As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-70627
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
NUWAVE TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 3663 22-3387630
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industry Identification No.)
Incorporation or Classification Code
Organization) Number)
ONE PASSAIC AVENUE, FAIRFIELD, NEW JERSEY 07004
(973) 882-8810
(Address and Telephone Number of Principal Executive Offices)
ONE PASSAIC AVENUE, FAIRFIELD, NEW JERSEY 07004
(973) 882-8810
(Address of Principal Place of Business or Intended Principal Place of Business)
-----------------------
Mr. Gerald Zarin
Chairman of the Board of Directors, President and Chief Executive Officer
One Passaic Avenue, Fairfield, New Jersey 07004
(973) 882-8810
(Name, Address and Telephone Number of Agent For Service)
----------------------
Copies To:
Fredric J. Klink, Esq.
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, New York 10112
(212) 698-3500
Approximate Date of Commencement of Proposed Sale to the Public: From time
to time after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / --------------.
If this form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ------------.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ------------.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
----------------------
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================
Proposed Proposed
Title of Each Maximum Maximum Amount of
Class of Securities Amount to Offering Price Aggregate Registration
to be Registered be Registered Per Unit Offering Price Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 2,742,904 $ 2.75(1) $7,542,986.00 $2,096.95
- -------------------------------------------------------------------------------------------------
Class A Redeemable Warrants (2) 2,057,207 -- -- -- (2)
- -------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
underlying the Class A
Redeemable Warrants (3) 2,057,207 $ 2.75(1) $5,657,319.25 $1,572.74
- -------------------------------------------------------------------------------------------------
Unit Warrants (4) 18.2 -- -- -- (4)
- -------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
underlying the Unit Warrants 688,084 $ 2.75(1) $1,892,231.00 $ 526.04
(5)
- -------------------------------------------------------------------------------------------------
Class A Redeemable Warrants
underlying the Unit Warrants 516,068 -- -- -- (6)
(6)
- -------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
underlying the Class A
Redeemable Warrants which
underlie the Unit Warrants (7) 516,068 $ 2.75(1) $1,419,187.00 $ 394.53
- -------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
underlying Consultant Warrants 400,000 $ 2.75(1) $1,100,000.00 $ 305.80
(8)
- -------------------------------------------------------------------------------------------------
Total Registration Fee $4,896.06
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the high and low prices of the Common
Stock on the Nasdaq SmallCap Market on January 12, 1999.
(2) The Class A Redeemable Warrants may be exercised to purchase shares of
Common Stock. The number of shares of Common Stock that may be acquired
upon the exercise of the Class A Redeemable Warrants is included in the
calculation of the number of shares of Common Stock to be registered in
note (3) below. No fee is required pursuant to Rule 457(g).
(3) Issuable upon exercise of outstanding Class A Redeemable Warrants to be
registered in Note (2) above.
(4) The Unit Warrants may be exercised to purchase shares of Common Stock and
Class A Redeemable Warrants. The number of shares of Common Stock that may
be acquired upon the exercise of the Unit Warrants is included in the
calculation of the number of shares of Common Stock to be registered in
note (5) below. The number of Class A Redeemable Warrants that may be
acquired upon the exercise of the Unit Warrants is included in the
calculation of the number of Class A Redeemable Warrants to be registered
in note (6) below. No fee is required pursuant to Rule 457(g).
(5) Issuable upon exercise of the Unit Warrants to be registered in Note (4)
above.
(6) Issuable upon exercise of the Unit Warrants to be registered in Note (4)
above. The Class A Redeemable Warrants may be exercised to purchase shares
of Common Stock. The number of shares of Common Stock that may be acquired
upon the exercise of the Class A Redeemable Warrants is included in the
calculation of the number of shares of Common Stock to be registered in
note (7) below. No fee is required pursuant to Rule 457(g).
(7) Issuable upon exercise of the Class A Redeemable Warrants to be registered
in note (6) above.
(8) Issuable upon exercise of outstanding Consultant Warrants which are
exercisable after September 3, 1999.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1999
PROSPECTUS
NUWAVE TECHNOLOGIES, INC.
6,404,263 Shares of Common Stock
2,573,275 Class A Redeemable Warrants
18.2 Unit Warrants
----------------------
Investing In These Securities Involves A High Degree Of Risk.
See "Risk Factors" On Page 5.
----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------------
Certain stockholders of our company are hereby offering for resale the
following securities of our company:
o up to 2,742,904 shares of Common Stock held by them;
o up to 2,057,207 Class A Redeemable Warrants held by them;
o up to 2,057,207 shares of Common Stock underlying the Class A Redeemable
Warrants;
o up to 18.2 Unit Warrants held by them;
o up to 688,084 shares of Common Stock underlying the Unit Warrants;
o up to 516,068 Class A Redeemable Warrants underlying the Unit Warrants;
o up to 516,068 shares of Common Stock underlying the Class A Redeemable
Warrants which underlie the Unit Warrants; and
o up to 400,000 shares of Common Stock underlying the Consultant Warrants
which are exercisable after September 3, 1999.
The selling stockholders may sell these securities at any time at any
price. We will not receive any proceeds from the resale of these securities. We
have agreed to pay for all expenses of this offering.
Our Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"WAVE." On January 14, 1999, the closing price for our Common Stock on the
Nasdaq SmallCap Market was $2.375 per share.
----------------------
The date of this Prospectus is February 4, 1999
----------------------
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.........................................................i
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS..............................ii
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................5
USE OF PROCEEDS..............................................................14
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................15
BUSINESS.....................................................................24
MANAGEMENT...................................................................34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................45
SELLING STOCKHOLDERS.........................................................48
DESCRIPTION OF SECURITIES....................................................53
PLAN OF DISTRIBUTION.........................................................57
LEGAL MATTERS................................................................58
EXPERTS......................................................................58
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS....................................58
INDEX TO FINANCIAL STATEMENTS...............................................F-1
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith file reports and other
information with the Securities and Exchange Commission (the "Commission"). You
may read and copy such reports and other information at the following locations:
o the Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549;
o the Commission's regional office at 7 World Trade Center, New York, New
York 10048;
o the Commission's regional office at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and
o the offices of the Nasdaq SmallCap Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Commission also maintains a Web site at http://www.sec.gov that contains
reports and other information regarding registrants that file electronically
with the Commission.
We have filed with the Commission a Registration Statement on Form SB-2
(the "Registration Statement") pursuant to the Securities Act of 1933, as
amended, covering the securities being offered. This Prospectus is part of the
Registration Statement but does not contain all the information set forth in the
Registration Statement. For more information about us or the securities being
offered, you should read the Registration Statement and related exhibits,
annexes and schedules. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. Although this Prospectus describes the material terms of certain
contracts, agreements and other documents filed as exhibits to the Registration
Statement, you should read the exhibits for a more complete description of the
document or matter involved. You may inspect and copy the Registration Statement
and related exhibits, annexes and schedules from the locations described above.
i
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Prospectus, including without
limitation, such statements under "Summary," "Management's Discussion and
Analysis or Plan of Operation" and "Business" with respect to our business are
forward-looking statements. Although we believe that our expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
they will prove to have been correct. Important factors that could cause actual
results to differ materially from expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in connection with
the forward-looking statements included in this Prospectus and/or in the section
"Risk Factors." The following additional factors could cause actual results to
differ materially from the results which might be projected, forecast, estimated
or budgeted by us in forward-looking statements:
o delays in product development;
o competitive products and pricing;
o new product development by competitors;
o product demand and industry capacity;
o commercialization of new technologies;
o risks of intellectual property litigation;
o the Company's ability to raise additional capital when required; and
o general economic conditions.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the Cautionary Statements.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
This summary is not complete and may not contain all of the information that you
should consider before purchasing our securities. You should carefully read this
entire Prospectus and the financial statements contained in this Prospectus.
Unless the context otherwise requires, the terms "we," "our," "us" and "the
Company" refers to NUWAVE Technologies, Inc.
The Company
We are a development stage enterprise organized in July 1995. We develop
and intend to manufacture and market products which improve picture quality in
set-top boxes, televisions, VCR's, DVD's, camcorders and other video devices by
enhancing and manipulating video signals. We believe that the television,
telecommunications and computer markets are converging and, in the process,
redefining the way their constituencies interact. We believe that video display
is the common denominator of that interaction, and that the products we have
developed and are developing will allow us to participate in the growth of the
converging market.
At the time of the initial public offering of our Common Stock in July
1996, we 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 our initial public offering, we established the Advanced Engineering
Group to support the continuing development of our products and related
technology, and the identification of additional sources of new technology. We
use the Advanced Engineering Group to create products and technology which are
independent of the Initial Products.
Through our Advanced Engineering Group, we have developed, among others,
the following products and technology:
o a product we call "NUWAVE Video Processor" which significantly enhances
video images;
1
<PAGE>
o a software product we call "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;
o a significant amount of the software included in our products; and
o new circuitry to allow certain of our products to be produced as chips.
We intend to produce the NUWAVE Video Processor in the form of a chip in
accordance with a customer's specific application requirements. We intend to
produce such chips when there is a firm commitment to buy them rather than
producing and inventorying them in anticipation of applications required by
customers in the future. In this regard, we contracted with Adaptive Micro-Ware
Inc. to provide necessary technical support and manage this process under our
direction. Adaptive is an engineering firm specializing in engineering product
management. We also contracted with The Engineering Consortium, a specialized
design engineering group, to complete the design work necessary to convert our
current NUWAVE Video Processor printed circuit board design to chip
specifications. In addition, we contracted with Zentrum Mikroelectronik Dresden
GmbH, a manufacturer of integrated circuits, to produce the chips. We anticipate
that the final design layout will be completed and sent to the foundry at
Zentrum during the fourth quarter of 1998 and expect production of the chips to
begin in the Spring of 1999.
We have significantly reduced our research and development, and marketing
and related activities with respect to the Initial Products to concentrate our
resources on the continued development and marketing of our NUWAVE Video
Processor and the Softsets. We believe this product strategy will allow us to
take full advantage of the growth opportunity presented by the converging
personal computer, television, high definition TV and telecommunication markets,
which we believe to be quite significant. We anticipate this strategy will also
allow us to conserve our resources and at the same time maximize the benefits
from introducing these products into these converging and expanding markets.
Our principal offices are located at One Passaic Avenue, Fairfield, New
Jersey 07004 and our telephone number is (973) 882-8810.
2
<PAGE>
The Offering
Securities Offered for Resale By
Certain Stockholders of Our
Company........................... o up to 2,742,904 shares of Common Stock
o up to 2,057,207 Class A Redeemable
Warrants
o up to 2,057,207 shares of Common Stock
underlying the Class A Redeemable
Warrants
o up to 18.2 Unit Warrants
o up to 688,084 shares of Common Stock
underlying the Unit Warrants
o up to 516,068 Class A Redeemable
Warrants underlying the Unit Warrants
o up to 516,068 shares of Common Stock
underlying the Class A Redeemable
Warrants which underlie the Unit
Warrants
o up to 400,000 shares of Common Stock
underlying the Consultant Warrants
which are exercisable after
September 3, 1999.
We will not receive any of the proceeds from the resale of these
securities. See "Use of Proceeds" and "Selling Stockholders."
Risk Factors
Investing in our securities involves a high degree of risk. You should
consider carefully the information under the caption "Risk Factors" beginning on
page 5 of this Prospectus in deciding whether to purchase the securities offered
under this Prospectus.
3
<PAGE>
Summary Financial Information
The following summary financial data is based upon our consolidated
financial statements included elsewhere in this Prospectus. We have prepared our
consolidated financial statements in accordance with generally accepted
accounting principles. Our results of operations for any interim period do not
necessarily indicate our results of operations for the full year. You should
read this summary financial data in conjunction with "Management's Discussion
and Analysis or Plan of Operation," "Business" and our consolidated financial
statements.
<TABLE>
<CAPTION>
Statement of Operations July 17, 1995
Data: (Inception) Year Ended Nine Months Ended
to December December 31, September 30,
31, ------------------ ------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales.................... $ 0 $ 0 $ 10,275 $ 6,395 $ 9,666
Net Loss..................... $ (910,591) $(4,430,649) $(3,848,316) $(3,038,956) $(2,970,804)
Net loss per common share.... $ (0.47) $ (1.18) $ (0.72) $ (0.57) $ (0.43)
Weighted average number of
shares..................... 1,941,706 3,767,403 5,343,348 5,341,667 6,898,426
Balance Sheet Data: As of
As of September 30,
December 31, 1998
1997 (unaudited)
Working capital.............. $ 1,709,988 $ 5,735,241
Total assets................. $ 2,270,763 $ 6,304,707
Total liabilities............ $ 153,623 $ 162,742
Deficit accumulated during
the development stage...... $ (9,189,556) $(12,160,360)
Stockholders' equity......... $ 2,117,140 $ 6,141,965
- ----------------------
</TABLE>
4
<PAGE>
RISK FACTORS
The securities offered under this Prospectus involve a high degree of risk.
You should carefully consider the risk factors set forth below, as well as the
other information appearing in this Prospectus, before purchasing any of our
securities.
Development Stage Enterprise; Absence of Operating History
We are a development stage enterprise. We have had only a limited operating
history and have sold only a limited quantity of our products to date (primarily
for demonstration purposes). Since our inception in July 1995, we have been
engaged primarily in:
o raising funds;
o directing Rave Engineering Corporation in the continuing development of the
Initial Products;
o recruiting management and technical personnel, including members of our
Advanced Engineering Group;
o directing and supervising our Advanced Engineering Group in the continuing
development of the NUWAVE Video Processor and the Softsets; and
o pre-marketing activities.
More recently, we have begun the commencement of a comprehensive program for
manufacturing and marketing the NUWAVE Video Processor and the Softsets.
Our prospects must be considered in light of the risks associated with the
establishment of a new business in the evolving electronic video industry. In
our case this is particularly so, as further risks will be encountered in our
shift from the development to the commercialization of new products based on
innovative technology. There can be no assurance that we will be able to
generate revenues or achieve profitable operations.
Limited Revenues; Accumulated Deficit; Anticipated Future Losses
To date, we have received only limited revenue from the sale of our
products (primarily from sales made for demonstration purposes). We do not
anticipate significant operating revenue until such time, if ever, as our
relevant technology and one or more of our products is completely developed,
manufactured in commercial quantities and available for commercial delivery.
There can be no assurance that our technology and products, if developed and
manufactured, will be able to compete successfully in the marketplace and/or
generate significant revenue. We anticipate incurring significant costs in
connection with the development of our technologies and proposed products and
there is no assurance that we will achieve sufficient revenues to offset
anticipated operating costs. As of September 30, 1998, we had an accumulated
deficit of $12,160,360. Although we anticipate deriving some revenue from the
sale of our NUWAVE Video Processor and related products and our Softsets within
the next 12 months, we can give no assurance that these products will be
successfully marketed or even completely developed and tested for commercial use
during such period. We anticipate that we will continue to incur substantial
losses for at least the next 12 months. Included in such former and future
losses are research and development
5
<PAGE>
expenses, marketing costs, manufacture and assembly, and general and
administrative expenses. We anticipate that we will continue to have high levels
of operating expenses and will be required to make significant expenditures in
connection with our continued research and development activities. We anticipate
that our losses will continue until such time, if ever, as we are able to
generate sufficient revenues to support our operations.
Significant Capital Requirements; Dependence on Available Cash; Need for
Additional Financing
Our capital requirements in connection with our development activities have
been and will continue to be significant. We have been dependent upon the
proceeds of sales of our securities to private investors to fund our initial
development activities. Since our initial public offering in July 1996, we have
raised capital by making the following sale of our securities to private
investors:
o On February 11, 1998, we received net proceeds of approximately $859,347
from the sale of 253,485 shares of our 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
o Between May 19, 1998 and June 9, 1998, we received net proceeds of
approximately $6,112,950 from the sale of 2,742,904 shares of our 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, we have the right, subject to
certain conditions, to draw up to $5,000,000 in cash by selling shares of Common
Stock to ProFutures. We have 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. We have the sole discretion, subject to
certain conditions, as to when and in what amount such draws will be made.
However, we are 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.
We anticipate, based on our current proposed plans and assumptions relating
to our operations, that we have sufficient cash to satisfy all of our estimated
cash requirements for the next 12 months. In the event of unanticipated
expenses, delays or other problems, we might be required to either utilize the
equity financing available under the Investment Agreement or to seek additional
funding elsewhere. Also, if we receive a larger than anticipated number of
initial purchase orders upon introduction of the Softsets or the NuWave Video
Processor products, we may require additional capital. We cannot be sure that we
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 us, and possibly require us to curtail or cease
operations. To the extent that any future financing involves the sale of our
equity securities, our existing stockholders could be substantially diluted.
<PAGE>
Special Meeting of the Stockholders; Nasdaq Compliance
On March 19, 1999, we will have a Special Meeting of Stockholders (the
"Special Meeting") to ratify our private placement of equity securities that was
conducted between May 19, 1998 and June 9, 1998 whereby the following equity
securities were issued:
(a) 2,742,904 shares of Common Stock;
(b) 2,057,207 Class A Redeemable Warrants to purchase 2,057,207
shares of Common Stock; and
(c) 18.2 Unit Warrants to purchase (i) 688,084 shares of Common
Stock and (ii) 516,068 Class A Redeemable Warrants to purchase
516,068 shares of Common Stock.
Only holders of record of our common stock, $.01 par value, on our
books at the close of business on February 3, 1999 (the "Record Date") will be
entitled to vote at the Special Meeting and any adjournments or postponements
thereof. Holders of shares issued in the private placement or issuable upon
exercise of warrants issued in the private placement (the "Private Placement
Shares") shall not be entitled to vote such shares. Because our Common Stock is
listed on the NASDAQ SmallCap Market, we are subject to The Nasdaq Stock Market,
Inc.'s ("Nasdaq") corporate governance rules, including Marketplace Rule
4310(c)(25)(H) (the "Nasdaq Rule"). Because the Nasdaq Rule requires prior
approval of the private placement, proper ratification of the private placement
at the Special Meeting can only be obtained if the Private Placement Shares are
not entitled to vote. As such, only holders of record of the 5,613,485 shares of
Common Stock which were issued prior to the private placement shall be entitled
to vote with respect to the proposal. If we do not obtain shareholder
ratification, the Nasdaq will issue a notice of delisting and a hearing may be
held to determine whether to delist us from the Nasdaq SmallCap Market.
6
<PAGE>
New Concept; Uncertainty of Market Acceptance; Lack of Marketing Experience
We develop technology and products utilizing new concepts and designs in
video imagery and processing. Our prospects for success will depend on our
ability to successfully sell our products to key manufacturers and distributors
who may be inhibited from doing business with us because of their commitment to
their own technologies and products. As a result, demand and market acceptance
for our technology and products are subject to a high level of uncertainty. We
currently have limited financial, personnel and other resources to undertake the
extensive marketing activities that will be necessary to market our technology
and products once their development is completed. We cannot be sure that any of
our potential customers will enter into any arrangements with us. Further, there
is no assurance that our marketing efforts will be successful.
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. We
anticipate that manufacturers wishing 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. Our ability to
sell and/or license our products would be adversely affected if designers and
manufacturers fail to make such modifications.
License
General
In July 1995, we 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 us a substantial
portion of the technology from which our Initial Products were derived. See
"Summary--The Company" for a definition of Initial Products. Under the License
Agreement, we are obligated to pay to Rave the following:
o royalties of 2.5% of "Licensed Product" (as defined in the License
Agreement) we sell;
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 us; and
o minimum aggregate payments of royalties (under the License Agreement) and
development fees (under the Development Agreement) equaling $65,000 per
month.
If we do 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, we stopped paying to Rave such minimum amount. This gave Rave
the right to make the License Agreement non-exclusive by giving us notice prior
to November 2, 1998. However, Rave failed to give such notice within the
specified time. Accordingly, we believe that we still retain exclusive license
rights to the "Licensed Product" and "Licensed Process" under the License
Agreement.
7
<PAGE>
Arbitration
In July 1996, on behalf of Rave, we filed a patent application on a video
clarity circuit which Rave provided to us under the License Agreement ("Rave
Clarity Circuit"). Of the products and technology which Rave provided to us
under the License Agreement, we had 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, we
received a rejection of our patent application from the patent examiner's
office. We 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,
we acquired exclusive rights to such previously patented circuit. As a result,
we have 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, our representatives 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 the Development Agreement. On the
basis of such audit and the repeated rejections of our patent application for
the Rave Clarity Circuit, we concluded that:
o Rave had not performed the required services under the Development
Agreement;
o misled us about its ability to perform the services required under the
Development Agreement; and
o misled us 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, we 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 us, 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 our technology and that we
continue to have exclusive license rights to the "Licensed Product" and
"Licensed Process" under the License Agreement.
There is no assurance that we will be successful in this arbitration. Further,
if the arbitrator rules that Rave is entitled to significant royalties or other
payments with respect to our technology, it could have a material adverse effect
on our operations.
Rave has informed us that we are obligated to pay Rave (a) $65,000 per
month under the License Agreement for at least the 12-month period ending
September 30, 1999 and (b) $380,000 for purchases and leases of equipment under
the Development Agreement. Our management believes that these claims are without
merit and will vigorously contest them; accordingly, no additional liability has
been recorded for such claims. However, there can be no assurances that such
claims will not result in us incurring a liability.
Uncertainty of Product and Technology Development; Need for Product Testing;
Technological Factors
Development of our products are subject to all of the risks inherent in the
development of new technology and products including the following risks:
o unanticipated delays;
o expenses;
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o technical problems or difficulties; and
o possible insufficiency of funding to complete development.
There is no assurance as to when, or whether, we can successfully complete such
developments. Further, there is no assurance that we can develop products in
commercially salable form within our projected development schedule. If we are
unable to complete our development activities for our proposed products, we
would have to complete development through third parties. We believe that we
have sufficient resources to complete development of our products. However,
there is no assurance that we will be able to complete such development in a
timely manner, or at all. There is also no assurance that we can enter into
economically reasonable arrangements for the completion of such products by
third parties.
In connection with the development of commercially salable prototypes, we
must successfully complete a testing program for our products before marketing
them. Unforeseen technical problems arising out of such testing could
significantly and adversely affect our ability to manufacture a commercially
acceptable version. In addition, our success will depend upon our technology and
proposed products meeting acceptable cost and performance criteria and upon
their timely introduction into the marketplace. There can be no assurance that
our 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 our proposed products.
Unconditional Obligation to Share Sublicense Fees
We have entered into an Agency Agreement with Prime. The Agency Agreement
provides that Prime will be our exclusive agent for entering into sublicenses
for the products and technology licensed to us by Rave under the License
Agreement. It also provides that Prime will assist us in the development and
implementation of a sublicensing program. Subject to certain minimum sales
requirements, we are required to pay to Prime 35% to 45% of net sublicense fees
that we receive (together with certain additional payments) for "Licensed
Product" and "Licensed Process" (as defined under the License Agreement) and for
the "Results of Developments" -- improvements and enhancements to the "Licensed
Product" and "Licensed Process" that Rave develops under the Development
Agreement, as well as the results of its efforts in unrelated investigations.
These payments, together with payments of sublicense royalties to Rave under the
License Agreement, obligate us to pay Rave and Prime 51.25% to 58.75% of the
sublicense fees. However, instead of sublicensing, if we sell "Licensed
Product," we are obligated to pay only Rave a sales royalty of 2.5% of net
sales.
We are required to make payments to Prime regardless of whether we enter
into the relevant sublicense through Prime's efforts or through our own. Since
we are obliged to pay Prime and Rave more than one-half of any sublicensing fees
which we receive for the technology licensed to us 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.
Our obligations to Prime could be affected by the arbitration with Rave
described above in "License" or by subsequent arbitration proceedings with
Prime. See "Risk Factors--License."
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Dependence on Third-Party Development and Manufacturing
We do not plan to directly manufacture any of our products. We intend to
contract with third parties to manufacture our proposed NUWAVE Video Processor
and Softsets, and related retail products. We may also license to third parties
the rights to manufacture our proposed products, either through direct
licensing, original equipment manufacturer arrangements or otherwise.
We will be dependent on third parties to manufacture our application
specific integrated circuit ("ASIC")-based NUWAVE Video Processor and related
products as well as future products we may choose to commercialize. Although we
have entered into an agreement with a potential manufacturer of our NUWAVE Video
Processor ASIC chip, there can be no assurance that such manufacturer will
dedicate sufficient production capacity to satisfy our requirements within
scheduled delivery times, or at all. Failure or delay by our suppliers in
fulfilling our anticipated needs would have an adverse effect on our ability to
develop and market our products. In addition, we will be dependent on third
party vendors for many of the components necessary for the final assembly of our
products. We 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 our management
believes that these components are available from multiple sources, it is
anticipated that we 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 us 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 our operations.
Competition
Intense competition exists in the markets that we intend 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. Our 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.; and
o Phillips Electronics, NV.
All of the above companies have substantially greater financial, technical,
personnel and other resources than we do. 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.
Rapid Changes to Industry Standards; Product Obsolescence
Rapid changes characterize the markets for our 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 which may be functionally similar, or superior, to some or all
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of our proposed products. As a result, our ability to compete will depend on our
ability to, among other things:
o complete development and introduce to the marketplace in a timely and
cost-competitive manner our proposed products and technology;
o continually enhance and improve our proposed products and technology;
o adapt our 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 we will be able to compete successfully or that our
competitors will not develop technologies or products that render our products
and technology obsolete or less marketable. Further, there is no assurance that
we will be able to successfully enhance our proposed products or technology or
adapt them satisfactorily.
Enforceability of Patents and Similar Rights; Possible Issuance of Patents to
Competitors; Trade Secrets
To the extent practicable, we have filed and intend to file U.S. patents
and/or copyright applications for certain of our proposed products and
technology. We have also filed and intend to file corresponding applications in
key industrial countries worldwide.
Under the License Agreement, we have 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 "Risk
Factors--License." In April 1996, we filed two patent applications on behalf of
Rave for its Randall connector system. We received one patent in November 1997
and the second one in January 1998.
In April 1998, we filed three patent applications for certain of our
independently developed products: one for our NUWAVE Video Processor and two for
our Softsets. Although we believe that each of these applications contains
patentable claims, there is no assurance that we will receive any patents. Also,
even if granted, there is no assurance that any patent will afford us with
commercially significant protection of our technology or that we will have
adequate resources to enforce our patents.
We also intend to license and/or sell our technology and products in
foreign markets. As such, we intend 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 our 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 patents issue and publication of discoveries in scientific or
patent literature tends to lag behind actual discoveries by several months. As a
result, we cannot be certain that we will be the first creator of inventions
covered by any patent applications we make or the first to file patent
applications on such inventions.
We believe that the products we intend to market and sell do not infringe
the patents or other proprietary rights of third parties. Further, we are not
aware of any patents held by our competitors that will prevent, limit or
otherwise interfere with our ability to make and sell our products. However, it
is
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possible that competitors may have applied for, or may in the future apply for
and obtain, patents which have an adverse impact on our ability to make and sell
our products. In addition, because we are a relatively new company in the
development stage, claims that our products infringe on the proprietary rights
of others are more likely to be asserted after commencement of commercial sales
of our products . There is no assurance that competitors will not infringe our
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 us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease selling our
products.
We also rely on unpatented proprietary technology. There is no assurance
that others may not independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. To protect our trade
secrets and other proprietary information, we require employees, advisors and
collaborators to enter into confidentiality agreements. We could be adversely
effected in the event that these agreements fail to provide meaningful
protection for our trade secrets, know-how or other proprietary information.
No Dividends
We have not paid any cash dividends to date. Payment of dividends on our
Common Stock is within the discretion of the Board of Directors and will depend
upon our earnings, our capital requirements and financial condition, and other
relevant factors. We do not intend to declare any dividends on our Common Stock
in the foreseeable future. Instead, we plan to retain any earnings we receive
for development of our business operations.
Limitation on Tax Loss Carryforwards
As of December 31, 1997, we had available unused net operating loss
carryforwards ("NOLs") aggregating approximately $3,761,463 to offset future
taxable income. The unused NOLs expire in various years from 2010 to 2012. Under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
utilization of prior NOLs is limited after an ownership change. We may be
subject to limitations on the use of our NOLs as provided under Section 382.
Accordingly, there can be no assurance that a significant amount of our existing
NOLs will be available to us. In the event that we achieve profitability, as to
which there can be no assurance, such limitation would have the effect of
increasing our tax liability and reducing our net income and available cash
resources in the future.
Limitation on Liability of Directors and Officers
Our Certificate of Incorporation provides that:
o we will indemnify any of our directors, officers, employees or agents
against actions, suits or proceedings relating to our company; and
o subject to certain limitations, a director shall not be personally liable
for monetary damages for breach of his fiduciary duty.
In addition, we have entered into an indemnification agreement with each of our
directors. Such indemnification agreement provides that a director is entitled
to indemnification to the fullest extent permitted by law.
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Reliance Upon Key Personnel
Our operations depend largely on the continued employment of Mr. Gerald
Zarin, our Chairman of the Board, President and Chief Executive Officer. If Mr.
Zarin or other members of management or key personnel resign or otherwise leave
us, our business and financial condition could be materially adversely affected.
General
You should not consider past financial performance as an indicator of
future performance. You should not use historical trends to anticipate future
results. You should be aware that the trading price of our 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.
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USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale of
the securities offered hereby. We will not receive any proceeds from the sale of
such securities. We will, however, receive the proceeds, if any, from the
exercise of the Class A Redeemable Warrants, the Unit Warrants and the
Consultant Warrants. There is no assurance that any or all of the Class A
Redeemable Warrants, the Unit Warrants or the Consultant Warrants will be
exercised.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been trading on the NASDAQ SmallCap Market under the
symbol "WAVE" since July 1996. Our redeemable common stock purchase warrants
("Public Warrants") issued in July 1996 also has been trading on the NASDAQ
SmallCap Market under the symbol "WAVEW"since July 1996. Prior to that time,
there was no public market for our Common Stock or Public Warrants.
The following table sets forth the high and low closing sale prices for our
Common Stock as reported on the NASDAQ SmallCap Market during each of the
quarters presented.
High Low
Sale Sale
------------ -----------
Fiscal year ended December 31, 1997
First quarter .............................. $ 9.75 $ 6.50
Second quarter ............................. 8.50 5.63
Third quarter .............................. 8.13 4.50
Fourth quarter ............................. 6.38 3.68
Fiscal year ended December 31, 1998
First quarter .............................. $ 6.63 $ 3.88
Second quarter ............................. 4.50 2.94
Third quarter .............................. 3.50 1.38
Fourth quarter.............................. 4.19 0.66
As of January 6, 1999, there were approximately 210 holders of record of
our Common Stock. This number does not include beneficial owners of our Common
Stock whose shares are held in the names of various dealers, clearing agencies,
banks, brokers and other fiduciaries.
We have never declared or paid any cash dividends. We currently intend to
retain any future earnings to finance the growth and development of our business
and future operations, and therefore do not anticipate paying any cash dividends
in the foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the financial
statements and related notes, and the other financial information, included
elsewhere in this Prospectus.
General
The Company is a development stage enterprise organized in July 1995. The
Company develops and intends to manufacture and market products which improve
picture quality in set-top boxes, televisions, VCR's, DVD's, 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 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 $6,112,950. 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 inventorying 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
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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 sent it to the foundry at ZMD and expects production of
such ASIC chip to begin in the Spring of 1999.
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). The Company
believes this product strategy will allow it to take full advantage of the
growth opportunity presented by the converging PC, television, HDTV and
telecommunication markets, which the Company believes to be quite significant.
The Company anticipates this strategy will also allow it to conserve its
resources and at the same time maximize the benefits to be derived from
introducing these products into these converging and expanding markets.
As of September 30, 1998 the Company had accumulated a deficit during the
development stage of $12,160,360 which includes a net loss for the nine months
ended September 30, 1998 of $2,970,804. The Company has had limited sales of its
products to date ($19,941 cumulative through September 30, 1998, primarily
representing sales of the Company's products for demonstration purposes ). The
loss for the nine months ended September 30, 1998 included $1,799,078 in general
and administrative expenses, representing a decrease of $54,393 compared to the
nine-month period ended September 30, 1997. This decrease included a reduction
in sales and marketing costs of $364,027 discussed more fully below and a
$70,000 decrease in payments made to Prime pursuant to the Exclusive Agency
Agreement ("Agency Agreement") between the Company and Prime dated July 21,
1995. See "Management's Discussion and Analysis or Plan of Operation--Liquidity
and Capital Resources." Such decreases were substantially offset by increases
resulting from the Company's planned growth and expansion including increased
personnel and payroll costs ($16,840), professional and legal services
($175,650), insurance costs ($29,747), investor relations ($73,870), travel and
entertainment costs ($23,140), office rent ($12,547), recruiting costs ($40,000)
and other ($7,840). 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 "Management's Discussion and Analysis or Plan of
Operation--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., original equipment manufacturers of set top boxes,
televisions, VCR's, DVD's and other video output devices). The availability of
the completed ASIC chip is directly related to the Company's ability to generate
OEM orders. 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 their development
of the product expected to utilize the NVP ASIC chip has not yet been completed
and therefore orders are not expected to begin until 2000.
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During the second quarter of 1998, the Company opened a sales and
engineering office in Osaka, Japan to maintain on-going 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.
The Company is currently developing retail products for consumers who have
TV's and do not have a NUWAVE enabled product 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 currently doing business. The Company is in the process of
identifying a qualified distributor with whom it hopes to establish a strategic
partnership to help expedite the introduction of the retail products to the
market in 1999. 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.
During 1997, the Company contracted with professional sales consultants to
establish the development of the Company's sales organization managed by the
Vice President of Sales. In this regard, 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
the first nine months of 1998 were reduced by approximately $364,027 compared to
the first nine months of 1997. During the nine-month period ended September 30,
1998 costs included $21,204 for professional sales and marketing consultants
compared to $218,887 for the nine-month period ended September 30, 1997; $99,853
for advertising and public relations compared to $298,014 for the nine months
ended September 30, 1997; $8,283 for trade shows compared to $53,761 for the
nine months ended September 30, 1997; and $77,294 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.
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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 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) $507,012 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 $109,632 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."
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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 have exclusive license rights to
the "Licensed Product" and "Licensed Process" under the License Agreement.
Rave has informed the Company that the Company is obligated to pay Rave (a)
$65,000 per month under the License Agreement for at least the 12-month period
ending September 30, 1999 and (b) $380,000 for purchases and leases of equipment
under the Development Agreement. Management believes that these claims are
without merit and will vigorously contest them; accordingly, no additional
liability has been recorded for such claims. However, there can be no assurances
that such claims will not result in the Company incurring a liability.
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, either 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 inventorying 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 anticipates producing the initial ASIC in the Spring of 1999.
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.
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 "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
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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.
In connection with the 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 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 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 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 warrants (the "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.
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
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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.
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 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 and the Company's systems
were determined to be Year 2000 compliant. In addition, the Company has
contacted its major supplier (the fabricator/manufacturer of its ASIC
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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 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which establishes standards for reporting information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 was adopted by the Company on December 31, 1998. The
Company does not expect the adoption of SFAS No. 131 to have an impact on the
presentation of the Company's results of operations, financial position or cash
flows.
In February 1998, FASB issued SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), 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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software developed
or obtained for internal uses including the requirement to capitalize specified
costs and amortization of such costs. The Company does not expect the adoption
of this standard to have a material effect on the Company's capitalization
policy.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on the Company's results of operations, financial
position or cash flows.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including
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certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company does not expect the adoption of this statement to have a significant
impact on the Company's results of operations, financial position or cash flows.
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BUSINESS
General
The Company is a development stage enterprise organized in July 1995. The
Company develops and intends to manufacture and market products which improve
picture quality in set-top boxes, televisions, VCR's, DVD's, 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 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;
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
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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 marketing 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 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. The Company expects to produce the ASIC chips in accordance
with the customer's specific application requirements supported by firm
commitments rather than producing and inventorying standard ASIC chips in
anticipation of the requirements of its potential customers. 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.
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
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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 Commission
pursuant to the provisions of 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 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 will not undertake any development activities for third parties without the
consent of the Company. 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 July 1995.
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
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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 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 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 standard
line equivalents, 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.
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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 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
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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), professional and retail markets and to best
capitalize on the expanding and converging markets, the Company has determined
to devote substantially all of the 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.
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, research and development activities with respect to other
products relating to video telecommunications although none are material to the
Company's present plan of operation. These activities may give rise to
additional products which may be commercialized by the Company. However, there
can be no assurance that its efforts will result in marketable products or
products which 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)
$507,012 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 $109,632 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
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<PAGE>
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 also utilizing the
NVP technology.
As of December 21, 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.
From July 17, 1995 to September 30, 1998, the Company incurred expenses of
$5,132,284 on research and development, of which approximately 66% was paid to
Rave pursuant to the Development Agreement. 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 televisions, 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,
30
<PAGE>
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.
In January 1998, the Company entered into a multi year supply agreement
with Thomson for the purchase of its NVP ASIC chip and expects to begin filling
Thomson orders in 1999. The Company originally anticipated the production of its
ASIC chip during the second half of 1998, however the design cycle has taken
longer than expected and management currently expects production of the ASIC
chip in the Spring of 1999. The availability of the completed ASIC chip is
directly related to the Company's ability to generate OEM orders and revenues
for the 1999 selling season.
During the second quarter of 1998, the Company opened a sales and engineering
office in Osaka, Japan to maintain on-going 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. Through September 30, 1998, eight
organizations had signed contracts to represent the Company's ProWave 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 have
TV's and do not have a NUWAVE enabled product 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
31
<PAGE>
business. The Company is in the process of identifying a qualified distributor
with whom it hopes to establish a strategic partnership to help expedite the
introduction of the retail products to the market in 1999. The Company's
potential customer base for such retail products are all major retail outlets
for consumer electronics products such as: retail consumer electronics dealers;
retail electronics & personal computer distributors; home shopping networks;
infomercial companies; mail order consumer electronics; wholesale clubs; mass
merchants; discount retail stores; department stores and OEM's. 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 sale 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.
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.
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 "Risk
Factors--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
our independently developed products and risks related thereto, see "Risk
Factors--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 "Risk Factors--Competition" and "Risk Factors--Rapid
Changes to Industry Standards; Product Obsolescence."
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<PAGE>
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 and the Company's systems were determined to be Year 2000 compliant. 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.
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 $5,400. 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.
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 informed the Company that the Company is obligated to pay Rave (a)
$65,000 per month under the License Agreement for at least the 12-month period
ending September 30, 1999 and (b) $380,000 for purchases and leases of equipment
under the Development Agreement. Management believes that these claims are
without merit and will vigorously contest them; accordingly, no additional
liability has been recorded for such claims. However, there can be no assurances
that such claims will not result in the Company incurring a liability.
33
<PAGE>
MANAGEMENT
Directors And Executive Officers
The following table sets forth the names, ages as of February 3, 1999 and
business experience of the directors and executive officers of the Company.
Directors of the Company hold their offices for a term of one year or until
their successors are elected and qualified. Officers of the Company serve at the
discretion of the Board of Directors of the Company.
Name Age Position
---- --- --------
Gerald Zarin 58 Chairman of the Board of Directors,
Chief Executive Officer and
President
Ed Bohn 54 Director
Lyle E. Gramley 71 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.
EDWARD BOHN has been a Director of the Company since July 1995. From
February 1995 to the present, he has been a Director and Consultant of Jennifer
Convertibles, a furniture distributor. From September 1994 to the present, he
has operated as an independent consultant in financial and operational matters.
From January 1983 to March 1994, Mr. Bohn was employed in various capacities by
Emerson Radio Corporation, which designs and sells consumer electronics
products. From March 1993 to March 1994, he was Senior Vice President-Special
Projects; from March 1991 to March 1993, he was Chief Financial Officer and
Treasurer/Vice President of Finance. Emerson Radio Corporation filed in the
United States Bankruptcy Court, District of New Jersey, for protection under
Chapter 11 of the Federal Bankruptcy Act on September 29, 1993 and was
discharged on March 31, 1994.
LYLE E. GRAMLEY has been a Director of the Company since December 1995. He
has been employed by the Mortgage Bankers Association in Washington, D.C. since
1985, as Senior Staff Vice
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<PAGE>
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.
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
United States). From June 1992 to May 1993 he was President of Technology
Solutions Distributing Inc., a computer products distribution company. From
November 1972 to June 1992, he was President and CEO of T.L.D. Limited, Inc., a
manufacturer's representative company representing major electronics and
computer consumer products firm such as Sanyo, Sharp, Sony and Apple Computer.
He also served on Manufacturer's Advisory Councils for several of these
companies.
JEREMIAH F. 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.
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 for the fiscal
years ended December 31, 1996, December 31, 1997 and December 31, 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").
35
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying
Other Options
Name and Principal Annual (Number of All Other
Position Year Salary Bonus Compensation Shares) Compensation
- ------------------ ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Zarin, President 1996 $115,700 $50,000 $0 0 $0
and Chief Executive 1997 $120,000 $0 $0 0 $0
Officer 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, 1996 $ 93,100 $7,500 $0 5,000 $0
Chief Financial 1997 $100,000 $0 $0 0 $0
Officer, Vice President 1998 $103,800 $15,000 $0 75,000 $0
and Secretary
- ------------------------------------------------------------------------------------------------
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>
Option Grants in Last Fiscal Year
The number of shares available for grant under the Company's 1996 Stock
Incentive Plan for Employees and Consultants (the "Employee Stock Option Plan")
is 349,500. Options for an aggregate of 855,500 shares have been granted under
the Employee Stock Option Plan. During the Company's 1998 fiscal year, options
covering a total of 653,000 shares of Common Stock were granted under the
Employee Stock Option Plan.
The following table sets forth certain information regarding options
granted under the Employee Stock Option Plan during the fiscal year ended
December 31, 1998 to the Named Executive Officers:
36
<PAGE>
OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1998
(Individual Grants in Fiscal Year)
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Price
Name Options Employees Per Share (1) Expiration Date
- --------------------------------------------------------------------------------
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. 25,000 3.8 3.25 May 25, 2003
O'Brien 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%
- --------------------------------------------------------------------------------
(1) All grants of options have been made with exercise prices equal to fair
value at date of grant.
Option Exercises And Year-End Option Values
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 in-the-money stock options held by
the Named Executive Officers.
37
<PAGE>
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
----------- ------------- ----------- -------------
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
- --------------------------------------------------------------------------------
(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.
On November 25, 1996, the Board of Directors adopted the 1996 Non-Employee
Director Stock Option Plan (the "Director Stock Option Plan"), which was
approved by the stockholders on May 29, 1997. Under the Director Stock Option
Plan, each individual elected, re-elected or continuing as a non-employee
director will automatically receive a stock option for 5,000 shares of Common
Stock, with an option exercise price equal to the fair market value of the
Common Stock on the date of grant. 235,000 shares have been reserved for
issuance under the Director Stock Option Plan. Initially, options to purchase
3,000 shares of Common Stock at an exercise price of $5.75 per share were
granted to each of Messrs. Bohn, Gramley, Kwong and Sarubbi on November 25, 1996
under the Director Stock Option Plan. On May 29, 1997, options to purchase 5,000
shares at an exercise price of $6.75 per share were granted to each of Messrs.
Bohn, Gramley, Kwong and Sarubbi under the Director Stock Option Plan. In
addition, on May 26, 1998, options to purchase 53,000 shares at an exercise
price of $3.25 per share were granted to Mr. Bohn and options to purchase 25,000
shares at an exercise price of $3.25 per share were granted to each of Messrs.
Gramley, Kwong and Sarubbi. Directors who are also officers or employees of the
Company do not receive any additional compensation for services as a director.
Currently, Mr. Zarin is the only such director. For a description of Mr. Zarin's
compensation as an officer of the Company, see "Management--Compensation of
Executive Officers."
38
<PAGE>
For a description of consulting fees paid to Messrs. Bohn and Sarubbi, see
"Certain Relationships and Related Transactions."
Employment Agreements
Mr. Zarin entered into an employment agreement with the Company, dated as
of July 20, 1995, pursuant to which he agreed to serve as the Company's
President and Chief Executive Officer through December 31, 2000. In December
1997, the term of the agreement was extended for two additional years to
December 31, 2002. The agreement provided for an initial salary of $90,000 per
year and increased to $120,000 on March 15, 1996. Mr. Zarin is also entitled to
an annual bonus equal to (i) 30% of his base compensation if the Company's net
profits before taxes is equal to projections to be approved by the Company's
Board of Directors, (ii) 60% of his base compensation if the Company's net
profits before taxes are equal to 110% of such projections, and (iii) 100% of
his base compensation if the Company's net profits before taxes are equal to
120% of such projections. Mr. Zarin can terminate the agreement upon 180 days
notice. The Company can terminate the agreement for good cause at any time. If
the Company terminates the agreement other than for good cause, or otherwise
materially breaches the agreement, Mr. Zarin will receive a single payment equal
to the remaining payments he would have been entitled to receive during the
unexpired portion of the agreement. In addition, the employment agreement
provides Mr. Zarin with an option to purchase 200,000 shares of Common Stock at
$1.50 per share. The option expires December 31, 2000 and terminates if Mr.
Zarin voluntarily leaves the Company or the employment agreement is terminated
by the Company for good cause. In connection with services rendered in
establishing the Company and creating its business plan and projections, Mr.
Zarin received 450,000 shares of the Company's Common Stock valued at $.01 per
share.
Mr. Webb entered into an employment agreement with the Company, dated as of
September 11, 1995, pursuant to which Mr. Webb was appointed Vice
President-Marketing of the Company. In March 1997, his title was changed to Vice
President-Marketing/Technical Development in order to more accurately reflect
his duties. The employment agreement continued until March 31, 1996 and
thereafter has been continuing for successive 3-month periods. Mr. Webb's
initial salary was $5,000 per month and was increased to $108,000 per year as of
August 14, 1996. In connection with his employment agreement, Mr. Webb received
options to purchase 70,000 shares of the Company's Common Stock at $1.50 per
share.
Mr. Legato entered into an employment agreement with the Company, dated as
of February 11, 1997, pursuant to which Mr. Legato was appointed Vice
President-Sales of the Company. The employment agreement continued until March
31, 1996 and thereafter has been continuing for successive 3-month periods. Mr.
Legato's initial salary was $150,000 per year as of August 14, 1996 and has not
been increased. In connection with his employment agreement, Mr. Legato received
options to purchase 60,000 shares of the Company's Common Stock at $6.875 per
share.
In connection with services performed by Mr. O'Brien, on July 17, 1995, he
received 5,000 shares of the Company's Common Stock valued at $.01 per share and
has been granted options to purchase 25,000 shares of the Company's Common Stock
at $1.50 per share and 5,000 shares of the Company's Common Stock at $2.00 per
share.
39
<PAGE>
1996 Stock Incentive Plan for Employees and Consultants
As of January 31, 1996, the Company adopted the Employee Stock Option Plan,
pursuant to which stock options (both Nonqualified Stock Options and Incentive
Stock Options), stock appreciation rights and restricted stock may be granted to
key employees and consultants (the "Participants"). The purpose of the Employee
Stock Option Plan is to provide employees and consultants of the Company with an
increased incentive to make significant and extraordinary contributions to the
long-term performance and growth of the Company, to align the interest of
employees and consultants with the interests of the stockholders of the Company,
and to attract and retain employees and consultants of exceptional ability.
The Employee Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee currently
consists of Gerald Zarin, Edward Bohn and Lyle Gramley. The Compensation
Committee determines persons to be granted stock options, stock appreciation
rights and restricted stock, the amount of stock or rights to be optioned or
granted to each such person, and the terms and conditions of any stock options,
stock appreciation rights or restricted stock.
The maximum number of shares with respect to which stock options, stock
appreciation rights or restricted stock may be granted under the Employee Stock
Option Plan is 1,205,000. The Compensation Committee determines, in its
discretion, the number of shares of Common Stock with respect to which a
Participant may be granted stock options, stock appreciation rights and
restricted stock. The Compensation Committee may grant to Participants either
Incentive Stock Options or Nonqualified Stock Options or any combination
thereof. Each option granted under the Employee Stock Option Plan designates the
number of shares covered thereby, if any, with respect to which the option is an
Incentive Stock Option, and the number of shares covered thereby, if any, with
respect to which the option is a Nonqualified Stock Option.
The Compensation Committee determines and designates which employees and
consultants of the Company will receive stock options, stock appreciation rights
or restricted stock. Incentive Stock Options may be granted only to employees of
the Company, which includes officers and directors who are also employees of the
Company.
The Compensation Committee, in its discretion, establishes the price per
share for which the shares covered by the option may be purchased. Any Incentive
Stock Option granted under the Employee Stock Option Plan will have an exercise
price of not less than 100 percent of the fair market value of the shares on the
date on which such option is granted. With respect to an Incentive Stock Option
granted to a Participant who owns more than 10 percent of the total combined
voting stock of the Company or of any parent or subsidiary of the Company, the
exercise price for such option must be at least 110 percent of the fair market
value of the shares subject to the option on the date the option is granted. A
Nonqualified Stock Option granted under the Employee Stock Option Plan (i.e., an
option to purchase the Common Stock that does not meet the requirements under
the Internal Revenue Code of 1986, as amended (the "Code") for Incentive Stock
Options) must have an exercise price of at least the par value of the stock.
Stock appreciation rights may be granted in conjunction with the grant of
an Incentive or Nonqualified Stock Option under the Employee Stock Option Plan
or independently of any such stock option. A stock appreciation right granted in
conjunction with a stock option may be an alternative right. In such event, the
exercise of the stock option terminates the stock appreciation right to the
extent of the shares purchased upon exercise of the stock option and,
correspondingly, the exercise of the stock appreciation right terminates the
stock option to the extent of the shares with respect to which such right is
exercised. Alternatively, a stock appreciation right granted in conjunction with
a stock option may be an
40
<PAGE>
additional right, in which case both the stock appreciation right and the stock
option may be exercised. A stock appreciation right may not, however, be granted
in conjunction with an Incentive Stock Option under circumstances in which the
exercise of the stock appreciation right affects the right to exercise the
Incentive Stock Option or vice versa, unless certain terms and conditions are
met.
The Committee may award shares of restricted stock to Participants.
Restricted shares may not be sold, assigned, transferred, pledged, hypothecated
or otherwise encumbered during the restricted period applicable to such shares.
Except for such restrictions on transferability, Participants have all the
rights of shareholders in respect of restricted shares awarded to him or her
including, but not limited to, the right to receive any dividends on, and the
right to vote, the shares. If a Participant ceases to be an employee or
consultant of the Company for any reason other than death or permanent
disability, all shares of restricted stock awarded to the Participant shall be
forfeited and transferred back to the Company. If a Participant ceases to be an
employee or consultant of the Company by reason of death or permanent
disability, the transferability restrictions on the shares of restricted stock
awarded to the Participant shall lapse.
The Company has registered the issuance of all options and all shares
issuable upon exercise of the options on Form S-8 under the Securities Act.
The Company has granted options to purchase a total of 855,500 shares of
Common stock at prices ranging from $1.50 to $6.75 per share under the Employee
Stock Option Plan.
Non-Employee Director Stock Option Plan
As of November 25, 1996, the Company adopted the Director Stock Option Plan
in order to attract and retain the services of non-employee members of the Board
of Directors and to provide them with increased motivation and incentive to
exert their best efforts on behalf of the Company by enlarging their personal
stake in the Company.
The Director Stock Option Plan is administered by the Board of Directors of
the Company. The Board grants stock options under the Director Stock Option Plan
and is authorized to interpret the Director Stock Option Plan, to promulgate,
amend and rescind rules and regulations relating to the Director Stock Option
Plan and to make all other determinations necessary or advisable for its
administration.
The maximum number of shares of Common Stock with respect to which options
may be granted under the Director Stock Option Plan is 235,000. The number of
shares subject to each outstanding option, the number of shares subject to each
option to be granted under the Director Stock Option Plan, the option price with
respect to outstanding options, and the aggregate number of shares remaining
available under the Director Stock Option Plan are subject to adjustment as the
Board, in its discretion, deems appropriate to reflect such events as
reorganizations of or by the Company.
Each member of the Board of Directors (an "Eligible Director") who
otherwise (1) is not currently an employee of the Company, or (2) is not a
former employee still receiving compensation for prior services (other than
benefits under a tax-qualified pension plan) is eligible for the grant of stock
options under the Director Stock Option Plan. The Board may grant Eligible
Directors such number of stock options as the Board may determine from time to
time. Annually, each Eligible Director shall be entitled to receive an option to
purchase 5,000 shares of Common Stock, which options will be exercisable at the
closing price of such shares of Common Stock at the date of such grant.
41
<PAGE>
An option granted under the Director Stock Option Plan will have an
exercise price equal to 100 percent of the fair market value of the shares on
the date on which such option is granted. No stock option may be exercisable
prior to the expiration of six months from the date of grant unless the Eligible
Director dies or becomes disabled prior thereto. If not sooner terminated, each
option granted under the Director Stock Option Plan will expire ten years from
the date of its granting.
If an Eligible Director is terminated from the Board of Directors by reason
of death or disability, an option granted to such Eligible Director may be
exercised for a period of twelve months after such termination. If an Eligible
Director is terminated from the Board of Directors for any reason other than
death or disability, an option granted to such Eligible Director may be
exercised for a period of sixty days after such termination.
The Company has granted options to purchase a total of 160,000 shares of
Common Stock at prices ranging from $3.25 to $6.75 per share under the Director
Stock Option Plan.
42
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 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
December 31, 1998 (except as noted below), by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a group.
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL OUTSTANDING
OWNER OWNERSHIP 1 SHARES OWNED 2
- ------------------------------------- -------------------- -----------------
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 *
525 W. 236th St., #5-F
Riverdale, NY 10463 7
Robert Webb 83,334 *
298 Stanton Mountain Rd.
Lebanon, NJ 08833 8
43
<PAGE>
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 1,132,336 12.6%
directors as a group (7
persons) 18
* 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 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.
44
<PAGE>
(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.
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
45
<PAGE>
January 28, 1996) is a principal of Corporate Builders. The Corporate Builders
Agreement provides, among other things, that Corporate Builders will serve as an
advisor to the Company with regard to its relationship with the investment
community, assist the Company in developing a corporate strategy and business
and management goals, assist in the preparation of media presentations, and
oversee the production of video production relating to the Company's products
and services. The Corporate Builders Agreement continued until August 1, 1997
and thereafter has been continuing for successive one-month periods. From August
1, 1995 to July 1996, the Company paid to Corporate Builders a fee of $7,500 per
month and thereafter has been paying a fee of $5,000 per month. In connection
with services rendered by Mr. Chu in establishing the Company and creating its
business plan and projections, at the direction of Mr. Chu, in July 1995, the
Company issued 450,000 shares of the Company's Common Stock valued at $.01 per
share earned by Mr. Chu to First Earth Investors, Corporate Builders, and W2
Technologies, Inc., all entities affiliated with Mr. Chu, in the amounts of
250,000 shares, 125,000 shares and 75,000 shares, respectively. As of June 19,
1996, Corporate Builders returned its 125,000 shares of the Company's Common
Stock back to Mr. Chu. As of June 28, 1996, the 125,000 shares of the Company's
Common Stock received by Mr. Chu from Corporate Builders were returned to the
Company. The 125,000 shares of the Company's Common Stock were returned to Mr.
Chu and, subsequently, to the Company to prevent such shares from being
considered underwriting compensation to either Corporate Builders or Mr. Chu.
The total consulting fees paid to Corporate Builders pursuant to the
Corporate Builders Agreement for the cumulative period from the Company's
inception (July 17, 1995) to December 31, 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, 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.
46
<PAGE>
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.
47
<PAGE>
SELLING STOCKHOLDERS*
The following table sets forth certain information regarding beneficial
ownership of certain of the Company's securities (the "Securities") as of
February 2, 1999. The Securities are being registered to permit public secondary
trading of such Securities, and each of the selling stockholders of the Company
(the "Selling Stockholders") may offer the Securities for resale from time to
time. See "Plan of Distribution." Upon completion of the offering and assuming
the sale by a Selling Stockholder of all of its Securities available for sale
under this Prospectus, such Selling Stockholder shall not own more than 1% of
such outstanding Securities of the Company.
- ------------------------
* Information concerning the Selling Stockholders may change from time to time;
any changes of which the Company is advised will be set forth in a Prospectus
Supplement to the extent required.
SECURITIES HELD BY THE SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING (4)
------------------- ----------------------
Number of Number of
Number of Class A Number of Class A
NAME OF Shares of Redeem- Number Securities Shares of Redeem- Number
BENEFICIAL Common able of Unit Being Common able of Unit
OWNER Stock Warrants Warrants Offered Stock Warrants Warrants
(1) (2) (3)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
N. Jack Alhadeff 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Aarnel Funding 175,000 75,000 -- -- -0- -0- --
Corp. Pension Plan
Michael Miller TTE
- ---------------------------------------------------------------------------------------------
Jessica Baron 23,650 10,136 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Anthony Bartone 67,568 28,958 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Kenneth Berg 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Robert Berger 13,514 5,792 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
James J. Binns 67,568 28,958 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
A.W. Boggs 28,875 12,375 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Arthur P. Bollon 10,136 4,344 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
David Braka 13,514 5,792 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Orlando J. Cartaya, MD 6,757 2,896 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
CLFS Equities, Ltd. 33,784 14,479 -- -- -0- -0- --
c/o James Lustig
- ---------------------------------------------------------------------------------------------
Robert M. Coar 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Gerald Cohen c/o 8,447 3,620 -- -- -0- -0- --
Weiss & Co.
- ---------------------------------------------------------------------------------------------
Robert H. Cohen & 13,514 5,792 -- -- -0- -0- --
Nanette C. Koryn
- ---------------------------------------------------------------------------------------------
Douglas M. Colbert 10,136 4,344 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
John L. Davimos 33,784 14,479 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Richard Davimos, Jr. 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Richard H. Davimos 202,703 86,873 -- -- -0- -0- --
Trustee
- ---------------------------------------------------------------------------------------------
Richard H. Davimos
Trust
- ---------------------------------------------------------------------------------------------
Robert S. Davimos 50,677 21,719 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Philip Davis 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Seth A. Eisner & 17,500 7,500 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
48
<PAGE>
FCS Custodian for 13,514 5,792 -- -- -0- -0- --
Marc Friedland IRA
- ---------------------------------------------------------------------------------------------
Douglas R. Feurring 33,784 14,479 -- -- -0- -0- --
& Beverly Feurring
- ---------------------------------------------------------------------------------------------
William H. 17,433 7,472 -- -- -0- -0- --
Fullerton Trust
William H.
Fullerton Trustee
- ---------------------------------------------------------------------------------------------
John G. Garell & 17,433 7,472 -- -- -0- -0- --
Jeannie W. Garell
- ---------------------------------------------------------------------------------------------
Martin Garfield 23,649 10,135 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Cary Geensburg 10,136 4,344 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Lloyd Glantz 8,750 3,750 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Jesse Grossman 33,784 14,479 -- -- -0- -0- --
c/o Gursey Schneider
- ---------------------------------------------------------------------------------------------
Gursey Schneider & 33,784 14,479 -- -- -0- -0- --
Co. Profit Sharing
Plan
Jessee Grossman TTEE
- ---------------------------------------------------------------------------------------------
Daniel Huntley 46,946 20,120 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Peter Janssen 270,271 115,831 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
David Jaroslowicz 33,784 14,479 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Iris Kalt 18,244 7,819 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Lawrence Kaplan & 33,784 14,479 -- -- -0- -0- --
Helaine Kaplan
- ---------------------------------------------------------------------------------------------
Richard Koral 27,028 11,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Gerald Korman & 16,893 7,240 -- -- -0- -0- --
Wendy Korman
- ---------------------------------------------------------------------------------------------
Howard Levy 6,757 2,896 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Larry McDonald & 67,568 28,958 -- -- -0- -0- --
Barry Berggren
- ---------------------------------------------------------------------------------------------
Jacob Majnmer 6,757 2,896 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Vincent Merola & 6,757 2,896 -- -- -0- -0- --
Anne Merola
- ---------------------------------------------------------------------------------------------
Michael Miller 28,000 12,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Gerald Jay 6,757 2,896 -- -- -0- -0- --
Millstein, MD
- ---------------------------------------------------------------------------------------------
Bruce Meyers 472,973 202,703 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Joseph Meyers & 101,353 43,437 -- -- -0- -0- --
Rita Meyers
- ---------------------------------------------------------------------------------------------
The Nagel Family 20,271 8,688 -- -- -0- -0- --
Living Trust
c/o Jack Nagel
- ---------------------------------------------------------------------------------------------
Ilya Novof 14,865 6,371 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
O.M. Tak 67,568 28,958 -- -- -0- -0- --
c/o Oscar Michaels
- ---------------------------------------------------------------------------------------------
Bonnie 6,757 2,896 -- -- -0- -0- --
Pensenstadler IRA
- ---------------------------------------------------------------------------------------------
Travis L. 6,757 2,896 -- -- -0- -0- --
Pensenstadler
- ---------------------------------------------------------------------------------------------
49
<PAGE>
Wayne J. 33,784 14,479 -- -- -0- -0- --
Pensenstadler IRA
- ---------------------------------------------------------------------------------------------
Wayne J. 27,028 11,584 -- -- -0- -0- --
Pensenstadler
- ---------------------------------------------------------------------------------------------
Jerry W. Peterson 101,353 43,437 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Barry Richter 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Michel Rosner 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Anthony R. Salandra 16,893 7,240 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Sy Sadonoff 67,568 28,958 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Robert J. Schmier 33,784 14,479 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Jonathan Spanier 171,623 73,553 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Deborah E. Stone 7,000 3,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Lore E. Stone Trust 49,000 21,000 -- -- -0- -0- --
Lore E. Stone TTEE
- ---------------------------------------------------------------------------------------------
Michael F. Stone 175,000 75,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Robert Strougo 6,757 2,896 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Jeffrey C. Ullman 16,893 7,240 -- -- -0- -0- --
Living Trust
Jeffrey C. Ullman
Trustee
- ---------------------------------------------------------------------------------------------
Univeral Partners, LP 67,568 28,958 -- -- -0- -0- --
c/o Joel Kantor
- ---------------------------------------------------------------------------------------------
Marc Wasserman & 33,784 14,479 -- -- -0- -0- --
Dawn Wasserman
- ---------------------------------------------------------------------------------------------
Weiss Capital Group 33,784 14,479 -- -- -0- -0- --
LLC
c/o Gary Weiss
- ---------------------------------------------------------------------------------------------
Melvyn I. Weiss c/o 67,568 28,958 -- -- -0- -0- --
Milberg Weiss
Bershad Hynes &
Lerach LLP
- ---------------------------------------------------------------------------------------------
Eric Willsky 50,677 21,719 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Eric Willsky, MD, a 16,893 7,240 -- -- -0- -0- --
Medical Profit
Sharing Plan
- ---------------------------------------------------------------------------------------------
Steven C. Witkoff 101,353 43,437 -- -- -0- -0- --
c/o The Witkoff
Group, LLC
- ---------------------------------------------------------------------------------------------
Martha Bartone 28,595 12,255 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Concetta Capotorto 14,298 6,128 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Bernard Cappiello 3,890 1,667 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
John Caruso 1,717 736 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
D.H. Blair 102,942 44,118 -- -- -0- -0- --
Investment Banking
Corp.
- ---------------------------------------------------------------------------------------------
Harold Dombeck IRA 28,595 12,255 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Douglas Horn 16,958 7,268 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Mark C. Lee 8,293 3,554 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Haim Pinhasi 5,012 2,148 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Phillip Roberts 14,298 6,128 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
John F. Santoro 57,190 24,510 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
50
<PAGE>
Marc A. & Susan K. 7,149 3,064 -- -- -0- -0- --
Snyder
- ---------------------------------------------------------------------------------------------
David Southward 28,595 12,255 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Marilyn L. Steinbright 45,752 19,608 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Joseph Thomas 14,298 6,128 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Marjorie J. Topkins 9,221 3,922 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Arthur Ulene IRA 28,595 12,255 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Pricilla Ulene IRA 28,595 12,255 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Phylis Webb 4,290 1,839 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Mark Alloy 30,142 12,918 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Kenneth J. Angell 7,898 3,385 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Altom Transport, Inc. 7,536 3,230 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Bryan E. Decker 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
David E. Jones & 12,238 5,245 -- -- -0- -0- --
Ardis B. Jones
- ---------------------------------------------------------------------------------------------
Ed Grindstaff 7,536 3,230 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Herbert Lerman 15,071 6,459 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Carol Miller 4,522 1,938 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Wade Miller 4,522 1,938 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Sheila Nagar 15,071 6,459 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
David Rice 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Paul Seltzer 7,536 3,230 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Jeffrey L. Stanger 18,086 7,751 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Edward E. Stumpff & 21,100 9,043 -- -- -0- -0- --
Valerie L. Stumpff
- ---------------------------------------------------------------------------------------------
Title/Greenspan 120,566 51,671 -- -- -0- -0- --
Revocable Trust
dated 5/29/96, Jay
Greenspan & Daena
Title Trustees
- ---------------------------------------------------------------------------------------------
John Burdette 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
James R. Rhodes 36,171 15,502 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Wendell J. Satre 18,086 7,751 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Edwin H. Smith, Jr. 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Victor Squitieri 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
L. Conway Wilson 6,029 2,584 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
William Zarella 15,071 6,459 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Alan H. Brooks and 4,024 1,725 -- -- -0- -0- --
Mary A. Brooks
- ---------------------------------------------------------------------------------------------
Matthew Burgay 3,185 1,365 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Gloria Buzi 15,423 6,610 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
David Kushner 16,763 7,184 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Howard Levy 6,706 2,874 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Willard C. McKNitt 33,526 14,368 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Oscar Investment 63,698 27,299 -- -- -0- -0- --
Fund L.P.
c/o Andrew Boszhurdt
- ---------------------------------------------------------------------------------------------
Donald Sheldon 16,763 7,184 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
51
<PAGE>
Amir Sitafalwalla 6,706 2,874 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Andrew Stillman 16,763 7,184 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Peter Bixby 2,940 1,260 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Matthew Burgay 5,250 2,250 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Howard Commander 7,000 3,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Lang Elliot 35,000 15,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Edward Imbrogno 7,000 3,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Leonid Khutorsky 10,500 4,500 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Beverly Levy 3,500 1,500 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Robert Lenz & Carol 13,020 5,580 -- -- -0- -0- --
Lenz
- ---------------------------------------------------------------------------------------------
William Lutz 7,000 3,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Warren A. Noden 11,200 4,800 -- -- -0- -0- --
Trust
Warren A. Noden TTEE
- ---------------------------------------------------------------------------------------------
Harvey Plosker & 7,000 3,000 -- -- -0- -0- --
Lila Lewenthal
- ---------------------------------------------------------------------------------------------
Peter Rettman 17,500 7,500 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Marsha Rosenberg 7,000 3,000 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Colin H. Smith 7,280 3,120 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Andrew Stillman 737 316 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Elizabeth Holmes 34,314 14,706 -- -- -0- -0- --
Crocker
- ---------------------------------------------------------------------------------------------
Jerry Peterson 85,785 36,765 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Riviera Holdings LLC 17,157 7,353 -- -- -0- -0- --
c/o Martin Levine
- ---------------------------------------------------------------------------------------------
Robert Seguso 68,628 29,412 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Richard H. Davimos 6,864 2,942 -- -- -0- -0- --
Trustee
Richard H. Davimos
Trust
- ---------------------------------------------------------------------------------------------
Robert S. Davimos 10,295 4,412 -- -- -0- -0- --
- ---------------------------------------------------------------------------------------------
Janssen-Meyers 962,042 240,877 8.519 -- -0- -0- -0-
Associates, L.P. (5)
- ---------------------------------------------------------------------------------------------
Bruce Meyers (6) 299,998 128,571 4.550 -- -0- -0- -0-
- ---------------------------------------------------------------------------------------------
Peter Janssen (6) 299,998 128,571 4.550 -- -0- -0- -0-
- ---------------------------------------------------------------------------------------------
Jeffrey Berns (7) 35,899 15,385 0.543 -- -0- -0- -0-
Christopher
- ---------------------------------------------------------------------------------------------
Markowski (7) 3,108 1,332 0.050 -- -0- -0- -0-
- ---------------------------------------------------------------------------------------------
Michael Markowski 3,108 1,332 0.050 -- -0- -0- -0-
(7)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares of Common Stock issuable upon exercise of the Class A
Redeemable Warrants and/or Unit Warrants beneficially owned by the relevant
Selling Stockholder.
(2) Includes Class A Redeemable Warrants issuable upon exercise of the Unit
Warrants beneficially owned by the relevant Selling Stockholder.
(3) All Securities listed in this table will be offered unless otherwise
indicated.
52
<PAGE>
(4) Assumes the sale by the Selling Stockholders of all of the Securities
available for sale under this Prospectus.
(5) Janssen-Meyers acted as placement agent in connection with the private
placement of Common Stock and Class A Redeemable Warrants between May 19,
1998 and June 9, 1998. Includes 400,000 shares of Common Stock issuable
upon exercise of the Consultant Warrants beneficially owned by
Janssen-Meyers. The Consultant Warrants are exercisable after September 3,
1999.
(6) Messrs. Meyers and Janssen are principals of Janssen-Meyers.
(7) Messrs. Bern, Markowski and Markowski are employees of Janssen-Meyers.
Except as noted below, none of the Selling Stockholders has had a material
relationship with the Company or any of its affiliates within the past three
years other than as a result of the ownership of the Securities or as a result
of entering into those agreements (the "Private Placement Agreements") in
connection with the Company's private equity placement between May 19, 1998 and
June 9, 1998, pursuant to which the Selling Stockholders acquired the Common
Stock, the Class A Redeemable Warrants and the Unit Warrants. See "Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources." In connection with such private equity placement, each of the
Selling Stockholders has represented to the Company in writing that he, she or
it is an accredited investor within the meaning of the Securities Act.
On March 3, 1998, the Company entered into a consulting agreement with
Janssen-Meyers (the "Consulting Agreement") 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. These Consultant Warrants have an exercise price of $4 per share, are
exercisable after September 3, 1999 and expire on March 3, 2003.
The Securities offered hereby by the Selling Stockholders have been
acquired or will be acquired pursuant to the Private Placement Agreements and/or
upon exercise of the Class A Redeemable Warrants, the Unit Warrants and/or the
Consultant Warrants. In accordance with the Private Placement Agreements and the
Consultant Warrants, the Company agreed to register the Securities for resale by
the Selling Stockholders to permit such resales from time to time in the market
or in privately-negotiated transactions.
The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration of the
Securities.
53
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized by its Articles of Incorporation, as amended, to
issue 20,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock"), which Preferred Stock may be
issued with such rights, designations and privileges as the Board of Directors
may from time to time determine. As of the date hereof, there were 8,356,389
shares of Common Stock issued and outstanding and no shares of Preferred Stock
outstanding.
The following summary descriptions are, to the extent applicable, qualified
in their entirety by reference to the Company's Articles of Incorporation, as
amended.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock are
entitled to receive ratably such dividends when, as and if declared by the Board
of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are validly issued,
fully paid and nonassessable.
Preferred Stock
Of the 2,000,000 shares of Preferred Stock authorized, 1,000,000 shares
have been designated as Series A Convertible Preferred Shares. In 1995, the
Company sold 600,000 shares of its Series A Convertible Preferred Shares, which
shares were converted into 600,000 shares of Common Stock in 1996. The Series A
Convertible Preferred Shares are convertible into Common Stock on a one-to-one
basis. The 1,000,000 shares of Preferred Stock not designated may have such
preferences and rights as the Board of Directors of the Company may designate.
Class A Redeemable Warrants
The following discussion is a summary of certain terms and provisions of
the Class A Redeemable Warrants contained in the Warrant Agreement, dated May
15, 1998, between the Company and American Stock Transfer & Trust Company (the
"Warrant Agreement"). As such, it is qualified in its entirety by reference to
the Warrant Agreement.
Each Class A Redeemable Warrant entitles the holder to purchase one share
of Common Stock at any time until May 11, 2003 at an exercise price of $3.24
(the "Exercise Price"), subject to adjustment in certain circumstances to
prevent dilution. The Class A Redeemable Warrants may be exercised in whole or
in part, at any time and from time to time until May 11, 2003 through a cash or
cashless exercise. Unless exercised, the Class A Redeemable Warrants will
automatically expire on May 11, 2003.
54
<PAGE>
Under the Warrant Agreement, the Company agreed to use its best effort to
file a registration statement under the Securities Act, registering the Class A
Redeemable Warrants and the shares of Common Stock underlying the Class A
Redeemable Warrants, upon demand, after December 9, 1998, and use its best
efforts to have the registration statement declared effective by the Commission
as soon as possible thereafter (the "Effective Date"). In the event the
registration statement is not declared effective within 60 days after a demand
for registration, the then number of Class A Redeemable Warrants shall be
increased by two percent (2%), effective as of the end of such 60 day period and
by an additional two percent (2%) on each one month anniversary thereafter,
until such time that the number of Class A Redeemable Warrants should equal 120%
of the original number of Class A Redeemable Warrants. The Company agrees to
keep the registration statement effective until expiration of the Class A
Redeemable Warrants.
The Class A Redeemable Warrants are subject to redemption by the Company at
$.01 per Class A Redeemable Warrant at any time commencing 12 months after the
Effective Date, or earlier with the prior written consent of Janssen-Meyers, on
not less than 30 days prior written notice to the holders of the Class A
Redeemable Warrants, provided the average closing bid quotation of the Common
Stock as reported on the Nasdaq SmallCap Market, if traded thereon, or, if not
traded thereon, the average closing bid quotation of the Common Stock if listed
on a national securities exchange (or other reporting system that provides last
sale prices), has been at least 250% of the then current Exercise Price of the
Class A Redeemable Warrants, for a period of 30 consecutive trading days ending
on the day prior to the date 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.
The Class A Redeemable Warrants were originally issued between May 19, 1998
and June 6, 1998 in connection with a private equity placement by the Company in
which Janssen-Meyers acted as the Company's placement agent. See "Management's
Discussion and Analysis or Plan of Operation--Liquidity and Capital Resources."
Unit Warrants
The following discussion is a summary of certain terms and provisions of
the Unit Warrants contained in the Placement Agent's Unit Purchase Warrant
Agreement, dated as of May 19, 1998, between the Company and Janssen-Meyers (the
"Unit Purchase Warrant Agreement"). As such, it is qualified in its entirety by
reference to the Unit Purchase Warrant Agreement.
Each Unit Warrant entitles the holder to purchase one Unit (as defined
below) at any time until May 11, 2003 at an exercise price of $100,000, subject
to adjustment in certain circumstances to prevent dilution. Each Unit consist of
shares of Common Stock and Class A Redeemable Warrants. The Unit Warrants may be
exercised in whole or in part, at any time and from time to time until May 11,
2003 through a cash or cashless exercise. Unless exercised, the Unit Warrants
will automatically expire on May 11, 2003.
Under the Unit Purchase Warrant Agreement, the Company agreed to file a
registration statement under the Securities Act as expeditiously as possible,
upon demand after December 9, 1998, but in any event no later than 60 days
following receipt of such demand, to register the following securities: (i) the
Unit Warrants, (ii) the Common Stock underlying the Unit Warrants, (iii) the
Class A Redeemable Warrants underlying the Unit Warrants and (iv) the Common
Stock underlying the Class A Redeemable Warrants which underlie the Unit
Warrants. The Company agreed to use its best efforts to have the
55
<PAGE>
registration statement declared effective at the earliest possible time. In
addition, all registered holders of the above described securities have the
right to participate, or "piggyback," in certain registrations initiated by the
Company. The Unit Warrants are not redeemable by the Company.
The Unit Warrants were originally issued between May 19, 1998 and June 9,
1998 in connection with a private equity placement by the Company in which
Janssen-Meyers acted as the Company's placement agent. See "Management's
Discussion and Analysis or Plan of Operation--Liquidity and Capital Resources."
Consultant Warrants
The following discussion is a summary of certain terms and provisions of
the Consultant Warrants dated March 3, 1998, and as such, it is qualified in its
entirety by reference to the Consultant Warrants.
Each Consultant Warrant entitles the holder to purchase one share of Common
Stock at any time after September 3, 1999 until March 3, 2003 at an exercise
price of $4.00, subject to adjustment in certain circumstances to prevent
dilution. The Consultant Warrants may be exercised in whole or in part, at any
time and from time to time after September 3, 1999 until March 3, 2003 through a
cash or cashless exercise. Unless exercised, the Consultant Warrants will
automatically expire on March 3, 2003.
Under the Consultant Warrants, the Company agreed that, after September 3,
1999, within 60 days after demand in accordance with the provisions of the
Consultant Warrants, the Company shall file a registration statement and use its
best efforts to cause such registration statement to become effective under the
Securities Act with respect to the resale of the Common Stock underlying the
Consultant Warrants. In addition, the holders of the Consultant Warrants have
the right to participate, or "piggyback," in certain registrations initiated by
the Company.
The Consultant Warrants were originally issued to Janssen-Meyers on March
3, 1998 pursuant to the Consulting Agreement with Janssen-Meyers. See "Selling
Stockholders."
Dividends
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment by the Company of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, as well as other relevant factors.
The Board of Directors does not intend to declare any dividends in the
foreseeable future, but instead intends to retain earnings for use in the
Company's business operations.
Transfer Agent and Warrant Agent
The transfer agent for the Common Stock is, and the warrant agent for the
Class A Redeemable Warrants is, American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York.
56
<PAGE>
PLAN OF DISTRIBUTION
All or a portion of the Securities offered hereby by the Selling
Stockholders may be delivered and/or sold in transactions from time to time on
the over-the-counter market, on the Nasdaq SmallCap Market, in negotiated
transactions, or a combination of such methods of sale, at market prices
prevailing at the time, at prices related to such prevailing prices or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling to or through one or more broker-dealers, and such broker-dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders. The Selling Stockholders and any
broker-dealers that participate in the distribution may under certain
circumstances be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions received by such broker-dealers and any
profits realized on the resale of Securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if they act as agent for the
purchaser of such Securities, from such purchaser). Broker-dealers may agree
with the Selling Stockholders to sell a specified number of Securities at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholders, to purchase as principal any
unsold Securities at the price required to fulfill the broker-dealer commitment
to the Selling Stockholders. Broker-dealers who acquire Securities as principal
may thereafter resell such Securities from time to time in transactions (which
may involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Securities commissions computed as described above. To the extent required under
the Securities Act, a supplemental prospectus will be filed, disclosing (a) the
name of any such broker-dealers; (b) the number of Securities involved; (c) the
price at which such Securities are to be sold; (d) the commissions paid or
discounts or concessions allowed to such broker-dealers, where applicable; (e)
that such broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this Prospectus, as
supplemented; and (f) other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale of Securities may not simultaneously
engage in market making activities with respect to the Securities of the Company
for a period of two business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act, and
the rules and regulations thereunder, including, without limitation, Regulation
M, which provisions may limit the timing of purchases and sales of the
Securities by the Selling Stockholders.
The Selling Stockholders will pay all commissions and certain other
expenses associated with the sale of the Securities by them. The Securities
offered hereby are being registered pursuant to contractual obligations of the
Company, and the Company has paid the expenses of the preparation of this
Prospectus.
57
<PAGE>
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Dechert Price & Rhoads, New York, New York.
EXPERTS
The balance sheet of the Company as of December 31, 1997, and the
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1997, and the amounts for such year included in the cumulative
amounts for the period from July 17, 1995 (inception) to December 31, 1997,
included in this Prospectus and in the related Registration Statement, have been
audited by Richard A. Eisner & Company, LLP ("Eisner & Company"), independent
accountants, as stated in their report appearing herein, and are included in
reliance on the report of such firm given on their authority as experts in
accounting and auditing.
The statements of operations, stockholders' equity and cash flows of the
Company 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, 1997, and for the year ended December 31, 1996 have been
included in this Prospectus and in the related Registration Statement, in
reliance on the report of PricewaterhouseCoopers, LLP ("Coopers"), independent
accountants, given on the authority of such firm as experts in accounting and
auditing.
CHANGES IN INDEPENDENT PUBLIC ACCOUNTANTS
On February 11, 1998, Coopers, the independent accounting firm that audited
the financial statements of the Company during fiscal year 1996, was dismissed
by the Company. Coopers' report on the Company's financial statements for either
of the past two years did not contain an adverse opinion or a disclaimer of
opinion, and was neither qualified nor modified as to uncertainty, audit scope
or accounting principles. In addition, during the Company's two most recent
fiscal years and any subsequent interim period preceding such dismissal, there
were no disagreements with Coopers on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Coopers, would have
caused it to make reference to the subject matter of the disagreement(s) in
connection with its report.
Effective February 11, 1998, the Company has engaged Eisner & Company as
its new independent accountants for the fiscal year 1998. Eisner & Company
audited the Company's financial statements for the fiscal year 1997. The
decision to change accountants was approved by the Board of Directors of the
Company at a meeting of the Board of Directors of the Company on February 4,
1998.
58
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Index to Financial Statements
Page(s)
-------
Reports of Independent Accountants....................................... F-2
Balance Sheet as of December 31, 1997.................................... F-4
Statements of Operations for the years ended December 31, 1996 and
December 31, 1997 and for the cumulative period from
July 17, 1995 (inception) to December 31, 1997....................... F-5
Statements of Stockholders' Equity for cumulative period from
July 17, 1995 (inception) to December 31, 1997....................... F-6
Statements of Cash Flows for the years ended December 31, 1996 and
December 31, 1997 and for the cumulative period from July 17,
1995 (inception) to December 31, 1997................................ F-7
Notes to Financial Statements............................................ F-8
Balance Sheet as of September 30, 1998 (unaudited)....................... F-21
Statements of Operations for the nine months periods ended
September 30, 1997 (unaudited) and September 30, 1998
(unaudited) and for the period from July 17, 1995 (inception)
to September 30, 1998 (unaudited).................................... F-22
Statements of Cash Flows for the nine month periods ended
September 30, 1997 (unaudited) and September 30, 1998
(unaudited) and for the period from July 17, 1995 (inception)
to September 30, 1998 (unaudited).................................... F-23
Notes to Condensed Financial Statements.................................. F-26
F-1
<PAGE>
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 at December 31, 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1997 and the amounts for such year included in the
period from July 17, 1995 (inception) to December 31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 Technolgies, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997 and the amounts for such year included in the
cumulative amounts for the period from July 17, 1995 (inception) to December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
Florham Park, New Jersey
March 3, 1998
F-2
<PAGE>
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, 1997 (not presented
separately herein), and for the year ended December 31, 1996 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, 1997), and for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 1997
F-3
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Balance Sheet
December
31, 1997
--------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,692,788
Inventory................................................... 59,818
Prepaid expenses and other current assets................... 111,005
-----------
Total current assets...................................... 1,863,611
Property and equipment.......................................... 103,471
Restricted Cash................................................. 221,481
Other assets.................................................... 82,200
-----------
Total assets.............................................. $ 2,270,763
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................... $ 153,623
-----------
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred Stock, noncumulative, $.01
par value; authorized 400,000 shares; issued and
outstanding -none
Preferred stock, $.01 par value; authorized 1,000,000
shares; issued and oustanding - none (such preferences
and rights to be designated by the Board of Directors)
Common stock, $.01 par value; authorized 20,000,000 shares:
issued and outstanding 5,348,334 shares................... 53,483
Additional paid in capital.................................. 11,253,213
Deficit accumulated during the development stage............ (9,189,556)
-----------
Total stockholders' equity................................ 2,117,140
-----------
Total liabilities and stockholders' equity................ $ 2,270,763
===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Operations
Cumulative
from
July 17, 1995
Year Year (inception)
ended ended to
December December December 31,
31, 1996 31, 1997 1997
-------- -------- -------------
Net sales........................... $ 10,275 $ 10,275
Cost of Sales....................... (4,214) (4,214)
----------- -----------
6,061 6,061
----------- -----------
Operating expenses:
Research and development expenses... $(1,620,594) (1,697,084) (3,808,800)
General and administrative expenses. (1,808,567) (2,336,000) (4,562,231)
(3,429,161) (4,033,084) (8,371,031)
----------- ----------- -----------
Loss from operations........... (3,429,161) (4,027,023) (8,364,970)
----------- ----------- -----------
Other income (expense):
Interest income................ 172,539 178,707 355,116
Interest expense............... (325,867) (331,542)
----------- ----------- -----------
Total other income (expense)........ (153,328) 178,707 23,574
----------- ----------- -----------
Loss before extraordinary item (3,582,489) (3,848,316) (8,341,396)
Extraordinary item............. (848,160) (848,160)
----------- ----------- -----------
Net loss....................... $(4,430,649) $(3,848,316) $(9,189,556)
=========== =========== ===========
Basic and diluted loss per share:
Weighted average number of
common shares outstanding.... 3,767,403 5,343,348
=========== ===========
Basic and diluted loss per
share before extraordinary $ (0.95) $ (0.72)
item.........................
Basic and diluted loss per
share on extraordinary item.. $ (0.23) $ --
----------- -----------
Basic and diluted loss per
share........................ $ (1.18) $ (0.72)
=========== ===========
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 $20,600 $ 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
July17, 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 notes 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
initial public offering.....(600,000) (6,000) 600,000 6,000 --
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
======= ====== ========= ======= =========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Cumulative
from
July 17,
Year Year 1995
ended ended (inception) to
December 31, December 31, December 31,
1996 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(4,430,649) $(3,848,316) $(9,189,556)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item............................. 848,160 848,160
Depreciation expense........................... 18,856 42,354 62,070
Amortization of unamortized debt discount...... 163,103 168,778
Amortization of deferred financing costs....... 89,062 89,062
Issuance of common stock for services rendered. 20,600
Increase in inventory.......................... (59,818) (59,818)
Increase in prepaid expenses and other current (70,218) (19,096) (111,005)
assets........................................
Increase (decrease) in accounts payable and 274,066 (219,487) 153,623
accrued liabilities...........................
Increase in other assets....................... (68,275) (9,925) (82,200)
----------- ----------- -----------
Net cash used in operating activities......... (3,175,895) (4,114,288) (8,100,286)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............. (80,892) (76,052) (165,541)
----------- ----------- -----------
Net cash used in investing activities......... (80,892) (76,052) (165,541)
----------- ----------- -----------
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
Proceeds from issuance of bridge units, net of
exchange of initial bridge notes.............. 1,650,000 1,650,000
Proceeds from IPO.............................. 11,753,010 11,753,010
Repayment of notes issued in connection with
initial bridge notes.......................... (2,000,000) (2,000,000)
Costs incurred for equity offerings............ (2,310,182) (2,348,582)
Issuance of common stock in connection with
exercise of stock options..................... 30,000 46,668 76,668
Increase in restricted cash.................... (221,481) (221,481)
Deferred financing costs....................... (180,900) (201,000)
----------- ----------- -----------
Net cash provided (used in) by financing
activities.................................... 8,941,928 (174,813) 9,958,615
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................... 5,685,141 (4,365,153) 1,692,788
Cash and cash equivalents at the beginning of the
period............................................ 372,800 6,057,941 --
----------- ----------- -----------
Cash and cash equivalents at the end of the
period........................................ $ 6,057,941 $ 1,692,788 $ 1,692,788
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid during the period................ $ 73,702 $ 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 $ 140,000
=========== ===========
Deferred equity costs charged to additional paid
in capital in connection with the PPO.......... $ 13,400 $ 13,400
=========== ===========
Deferred financing costs charged to additional
paid-in capital in connection with the IPO..... $ 25,000 $ 25,000
=========== ===========
600,000 Series A Convertible Preferred Stock
converted into Common Stock.................... $ 6,000 $ 6,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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 which 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") 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.
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. The cost of maintenance and
repairs is charged against results of operations as incurred.
F-8
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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, 1997 amounted to $421,124 and for the years ended December 31, 1997
and December 31, 1996 amounted to $289,892 and $131,232, 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 a commercial bank 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,
3) Certificates of Deposit.
Per Share Data
The Company has adopted the standards set by the Financial Accounting
Standards Board and computes earnings per share data in accordance with SFAS No.
128 "Earnings per Share". The basic per share data has 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.
3. Inventory
Inventory consists of the following:
F-9
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31,
1997
------------
Finished goods.............................. $46,316
Work in process............................. 13,502
-------
$59,818
=======
4. Property and equipment
Property and equipment consist of the following:
Useful Lives December 31,
in Years 1997
------------ ------------
Furniture and Fixtures.................... 10 $ 4,323
Computers................................. 5 100,954
Equipment................................. 5 60,264
--------
$165,541
Less, accumulated depreciation.......... 62,070
--------
$103,471
========
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
December 31,
1997
------------
Accounts payable............................ $ 36,964
Legal and accounting fees................... 90,908
Accrued payroll............................. 18,399
Payroll taxes payable....................... 7,352
--------
$153,623
========
6. 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
F-10
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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 are exercisable
at $5.50 per share commencing on July 3, 1997, and have an expiration date of
July 3, 2001. The Warrants are redeemable by the Company at any time commencing
twelve months after date of the IPO 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 (initially, $8.25 per share), 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, 220,000 warrants to purchase Common Stock
and 220,000 Redeemable Warrants to purchase 220,000 Redeemable Warrants (the
"Underwriter's Warrants"). Thereafter, for a period of four years, the
Underwriter's Warrants will be exercisable at an amount of 165% above the
offering price of the Common Stock and Warrants. The warrants expire five years
after the date of issue.
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 were convertible
into common shares on a one-for-one basis, either at the option of each holder
or automatically upon the effective date of an IPO.
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.
On July 3, 1996, the effective date of the IPO, the Series A Convertible
Preferred Stock consisting of 600,000 shares was converted to common shares on a
one for one basis.
F-11
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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 PPO. 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.
Stock Options
The accompanying financial position and results of operations of the
Company have been prepared 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 accompanying
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:
F-12
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Weighted
Number of Average Number of
Common Exercise Price Exercise Shares
Shares Range per Share Price Exercisable
--------- --------------- --------- ------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 315,000 $ 1.50 $ 1.50 260,714
=======
Granted........................ 67,000 $ 2.00 - $ 5.75 $ 2.67
Exercised...................... (20,000) $ 1.50 $ 1.50
-------
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 - $6.88 $ 2.92 401,000
======= =======
</TABLE>
During 1995, the Company granted options to purchase 315,000 shares of
Common Stock, exercisable at $1.50 per share. The options vested as follows:
260,714 at date of grant, 27,143 in 1996 and 27,143 in 1997. The options expire
as follows: 240,714 in 2000, 27,143 in 2001 and 27,143 in 2002.
During 1996, the Company granted options to purchase 55,000 shares of
Common Stock , exercisable at $2.00 per share. The options vested as follows:
31,667 at date of grant, 11,667 in 1997 at 11,666 in 1998. The options expire as
follows: 8,333 in 2001, 11,667 in 2002 and 11,666 in 2003.
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 260,000 options
can be awarded under the Plan. 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.
F-13
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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 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 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. The maximum number of shares of Common Stock with respect to which
options may be granted under the Director's Plan is 80,000 shares. As of
December 31, 1997, there are 48,000 stock options reserved for issuance in the
Director's Plan.
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, 1997 are as follows:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$ 1.50 - $ 2.00 326,666 3.4 $1.55 315,000 $1.53
$ 5.75 - $ 6.88 179,500 5.6 $6.47 86,000 $6.16
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
F-14
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
based method of accounting for stock based compensation as prescribed by SFAS
No. 123. Since certain option grants awarded during 1996 and 1997 vest over
several years and additional awards are expected 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.
1996 1997
---- ----
Pro forma net loss............................ $(4,496,349) $(4,029,183)
Pro forma basic and diluted loss per share.... $ (1.19) $ (.75)
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
1996 and 1997 was $.84 and $1.75, respectively. The following weighted-average
assumptions were used in computing the fair value of option grants for 1996 and
1997: weighted-average risk-free interest rates of 5.32% for 1996 and 5.64% for
1997; zero dividend yields for both years; volatility of the Company's Common
Stock of 50% for both years; and an expected life of the options of two years
for 1996 and 1997, respectively.
7. Income taxes
There is no benefit for federal, state or local income taxes for the years
ended December 31, 1997 and December 31, 1996, since the Company has incurred
operating losses. In addition, the Company has fully reserved the net potential
future tax benefits resulting from its organization costs and a net operating
loss carryforwards.
The tax effect of temporary differences consists of the following:
December
31, 1997
--------
Deferred tax assets:
Start up costs............................... $ 2,130,610
Property and equipment....................... 24,828
Net operating loss carryforward.............. 1,504,585
-----------
3,660,023
Valuation allowance.......................... (3,660,023)
-----------
$ --
-----------
Certain costs in the statement of operations have been capitalized under
Internal Revenue Code and will be amortized over five years commencing with the
date the Company begins its trade or business, as defined by Internal Revenue
Service regulations. The valuation allowance offsets all of the deferred tax
assets as of December 31, 1997.
As of December 31, 1997, the Company has unused net operating loss
carryforwards of $3,761,463 available for income tax purposes. The unused net
operating loss carryforwards expire in various years from 2010 to 2012. 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.
F-15
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
8. 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 ("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)
the Company's aggregate net profits from sales of licensed products and
technology equaling $5,000,000, whichever comes first.
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 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 has entered into a development agreement (the "Development
Agreement") with Rave, pursuant to which the Company has formulated a
development plan (the "Development Plan") extending through October 1998, with
annual renewals, subject to one year's written notice. The Development Plan
focuses principally on the development of the products, as defined, and will be
revised from time to time to provide for the development of additional related
products. The Development Agreement provides for the payment to Rave of a
monthly fee which, when aggregated with the Royalties provided for in the
License Agreement, must equal at least $65,000 per month. The Development Plan
is to be revised by October 2, 1998 and on each anniversary thereafter for each
year the Development Agreement remains in effect. The Development Agreement
terminates on October 2, 1998. The Development Agreement also provides 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 will be reduced by any payments made and any cash restriction on the
certificate of deposit is limited to the balance of the standby letter of
credit. Through December 31, 1997, the Company had made payments of $386,657
under this agreement and at that date had $221,481 pledged as collateral to
guarantee the monthly payments.
F-16
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Rave research and development expenses charged to the statement of
operations for the cumulative period from July 17, 1995 (inception) to December
31, 1997 amounted to $2,657,355; and for the years ended December 31, 1997 and
December 31, 1996 amounted to $1,096,903 and $1,143,825, respectively.
Agency Agreement
In order to assist it in obtaining sublicensing revenue, the Company has
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 provides that
Prime will contribute its royalty participation to pay Rave in any month in
which the Company, after making reasonable commercial effort, is unable to make
the $65,000 Rave Minimum Payment necessary to maintain the License Agreement on
an exclusive basis with such amounts to be repaid by the Company to Prime out of
the Company's next available royalty payment or 12 months from the date of such
advance.
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 years
ended December 31, 1997 and December 31, 1996 amounted to $70,000 and $330,000,
respectively.
The minimum annual commitments under the Rave License and Development
Agreements, and the Agency Agreement, as of December 31, 1997 are as follows:
For the Year
Ending Royalty and
December 31, Development Consulting Equipment
1997 Fees Fees Financing Total
- ------------ ----------- ---------- --------- -----
$650,000 $35,000 $463,342 $1,148,342
======== ======= ======== ==========
F-17
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Employment Agreements
The Company entered into an employment agreement with its President
originally expiring December 31, 2000. In December 1997, the agreement was
extended for two years to December 31, 2002. The employment agreement provides
for a minimum annual salary, and bonus incentives, based upon the Company
meeting profit levels to be set by the Board of Directors. The agreement also
provides for termination payments to the President under certain circumstances.
The minimum annual salary commitment as of December 31, 1996 and December 31,
1997, excluding bonus arrangements, amounted to $120,000 per annum.
On February 10, 1997, the Company entered into an employment agreement with
its Vice President - Sales. As part of the agreement, the Company granted to
this individual, under the Company's Plan, options to purchase 60,000 shares of
common stock at $6.875 per share, the underlying value of the Company's common
stock at the date of grant. 5,000 options vested immediately; 5,000 options vest
on June 10, 1997; 20,000 options vest on February 10, 1998; 30,000 options vest
on February 10, 1999.
Consulting and Representative Agreements
The Company has a consulting agreement with a Limited Partnership (the
"Consultant") rendering business advice. One of the general partners of the
Consultant is a former member of the Company's Board of Directors. In addition,
this general partner was a partner in two other affiliated entities. Together
the Consultant and the two other affiliated entities (which also provided
services to the Company) received 450,000 shares of the Company's common stock
for an aggregate consideration of $4,500 (see Note 6). The term of the agreement
was initially for two years and has been orally extended for one additional year
to June 30,1998. The Consultant received fees of $7,500 per month until the
completion of the IPO. Once the IPO was completed, the fee was reduced to $5,000
per month until the agreement terminates. The total consulting fee per the
consulting agreement charged to the statement of operations for the cumulative
period from July 17, 1995 (inception) to December 31, 1997 amounted to $175,000
plus out-of-pocket expenses; and for the years ended December 31, 1997 and
December 31, 1996 amounted to $60,000 and $77,500 plus out of pocket expenses,
respectively. The total aggregate consideration charged to operations in
connection with the services rendered by the principal of the Consultant and his
affiliated entities for the cumulative period from July 17, 1995 (inception) to
December 31, 1997 amounted to $264,998; and for the years ended December 31,
1997 and December 31, 1996 amounted to $66,329 and $110,367, respectively.
Effective August 1, 1995, the Company entered into an agreement with a
consultant whereby the consultant provided to the Company on a non-exclusive
basis, certain services, among others: evaluation of the Company's technologies
and products, assistance in product development and the development of a
marketing strategy and plan, and the recommendation of candidates for marketing
and sales positions. On April 7, 1997, the Company entered into a Representative
Agreement with this same consultant whereby the consultant was appointed as an
exclusive sales representative for selected accounts, identified in the
agreement, to obtain Strategic Alliance Contracts for the Company and to sell
Products during the term of the Agreement. The term of the Agreement was from
April 7, 1997 to November 30, 1997. Under the terms of the Agreement, the
consultant or his designees will receive options to purchase shares of common
stock of the
F-18
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Company for each Strategic Alliance Contract the Company enters into through the
efforts of the Representative and/or his designees. For options granted, the
options price is equal to the fair market value as of the date of the grant and
will expire five years after the date of grant. In addition, the Company shall
pay the Representative a commission on net sales of all products sold by the
Company solely through the efforts of the Representative and/or his designees if
the Representative and/or his designees made substantial efforts to sell the
Products to the purchaser during the term of this Agreement. The commission rate
is based on the type of sale and timing of the sale. For all purchase orders
accepted by the company during the period April 7,1997 to November 15, 2001, the
Company will also pay to the Representative a commission of three percent of net
sales of active and/or passive presets and device drivers whether or not the
representative made any effort to sell these items. As of December 31, 1997, no
commissions had been earned and 45,000 options had been granted pursuant to this
Agreement. Since inception to December 31, 1997 the Company has incurred
$376,122; and for the years ended December 31, 1997 and December 31, 1996,
$143,657 and $195,968, respectively, of consulting fees and out of pocket
expenses for this consultant which have been charged to operations.
On November 12, 1997, the Company contracted with Adaptive Miro-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. The contract is expected to be completed during the first
half of 1998. At December 31,1997 $17,500 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. The
contract is expected to be completed during the first half of 1998. At December
31, 1997 no payments had been made under the terms 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 terminates on March 31,1998, at which time the contract will continue
on a month-to-month basis. However, the Company may terminate the agreement at
any time after March 31, 1998 upon 60 days notice to LHA.
The Company has entered into numerous sales representation agreements with
various organizations whereby the Company will pay to the representative
organization commissions based on the type of sale and timing of sale. The
commission rates vary from 2% to 16%. No commissions had been earned through
December 31, 1997 pursuant to these agreements.
Leases
The Company leases shared office space on a month-to-month basis for a
monthly rental of $5,400. Rent expense incurred for the cumulative period from
July 17, 1995 (inception) to
F-19
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31, 1997 amounted to $122,348; and for the years ended December 31,
1997 and December 31, 1996 amounted to $78,496 and $37,452, respectively. In
addition, the Company is a guarantor on lease payments of $4284 per month
regarding Rave's facility. The lease expires on June 14,1998.
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.
10. Subsequent events
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
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 "Puts" to the investor whereby the Company
shall issue for each Put and the investor 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 stock will be at 88% of the fair market value of the stock
at the time of the Put. The following restrictions 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; 4) unless the investor agrees otherwise, no put can be
made which cause the investor to own more than 9.9% of the Company's then
outstanding 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. The warrants may be exercised at any time beginning
August 6, 1998 and ending three years thereafter. Also, in the event that the
market price as of the effective date of the registration statement filed with
the Securities and Exchange Commission on March 3, 1998 regarding the resale of
the underlying securities is less than $3.95, then the Company will issue to the
investor a supplemental warrant to purchase 50,000 shares of Common stock at a
stock price of $3.95. The supplemental warrant may be exercised at any time
beginning 5 days after the effective date and ending 5 years thereafter.
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 terms unless either the Company or the Consultant shall have given
written notice at least 30 days prior to the end of the initial or subsequent
terms.
F-20
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A DEVELOPMENT ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In connection with this agreement, the Company issued to the Consultant
400,000 common stock purchase warrants. The warrants The warrants have an
exercise price of $4 and are exercisable after September 3, 1999. The warrants
expire on March 3, 2003.
11. Subsequent Events (unaudited)
On November 13, 1998, pursuant to the provisions of the Exclusive Worldwide
License Agreement and the Development Agreement each dated July 20, 1995 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 informed the Company that the Company is obligated to pay Rave (a)
$65,000 per month under the License Agreement for at least the 12-month period
ending September 30, 1999 and (b) $380,000 for purchases and leases of equipment
under the Development Agreement. Management believes that these claims are
without merit and will vigorously contest them; accordingly, no additional
liability has been recorded for such claims. However, there can be no assurances
that such claims will not result in the Company incurring a liability.
F-21
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Balance Sheet
September 30,
1998
-------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,641,565
Inventory................................................. 61,784
Prepaid expenses and other current assets................. 194,634
-----------
Total current assets.................................... 5,897,983
Property and equipment.................................... 110,169
Restricted Cash........................................... 132,003
Other assets.............................................. 164,552
-----------
Total assets............................................ $ 6,304,707
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 162,742
-----------
Total liabilities....................................... $ 162,742
-----------
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; issued
and outstanding -none
Preferred stock, $.01 par value; authorized 1,000,000
shares; issued and oustanding - none (such preferences
and rights to be designated by the Board of Directors)
Common stock, $.01 par value; authorized 20,000,000
shares: issued and outstanding 5,348,334 shares........ 83,585
Additional paid in capital................................ 18,218,740
Deficit accumulated during the development stage.......... (12,160,360)
-----------
Total stockholders' equity.............................. 6,141,965
-----------
Total liabilities and stockholders' equity............. $ 6,304,707
===========
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative
from
July 17, 1995
Nine months Nine months (inception)
ended ended to
September 30, September 30, September 30,
1997 1998 1998
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net sales............................... $ 6,395 $ 9,666 $ 19,941
Cost of Sales........................... (3,080) (3,363) (7,577)
----------- ----------- ------------
3,315 6,303 12,364
----------- ----------- ------------
Operating expenses:
Research and development expenses....... (1,343,964) (1,323,483) (5,132,284)
General and administrative expenses..... (1,853,471) (1,799,078) (6,361,309)
(3,197,435) (3,122,561) (11,493,593)
----------- ----------- ------------
Loss from operations.............. (3,194,120) (3,116,258) (11,481,229)
----------- ----------- ------------
Other income (expense):
Interest income................... 155,164 145,454 500,571
Interest expense.................. (331,542)
----------- ----------- ------------
155,164 145,454 169,029
----------- ----------- ------------
Net loss before extraordinary item (3,038,956) (2,970,804) (11,312,200)
Extraordinary item................ (848,160)
----------- ----------- ------------
Net loss.......................... $(3,038,956) $(2,970,804) $(12,160,360)
=========== =========== ============
Basic and diluted loss per share:
Weighted average number of common
shares outstanding............. 5,341,667 6,898,426
=========== ===========
Basic and diluted loss per share.. $ (0.57) $ (0.43)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Cumulative
from
July 17, 1995
Nine Months Nine Months (inception)
ended ended to
September September September 30,
30, 1997 30, 1998 1998
----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(3,038,956) $(2,970,804) $(12,160,360)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item.............................. 848,160
Depreciation expense............................ 35,983 37,041 99,111
Amortization of unamortized debt discount....... 168,778
Amortization of deferred financing costs........ 89,062
Issuance of common stock for services rendered.. 20,600
Increase in inventory........................... (21,877) (1,967) (67,785)
Increase in prepaid expenses and other current
assets........................................ (58,156) (83,628) (194,633)
Increase (decrease) in other assets............. (17,737) (82,353) (164,553)
Increase (decrease) in accounts payable and
accrued liabilities........................... (239,366) 9,118 162,741
----------- ----------- ------------
Net cash used in operating activities......... (3,340,109) (3,092,593) (11,192,879)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment.............. (69,532) (43,738) (209,280)
----------- ----------- ------------
Net cash used in investing activities......... (69,532) (43,738) (209,280)
----------- ----------- ------------
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
Proceeds from issuance of bridge units, net of
exchange 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 Janssen Meyers equity offering May
& June 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............. (1,308,249) (3,656,830)
Issuance of common stock in connection with
exercise of stock options..................... 46,668 23,332 100,000
Increase in restricted cash..................... (256,003) 89,479 (132,002)
Deferred financing costs........................ (201,000)
----------- ----------- ------------
Net cash provided (used in) by financing
activities.................................... (209,335) 7,085,108 17,043,724
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................... (3,618,976) 3,948,777 5,641,565
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.. $ 2,438,965 $ 5,641,565 $ 5,641,565
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Cumulative
from
July 17, 1995
Nine Months Nine Months (inception)
ended ended to
September September September 30,
30, 1997 30, 1998 1998
----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
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
PPO.............................................. $ 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 Stock................ $ 6,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis Of Interim Financial Statement Preparation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. NUWAVE Technologies, Inc. (the
"Company" or "NUWAVE"), a development stage enterprise, believes that the
quarterly information presented includes all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation in accordance
with generally accepted accounting principles. The accompanying condensed
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB as filed with the Securities and Exchange Commission
("SEC") on April 14, 1998.
2. Capital Transactions
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 issue "Puts" to the investor whereby the Company shall issue for each Put
and the investor 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
stock will be at 88% of the fair 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 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 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.
F-26
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
In connection with such consulting agreement, the Company issued to the
Consultant 400,000 common stock purchase warrants. The warrants have an exercise
price of $4 and are exercisable after September 3, 1999. The warrants expire on
March 3, 2003.
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 9, 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 on
June 9, 1998 and expiring on May 11, 2003. The Class A Warrants are subject to
redemption by the Company at $.01 per Class A Warrant 12 months after the
effective date of a registration statement covering the Class A Warrants on not
less than 30 days prior written notice to the holders of the Class A 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 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 received for acting as placement agent, a commission of 10%
($728,055) of the gross proceeds from the sale of the Units (consisting of the
Company's Common Stock and Class A 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, the Consultant
received as part of its compensation, 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 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 Warrant 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
versus the original price of $8.25.
On March 19, 1998, a director exercised options with respect to 11,666
shares of Common Stock at $2.00 per share.
F-27
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
3. Subsequent Events
On November 13, 1998, pursuant to the provisions of the Exclusive Worldwide
License Agreement and the Development Agreement each dated July 20, 1995 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 informed the Company that the Company is obligated to pay Rave (a)
$65,000 per month under the License Agreement for at least the 12-month period
ending September 30, 1999 and (b) $380,000 for purchases and leases of equipment
under the Development Agreement. Management believes that these claims are
without merit and will vigorously contest them; accordingly, no additional
liability has been recorded for such claims. However, there can be no assurances
that such claims will not result in the Company incurring a liability.
F-28
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145(a) of the General Corporation Law of the State of Delaware (the
"Delaware Code") grants corporations the power to indemnify any person who was
or is a party to any action, suit or proceeding by reason of the fact that the
person was or is a director or officer against expenses, judgments, fines and
settlement amounts actually and reasonably incurred by the person in connection
with such action, suit or proceeding. The indemnification is contingent on the
fact that the person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
Section 145(b) of the Delaware Code grants corporations the power to
indemnify any person who was or is a party to any action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that the person was or is a director or officer against expenses actually
and reasonably incurred by the person in connection with the defense or
settlement of such action or suit. The person must meet the same applicable
standard of conduct as in Section 145(a), except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation.
Section 102(b)(7) of the Delaware Code permits a corporation to include in
its certificate of incorporation a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages arising out of a breach of his fiduciary duty as a director.
Such provision shall not eliminate or limit the liability of a director with
respect to any of the following: (i) breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) acts or omissions not made in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) liability for unlawful dividends paid or an unlawful stock purchase or
redemption pursuant to Section 174 of the Delaware Code; or (iv) transactions
from which the director derived an improper personal benefit.
Article Seventh of the Company's Certificate of Incorporation provides that
"the Corporation shall, to the fullest extent permitted by the provisions of
ss.145 of the General Corporation Law of the State of Delaware, as the same may
be amended and supplemented, indemnify any and all persons whom it shall have
the power to indemnify under said section from and against any and all of the
expenses, liabilities, or other matters referred to, in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person."
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth various costs and expenses of the Company in
connection with the sale and distribution of the Securities being registered.
All of the amounts shown are estimates except for the Securities and Exchange
Commission Registration Fee.
II-1
<PAGE>
Securities and Exchange Commission Registration Fee $ 4,896
Legal Fees and Expenses $50,000
Accounting Fees and Expenses $ 2,000
Other Expenses $ 1,000
Total Expenses $57,896
Item 26. 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 "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.
II-2
<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 27. Exhibits
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to the Company's 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 validity of the
Securities being offered.**
10.1 Placement Agency Agreement, dated as of May 11, 1998, between
Janssen-Meyers
II-3
<PAGE>
Associates, L.P. and NUWAVE Technologies, Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K
filed with the Commission on June 11, 1998). *
10.2 Escrow Agreement, dated May 11, 1998, between NUWAVE Technologies,
Inc., Janssen-Meyers Associates, L.P. and Republic National Bank of
New York (incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K filed with the Commission on June 11,
1998). *
10.3 Warrant Agreement, dated May 15, 1998, between NUWAVE Technologies,
Inc. and American Stock Transfer & Trust Company (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on Form 8-K
filed with the Commission on June 11, 1998). *
10.4 Form of Warrant Certificate (incorporated by reference to Exhibit 10.4
of the Company's Current Report on Form 8-K filed with the Commission
on June 11, 1998). *
10.5 Placement Agent's Unit Purchase Warrant Agreement, dated May 19, 1998,
between NUWAVE Technologies, Inc. and Janssen-Meyers Associates, L.P.
(incorporated by reference to Exhibit 10.5 of the Company's Current
Report on Form 8-K filed with the Commission on June 11, 1998). *
10.6 Form of Placement Agent Warrant Certificate (incorporated by reference
to Exhibit 10.6 of the Company's Current Report on Form 8-K filed with
the Commission on June 11, 1998). *
10.7 Form of Subscription Agreement (incorporated by reference to Exhibit
10.7 of the Company's Current Report on Form 8-K filed with the
Commission on June 11, 1998). *
23.1 Consent of PricewaterhouseCoopers, LLP **
23.2 Consent of Richard A. Eisner & Company, LLP **
24.1 Special Power of Attorney for Lyle Gramley.**
24.2 Special Power of Attorney for Joseph A. Sarubbi.**
24.3 Special Power of Attorney for Edward Bohn.**
99.1 Press Release, dated May 21, 1998 (incorporated by reference to
Exhibit 99.1 of the Company's 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 with this Registration Statement.
Item 28. Undertakings
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
II-4
<PAGE>
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 24 above, or otherwise, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted against
the Company by such director, officer or controlling person in connection with
the securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Company hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the Company's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of
Fairfield, State of New Jersey, on February 3, 1999.
NUWAVE TECHNOLOGIES, INC.
By: /S/ GERALD ZARIN
---------------------------------
GERALD ZARIN
PRESIDENT, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE(S) DATE
- --------- -------- ----
/S/ GERALD ZARIN PRESIDENT, CHAIRMAN OF THE FEBRUARY 3, 1999
- --------------------------- BOARD, CHIEF EXECUTIVE
GERALD ZARIN OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
/S/ JEREMIAH F. O'BRIEN CHIEF FINANCIAL OFFICER AND FEBRUARY 3, 1999
- --------------------------- SECRETARY (PRINCIPAL FINANCIAL
JEREMIAH F. O'BRIEN OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
* DIRECTOR FEBRUARY 3, 1999
- ---------------------------
LYLE GRAMLEY
* DIRECTOR FEBRUARY 3, 1999
- ---------------------------
ED BOHN
* DIRECTOR FEBRUARY 3, 1999
- ---------------------------
JOSEPH A. SARUBBI
* By: /S/ JEREMIAH F. O'BRIEN
---------------------------
JEREMIAH F. O'BRIEN
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's 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 validity of the
Securities being offered.**
10.1 Placement Agency Agreement, dated as of May 11, 1998, between
Janssen-Meyers Associates, L.P. and NUWAVE Technologies, Inc.
(incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K filed with the Commission on June 11,
1998). *
10.2 Escrow Agreement, dated May 11, 1998, between NUWAVE
Technologies, Inc., Janssen-Meyers Associates, L.P. and Republic
National Bank of New York (incorporated by reference to Exhibit
10.2 of the Company's Current Report on Form 8-K filed with the
Commission on June 11, 1998). *
10.3 Warrant Agreement, dated May 15, 1998, between NUWAVE
Technologies, Inc. and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.3 of the Company's
Current Report on Form 8-K filed with the Commission on June 11,
1998). *
10.4 Form of Warrant Certificate (incorporated by reference to Exhibit
10.4 of the Company's Current Report on Form 8-K filed with the
Commission on June 11, 1998). *
10.5 Placement Agent's Unit Purchase Warrant Agreement, dated May 19,
1998, between NUWAVE Technologies, Inc. and Janssen-Meyers
Associates, L.P. (incorporated by reference to Exhibit 10.5 of
the Company's Current Report on Form 8-K filed with the
Commission on June 11, 1998). *
10.6 Form of Placement Agent Warrant Certificate (incorporated by
reference to Exhibit 10.6 of the Company's Current Report on Form
8-K filed with the Commission on June 11, 1998). *
10.7 Form of Subscription Agreement (incorporated by reference to
Exhibit 10.7 of the Company's Current Report on Form 8-K filed
with the Commission on June 11, 1998). *
23.1 Consent of PricewaterhouseCoopers, LLP **
23.2 Consent of Richard A. Eisner & Company, LLP **
24.1 Special Power of Attorney for Lyle Gramley.**
24.2 Special Power of Attorney for Joseph A. Sarubbi.**
II-7
<PAGE>
24.3 Special Power of Attorney for Edward Bohn.**
99.1 Press Release, dated May 21, 1998 (incorporated by reference to
Exhibit 99.1 of the Company's 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 with this Registration Statement.
II-8
OPINION OF COUNSEL TO THE COMPANY
January 14, 1999
NUWAVE Technologies, Inc.
One Passaic Avenue
Fairfield, New Jersey 07004
Re: Registration Statement on Form SB-2
Dear Sirs:
We have acted as counsel to NUWAVE Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the filing with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), of a Registration Statement on Form SB-2 (the "Registration Statement"),
relating to the proposed sale by certain stockholders of the Company (the
"Selling Stockholders") of:
(a) 2,742,904 shares of common stock, par value $0.01 per share ("Common
Stock"), of the Company issued to certain Selling Stockholders in
connection with the Company's private equity placement between May 19,
1998 and June 9, 1998 (the "Private Placement");
(b) 2,057,207 Class A Redeemable Warrants of the Company issued to
certain Selling Stockholders in connection with the Private Placement;
(c) 2,057,207 shares of Common Stock issuable upon exercise of the Class A
Redeemable Warrants described in (b) above;
(d) 18.2 Unit Warrants of the Company issued to certain Selling
Stockholders in connection with the Private Placement;
(e) 688,084 shares of Common Stock issuable upon exercise of the Unit
Warrants described in (d) above;
(f) 516,068 Class A Redeemable Warrants issuable upon exercise of the Unit
Warrants described in (d) above;
<PAGE>
(g) 516,068 shares of Common Stock issuable upon exercise of the Class A
Redeemable Warrants which underlie the Unit Warrants described in (d)
above; and
(h) 400,000 shares of Common Stock issuable upon exercise of warrants (the
"Consultant Warrants") of the Company issued to certain Selling
Stockholders pursuant to a consulting agreement (the "Consulting
Agreement"), dated as of March 3, 1998, between the Company and
Janssen-Meyers Associates, L.P. ("Janssen-Meyers").
The issued and outstanding securities described in (a), (b) and (d)
above are hereinafter referred to as the "Issued Securities." The securities
issuable upon exercise of various warrants as described in (c), (e), (f), (g)
and (h) above are hereinafter referred to as the "Issuable Securities."
The Issued Securities were issued in the Private Placement pursuant to
(i) the Placement Agency Agreement (the "Placement Agency Agreement"), dated as
of May 11, 1998, between the Company and Janssen-Meyers, (ii) the Warrant
Agreement (the "Warrant Agreement"), dated May 15, 1998, between the Company and
American Stock Transfer & Trust Company, (iii) the Placement Agent's Unit
Purchase Warrant Agreement (the "Unit Purchase Warrant Agreement"), dated May
19, 1998, between the Company and Jannssen-Meyers and (iv) the Subscription
Agreements (the "Subscription Agreements"), entered into by the Company and
certain accredited investors, in connection with such Private Placement, between
May 19, 1998 and June 9, 1998.
In connection with the foregoing, we have reviewed such records,
documents, agreements and certificates, and examined such questions of law, as
we have considered necessary or appropriate for the purpose of this opinion. In
making our examination of records, documents, agreements and certificates, we
have assumed the authenticity of the same, the correctness of the information
contained therein, the genuineness of all signatures, the authority of all
persons entering and maintaining records or executing documents, agreements and
certificates (other than persons executing documents, agreements and
certificates on behalf of the Company), and the conformity to authentic
originals of all items submitted to us as copies (whether certified, conformed,
photostatic or by other electronic means) of records, documents, agreements or
certificates. In rendering our opinion we have relied as to factual matters upon
certificates of public officials and certificates and representations of
officers of the Company.
We have assumed that each of the Placement Agreement, the Warrant
Agreement, the Unit Purchase Warrant Agreement, each of the Subscription
Agreements and the Consulting Agreement have been duly authorized, executed and
delivered by the parties thereto. In addition, the opinions expressed herein are
based on states of law, documentation and fact as they exist on the date hereof
and we do not undertake to advise you of any changes therein which hereafter may
be brought to our attention.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. The Issued Securities are legally issued, fully paid and
non-assessable.
<PAGE>
2. The Issuable Securities, when issued and paid for upon valid
exercise of the Class A Redeemable Warrants, the Unit Warrants
and/or the Consultant Warrants, in accordance with their terms,
will be legally issued, fully paid and non-assessable.
This opinion is rendered to the Company in connection with the filing
of the Registration Statement and for no other purpose. We are members of the
Bar of the State of New York and express no opinion as to the laws of any
jurisdiction other than the laws of the United States of America, the State of
New York and, to the extent necessary to render the opinions set forth herein,
the General Corporation Law of the State of Delaware.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the prospectus which is included in the Registration Statement. In
giving the foregoing consent, we do not admit that we come within the category
of persons whose consent is required by the Act or the rules and regulations
promulgated thereunder.
Very truly yours,
/S/ DECHERT PRICE & RHOADS
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this registration statement on Form SB-2
of our report dated March 3, 1998 on the audit of financial statements of NUWAVE
Technologies, Inc. as of and for the year ended December 31, 1997 and the
amounts for such year included in the cumulative amounts for the period from
July 17, 1995 (inception) to December 31, 1997. We also consent to the reference
to our firm under the caption "Experts."
/s/ Richard A. Eisner & Company, LLP
Florham Park, New Jersey
February 3, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated March 26, 1997 on our audit of 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,
1997 (not presented separately herein), and for the year ended December 31, 1996
and the related statement of stockhol ders' equity for the period from July 17,
1995 (inception) to December 31, 1995 and the year ended December 31, 1996. We
also consent to the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
New York, New York
February 3, 1999
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of NUWAVE
Technologies, Inc., a Delaware corporation (the "Company"), constitutes and
appoints Gerald Zarin and/or Jeremiah O'Brien, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign a Form SB-2 registration statement for filing with the
Securities and Exchange Commission respecting the registration of shares of
Common Stock, par value $.01 per share, of the Company, Class A Redeemable
Warrants of the Company which may be exercised to purchase shares of Common
Stock of the Company and Unit Warrants which may be exercised to purchase shares
of Common Stock of the Company and Class A Redeemable Warrants of the Company,
together with any and all amendments (including post-effective amendments) to
such registration statement, and to file the same with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or each of them, may lawfully do or
cause to be done in virtue hereof.
DATED: January 8, 1999
/s/ Lyle Gramley
---------------------------
Lyle Gramley
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of NUWAVE
Technologies, Inc., a Delaware corporation (the "Company"), constitutes and
appoints Gerald Zarin and/or Jeremiah O'Brien, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign a Form SB-2 registration statement for filing with the
Securities and Exchange Commission respecting the registration of shares of
Common Stock, par value $.01 per share, of the Company, Class A Redeemable
Warrants of the Company which may be exercised to purchase shares of Common
Stock of the Company and Unit Warrants of the Company which may be exercised to
purchase shares of Common Stock of the Company and Class A Redeemable Warrants
of the Company, together with any and all amendments (including post-effective
amendments) to such registration statement, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done in virtue hereof.
DATED: January 8, 1999
/s/ Joseph A. Sarubbi
---------------------
Joseph A. Sarubbi
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned, a Director of NUWAVE
Technologies, Inc., a Delaware corporation (the "Company"), constitutes and
appoints Gerald Zarin and/or Jeremiah O'Brien, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign a Form SB-2 registration statement for filing with the
Securities and Exchange Commission respecting the registration of shares of
Common Stock, par value $.01 per share, of the Company, Class A Redeemable
Warrants of the Company which may be exercised to purchase shares of Common
Stock of the Company and Unit Warrants of the Company which may be exercised to
purchase shares of Common Stock of the Company and Class A Redeemable Warrants
of the Company, together with any and all amendments (including post-effective
amendments) to such registration statement, and to file the same with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done in virtue hereof.
DATED: January 8, 1999
/s/ Edward Bohn
--------------------------
Edward Bohn
