Officers of the Company serve at the discretion of the Board of
Directors of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation
paid by the Company for services performed on the Company's behalf since the
Company's inception in July 1995 through December 31, 1995, and for the fiscal
years ended December 31, 1996 and December 31, 1997, with respect to those
persons who were, as of December 31, 1997, the Company's Chief Executive Officer
and the Company's executive officers (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
- ------------------------------ ------------------------------------------------ -------------------------------------
Securities
Underlying
Options
Other Annual (Number of All Other
Name and Principal Position Year Salary Bonus Compensation Shares) Compensation
- ------------------------------ --------- ----------- ---------- --------------- -------------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Zarin, President and 1995 $ 39,800 $0 $0 200,000 $37,500(1)
Chief Executive Officer 1996 $115,700 $50,000 $0 0 $0
1997 $120,000 $0 $0 0 $0
- ------------------------------ --------- ----------- ---------- --------------- -------------------- ----------------
Don Legato, 1997 $129,800 $0 $0 60,000 $0
Vice President-Sales
- ------------------------------ --------- ----------- ---------- --------------- -------------------- ----------------
Jeremiah F. O'Brien, Chief 1995 $ 22,000 $0 $0 25,000 $0
Financial Officer, Vice 1996 $ 93,100 $7,500 $0 5,000 $0
President and Secretary 1997 $100,000 $0 $0 0 $0
- ------------------------------ --------- ----------- ---------- --------------- -------------------- ----------------
Robert Webb, Vice 1995 $ 19,600 $0 $0 70,000 $0
President-Marketing/ 1996 $ 99,900 $17,500 $0 0 $0
Technical Development 1997 $108,000 $0 $0 0 $0
- ------------------------------ --------- ----------- ---------- --------------- -------------------- ----------------
</TABLE>
(1) Payments made on account of services rendered in connection with the
organization of the Company prior to July 17, 1995. In consideration for
such services, Mr. Zarin also received 450,000 shares of Common Stock
valued at $.01 per share. See "Certain Relationships and Related
Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The number of shares available for grant under the Company's Employee
Stock Option Plan is 57,500. Options for an aggregate of 202,500 shares have
been granted under the Stock Option Plan. During the Company's 1997 fiscal year,
options covering a total of 172,500 shares of Common Stock were granted under
the Employee Stock Option Plan, 25,000 of which were canceled.
7
<PAGE>
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1997 to the Named Executive
Officers:
OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1997
(Individual Grants in Fiscal Year)
<TABLE>
<CAPTION>
Percent of
Number of Total Options
Securities Granted to
Underlying Employees Exercise Price
Name Options Per Share (1) Expiration Date
------------------- ------------------ -------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
Don Legato 5,000 5.8 6.875 February 10, 2001
5,000 5.8 6.875 June 10, 2002
20,000 23.6 6.875 February 10, 2003
30,000 35.4 6.875 February 10, 2004
------------------- ------------------ -------------------- --------------------- --------------------------
TOTAL 60,000 70.6%
------------------- ------------------ -------------------- --------------------- --------------------------
(1) All grants of options have been made with exercise prices equal to fair value at date of grant.
</TABLE>
OPTION EXERCISES AND YEAR-END OPTION VALUES
No options were exercised in fiscal year 1997 by any of the Named
Executive Officers. The following table sets forth, as of December 31, 1997, the
number of stock options and the value of unexercised in-the-money stock options
held by the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options(1)
Name Options at December 31, 1997 at December 31, 1997
---- ---------------------------- ---------------------------
- --------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Gerald Zarin 200,000 0 $1,000,000 $0
Robert Webb 70,000 0 350,000 0
Don Legato 60,000 0 0 0
Jeremiah F. O'Brien 30,000 0 150,000 0
- --------------------------------------------------------------------------------------------------------------------
TOTAL: 360,000 0 $1,500,000 $0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise price of the option at exercise or
fiscal year-end, respectively.
NEW OPTION GRANTS
On May 26, 1998, subject to Stockholder approval, options to purchase
550,000 shares of Common Stock at an exercise price of $3.25 per share were
granted to the Named Executive Officers of the Company as follows: 385,000
options to Gerald Zarin; 50,000 options to Don Legato; 40,000 options to Robert
Webb; and 75,000 options to Jeremiah f. O'Brien. See "Proposal Two--Amendments
to the 1996 Stock Incentive Plan for Employees and Consultants and Grant of
Stock Options to the Named Executive Officers."
8
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Zarin entered into an employment agreement with the Company, dated
as of July 20, 1995, pursuant to which he agreed to serve as the Company's
President and Chief Executive Officer through December 31, 2000. In December
1997, the term of the agreement was extended for two additional years to
December 31, 2002. The agreement provided for an initial salary of $90,000 per
year and increased to $120,000 on March 15, 1996. Mr. Zarin is also entitled to
an annual bonus equal to (i) 30% of his base compensation if the Company's net
profits before taxes is equal to projections to be approved by the Company's
Board of Directors, (ii) 60% of his base compensation if the Company's net
profits before taxes are equal to 110% of such projections, and (iii) 100% of
his base compensation if the Company's net profits before taxes are equal to
120% of such projections. Mr. Zarin can terminate the agreement upon 180 days
notice. The Company can terminate the agreement for good cause at any time. If
the Company terminates the agreement other than for good cause, or otherwise
materially breaches the agreement, Mr. Zarin will receive a single payment equal
to the remaining payments he would have been entitled to receive during the
unexpired portion of the agreement. In addition, the employment agreement
provides Mr. Zarin with an option to purchase 200,000 shares of Common Stock at
$1.50 per share. The option expires December 31, 2000 and terminates if Mr.
Zarin voluntarily leaves the Company or the employment agreement is terminated
by the Company for good cause. In connection with services rendered in
establishing the Company and creating its business plan and projections, Mr.
Zarin received 450,000 shares of the Company's Common Stock valued at $.01 per
share.
Mr. Webb entered into an employment agreement with the Company, dated
as of September 11, 1995, pursuant to which Mr. Webb was appointed Vice
President-Marketing of the Company. In March 1997, his title was changed to Vice
President-Marketing/Technical Development in order to more accurately reflect
his duties. The employment agreement continued until March 31, 1996 and
thereafter has been continuing for successive 3-month periods. Mr. Webb's
initial salary was $5,000 per month and was increased to $108,000 per year as of
August 14, 1996. In connection with his employment agreement, Mr. Webb received
options to purchase 70,000 shares of the Company's Common Stock at $1.50 per
share.
Mr. Legato entered into an employment agreement with the Company, dated
as of February 11, 1997, pursuant to which Mr. Legato was appointed Vice
President-Sales of the Company. The employment agreement continued until March
31, 1996 and thereafter has been continuing for successive 3-month periods. Mr.
Legato's initial salary was $150,000 per year as of August 14, 1996 and has not
been increased. In connection with his employment agreement, Mr. Legato received
options to purchase 60,000 shares of the Company's Common Stock at $6.875 per
share.
In connection with services performed by Mr. O'Brien, on July 17, 1995,
he received 5,000 shares of the Company's Common Stock valued at $.01 per share
and has been granted options to purchase 25,000 shares of the Company's Common
Stock at $1.50 per share and 5,000 shares of the Company's Common Stock at $2.00
per share.
REPORT OF COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
currently composed of two non-employee Directors and one employee Director. The
Committee is responsible for establishing and administering the policies which
govern both annual compensation and equity ownership programs. All decisions by
the Committee relating to the compensation of the Company's executive officers
are reviewed by the full Board of Directors. The one employee Director does not
participate in the Committee's discussions concerning his own compensation. This
report is submitted by the Committee and addresses the Company's policies for
1997 as they apply to Gerald Zarin, the President and Chief Executive Officer of
the Company, and the Named Executive Officers.
9
<PAGE>
OVERVIEW AND PHILOSOPHY
The Company's executive compensation program is designed to promote the
following objectives:
(1) To provide competitive compensation that will help attract, retain
and reward highly qualified executives who contribute to the
long-term success of the Company;
(2) To align management's interests with the success of the Company by
placing a portion of the executive's compensation at risk in
relation to the Company's performance; and
(3) To align management's interests with stockholders by including
long-term equity incentives.
The Committee believes that the Company's executive compensation
program provides an overall level of compensation that is competitive within its
industry and among companies of comparable size and complexity. To ensure that
compensation is competitive, the Company regularly compares its compensation
practices with those of other similar companies and sets its compensation
guidelines based on this review. The Committee also seeks to achieve an
appropriate balance of the compensation paid to a particular individual and the
compensation paid to other executives both inside the Company and at comparable
companies and attempts to maintain an appropriate mix of salary and incentive
compensation. While compensation data are useful guides for comparative
purposes, the Company believes that a successful compensation program also
requires the application of judgment and subjective determinations of individual
performance.
EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program consists of base salary,
periodic incentive compensation and long-term equity incentives in the form of
stock options. Executive officers also are eligible to participate in certain
benefit programs which are generally available to all employees of the Company,
such as medical insurance programs. In addition to the basic medical insurance
program, the executive officers are eligible to participate in an enhanced
medical insurance program which is available only to the executive officers of
the Company.
BASE SALARY
At the beginning of each fiscal year, the Committee establishes an
annual salary plan for the Company's senior executive officers based on
recommendations made by the Company's Chief Executive Officer. The Committee has
attempted to base salary determinations both upon the Company's financial
performance and upon the individual's performance as measured by certain
subjective non-financial objectives. These non-financial objectives include the
individual's contribution to the Company as a whole, including his or her
ability to motivate others, develop the skills necessary to grow as the Company
matures, recognize and pursue new business opportunities and initiate programs
to enhance the Company's growth and success.
ANNUAL AND LONG-TERM INCENTIVE COMPENSATION
The Company has no formal bonus program for its key employees, although
the Committee may consider adopting such a program during the current fiscal
year. Occasionally, bonus payments may be made to key employees based on the
achievement of agreed upon performance objectives or as a part of the
recruitment process. During 1997, no bonuses were awarded to the Company's
President nor any of the Named Executives.
The Company's Employee Stock Option Plan is designed to promote the
identity of long-term interests between the Company's employees and its
stockholders and to assist in the retention of executives. The size of option
grants is generally intended by the Committee to reflect the executive's
position with the Company and his or her contributions to the Company. Stock
options generally vest over a period not to exceed five years from the date of
the grant in order to encourage key employees to continue in the employ of the
Company. Stock options are granted at an option price equal to the fair market
10
<PAGE>
value of the Company's Common Stock on the date of grant; however, the Company
reserves the right to grant stock options having exercise prices less than the
fair market value of the Common Stock on the date of grant, to modify the terms
of existing options and to reprice the options as an incentive for employees to
remain with the Company.
BENEFITS
The Company's executive officers are entitled to receive medical
insurance benefits on the same basis as other full-time employees of the
Company. In addition to the basic medical insurance program, the executive
officers are eligible to participate in an enhanced medical insurance program
which is available only to the executive officers of the Company.
SUMMARY OF COMPENSATION OF NAMED EXECUTIVE OFFICERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In 1997, Mr. Zarin, the Company's President and Chief Executive
Officer, received a base salary of $120,000. He received no bonus payment for
the year 1997. The amount of Mr. Zarin's base salary and provisions for bonus
payments to him are included in an employment agreement between the Company and
Mr. Zarin. See "Employment Agreement."
VICE PRESIDENT-SALES
In 1997, Mr. Legato, the Company's Vice President-Sales, received a
salary of $129,800, and on February 10, 1997, in connection with the execution
of an employment agreement, the Company granted to Mr. Legato options to
purchase 60,000 shares of Common Stock at $6.875 per share, the fair market
value of the Company's Common Stock on the date of grant. He received no bonus
payment for the year 1997.
CHIEF FINANCIAL OFFICER
In 1997, Mr. O'Brien, the Company's Vice President, Secretary and Chief
Financial Officer, received a base salary of $100,000. He received no bonus
payment for the year 1997.
VICE PRESIDENT-MARKETING/TECHNICAL DEVELOPMENT
In 1997, Mr. Webb, the Company's Vice President-Marketing/Technical
Development, received a base salary of $108,000. He received no bonus payment
for the year 1997. The amount of Mr. Webb's base salary and provisions for
issuance of options to him are included in an employment agreement between the
Company and Mr. Webb. See "Employment Agreement."
COMPENSATION COMMITTEE
Gerald Zarin
Edward Bohn
Lyle Gramley
11
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
The Company was conceived of by Mr. Ernest Chu in June 1994 when he met
Mr. Ted Wong, President of Prime Technology, Inc. ("Prime"). At that time, Prime
was the exclusive licensee of all of the technology belonging to Rave
Engineering Corp. ("Rave"). Mr. Chu believed that the technology had the
potential to be commercialized on a mass basis for use in the video broadcast
industry. In the fall of 1994, Mr. Chu and Mr. Wong determined that the Rave
technology could be most effectively exploited if a new company were organized
to license the technology and related products and devote its principal
attention to directly commercialize and manufacture them, rather than relying on
sublicensing. They agreed that Prime and Mr. Chu would directly participate in
the equity of the new entity, and Rave would participate through its
approximately 20% equity ownership in Prime and through royalty and development
payments from the new company. Prime would continue to be responsible for
sublicensing through an agency agreement with the new company. The parties
recognized the need for an experienced president to operate the new company and
to commercialize the products, and began negotiations with Mr. Gerald Zarin,
whom Mr. Wong had recently met, to accept that position and participate in the
Company's equity.
Negotiations commenced in December 1994 and continued among Mr. Zarin,
Mr. Chu and Mr. Wong, on behalf of Prime, and Mr. Randy Burnworth, on behalf of
Rave, through early July 1995. As a result of these negotiations, the Company
was organized in July 1995, at which time Prime terminated its exclusive license
arrangement with Rave, and the Company entered into the License Agreement
described below. In addition, Rave agreed to continue the development of the
technology on which the Company's initial products were based pursuant to the
Development Agreement described below. Prime became the Company's exclusive
agent to sublicense the Rave technology-related products to third parties
(subject in all cases to the Company's approval) under the terms of the Agency
Agreement described below. Zarin became the Company's President and Mr. Chu
became the Chairman of its Board of Directors and acting Chief Financial
Officer. Mr. Wong also became a director of the Company. The Company also
entered into a consulting agreement with Corporate Builders, L.P. ("Corporate
Builders"), a limited partnership controlled by Mr. Chu.
In connection with their organizational activities, Messrs. Chu, Wong,
Burnworth and Zarin, as well as Rave and Prime, acted as "Promoters" of the
Company within the meaning of the regulations promulgated by the Commission
pursuant to the provisions of the Securities Act of 1933, as amended (the
"Securities Act").
Mr. Wong, a former director of the Company, is a director of Prime and
an approximate 16% stockholder of Prime. Mr. Wong is also the President and
Chief Executive Officer of Prime. Mr. David Kwong, a director of the Company, is
a director and approximate 22% stockholder of Prime. Mr. Kwong is also a Vice
President of Prime. Rave is an approximate 22% stockholder of Prime, and Mr.
Burnworth is a director of Prime. Mr. Burnworth is not a stockholder or officer
of Rave; however, he is the primary source of Rave's technology and provides the
direct supervision with respect to all of the development performed by Rave.
Substantially all of the stock of Rave is owned by members of Mr. Burnworth's
immediate family. No officer or director of the Company, except for Mr. Kwong,
has any ownership interest in, or serves as a director or officer of, Prime. No
officer or director of the Company has any ownership interest in, or serves as a
director or officer of, Rave.
A substantial portion of the technology from which the Company's
initial products were derived has been licensed from Rave pursuant to an
Exclusive Worldwide License Agreement between the Company and Rave dated July
21, 1995 (the "License Agreement"). Pursuant to the terms of the License
Agreement, the Company is obligated to pay Rave royalties ("Royalties") of (i) 2
1/2% of net sales of products sold by the Company utilizing Rave's technology
("Sales Royalties") and (ii) 25% of any sublicensing fees received by the
Company from sublicenses of the products and technology covered by the License
Agreement ("Licensed Products and Technology"). Payments of Sales Royalties will
commence upon the earlier of (i) accumulated net sales of Licensed Products and
Technology sold by the Company or its future affiliates reaching an aggregate of
$50,000,000 or (ii) the Company's aggregate net profits from sales of Licensed
Products and Technology equaling $5,000,000. As of
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<PAGE>
the date hereof, no Royalties other than the Rave Minimum Payments (as defined
below) have been paid to Rave pursuant to the License Agreement.
The License Agreement also obligates the Company to pay $60,000 per
year to Rave for consulting services (the "Rave Consulting Fees") through July
21, 1998. The Rave Consulting Fees are payable in $15,000 quarterly
installments, in advance, plus reasonable expenses. The License Agreement also
provides that Rave will receive minimum aggregate payments (the "Rave Minimum
Payments") of Royalties and Development Fees (pursuant to the Development
Agreement described below) of at least $65,000 per month. If Rave does not
receive the Rave Minimum Payments, it may elect to make the License Agreement
non-exclusive. If the Company fails to pay the Royalties, Rave may terminate the
License Agreement and become the licensor with respect to licenses granted by
the Company pursuant to the License Agreement.
The License Agreement terminates upon the later to occur of either (i)
the expiration of the last to expire of the patents obtained with respect to the
Company's technology or (ii) July 21, 2012.
In March 1997, the Company agreed with Rave to exclude from the License
Agreement certain video transmission technology which Rave may develop for
application in the video game industry (the "Video Game Technology"). In return,
Rave agreed to pay the Company 2.5% of net sales of products using the Video
Game Technology and 25% of any fees it receives from licensing such technology.
The Video Game Technology is not used in any of the Company's current products,
and the Company had no current plans to develop it. As a result, the Company
determined that it was more likely that it would derive economic benefit from
the technology if its development and commercialization was undertaken by
another party. The Company continues to hold the rights to the technology
outside the video game industry under the License Agreement.
The Company also has entered into a Development Agreement with Rave,
dated July 21, 1995 (the "Development Agreement"), pursuant to which the Company
has formulated a development plan (the "Development Plan") extending through
October 1998. The Development Plan focuses principally on the development of
defined products. Pursuant to its terms, it will be revised from time to time to
provide for the development of additional related products. The Development
Agreement provides for the payment to Rave of a monthly fee (the "Development
Fee") which, when aggregated with the Royalties provided for in the License
Agreement, must equal at least $65,000 per month. The Development Plan is to be
revised by October 2, 1998 and on each anniversary thereafter for each year the
Development Agreement remains in effect. The Development Agreement, which
terminates on October 2, 1998, provides that it continues for successive
12-month periods if the parties agree to additional services to be performed by
Rave and related compensation at least 12 months prior to its expiration. In
addition, the Development Agreement provides for Rave to receive payments
aggregating $850,000 to purchase or lease equipment (the "Equipment") for use in
developing the Licensed Products and Technology. In this regard, on April 22,
1997, the Company deposited $300,000 into a certificate of deposit. The
certificate of deposit has been pledged as collateral for an irrevocable standby
letter of credit opened by the Company to guarantee monthly equipment lease
payments (not to exceed $23,611 per month) to be made by the Company on behalf
of Rave pursuant to the Development Agreement. The balance of the standby letter
of credit will be reduced by any payments made and any cash restriction on the
certificate of deposit is limited to the balance of the standby letter of
credit. Through March 31, 1998, the Company had made payments of $431,396
against the $850,000 of Equipment purchases and at that date had $176,742
pledged as collateral to guarantee the monthly Equipment lease payments.
Expenditures of the remaining $241,862 of the $850,000 will depend on finalizing
mutually agreed plans for the development of additional products for evaluation
by the Company during the remaining term of the Development Agreement.
The Development Agreement provides that all results of development,
including unrelated developments, belong to the Company, and that Rave will not
undertake any development activities for third parties without the consent of
the Company. To the best of the Company's knowledge, Rave is not providing
development activities for any third parties.
Through December 31, 1997, all amounts paid to Rave pursuant to the
License Agreement and the Development Agreement have been charged to research
and development expenses ("Rave R & D Expenses"). For
13
<PAGE>
the cumulative period from July 17, 1995 (inception) to December 31, 1997, Rave
R & D Expenses were $2,657,355.
In order to assist it in obtaining sublicensing revenue, the Company
entered into an agency agreement with Prime dated July 21, 1995 (the "Agency
Agreement"). The Agency Agreement provides that Prime will be the Company's
exclusive agent for entering into sublicenses with respect to the products and
technology licensed to the Company pursuant to the License Agreement. For its
services, with respect to the first $50,000,000 of aggregate net sales made by
the Company's sublicensees, after subtracting the payments to Rave pursuant to
the Licensing Agreement and licensing expenses, Prime will receive 35% of net
sublicensing fees received by the Company and thereafter 45%. Payments to Prime
are to be made regardless of whether the relevant sublicenses are entered into
through Prime's efforts or by the Company itself. Prime will also receive up to
an additional $1,500,000 of which (i) $400,000 is payable regardless of the
receipt of sublicense fees in installments of $15,000 per month which began
January 1, 1996 and increased in accordance with the terms of the agreement to
installments of $40,000 per month in July 1996, (ii) $400,000 is payable out of
the Company's first sublicensing fees and (iii) $700,000 is payable out of the
Company's portion of sublicensing royalties when net sublicensing sales exceed
$200,000,000.
The Agency Agreement terminates upon the termination of the License
Agreement or upon a default, as defined in the Agency Agreement. Prime has been
paid $400,000 pursuant to the Agency Agreement through December 31, 1997.
In connection with the organization of the Company and the termination
of Prime's then existing licensing arrangements with Rave, on July 17, 1995,
Prime received 1,090,000 shares of the Company's Common Stock valued at $.01 per
share, of which 858,883 shares have been distributed to certain shareholders of
Prime in May 1998.
The Company entered into a Consulting Agreement with Corporate
Builders, effective as of August 1, 1995 (the "Corporate Builders Agreement").
Mr. Chu (who served as the Chairman of the Company's Board of Directors and its
Chief Financial Officer from its inception until January 28, 1996) is a
principal of Corporate Builders. The Corporate Builders Agreement provides,
among other things, that Corporate Builders will serve as an advisor to the
Company with regard to its relationship with the investment community, assist
the Company in developing a corporate strategy and business and management
goals, assist in the preparation of media presentations, and oversee the
production of video production relating to the Company's products and services.
The Corporate Builders Agreement continued until August 1, 1997 and thereafter
has been continuing for successive one-month periods. From August 1, 1995 to
July 1996, the Company paid to Corporate Builders a fee of $7,500 per month and
thereafter has been paying a fee of $5,000 per month. In connection with
services rendered by Mr. Chu in establishing the Company and creating its
business plan and projections, at the direction of Mr. Chu, in July 1995, the
Company issued 450,000 shares of the Company's Common Stock valued at $.01 per
share earned by Mr. Chu to First Earth Investors, Corporate Builders, and W2
Technologies, Inc., all entities affiliated with Mr. Chu, in the amounts of
250,000 shares, 125,000 shares and 75,000 shares, respectively. As of June 19,
1996, Corporate Builders returned its 125,000 shares of the Company's Common
Stock back to Mr. Chu. As of June 28, 1996, the 125,000 shares of the Company's
Common Stock received by Mr. Chu from Corporate Builders were returned to the
Company. The 125,000 shares of the Company's Common Stock were returned to Mr.
Chu and, subsequently, to the Company to prevent such shares from being
considered underwriting compensation to either Corporate Builders or Mr. Chu.
The total consulting fees paid to Corporate Builders pursuant to the
Corporate Builders Agreement for the cumulative period from the Company's
inception (July 17, 1995) to December 31, 1997 was $175,000 plus out-of-pocket
expenses. The total aggregate payments made to Mr. Chu and his affiliated
entities for the cumulative period from inception (July 17, 1995) to December
31, 1997 was $264,998.
In connection with the organization of the Company, on July 17, 1995,
Mr. Gerald Zarin, the Company's Chief Executive Officer and President and
Chairman of its Board of Directors, received 450,000 shares of the Company's
Common Stock valued at $.01 per share. Mr. Zarin entered into an employment
agreement with the
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<PAGE>
Company as of July 20, 1995 and in that connection was granted options to
purchase 200,000 shares of the Company's Common Stock at $1.50 per share. The
options expire December 31, 2000.
Since 1996, Mr. Edward Bohn, a director of the Company, has been acting
as a consultant to the Company from time to time on matters specified by the
Company's President. For the year ended December 31, 1996, Mr. Bohn received
$14,250 on account of such consulting services. In March 1997, Mr. Bohn entered
into a consulting agreement with the Company pursuant to which he agreed to act
as the Company's consultant with regard to certain agreements for a three-month
period at a rate of $1,000 per day with a minimum of $1,750 per week and a
maximum of $2,750 per week regardless of the actual time spent on the Company's
behalf. For the year ended December 31, 1997, Mr. Bohn received $56,750 on
account of such consulting services. In addition, on May 29, 1997, Mr. Bohn was
granted options to purchase 12,500 shares of Common Stock at an exercise price
of $6.75 for his services as a consultant.
Since 1996, Mr. Joseph A. Sarubbi, a director of the Company, has been
acting as a consultant to the Company from time to time on matters specified by
the Company's President. In that connection he has received compensation on a
per diem basis of $1,000 per day. For the year ended December 31, 1996, Mr.
Sarubbi received $6,000 on account of such consulting services.
In July and August 1995, Ms. Helen Burgess, a 6% stockholder of the
Company, purchased 437,854 shares of the Company's Series A Preferred stock for
$1.50 per share in a private placement, which shares were converted into Common
Stock on a one-for-one basis at the time of the Company's initial public
offering in July 1996. In December 1995, Ms. Burgess purchased certain
promissory notes of the Company in the principal amount of $350,000 and 70,000
shares of Common Stock. In March 1996, when the Company concluded a private
placement of an aggregate of (i) $2,000,000 senior subordinated non-negotiable
promissory notes (collectively, the "Bridge Notes") bearing interest at the rate
of 6% per annum and (ii) 400,000 shares of Common Stock (the "Bridge Shares") to
certain accredited investors, Ms. Burgess exchanged her promissory notes for
Bridge Notes in the principal amount of $350,000 and 70,000 additional shares of
Common Stock. The Bridge Notes were repaid from the proceeds of the Company's
initial public offering. Ms. Burgess is a limited partner of Corporate Builders.
On March 27, 1996, Mr. David Kwong, a director of the Company,
purchased $150,000 principal amount of Bridge Notes and 30,000 Bridge Shares.
The Bridge Notes were repaid from the proceeds of the Company's initial public
offering.
RECENT DEVELOPMENTS
As of May 11, 1998, the Company entered into a placement agency
agreement (the "Placement Agreement") with Janssen-Meyers Associates, L.P.
("JMA") whereby JMA agreed to act as the Company's placement agent in a private
placement (the "Offering") of not less than 25 and not more than 70 Units (as
defined below) of the Company, as such maximum number of Units may be increased
by the Chief Executive Officer or Chief Financial Officer of the Company. Each
Unit consists of (i) a number of shares of Common Stock of the Company,
determined by dividing the purchase price per Unit of $100,000 by, for the
initial closing of the Offering, $2.59, and for each subsequent closing, the
lesser of (x) $3.20 and (y) eighty percent (80%) of the "Average Closing Bid
Price" which shall be the average closing bid price for the Common Stock for the
eight (8) consecutive trading days immediately preceding the date of a closing
of the Offering, and (ii) Class A Redeemable Warrants to purchase seventy-five
percent (75%) of the number of shares of Common Stock of the Company determined
in (i) above.
Under the Placement Agreement, the Company agreed to pay to JMA for its
services as the placement agent of the Units, a commission of 10% of the gross
proceeds from the sale of the Units, as well as a 3% non-accountable expense
allowance and reimbursement for other costs, including legal expenses related to
the Offering, subject to receipt by the Company of appropriate documentation.
The Company also agreed to grant to JMA warrants (the "Placement Agent
Warrants") to purchase 25% of the number of Units sold in the Offering,
exercisable until May 11, 2003, at a price per Unit equal to the Offering Price
per Unit of $100,000. As of May 26, 1998, pursuant to the Placement Agreement,
the Company paid to JMA $585,420 as commission and $175,626 as
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<PAGE>
non-accountable expense allowance. In addition, as of May 26, 1998, the Company
granted to JMA 14.634 Placement Agent Warrants to purchase 14.634 Units of the
Company.
Bruce Meyers and Peter Janssen, who respectively purchased 270,270
shares and 154,440 shares of Common Stock of the Company in the Offering as of
May 26, 1998, are principals of JMA.
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The table below is based on information obtained from the persons named
below with respect to the shares of Common Stock beneficially owned, as of May
26, 1998 (except as noted below), by (i) each person known by the Company to be
the owner of more than 5% of the outstanding shares of Common Stock, (ii) each
director and nominee for director, (iii) each executive officer included in the
Summary Compensation Table and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL OUTSTANDING
OWNER OWNERSHIP1 SHARES OWNED2
- -------------------------------------------- -------------------------- -------------------------
<S> <C> <C>
Gerald Zarin 650,000 8.1%
36 Troy Drive
Short Hills, NJ 070783
Edward Bohn 29,167 *
322 Broadway
Pompton Lakes, NJ 074424
Lyle Gramley 25,000 *
12901 Three Sisters Road
Potomac, MD 208545
David Kwong 459,717 5.9%
13694 Fremont Pines Road
Los Altos, CA 940225, 6, 7
Joseph A. Sarubbi 40,000 *
3221 S. Ocean Blvd., Suite 908
Highland Beach, FL 334875
Don Legato 30,000 *
2 West Close Street
Moorestown, NJ 080578
Jeremiah F. O'Brien 37,500 *
525 W. 236th St., #5-F
Riverdale, NY 104639
Robert Webb 70,000 *
298 Stanton Mountain Rd.
Lebanon, NJ 0883310
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Helen Burgess 577,854 7.4%
40 E. 30th St., 10th Fl.
New York, NY 10016
Bruce Meyers 823,672 9.8%
17 State Street
New York, NY 1000411
Peter Janssen 707,842 8.4%
17 State Street
New York, NY 1000412
Janssen-Meyers Associates, L.P. 553,402 6.6%
17 State Street
New York, NY 1000413
All executive officers and directors as a 1,341,384 16.4%
group (8 persons) 14
* Less than 1%.
</TABLE>
(1) The number of shares of Common Stock beneficially owned by each person
is determined in accordance with the rules of the Commission, and the
information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any
shares as to which the individual has sole or shared voting power or
investment power and also any shares of Common Stock which the
individual has the right to acquire within 60 days after May 26, 1998
through the exercise of any stock option or other right. The inclusion
herein of any shares of Common Stock deemed beneficially owned does not
constitute an admission of beneficial ownership of those shares. Unless
otherwise indicated, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown
as beneficially owned by them.
(2) The number of shares deemed outstanding includes shares outstanding as
of May 26, 1998 plus any shares subject to options and warrants held by
the person in question that are currently exercisable within 60 days
after May 26, 1998.
(3) Includes 200,000 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Does not include
options granted on May 26, 1998, which are subject to Stockholder
approval.
(4) Includes 24,167 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Does not include
options granted on May 26, 1998, which are subject to Stockholder
approval.
(5) Includes 5,000 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Does not include
options granted on May 26, 1998, which are subject to Stockholder
approval.
(6) David Kwong, a director of the Company, and Rave (substantially all of
the stock of which is owned by the family of Randy Burnworth) each own
approximately 21.6% of Prime's stock. Ted Wong, a former director of
the Company, owns approximately 16.1% of the Prime's stock. Messrs.
Kwong, Burnworth and Wong are each directors of Prime. Each of Messrs.
Kwong, Burnworth and Wong disclaim beneficial interest in the Company's
Common Stock owned by Prime.
(7) Includes 231,117 shares of the Company's Common Stock owned by Prime,
as to which Mr. Kwong disclaims beneficial interest. See footnote 6
above.
(8) Includes 30,000 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Does not include
options granted on May 26, 1998, which are subject to Stockholder
approval.
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<PAGE>
(9) Includes 30,000 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Also includes 2,500
shares that may be acquired within 60 days of May 26, 1998, upon the
exercise of outstanding warrants held by Mr. O'Brien's wife. As to
these 2,500 shares, Mr. O'Brien disclaims beneficial interest. Does not
include options granted on May 26, 1998, which are subject to
Stockholder approval.
(10) Includes 70,000 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding options. Does not include
options granted on May 26, 1998, which are subject to Stockholder
approval.
(11) Includes 553,402 shares of the Company's Common Stock owned by
Janssen-Meyers Associates, L.P., as to which Mr. Meyers disclaims
beneficial interest.
(12) Includes 553,402 shares of the Company's Common Stock owned by
Janssen-Meyers Associates, L.P., as to which Mr. Janssen disclaims
beneficial interest.
(13) Includes 553,402 shares that may be acquired within 60 days of May 26,
1998, upon the exercise of outstanding warrants.
(14) See footnotes (1) through (10) above.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
any persons who beneficially own ten percent or more of the Company's Common
Stock, to file with the Commission initial reports of beneficial ownership and
reports of changes in beneficial ownership of Common Stock. Such persons are
required by regulations of the Commission to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely upon a review of (i) copies of Section 16(a) filings
received by the Company during or with respect to the 1997 fiscal year and (ii)
certain written representations of its officers and directors with respect to
the filing of annual reports of changes in beneficial ownership on Form 5, the
Company believes that each filing required to be made pursuant to Section 16(a)
of the Exchange Act during the 1997 fiscal year has been filed in a timely
manner.
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PROPOSAL TWO
AMENDMENTS TO THE 1996 STOCK INCENTIVE PLAN FOR EMPLOYEES AND CONSULTANTS
AND GRANT OF STOCK OPTIONS TO THE NAMED EXECUTIVE OFFICERS
The Board of Directors unanimously recommends the ratification of (i)
an amendment to the Employee Stock Option Plan to increase the number of shares
of Common Stock available for grant thereunder from 260,000 shares to 1,205,000
shares, (ii) an amendment to the Employee Stock Option Plan to increase the
maximum number of shares of Common Stock that may be granted to any individual
under the Employee Stock Option Plan during the term thereof from 150,000 shares
to 500,000 shares, and (iii) a grant of stock options to the Named Executive
Officers of the Company, as more fully described below.
GENERAL
As of January 31, 1996, the Company adopted the Employee Stock Option
Plan, pursuant to which stock options (both Nonqualified Stock Options and
Incentive Stock Options), stock appreciation rights and restricted stock may be
granted to key employees and consultants (the "Participants"). The purpose of
the Employee Stock Option Plan is to provide employees and consultants of the
Company with an increased incentive to make significant and extraordinary
contributions to the long-term performance and growth of the Company, to align
the interest of employees and consultants with the interests of the stockholders
of the Company, and to attract and retain employees and consultants of
exceptional ability.
The Employee Stock Option Plan is administered by the Compensation
Committee. The Compensation Committee currently consists of Gerald Zarin, Edward
Bohn and Lyle Gramley. The Compensation Committee determines persons to be
granted stock options, stock appreciation rights and restricted stock, the
amount of stock or rights to be optioned or granted to each such person, and the
terms and conditions of any stock options, stock appreciation rights or
restricted stock.
The maximum number of shares with respect to which stock options, stock
appreciation rights or restricted stock may be granted under the Employee Stock
Option Plan is 260,000. The Compensation Committee determines, in its
discretion, the number of shares of Common Stock with respect to which a
Participant may be granted stock options, stock appreciation rights and
restricted stock. The Compensation Committee may grant to Participants either
Incentive Stock Options or Nonqualified Stock Options or any combination
thereof. Each option granted under the Employee Stock Option Plan designates the
number of shares covered thereby, if any, with respect to which the option is an
Incentive Stock Option, and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Stock Option.
The Compensation Committee determines and designates which employees
and consultants of the Company will receive stock options, stock appreciation
rights or restricted stock. Incentive Stock Options may be granted only to
employees of the Company, which includes officers and directors who are also
employees of the Company.
The Compensation Committee, in its discretion, establishes the price
per share for which the shares covered by the option may be purchased. Any
Incentive Stock Option granted under the Employee Stock Option Plan will have an
exercise price of not less than 100 percent of the fair market value of the
shares on the date on which such option is granted. With respect to an Incentive
Stock Option granted to a Participant who owns more than 10 percent of the total
combined voting stock of the Company or of any parent or subsidiary of the
Company, the exercise price for such option must be at least 110 percent of the
fair market value of the shares subject to the option on the date the option is
granted. A Nonqualified Stock Option granted under the Employee Stock Option
Plan (i.e., an option to purchase the Common Stock that does not meet the
requirements under the Internal Revenue Code of 1986, as amended (the "Code")
for Incentive Stock Options) must have an exercise price of at least the par
value of the stock.
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Stock appreciation rights may be granted in conjunction with the grant
of an Incentive or Nonqualified Stock Option under the Employee Stock Option
Plan or independently of any such stock option. A stock appreciation right
granted in conjunction with a stock option may be an alternative right. In such
event, the exercise of the stock option terminates the stock appreciation right
to the extent of the shares purchased upon exercise of the stock option and,
correspondingly, the exercise of the stock appreciation right terminates the
stock option to the extent of the shares with respect to which such right is
exercised. Alternatively, a stock appreciation right granted in conjunction with
a stock option may be an additional right, in which case both the stock
appreciation right and the stock option may be exercised. A stock appreciation
right may not, however, be granted in conjunction with an Incentive Stock Option
under circumstances in which the exercise of the stock appreciation right
affects the right to exercise the Incentive Stock Option or vice versa, unless
certain terms and conditions are met.
The Committee may award shares of restricted stock to Participants.
Restricted shares may not be sold, assigned, transferred, pledged, hypothecated
or otherwise encumbered during the restricted period applicable to such shares.
Except for such restrictions on transferability, Participants have all the
rights of shareholders in respect of restricted shares awarded to him or her
including, but not limited to, the right to receive any dividends on, and the
right to vote, the shares. If a Participant ceases to be an employee or
consultant of the Company for any reason other than death or permanent
disability, all shares of restricted stock awarded to the Participant shall be
forfeited and transferred back to the Company. If a Participant ceases to be an
employee or consultant of the Company by reason of death or permanent
disability, the transferability restrictions on the shares of restricted stock
awarded to the Participant shall lapse.
The Company has registered the issuance of all options and all shares
issuable upon exercise of the options on Form S-8 under the Securities Act.
The stock options and stock appreciation rights expire not more than 10
years from the date of granting thereof; provided, however, that with respect to
an Incentive Stock Option or a related stock appreciation right granted to a
Participant who, at the time of the grant, owns more than 10 percent of the
total combined voting stock of all classes of stock of the Company or of any
parent or subsidiary, such option and stock appreciation right shall expire not
more than five years after the date of granting thereof.
If the employment or consultancy of a Participant terminates, the
Compensation Committee may permit the exercise of stock options and stock
appreciation rights granted to such Participant (i) for a period not to exceed
three months following termination of employment with respect to Incentive Stock
Options or related stock appreciation rights if termination of employment is not
due to death or permanent disability of the Participant; (ii) for a period not
to exceed one year following termination of employment with respect to Incentive
Stock Options or related stock appreciation rights if termination of employment
is due to the death or permanent disability of the Participant; and (iii) for a
period not to extend beyond the expiration date with respect to Nonqualified
Stock Options or related stock appreciation rights.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the income tax consequences to
the Company and the Participants of the grant and exercise of stock options
granted under the Employee Stock Option Plan. Such tax consequences are based
upon the current provisions of the Code, all of which are subject to change,
which change could be retroactive.
The Employee Stock Option Plan provides for the grant of options which
are Incentive Stock Options within the meaning of Section 422 of the Code and
Nonqualified Stock Options, which are options that do not qualify as Incentive
Stock Options.
In general, under the Code there is no taxable income to a Participant
upon the grant of a Nonqualified Stock Option. Upon the exercise of a
Nonqualified Stock Option, the Participant recognizes ordinary income equal to
the excess of the fair market value of the stock on the date of exercise over
the exercise price paid for the stock
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pursuant to the Nonqualified Stock Option, unless the stock is subject to a
substantial risk of forfeiture. If the stock is subject to a substantial risk of
forfeiture, the Participant generally does not recognize income until the
restrictions lapse, although the Participant may elect to recognize income on
the date of exercise by making a timely election under the Code. The Company
generally obtains a tax deduction equal to the amount of income recognized by
the Participant at the time such income is recognized by the Participant,
subject to compliance with applicable provisions of the Code. The Participant
generally acquires a tax basis in the stock acquired pursuant to the exercise of
the Nonqualified Stock Option equal to the fair market value of the stock on the
date of exercise. Upon the subsequent disposition of the stock, the Participant
would recognize capital gain or loss, assuming the stock was a capital asset in
the Participant's hands, equal to the difference between the tax basis of the
stock and the amount realized upon disposition. If the stock was held for more
than 12 months, the capital gain, if any, recognized by the Participant on a
disposition would be eligible for the maximum federal income tax rate of 28
percent; if the stock was held for more than 12 months, the capital gain, if
any, recognized by the Participant on a disposition would be eligible for the
maximum federal income tax rate of 20 percent.
Under the Code, there is no taxable income to an Participant upon the
grant or exercise of Incentive Stock Options. Upon exercise, the Participant
acquires a tax basis in the stock acquired equal to the exercise price of the
option. Under the Code, an Participant must satisfy employment and holding
period requirements for Incentive Stock Option treatment. In general, an
Incentive Stock Option must be exercised while the Participant is an employee of
the Company or within three months following termination of employment, except
in cases of death or disability. The holding period requirements for Incentive
Stock Option treatment are as follows: the stock acquired upon exercise of an
Incentive Stock Option must be held until at least two years from the date of
grant of the option and for at least one year from the exercise of the option.
If the foregoing requirements are met, the Participant does not recognize
ordinary income in connection with the Incentive Stock Option and the Company
does not obtain a deduction for compensation paid to the Participant with
respect to such option. Upon the subsequent disposition of the stock, the
Participant would recognize capital gain or loss, assuming the stock was a
capital asset in the Participant's hands, equal to the difference between the
tax basis of the stock and the amount realized upon disposition. If the stock
was held for more than 12 months, the capital gain, if any, recognized by the
Participant on a disposition would be eligible for the maximum federal income
tax rate of 28 percent; if the stock was held for more than 12 months, the
capital gain, if any, recognized by the Participant on a disposition would be
eligible for the maximum federal income tax rate of 20 percent.
REPORT OF COOPERS & LYBRAND L.L.P.
In order to independently confirm the fairness of an increase in the
number of shares of Common Stock available for grant under the Employee Stock
Option Plan and the Director Stock Option Plan and the granting of stock options
to Named Executive Officers and directors of the Company, the Board of Directors
retained Coopers & Lybrand L.L.P. ("Coopers") to review and analyze whether such
increase and grant would be consistent with equity incentives of an industry
peer group of similar development stage companies. On May 26, 1998, Coopers
delivered a report (the "Report") of its evaluation to the Board of Directors.
STOCKHOLDERS SHOULD NOTE THAT THE REPORT IS ADDRESSED TO A MEMBER OF THE BOARD
OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE IN CONNECTION WITH PROPOSAL TWO OR PROPOSAL
THREE.
The Report states that recent equity financing by the Company has had a
significant dilutive impact on the shares and warrants of the executives and
directors of the Company. In order to keep the stockholdings for executives and
directors of the Company in line with competitive practice, the Report
recommends that the Company grant stock options to executives and directors at
the levels proposed by the Compensation Committee. Specifically, the Report
states that an increase in the number of shares of Common Stock available for
grant under the Employee Stock Option Plan and the Director Stock Option Plan by
945,000 options and 155,000 options, respectively, with 550,000 options being
granted to executives, 128,000 options being granted to directors and the rest
being granted to other employees, will keep the executive, employee and director
options at levels that are consistent with an industry peer group of small early
stage companies. Also, since the most common term for expiration of options is
ten years, and shorter terms usually have a specific purpose, the Report
recommends that the Company set the term for future option grants at ten years.
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REASONS FOR PROPOSAL
Authorization of Additional Shares. Since only 57,500 shares of Common
Stock of the Company are available for issuance under the Employee Stock Option
Plan, the Board of Directors believes that it would be desirable to have more
shares of Common Stock available under the Employee Stock Option Plan for
incentive purposes. The Board of Directors therefore has approved an amendment
to the Employee Stock Option Plan to increase the number of shares of Common
Stock available for grant thereunder from 260,000 shares to 1,205,000 shares.
The Board of Directors recommends that the Company's Stockholders ratify such
amendment since such amendment will allow the Employee Stock Option Plan to
remain in effect, and should address the need for available shares, for a number
of years.
Grant of Stock Options. Recent equity financing by the Company has had
a significant dilutive impact on the shares and warrants of the Named Executive
Officers of the Company. As stated in the Report, in order to keep the
stockholdings for Named Executive Officers of the Company in line with
competitive practice, the Company should grant stock options to Named Executive
Officers at the levels proposed in this proxy statement. The Board of Directors
therefore approved on May 26, 1998 the grant of 550,000 stock options with an
exercise price of $3.25 per share to the Named Executive Officers of the Company
as follows: 385,000 options to Gerald Zarin; 50,000 options to Don Legato;
40,000 options to Robert Webb; and 75,000 options to Jeremiah F. O'Brien. The
Board of Directors recommends that the Company's stockholders ratify such grant.
Amendment of the Per-Employee Restriction. In order to effect the grant
of stock options described above, the Board of Directors has approved the
increase of the maximum number of shares of Common Stock that may be granted to
any individual under the Employee Stock Option Plan during the term thereof from
150,000 shares to 500,000 shares. The Board of Directors recommends that the
Company's Stockholders ratify such amendment and, in accordance therewith,
ratify the amendment to change "150,000" to "500,000" in the second and third
paragraphs of Section 5 of the Employee Stock Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE RATIFICATION OF THE PROPOSED AMENDMENTS TO
THE EMPLOYEE STOCK OPTION PLAN AND THE PROPOSED GRANT OF
STOCK OPTIONS TO THE NAMED EXECUTIVE OFFICERS.
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PROPOSAL THREE
AMENDMENTS TO THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
AND GRANT OF STOCK OPTIONS TO THE DIRECTORS
The Board of Directors unanimously recommends the ratification of (i)
an amendment to the Director Stock Option Plan to increase the number of shares
of Common Stock available for grant thereunder from 80,000 shares to 235,000
shares, (ii) an amendment to the Director Stock Option Plan to extend the terms
of all stock options to be granted pursuant to the Director Stock Option Plan
from five years from the date of grant to ten years from the date of grant, and
(iii) a grant of stock options to the directors of the Company, as more fully
described below.
GENERAL
As of November 25, 1996, the Company adopted the Director Stock Option
Plan in order to attract and retain the services of non-employee members of the
Board of Directors and to provide them with increased motivation and incentive
to exert their best efforts on behalf of the Company by enlarging their personal
stake in the Company.
The Director Stock Option Plan is administered by the Board of
Directors of the Company (the "Administrator"). The Administrator grants stock
options under the Director Stock Option Plan and is authorized to interpret the
Director Stock Option Plan, to promulgate, amend and rescind rules and
regulations relating to the Director Stock Option Plan and to make all other
determinations necessary or advisable for its administration.
The maximum number of shares of Common Stock with respect to which
options may be granted under the Director Stock Option Plan is 80,000. The
number of shares subject to each outstanding option, the number of shares
subject to each option to be granted under the Director Stock Option Plan, the
option price with respect to outstanding options, and the aggregate number of
shares remaining available under the Director Stock Option Plan are subject to
adjustment as the Administrator, in its discretion, deems appropriate to reflect
such events as reorganizations of or by the Company.
Each member of the Board of Directors (an "Eligible Director") who
otherwise (1) is not currently an employee of the Company, or (2) is not a
former employee still receiving compensation for prior services (other than
benefits under a tax-qualified pension plan) is eligible for the grant of stock
options under the Director Stock Option Plan. The Administrator may grant
Eligible Directors such number of stock options as the Administrator may
determine from time to time. Annually, each Eligible Director shall be entitled
to receive an option to purchase 5,000 shares of Common Stock, which options
will be exercisable at the closing price of such shares of Common Stock at the
date of such grant.
An option granted under the Director Stock Option Plan will have an
exercise price equal to 100 percent of the fair market value of the shares on
the date on which such option is granted.
No stock option may be exercisable prior to the expiration of six
months from the date of grant unless the Eligible Director dies or becomes
disabled prior thereto. If not sooner terminated, each option granted under the
Director Stock Option Plan will expire five years from the date of its vesting.
The Administrator may require, in its discretion, that any Eligible
Director under the Director Stock Option Plan to whom an option is granted agree
in writing as a condition of the granting of such option to continue serving on
the Board of Directors for a designated minimum period from the date of the
granting of such option as will be fixed by the Administrator.
If an Eligible Director is terminated from the Board of Directors by
reason of death or disability, an option granted to such Eligible Director may
be exercised for a period of twelve months after such termination. If an
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Eligible Director is terminated from the Board of Directors for any reason other
than death or disability, an option granted to such Eligible Director may be
exercised for a period of sixty days after such termination.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the income tax consequences to
the Company and the Eligible Directors of the grant and exercise of stock
options granted under Director Stock Option Plan. Such tax consequences are
based upon the current provisions of the Code, all of which are subject to
change, which change could be retroactive.
The Director Stock Option Plan provides for the grant of options which
are Nonqualified Stock Options. In general, under the Code there is no taxable
income to an Eligible Director upon the grant of a Nonqualified Stock Option.
Upon the exercise of a Nonqualified Stock Option, the Eligible Director
recognizes ordinary income equal to the excess of the fair market value of the
stock on the date of exercise over the exercise price paid for the stock
pursuant to the Nonqualified Stock Option, unless the stock is subject to a
substantial risk of forfeiture. If the stock is subject to a substantial risk of
forfeiture, the Eligible Director generally does not recognize income until the
restrictions lapse, although the Eligible Director may elect to recognize income
on the date of exercise by making a timely election under the Code. The Company
generally obtains a tax deduction equal to the amount of income recognized by
the Eligible Director at the time such income is recognized by the Eligible
Director, subject to compliance with applicable provisions of the Code. The
Eligible Director generally acquires a tax basis in the stock acquired pursuant
to the exercise of the Nonqualified Stock Option equal to the fair market value
of the stock on the date of exercise. Upon the subsequent disposition of the
stock, the Eligible Director would recognize capital gain or loss, assuming the
stock was a capital asset in the Eligible Director's hands, equal to the
difference between the tax basis of the stock and the amount realized upon
disposition. If the stock was held for more than 12 months, the capital gain, if
any, recognized by the Eligible Director on a disposition would be eligible for
the maximum federal income tax rate of 28 percent; if the stock was held for
more than 12 months, the capital gain, if any, recognized by the Eligible
Director on a disposition would be eligible for the maximum federal income tax
rate of 20 percent.
REASONS FOR PROPOSAL
Authorization of Additional Shares. Since only 48,000 shares of Common
Stock of the Company are available for issuance under the Director Stock Option
Plan, the Board of Directors believes that it would be desirable to have more
shares of Common Stock available under the Director Stock Option Plan for
incentive purposes. The Board of Directors therefore has approved an amendment
to the Director Stock Option Plan to increase the number of shares of Common
Stock available for grant thereunder from 80,000 shares to 235,000 shares. The
Board of Directors recommends that the Company's Stockholders ratify such
amendment since such amendment will allow the Director Stock Option Plan to
remain in effect, and should address the need for available shares, for a number
of years.
Extension of Term to Expiration. As stated in the Report, the most
common terms for expiration of options is ten years, and shorter terms usually
have a specific purpose. See "Proposal Two--Report of Coopers & Lybrand L.L.P."
In order to keep the Director Stock Option Plan competitive with the plans of
other companies, the Board of Directors has approved the extension of the terms
of all options to be granted pursuant to the Director Stock Option Plan from
five years to a maximum of ten years from the date of grant. In accordance with
such approval, the Board of Directors also has approved (i) the replacement of
the last sentence of Section 5 of the Director Stock Option Plan with the
sentence "The Annual Options shall expire ten years from the date of granting"
and (ii) the replacement of the last sentence of the first paragraph of Section
9 with the sentence "If not sooner terminated as provided herein, each option
granted hereunder shall expire ten years from the date of its granting."
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Grant of Stock Options. Recent equity financing by the Company has had
a significant dilutive impact on the shares of the directors of the Company. As
stated in the Report, in order to keep the stockholdings for directors of the
Company in line with competitive practice, the Company should grant stock
options to directors at the levels proposed in this Proxy Statement. The Board
of Directors therefore approved on May 26, 1998 the grant of 128,000 stock
options with an exercise price of $3.25 per share to the directors of the
Company as follows: 53,000 options to Edward Bohn; 25,000 options to Lyle E
Gramley; 25,000 options to David Kwong; and 25,000 options to Joseph A Sarubbi.
The Board of Directors recommends that the Company's Stockholders ratify such
grant.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE RATIFICATION OF THE PROPOSED AMENDMENTS TO
THE DIRECTOR STOCK OPTION PLAN AND THE PROPOSED GRANT OF
STOCK OPTIONS TO THE DIRECTORS.
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INDEPENDENT PUBLIC ACCOUNTANTS
On February 11, 1998, Coopers & Lybrand L.L.P. ("Coopers"), the
independent accounting firm that audited the financial statements of the Company
during fiscal year 1996, was dismissed by the Company. Coopers' report on the
Company's financial statements for either of the past two years did not contain
an adverse opinion or a disclaimer of opinion, and was neither qualified nor
modified as to uncertainty, audit scope or accounting principles. In addition,
during the Company's two most recent fiscal years and any subsequent interim
period preceding such dismissal, there were no disagreements with Coopers on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of Coopers, would have caused it to make reference to the subject
matter of the disagreement(s) in connection with its report.
Effective February 11, 1998, the Company has engaged Richard A. Eisner
& Company, LLP ("Eisner & Company") as its new independent accountants for the
fiscal year 1998. Eisner & Company audited the Company's financial statements
for the fiscal year 1997. The decision to change accountants was approved by the
Board of Directors of the Company at a meeting of the Board of Directors of the
Company on February 4, 1998.
Representatives of Eisner & Company ("Representatives") are expected to
be present at the Annual Meeting. The Representatives will have the opportunity
to make a statement, although they are currently not expected to do so. The
Representatives are expected to be available to respond to appropriate
questions.
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STOCKHOLDER PROPOSALS
Stockholders who intend to submit proposals to the Company's
stockholders at the 1999 Annual Meeting of Stockholders must submit such
proposals to the Company no later than February 5, 1999 in order to be
considered for inclusion in the proxy statement and proxy to be distributed by
the Board of Directors in connection with that meeting. Stockholder proposals
should be submitted to Jeremiah F. O'Brien, Secretary, NUWAVE Technologies,
Inc., One Passaic Avenue, Fairfield, New Jersey 07004.
OTHER MATTERS
The Board of Directors is not aware of any matters to be presented at
the Annual Meeting other than the matters described herein and does not intend
to bring any other matters before the meeting. However, if any other matters
should come before the meeting, or any adjournments or postponements thereof,
the persons named in the proxies will have discretionary authority to vote all
proxies in accordance with their best judgment.
NUWAVE TECHNOLOGIES, INC.
By: GERALD ZARIN,
President and Chief Executive Officer
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, STOCKHOLDERS
WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO FILL IN, SIGN,
DATE AND RETURN THE ENCLOSED PROXY.
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NUWAVE TECHNOLOGIES, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 23, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
The undersigned, revoking all prior proxies, hereby appoint(s) Gerald
Zarin and Jeremiah F. O'Brien, and each of them, with full power of
substitution, as proxies to represent and vote, as designated herein, all shares
of stock of NUWAVE TECHNOLOGIES, INC. (the "Company"), which the undersigned
would be entitled to vote if personally present at the Annual Meeting of
Stockholders of the Company to be held at The Plaza Hotel, Fifth Avenue at
Central Park South, New York, New York 10019, The Edwardian Room, on Tuesday,
June 23, 1998 at 9:00 a.m., local time, and at any adjournment or postponement
thereof (the "Meeting").
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment or
postponement thereof.
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is given, this
proxy will be voted FOR all proposals. Attendance of the undersigned at the
meeting or at any adjournment or postponement thereof, will not be deemed to
revoke this proxy unless the undersigned shall revoke this proxy in writing or
shall deliver a subsequently dated proxy to the Secretary of the Company or
shall vote in person at the Meeting.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
1. To elect the following five (5) directors (except as marked below) for the
ensuing year.
NOMINEES: Gerald Zarin, Edward Bohn, Lyle Gramley, David Kwong and
Joseph A. Sarubbi
[ ] FOR all nominees (except as marked below)
[ ] WITHHOLD authority to vote for all nominees
For all nominees except the following nominee(s):
- --------------------------------------------------------------------------------
(CONTINUED AND TO BE SIGNED, ON REVERSE SIDE)
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2. To ratify amendments to the Company's 1996 Stock Incentive Plan for
Employees and Consultants and to ratify the grant of stock options to the
Named Executive Officers of the Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To ratify amendments to the Company's Non-Employee Director Stock Option
Plan and to ratify the grant of stock options to the Directors of the
Company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: , 1998
---------------- -----------------------------------
Signature
-----------------------------------
Signature if held jointly
Please sign exactly as name appears hereon. If the stock is registered in the
names of two or more persons, each should sign. Executors, administrators,
trustees, guardians, attorneys and corporate officers should add their titles.
29
