UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-28606
NUWAVE TECHNOLOGIES, INC.
(name of small business issuer in its charter)
DELAWARE 22-3387630
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
ONE PASSAIC AVENUE
FAIRFIELD, NEW JERSEY 07004
(Address of principal executive offices)(Zip Code)
(973) 882-8810
(Issuer's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes
[XX] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [XX]
State issuer's revenues for its most recent fiscal year: $12,545
Aggregate market value of the voting stock held by non-affiliates based on the
last sale price for such stock at March 10, 1999: $17,757,327
The number of shares of Common Stock outstanding as of March 10, 1999: 8,356,389
Transitional Small Business Disclosure Format: Yes [ ] No [XX]
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NUWAVE TECHNOLOGIES, INC.
FORM 10-KSB
INDEX
PART I........................................................................2
ITEM 1. BUSINESS...................................................2
ITEM 3. LEGAL PROCEEDINGS.........................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......12
PART II......................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.................................................15
ITEM 7. FINANCIAL STATEMENTS......................................32
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................32
PART III.....................................................................33
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS...................................................33
ITEM 10. EXECUTIVE COMPENSATION....................................34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................38
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..........................42
SIGNATURES...................................................................49
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PART I
ITEM 1. BUSINESS.
General
The Company is a development stage enterprise organized in July 1995. The
Company develops and intends to manufacture and market products that improve
picture quality in set-top boxes, TVs, VCRs, DVDs, camcorders and other video
devices by enhancing and manipulating video signals. The television,
telecommunications and computer markets are converging and, in the process,
redefining the way their constituencies interact. The Company believes that
video display is the common denominator of that interaction, and that the
products it has developed and is developing will allow it to participate in the
growth of the converging market.
At the time of the initial public offering of the Company's Common Stock in
July 1996, the Company had produced the following (together, the "Initial
Products"):
o an operational prototype of an analog video processor which
significantly enhances video picture quality;
o an operational prototype of another video enhancement device which
combined the analog video processor with digitally-based frame
extrapolation video noise reduction circuits for use in national
television standard codes or phase alternate lines;
o an operational prototype of a time base corrector providing for analog
to digital conversion and the synchronization of up to 3 video
sources; and
o an initial prototype of a video editing "studio" mounted on printed
circuit boards.
After the initial public offering, the Company established the Advanced
Engineering Group to support the continuing development of its products and
related technology, and the identification of additional sources of new
technology. The Advanced Engineering Group is made up of the Company's own
employees and third-party consultants who work with the Company on a
project-by-project basis under the direction of the Company's Vice
President-Engineering. The Company uses the Advanced Engineering Group to create
products and technology which are independent of the Initial Products. See
"Management's Discussion and Analysis or Plan of Operation--General."
Through the Advanced Engineering Group, the Company has developed, among
others, the following products and technology:
o the "NUWAVE Video Processor" which significantly enhances video
images;
o a software called "Softsets" which provides end-users and
manufacturers who use the NUWAVE Video Processor in their products
with an option to manipulate the attributes of video images to their
own tastes or standards;
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o a significant amount of the software included in the Company's
products; and
o new circuitry to allow certain of the Company's products to be
produced as chips.
The Company originally anticipated devoting significant resources to the
final commercial development of the Initial Products. However, with the
introduction and apparent favorable reception of the NUWAVE Video Processor
("NVP") and Softsets by original equipment manufacturers ("OEM") and
professional and retail markets and to best capitalize on the expanding and
converging markets, the Company has determined to devote substantially all of
its personnel and economic resources it would have devoted to the Initial
Products to the final commercial development and marketing of the NVP and
Softsets.
During 1997, the Company began the introduction and premarketing of its NVP
as the "NUWAVE Video Processor" and the "Crystal Wave Video(TM)" circuit, and
the Softsets as "Crystal Wave Softsets," through comprehensive sales
presentations to prospective customers. Although the Company is unable to
predict whether its marketing efforts will be successful, it believes based upon
its presentations that the products have been well received, and several
potential customers have indicated their desire to continue discussions. In
January 1998, the Company entered into its first OEM contract, a multi-year
supply agreement with Thomson Consumer Electronics for the purchase of the NVP
ASIC chip. Thomson is the largest manufacturer and marketer of television
receivers and related video products in the U.S. under the RCA, GE and ProScan
brands. Thomson has recently informed the Company that it has not yet completed
the development of the product that it intended to utilize the NVP ASIC chip,
and therefore orders are not expected during 1999. The Company also recently
announced a five-year manufacturing and marketing agreement with Terk
Industries, Inc., a well-respected brand name, to manufacture and market under
the Terk brand name a line-up of set-top boxes incorporating NUWAVE's technology
for existing televisions and video output products.
During March 1999 the Company produced its first NVP ASIC chips. After
evaluation of these chips the Company will launch a full-scale sales program
aimed at obtaining orders initially from those customers who have already
evaluated the Company's technology and wish to test these chips in their
products. The Company has marketing and sales organizations in place in the
U.S., Japan and China, close to key prospective customers, to implement this
program. For a discussion relating to manufacturing of the Company's products,
see "Management's Discussion and Analysis or Plan of Operation--Manufacturing."
The technology on which the Company's Initial Products is based was
originated by Rave prior to the Company's organization and is licensed to the
Company by Rave pursuant to the License Agreement. The Company also entered into
the Development Agreement with Rave pursuant to which Rave did work in
connection with the development of the Initial Products. The Development
Agreement expired on October 1, 1998. See "Business--Research and Development."
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. The Company continues to
hold the rights to the technology outside the video game industry under the
License Agreement.
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History
The Company was conceived of by Mr. Ernest Chu in June 1994 when he met
with Mr. Ted Wong, the President of Prime as a result of an introduction by
employees of a high-technology company for which Mr. Chu was then rendering
consulting services in his individual capacity. At that time, Prime was the
exclusive licensee of Rave's technology. 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 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, 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. In
addition, Rave agreed to continue the development of the technology and the
Initial Products pursuant to the Development Agreement and Prime became the
Company's exclusive agent to sublicense the products covered by the License
Agreement to third parties (subject in all cases to the Company's approval)
under the terms of the Agency Agreement. See "Risk Factors--Unconditional
Obligation to Share Sublicense Fees" for a description of the Agency Agreement.
Mr. Zarin became the Company's President and Mr. Chu became the Chairman of its
Board of Directors and acting Chief Financial Officer. Mr. Wong became a
director of the Company. The Company also entered into a consulting agreement
with Corporate Builders, L.P., 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 Securities and
Exchange Commission (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 and an
approximate 16% shareholder in Prime. Mr. Wong is also the President and Chief
Executive Officer of Prime. Mr. David Kwong, a former director of the Company,
is a director and approximate 22% shareholder of Prime. Mr. Kwong is also a Vice
President of Prime. Rave is an approximate 20% shareholder of Prime, and Mr.
Burnworth is a director of Prime. Mr. Burnworth is not a shareholder 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 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.
Rave's principal activities were to provide services for the Company
pursuant to the Development Agreement which expired on October 1, 1998. See
"Management's Discussion and Analysis or Plan of Operation--Research and
Development" for a description of the services provided
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by Rave pursuant to the Development Agreement. The Development Agreement
provided that all results of development, including unrelated developments,
belong to the Company, and that Rave would not undertake any development
activities for third parties without the consent of the Company. The Company
believes that Rave misled the Company about its ability to perform the services
required under the Development Agreement; did not perform the required services
under the Development Agreement; and misled the Company about Rave's propriety
rights to the Rave Clarity Circuit.
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
(the "Arbitration") under the American Arbitration Association Rules of Patent
Arbitration against Rave and Randy Burnworth. Such proceeding seeks: damages due
to Rave's and Burnworth's breaches of their contractual and common law
obligations to the Company, including but not limited to those described above;
and a determination that, among other things, Rave is not entitled to any
royalties or other payments with respect to the Company's technology and that
the Company continues to have exclusive license rights to the "Licensed Product"
and "Licensed Process" under the License Agreement.
Prime was organized in 1993 and, at that time, substantially all of its
activities related to proposed licensing of Rave's products and technology and
the organization of the Company. The exclusive licensing arrangement between
Rave and Prime relating to the technology used in the Initial Products was
terminated in October 1998.
Background--Video Images
The human eye perceives all images as a result of its ability to recognize
light. Light travels as continuous electromagnetic waves ("Analog Light Waves")
that are either emitted by the object being observed or reflected from it.
Analog Light Waves vary in frequency and amplitude, and can be directly captured
as images. For example, in photography, light waves strike film treated with
certain chemicals and the energy from the light wave causes chemical reactions
that change the translucency of the film. As a result, the image can be
recreated by again passing light through the film. In computers, visual images
can be stored and manipulated after Analog Light Waves have been broken down
into smaller constituent parts expressed as digital signals. These digital
signals are transmitted as bits and then reconstituted into Analog Light Waves
visible to the human eye.
Broadcast television technology is based on Analog Light Wave
transmissions. Analog Light Waves are captured by an electronic television
camera and turned into usable electrical energy in the form of lower frequency
waves in the form of electrical currents in an electric circuit ("Analog Video
Waves"). That wave is transmitted to a receiver, where it is projected at the
standard broadcast rate of 30 frames per second ("fps") against a phosphorescent
screen. The screen then emits Analog Light Waves, making the image visible to
the human eye.
Modern video telecommunications, such as satellite broadcasting and cable
television, generally combine both analog and digital processes in order to
capture and transmit images. For example, in digital satellite video
telecommunication the image is digitized by a computer processor and then
broadcast to a satellite. The digital information is received and rebroadcast by
the satellite directly to a receiver, and then reconstituted into energy in the
form of an analog wave and displayed at 30 fps to create a visible image.
Band widths available for satellite video transmission are limited by the
Federal Communications Commission ("FCC"). These limitations significantly
restrict the amount of
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information that can be transmitted in any time interval and require most
information to be transmitted in a compressed digitized format.
Internet telecommunication is subject to greater limitations. All sites on
the Internet are computers that process data on a digital basis linked by
telephone lines. Information is typically transmitted over these lines from
computers through modems. Currently, the fastest modems available for general
use can transmit only a fraction of the digital information necessary to create
real time images at 30 fps. Even if the speed of a modem was increased, the
limitations of currently available personal computers for general use make it
unlikely that a user would be able to retrieve and display data at a rate
greater than 15 fps. One result is that real time teleconferences are generally
accomplished by using special high speed modems and dedicated telephone lines
rather than using the Internet. These telephone lines are usually provided by a
national carrier having the equivalent band width of approximately 24 standard
telephone lines, which is then able to transmit the video images at 30 fps.
Charges for these dedicated lines are substantially the same as for 24 standard
lines, making real time teleconferences expensive. The ability to use the
Internet or otherwise use standard telephone lines for teleconferencing would
substantially reduce costs of teleconferencing.
Given the physical limitations of satellite, cable and telephone systems,
and their increasing interactivity, ever more emphasis is being placed on
compression technology as a means to allow more data to be transmitted in any
time interval. Using a variety of techniques, portions of a digital description
of an image are omitted in the transmission of information, and, by mathematical
formula or inference, most of the omitted data is then replaced after reception.
The result of this compression technology has been to increase the number of
channels available for digital satellite broadcasting from 50 to 150, and to
significantly improve the quality of images transmitted over the Internet. The
Company believes that improvements in the amount of compression possible will
continue. However, as the amount of compression increases, more data will likely
be lost, and the quality of the image will deteriorate.
Image information may be lost in the process of compression or distorted
during recording, transmission or playback because of various factors, including
signal interference or deterioration of original film quality and camera focus.
Some of the problems from this loss or distortion of image information include
lack of clarity, a "washed out" look and excessive or inadequate black level.
One of the methods used to compress digitized video information for storage
and transmission (other than television transmission) is to eliminate frames. A
phenomenon causing analogous results occurs when the hard drive of a computer,
or some other component, cannot retrieve or present data at sufficiently high
fps. In either case, image movement is erratic and unrealistic. Regardless of
whether the signal is compressed, the image may be subject to random salt and
pepper patterns.
The Company's Video Enhancement Products
The NVP and Softsets
The NVP controls, corrects and improves analog video signals' use of
digital control (software). The NVP first detects and replaces all important
picture synchronization and stability attributes. It then separates and corrects
the color and black and white information. The NVP enhances fine details of an
image and reduces distortions incurred in the course of transmitting the image,
corrects the pure black content of images and adjusts perceived light on
projected images. Fine detail
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enhancement is achieved by a proprietary circuit that analyzes the form of the
analog waves at the point of origin or display, and processes the wave to
significantly increase the clarity of the image.
The NVP achieves "blackness" correction by establishing a "reference to
true black" and adjusting the rest of the color spectrum to that reference,
making a "washed out" image appear more vivid. Similar referencing currently is
available only in expensive video display units, TV monitors and projection
systems; the NVP's proprietary circuits enable the process to be performed
inexpensively on a printed circuit board, ASIC or a small portion of a
integrated circuit chip.
The NVP also contains circuits that provide for the adjustment of light in
images and brightness of the colors presented, similar to circuits traditionally
included in televisions.
The NVP can be used prior to further processing of the Analog Video Wave at
the source of the video signal and/or at the other end of the process prior to
the display of the video image. In the form of a chip, it can be included in a
television set, video projector or in a video conference display or in the
decoder or routing box that connects a typical television to a cable
broadcasting company or a multichannel satellite provider. The NVP also can be
included in any personal computer that has a capture board, a device enabling
the computer to convert standard broadcast video signals into a digitized form.
This enables the image to be enhanced prior to digitization.
Through its Advanced Engineering Group, the Company has developed the
Softsets to control the functions of the NVP. The Softsets give both end-users
and manufacturers who use the NVP in their products the ability to manipulate
the attributes of video images to their own taste or standards. For example, the
manufacturer of a set-top box who includes the NVP and Softsets in its product
could offer viewers the ability to select predetermined optimum video parameters
for "Sports," "Movies," "Drama" or other predesignated programming from their
remote control ("Active Softsets"). Additionally, program providers or other
transmitters can encode their signal so that a receiving device containing the
Softsets and enhanced NVP will automatically adjust its video parameters to a
predetermined value when the signal is received ("Passive Softsets"). The
encoded signal can also be included in the actual programming.
During 1997, the Company began marketing the NVP as the "NUWAVE Video
Processor" and the "Crystal Wave Video(TM)" circuit, and the Softsets as
"Crystal Wave Softsets" through comprehensive sales presentations to prospective
customers.
The Initial Products
The Company originally anticipated devoting significant resources to the
final commercial development of the Initial Products. However, with the
introduction and apparent favorable reception of the NVP and Softsets by the OEM
(including an order from Thomson) and the professional and retail markets and to
best capitalize on the expanding and converging markets, the Company has
determined to devote substantially all of its personnel and economic resources
it would have devoted to these products to the marketing of the NVP and
Softsets. Because the final commercial development of the Initial Products will
be based in large part on the Company's experience in marketing the NVP and
Softsets, the Company cannot predict when, if at all, it will finalize
commercial development of these products or commence marketing them.
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The Company's Other Potential Products
The Company intends to continue to use outside consultants to assure
exposure to new ideas and technology. The Company, through its Advanced
Engineering Group and agreements with third parties, is conducting investigation
and research and development activities with respect to other new
technologies/products to address the digital, PC and internet markets, which are
new markets for the Company to participate in. These activities may give rise to
additional products that may be commercialized by the Company. However, there
can be no assurance that its efforts will result in marketable products or
products that can be produced at commercially acceptable costs.
Research and Development
Research and development activity with respect to the Company's Initial
Products was carried out by Rave prior to July 21, 1995, the date upon which the
Company and Rave entered into the License Agreement and the Development
Agreement. The Company's Initial Products were based on technology originated by
Rave prior to the Company's organization and licensed to the Company by Rave
pursuant to the License Agreement. Although it was the Company's intention to
utilize Rave as its primary source for research and development activities, the
Company has become dissatisfied with Rave's performance under the Development
Agreement and has found it necessary to utilize its Advanced Engineering Group
as its primary means for product development. On October 1, 1998 the three year
term of the Development Agreement between the Company and Rave expired. The
Company paid Rave an aggregate of (i) $2,731,906 for development services, (ii)
$541,593 for equipment which was supposed to be used in conjunction with
development services which were required and (iii) $125,913 for materials
intended to be used in conjunction with the development services. The Company
has also guaranteed an additional $76,078 for related equipment lease payments
to be made on Rave's behalf.
The Company's Advanced Engineering Group currently operates to support the
continuing development of the Company's products and related technology, and the
identification of additional sources of new technology. The Company utilizes its
Advanced Engineering Group to create products and technology independent of the
"Licensed Product" and "Licensed Process" as outlined in the License Agreement.
These independently developed products and technology include the NVP, a
significant amount of the software included in each of its products and new
circuitry to allow certain of the products to be produced as ASICs. The Advanced
Engineering Group also developed the Softsets for the NVP and certain of the
enhancements to it. Utilizing this technology, the Company has developed the
ProWave NVP 2.2 that is currently available as a stand-alone unit or a PC board
with software. The Advanced Engineering Group is also currently developing a
commercial video retail product which utilizes the NVP technology.
As of December 31, 1998, the Advanced Engineering Group consisted of 5 of
the Company's employees and outside consultant organizations who have on their
respective staffs engineers, technicians and support personnel (totaling more
than 30 personnel) who devote time to the Company on an as-needed
project-by-project basis. The Company anticipates that the make-up of its
Advanced Engineering Group will change from time to time depending on its
current and anticipated development and commercialization plans. The Company's
strategy with respect to new products and technologies is to continue to utilize
the Advanced Engineering Group as well as other independent third party sources
and to increase its internal technical and engineering staff as appropriate.
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From July 17, 1995 to December 31, 1998, the Company incurred expenses of
$5,378,892 on research and development, of which approximately 63% was paid to
Rave pursuant to the Development Agreement. During fiscal 1997 and 1998,
$1,697,084 and $1,572,364, respectively, was spent on research and development
activities. During the next 12 months, the Company estimates that it will spend
approximately $850,000 in support of the commercialization of its products and
on research and development. In the event the Company is able to generate
sufficient revenues from sales of its Softsets and NVP products during such
12-month period, it anticipates it will increase its expenditures on research
and development and the identification of new sources of technology.
For a discussion regarding disputes under the License Agreement, see
"Management's Discussion and Analysis or Plan of Operation--Research and
Development."
Marketing and Sales
The Company commenced marketing of its NVP and Softsets to manufacturers of
video products including TVs, VCR's, DVD's, set-top boxes, satellite
distribution systems, digital cameras and camcorders. The Company has also
introduced its technology to companies that manufacture component parts and
semiconductors used in the manufacture of such video products. The Company
believes that the inclusion of its NVP and Softsets in such video products will
allow them to produce significantly better images and allow for product
differentiation, and the low cost to the user will make it an attractive
product. The Company's goal is to position itself to take advantage of the
converging television, telecommunication and computer markets by developing
multiple products from its unique video enhancement technology.
In that regard, the Company established three sales and marketing divisions
to service the market needs: (1) the Crystal Wave Division for OEM, (2) the
ProWave Division for the professional market and (3) the CWave Division for the
retail and direct consumer markets. The core of the Company's unique technology
is the NVP ASIC chip. This integrated circuit will be incorporated into each of
the Company's divisional product lines.
The Crystal Wave Division's potential customer base includes manufacturers
of products that can utilize the NVP ASIC including the following product
categories: TV, VCR, camcorder, digital camera, set-top box, large screen TV,
LCD TV, plasma LCD TV, audio/video receivers, direct TV (DSS systems) and web
TV. Manufacturers of such products include Thomson, Sony, Matsushita, Phillips,
Mitsubishi, Sharp, Sanyo, Samsung, JVC, Zenith, General Instruments, Packard
Bell, Compaq, IBM, Dell Computers and LSI Logic.
Initially, the Company elected to contact all of the potential customers
listed above directly or in conjunction with selected consultant organizations
such as CTI with whom the Company has contracted on a commission basis. CTI, for
over twenty six years, has been in the business of taking R&D and technology
companies and introducing them to major companies specializing in their
respective markets. The Company's sales strategy is a direct consultative sales
approach that requires the presence of its own engineering and sales personnel
to properly present and demonstrate the technology, explain the sales and
marketing concepts, and maintain direct contact from an engineering position
throughout the entire sales cycle. Although the Company is unable to predict
whether its marketing efforts will be successful, it believes, based on its
presentations, that the products have been well received, and several potential
customers have indicated their desire to continue discussions.
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In January 1998, the Company entered into a multi-year supply agreement
with Thomson for the purchase of its NVP ASIC chip. Thomson has recently
informed the Company that it has not yet completed the development of the
product that will utilize the NVP ASIC chip, and therefore orders are not
expected during 1999. During March, 1999 the Company produced the first ASIC
chips which, subsequent to testing and modification, will be used to launch a
full-scale commercial marketing and sales program aimed at obtaining orders from
those customers who have already evaluated the Company's technology and wish to
test these chips in their products.
During the second quarter of 1998, the Company opened a sales and
engineering office in Osaka, Japan to maintain ongoing discussions, provide
in-person demonstrations of the Company's technology and directly participate in
technical due diligence sessions with potential customers who are evaluating the
Company's technology. During the third quarter of 1998, the Company opened a
sales and engineering office in Beijing, China for its products and technology
to be sold into the Chinese domestic market, which is equal in size to the U.S.
market.
During 1997, the Company formed its ProWave Division for sales and
marketing of the ProWave NVP 2.2 and related products to the professional video
marketplace. The Company's potential customer base in this division fall into
three major categories: (1) integrated systems dealers; (2) professional
security and surveillance dealers; and (3) medical imaging dealers. These
dealers will sell to the ultimate user of the product. The Company plans to
utilize independent commissioned sales representatives along with its own
internal staff and management team to manage, oversee, train and support the
sales effort of the dealers. In November 1997, the Company contracted with The
LACOM Group to help the Company activate a national independent sales "rep" and
dealer network to support the launch of this Division. To date, the Company has
sold limited quantities of the ProWave NVP 2.2 (primarily for sales
demonstration purposes until the ASIC chip is available to replace the more
expensive printed circuit board).
The Company is currently developing retail products for consumers who do
not have NUWAVE enabled products for their TV's but want to improve the picture
quality of their home viewing. The Company's CWave Division will market these
products. The Company has determined that the most effective way to introduce
these products into the retail marketplace during 1999 is to work through
distributors who will manufacture and sell to retailers, including those with
whom they are currently doing business. The Company recently announced a
five-year manufacturing and marketing agreement with Terk Industries, Inc., a
well-respected brand name, to manufacture and market under the Terk brand name a
line-up of set-top boxes incorporating NUWAVE's technology for existing
televisions and video output products. At present, there are three hundred
million non-enhanced televisions in the United States alone. See "Management's
Discussion and Analysis or Plan of Operation--Marketing and Sales."
In addition to product sales, the Company may license the manufacture of
its products and use of its technology in situations in which such arrangements
are to its economic advantage. However, because its emphasis has been on product
sales and OEM manufacturing, it has not yet developed a comprehensive licensing
program, established proposed royalties or otherwise determined the terms and
conditions of the arrangements it may want to make with proposed licensees or
others.
The Company intends to support the above sales efforts through various
sales and marketing programs/activities including trade advertising, attendance
at industry trade shows, attendance at participating dealer shows, attendance at
end-user events, literature mailers and co-op dealer advertising.
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Manufacturing
For a discussion relating to manufacturing of the Company's products, see
"Management's Discussion and Analysis or Plan of Operation--Manufacturing."
Patents; Proprietary Information
To the extent practicable, the Company has filed and intends to file U.S.
patent and/or copyright applications for certain of its proposed products and
technology. The Company has also filed and intends to file corresponding
applications in key industrial countries worldwide.
Under the License Agreement, the Company has exclusive license rights to
all patents and copyrights obtained or to be obtained for the products and
technology licensed under the License Agreement. For a discussion relating to
the License Agreement and the exclusivity provisions thereunder, see
"Management's Discussion and Analysis or Plan of Operation--Certain Factors That
May Effect Future Results--License." In April 1996, the Company filed on behalf
of Rave two patent applications for its Randall connector system and received
one patent in respect thereof in November 1997 and the second patent in respect
thereof in January 1998.
For a discussion relating to the rejections of the patent applications for
the Rave Clarity Circuit, see "Management's Discussion and Analysis or Plan of
Operation--Research and Development." For a discussion relating to patents for
the Company's independently developed products and risks related thereto, see
"Management's Discussion and Analysis or Plan of Operation--Certain Factors That
May Effect Future Results --Enforceability of Patents and Similar Rights;
Possible Issuance of Patents to Competitors; Trade Secrets."
Competition
For a discussion relating to the competition that the Company faces and
risks related thereto, see "Management's Discussion and Analysis or Plan of
Operation--Certain Factors That May Effect Future Results --Competition" and
"--Rapid Changes to Industry Standards; Product Obsolescence."
Management Information Systems
The Company believes that the capacity of its existing data processing and
management information systems is sufficient to allow the Company to expand its
business without significant additional capital expenditures. In addition, the
Company has conducted a review of its systems to identify those systems that
could be affected by the year 2000 problem and modifications to the Company's
systems have been made. Testing of these modifications was completed January 31,
1999. See "Management's Discussion and Analysis or Plan of Operation--Year
2000."
Employees
The Company currently has ten full-time employees and, depending on its
level of business activity, expects to hire additional employees in the next 12
months, as needed, to support marketing and sales, manufacturing and research
and development.
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Facilities
The Company has established its headquarters in Fairfield, New Jersey.
Pursuant to the sublease relating to such facility, the Company is obligated to
make monthly rental payments of $5,950. The lease is on a month-to-month basis.
The Company's subleased portion of the facility is approximately 2,500 square
feet and the sublease entitles the Company to share certain common areas.
ITEM 3. LEGAL PROCEEDINGS
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
under the American Arbitration Association Rules of Patent Arbitration against
Rave and Randy Burnworth. Such proceeding seeks (a) damages for the injuries to
the Company caused by Rave's and Burnworth's breaches of their contractual and
common law obligations to the Company and (b) a declaration that, among other
things, Rave is not entitled to any royalties or other payments with respect to
the Company's technology and that the Company continues to have exclusive
license rights to the "Licensed Product" and "Licensed Process" (each as defined
in the License Agreement). See "Risk Factors--License."
Rave has filed an amended counterclaim against the Company in the
Arbitration, alleging breaches of the License Agreement and Development
Agreement, trade libel, tortious interference and conspiracy, and seeking a
declaration that Rave is entitled to the return and exclusive use of its own
technology. Rave claims that it is entitled to $65,000 per month for the life of
any patents on products it developed for the Company (approximately 15 more
years), as well as damages in excess of $4 million on the various claims. The
Company believes that Rave's claims are completely without merit; accordingly no
liability has been recorded for this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company had a special meeting of its stockholders on March 19, 1999
(the "Special Meeting"). The meeting was convened for the purpose of ratifying
the private placement of the Company's securities by Janssen-Meyers between May
19 and June 9 of 1998 (the "Private Placement").
Shareholder ratification was required in order to comply with the corporate
governance rules of NASDAQ SmallCap Market ("Nasdaq"). These rules require an
issuer to obtain stockholder approval for the sale or issuance of common stock
(or securities convertible into or exercisable for common stock) equal to 20% or
more of the common stock outstanding before the issuance for less than the
greater of book or market value of the stock. Because the Company did not obtain
shareholder approval prior to the Private Placement, it was necessary for the
Company to obtain shareholder ratification of the Private Placement after the
fact.
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On March 19, 1999, the Special Meeting was held to ratify the Private
Placement. Because the vote related to post-effective ratification of the
Private Placement, holders of shares issued in the Private Placement or issuable
upon exercise of warrants issued in the Private Placement ("Private Placement
Shares") were not entitled to vote such Private Placement Shares. As such, only
the holders of record of shares other than Private Placement Shares on the
record date, February 3, 1999, were entitled to vote. There were 5,613,485 such
shares outstanding and entitled to vote on the ratification of the Private
Placement at the Special Meeting. 3,459,307 shares were voted at the Special
Meeting, constituting 61.62% of the shares eligible to vote. Of those shares,
3,394,619 were voted in favor of the proposal to ratify the Private Placement,
and 64,688 shares were voted against the proposal. There were 20,425
abstentions. As such, the Private Placement was ratified at the Special Meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Equity
The Company's Common Stock, par value $.01 per share ("Common Stock"), has
been traded since July 1996 on the NASDAQ SmallCap Stock Market under the symbol
"WAVE" for Common Stock and "WAVEW" for Common Stock Warrants. Prior to that
time, there was no public market for the Common Stock or Warrants. The following
table sets forth the range of high and low closing sale prices for the Common
Stock as reported on the NASDAQ SmallCap Stock Market during each of the
quarters presented. The quotations set forth below are inter-dealer quotations,
without retail mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions.
COMMON STOCK
QUARTERLY PERIOD ENDED HIGH LOW
March 31, 1997 $9.75 $6.50
June 30, 1997 8.50 5.63
September 30, 1997 8.13 4.50
December 31, 1997 6.38 3.68
March 31, 1998 6.63 3.88
June 30, 1998 4.50 2.94
September 30, 1998 3.50 1.38
December 31, 1998 4.19 0.66
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As of March 12, 1999, there were approximately 212 holders of record of the
Company's Common Stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
The Company has never declared or paid any cash dividends. The Company
currently intends to retain any future earnings to finance the growth and
development of its business and future operations, and therefore does not
anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
The following paragraphs set forth certain information with respect to
securities sold by the Company within the past three years in transactions that
were not registered under the Securities Act pursuant to the provisions of
Section 4(2) of the Securities Act and/or Regulation D as promulgated under the
Securities Act.
On December 3, 1997, the Company contracted with Lippert/Heilshorn &
Associates, Inc. ("LHA") to provide various investor relations and public
relations services for the Company. In return for such services, the Company
granted to LHA 30,000 options to purchase the Company's Common Stock at $5.78
per share (market price on date of grant). In addition, the Company agreed to
pay LHA a fee of $7,500 per month plus normal business expenses. The original
term of the contract terminated on March 31, 1998 and had continued on a
month-to-month basis until December, 1998, at which point the contract was
terminated completely.
On January 16, 1998, the Company entered into a letter agreement (the
"Letter Agreement") with Trinity Capital Advisors, Inc. ("Trinity") pursuant to
which Trinity agreed to identify an accredited investor who would provide
financing to the Company by purchasing shares of Common Stock from the Company.
In return for such service, the Company agreed to pay to Trinity a commission of
7% of the principal amount of the Common Stock sold and 20,000 warrants to
purchase Common Stock at $5.75 per share (market price on the date of grant). In
February 1998, Trinity identified Profutures as such an accredited investor (see
paragraph below). Pursuant to the Letter Agreement, in February 1998, the
Company paid a commission of $70,000 (i.e., 7% of the principal amount of the
Common Stock sold) and granted 20,000 warrants to Trinity.
On February 6, 1998, the Company entered into a two-year agreement with
Profutures whereby the Company issued 253,485 shares of its Common Stock for an
aggregate purchase price of $1,000,000. In addition, subject to certain
conditions, the agreement provides that, from time to time over the life of the
agreement, the Company shall issue put options ("Puts") to Profutures whereby
the Company shall issue for each Put and Profutures shall purchase, at the
Company's option, shares of the Company's Common Stock for a minimum of $250,000
and a maximum of $750,000. The total aggregate value of the Puts over the life
of the agreement must be a minimum of $1,000,000 and cannot exceed $5,000,000.
The purchase price of the Common Stock will be at 88% of the fair market value
of the Common Stock at the time of the Put. The following restrictions, among
others, apply beginning with the second Put: (1) there must be 20 business days
between Puts; (2) the average daily trading volume in the Company's Common Stock
for the 30 trading days prior to the Put date must be at least 20,000 shares;
(3) the minimum bid price for the Company's Common Stock on the trading day
immediately preceding the Put date must be at least $2.50; and (4) unless
Profutures agrees otherwise, no Put can be made which causes Profutures to own
more than 9.9% of the Company's then outstanding Common Stock.
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<PAGE>
In connection with such agreement, the Company issued to Profutures
warrants to purchase an aggregate of 50,000 shares of Common Stock at a purchase
price of $6.41 per share and supplemental warrants to purchase an aggregate of
50,000 shares of Common Stock at a purchase price of $3.95 per share. The
warrants may be exercised at any time beginning August 6, 1998 and ending 3
years thereafter. The supplemental warrants may be exercised at any time
beginning April 19, 1998 and ending 5 years thereafter.
On March 3, 1998, the Company entered into the Consulting Agreement with
Janssen-Meyers whereby Janssen-Meyers agreed to provide consulting services
relating to corporate finance and other financial services matters. As
compensation for such services, the Company agreed to pay Janssen-Meyers $5,000
per month during an initial term ending September 3, 1999, subject to automatic
one-year term extensions unless either the Company or Janssen-Meyers gives
written notice of termination at least 30 days prior to the end of the initial
or subsequent terms. In connection with such Consulting Agreement, the Company
also issued to Janssen-Meyers 400,000 Consultant Warrants. The Consultant
Warrants have an exercise price of $4 per share, are exercisable after September
3, 1999 and expire on March 3, 2003.
On May 11, 1998, the Company entered into a placement agency agreement with
Janssen-Meyers to act as the Company's placement agent in a private equity
placement whereby the Company issued to certain accredited investors, as defined
under Regulation D as promulgated under the Securities Act, 2,742,904 shares of
the Company's Common Stock and 2,057,207 Class A Redeemable Warrants between May
19, 1998 and June 9, 1998 for an aggregate purchase price of $7,280,546. Each
Class A Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price per share of $3.24, subject to adjustment upon
the occurrence of certain events to prevent dilution, at any time during the
period commencing on June 9, 1998 and expiring on May 11, 2003. The Class A
Redeemable Warrants are subject to redemption by the Company at $.01 per warrant
12 months after the effective date of a registration statement covering the
Class A Redeemable Warrants on not less than 30 days prior written notice to the
holders of the Class A Redeemable Warrants, provided the average closing bid
price of the Common Stock has been at least 250% of the then current exercise
price of the Class A Redeemable Warrants for a period of thirty consecutive
trading days ending on the day prior to the day on which the Company gives
notice of redemption. The Class A Redeemable Warrants will be exercisable until
the close of business on the day immediately preceding the date fixed for
redemption.
Janssen-Meyers received for acting as placement agent a commission of 10%
($728,055) of the gross proceeds from the sale of the Common Stock and Class A
Redeemable Warrants, as well as a 3% non-accountable expense allowance
($218,416) and reimbursement of other costs, including legal expenses relating
to the offering ($77,171). In addition, Janssen-Meyers received as part of its
compensation Unit Warrants, exercisable until May 11, 2003, to purchase up to
(i) 688,084 shares of the Company's Common Stock at a price per share ranging
from $2.50 to $3.06 and (ii) 516,068 Class A Redeemable Warrants to purchase up
to 516,068 shares of the Company's Common Stock at a price per share of $3.24.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Summary Financial Information
The summary financial data set forth below are derived from and should be
read in conjunction with the financial statements, including the notes thereto,
filed as part of this Form 10-KSB.
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<TABLE>
<CAPTION>
July 17, 1995
Year Ended Year Ended (Inception) to
Statement of Operations Data: December 31, 1997 December 31, 1998 December 31, 1998
<S> <C> <C> <C>
Revenues $ 10,275 $ 12,545 $ 22,820
Net Loss $ 3,848,316 $ 3,998,271 $ 13,187,827
Net loss per common share $ (0.72) $ (0.55)
Weighted average number of shares 5,343,348 7,259,896
December 31, December 31,
Balance Sheet Data: 1997 1998
Working capital $ 1,709,988 $ 4,904,765
Total assets $ 2,270,763 $ 5,515,352
Total liabilities $ 153,623 $ 261,201
Deficit accumulated during $ 9,189,556 $ 13,187,827
the development stage
Stockholders' equity $ 2,117,140 $ 5,254,151
</TABLE>
Forward Looking Statements
This Report on Form 10-KSB contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Report, including without
limitation, the statements under "General," "Marketing and Sales," "Research and
Development," "Manufacturing," "Liquidity and Capital Resources" and "Plan of
Operation" are forward-looking statements. The Company cautions that
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements, due to several important factors herein identified.
Important factors that could cause actual results to differ materially from
those indicated in the forward-looking statements ("Cautionary Statements")
include delays in product development, competitive products and pricing, general
economic conditions, risks of intellectual property litigation, product demand
and industry capacity, new product development, commercialization of new
technologies, the Company's ability to raise additional capital when required,
and the risk factors detailed from time to time in the Company's annual report
on Form 10-KSB and other materials filed with the Securities and Exchange
Commission ("SEC").
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
General
The Company is a development stage enterprise organized in July 1995. The
Company develops and intends to manufacture and market products that improve
picture quality in set-top boxes, TVs, VCRs, DVDs, camcorders and other video
devices by enhancing and manipulating video signals. In July 1996, the Company
completed an initial public offering ("IPO") of its Common Stock and Public
Warrants from which it received net proceeds of $9,538,428 and repaid $2,000,000
principal amount of promissory notes issued in a previous financing. On February
11, 1998, the Company received net proceeds of $859,347 for issuance of 253,485
shares of its Common Stock to Profutures. The Company
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<PAGE>
also issued warrants to purchase up to 100,000 shares of its Common Stock to
Profutures. In addition, the Company may issue Puts to Profutures over a
two-year period whereby Profutures shall purchase a minimum of $1,000,000 up to
a maximum of $5,000,000 of the Company's Common Stock (valued at 88% of the
market value thereof). Puts are for a minimum of $250,000 and a maximum of
$750,000 with certain restrictions applying beginning with the second Put. On
May 11, 1998, the Company entered into a placement agency agreement with
Janssen-Meyers Associates, L.P. ("Janssen-Meyers") to act as the Company's
placement agent in a private equity placement whereby the Company issued
2,742,904 shares of its Common Stock and 2,057,207 Class A Redeemable Warrants
between May 19, 1998 and June 9, 1998 for net proceeds of $6,035,562. See
"Management's Discussion and Analysis or Plan of Operation--Liquidity and
Capital Resources."
At the time of the IPO, the Company had produced and tested fully
operational working prototypes of certain of the Initial Products. Subsequent to
the IPO, the Company established the Advanced Engineering Group to support the
continuing development of its products and related technology, and the
identification of additional sources of new technology. The Advanced Engineering
Group is made up of the Company's own employees and third party consultants who
work with the Company on a project by project basis. The Advanced Engineering
Group operates under the direction of the Company's Vice President-Engineering
(prior to September 1998, it operated under the direction of the Company's Vice
President-Marketing/Technical Development). The Company utilizes its Advanced
Engineering Group to create products and technology independent of the "Licensed
Product" and "Licensed Process" as outlined in the License Agreement with Rave.
These independently developed products and technology include the NUWAVE Video
Processor ("NVP"), a significant amount of the software included in each of its
products and new circuitry to allow certain of the products to be produced as
ASICs. The Advanced Engineering Group also developed the Softsets for the NVP
and certain of the enhancements to it. Utilizing this technology, the Company
has developed the ProWave NVP 2.2, a product for the professional video market,
that is currently available as a stand-alone unit or a PC board with software.
The Advanced Engineering Group is also currently developing a commercial video
retail product also utilizing the NVP technology.
The Company intends to produce the NVP in the form of an ASIC chip in
accordance with a customer's specific application requirements supported by firm
commitments rather than producing and storing in inventory ASIC chips in
anticipation of applications required by customers in the future. In this
regard, the Company contracted with Adaptive Micro-Wave Inc. ("Adaptive"), an
engineering firm specializing in engineering product management, to provide
necessary technical support and manage this process under the Company's
direction. The Company also contracted with The Engineering Consortium ("TEC"),
a specialized design engineering group, to complete the design work necessary to
convert the Company's current NVP PC board design to ASIC specifications and
contracted with Zentrum Mikroelectronik Dresden GmbH ("ZMD"), a fabricator and
manufacturer of integrated circuits, for production of the ASIC. The Company
recently completed the final design layout of the ASIC chip and during March
1999 produced the first ASIC chips for testing and final evaluation purposes.
The Company has significantly scaled back its research and development, and
marketing and related activities with respect to all other existing or proposed
products in order to concentrate its resources on the continued development and
marketing of its Softsets and NVP products (i.e., ASIC chip for the OEM market,
the ProWave NVP 2.2 in the stand alone unit and PC board version for the
professional video market and the consumer video retail version). As indicated
above, the Company recently produced its first NVP ASIC chips for testing and
final evaluation purposes. The Company, through its Advanced Engineering Group
and agreements with third parties, is currently conducting
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investigation and research and development activities with respect to other new
technologies/products to address the digital, PC and internet markets. These
activities may give rise to additional products that may be commercialized by
the Company. However, there can be no assurance that its efforts will result in
marketable products or products that can be produced at commercially acceptable
costs. The Company believes this product strategy will allow it to take full
advantage of the growth opportunity presented by the converging PC, television,
internet and telecommunication markets, which the Company believes to be quite
significant.
As of December 31, 1998 the Company had accumulated a deficit during the
development stage of $13,187,827 which includes a net loss for the year ended
December 31, 1998 of $3,998,271. The loss for the year ended December 31, 1998
included $2,646,409 in general and administrative expenses, representing an
increase of $310,409 compared to the year ended December 31, 1997. This increase
was the result of the Company's planned growth and expansion including
establishment of a China office ($91,503), increased personnel and payroll costs
($22,558), professional and legal services ($203,315), insurance costs ($9,745),
investor relations ($85,305), travel and entertainment costs ($7,646), office
rent ($14,017), recruiting costs ($40,000), financial consulting fees ($235,412)
and other ($33,762). This increase was partially offset by a decline in sales
and marketing costs of $362,854 discussed more fully below and a $70,000
decrease in payments made to Prime Technologies, Inc. ("Prime") pursuant to the
Exclusive Agency Agreement ("Agency Agreement") between the Company and Prime
dated July 21, 1995. See "Liquidity and Capital Resources." Although the Company
anticipates deriving some revenue from the sale of its proprietary software
(Softsets) and the NVP products during 1999, no assurance can be given that
these products will be successfully marketed during such period. Even if
revenues are produced from the sale of such products, the Company expects to
continue to incur losses for at least the next 12 months. See "Liquidity and
Capital Resources."
Marketing and Sales
In anticipation of production of its NVP ASIC chip, the Company has been
conducting sales presentations of the NVP and Softsets to prospective OEM
customers world wide (i.e., manufacturers of set-top boxes, televisions, VCR's,
DVD's and other video output devices). During March 1999 the Company produced
its first NVP ASIC chips. After final evaluation and modification of these chips
the Company will launch a full-scale sales program aimed at obtaining orders
initially from those customers who have already evaluated the Company's
technology and wish to test these chips in their products. The Company has
marketing and sales organizations in place in the U.S., Japan and China, close
to key prospective customers, to implement this program. Although the Company is
unable to predict whether its marketing efforts will be successful, it believes
that its products have been well received.
In January 1998, the Company entered into a multi-year supply agreement
with Thomson Consumer Electronics ("Thomson") for the purchase of its NVP ASIC
chip. Thomson has recently informed the Company that it has not yet completed
the development of the product that will utilize the NVP ASIC chip, and
therefore orders are not expected during 1999.
The Company is currently developing retail products for consumers who do
not have NUWAVE enabled products for their TV's but want to improve the picture
quality of their home viewing. The Company's CWave Division will market these
products. The Company has determined that the most effective way to introduce
this product into the retail marketplace during 1999 is to work through
distributors who will manufacture and sell to retailers, including those with
whom they are
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<PAGE>
currently doing business. The Company recently announced a five-year
manufacturing and marketing agreement with Terk Industries, Inc., a well
respected brand name to manufacture and market under the Terk brand name, a
line-up of set-top boxes, incorporating NUWAVE's technology for existing
televisions and video output products. At present, there are three hundred
million non-enhanced televisions in the United States alone.
During the second quarter of 1998, the Company opened a sales and
engineering office in Osaka, Japan to maintain ongoing discussions, provide
in-person demonstrations of the Company's technology and directly participate in
technical due diligence sessions with potential customers who are evaluating the
Company's technology. During the third quarter of 1998, the Company opened a
sales and engineering office in Beijing, China for its products and technology
to be sold into the Chinese domestic market, which is equal in size to the U.S.
market.
During 1997, the Company formed its ProWave Division for sales and
marketing of the ProWave NVP 2.2 and related products to the professional video
market (e.g., security surveillance systems) and began selling limited
quantities (primarily for demonstration purposes until the ASIC chip is
available to replace the more expensive PC board) of its first commercial
product, the ProWave NVP 2.2.
The Company has contracted with Competitive Technologies, Inc. ("CTI") to
assist it in the development of the Company's OEM business. CTI, for over
twenty-six years, has been in the business of taking R&D and technology
companies and introducing them to the major companies specializing in their
respective markets. The Company also has contracts with several individuals and
organizations that will act in a commissioned sales representation capacity
regarding the Company's products.
During 1997, the Company had contracted with a professional marketing
communications firm to assist in the development and implementation of a program
to develop market awareness and commercialization of its products. This program
included development of Company and product brochures and press kits, product
specification sheets, development of a Company booth for use at trade shows,
attendance at key trade shows, mailers, the production of corporate videos for
use at sales presentations, development of and placement of advertisements in
key industry journals, etc. The developmental costs relating to these programs
were substantially incurred during 1997 and as a result such expenditures for
1998 were reduced by approximately $271,351. During the year ended December 31,
1998 costs included $21,204 for professional sales and marketing consultants
compared to $230,361 for the year ended December 31, 1997; $139,708 for
advertising and public relations compared to $314,527 for the year ended
December 31, 1997; $8,283 for trade shows compared to $47,610 for the twelve
months ended December 31, 1997; and $151,953 relating to the offices in Japan
and China opened in 1998. The Company is continually reviewing its needs with a
view to maximizing efficiency while conserving its resources.
Research and Development
For a discussion of the Company's research and development activities
carried out by its Advanced Engineering Group, see "Management's Discussion and
Analysis or Plan of Operation--General."
Research and development activity with respect to the Company's Initial
Products was carried out by Rave prior to July 21, 1995, the date upon which the
Company and Rave entered into the
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License Agreement and the Development Agreement. The Company's Initial Products
were based on technology originated by Rave prior to the Company's organization
and licensed to the Company by Rave pursuant to the License Agreement. Although
it was the Company's intention to utilize Rave as its primary source for
research and development activities, the Company has become dissatisfied with
Rave's performance under the Development Agreement and has found it necessary to
utilize its Advanced Engineering Group as its primary means for product
development. On October 1, 1998 the three-year term of the Development Agreement
between the Company and Rave expired. The Company paid Rave an aggregate of (i)
$2,731,906 for development services ("Development Service Payments"), (ii)
$541,593 for equipment which was supposed to be used in conjunction with
required development services and (iii) $125,913 for materials intended to be
used in conjunction with the development services. The Company has also
guaranteed an additional $76,078 for related equipment lease payments to be made
on Rave's behalf.
Concurrent with the research and development undertaken by the Advanced
Engineering Group, the Company retained patent counsel in 1996 to prosecute a
patent application on the video clarity circuit provided by Rave ( the "Rave
Clarity Circuit"), which, of the Initial Products, the Company had identified as
the most likely candidate for immediate commercial exploitation. The Company was
informed in January, 1998, that (a) such application had been rejected, and (b)
such initial rejections by the United States Patent and Trademark Office
("Patent office") are not uncommon. The claims in the application were modified
and the application was resubmitted twice. Both times it was again rejected by
the Patent Office on the grounds that the Rave Clarity Circuit was identical to
a circuit that was the subject of a prior United States patent issued to a third
party (the "Prior Art"). The Company has determined not to proceed with further
prosecution of the patent application on the Rave Clarity Circuit. The Company
acquired the exclusive rights to the Prior Art in August 1998.
In July 1998, the Company's representatives conducted a "Technical Audit"
of the consulting and development services (not limited to the Rave Clarity
Circuit) that Rave was to have performed under the License Agreement and the
Development Agreement. The Company concluded, on the basis of the Technical
Audit and the information regarding the Prior Art, that Rave had not performed
the required services and misled the Company about its ability to perform them,
and about Rave's ownership of the technology licensed to the Company.
The Development Service Payments also satisfied the Company's payment
obligations under the License Agreement between the Company and Rave which gave
the Company exclusive rights to the "Licensed Product" and "Licensed Process"
(each as defined therein) for the three-year term of the Development Agreement.
Commencing October 1, 1998, the Company did not pay Rave $65,000 per month under
the License Agreement thereby giving Rave the right, which was exercisable by
giving notice to the Company prior to November 2, 1998, to convert the Company's
rights to the "Licensed Product" and "Licensed Process" into that of a
non-exclusive licensee. Rave failed to give such notice in the specified time
and the Company believes it retains exclusive rights to the "Licensed Product"
and "Licensed Process."
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
under the American Arbitration Association Rules of Patent Arbitration against
Rave and Randy Burnworth. Such proceeding seeks (a) damages for the injuries to
the Company caused by Rave's and Burnworth's breaches of their contractual and
common law obligations to the Company, including but not limited to those
referred to above and (b) a declaration that, among other things, Rave is not
entitled to any royalties or other payments with respect to the Company's
technology and that the Company continues to
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have exclusive license rights to the "Licensed Product" and "Licensed Process"
under the License Agreement.
Rave has filed an amended counterclaim against the Company in the
Arbitration, alleging breaches of the License Agreement and Development
Agreement, trade libel, tortious interference and conspiracy, and seeking a
declaration that Rave is entitled to the return and exclusive use of its own
technology. Rave claims that it is entitled to $65,000 per month for the life of
any patents on products it developed for the Company (approximately 15 more
years), as well as damages in excess of $4 million on the various claims. The
Company believes that Rave's claims are completely without merit; accordingly no
liability has been recorded for this claim.
Manufacturing
The Company does not contemplate that it will directly manufacture any of
its products. It intends to contract with third parties to manufacture its
proposed NVP and Softsets. It also may license to third parties the rights to
manufacture the products, through direct licensing, OEM arrangements or
otherwise.
The Company intends to produce the NVP ASIC chip in accordance with a
customer's specific application requirements supported by firm commitments
rather than producing and storing in inventory ASIC chips in anticipation of
applications required by customers in the future. In this regard, the Company
contracted with Adaptive to provide necessary technical support and manage this
process under the Company's direction, contracted with TEC to complete the
design work necessary to convert the Company's current NVP PC board design to
ASIC specifications and contracted with ZMD for production of the ASIC. The
Company recently produced its first NVP ASIC chips for testing and final
evaluation purposes.
Employees
The Company has ten full-time employees and, depending on its level of
business activity, expects to hire additional employees in the next 12 months,
as needed, to support marketing and sales, manufacturing and research and
development.
Liquidity and Capital Resources
From its inception until the IPO, the Company relied for all of its funding
($2,900,000 in cash plus the cancellation of the notes in the principal amount
of $350,000) on private sales of its debt and equity securities ("Private
Financings"). In July 1996, the Company completed its IPO and received net
proceeds of $9,538,428. The Company used $2,073,652 of the net proceeds of the
IPO to repay the principal and interest on the outstanding notes issued to
investors in connection with the Private Financings.
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On February 6, 1998, the Company entered into a two-year agreement with
Profutures whereby the Company issued 253,485 shares of its Common Stock for an
aggregate purchase price of $1,000,000. On May 11, 1998, the Company entered
into a placement agency agreement with Janssen-Meyers to act as the Company's
placement agent in a private equity placement whereby the Company issued to
certain accredited investors, as defined under Regulation D as promulgated under
the Securities Act, 2,742,904 shares of the Company's Common Stock and 2,057,207
Class A Redeemable Warrants between May 19, 1998 and June 9, 1998 for an
aggregate purchase price of $7,280,546. See "Market For Registrant's Common
Equity and Related Stockholder Matters--Recent Sales of Unregistered Securities"
for further descriptions of these agreements.
As indicated earlier, the Company has developed products and technology
independent of the "Licensed Product" and "Licensed Process" covered by the
License Agreement with Rave and believes that a substantial portion of its
future sales will not include "Licensed Product" and "Licensed Process."
Pursuant to the terms of the Agency Agreement between the Company and Prime,
Prime will receive 35% of net sublicensing fees received by the Company with
respect to the first $50,000,000 of aggregate net sales of "Licensed Product,"
"Licensed Process" and "Results of Development" (as defined in the Development
Agreement) made by the Company's sublicensees, after subtracting any royalty
payments made to Rave pursuant to the License Agreement, and any other licensing
expenses, and thereafter 45%. Prime will also receive up to an additional
$1,500,000 of which (i) $400,000 has been paid in accordance with the terms of
the Agency Agreement, (ii) $400,000 is payable out of the Company's first
sublicensing fees of "Licensed Product," "Licensed Process" and "Results of
Development," and (iii) $700,000 is payable out of the Company's portion of
sublicensing royalties when net sublicensing sales of "Licensed Product,"
"Licensed Process" and "Results of Development" exceed $200,000,000.
The Company has determined to concentrate its resources and product
strategy on the sale of its Softsets and NVP products and therefore the Company
anticipates that its available cash will be sufficient to satisfy its
contemplated cash requirements for at least through the next twelve months.
Plan of Operation
The Company's plan of operation over the next 12 months focuses primarily
on the final phase of the development of its ASIC chip, marketing and sales of
its Softsets and NVP products in the OEM, professional video and retail markets
and the continued effort necessary to support the sales and marketing of these
products. In this regard, the Company has recently produced the first NVP ASIC
chips. After final evaluation of the chips, the Company plans to launch a
full-scale sales and marketing program aimed initially at obtaining orders from
those customers who have already evaluated the Company's technology and wish to
test the chips in their products. Also, the Company, through its Advanced
Engineering Group and agreement with third parties, is currently conducting
investigation and research and development activities with respect to other new
technologies/products to address the digital, PC and internet markets. These
activities may give rise to additional products that may be commercialized by
the Company. However, there can be no assurance that its efforts will result in
marketable products or products that can be produced at commercially acceptable
costs.
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations, that it has sufficient cash to satisfy
the estimated cash requirements of the Company for the next 12 months. In the
event of unanticipated expenses, delays or other problems beyond this period,
the Company might be required to seek additional funding. In addition, in the
event that the Company receives a larger than anticipated number of initial
purchase orders upon introduction of Softsets
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and the NVP products, it may require resources greater than its available cash
or than are otherwise available to the Company. In such event, the Company may
be required to raise additional capital. There can be no assurance that such
additional capital will be available to the Company if needed, on commercially
reasonable terms or at all.
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences, as well as the level of
competition and the ability of the Company to successfully market its products
and technology. There can be no assurance that the Company will be able to
successfully implement a marketing strategy, generate significant revenues or
achieve profitable operations. In addition, because the Company has had only
limited operations to date, there can be no assurance that its estimates will
prove to be accurate or that unforeseen events will not occur.
Year 2000
The Company recognizes the need to ensure that its operations and systems
(including information technology ("IT") and non-information technology
("non-IT") systems) will not be adversely affected by year 2000 hardware and
software issues. The year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable years. Any
of the company's programs that have time-sensitive software may recognize the
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculations or system failures. The year 2000 problem affects the
Company's installed computer systems, software applications and other business
systems that have time sensitive programs.
The Company has conducted a review of its IT and non-IT systems to identify
those systems that could be affected by the year 2000 problem. Modifications to
the Company's systems as a result of the findings have been completed. Testing
of these modifications was completed January 31, 1999. In addition, the Company
has contacted its major supplier (the fabricator/manufacturer of its ASIC chip)
to verify that the systems that the major supplier uses are or will be year 2000
compliant. If the Company's major supplier, or others with whom the Company does
business, experience problems related to the year 2000 issue, the Company's
business, financial condition or results of operations could be materially
adversely affected. Based on its current estimates and on information currently
available, the Company does not anticipate that the costs associated with year
2000 compliance issues will be material to the Company's financial position or
results of operations.
The Company believes that its year 2000 project will allow it to be year
2000 compliant in a timely manner. There can be no assurances, however, that the
Company's information systems or those of a third party on which the Company
relies will be year 2000 compliant by the year 2000. An interruption of the
Company's ability to conduct its business due to a year 2000 readiness problem
could have a material adverse affect on the Company's business, operations or
financial condition. There can be no guarantee that the Company's year 2000
goals or expense estimates will be achieved, and actual results could differ.
Certain Factors That May Affect Future Results
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Annual Report on Form 10-KSB and presented elsewhere by management from time to
time.
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1. Development Stage Enterprise; Absence of Operating History
The Company is a development stage enterprise. It has had only a limited
operating history and has sold only a limited quantity of its products to date
(primarily for demonstration purposes). Since its inception in July 1995, the
Company has been engaged primarily in: raising funds; directing Rave Engineering
Corporation in the continuing development of the Initial Products; recruiting
management and technical personnel, including members of the Company's Advanced
Engineering Group; directing and supervising its Advanced Engineering Group in
the continuing development of the NUWAVE Video Processor and the Softsets; and
pre-marketing activities.
More recently, the Company produced its first NUWAVE Video Processor in an
application specific integrated chip (ASIC) format. After final evaluation of
these chips, the Company will launch a full scale sales program aimed at
obtaining orders initially from those customers who have already evaluated the
Company's technology and wish to test these chips in their products.
The Company's prospects must be considered in light of the risks associated
with the establishment of a new business in the evolving electronic video
industry. In the Company's case this is particularly so, as further risks will
be encountered in its shift from the development to the commercialization of new
products based on innovative technology. There can be no assurance that the
Company will be able to generate revenues or achieve profitable operations.
2. Limited Revenues; Accumulated Deficit; Anticipated Future Losses
To date, the Company has received only limited revenue from the sale of its
products (primarily from sales made for demonstration purposes). It does not
anticipate significant operating revenue until its relevant technology and one
or more of its products is completely developed, manufactured in commercial
quantities and made available for commercial delivery. There can be no assurance
that its technology and products, if developed and manufactured, will be able to
compete successfully in the marketplace and/or generate significant revenue. The
Company has incurred significant costs in connection with the development of its
technologies and proposed products and there is no assurance that it will
achieve sufficient revenues to offset anticipated operating costs. As of
December 31, 1998, the Company had an accumulated deficit of $13,187,827.
Although the Company anticipates deriving some revenue from the sale of its
NUWAVE Video Processor and related products and Softsets within the next 12
months, no assurance can be given that these products will be successfully
marketed or even completely developed and tested for commercial use during such
period. Management anticipates that the Company will continue to incur
substantial losses for at least the next 12 months. Included in such former and
future losses are research and development expenses, marketing costs,
manufacture and assembly, and general and administrative expenses. The Company
anticipates that it will continue to have high levels of operating expenses and
will be required to make significant expenditures in connection with its
continued research and development activities. The Company anticipates that its
losses will continue until it is able to generate sufficient revenues to support
its operations.
3. Significant Capital Requirements; Dependence on Available Cash; Need for
Additional Financing
The Company's capital requirements in connection with its development
activities have been and will continue to be significant. The Company has been
dependent upon the proceeds of sales of its securities to private investors to
fund its initial development activities. Since its initial public offering in
July 1996, the Company has raised capital by making the following sale of its
securities to
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private investors: on February 11, 1998, the Company received net proceeds of
approximately $859,347 from the sale of 253,485 shares of its Common Stock to
Profutures Special Equities Fund, L.P. ("Profutures") pursuant to a Securities
Subscription Agreement dated as of February 6, 1998 (the "Investment
Agreement"); and between May 19, 1998 and June 9, 1998, the Company received net
proceeds of approximately $6,035562 from the sale of 2,742,904 shares of its
Common Stock and 2,057,207 Class A Redeemable Warrants to certain accredited
investors. See "Management's Discussion and Analysis or Plan of
Operation--General."
In addition, under the Investment Agreement, the Company has the right,
subject to certain conditions, to draw up to $5,000,000 in cash by selling
shares of Common Stock to ProFutures. The Company has this right until April 15,
2000, and such shares are to be sold at a price equal to eighty-eight percent
(88%) of the Market Price (as defined in the Investment Agreement) of the Common
Stock on the relevant draw down date. There is no assurance, however, that the
conditions to the right to draw will be satisfied. The company has the sole
discretion, subject to certain conditions, as to when and in what amount such
draws will be made. However, The Company is required to draw a minimum of
$1,000,000 in cash in exchange for shares of Common Stock prior to April 15,
2000. A registration statement on Form S-3 covering the resale of all of the
Common Stock issued and issuable to ProFutures under the Investment Agreement
became effective on April 15, 1998.
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations, that it has sufficient cash to satisfy
all of its estimated cash requirements for the next 12 months. In the event of
unanticipated expenses, delays or other problems, the Company might be required
to either utilize the equity financing available under the Investment Agreement
or seek additional funding elsewhere. Also, if it were to receive a larger than
anticipated number of initial purchase orders upon introduction of the Softsets
or the NuWave Video Processor products, the Company might require additional
capital. No assurance can be given that the Company will be able to obtain such
additional capital on commercially reasonable terms or at all. An inability to
obtain additional financing, when needed, would have a material adverse effect
on the Company, and possibly require it to curtail or cease operations. To the
extent that any future financing involves the sale the Company's equity
securities, its existing stockholders could be substantially diluted.
4. New Concept; Uncertainty of Market Acceptance; Lack of Marketing Experience
The Company develops technology and products utilizing new concepts and
designs in video imagery and processing. The Company's prospects for success
will depend on its ability to successfully sell its products to key
manufacturers and distributors who may be inhibited from doing business with the
Company because of their commitment to their own technologies and products. As a
result, demand and market acceptance for the Company's technology and products
are subject to a high level of uncertainty. The Company currently has limited
financial, personnel and other resources to undertake the extensive marketing
activities that will be necessary to market its technology and products once
their development is completed. No assurance can be given that any of its
potential customers will enter into any arrangements with the Company. Further,
there is no assurance that the Company's marketing efforts will be successful.
5. Dependence on Third-Party Design Changes
Commercialization of the NuWave Video Processor and sale to manufacturers
of the relevant video equipment will require such manufacturers to adopt new
circuit configurations to accommodate the relevant chip in their products. The
Company anticipates that manufacturers wishing
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to use the NuWave Video Processor will make such modifications because of the
benefits derived from the improved performance of their products and the
relative simplicity of such modifications. However, there is no assurance that
such modifications will be made. Also, the cost of such modifications may
inhibit or prevent their adoption. The Company's ability to sell and/or license
its products would be adversely affected if designers and manufacturers fail to
make such modifications.
6. License
General. In July 1995, the company entered into the following agreements
with Rave Engineering Corporation ("Rave"): (1) Exclusive Worldwide License
Agreement, dated July 21, 1995 (the "License Agreement") and (2) Development
Agreement, dated July 21, 1995 (the "Development Agreement"), which expired on
October 1, 1998. Pursuant to the License Agreement, Rave licensed to the Company
a substantial portion of the technology from which its Initial Products were
derived. See "Summary--The Company" for a definition of Initial Products. Under
the License Agreement, the Company is obligated to pay to Rave the following:
o royalties of 2.5% of "Licensed Product" (as defined in the License
Agreement) the Company sells;
o royalties of 25% of any sublicensing fees that sublicensees of the
"Licensed Product" and "Licensed Process" (as defined in the License
Agreement) pay to the Company; and
o minimum aggregate payments of royalties (under the License Agreement)
and development fees (under the Development Agreement) equaling
$65,000 per month.
If the Company does not make the $65,000 minimum aggregate payment
described above, Rave has the option to make the License Agreement
non-exclusive. Commencing October 1, 1998, the Company stopped paying to Rave
such minimum amount. This gave Rave the right to make the License Agreement
non-exclusive by giving the Company notice prior to November 2, 1998. However,
Rave failed to give such notice within the specified time. Accordingly, the
Company believes that it still retains exclusive license rights to the "Licensed
Product" and "Licensed Process" under the License Agreement.
Arbitration. In July 1996, on behalf of Rave, the Company filed a patent
application on a video clarity circuit which Rave provided to it under the
License Agreement ("Rave Clarity Circuit"). Of the products and technology which
Rave provided to the Company under the License Agreement, the Company identified
the Rave Clarity Circuit as the most likely candidate for immediate commercial
exploitation. Although Rave claimed proprietary rights to the Rave Clarity
Circuit, in January 1998, the Company received a rejection of its patent
application from the patent examiner's office. The Company modified the claims
in the application and resubmitted the application twice. Both times it was
rejected on the grounds that the Rave Clarity Circuit was identical to a
previously patented circuit. In August 1998, the Company acquired exclusive
rights to such previously patented circuit. As a result, the Company decided not
to proceed with further prosecution of the patent application on the Rave
Clarity Circuit.
Dissatisfied with Rave's performance under the Development Agreement, in
July 1998, representatives of the Company conducted a technical audit of the
consulting and development services (not limited to the Rave Clarity Circuit)
that Rave agreed to perform under the License Agreement and
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the Development Agreement. On the basis of such audit and the repeated
rejections of the patent applications for the Rave Clarity Circuit, the Company
concluded that:
o Rave had not performed the required services under the Development
Agreement;
o Rave misled the Company about its ability to perform the services
required under the Development Agreement; and
o Rave misled the Company about Rave's propriety rights to the Rave
Clarity Circuit.
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
under the American Arbitration Association Rules of Patent Arbitration against
Rave and Randy Burnworth. Such proceeding seeks:
o damages due to Rave's and Burnworth's breaches of their contractual
and common law obligations to the Company, including but not limited
to those described above; and
o a determination that, among other things, Rave is not entitled to any
royalties or other payments with respect to the Company's technology
and that the Company continue to have exclusive license rights to the
"Licensed Product" and "Licensed Process" under the License Agreement.
There is no assurance that the Company will be successful in the
Arbitration. Further, if the arbitrator rules that Rave is entitled to
significant royalties or other payments with respect to its technology, it could
have a material adverse effect on the Company's operations.
Rave has filed an amended counterclaim against the Company in the
Arbitration, alleging breaches of the License Agreement and Development
Agreement, trade libel, tortious interference and conspiracy, and seeking a
declaration that Rave is entitled to the return and exclusive use of its own
technology. Rave claims that it is entitled to $65,000 per month for the life of
any patents on products it developed for the Company (approximately 15 more
years), as well as damages in excess of $4 million on the various claims. The
Company believes that Rave's claims are completely without merit; accordingly no
liability has been recorded for this claim.
7. Uncertainty of Product and Technology Development; Need for Product
Testing; Technological Factors
Development of the Company's products are subject to all of the risks
inherent in the development of new technology and products including the
following risks: unanticipated delays; expenses; technical problems or
difficulties; and possible insufficiency of funding to complete development.
There is no assurance as to when, or whether, the Company can successfully
complete such developments. Further, there is no assurance that the Company can
develop products in commercially
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salable form within its projected development schedule. If the Company is unable
to complete its development activities for its proposed products, it would have
to complete development through third parties. Management believes that the
Company has sufficient resources to complete development of its products.
However, there is no assurance that it will be able to complete such development
in a timely manner, or at all. There is also no assurance that it can enter into
economically reasonable arrangements for the completion of such products by
third parties.
In connection with the development of commercially salable prototypes, the
Company must successfully complete a testing program for its products before
marketing them. Unforeseen technical problems arising out of such testing could
significantly and adversely affect its ability to manufacture a commercially
acceptable version. In addition, the Company's success will depend upon its
technology and proposed products meeting acceptable cost and performance
criteria and upon their timely introduction into the marketplace. There can be
no assurance that the Company's technology and proposed products will
satisfactorily perform the functions for which they are designed, that they will
meet applicable price or performance objectives or that unanticipated technical
or other problems will not occur. Should any such problems arise, the result
would be increased costs and/or material delays in the development of the
proposed products.
8. Unconditional Obligation to Share Sublicense Fees
The Company has entered into an Agency Agreement with Prime. The Agency
Agreement provides that Prime will be the Company's exclusive agent for entering
into sublicenses for the products and technology licensed to the Company by Rave
under the License Agreement. It also provides that Prime will assist the Company
in the development and implementation of a sublicensing program. [Subject to
certain minimum sales requirements, the Company is required to pay to Prime 35%
to 45% of net sublicense fees that it receives (together with certain additional
payments) for (a) "Licensed Product" and "Licensed Process" (as defined under
the License Agreement) and for the "Results of Developments"; (b) improvements
and enhancements to the "Licensed Product" and "Licensed Process" that Rave
develops under the Development Agreement; and (c) the results of its efforts in
unrelated investigations.] These payments, together with payments of sublicense
royalties to Rave under the License Agreement, obligate the Company to pay Rave
and Prime 51.25% to 58.75% of the sublicense fees. However, instead of
sublicensing, if the Company sells "Licensed Product," it is obligated to pay
only Rave a sales royalty of 2.5% of net sales.
The Company is required to make payments to Prime regardless of whether or
not it enters into the relevant sublicense through Prime's efforts. Since the
Company is obliged to pay Prime and Rave more than one-half of any sublicensing
fees that it receives for the technology licensed to the Company under the
License Agreement or developed under the Development Agreement, sublicensing of
such technology may become a less attractive alternative than selling products.
In some cases, however, the sale of products embodying such technology may be
more difficult than licensing such technology.
The Company's obligations to Prime could be affected by the Arbitration
with Rave described above in "License" or by subsequent arbitration proceedings
with Prime. See "Certain Factors That May Affect Future Results--License."
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9. Dependence on Third-Party Development and Manufacturing
The Company does not plan to directly manufacture any of its products. It
intends to contract with third parties to manufacture its proposed NUWAVE Video
Processor and Softsets, and related retail products. The Company may also
license to third parties the rights to manufacture proposed products, through
direct licensing, OEM arrangements or otherwise.
The Company will be dependent on third parties to manufacture the NVP ASIC
(the application specific integrated circuit-based NUWAVE Video Processor) and
related products as well as future products the Company may choose to
commercialize. Although the Company has entered into an agreement with a
potential manufacturer of the NVP ASIC chip, there can be no assurance that such
manufacturer will dedicate sufficient production capacity to satisfy the
Company's requirements within scheduled delivery times, or at all. Failure or
delay by the Company's suppliers in fulfilling its anticipated needs would have
an adverse effect on the Company's ability to develop and market its products.
In addition, the Company will be dependent on third party vendors for many of
the components necessary for the final assembly of its products. The Company may
have difficulty in obtaining contractual agreements with suppliers of such
materials due to, among other things, possible material shortages or possible
lack of adequate purchasing power. While management believes that these
components are available from multiple sources, it is anticipated that the
Company will obtain certain of them from a single source, or limited number of
sources, of supply. In the event that certain of such suppliers are unable or
unwilling to provide the Company with such components on commercially reasonable
terms, or at all, delays in securing alternative sources of supply would result
and could have a material adverse effect on the Company's operations.
10. Competition
Intense competition exists in the markets that the Company intends to
enter. Further, with respect to the market for video editing, video production
and video processing products, significant price erosion over the life of a
product exists. The Company's products will directly compete with those of
numerous well-established companies, such as the following companies, which
design, manufacture and/or market video technology and other products:
o Sony Electronics, Inc.
o Panasonic Division of Matsushita Electric Industrial Co.
o Motorola, Inc.
o Mitsubishi International Corp.
o Phillips Electronics, NV
All of the above companies have substantially greater financial, technical,
personnel and other resources than the Company. Further, each has established a
reputation for success in the development, licensing, sale and service of its
products and technology. In addition, certain of these competitors dominate
their industries and have the necessary financial resources to enable them to
withstand substantial price competition or downturns in the market for video
products.
11. Rapid Changes to Industry Standards; Product Obsolescence
Rapid changes characterize the markets for the Company's technology and
products. Further, evolving industry standards often result in product
obsolescence or short product life cycles. Certain companies may be developing
technologies or products that may be functionally similar, or
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superior, to some or all of the Company's proposed products. As a result, the
Company's ability to compete will depend on its ability to, among other things:
o complete development and introduce to the marketplace in a timely and
cost-competitive manner its proposed products and technology;
o continually enhance and improve its proposed products and technology;
o adapt its proposed products to be compatible with specific products
manufactured by others; and
o successfully develop and market new products and technology.
There is no assurance that the Company will be able to compete successfully
or that its competitors will not develop technologies or products that render
the Company's products and technology obsolete or less marketable. Further,
there is no assurance that the Company will be able to successfully enhance its
proposed products or technology or adapt them satisfactorily.
12. Enforceability of Patents and Similar Rights; Possible Issuance of Patents
to Competitors; Trade Secrets
To the extent practicable, the Company has filed and intends to file U.S.
patents and/or copyright applications for certain of its proposed products and
technology. The Company has also filed and intends to file corresponding
applications in key industrial countries worldwide.
Under the License Agreement, the Company has exclusive license rights to
all patents and copyrights obtained or to be obtained for the products and
technology licensed under the License Agreement. For a discussion relating to
the License Agreement and the exclusivity provisions thereunder, see "Certain
Factors That May Affect Future Results--License." In April 1996, the Company
filed two patent applications on behalf of Rave for its Randall connector
system. One patent was received in November 1997 and the second one in January
1998.
In April 1998, the Company filed three patent applications for certain of
its independently developed products: one for the NUWAVE Video Processor and two
for the Softsets. Although management believes that each of these applications
contains patentable claims, there is no assurance that the Company will receive
any patents. Also, even if granted, there is no assurance that any patent will
afford the Company with commercially significant protection of its technology or
that it will have adequate resources to enforce these patents.
The company also intends to license and/or sell its technology and products
in foreign markets. As such, it intends to seek foreign patent protection. The
patent laws of other countries may differ significantly from those of the United
States as to the patentability of the Company's products and technology.
Moreover, the degree of protection afforded by foreign patents may be different
from that in the United States. Patent applications in the United States are
maintained in secrecy until the patents are issued, and publication of
discoveries in scientific or patent literature tends to lag behind actual
discoveries by several months. As a result, the Company cannot be certain that
it will be the first creator of inventions covered by any patent applications it
makes or the first to file patent applications on such inventions.
Management believes that the products the Company intends to market and
sell do not infringe the patents or other proprietary rights of third parties.
Further, it is not aware of any patents held
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by competitors that will prevent, limit or otherwise interfere with the
Company's ability to make and sell its products. However, it is possible that
competitors may have applied for, or may in the future apply for and obtain,
patents which have an adverse impact on the Company's ability to make and sell
its products. In addition, because the Company is a relatively new company in
the development stage, claims that its products infringe on the proprietary
rights of others are more likely to be asserted after commencement of commercial
sales of its products. There is no assurance that competitors will not infringe
the Company's patents. Defense and prosecution of patent suits, even if
successful, are both costly and time consuming. An adverse outcome in the
defense of a patent suit could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require it to cease selling its products.
The Company also relies on unpatented proprietary technology. There is no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. To
protect its trade secrets and other proprietary information, the Company
requires employees, advisors and collaborators to enter into confidentiality
agreements. The Company could be adversely affected in the event that these
agreements fail to provide meaningful protection for its trade secrets, know-how
or other proprietary information.
13. No Dividends
The Company has not paid any cash dividends to date. Payment of dividends
on the Company's Common Stock is within the discretion of the Board of Directors
and will depend upon the Company's earnings, capital requirements and financial
condition, and other relevant factors. The Company does not intend to declare
any dividends on its Common Stock in the foreseeable future. Instead, it plans
to retain any earnings it receives for development of its business operations.
14. Limitation on Tax Loss Carryforwards
As of December 31, 1998, the Company had available unused net operating
loss carryforwards ("NOLs") aggregating approximately $8,778,000 to offset
future taxable income. The unused NOLs expire in various years from 2010 to
2018. Under Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of prior NOLs is limited after an ownership change. The
company may be subject to limitations on the use of its NOLs as provided under
Section 382. Accordingly, there can be no assurance that a significant amount of
the existing NOLs will be available to use. In the event that the Company
achieves profitability, as to which there can be no assurance, such limitation
would have the effect of increasing its tax liability and reducing its net
income and available cash resources in the future.
15. Limitation on Liability of Directors and Officers
The Company's Certificate of Incorporation provides that: it indemnify any
of its directors, officers, employees or agents against actions, suits or
proceedings relating to the Company; and subject to certain limitations, a
director shall not be personally liable for monetary damages for breach of his
fiduciary duty. In addition, the Company has entered into an indemnification
agreement with each of its directors. Such indemnification agreement provides
that a director is entitled to indemnification to the fullest extent permitted
by law.
31
<PAGE>
16. Reliance Upon Key Personnel
The Company's operations depend largely on the continued employment of Mr.
Gerald Zarin, Chairman of the Board, President and Chief Executive Officer. If
Mr. Zarin or other members of management or key personnel resign or otherwise
leave the Company, its business and financial condition could be materially
adversely affected.
17. General
Because of these and other factors, past financial performance should not
be considered as an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's Common Stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the computer, video and telecommunications industries, changes in
earnings estimates, recommendations by analysts and other events.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to pages
F-1 through F-19 of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Dismissal of Independent Accounting Firm
Coopers & Lybrand L.L.P. ("Coopers"), the independent accounting firm which
audited the financial statements of the registrant during fiscal year 1996, was
dismissed by the Company on February 11, 1998. Coopers' reports on the Company's
financial statements for the past two years did not contain any adverse opinions
or disclaimers of opinion, and neither report was qualified or modified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was approved by the Board of Directors of the Company at the Meeting
of the Board of Directors of the Company on February 4, 1998. 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 disagreements, if not resolved to the
satisfaction of Coopers, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
Engagement of New Independent Accountants
The Company has engaged Richard A. Eisner & Company, LLP as its new
independent accountants effective February 11, 1998. During the Company's two
most recent fiscal years and any subsequent interim period prior to engaging
such accountants, the Company has not consulted with Richard A. Eisner &
Company, LLP regarding any of the matters specified in Item 304(a)(2) of
Regulation S-B.
The disclosure called for by this Item 8 has been previously disclosed by
the Company under Item 4 of the Company's Current Report on Form 8-K filed with
the SEC on February 18, 1998.
32
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names, ages as of March 17, 1999 and business
experience of the directors and executive officers of the Company:
Name Age Position
---- --- --------
Gerald Zarin 58 Chairman of the Board of Directors,
Chief Executive Officer and President
Ed Bohn 53 Director
Lyle E. Gramley 72 Director
Joseph A. Sarubbi 70 Director
Don Legato 55 Vice President-Sales
Jeremiah F. O'Brien 52 Vice President, Secretary and Chief
Financial Officer
Robert Webb 63 Vice President - Marketing/Technical
Development
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.
ED 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 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.
33
<PAGE>
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.
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
US). 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 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.
ITEM 10. EXECUTIVE COMPENSATION
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, 1997 and 1998, with respect to those persons who
were, as of December 31, 1998, the Company's Chief Executive Officer and the
Company's executive officers (the "Named Executive Officers").
34
<PAGE>
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 1996 $115,700 $50,000 0 0 0
Chief Executive Officer 1997 $120,000 0 0 0 0
1998 $120,000 $25,000 0 385,000 0
- ---------------------------------------------------------------------------------------------------------------
Don Legato, 1997 $129,800 0 0 60,000 0
Vice President-Sales 1998 $150,000 $12,500 0 50,000 0
- ---------------------------------------------------------------------------------------------------------------
Jeremiah F. O'Brien, Chief 1996 $ 93,100 $7,500 0 5,000 0
Financial Officer, Vice 1997 $100,000 0 0 0 0
President and Secretary 1998 $103,800 $15,000 0 75,000 0
- ---------------------------------------------------------------------------------------------------------------
Robert Webb, Vice 1996 $ 99,900 $17,500 0 0 0
President-Marketing/ 1997 $108,000 0 0 0 0
Technical Development 1998 $108,000 $12,500 0 40,000 0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all grants of options for the Company's
Common Stock to the Named Executive Officers of the Company during fiscal 1998.
OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1998
(Individual Grants in Fiscal Year)
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Price
Name Options Employees Per Share (1) Expiration Date
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gerald Zarin 128,334 19.7 3.25 May 25, 2003
128,333 19.7 3.25 May 25, 2004
128,333 19.7 3.25 May 25, 2005
Don Legato 16,667 2.6 3.25 May 25, 2003
16,667 2.6 3.25 May 25, 2004
16,666 2.6 3.25 May 25, 2005
Jeremiah F. O'Brien 25,000 3.8 3.25 May 25, 2003
25,000 3.8 3.25 May 25, 2004
25,000 3.8 3.25 May 25, 2005
Robert Webb 13,334 2.0 3.25 May 25, 2003
13,333 2.0 3.25 May 25, 2004
13,333 2.0 3.25 May 25, 2005
- ----------------------------------------------------------------------------------------------------
TOTAL 550,000 84.2%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) All grants of options have been made with exercise prices equal to fair
value at date of grant.
AGGREGATED OPTION EXERCISES
No options were exercised in fiscal year 1998 by any of the Named Executive
Officers. The following table sets forth, as of December 31, 1998, the number of
stock options and the value of unexercised stock options held by the Named
Executive Officers.
36
<PAGE>
Aggregated Option Exercises in Year Ended December 31, 1998
and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options(1)
Name Options at December 31, 1998 at December 31, 1998
---- ---------------------------- -----------------------
- ------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gerald Zarin 328,334 256,666 $299,000 $0
Robert Webb 83,334 26,666 105,000 0
Don Legato 76,667 33,333 0 0
Jeremiah F. O'Brien 55,000 50,000 42,000 0
- ------------------------------------------------------------------------------------------------------------
TOTAL: 548,335 366,665 $446,000 $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 fiscal
year-end.
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, 1998, each of Messrs. Bohn,
Gramley and Sarubbi received compensation of $2,500 and $1,500 for attendance at
three non-telephonic board meetings and David Kwong (who resigned as a director
in August 1998) received compensation of $2,500 and $1,000 for attendance at two
non-telephonic board meetings. For the fiscal year ended December 31, 1998, the
following stock options were granted to the Company's directors: 53,000 options
to Mr. Bohn and 25,000 options to each of Messrs. Gramley, Kwong and Sarubbi.
The stock options granted to the directors during 1998 expire as follows: one
third (42,666 options) on May 29, 2002; one third (42,666 options) on May 29,
2003; and the remaining 42,668 options on May 29, 2004.
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 are 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
37
<PAGE>
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. These stock options expire as follows: 30,000 options on September 11,
2000; 20,000 options on September 11, 2001; and the remaining 20,000 options on
September 11, 2002.
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 August
1997 and thereafter has been continuing for successive 3-month periods. Mr.
Legato's initial salary was $150,000 per year 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. These
stock options expire as follows: 5,000 options on February 10, 2002; 5,000
options on June 10, 2002; 20,000 options on February 10, 2003; and the remaining
30,000 options on February 10, 2004.
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. The stock options expire as follows: 10,714 options on July 17, 2000;
7,143 options on July 17, 2001; and the remaining 7,143 options on July 17,
12002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS 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 March
12, 1999 (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.
38
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF AMOUNT AND NATURE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) SHARES OWNED (2)
- ------------------- ------------------------ ----------------
<S> <C> <C>
Gerald Zarin 781,334 9.0%
36 Troy Drive
Short Hills, NJ 07078 (3)
Edward Bohn 46,833 *
322 Broadway
Pompton Lakes, NJ 07442 (4)
Lyle Gramley 33,334 *
12901 Three Sisters Road
Potomac, MD 20854 (5)
Joseph A. Sarubbi 48,334 *
3221 S. Ocean Blvd., Suite 908
Highland Beach, FL 33487 (5)
Don Legato 76,667 *
2 West Close Street
Moorestown, NJ 08057 (6)
Jeremiah F. O'Brien 62,500 *
Netherland Avenue Apt. D-61
Riverdale, NY 10471 (7)
Robert Webb 83,334 *
298 Stanton Mountain Rd.
Lebanon, NJ 08833 (8)
Helen Burgess 577,854 6.9%
40 E. 30th St., 10th Fl.
New York, NY 10016
David Kwong 459,718 5.5%
13694 Fremont Pines Road
Los Altos, CA 94022 (5) (9) (10)
Bruce Meyers 1,335,013 15.1%
17 State Street
New York, NY 10004 (11) (12) (13)
Peter Janssen 1,132,311 12.9%
17 State Street
New York, NY 10004 (14) (15) (16)
Janssen-Meyers Associates, L.P. 562,042 6.3%
17 State Street
New York, NY 10004 (17)
All executive officers and directors as 1,132,336 12.6%
a group (7 persons) (18)
</TABLE>
- -----------------------------------------
* Less than 1%.
(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
39
<PAGE>
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 December 31, 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
December 31, 1998 plus any shares subject to options and warrants held by
the person in question that are currently exercisable within 60 days after
December 31, 1998.
(3) Includes 328,334 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options.
(4) Includes 41,833 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options.
(5) Includes 13,334 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options.
(6) Includes 76,667 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options.
(7) Includes 55,000 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options. Also includes 2,500
shares that may be acquired within 60 days after December 31, 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.
(8) Includes 83,334 shares that may be acquired within 60 days after December
31, 1998, upon the exercise of outstanding options.
(9) David Kwong, a former director of the Company, owns approximately 21.6% of
Prime's stock. Mr. Kwong is a director of Prime. Mr. Kwong disclaims
beneficial interest in the Company's Common Stock owned by Prime.
(10) Includes 231,117 shares of the Company's Common Stock owned by Prime, as to
which Mr. Kwong disclaims beneficial interest. See footnote 9 above.
(11) Includes (i) 202,703 shares that may be acquired within 60 days after
December 31, 1998, upon the exercise of Class A Redeemable Warrants, (ii)
171, 427 shares that may be acquired within 60 days after December 31,
1998, upon the exercise of Unit Warrants and (iii) 128,571 shares that may
be acquired within 60 days after December 31, 1998, upon the exercise of
the Class A Redeemable Warrants which underlie the Unit Warrants.
(12) Bruce Meyers is a principal of Janssen-Meyers Associates, L.P.
("Janssen-Meyers"). Mr. Meyers disclaims beneficial interest in the
Company's Common Stock beneficially owned by Janssen-Meyers.
(13) Includes 562,042 shares of the Company's Common Stock beneficially owned by
Janssen-Meyers, as to which Mr. Meyers disclaims beneficial interest. See
footnote (12) above and footnote (17) below.
(14) Includes (i) 115,831 shares that may be acquired within 60 days after
December 31, 1998, upon the exercise of Class A Redeemable Warrants, (ii)
171, 427 shares that may be acquired within 60 days after December 31,
1998, upon the exercise of Unit Warrants and (iii) 128,571 shares that may
be acquired within 60 days after December 31, 1998, upon the exercise of
the Class A Redeemable Warrants which underlie the Unit Warrants.
(15) Peter Janssen is a principal of Janssen-Meyers. Mr. Janssen disclaims
beneficial interest in the Company's Common Stock beneficially owned by
Janssen-Meyers.
(16) Includes 562,042 shares of the Company's Common Stock beneficially owned by
Janssen-Meyers, as to which Mr. Janssen disclaims beneficial interest. See
footnote (15) above and footnote (17) below.
(17) Includes (i) 321,165 shares that may be acquired within 60 days after
December 31, 1998, upon the exercise of Unit Warrants and (ii) 240,877
shares that may be acquired within 60 days after December 31, 1998, upon
the exercise of the Class A Redeemable Warrants which underlie the Unit
Warrants.
(18) See footnotes (1) through (8) above.
40
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
For a description of the formation of the Company and transactions with
"Promoters" of the Company within the meaning of the regulations promulgated by
the Commission pursuant to the provisions of the Securities Act, see
"Business--History."
The Company entered into a consulting agreement with Corporate Builders,
L.P. ("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 June 30, 1998. 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, 1998 was $205,000 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, 1998 was $294,998.
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 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,
41
<PAGE>
Mr. Bohn received $56,750 on account of such consulting services and for the
year ended December 31, 1998, Mr. Bohn received $35,025 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. For the year
ended December 31, 1998, Mr. Sarubbi received $20,000 on account of such
consulting services.
In July and August 1995, Ms. Helen Burgess, a 6.9% 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 IPO 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 IPO. Ms. Burgess is
a limited partner of Corporate Builders.
On March 27, 1996, Mr. David Kwong, a former 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 IPO. For the
year ended December 31, 1998, Mr. Kwong received $47,500 for consulting services
relating to the opening and administration of a sales office in China.
On May 11, 1998, the Company entered into a placement agency agreement with
Janssen-Meyers whereby Janssen-Meyers agreed to act as the Company's placement
agent in a private equity placement of the Company's Common Stock and Class A
Redeemable Warrants. See "Management's Discussion and Analysis or Plan of
Operation--Liquidity and Capital Resources."
Bruce Meyers and Peter Janssen, who respectively purchased 270,270 shares
and 154,440 shares of Common Stock of the Company in such private equity
placement, are principals of Janssen-Meyers.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
1.1* Form of Underwriting Agreement (See Exhibit 1.1 to Registration
Statement on Form SB-2 filed with the Commission on April 2, 1996).
3.1* Articles of Incorporation of the Company (Delaware) (See Exhibit
3.1(a) to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
42
<PAGE>
3.2* Certificate of Amendment to Articles of Incorporation of the Company
(Delaware) (See Exhibit 3.1(b) to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
3.3* Certificate of Authority (New Jersey) (See Exhibit 3.1(c) to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
3.4* Amended Certificate of Authority (New Jersey) (See Exhibit 3.1(d) to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
3.5* Certificate of Amendment to Articles of Incorporation of the Company
(Delaware) (See Exhibit 3.1(e) to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
3.6* By-Laws of the Company (See Exhibit 3.2 to Registration Statement on
Form SB-2 filed with the Commission on April 2, 1996).
4.1* Form of Common Stock Certificate (See Exhibit 4.1 to Amendment No. 2
to Registration Statement on Form SB-2 filed with the Commission on
July 3, 1996).
4.2* Form of Public Warrant Agreement between the Company, American Stock
Transfer & Trust Company and Rickel & Associates, Inc. (See Exhibit
4.2 to Amendment No. 1 to Registration Statement on Form SB-2 filed
with the Commission on May 22, 1996).
4.3* Form of Public Warrant Certificate (See Exhibit 4.3 to Amendment No. 2
to Registration Statement on Form SB-2 filed with the Commission on
July 3, 1996).
4.4* Form of Underwriter's Warrant Agreement (including Warrant
Certificate) between the Company and Rickel & Associates (See Exhibit
4.4 to Amendment No. 1 to Registration Statement on Form SB-2 filed
with the Commission on May 22, 1996).
4.5* Selected Dealer Agreement among Rickel & Associates, Inc. and certain
underwriters (See Exhibit 4.5 to Amendment No. 2 to Registration
Statement on Form SB-2 filed with the Commission on July 3, 1996).
5.1* Opinion of counsel to the Company concerning the legality of the
securities offered in the Company's Initial Public Offering (See
Exhibit 5.1 to Amendment No. 2 to Registration Statement on Form SB-2
filed with the Commission on July 3, 1996).
5.2* Opinion of Greenberg Taurig Hoffman Lipoff Rosen & Quentel, P.A. (See
Exhibit 5.1 to Registration Statement on Form S-8 filed with the
Commission on November 12, 1997).
5.3* Opinion of counsel to the Company concerning the legality of the
securities being offered (See Exhibit 5 to Registration Statement on
Form S-3 filed with the Commission on March 8, 1998).
10.1* Restated Employment Agreement dated as of July 20, 1995 between
NUWAVE Engineering, Inc. and Gerald Zarin (See Exhibit 10.1 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.2* Employment Agreement dated as of September 11, 1995 between NUWAVE
Engineering, Inc. and Robert I. Webb (See Exhibit 10.2 to Registration
Statement on Form SB-2 filed with the Commission on April 2, 1996).
43
<PAGE>
10.3* Consulting Agreement dated as of July 18, 1995 between NUWAVE
Engineering, Inc. and Corporate Builders, L.P. (See Exhibit 10.3 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.4* Letter Agreement dated as of November 22, 1995 between NUWAVE
Technologies, Inc. and Rickel & Associates, Inc. (See Exhibit 10.5 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.5* 1996 Performance Incentive Plan (See Exhibit 10.6 to Registration
Statement on Form SB-2 filed with the Commission on April 2, 1996).
10.6* Exclusive Worldwide License Agreement dated as of July 21, 1995
between NUWAVE Engineering, Inc. and Rave Engineering Corporation (See
Exhibit 10.7 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.7* Development Agreement dated as of July 21, 1995 between NUWAVE
Engineering, Inc. and Rave Engineering Corporation (See Exhibit 10.8
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.8* Exclusive Agency Agreement dated as of July 21, 1995 between NUWAVE
Engineering, Inc. and Prime Technology, Inc. (See Exhibit 10.9 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.9* Assignment dated as of July 21, 1995 between NUWAVE Engineering,
Inc., Prime Technology, Inc. and Rave Engineering Corporation (See
Exhibit 10.10 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.10* Shareholders' Agreement dated as of July 21, 1995 (See Exhibit 10.11
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.11* Finder's Agreement dated as of September 1, 1995 among NUWAVE
Technologies, Inc., Prime Technology, Inc. and Harvest Technologies,
Inc. (See Exhibit 10.12 to Registration Statement on Form SB-2 filed
with the Commission on April 2, 1996).
10.12* Finder's Agreement dated as of January 16, 1996 among NUWAVE
Engineering, Inc., Prime Technology, Inc. and Jay Vahl (See Exhibit
10.13 to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
10.13* Option Agreement for the Purchase of Common Stock dated as of July
17, 1995 between NUWAVE Engineering, Inc. and Jeremiah F. O'Brien (See
Exhibit 10.14 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.14* Option Agreement for the Purchase of Common Stock dated as of
September 11, 1995 between NUWAVE Engineering, Inc. and Robert I. Webb
(See Exhibit 10.15 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
10.15* Option Agreement for the Purchase of Common Stock dated as of
November 9, 1995 between NUWAVE Engineering, Inc. and Lyle E. Gramley
(See Exhibit 10.16 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
44
<PAGE>
10.16* Option Agreement for Purchase of Common Stock dated as of March 1,
1996 between NUWAVE Technologies, Inc. and Jeremiah F. O'Brien (See
Exhibit 10.17 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.17* Option Agreement for Purchase of Common Stock dated as of July 20,
1995 between NUWAVE Technologies, Inc. and Gerald Zarin (See Exhibit
10.18 to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
10.18* Option Agreement for Purchase of Common Stock dated as of March 1,
1996 between NUWAVE Technologies, Inc. and Joseph A. Sarubbi (See
Exhibit 10.19 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.19* Option Agreement for Purchase of Common Stock dated as of March 1,
1996 between NUWAVE Technologies, Inc. and Ed Bohn (See Exhibit 10.20
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.20* Shareholder's Agreement dated as of July 17, 1995 between NUWAVE
Engineering, Inc. and its Common Stockholders (See Exhibit 10.21 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.21* Form of Subscription Agreement between NUWAVE Engineering, Inc. and
its Series A Preferred Stockholders through August 1995 (See Exhibit
10.22 to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
10.22* Loan and Stock Purchase Agreement dated as of December 15, 1995
between NUWAVE Engineering, Inc. and Helen Burgess (See Exhibit 10.23
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.23* Form of Indemnification Agreement between the Company and its
directors, dated as of January 31, 1996 (See Exhibit 10.24 to
Registration Statement on Form SB-2 filed with the Commission on April
2, 1996).
10.24* Form of Note entered into between the Company and the Initial Bridge
Investor relating to the Initial Bridge Financing (See Exhibit 10.25
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.25* Form of 10% Promissory Note delivered by the Company in connection
with the private placement of 80 Units (the "Private Placement
Bridge"), each unit consisting of an unsecured 10% non-negotiable
promissory note in the amount of $25,000 and 5,000 shares of Common
Stock of the Company, during February and March of 1996 (See Exhibit
10.26 to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
10.26* Form of Securities Registration Rights Agreement entered into
between the Company and the purchasers of Common Stock in the Private
Placement (See Exhibit 10.27 to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
10.27* Form of Registration Rights Agreement entered into between Company
and the purchasers of its Series A Preferred Stock (See Exhibit 10.28
to Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
45
<PAGE>
10.28* Form of Lock-up letter between the Company and certain holders of
its Common Stock (See Exhibit 10.29 to Registration Statement on Form
SB-2 filed with the Commission on April 2, 1996).
10.29* Lease Letter Agreement between the Company and Simon, Sarver &
Rosenberg dated July 28, 1995 (See Exhibit 10.30 to Registration
Statement on Form SB-2 filed with the Commission on April 2, 1996).
10.30* Guaranty executed by the Company as of October 13, 1995 in
connection with Standard Industrial Net Lease between Collins Tech RB
and Rave Engineering, Inc. (See Exhibit 10.31 to Registration
Statement on Form SB-2 filed with the Commission on April 2, 1996).
10.31* Amendment to Employment Agreement dated as of September 11, 1995
between NUWAVE Engineering, Inc. and Robert I. Webb dated June 3, 1996
(See Exhibit 10.32 to Amendment No. 2 to Registration Statement on
Form SB-2 filed with the Commission on July 3, 1996).
10.32* Financial Consulting Agreement between Prime Technology, Inc. and
Ernest Chu dated January 15, 1995 (See Exhibit 10.33 to Amendment No.
2 to Registration Statement on Form SB-2 filed with the Commission on
July 3, 1996).
10.33* Letter Agreement concerning the Gaming Technology among the Company,
Rave Engineering Corp. and Prime Technology, Inc. dated March 24, 1997
(See Exhibit 10.34 to Annual Report filed with the Commission on April
30, 1997).
10.34* Non-Employee Director Stock Option Plan (See Exhibit 10.1 to Current
Report on Form 8-K filed with the Commission on June 6, 1997).
10.35* Form of Incentive Stock Option Agreement (See Exhibit 4.3 to
Registration Statement on Form S-8 filed with the Commission on
November 12, 1997).
10.36* Form of Non-Employee Director Stock Option Agreement (See Exhibit
4.4 to Registration Statement on Form S-8 filed with the Commission on
November 12, 1997).
10.37* Form of Non-Qualified Stock Option Agreement covering options not
granted under either the 1996 Performance Incentive Plan or the
Non-Employee Director Stock Option Plan (See Exhibit 4.5 to
Registration Statement on Form S-8 filed with the Commission on
November 12, 1997).
10.38* Registration Rights Agreement, dated February 6, 1998, between
NuWave Technologies, Inc. and ProFutures Special Equities Fund, L.P.
(See Exhibit 4.1 to Current Report on Form 8-K filed with the
Commission on February 18, 1998).
10.39* Private Securities Subscription Agreement, dated as of February 6,
1998, between NuWave Technologies, Inc. and ProFutures Special
Equities Fund, L.P. (See Exhibit 10.1 to Current Report on Form 8-K
filed with the Commission on February 18, 1998).
10.40* Warrant, dated February 6, 1998, executed by NuWave Technologies,
Inc. in favor of ProFutures Special Equities Fund, L.P., to purchase
up to 50,000 shares of Common Stock, par value $.01 per share, of
NuWave Technologies, Inc. (See Exhibit 10.2 to Current Report on Form
8-K filed with the Commission on February 18, 1998).
46
<PAGE>
10.41* Component Purchase Agreement, dated December 31, 1997, between
Thomson Consumer Electronics, Inc. and NuWave Technologies, Inc. (See
Exhibit 10.41 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.42* Letter Agreement, dated March 3, 1998, between NuWave Technologies,
Inc. and Janssen/Meyers Associates, L.P. (See Exhibit 10.41 to Annual
Report on Form 10-KSB filed with the Commission on March 25, 1998).
10.43* Warrant, dated March 3, 1998, executed by NuWave Technologies, Inc.
in favor of Janssen/Meyers Associates, L.P., to purchase up to 400,000
shares of Common Stock, par value $.01 per share, of NuWave
Technologies, Inc. (See Exhibit 10.41 to Annual Report on Form 10-KSB
filed with the Commission on March 25, 1998).
10.44* Letter Agreement, dated December 3, 1997, between NuWave
Technologies, Inc. and Lippert/Heilshorn & Associates, Inc. (See
Exhibit 10.41 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.45* Option Agreement, dated December 9, 1997, between NuWave
Technologies, Inc. and Lippert/Heilshorn & Associates, Inc. (See
Exhibit 10.41 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.46* First Amendment to Restated Employment Agreement, dated December 9,
1997, between NuWave Technologies, Inc. and Gerald Zarin (See Exhibit
10.41 to Annual Report on Form 10-KSB filed with the Commission on
March 25, 1998).
10.47* Placement Agency Agreement, dated as of May 11, 1998, between
Janssen-Meyers Associates, L.P. and NuWave Technologies, Inc. (See
Exhibit 10.1 to Current Report on Form 8-K filed with the Commission
on June 11, 1998).
10.48* Escrow Agreement, dated May 11, 1998, between NuWave Technologies,
Inc., Janssen-Meyers Associates, L.P. and Republic National Bank of
New York (See Exhibit 10.2 to Current Report on Form 8-K filed with
the Commission on June 11, 1998).
10.49* Warrant Agreement, dated May 15, 1998, between NuWave Technologies,
Inc. and American Stock Transfer & Trust Company (See Exhibit 10.3 to
Current Report on Form 8-K filed with the Commission on June 11,
1998).
10.50* Form of Warrant Certificate (See Exhibit 10.4 to Current Report on
Form 8-K filed with the Commission on June 11, 1998).
10.51* Placement Agent Warrant Agreement, dated May 19, 1998, between
NuWave Technologies, Inc. and Janssen-Meyers Associates, L.P. (See
Exhibit 10.5 to Current Report on Form 8-K filed with the Commission
on June 11, 1998).
10.52* Form of Placement Agent Warrant Certificate (See Exhibit 10.6 to
Current Report on Form 8-K filed with the Commission on June 11,
1998).
10.53* Form of Subscription Agreement (See Exhibit 10.7 to Current Report
on Form 8-K filed with the Commission on June 11, 1998).
10.54** Agreement, dated February 1, 1999, between NuWave Technologies,
Inc. and Terk Technologies Corp.
16.1* Letter from Coopers & Lybrand L.L.P. to the Commission dated February
16, 1998 (See Exhibit 16.1 to Current Report on Form 8-K filed with
the Commission on February 18, 1998).
47
<PAGE>
23.1* Consent of Coopers & Lybrand L.L.P. (See Exhibit 23.1 to Annual
Report on Form 10-KSB filed with the Commission on March 25, 1998)
27.1* Financial Data Schedule (See Exhibit 27.1 to Annual Report on Form
10-KSB filed with the Commission on March 25, 1998)
99.1* Press release, dated May 21, 1998 (See Exhibit 99.1 to Current Report
on Form 8-K filed with the Commission on June 11, 1998).
* The exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such exhibits is a reference
to the copy of the exhibit heretofore filed with the Commission, to which
there have been no amendments or changes.
** Filed herewith. Certain portions of this Exhibit 10.54 were omitted and
filed separately with the Commission pursuant to a request for confidential
treatment.
(b) REPORTS ON FORM 8-K:
None.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NUWAVE TECHNOLOGIES, INC.
(Registrant)
Date: March 31, 1999 By: /s/ Gerald Zarin
-----------------------------------
Gerald Zarin
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gerald Zarin President, Chief Executive March 31, 1999
- --------------------------- Officer and Chairman of
Gerald Zarin the Board (Principal
Executive Officer)
/s/ Jeremiah F. O'Brien Chief Financial Officer and March 31, 1999
- --------------------------- Secretary (Principal
Jeremiah F. O'Brien Financial Officer and
Accounting Officer)
/s/ Ed Bohn Director March 31, 1999
- ---------------------------
Ed Bohn
/s/ Lyle Gramley Director March 31, 1999
- ---------------------------
Lyle Gramley
/s/ Joseph A. Sarubbi Director March 31, 1999
- ---------------------------
Joseph A. Sarubbi
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------ ----------- ------
<S> <C> <C>
1.1* Form of Underwriting Agreement (See Exhibit 1.1 to Registration
Statement on Form SB-2 filed with the Commission on April 2,
1996).
3.1* Articles of Incorporation of the Company (Delaware) (See Exhibit
3.1(a) to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
3.2* Certificate of Amendment to Articles of Incorporation of the
Company (Delaware) (See Exhibit 3.1(b) to Registration Statement
on Form SB-2 filed with the Commission on April 2, 1996).
3.3* Certificate of Authority (New Jersey) (See Exhibit 3.1(c) to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
3.4* Amended Certificate of Authority (New Jersey) (See Exhibit 3.1(d)
to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
3.5* Certificate of Amendment to Articles of Incorporation of the
Company (Delaware) (See Exhibit 3.1(e) to Registration Statement
on Form SB-2 filed with the Commission on April 2, 1996).
3.6* By-Laws of the Company (See Exhibit 3.2 to Registration Statement
on Form SB-2 filed with the Commission on April 2, 1996).
4.1* Form of Common Stock Certificate (See Exhibit 4.1 to Amendment
No. 2 to Registration Statement on Form SB-2 filed with the
Commission on July 3, 1996).
4.2* Form of Public Warrant Agreement between the Company, American
Stock Transfer & Trust Company and Rickel & Associates, Inc. (See
Exhibit 4.2 to Amendment No. 1 to Registration Statement on Form
SB-2 filed with the Commission on May 22, 1996).
4.3* Form of Public Warrant Certificate (See Exhibit 4.3 to Amendment
No. 2 to Registration Statement on Form SB-2 filed with the
Commission on July 3, 1996).
4.4* Form of Underwriter's Warrant Agreement (including Warrant
Certificate) between the Company and Rickel & Associates (See
Exhibit 4.4 to Amendment No. 1 to Registration Statement on Form
SB-2 filed with the Commission on May 22, 1996).
4.5* Selected Dealer Agreement among Rickel & Associates, Inc. and
certain underwriters (See Exhibit 4.5 to Amendment No. 2 to
Registration Statement on Form SB-2 filed with the Commission on
July 3, 1996).
50
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
5.1* Opinion of counsel to the Company concerning the legality of the
securities offered in the Company's Initial Public Offering (See
Exhibit 5.1 to Amendment No. 2 to Registration Statement on Form
SB-2 filed with the Commission on July 3, 1996).
5.2* Opinion of Greenberg Taurig Hoffman Lipoff Rosen & Quentel, P.A.
(See Exhibit 5.1 to Registration Statement on Form S-8 filed with
the Commission on November 12, 1997).
5.3* Opinion of counsel to the Company concerning the legality of the
securities being offered (See Exhibit 5 to Registration Statement
on Form S-3 filed with the Commission on March 8, 1998).
10.1* Restated Employment Agreement dated as of July 20, 1995 between
NUWAVE Engineering, Inc. and Gerald Zarin (See Exhibit 10.1 to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.2* Employment Agreement dated as of September 11, 1995 between
NUWAVE Engineering, Inc. and Robert I. Webb (See Exhibit 10.2 to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.3* Consulting Agreement dated as of July 18, 1995 between NUWAVE
Engineering, Inc. and Corporate Builders, L.P. (See Exhibit 10.3
to Registration Statement on Form SB-2 filed with the Commission
on April 2, 1996).
10.4* Letter Agreement dated as of November 22, 1995 between NUWAVE
Technologies, Inc. and Rickel & Associates, Inc. (See Exhibit
10.5 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.5* 1996 Performance Incentive Plan (See Exhibit 10.6 to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.6* Exclusive Worldwide License Agreement dated as of July 21, 1995
between NUWAVE Engineering, Inc. and Rave Engineering Corporation
(See Exhibit 10.7 to Registration Statement on Form SB-2 filed
with the Commission on April 2, 1996).
10.7* Development Agreement dated as of July 21, 1995 between NUWAVE
Engineering, Inc. and Rave Engineering Corporation (See Exhibit
10.8 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.8* Exclusive Agency Agreement dated as of July 21, 1995 between
NUWAVE Engineering, Inc. and Prime Technology, Inc. (See Exhibit
10.9 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
51
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
10.9* Assignment dated as of July 21, 1995 between NUWAVE Engineering,
Inc., Prime Technology, Inc. and Rave Engineering Corporation
(See Exhibit 10.10 to Registration Statement on Form SB-2 filed
with the Commission on April 2, 1996).
10.10* Shareholders' Agreement dated as of July 21, 1995 (See Exhibit
10.11 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.11* Finder's Agreement dated as of September 1, 1995 among NUWAVE
Technologies, Inc., Prime Technology, Inc. and Harvest
Technologies, Inc. (See Exhibit 10.12 to Registration Statement
on Form SB-2 filed with the Commission on April 2, 1996).
10.12* Finder's Agreement dated as of January 16, 1996 among NUWAVE
Engineering, Inc., Prime Technology, Inc. and Jay Vahl (See
Exhibit 10.13 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
10.13* Option Agreement for the Purchase of Common Stock dated as of
July 17, 1995 between NUWAVE Engineering, Inc. and Jeremiah F.
O'Brien (See Exhibit 10.14 to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
10.14* Option Agreement for the Purchase of Common Stock dated as of
September 11, 1995 between NUWAVE Engineering, Inc. and Robert I.
Webb (See Exhibit 10.15 to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
10.15* Option Agreement for the Purchase of Common Stock dated as of
November 9, 1995 between NUWAVE Engineering, Inc. and Lyle E.
Gramley (See Exhibit 10.16 to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
10.16* Option Agreement for Purchase of Common Stock dated as of March
1, 1996 between NUWAVE Technologies, Inc. and Jeremiah F. O'Brien
(See Exhibit 10.17 to Registration Statement on Form SB-2 filed
with the Commission on April 2, 1996).
10.17* Option Agreement for Purchase of Common Stock dated as of July
20, 1995 between NUWAVE Technologies, Inc. and Gerald Zarin (See
Exhibit 10.18 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
10.18* Option Agreement for Purchase of Common Stock dated as of March
1, 1996 between NUWAVE Technologies, Inc. and Joseph A. Sarubbi
(See Exhibit 10.19 to Registration Statement on Form SB-2 filed
with the Commission on April 2, 1996).
10.19* Option Agreement for Purchase of Common Stock dated as of March
1, 1996 between NUWAVE Technologies, Inc. and Ed Bohn (See
Exhibit 10.20 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
52
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
10.20* Shareholder's Agreement dated as of July 17, 1995 between
NUWAVE Engineering, Inc. and its Common Stockholders (See Exhibit
10.21 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.21* Form of Subscription Agreement between NUWAVE Engineering, Inc.
and its Series A Preferred Stockholders through August 1995 (See
Exhibit 10.22 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
10.22* Loan and Stock Purchase Agreement dated as of December 15, 1995
between NUWAVE Engineering, Inc. and Helen Burgess (See Exhibit
10.23 to Registration Statement on Form SB-2 filed with the
Commission on April 2, 1996).
10.23* Form of Indemnification Agreement between the Company and its
directors, dated as of January 31, 1996 (See Exhibit 10.24 to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996). 10.24* Form of Note entered into between the
Company and the Initial Bridge Investor relating to the Initial
Bridge Financing (See Exhibit 10.25 to Registration Statement on
Form SB-2 filed with the Commission on April 2, 1996).
10.25* Form of 10% Promissory Note delivered by the Company in
connection with the private placement of 80 Units (the "Private
Placement Bridge"), each unit consisting of an unsecured 10%
non-negotiable promissory note in the amount of $25,000 and 5,000
shares of Common Stock of the Company, during February and March
of 1996 (See Exhibit 10.26 to Registration Statement on Form SB-2
filed with the Commission on April 2, 1996).
10.26* Form of Securities Registration Rights Agreement entered into
between the Company and the purchasers of Common Stock in the
Private Placement (See Exhibit 10.27 to Registration Statement on
Form SB-2 filed with the Commission on April 2, 1996).
10.27* Form of Registration Rights Agreement entered into between
Company and the purchasers of its Series A Preferred Stock (See
Exhibit 10.28 to Registration Statement on Form SB-2 filed with
the Commission on April 2, 1996).
10.28* Form of Lock-up letter between the Company and certain holders
of its Common Stock (See Exhibit 10.29 to Registration Statement
on Form SB-2 filed with the Commission on April 2, 1996).
10.29* Lease Letter Agreement between the Company and Simon, Sarver &
Rosenberg dated July 28, 1995 (See Exhibit 10.30 to Registration
Statement on Form SB-2 filed with the Commission on April 2,
1996).
53
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
10.30* Guaranty executed by the Company as of October 13, 1995 in
connection with Standard Industrial Net Lease between Collins
Tech RB and Rave Engineering, Inc. (See Exhibit 10.31 to
Registration Statement on Form SB-2 filed with the Commission on
April 2, 1996).
10.31* Amendment to Employment Agreement dated as of September 11,
1995 between NUWAVE Engineering, Inc. and Robert I. Webb dated
June 3, 1996 (See Exhibit 10.32 to Amendment No. 2 to
Registration Statement on Form SB-2 filed with the Commission on
July 3, 1996).
10.32* Financial Consulting Agreement between Prime Technology, Inc.
and Ernest Chu dated January 15, 1995 (See Exhibit 10.33 to
Amendment No. 2 to Registration Statement on Form SB-2 filed with
the Commission on July 3, 1996).
10.33* Letter Agreement concerning the Gaming Technology among the
Company, Rave Engineering Corp. and Prime Technology, Inc. dated
March 24, 1997 (See Exhibit 10.34 to Annual Report filed with the
Commission on April 30, 1997).
10.34* Non-Employee Director Stock Option Plan (See Exhibit 10.1 to
Current Report on Form 8-K filed with the Commission on June 6,
1997).
10.35* Form of Incentive Stock Option Agreement (See Exhibit 4.3 to
Registration Statement on Form S-8 filed with the Commission on
November 12, 1997).
10.36* Form of Non-Employee Director Stock Option Agreement (See
Exhibit 4.4 to Registration Statement on Form S-8 filed with the
Commission on November 12, 1997).
10.37* Form of Non-Qualified Stock Option Agreement covering options
not granted under either the 1996 Performance Incentive Plan or
the Non-Employee Director Stock Option Plan (See Exhibit 4.5 to
Registration Statement on Form S-8 filed with the Commission on
November 12, 1997).
10.38* Registration Rights Agreement, dated February 6, 1998, between
NuWave Technologies, Inc. and ProFutures Special Equities Fund,
L.P. (See Exhibit 4.1 to Current Report on Form 8-K filed with
the Commission on February 18, 1998).
10.39* Private Securities Subscription Agreement, dated as of February
6, 1998, between NuWave Technologies, Inc. and ProFutures Special
Equities Fund, L.P. (See Exhibit 10.1 to Current Report on Form
8-K filed with the Commission on February 18, 1998).
10.40* Warrant, dated February 6, 1998, executed by NuWave
Technologies, Inc. in favor of ProFutures Special Equities Fund,
L.P., to purchase up to 50,000 shares of Common Stock, par value
$.01 per share, of NuWave Technologies, Inc. (See Exhibit 10.2 to
Current Report on Form 8-K filed with the Commission on February
18, 1998).
54
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
10.41* Component Purchase Agreement, dated December 31, 1997, between
Thomson Consumer Electronics, Inc. and NuWave Technologies, Inc.
(See Exhibit 10.41 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.42* Letter Agreement, dated March 3, 1998, between NuWave
Technologies, Inc. and Janssen/Meyers Associates, L.P. (See
Exhibit 10.42 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.43* Warrant, dated March 3, 1998, executed by NuWave Technologies,
Inc. in favor of Janssen/Meyers Associates, L.P., to purchase up
to 400,000 shares of Common Stock, par value $.01 per share, of
NuWave Technologies, Inc. (See Exhibit 10.43 to Annual Report on
Form 10-KSB filed with the Commission on March 25, 1998).
10.44* Letter Agreement, dated December 3, 1997, between NuWave
Technologies, Inc. and Lippert/Heilshorn & Associates, Inc. (See
Exhibit 10.44 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.45* Option Agreement, dated December 9, 1997, between NuWave
Technologies, Inc. and Lippert/Heilshorn & Associates, Inc. (See
Exhibit 10.45 to Annual Report on Form 10-KSB filed with the
Commission on March 25, 1998).
10.46* First Amendment to Restated Employment Agreement, dated
December 9, 1997, between NuWave Technologies, Inc. and Gerald
Zarin (See Exhibit 10.46 to Annual Report on Form 10-KSB filed
with the Commission on March 25, 1998).
10.47* Placement Agency Agreement, dated as of May 11, 1998, between
Janssen-Meyers Associates, L.P. and NuWave Technologies, Inc.
(See Exhibit 10.1 to Current Report on Form 8-K filed with the
Commission on June 11, 1998).
10.48* Escrow Agreement, dated May 11, 1998, between NuWave
Technologies, Inc., Janssen-Meyers Associates, L.P. and Republic
National Bank of New York (See Exhibit 10.2 to Current Report on
Form 8-K filed with the Commission on June 11, 1998).
10.49* Warrant Agreement, dated May 15, 1998, between NuWave
Technologies, Inc. and American Stock Transfer & Trust Company
(See Exhibit 10.3 to Current Report on Form 8-K filed with the
Commission on June 11, 1998).
10.50* Form of Warrant Certificate (See Exhibit 10.4 to Current Report
on Form 8-K filed with the Commission on June 11, 1998).
10.51* Placement Agent Warrant Agreement, dated May 19, 1998, between
NuWave Technologies, Inc. and Janssen-Meyers Associates, L.P.
(See Exhibit 10.5 to Current Report on Form 8-K filed with the
Commission on June 11, 1998).
55
<PAGE>
Exhibit Page
Number Description Number
- ------ ----------- ------
10.52* Form of Placement Agent Warrant Certificate (See Exhibit 10.6
to Current Report on Form 8-K filed with the Commission on June
11, 1998).
10.53* Form of Subscription Agreement (See Exhibit 10.7 to Current
Report on Form 8-K filed with the Commission on June 11, 1998).
10.54** Agreement, dated February 1, 1999, between NuWave
Technologies, Inc. and Terk Technologies Corp.
16.1* Letter from Coopers & Lybrand L.L.P. to the Commission dated
February 16, 1998 (See Exhibit 16.1 to Current Report on Form 8-K
filed with the Commission on February 18, 1998).
23.1* Consent of Coopers & Lybrand L.L.P. (See Exhibit 23.1 to Annual
Report on Form 10-KSB filed with the Commission on March 25,
1998).
27.1* Financial Data Schedule (See Exhibit 27.1 to Annual Report on
Form 10-KSB filed with the Commission on March 25, 1998)
99.1* Press release, dated May 21, 1998 (See Exhibit 99.1 to Current
Report on Form 8-K filed with the Commission on June 11, 1998).
</TABLE>
* The exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such exhibits is a reference
to the copy of the exhibit heretofore filed with the Commission, to which
there have been no amendments or changes.
** Filed herewith. Certain portions of this Exhibit 10.54 were omitted and
filed separately with the Commission pursuant to a request for confidential
treatment.
56
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Index to Financial Statements
Page
----
Reports of Independent Accountants ........................................ F-2
Balance Sheet as of December 31, 1998 ..................................... F-4
Statements of Operations for the years ended December 31, 1997 and
December 31, 1998 and for the cumulative period from July 17, 1995
(inception) to December 31, 1998 ..................................... F-5
Statement of Stockholders' Equity for cumulative period from
July 17, 1995 (inception) to December 31, 1998 ....................... F-6
Statements of Cash Flows for the years ended December 31, 1997 and
December 31, 1998 and for the cumulative period from July 17, 1995
(inception) to December 31, 1998 ..................................... F-8
Notes to Financial Statements ............................................. F-10
F-1
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Report of Independent Accountants
To the Board of Directors and Stockholders of
NUWAVE Technologies, Inc.
We have audited the statement of operations, cash flows of NUWAVE
Technologies, Inc. (a development stage enterprise) for the period from July 17,
1995 (inception) to December 31, 1996 included in the cumulative amounts for the
period from July 17, 1995 (inception to December 31, 1998 (not presented
separately herein), and the related statement of stockholders' equity for the
period from July 17, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts or disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of NUWAVE
Technologies, Inc. for the period from July 17, 1995 (inception) to December 31,
1996 included in the cumulative amounts for the period from July 17, 1995
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1997
F-2
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Report of Independent Accountants
Board of Directors and Stockholders
NUWAVE Technologies, Inc.
Fairfield, New Jersey
We have audited the accompanying balance sheet of NUWAVE Technologies, Inc. (a
development stage enterprise) as of December 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 1998 and the amounts for such
years included in the period from July 17, 1995 (inception) to December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of NUWAVE Technologies, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1998 and the amounts for
such years included in the cumulative amounts for the period from July 17, 1995
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
March 10, 1999
F-3
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Balance Sheet
ASSETS December 31,
1998
------------
Current assets:
Cash and cash equivalents $ 4,990,159
Inventory 49,073
Prepaid expenses and other current assets 126,734
------------
Total current assets 5,165,966
Property and equipment 111,029
Restricted Cash 76,078
Other assets 162,279
------------
Total assets $ 5,515,352
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 261,201
------------
Total liabilities 261,201
------------
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred Stock,
noncumulative, $.01 par value, authorized
400,000 shares, issued - none
Preferred stock, $.01 par value; authorized
1,000,000 shares; issued - none (such preferences
and rights to be designated by the Board of
Directors)
Common stock, $.01 par value; authorized
20,000,000 shares; as of December 31, 1998;
issued and outstanding 8,356,389 shares 83,564
Additional paid in capital 18,358,414
Deficit accumulated during the development stage (13,187,827)
------------
Total stockholders' equity 5,254,151
Total liabilities and stockholders' equity $ 5,515,352
============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statement of Operations
<TABLE>
<CAPTION>
Cumulative from
July 17, 1995
Year Year (inception)
ended ended to
December 31, December 31, December 31,
1997 1998 1998
----------------------------------------------
<S> <C> <C> <C>
Net Sales $ 10,275 $ 12,545 $ 22,820
Cost of Sales (4,214) (4,906) (9,120)
----------------------------------------------
6,061 7,639 13,700
----------------------------------------------
Operating expenses:
Research and development expenses (1,697,084) (1,572,364) (5,381,164)
General and administrative expenses (2,336,000) (2,646,409) (7,208,640)
----------------------------------------------
(4,033,084) (4,218,773) (12,589,804)
----------------------------------------------
Loss from operations (4,027,023) (4,211,134) (12,576,104)
----------------------------------------------
Other income (expense):
Interest income 178,707 212,863 567,979
Interest expense (331,542)
----------------------------------------------
178,707 212,863 236,437
----------------------------------------------
Loss before extraordinary item (3,848,316) (3,998,271) (12,339,667)
Extraordinary item (848,160)
----------------------------------------------
Net loss $(3,848,316) $(3,998,271) $(13,187,827)
==============================================
Basic and diluted loss per share:
Weighted average number of
common shares outstanding 5,343,348 7,259,896
=============================
Basic and diluted loss per
share $ (0.72) $ (0.55)
=============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Series A Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred During the
-------------------- -------------------- Paid-in Equity Development
Shares Amount Shares Amount Capital Costs Stage Total
--------- --------- --------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Shares issued in
connection with the
formation of the
company......................... 2,060,000 $ 20,000 $ 20,600
Common shares returned and
retired without consideration... (125,000) (1,250) $ 1,250
Sale of Series A convertible
preferred stock for cash of
$1.50 per share................. 600,000 $ 6,000 894,000 900,000
Common shares issued with
initial bridge notes payable
for cash of $1.50 per share..... 70,000 700 104,300 105,000
Costs incurred in connection
with equity financing........... $ (38,400) (38,400)
Net loss for the period from
July 17, 1995 (inception) to
December 31, 1995............... $ (910,591) (910,591)
--------- --------- --------- --------- ---------- --------- ----------- -----------
Balance at December 31, 1995..... 600,000 6,000 2,005,000 20,050 999,550 (38,400) (910,591) 76,609
Common shares issued in
connection with the exchange
of the initial bridge notes
for 14 bridge units............. 70,000 700 139,300 140,000
Common shares issued with
bridge nots payable for
cash of $2.00 per share......... 330,000 3,300 656,700 660,000
Costs incurred in connection
with the private placement
offering relating to the
equity financing................ (134,000) 13,400 (120,600)
Common shares issued in
connection with the initial
public offering for cash of
$5.00 per share................. 2,300,000 23,000 11,477,000 11,500,000
2,530,000 common stock purchase
warrants issued in connection
with the initial public
offering for cash of $0.10
per warrant..................... 253,000 253,000
220,000 common stock purchase
warrants and 220,000
redeemable warrants issued
to the underwriter in
connection with the initial
public offering for cash of
$10.00.......................... 10 10
Conversion of 600,000 preferred
shares into 600,000 common
shares in connection with
the IPO......................... (600,000) (6,000) 600,000 6,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Series A Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred During the
-------------------- -------------------- Paid-in Equity Development
Shares Amount Shares Amount Capital Costs Stage Total
--------- --------- --------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Costs incurred in connection
with the initial public
offering........................ (2,214,582) 25,000 (2,189,582)
Common shares issued in
connection with the exercise
of 20,000 stock options for
cash of $1.50 per share......... 20,000 200 29,800 30,000
Net loss for the year ended
December 31, 1996............... (4,430,649) (4,430,649)
--------- --------- --------- --------- ---------- --------- ----------- -----------
Balance at December 31, 1996..... - $ - 5,325,000 $ 53,250 $11,206,778 $ - $ (5,341,240) $ 5,918,788
Common shares issued in
connection with the exercise
of 23,334 stock options for
cash of $2.00 per share......... 23,334 233 46,435 46,668
Net loss for the year ended
December 31, 1997............... (3,848,316) (3,848,316)
--------- --------- --------- --------- ---------- --------- ----------- -----------
Balance at December 31, 1997..... - $ - 5,348,334 $ 53,483 $11,253,213 $ - $ (9,189,556) $ 2,117,140
Common shares issued in
connection with a private
placement for cash of
$3.95 per share and 50,000
supplemental warrants........... 253,485 2,535 997,465 1,000,000
Costs incurred in connection
with private placement.......... (140,652) (140,652)
Common shares issued in
connection with the exercise
of 11,666 stock options for
cash of $2.00 per share......... 11,666 117 23,215 23,332
Warrants to purchase common
stock issued in connection
with a consulting agreement..... 217,040 217,040
2,742,904 Common shares issued
with 2,057,207 class A
warrants to purchase common
shares in connection with a
private placement for a cash
price ranging from $2.50 to
$3.06 per share................. 2,742,904 27,429 7,253,117 7,280,546
18.2 Unit Warrants issued in
connection with private
placement....................... 6 6
Costs incurred in connection
with private placement.......... (1,244,990) (1,244,990)
Net loss for the year ended
December 31, 1998............... (3,998,271) (3,998,271)
--------- --------- --------- --------- ----------- --------- ------------ -----------
Balance at December 31, 1998..... - $ - 8,356,389 $ 83,564 $18,358,414 $ - $(13,187,827) $ 5,254,151
========= ========= ========= ========= =========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
Cumulative
from
July 17, 1995
Year Year (inception)
ended ended to
December 31, December 31, December 31,
1997 1998 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(3,848,316) $(3,998,271) $(13,187,827)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Extraordinary item 848,160
Depreciation expense 42,354 52,690 114,760
Amortization of unamortized
debt discount 168,778
Amortization of deferred
financing costs 89,062
Issuance of common stock for
services rendered 20,600
(Increase) decrease in inventory (59,818) 10,745 (49,073)
(Increase) in prepaid expenses
and other current assets (19,096) (15,730) (126,734)
(Increase) in other assets (9,925) (80,079) (162,279)
Issuance of warrants in connection
with consultant agreement 217,040 217,040
Increase (decrease) in accounts
payable and accrued liabilities (219,487) 107,578 261,201
------------ ------------ ------------
Net cash used in operating
expenses (4,114,288) (3,706,027) (11,806,312)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and
equipment (76,052) (60,247) (225,788)
------------ ------------ ------------
Net cash used in investing (76,052) (60,247) (225,788)
activities
Cash flows from financing activities:
Proceeds from sales of Series A
Convertible Preferred Stock 900,000
Proceeds from issuance of initial
bridge units 350,000
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
Cumulative
Year Year from July 17, 1995
ended ended (inception)
December 31, December 31, to December 31,
1997 1998 1998
------------ ------------ ------------
Proceeds from issuance of bridge
units, net of exchage of initial
bridge notes 1,650,000
Proceeds from IPO 11,753,010
Proceeds from equity offering -
February 6, 1998 1,000,000 1,000,000
Proceeds from equity offering
May 19, to June 6, 1998 7,280,546 7,280,546
Repayment of notes issued in
connection with initial bridge notes (2,000,000)
Costs incurred for equity offerings
and warrants (1,385,636) (3,734,219)
Issuance of common stock in
connection with exercise of
stock options 46,668 23,332 100,000
(Increase) decrease in restricted
cash (221,481) 145,403 (76,078)
Deferred financing costs (201,000)
------------ ------------ ------------
Net cash provided (used in) by
financing activities (174,813) 7,063,645 17,022,259
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (4,365,153) 3,297,371 4,990,159
Cash and cash equivalents at the
beginning of the period 6,057,941 1,692,788 -
------------ ------------ ------------
Cash and cash equivalents at
the end of the period $1,692,788 $4,990,159 $4,990,159
============ ============ ============
Supplemental disclosure of cash
flow information:
Interest paid during the
period $ 73,702
==========
Supplemental disclosure of non cash
investing and financing activities:
Deferred financing costs incurred in
connection with the exchange of the
initial bridge notes for 14 bridge
units $ 140,000
==========
Deferred equity costs charged to
additional paid-in capital in
connection with the IPO $ 13,400
==========
Deferred financing costs charged to
additional paid-in capital in
connection with the IPO $ 25,000
==========
600,000 Series A Convertible Preferred
Stock converted into Common $ 6,000
==========
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
1. Organization and Business
NUWAVE Technologies, Inc. (the "Company"), a development stage enterprise,
was incorporated in Delaware on July 17, 1995. It was formed to develop,
manufacture and market products that improve picture quality in set-top boxes,
televisions, VCR's, camcorders and other video devices by enhancing and
manipulating video signals, and facilitate the production of sophisticated
consumer and professional videos. It has had only a limited operating history
and has had only limited sales of its products to date. Since its inception in
July 1995, the Company has been engaged primarily in raising funds, directing,
supervising and coordinating Rave Engineering Corporation ("Rave," see note 7)
and its own Advanced Engineering Group in the continuing development of its
products, pre-marketing activities, the commencement of comprehensive marketing
of the NUWAVE Video Processor and the recruitment of management and technical
personnel, including members of the Advanced Engineering Group. The Company
conducts its operations primarily in the United States.
There is no assurance that the Company's research and development and
marketing efforts will be successful, that the Company will ever have
commercially accepted products, or that the Company will achieve significant
sales of any such products. The Company has incurred net losses and negative
cash flows from operations since its inception. In addition, the Company
operates in an environment of rapid change in technology and is dependent upon
the services of its employees and its consultants. If the Company is unable to
successfully market its NUWAVE Video Processor and related products, it is
unlikely that the Company could continue its business.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. The
most significant estimates relate to the valuation allowance in connection with
deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances, money market
instruments and other highly liquid investments with insignificant interest rate
risk and original maturities of three months or less. At December 31, 1998,
$4,990,159 of money market accounts and commercial checking accounts, the fair
value of which approximate cost, are included in cash and cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
The cost of maintenance and repairs is charged against results of operations as
incurred.
F-10
<PAGE>
Depreciation is charged against results of operations by an accelerated
method over the estimated useful lives of the related assets.
Sales and retirements of depreciable property are recorded by removing the
related cost and accumulated depreciation from the accounts. Gains or losses on
sales and retirements of property and equipment are reflected in the results of
operations.
Research and Development Expenses
Expenditures for research and development are expensed as incurred.
Advertising Expenses
The Company expenses advertising costs which consist primarily of
promotional items and print media. Advertising and promotional expenses charged
to operations for the cumulative period from July 17, 1995 (inception) to
December 31, 1998 amounted to $537,900 and for the years ended December 31, 1998
and December 31, 1997 amounted to $116,776 and $289,892, respectively.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist of cash and cash equivalents. The Company places its cash
and cash equivalents in high quality institutions with three types of accounts:
(1) an operating account where the cash balance is in excess of the FDIC
insurance limit; (2) a money market fund which invests only in U.S. Government
securities; and (3) certificates of deposit.
Benefit Plan
The Company maintains a 401(k) Savings Plan, which allows all employees to
participate by making salary deferral contributions to the 401(k) Savings Plan
ranging from 1% to 15% of their eligible earnings. The Company has not
contributed to the 401(k) Savings Plan to date.
Per Share Data
The basic per share data have been computed on the basis of the loss for
the period divided by the historic weighted average number of shares of Common
Stock outstanding. All potentially dilutive securities have been excluded from
the computations since they would be antidilutive (see note 6).
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined on the basis of the differences between the tax basis of
assets and liabilities and their respective financial reporting amounts
("temporary differences") at enacted tax rates in effect for the years in which
the differences are expected to reverse.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income. This statement establishes standards for
reporting and displaying
F-11
<PAGE>
comprehensive income and its components (revenues, expenses, gains and losses).
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Such items may include foreign currency translation
adjustments, unrealized gains/losses from investing and hedging activities, and
other transactions. The Company has no source of comprehensive income, and
therefore, no disclosure reporting requirements are necessary relating to
Statement No. 130.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information, which
was adopted by the Company on December 31, 1998. This Statement requires public
business enterprises to report certain information about operating segments in
sets of annual financial statements of the enterprise and in interim statements
issued to shareholders. It further requires that a public business enterprise
report certain information about their products and services, geographical areas
of operation and major customers. As the Company operates and accounts for
results as one operating segment, there are no additional reporting requirements
pertaining to Statement No. 131.
In February 1998, FASB issued SFAS No. 132, Employer's Disclosures about
Pension and Other Postretirement Benefits, which revises employers' disclosures
about pension and other postretirement benefit plans. SFAS No. 132 does not
change the measurement or recognition of those plans. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The Company does not expect
the adoption of SFAS No. 132 to have an impact on the Company's results of
operations, financial position or cash flows.
3. Property and equipment
Property and equipment consist of the following:
Useful Lives in December 31,
Years 1998
--------------- ------------
Furniture and Fixtures..................... 10 $ 5,523
Computers.................................. 5 141,829
Equipment.................................. 5 78,437
----------
$ 225,789
Less, accumulated depreciation........ 114,760
----------
TOTAL $ 111,029
==========
4. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
December 31,
1998
------------
Accounts payable........................... $ 125,610
Legal and accounting fees.................. 129,843
Payroll taxes payable...................... 5,748
----------
TOTAL $ 261,201
==========
F-12
<PAGE>
5. Capital Transactions
Common Stock
On July 17, 1995, the Company issued 2,060,000 shares of Common Stock for a
fair market value of $.01 per share as consideration for services rendered in
connection with the formation of the Company, as follows:
o 1,090,000 shares to Prime Technologies, Inc. ("Prime") - Rave and two
members of the Company's Board of Directors have ownership interests
in Prime of 22%, 22% and 16%, respectively;
o 450,000 shares to the Company's President;
o 450,000 shares to three entities affiliated with an individual who was
a member of the Company's Board of Directors (125,000 of such shares
were subsequently returned and retired without consideration); and
o 70,000 shares to individuals who were either employees of, or
consultants to, the Company.
On April 30, 1996, the Board of Directors and the Company's stockholders
authorized the increase in the shares of Common Stock to 20,000,000 common
shares, par value $.01 per share.
In July 1996, the Company completed an IPO in which it sold 2,300,000
common shares and 2,530,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") to purchase an additional 2,530,000 common shares. The Warrants
became exercisable at $5.50 per share on July 3, 1997, and have an expiration
date of July 3, 2001. The Warrants are redeemable by the Company at any time on
not less than 30 days prior written notice to the holders of the Warrants,
provided the average closing bid quotation of the Common Stock as reported on
the NASDAQ Stock Market, if traded thereon, or if not traded thereon, the
average closing sale price of the Common Stock if listed on a national
securities exchange (or other reporting system that provides last sale prices),
has been at least 150% of the then current exercise price of the Warrants
(currently $6.225) for a period of 20 consecutive trading days ending on the
third day prior to the date on which the Company gives notice of redemption. The
Warrants will be exercisable until the close of business on the day immediately
preceding the date fixed for redemption. The Underwriter will receive from the
Company a Warrant Solicitation fee of five percent (5%) of the aggregate
exercise price of the Warrants if the market price of the Common Stock is
greater than the exercise price of the Warrants on the date of exercise.
Also in connection with the IPO, the Company issued to the Underwriter, for
an aggregate purchase price of $10.00, warrants to purchase 220,000 Common Stock
and Redeemable Warrants to purchase 220,000 Redeemable Warrants (the
"Underwriter's Warrants"). The Underwriter's Warrants are at $8.25. The warrants
expire July 2001.
On February 6, 1998, the Company entered into a two-year agreement with an
investor whereby the Company issued 253,485 shares of the Company's Common
Stock, par value $0.01 per share ("Common Stock"), for an aggregate purchase
price of $1,000,000. In addition, subject to certain conditions, the agreement
provides that, from time to time over the life of the agreement the Company
shall put shares of the Company's Common Stock for a minimum of $250,000 and a
maximum of $750,000. The total aggregate value of the Puts over the life of the
agreement must be a minimum of $1,000,000 and cannot exceed $5,000,000. The
purchase price of the stock will be at 88% of the fair
F-13
<PAGE>
market value of the stock at the time of the Put. The following restrictions,
among others, apply beginning with the second Put: (1) there must be 20 business
days between Puts; (2) the average daily trading volume in the Company's Common
Stock for the 30 trading days prior to the Put date must be at least 20,000
shares; (3) the minimum bid price for the Company's Common Stock on the trading
day immediately preceding the Put date must be at least $2.50; and (4) unless
the investor agrees otherwise, no Put can be made which causes the investor to
own more than 9.9% of the Company's then outstanding Common Stock.
In connection with the agreement, the Company issued to the investor
warrants to purchase an aggregate of 50,000 shares of Common Stock at a purchase
price of $6.41 per share and additional warrants (the "supplemental warrants")
to purchase an aggregate of 50,000 shares of Common Stock at a purchase price of
$3.95 per share. The warrants may be exercised at any time through August 6,
2001. The Supplemental warrants may be exercised at any time through April 19,
2003.
On March 3, 1998, the Company entered into a consulting agreement with an
organization (the "Consultant") whereby the Consultant will perform consulting
services relating to corporate finance and other financial services matters. As
compensation for such services, the Company shall pay the consultant $5,000 per
month during an initial term ending September 3, 1999 subject to automatic
one-year renewal terms unless either the Company or the Consultant shall have
given written notice of termination at least 30 days prior to the end of the
initial or subsequent terms.
In connection with such consultant agreement, the Company issued to the
Consultant warrants to purchase 400,000 shares of Common Stock. The warrants
have an exercise price of $4 per share and are exercisable after September 3,
1999. The warrants expire on March 3, 2003. The fair value of these warrants was
estimated at $386,805 and is being charged to operations over the life of the
consulting agreement. $217,000 was charged against operations for the year ended
December 31, 1998.
On May 11, 1998 the Company entered into a placement agency agreement with
the Consultant to act as the Company's placement agent in a private equity
placement whereby the Company issued to certain accredited investors, as defined
under Regulation D as promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), 2,742,904 shares of the Company's Common Stock and
2,057,207 Class A Redeemable Warrants ("Class A Warrants") between May 19, 1998
and June 6, 1998 for an aggregate purchase price of $7,280,546. Each Class A
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price per share of $3.24, subject to adjustment upon the occurrence of
certain events to prevent dilution, at any time during the period commencing
from June 6, 1998 and expiring on May 11, 2003. The Class A Warrants are subject
to redemption by the Company at $.01 per Warrant 12 months after the effective
date of a registration statement covering the Warrants on not less than 30 days
prior written notice to the holders of the Warrants, provided the average
closing bid price of the Common Stock has been at least 250% of the then current
exercise price of the Warrants for a period of thirty consecutive trading days
ending on the day prior to the day on which the Company gives notice of
redemption. The Class A Warrants will be exercisable until the close of business
on the day immediately preceding the date fixed for redemption.
The Consultant for acting as placement agent received a commission of 10%
($728,055) of the gross proceeds from the sale of the Units, as well as a 3%
non-accountable expense allowance ($218,416) and reimbursement of other costs,
including legal expenses relating to the offering ($77,171). In addition, the
Consultant, as part of its compensation, received warrants exercisable until May
11, 2003 to purchase up to (i) 688,084 shares of the Company's Common Stock at a
price per share ranging from
F-14
<PAGE>
$2.50 to $3.06 and (ii) warrants to purchase up to 516,068 shares of the
Company's Common Stock at a price per share of $3.24.
As a result of the above capital transactions and in accordance with the
provisions of the Warrant Agreement dated as of July 3, 1996 between the
Company, Rickel & Associates, Inc. and American Stock Transfer & Trust Company,
adjustments have been made to the exercise price (the "Warrant Price") for the
warrants issued pursuant to such Agreement (the Public Warrants") and to the
number of shares of Common Stock issuable on exercise of the Public Warrants.
The Warrant Price has been reduced from $5.50 to $4.15. In addition, for every
share of Common Stock the warrant holders were entitled to prior to the dilutive
transactions (2,530,000 shares), the warrant holders are now entitled to 1.325
shares (3,352,250 shares). Also, pursuant to the Warrant Agreement, the Company
can redeem the Public Warrants in the event that the average closing price of
the Company's Common Stock is at least 150% of the then current Warrant Price of
the Public Warrants for a period of 20 consecutive trading days; consequently,
the average closing price now required is $6.225.
Preferred Stock
During July and August 1995, the Company sold 600,000 shares of Series A
Convertible Preferred Stock for $900,000 to several investors, one of whom was
the purchaser of the initial bridge notes. The preferred shares converted into
common shares on a one-for-one basis at the IPO date.
On April 30, 1996, the Board of Directors and the Company's stockholders
authorized an additional 1,000,000 shares of preferred stock, $.01 par value,
which may have such preferences and rights as the Board of Directors may
designate.
Bridge Units
On December 15, 1995, the Company issued to a Series A Convertible
Preferred stockholder 14 initial bridge units, each unit consisting of the
Company's unsecured initial bridge notes in the principal amount of $25,000 with
a stated interest rate of 10% per annum and 5,000 shares of the Company's Common
Stock with a fair market value of $1.50 per share for proceeds of $350,000.
After giving effect to the amortization of the initial bridge notes debt
discount, the effective interest rate of the initial bridge notes was 33% per
annum.
On March 1, 1996, based upon an offer from the Company, the initial bridge
noteholder elected to exchange the 14 initial bridge units for 14 bridge units.
On March 1 and March 27, 1996, the Company sold and exchanged to accredited
investors an accumulative total of 80 units (the "bridge units"), respectively,
in its IPO. Each bridge unit consisted of (i) a senior subordinated
non-negotiable promissory note ("Bridge Notes") in the principal amount of
$25,000, with a stated interest rate of 10% per annum, and (ii) 5,000 shares of
Common Stock with a fair market value of $2.00 per share. After giving effect to
the amortization of the Bridge Notes debt discount, the effective interest rate
of the Bridge Notes was 49%.
On July 9, 1996, the aggregate principal amount of the Bridge Notes of
$2,000,000 and accrued interest of $73,652 was repaid upon the consummation, and
out of the proceeds, of the IPO.
F-15
<PAGE>
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25"). Under APB No. 25, generally, no compensation expense is recognized in
the financial statements in connection with the awarding of stock option grants
to employees provided that, as of the grant date, all terms associated with the
award are fixed and the quoted market price of the Company's stock, as of the
grant date, is not more than the amount an employee must pay to acquire the
stock as defined; however, to the extent that stock options are granted to
non-employees, for goods or services, the fair value of these options are
included in operating results as an expense.
A summary of the Company's stock option activity, and related information,
is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average Number of
Common Exercise Price Exercise Shares
Share Range per Share Price Exercisable
--------- --------------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996........... 362,000 $ 1.50 - $ 5.75 $ 1.72 311,524
=======
Granted.................................... 192,500 $ 5.78 - $ 6.88 $ 6.54
Exercised.................................. (23,334) $ 2.00 $ 2.00
Canceled................................... (25,000) $ 6.38 - $ 6.81 $ 6.64
--------
Outstanding at December 31, 1997........... 506,166 $ 1.50 - $ 6.75 $ 2.92 401,000
========= =======
Granted.................................... 733,000 $ 1.50 - $ 3.25 $ 3.13
Exercised.................................. (11,666) $ 2.00 $ 2.00
Canceled................................... (13,000) $ 3.00 - $ 6.75 $ 5.23
--------
Outstanding at December 31, 1998........... 1,214,500 $ 1.50 - $ 6.75 $ 3.18 633,503
========= =======
</TABLE>
Disclosures required by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), including pro
forma operating results had the Company prepared its financial statements in
accordance with the fair value based method of accounting for stock-based
compensation are shown below.
Exercise prices and weighted-average contractual lives for stock options
outstanding as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ----------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 2.00 365,000 2.12 $1.53 315,000 $1.53
$ 2.00 - $3.25 618,000 4.40 $3.25 204,336 $3.25
$ 5.75 - $ 6.75 171,500 4.09 $6.42 114,167 $6.30
</TABLE>
The following table summarizes the pro forma operating results of the
Company had compensation costs for the stock options granted been determined in
accordance with the fair value based method of accounting for stock based
compensation as prescribed by SFAS No. 123. Since certain option grants awarded
during 1998 and 1997 vest over several years and additional awards are expected
F-16
<PAGE>
to be issued in the future, the pro forma results noted below are not likely to
be representative of the effects on future years of the application of the fair
value based method.
1997 1998
---- ----
Pro forma net loss............................. $ (4,029,183) $ (4,285,280)
Pro forma basic and diluted loss per share..... $ (.75) $ (.59)
For the purpose of the above pro forma information, the fair value of these
options was estimated at the date of grant using the Black-Scholes option
pricing model. The weighted-average fair value of the options granted during
1998 and 1997 was $.85 and $1.75, respectively. The following weighted-average
assumptions were used in computing the fair value of option grants for 1998 and
1997: weighted-average risk-free interest rates ranged from 4.26% to 5.60% for
1998 and 5.64% for 1997; zero dividend yields for both years; volatility of the
Company's Common Stock of 30% for 1998 and 50% for 1997; and an expected life of
the options of three years for 1998 and two years for 1997, respectively.
Performance Incentive Stock Option Plan
On January 31, 1996, the Company adopted its 1996 Performance Incentive
Stock Option Plan (the "Plan"). Under the Plan, incentive and nonqualified stock
options, stock appreciation rights and restricted stock may be granted to key
employees and consultants (the "Participants") by certain disinterested
directors of the Board of Directors. Any incentive option granted under the Plan
will have an exercise price of not less than 100% of the fair market value of
the shares on the date on which such option is granted. With respect to an
incentive option granted to a Participant who owns more than 10% 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% of the fair
market value of the shares subject to the option on the date on which the option
is granted. A nonqualified option granted under the Plan (i.e., an option to
purchase the Common Stock that does not meet the Internal Revenue Code's
requirements for incentive options) must have an exercise price of at least the
par value of the stock. Stock appreciation rights may be granted in conjunction
with the grant of an incentive or nonqualified option under the Plan or
independently of any such stock option. The directors determine the vesting of
the options under the Plan at the date of grant. A maximum of 1,205,000 options
can be awarded under the Plan (as amended May 26, 1998). As of December 31, 1996
no options had been issued. During 1997, 172,500 options were granted and 25,000
options were canceled under the plan. During 1998, 605,000 options were granted
under the plan.
Non-Employee Director Stock Option Plan
On November 25, 1996, the Company established a Non-Employee Director Stock
Option Plan (the "Director's Plan"). The Director's Plan provides that 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) shall be eligible for the grant of stock options
under the Director's Plan. Each Eligible Director at the time of his election to
the Board of Directors, shall be granted an option to purchase 3,000 shares of
the Company's Common Stock at an exercise price equal to closing price of such
Common Stock at close of business at the date of such grant, such option to vest
immediately and to expire five years from the date of such grant.
Beginning with the annual meeting of the stockholders of the Company held
on May 29, 1997 and provided that a sufficient number of shares remain available
under the Director's Plan, each year
F-17
<PAGE>
immediately following the date of the annual meeting of the Company there
automatically will be granted to each Eligible Director who is then serving on
the Board an option to purchase 5,000 shares of the Company's Common Stock. The
first 1,000 options vest immediately, the remainder vest equally over the next
four years from the date of grant and are exercisable at the closing price of
such shares of Common Stock at the date of grant. Such options expire five years
from the date of vesting.
On November 25, 1996, four Eligible Directors were each granted 3,000 stock
options at an exercise price of $5.75 per share. On May 29, 1997, four Eligible
Directors were each granted 5,000 stock options at an exercise price of $6.75
per share. On May 26, 1998, one eligible director was granted 53,000 options at
an excise price of $3.25 per share and the three remaining Eligible Directors
were each granted 25,000 stock options at $3.25 per share. The maximum number of
shares of Common Stock with respect to which options may be granted under the
Director's Plan (as amended May 26, 1998) is 235,000 shares. During 1998, 13,000
options previously granted under the plan were cancelled. As of December 31,
1998, there are 148,000 stock options reserved for issuance in the Director's
Plan.
6. Income taxes
There is no benefit for federal, state or local income taxes for the years
ended December 31, 1997 and December 31, 1998, since the Company has incurred
operating losses. In addition, the Company has fully reserved the net potential
future tax benefits resulting from its temporary differences and net operating
loss carryforwards.
The tax effect of temporary differences consists of the following:
December 31,
1998
------------
Deferred tax assets:
Start up costs.................................... $ 1,680,000
Property and equipment............................ 17,000
Net operating loss carryforward................... 3,506,000
------------
5,203,000
Valuation allowance............................... (5,203,000)
------------
$ --
============
As of December 31, 1998, the Company has unused net operating loss
carryforwards of $8,778,000 available for income tax purposes. The unused net
operating loss carryforwards expire in various years from 2010 to 2018. The
Company, in the future, may be subject to limitations on the use of its NOL's as
provided under Section 382 of the Internal Revenue Code.
7. Commitments and Contingencies
License and Development Agreements
Pursuant to the terms of the License Agreement dated July 21, 1995, the
Company is obligated to pay to Rave royalties of (i) 2 1/2 % of net sales
("Sales Royalties"), as defined, of products sold by the Company utilizing
Rave's technology and (ii) 25% of any sublicensing fees received by the Company
from sublicenses of the products and technology covered by the License
Agreement. 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 sublicensees reaching an aggregate of $50,000,000, or (ii)
F-18
<PAGE>
the Company's aggregate net profits from sales of Licensed Products and
technology equaling $5,000,000, whichever comes first. The License Agreement
became effective on July 21, 1995 and continues in force until either (1) the
expiration of the last patent rights or (2) July 21, 2012, whichever is later.
The Company also entered into a development agreement (the "Development
Agreement") with Rave on July 21,1995 which focused principally on the
development of products as defined in the agreement. The Development Agreement
provided for the payment to Rave of a monthly fee which, when aggregated with
the royalties provided for in the License Agreement, totaled a minimum of
$65,000 per month. The Development Agreement terminated on October 2, 1998. The
Development Agreement also provided for Rave to receive additional payments
under certain conditions aggregating $850,000 to purchase or lease equipment for
use in developing the "Licensed Product" and "Licensed Process." The payments
were originally to be made in monthly installments not to exceed $23,611 with a
lump sum payment of $283,336 due in March 1998, if certain conditions were met.
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 has been 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 December 31, 1998, the Company
had made payments of $507,012 under this agreement and at that date had $76,078
pledged as collateral to guarantee the monthly payments.
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 has no current plans to develop it.
The Rave research and development expenses charged to the statement of
operations for the cumulative period from July 17, 1995 (inception) to December
31, 1998 amounted to $3,399,413; and for the years ended December 31, 1998 and
December 31, 1997 amounted to $742,058 and $1,096,903, respectively.
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement between Rave and the Company, the Company
commenced an arbitration proceeding seeking (a) damages for the injuries to the
Company caused by Rave's breaches of its contractual and common law obligations
to the Company and (b) a declaration that, among other things, Rave is not
entitled to any royalties or other payments with respect to the Company's
technology and that the Company continues to have exclusive license rights to
the "Licensed Product" and "Licensed Process" (as defined in the Exclusive
Worldwide License Agreement). While management does not anticipate this
arbitration will have a material effect on the Company's financial position, it
is not possible to determine the outcome at this early stage of the proceeding.
Rave has filed an amended counterclaim against the Company in the
Arbitration, alleging breaches of the License Agreement and Development
Agreement, trade libel, tortious interference and conspiracy, and seeking a
declaration that Rave is entitled to the return and exclusive use of its own
technology. Rave claims that it is entitled to $65,000 per month for the life of
any patents on products it developed for the Company (approximately 15 more
years), as well as damages in excess of $4 million on the various claims. The
Company believes that Rave's claims are completely without merit; accordingly no
liability has been recorded for this claim. However, there can be no assurances
that such claims will not result in the Company incurring a liability.
F-19
<PAGE>
Agency Agreement
In order to assist it in obtaining sublicensing revenue, the Company
entered into an Agency Agreement (the "Agency Agreement") with Prime. The Agency
Agreement provides that Prime will be the Company's exclusive agent for entering
into sublicenses with respect to the Licensed Products and technology. Because
its products are not fully developed, the Company has not developed a licensing
program, established proposed royalties, or otherwise determined the terms or
conditions of the arrangements it may want to make with proposed licensees or
others. These programs will be developed in conjunction with product research
and development, and with Prime pursuant to the Agency Agreement. For its
services, with respect to the first $50,000,000 of aggregate net sales of the
Company's licensees and sublicensees, after subtracting the payments to Rave and
licensing expenses, Prime will receive 35% of net sublicense fees received by
the Company, and thereafter 45%. Because the Company has retained the right to
enter into licenses and sublicenses independently, 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 receive an additional
agency fee of up to $1,500,000, of which (i) $400,000 has been paid, (ii)
$400,000 is payable out of the Company's first sublicensing royalties 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.
The agency fee charged to operations for the cumulative period from July
17, 1995 (inception) to December 31, 1997 amounted to $400,000 and for the year
ended December 31, 1997 amounted to $70,000; no fees were charged to operations
for the year ended December 31, 1998.
Consulting and Representative Agreements
On November 12, 1997, the Company contracted with Adaptive Micro-Ware, Inc.
to work with TEC (see below) in the design and development of a custom
integrated circuit ("ASIC") in accordance with the Company's specifications. The
total cost of the project was estimated to be $179,550 to be paid in intervals
based upon milestones. At December 31, 1998, $89,602 had been paid under the
terms of the contract.
On November 14, 1997, the Company contracted with The Engineering
Consortium ("TEC") to design and develop a custom integrated circuit ("ASIC") in
accordance with the Company's specifications. The total cost of the project was
estimated to be $130,000 to be paid in intervals based upon milestones. At
December 31, 1998, $105,000 had been paid under the terms of the contract.
On December 3, 1997, the Company contracted with Lippert/Heilshorn &
Associates, Inc. ("LHA") to provide various Investor Relations and Public
Relations services for the Company. In return for such services the Company
granted to the LHA 30,000 options for the purchase of the Company's Common Stock
at $5.78 per share (market price on date of grant). In addition the Company
agreed to pay LHA a fee of $7,500 per month plus normal business expenses. The
contract terminated on November 15, 1998. As of December 31, 1998, $100,858 had
been paid under the terms of the contract.
F-20
<PAGE>
On January 12, 1998, the Company contracted with Zentrum Mikroelectronik
Dresden GmbH (ZMD), a manufacturer of integrated circuits, to produce the ASIC
chips. ZMD is to produce the necessary masks required for ASIC production,
perform the initial wafer run and deliver prototypes to the Company for testing.
Upon the Company's approval ZMD will manufacture production quantities of the
chip as specified by individual purchase orders. As of December 31, 1998, no
payments have been made under the terms of the contract.
On June 1, 1998, the Company contracted with Innovation Partners
International, Inc. ("IPI") to provide sales management and engineering services
for the Company in Japan and other designated countries, for the purpose of
securing the Company's product sales to the Asian Original Equipment
Manufacturers market. In return for such services the Company agreed to pay IPI
a fee of $6,000 per month plus normal business expenses. At December 31, 1998, a
total of $60,450 had been paid under the terms of the contract, representing
consulting fees and out of the pocket expenses, which have been charged to
operations.
On July 22, 1998, the Company contracted with David Kwong ("consultant") to
sell and license products in China and to maintain a sales office for the
Company in China. The contract may be terminated, by either party, any time
subsequent to September 30, 1999 by giving the other party at least 90 days
notice of termination. In return for such services the Company agreed to pay the
consultant a monetary commission and grant certain stock options upon attaining
determined sales levels. In addition the consultant will receive a monthly
consulting fee until August 1999. The Company further agreed to pay the costs to
establish and maintain an office in China within the limits of an approved
budget. As of December 31, 1998 a total of $120,201 had been paid under the
terms of the contract, representing consulting fees of $45,000, office expenses
of $48,439 and travel costs of $26,762. No commissions had been earned and no
stock options had been granted through December 31, 1998 pursuant to this
agreement.
Leases
The Company leases shared office space on a month-to-month basis for a
monthly rental of $5,950. Rent expense incurred for the cumulative period from
July 17, 1995 (inception) to December 31, 1998 amounted to $196,446; and for the
years ended December 31, 1998 and December 31, 1997 amounted to $74,098 and
$78,496, respectively.
8. 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 are 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
F-21
<PAGE>
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 August
1997 and thereafter has been continuing for successive 3-month periods. Mr.
Legato's initial salary was $150,000 per year 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.
On September 4, 1998 the Company entered into an employment agreement with
its Vice President - Engineering. As part of the agreement, the Company granted
to this individual, under the Company's Plan, options to purchase 50,000 shares
of Common Stock at $1.50 per share, the underlying value of the Company's Common
Stock at, October 1, 1998, the date of grant: 10,000 options vest on March 16,
1999; 13,334 options vest on March 16, 2000; 13,333 options vest on March 16,
2001; and 13,333 options vest on March 16, 2002.
9. Extraordinary Item
The terms of the Bridge Notes of the Company contained early repayment
provisions in the event the Company completed an IPO. As a result of the
Company's completing an IPO in July 1996, the Bridge Notes were repaid and the
unamortized financing costs of $251,938 and the unamortized debt discount of
$596,222 as of that date, totaling $848,160, were written off and recorded as an
extraordinary item for the year ended December 31, 1996.
F-22
AGREEMENT dated as of February 1, 1999 between NUWAVE TECHNOLOGIES,
INC. ("Company"), a Delaware corporation having offices at One Passaic Avenue,
Fairfield, New Jersey 07004, and TERK TECHNOLOGIES CORP. ("Terk"), a New York
corporation having offices at 63 Mall Drive, Commack, New York 11725.
WHEREAS:
A. The Company is in the business of developing and selling or
licensing, among other things, certain technical information for enhancing video
("Intellectual Property") (i) as embodied in the Company's NVP 103-ASIC Chip
("ASIC Chip") which includes the processes referred to in U. S. Patent
Applications Nos. 09/040.200, 09/040.232 and 09/040-233, including presets and
device drivers, and which ASIC Chip substantially conforms to the Technical Data
Sheet attached as Exhibit A to this Agreement and (ii) certain technical
information concerning the ASIC Chip.
B. Terk is in the business of developing and selling electronic
products and would like to develop, with the use of the Intellectual Property,
certain Consumer Video Enhancement Products (as hereinafter defined in
subsection C of the WHEREAS clause of this Agreement).
C. For purposes of this Agreement, consumer Video Enhancement Products
shall mean stand-alone products (which stand-alone products may include user
selectable video-related features developed by the Company) designed to go
between a television receiver and a video source whose sole function would be
video enhancement but also may include functions (i) that provide switching of
multiple video and audio signal inputs; (ii) that provide video and audio signal
output distribution to multiple destinations; (iii) that provide transmission of
signals over twisted pair wire utilizing technology described in U.S. Patent No.
5,010,399 and
<PAGE>
Canadian Patent No. 2,020,841, or (iv) that may be approved in writing by the
Company. Notwithstanding the foregoing, Consumer Video Enhancement Products
shall not include any products (a) which have functions for audio or video
transmitting or receiving; or (b) which have functions for security or
surveillance.
NOW, THEREFORE, IT IS AGREED:
1. The Company hereby agrees to sell the ASIC Chip exclusively to Terk
solely for inclusion in Consumer Video Enhancement Products for sale to end-user
consumers through retail outlets ("retail trade") in the United States and
Canada ("Territory"). Terk hereby agrees to purchase all of its requirements for
ASIC Chips from the Company for use in Consumer Video Enhancement Products to be
sold in the Territory. The Company reserves the right to sell or license ASIC
Chips to others for use in connection with all products and in all parts of the
world except for Consumer Video Enhancement Products to be sold to the retail
trade in the Territory during the term of this Agreement. During the term of
this Agreement, if the Company makes any improvements or enhancements in the
Intellectual Property as embodied in the ASIC Chip which (a) do not increase the
cost of the ASIC Chip to the Company, those improvements or enhancements shall
be included in the ASIC Chip delivered to Terk at no additional charge to Terk
or (b) do increase the cost of the ASIC Chip to the Company, the Company shall
offer to include the improvements and enhancements to Terk at an additional
charge.
2. Each of the Company and Terk is an independent contractor and each
is not an agent or employee of the other, and each has no authority to bind the
other.
3. The term of this Agreement shall be for five years and shall
commence as of July 1, 1999 and shall terminate on June 30, 2004 ("original date
of termination"), provided, however, that if Terk purchased and paid for at
least [ * ] ASIC Chips in the 12 months
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<PAGE>
immediately preceding the original date of termination, this Agreement shall
continue in force and effect, as a non-exclusive agreement, subsequent to the
original date of termination for consecutive 12-month periods as long as Terk
purchases and pays for at least [ * ] ASIC Chips in each 12-month period
subsequent to the original date of termination. Notwithstanding the foregoing
(i) if, during the first six months of this Agreement (July 1,
1999 through December 31, 1999), Terk does not purchase and pay for at least [ *
] ASIC Chips pursuant to the terms of this Agreement, the Company may, upon at
least 30 days' notice, convert this Agreement to a non-exclusive agreement in
the Territory;
(ii) if, during the 7th through 18th months of this Agreement
(January 1, 2000 through December 31, 2000), Terk does not purchase and pay for
at least [ * ] ASIC Chips pursuant to the terms of this Agreement, the Company
may, upon at least 30 days' notice, convert this Agreement to a nonexclusive
agreement in the Territory;
(iii) if, during any 12-month period during the term of this
Agreement subsequent to the 18th month of this Agreement (December 31, 2000),
Terk does not purchase and pay for at least [ * ] ASIC Chips pursuant to the
terms of this Agreement, (A) the Company may, upon at least 30 days' notice,
either (a) terminate this Agreement or (b) convert this Agreement to a
non-exclusive agreement in the Territory and (B) Terk may, upon at least 180
days' notice, terminate this Agreement.
(iv) if the ASIC Chip is not available by July 1, 1999, (a) the
term of this Agreement shall be for five years and shall commence as of the
first day of the month after the Company notifies Terk that the ASIC Chip is
available ("revised commencement date") and shall terminate on the fifth
anniversary of the revised commencement date; (b) the first six months of
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<PAGE>
this Agreement, as set forth in clause (i) above, shall commence on the revised
commencement date and shall terminate on a date six months after the revised
commencement date; (c) the references to the 7th through 18th months of this
Agreement, as set forth in clause (ii) above, shall mean the 7th through 18th
months after the revised commencement date, and (d) the reference to any
12-month period during the term of this Agreement subsequent to the 18th month
of this Agreement, as set forth in clause (iii) above, shall mean any 12-month
period during the term of this Agreement subsequent to the 18th month after the
revised commencement date;
(v) if the ASIC Chip is not available by October 1, 1999, Terk may
terminate this Agreement by notice to that effect to the Company on or before
November 1, 1999 and, in that event, this Agreement shall terminate as of
November 1, 1999 with no liability of either party to the other;
(vi) Terk shall not be subject to any minimum purchase
requirements set forth in any of the above clauses of this paragraph 3 if, and
to the extent that, the Company is not able to fill Terk's orders for ASIC Chips
until the Company can fill Terk's orders.
If the Company gives a 30-day notice to Terk, as set forth in
the immediately preceding clauses, Terk may avoid the termination of this
Agreement or the conversion of this Agreement to a non-exclusive basis in the
Territory, as the case may be, by purchasing and paying for, before the end of
the 30-day period, a sufficient number of ASIC Chips so that the number of ASIC
Chips purchased and paid for in the period in question and the number of ASIC
Chips purchased and paid for before the end of the 30-day period total at least
[ * ] in the first six months of this Agreement, [ * ] during the 7th through
18th months of this Agreement, or [ * ] during any 12-month period subsequent to
the 18th month of this Agreement, as the case may be.
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<PAGE>
4. The purchase price that Terk shall pay to the Company for each ASIC
Chip shall be [ * ] and all ASIC Chips shall be paid for, without setoff or
deduction, within 30 days after delivery.
5. Terk shall develop Consumer Video Enhancement Products utilizing the
Intellectual Property and, to this end, will develop and contribute all
necessary industrial design and also will provide all marketing and distribution
for the Consumer Video Enhancement Products.
6. The Company will assist Terk, if requested (a) in developing
Consumer Video Enhancement Products utilizing the Intellectual Property and, to
this end, will supply engineering and other technical support upon receipt of
payment therefor on a mutually agreed basis; (b) in sourcing of parts and in
selecting manufacturers; (c) in identifying additional sales representatives to
supplement Terk's sales force; and (d) in assisting in the development of sales,
marketing and advertising programs and strategies.
7. (a) Terk acknowledges that it may acquire (i) information and
materials from the company and (ii) knowledge about the Intellectual Property
and the business, products, processing, know-how, experimental work, customers,
clients and suppliers of the Company, and that all such information, materials
and knowledge are and will be the trade secrets and confidential and proprietary
information of the company (collectively "Confidential Information").
Confidential Information will not include, however, any information which is or
becomes part of the public domain through no fault of Terk or that the Company
regularly gives to third parties without restrictions on use or disclosure. Terk
agrees to hold all such Confidential Information that it has acquired or may
hereafter acquire in strict confidence, not to disclose it, directly or
indirectly, to others, or use it in any way, commercially or otherwise, except
with respect to the
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<PAGE>
Consumer Video Enhancement Products contemplated by this Agreement, to disclose
it to Terk's employees and associates only on a need-to-know basis and only to
employe6s and associates who have signed a confidentiality agreement which
adequately protects the Company's interest therein, and not to allow any
unauthorized person access to it, either before or after the expiration or
termination of this Agreement.
(b) The Company acknowledges that it may acquire (i) information from
Terk, and (ii) knowledge about Terk's business, products, processes, know-how,
experimental work, customers, clients, and suppliers, and that all such
information and knowledge are and will be the trade secrets and confidential and
proprietary information of Terk (collectively "Terk Confidential Information").
Terk Confidential Information will not include, however, any information which
is or becomes part of the public domain through no fault of the Company or that
Terk regularly gives to third parties without restriction on use or disclosure.
The Company agrees to hold all such Terk Confidential Information that it has
acquired or may hereafter acquire in strict confidence, not to disclose it,
directly or indirectly, to others, or use it in any way, commercially or
otherwise, to disclose it to the Company's employees and associates only on a
need-to-know basis and only to employees and associates who have signed a
confidentiality agreement which adequately protects Terk's interest therein, and
not to allow any unauthorized person access to it, either before or after the
expiration or termination of this Agreement. Notwithstanding the foregoing, the
Company may use Terk Confidential Information to assist Terk or in connection
with Consumer Video Enhancement Products.
8. Terk will use and prominently display trademarks designated by the
Company on all of the Consumer Video Enhancement Products and related packaging
and written materials utilizing the Intellectual Property. Terk will not use,
authorize or permit the use of, any
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<PAGE>
of the Company's trademarks or trade names or any trademark or trade name used
by the Company which is not owned by third parties or by Terk except to
designate the Consumer Video Enhancement Products. Terk shall not contest the
right of the Company to the exclusive use of any trademark or trade name used or
claimed by the Company except as to those trademarks or trade names owned by
third parties or Terk. Upon termination of this Agreement, for any reason
whatsoever, Terk immediately shall cease, directly and indirectly, from using
any trademark or trade name of the Company or used by the Company except as to
those trademarks or trade names owned by third parties or Terk.
9. The Company represents to Terk that, to the best of its knowledge
(a) it is the owner of, and has the right to grant, rights to the Intellectual
Property and to the trade names and trademarks designated by the Company for use
on Consumer Video Enhancement Products and (b) the Intellectual Property and the
trade names and trademarks designated by the company for use on Consumer Video
Enhancement Products are not the subject of any lawsuit or claim of infringement
by any third party. The Company hereby indemnifies and holds Terk harmless from
and against any and all claims, demands, actions, proceedings, costs and
expenses which shall arise by virtue of any claim that the Intellectual Property
and the trade names and trademarks designated by the Company for use on Consumer
Video Enhancement Products infringe on any valid patent or patent application or
valid trademark or trade name copyright, as the case may be. Terk shall promptly
notify the Company of any such claim, demand, action, proceeding, cost or
expense. The Company shall promptly make payment to Terk for any costs or
expenses incurred by Terk at any time or from time to tine for which
indemnification is due to Terk pursuant to this section. The Company will (i)
furnish Terk with a certificate of insurance certifying that the
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<PAGE>
Company has product liability insurance and (ii) require the insurance company
to name Terk as an entity to be notified in the event of the cancellation of the
product liability insurance.
10. The Company shall have the sole right, in the first instance, to
take appropriate measures, including instituting or defending litigation, to
prevent or stop infringement or misappropriation by third parties in making,
using or selling products using the Intellectual Property ("third party
infringement"). If, after six months from the date of notice from Terk that
there is third party infringement, the Company fails or refuses either (a) to
take or initiate appropriate measures against the third party infringement or
(b) to offer to permit Terk to take or initiate appropriate measures against
third party infringement, Terk nay terminate this Agreement upon 60 days'
notice.
11. The Company shall notify Terk if the patent applications referred
to in WHEREAS clause A(i) of this Agreement are accepted or rejected by the
United States Patent Office.
12. If this Agreement is continued in force and effect as a
non-exclusive agreement after the original date of termination, as contemplated
by paragraph 3 of this Agreement, the parties, upon request by Terk, shall
attempt to arrive at new minimum amounts of purchases of ASIC Chips by Terk in
order to restore the Agreement as an exclusive Agreement in the Territory.
13. During the period that this is an exclusive Agreement, the Company
will not sell or license any Intellectual Property to third parties for use in
any Consumer Video Enhancement Products which permits the resale to the retail
trade of the Consumer Video Enhancement Products in the Territory.
- 8 -
<PAGE>
14. Terk shall have full title to all patent applications, Letters
Patent, know-how, designs, and trade secrets ("Terk Technology") for any
inventions or products developed solely by Terk. The company acknowledges and
agrees that Terk is and shall be the sole and exclusive owner of the Terk
Technology. Terk also shall own all of its own trademarks and trade names and
may display those trademarks and trade names on all of the Consumer Video
Enhancement Products and related packaging and written material. This Agreement
shall not be considered a license for the Company to use the Terk Technology.
15. In no event shall the Company or Terk be liable for any special,
incidental, indirect or consequential damages of any kind in connection with
this Agreement, even if the Company or Terk has been informed in advance of the
possibility of such damages.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New Jersey.
17. All notices, reports, requests, acceptances and other
communications required or permitted under this Agreement shall be in writing,
sent to the receiving party's address as set forth on the first page of this
Agreement (or to such other address that the receiving party may have provided
for purpose of notice as provided in this paragraph), and will be deemed given
when (i) delivered personally, (ii) sent by confirmed facsimile machine, (iii)
sent by commercial overnight courier with written verification of receipt, or
(iv) sent by registered or certified mail, return receipt requested, postage
prepaid.
- -------------------------
* These portions of the Agreement were omitted and filed separately with the
Commission pursuant to a request for confidential treatment.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first above written.
TERK TECHNOLOGIES CORP. NUWAVE TECHNOLOGIES, INC.
By: /s/ Neil Terk By: /s/ Jeremiah F. O'Brien
------------------- -----------------------
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