AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 2004
REGISTRATION NO. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NUTECH DIGITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 95-4642831
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
7900 GLORIA AVENUE
VAN NUYS, CALIFORNIA 91406
TELEPHONE: (818) 994-3831
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
LEE KASPER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NUTECH DIGITAL, INC.
7900 GLORIA AVENUE
VAN NUYS, CALIFORNIA 91406
TELEPHONE: (818) 994-3831
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
COPIES OF COMMUNICATIONS TO:
MARY ANN SAPONE, ESQ.
RICHARDSON & PATEL LLP
10900 WILSHIRE BOULEVARD, SUITE 500
LOS ANGELES, CA 90024
TELEPHONE: (310) 208-1182
FACSIMILE: (310) 208-1154
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
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. |_|
CALCULATION OF REGISTRATION FEE
==========================================================================================-------------------------
PROPOSED MAXIMUM PROPOSED
OFFERING PRICE MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PER UNIT AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE (1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
Common stock, no par value 8,721,223 $0.93 $8,110,737.39 $1,027.63(1)
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants
exercisable at $0.75 per share. 13,130,946 $0.75 $9,848,209.50 $1247.77(2)
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants issued
to Redwood Consultants, LLC 100,000 $1.15 $115,000 $14.57(2)
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants issued
to Redwood Consultants, LLC 100,000 $1.50 $150,000 $19.00(2)
- -------------------------------------------------------------------------------------------------------------------
Common stock underlying warrants issued
to Redwood Consultants, LLC 100,000 $1.80 $180,000 $22.81(2)
==========================================================================================-------------------------
(1) Calculated as of March 23, 2004 pursuant to Rule 457(c) under the
Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(g) under the Securities Act of 1933, as
amended.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
PROSPECTUS MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES.
INFORMATION MAY HAVE CHANGED SINCE THAT DATE.
[LOGO OF NUTECH DIGITAL, INC.]
NUTECH DIGITAL, INC.
22,152,169 SHARES OF COMMON STOCK
This prospectus covers the resale of 8,721,223 shares of our common
stock and 13,430,946 shares of our common stock issuable upon the exercise of
warrants by the selling shareholders listed on page 25. The selling shareholders
will sell at prevailing market prices or privately negotiated prices. If all of
the selling shareholders exercised their warrants, we would receive
$10,293,209.50. The selling shareholders are not obligated to exercise the
warrants. Although we will receive proceeds from the exercise of the warrants,
we will not receive any of the proceeds from the sale of the shares sold by the
selling shareholders.
Our common stock is traded on the Over-The-Counter Bulletin Board under
the symbol "NTDL".
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March 26, 2004
NuTECH DIGITAL, INC.
Table of Contents
Page No.
Prospectus Summary 1
Risk Factors 3
Forward Looking Statements 9
Management's Discussion and Analysis of Financial Condition 10
Description of Business 19
Description of Property 24
Selling Shareholders 25
Plan of Distribution 28
Use of Proceeds 30
Legal Proceedings 30
Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure 31
Directors, Executive Officers, Promoters and Control Persons 31
Security Ownership of Certain Beneficial Owners and Management 34
Description of Securities to be Registered 35
Certain Transactions 36
Market for Common Equity and Related Shareholder Matters 38
Executive Compensation/Remuneration of Directors and Officers 40
Interests of Named Experts and Counsel 43
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 43
Experts 44
Financial Statements F-1
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS
OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE
PROSPECTUS.
NUTECH DIGITAL, INC.
We are engaged in licensing and distributing general entertainment
products, most of which are made available through digital versatile discs,
commonly known as DVDs. Our products include children's animated films, karaoke
software, Japanese anime and late night programming. We have recently begun
licensing popular music concerts for distribution. Our products are not only
sold through retail stores, the Internet, and wholesale distributors, but we are
able, through our digital rights management technology, to provide entertainment
content in high definition and DVD audio and video quality over the Internet. We
have recently begun producing popular music concerts, which we intend to also
distribute.
HOW TO CONTACT US
We maintain our principal offices at 7900 Gloria Avenue, Van Nuys,
California 91406. Our telephone number at that address is (818) 994-3831 and our
facsimile number is (818) 994-1575.
THE OFFERING
We are registering 22,152,169 shares of our common stock for sale by
selling shareholders identified in the section of this prospectus titled
"Selling Shareholders". The shares included in the table identifying the selling
shareholders include 13,430,946 shares of common stock that have not yet been,
but that may be, issued to designated selling shareholders upon the exercise of
warrants. These warrants were issued in conjunction with private offerings of
units composed of our common stock and warrants to purchase our common stock,
which we undertook in February 2004.
After this offering, assuming the conversion of all the warrants, we
will have 35,583,115 shares of common stock outstanding. These numbers do not
include shares of common stock issuable upon the exercise of options issued in
connection with our NuTech Digital, Inc. 2001 Equity Incentive Plan and our
NuTech Digital, Inc. 2003 Consultant Plan.
1
SUMMARY OF FINANCIAL INFORMATION
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December 31,
- ------------------------------------------------- -----------------------------
Statement of Operations 2003 2002
- ------------------------------------------------ ------------ ------------
Sales $ 3,745,297 $ 4,292,510
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Costs of Sales 1,100,840 1,403,210
------------ ------------
- ------------------------------------------------ ------------ ------------
Gross Profit 2,644,457 2,889,300
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Expenses
- ------------------------------------------------ ------------ ------------
Selling Expenses 515,495 904,206
- ------------------------------------------------ ------------ ------------
General and Administrative Expenses 2,173,071 2,708,008
------------ ------------
- ------------------------------------------------ ------------ ------------
Total Expenses 2,688,566 3,612,214
------------ ------------
- ------------------------------------------------ ------------ ------------
Operating (Loss) (44,109) (722,914)
- ------------------------------------------------ ------------ ------------
Interest Expense 133,282 214,684
- ------------------------------------------------ ------------ ------------
(Loss) Before Other Income (177,391) (937,598)
- ------------------------------------------------ ------------ ------------
Other Income (Expense)
- ------------------------------------------------ ------------ ------------
Cost Recovery - KSS Contract 320,392 0
- ------------------------------------------------ ------------ ------------
Cancellation of debt 169,868 0
- ------------------------------------------------ ------------ ------------
Loss on Disposal of Asset (4,820) 0
- ------------------------------------------------ ------------ ------------
Total Other Income 485,442 0
- ------------------------------------------------ ------------ ------------
Income (Loss) Before Income Taxes 308,051 (937,598)
- ------------------------------------------------ ------------ ------------
Corporation Income Taxes (Benefit) 800 (19,225)
------------ ------------
- ------------------------------------------------ ------------ ------------
Net Income (Loss) $ 307,251 $ (918,373)
============ ============
- ------------------------------------------------ ------------ ------------
NET INCOME PER COMMON SHARE
- ------------------------------------------------ ------------ ------------
Basic and Diluted Income Per Share $ .03 $ (.09)
============ ============
- ------------------------------------------------ ------------ ------------
Weighted Average Number of Common Shares
Outstanding
- ------------------------------------------------ ------------ ------------
Basic 11,290,644 10,257,979
============ ============
- ------------------------------------------------ ------------ ------------
Diluted 12,068,727 10,257,979
============ ============
- ------------------------------------------------ ------------ ------------
2
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH
THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR
SECURITIES. ANY OF THESE FACTORS COULD CAUSE THE VALUE OF YOUR INVESTMENT TO
DECLINE SIGNIFICANTLY OR BECOME WORTHLESS. IF YOU DECIDE TO BUY OUR SECURITIES,
YOU SHOULD BE ABLE TO AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS.
WE WILL CONTINUE TO NEED MONEY TO LICENSE PRODUCTS AND WE ARE NOT SURE
WE CAN OBTAIN ADDITIONAL FINANCING. IF WE CANNOT OBTAIN ADDITIONAL FINANCING, IT
WILL ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS AND THE VALUE OF
YOUR INVESTMENT.
We acquire licenses to reproduce and sell general entertainment
products. The products we license include films, musical concerts and karaoke
products. Many of these licenses, especially those relating to our hentai
products, are extremely expensive to obtain and most of them require us to pay
significant up-front advances against future royalties and distribution fees. We
have also entered into our first agreement to produce and distribute a popular
music concert, which requires a substantial cash outlay.
While our cash flow from operations is sufficient to support our
day-to-day operations, it is unlikely that we will be able to continue to
acquire titles or produce music concerts without additional financing. In the
past, we have borrowed money from Lee Kasper, our majority shareholder, and sold
our securities to raise money to acquire product licenses. Currently, we have no
commitments for additional financing. To the extent that we need more money to
acquire additional licenses, we cannot assure you that funds will be available
to us on favorable terms, or at all. To the extent that additional money is
raised through the sale of our securities, the issuance of those securities
could result in dilution to our shareholders. The unavailability of funds could
have a material adverse effect on our ability to expand our library of titles or
continue our concert production work, which will adversely affect our business
and results of operations and the value of your investment.
THE HOME ENTERTAINMENT INDUSTRY IS INTENSELY COMPETITIVE. WE CANNOT
GUARANTEE YOU THAT WE CAN COMPETE SUCCESSFULLY. IF WE DO NOT COMPETE
SUCCESSFULLY, YOUR INVESTMENT COULD BECOME WORTHLESS.
The home entertainment industry is intensely competitive. Our
competitors include major motion picture studios and music labels that are much
larger than we are and have far greater name recognition and financial resources
than we have. We also compete against smaller, independent companies that seek,
as we do, to create niche markets.
In 2000 we began licensing Japanese hentai, a form of adult
animation. We dubbed over the sound tracks of these films, using the voices of
actors from the adult entertainment industry. During the 2000 and 2001 fiscal
years, we earned $4,186,673 and $5,021,232 in gross revenues, respectively.
These films accounted for approximately 30% of our sales for the fiscal year
3
ended December 31, 2000 and approximately 50% of our sales for the fiscal year
ended December 31, 2001.
Due in part to the slowdown of the U.S. economy, which we believe has
had an adverse effect on discretionary consumer spending, in part to an increase
in competition in the sale of Japanese anime and hentai, and in part to a change
in our business strategy to prevent erosion of our customer base through
discounted pricing of our products, our gross revenues declined to $4,292,510
for the fiscal year ended December 31, 2002 and $3,745,297 for the fiscal year
ended December 31, 2003.
In order to strengthen our competitive presence in our market we have
implemented a new technology that we call digital rights management, or DRM,
that allows consumers to download films from our website, for either rent or
purchase. The technology delivers high definition and DVD quality audio and
video over the Internet, but prevents copying or further distribution of the
work by the consumer. We believe that this easy method of downloading films for
immediate viewing will encourage visitors to our website to act spontaneously to
rent or purchase these products. We are also beginning to produce and distribute
popular music concerts, which we believe will sell as well as our films, and
which we expect to have significantly better margins, since prices are rarely
discounted to distributors as they are for our other products.
In spite of the measures we have introduced, we may not be able to
compete successfully in our market. If we fail to compete successfully, our
business and your investment will be adversely affected.
THE MARKET IN WHICH WE DO BUSINESS MAY CHANGE, DECREASING THE DEMAND
FOR OUR PRODUCTS. IF THE DEMAND FOR OUR PRODUCTS DECLINES, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED WHICH, IN TURN, WILL CAUSE THE
VALUE OF YOUR INVESTMENT TO DECLINE.
In spite of the introduction of our digital rights management
technology, which allows consumers visiting our website to immediately download
films over the Internet, the majority of our revenues are derived from sales of
our DVD products. Our DVD products compete with pay-per-view cable television
systems, in which cable television subscribers pay a fee to see a movie or other
program selected by the subscriber. Existing pay-per-view services offer a
limited number of channels and programs and are generally available only to
households with a converter to unscramble incoming signals. Recently developed
technologies, however, permit certain cable companies, direct broadcast
satellite companies, telephone companies and other telecommunications companies
to transmit a much greater number of movies to homes in more markets.
Ultimately, further improvements in these technologies or the development of
other technologies, such as Internet-TV, could lead to the availability of a
broad selection of movies or music videos to consumers on demand at low prices,
which could substantially decrease the demand for DVD-video purchases or
rentals. This could have a material adverse effect on our financial condition
and results of operations and on the value of your investment.
4
WE RELY ON SALES TO A FEW KEY CUSTOMERS. OUR BUSINESS AND FINANCIAL
RESULTS COULD BE ADVERSELY AFFECTED IF WE LOST THESE CUSTOMERS, WHICH WOULD
CAUSE THE VALUE OF YOUR INVESTMENT TO DECLINE.
As a percentage of total revenues, our net sales to our four largest
customers during the fiscal year ended December 31, 2003 totaled approximately
28.86%. One major customer accounted for over 14% of our revenues in fiscal
2003. Although we have long-established relationships with many of our
customers, we do not have long-term contractual arrangements with any of them. A
decrease in business from any of our major customers could have a material
adverse effect on our results of operations and financial condition and the
value of your investment.
WE COULD BECOME INVOLVED IN LITIGATION OVER OUR RIGHTS TO USE OUR
PRODUCTS, OR THE RIGHTS OF OTHERS TO USE OUR PRODUCTS. RESOLUTION OF ANY SUCH
LITIGATION COULD BE TIME CONSUMING AND COSTLY, WHICH MAY HAVE A MATERIAL ADVERSE
AFFECT OUR OPERATIONS AND FINANCIAL POSITION.
We are not aware that any of our products infringe the proprietary
rights of third parties, and we are not currently engaged in any material
intellectual property litigation or proceedings. Nonetheless, we cannot assure
you that we will not become the subject of infringement claims or legal
proceedings by third parties with respect to our current or future products. In
addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights, or to establish the validity of our
proprietary rights. Any such claims could be time-consuming, divert management
from our daily operations, result in litigation, cause product shipment delays
or lead us to enter into royalty or licensing agreements rather than disputing
the merits of such claims. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject us to significant liabilities to third
parties, require the expenditure of significant resources to develop
non-infringing products, require disputed rights to be licensed from others or
require us to cease the marketing or use of certain products, any of which could
have a material adverse effect on our business and operating results.
GOVERNMENT REGULATIONS COULD ADVERSELY EFFECT THAT PORTION OF OUR
BUSINESS THAT RELATES TO LATE NIGHT PROGRAMMING. IF WE WERE PROHIBITED FROM
DISSEMINATING LATE NIGHT PROGRAMMING, IT WOULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS. THIS COULD CAUSE THE VALUE OF YOUR INVESTMENT TO
DECLINE.
During 2003 approximately 10.23% of our sales were from late night
programming, that is, programming that includes sexually explicit content which
is made to be viewed solely by adults. If we include hentai in the category of
late night programming, then approximately 62.11% of our sales would fall into
this category.
Although the right to create material containing sexually explicit
content is protected by the First and Fourteenth Amendments to the United States
Constitution, the First and Fourteenth Amendments do not protect the
dissemination of this material. Several states and communities in which our
products are distributed have enacted laws regulating the distribution of such
programming, with some offenses designated as misdemeanors and others as
5
felonies. The consequences for violating the state statutes are as varied as the
number of states enacting them. Similarly, there is a federal prohibition with
respect to the dissemination of late night programming, and the potential
penalties for individuals (including corporate directors and officers) violating
these federal laws include fines, community service, probation, forfeiture of
assets and incarceration. While we undertake to restrict the distribution of our
products in order to comply with all applicable statutes and regulations, we
cannot assure you that our efforts will be successful and that we will always be
in compliance. If we are accused of failing to comply, we may incur substantial
legal costs to defend the action, management will likely be diverted from its
routine activities to assist with preparing the defense, and we could incur
significant fines or penalties if we fail to prevail in our defense.
Furthermore, because of the adult content of our products, many people
may regard our business as unwholesome. Federal, state and municipal
governments, along with various religious and children's advocacy groups,
consistently propose and pass new legislation aimed at restricting provision of,
access to, and content of late night entertainment. These groups also may file
lawsuits against providers of late night entertainment, encourage boycotts
against such providers, and mount negative publicity. We cannot assure you that
our products will not be subject to successful legal challenges in the future.
If we lost the ability to sell our late night products, or if our
ability to sell these products was substantially curtailed, it would have a
material adverse affect on our business and operating results and on the value
of your investment.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW EMPLOYEES. THE LOSS OF ONE OR
MORE OF THESE EMPLOYEES COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS.
Our future success will depend, to a significant degree, on the
continued services of our executive officers and other key personnel,
particularly our founder, Mr. Lee Kasper, and our Vice President, Mr. Joseph
Giarmo. The loss of Mr. Kasper's or Mr. Giarmo's services would have a material
adverse effect on our business and operations.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY
CASH DIVIDENDS IN THE FORESEEABLE FUTURE. INVESTING IN OUR SECURITIES WILL NOT
PROVIDE YOU WITH INCOME.
We plan to use all of our earnings, to the extent we have earnings, to
fund our operations. We do not plan to pay any cash dividends in the foreseeable
future. We cannot guarantee that we will, at any time, generate sufficient
surplus cash that would be available for distribution as a dividend to the
holders of our common stock. You should not expect to receive cash dividends on
our common stock.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK, AND
PREFERRED STOCK, WITHOUT ASKING FOR SHAREHOLDER APPROVAL, WHICH COULD CAUSE YOUR
INVESTMENT TO BE DILUTED.
6
Our Articles of Incorporation currently authorize the Board of
Directors to issue up to 100,000,000 shares of common stock and up to 50,000,000
shares of preferred stock. The power of the Board of Directors to issue shares
of common stock, preferred stock or warrants or options to purchase shares of
common stock or preferred stock is generally not subject to shareholder
approval. Accordingly, any additional issuance of our common stock, or preferred
stock that may be convertible into common stock, may have the effect of further
diluting your investment.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT
COULD DILUTE YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we
raise additional funds through the issuance of equity, equity-related or
convertible debt securities, these securities may have rights, preferences or
privileges senior to those of the holders of our common stock. The issuance of
additional common stock by our management will also have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock.
OUR ARTICLES OF INCORPORATION PERMIT US TO ISSUE SHARES OF PREFERRED
STOCK. BY ISSUING PREFERRED STOCK, WE MAY BE ABLE TO DELAY, DEFER OR PREVENT A
CHANGE OF CONTROL.
Our Articles of Incorporation permit us to issue 50,000,000 shares of
preferred stock. Our Articles of Incorporation also permit our Board of
Directors to determine the rights, preferences, privileges and restrictions
granted to, or imposed upon, the preferred stock and to fix the number of shares
constituting any series and the designation of such series without further
action by our shareholders.
Depending on the rights, preferences and privileges granted when the
preferred stock is issued, it may have the effect of delaying, deferring or
preventing a change in control without further action by the shareholders, may
discourage bids for our common stock at a premium over the market price of the
common stock and may adversely affect the market price of and the voting and
other rights of the holders of our common stock.
THE MARKET FOR OUR COMMON STOCK IS VOLATILE. THIS AFFECTS BOTH THE
ABILITY OF OUR INVESTORS TO SELL THEIR SHARES AS WELL AS THE PRICE AT WHICH THEY
SELL THEIR SHARES.
The market price for our common stock is extremely volatile and is
significantly affected by factors such as reports written by third parties, over
whom we have no control, about our business and sales of large amounts of our
common stock. Furthermore, in recent years the stock market has experienced
extreme price and volume fluctuations that are unrelated to the operating
performance of the affected companies. These volatile conditions may make it
difficult for you to sell our common stock at a price that is acceptable to you
if you need money.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY
AFFECT TRADING IN OUR COMMON STOCK.
Our common stock is considered a "low-priced" security under rules
promulgated under the Securities Exchange Act of 1934. In accordance with these
rules, broker-dealers participating in transactions in low-priced securities
7
must first deliver a risk disclosure document which describes the risks
associated with such stocks, the broker-dealer's duties in selling the stock,
the customer's rights and remedies and certain market and other information.
Furthermore, the broker-dealer must make a suitability determination approving
the customer for low-priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the
customer. The effect of these restrictions will likely be a decrease in the
willingness of broker-dealers to make a market in our common stock, decrease
liquidity of our common stock and increase transaction costs for sales and
purchases of our common stock as compared to other securities.
8
FORWARD LOOKING STATEMENTS
This prospectus contains "forward-looking statements". These
forward-looking statements are based on our current expectations, assumptions,
estimates and projections about our business and our industry. Words such as
"believe," "anticipate," "expect," "intend," "plan," "will," "may," and other
similar expressions identify forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the sections of this prospectus
titled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation", as well as the following:
o a decline in the general state of the economy, which impacts
the amount of money spent by consumers for entertainment
products,
o our lack of capital and whether or not we will be able to
raise capital when we need it,
o whether or not the popularity of Japanese anime and karaoke
will continue and will grow,
o our overall ability to successfully compete in our market and
our industry,
o whether or not we will continue to receive the services of our
executive officers and directors, particularly our President,
Mr. Lee Kasper,
o whether or not our largest customers will continue to do
business with us,
o whether or not our digital rights management technology is
successful in increasing our sales over the Internet,
o whether or not we are successful in producing contemporary
music concerts,
o whether or not the contemporary music concerts we produce
generate significant sales
and other factors, some of which will be outside our control. You are cautioned
not to place undue reliance on these forward-looking statements, which relate
only to events as of the date on which the statements are made. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. You should refer to and
carefully review the information in future documents we file with the Securities
and Exchange Commission.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of results of operations and
financial condition are based on our financial statements. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In consultation with our Board of Directors, we have identified four
accounting principles that we believe are key to an understanding of our
financial statements. These important accounting policies require management's
most difficult, subjective judgments.
Revenue Recognition. We recognize revenue from product sales when we
ship the product to the customer. Sales are recorded net of sales returns and
discounts. We recognize revenue in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements."
Allowance for Doubtful Accounts. We establish an allowance for doubtful
accounts based on factors surrounding the credit risk of our customers,
historical trends and other information. The allowance for doubtful accounts is
established by analyzing each customer account that has a balance over 90 days
past due. Each account is individually assigned a probability of collection.
When other circumstances suggest that a receivable may not be collectible, it is
immediately reserved for, even if the receivable is not yet in the 90-days-past
due category.
Inventory. Our inventories are stated at the lower of standard cost or
market. Slow moving and obsolete inventories are analyzed for potential reserves
on a quarterly basis. To calculate the reserve amount, we compare the current
on-hand quantities with the actual usage over the past 36 months. On-hand
quantities greater than actual usage are considered for reserve at the standard
unit cost. Additionally, non-cancelable open purchase orders for inventory we
are obligated to purchase, where demand has been reduced, may be reserved.
Reserves for open purchase orders where the market price is lower than the
purchase order price are also established.
Income Taxes. We account for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (SFAS 109), which is an asset and
liability method of accounting that requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between tax bases and financial reporting bases of accounting. In
10
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
RESULTS OF OPERATIONS
OVERVIEW
According to media industry analysis, in the year 2003 consumers spent
$14.4 billion purchasing DVDs. This is approximately $5 billion more than was
spent on movie tickets or video rentals. Currently, there are approximately
27,000 movies now available on DVD and collectors are routinely building large
libraries of films. We believe that consumers are using, and will continue to
use, their discretionary income to build their film libraries, as they do with
music and books. We also believe that the audience for anime will continue to
grow worldwide, and that our investment in anime is well-timed.
We experienced a decline in sales during 2003, which we attribute to a
number of factors. First, the economy of the United States still has not fully
recovered from the slowdown of the last two years, which we believe has driven
down discretionary spending by consumers. Second, in an effort to stabilize the
pricing of our products, we changed our pricing model. We no longer sell
products to distributors at steep discounts. This policy allowed the
distributors to sell the products to retailers at lower prices than we were
willing to sell them. Also, we were unable to fulfill some orders during the
fiscal year ended December 31, 2003 because of a lack of inventory. We have
improved our inventory control procedures to try to avoid this in the future.
Finally, Japanese anime and hentai are becoming more popular, both here in the
United States and abroad, fueling competition in our market.
Despite the decline in revenues during the 2003 fiscal year, we
operated profitably. We implemented stringent cost-cutting procedures that
significantly reduced our operating expenses. We also reduced our debt, which
resulted in a significant reduction of interest expense. Because of these
measures, we had net income for the 2003 fiscal year of over $300,000 as
compared to a net loss for the 2002 fiscal year of over $900,000.
We have also begun expanding our business and our product offerings. We
recently produced our first contemporary music concert, which we plan to
distribute. We believe that the production of music concerts will be a
significant source of revenue, since we will own all the rights to the concerts.
This will allow us to choose the manner in which we derive revenues from these
works. For example, we will be able to broadcast the concerts on television and
over the Internet as well as to sell them on DVD or CD. We also announced our
acquisition of the North American licensing rights for 65 high definition DVD
titles of classical concert music from Cascade Gmbh, a prominent German based
DVD and CD label. Finally, we believe that we can increase revenue from our
Internet sales through our digital rights management technology. This technology
allows customers visiting our website to immediately download high definition,
11
DVD-quality films, either for rent or for purchase. The customer can act
spontaneously, obtaining immediate access to the film of his choice and avoid
handling and shipping costs.
With the exception of the licenses we will acquire, we have not made
any material commitments for capital expenditures in the immediate future.
Following is summary financial information reflecting our operations
for the periods indicated.
Years Ended
12/31/2003 12/31/2002 Increase %
---------- ---------- -------- -----
(Decrease)
----------
Statements of Operations
Sales $ 3,745,297 $ 4,292,510 $ (547,213) (13%)
Cost of Sales 1,110,840 1,403,210 (292,370) (21%)
Percentage of Sales 30% 33% (3%)
Gross Profit 2,644,457 2,889,300 (244,843) (8%)
Percentage of Sales 70% 67% (3%)
Selling, General and Administrative Expenses 2,688,566 3,612,214 (923,648) (26%)
Interest Expense 133,282 214,684 (81,402) (38%)
(Loss) Before Other Income (177,391) (937,598) (760,207) (81%)
Other Income 485,442 0 485,442
Income (Loss) Before Corporation Income 308,051 (937,598) 1,245,649 (133%)
Taxes
Corporation Income Tax (Benefit) 800 (19,225) 20,025
Net Income (Loss) $ 307,251 $ (918,373) $ 1,225,624 133%
Net Income (Loss) Per Share
Basic .03 (.09) .12
Diluted .03 (.09) .12
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
SALES
Our revenues from operations for the year ended December 31, 2003 were
$3,745,297, as compared to revenues of $4,292,510 for the year ended December
31, 2002, a 13% decrease. As noted above, we attribute the decrease in our
revenues to the following:
o continued weak economic conditions;
o our decision to discontinue discounting our product prices to
certain customers, which resulted in reduced sales. Because we
are the exclusive distributor for many of our products in the
United States, our decision to stabilize our product pricing
for all of our customers, while resulting in lower sales,
prevents those customers who purchased from us at a reduced
price from selling to others at a reduced price, thereby
eroding our customer base;
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o increased competition; and
o lack of inventory so that we were unable to fulfill many of
our sales orders. We have improved our inventory control
procedures so that we are now able to fill orders that
previously we could not fill due to lack of inventory.
During January and February 2004, our sales increased in comparison to
the same months in 2003. This increase is due to our release of new titles and
our ability to fill orders that were placed during 2003. We also received
$2,500,000 from private offerings of our securities that closed in February
2004. We plan to use these funds primarily for the purchase of new licenses and
the production of popular music concerts.
COST OF SALES AND GROSS PROFIT
Due to our lower sales, our gross profit from operations for the fiscal
year ended December 31, 2003 decreased to $2,644,457 as compared to $2,889,300
for the fiscal year ended December 31, 2002. Our gross profit increased to 70.6%
in 2003 as compared to 67.3% in 2002. This increase resulted partially from our
decision to stabilize our pricing by discontinuing the discounts we had given in
the past to certain customers and partially from a reduction in our replication
costs. We expect the reduction in replication costs to continue during 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative costs decreased by $923,648, to
$2,688,566 for the year ended December 31, 2003 as compared to $3,612,214, for
the prior fiscal year, a 25.6% decrease. The decrease in selling, general and
administrative expenses was attributable to a cost savings program implemented
by management during the year ended December 31, 2003, which included a
reduction in personnel, various cost eliminations, reduced use of computer
consultants, reduced royalties due to reduced sales and a $168,500 write-off of
obsolete royalty advances in 2002. Professional fees increased mainly due to
costs involved in the preparation of our SEC filings. A summary of our costs is
as follows:
Years Ended
12/31/2003 12/31/2002 Increase %
---------- ---------- -------- -----
(Decrease)
----------
Selling, General and Administrative Expenses
Salaries, wages and payroll taxes $1,042,884 $1,221,957 $ (179,073) (15%)
Professional fees 346,920 182,190 164,730 90%
Royalty expenses 305,610 655,238 (349,628) (53%)
Advertising 5,611 39,510 (33,899) (86%)
Automobile expenses 73,239 91,098 (17,859) (20%)
Credit card fees 68,229 85,604 (17,375) (20%)
Depreciation Expense 316,649 623,067 (317,457) (50%)
Rent 109,471 107,670 1,801 2%
Freight and Delivery 64,785 90,949 (26,154) (29%)
Other selling, general and administrative expenses 257,298 446,771 (194,473) (44%)
Total Selling, General and Administrative
Expenses $2,688,566 $3,612,214 $ (923,648) (26%)
13
Even with a decline in sales, we recorded a net profit of $307,251 from
operations in the 2003 fiscal year as compared to a net loss from operations of
$918,373 in the 2002 fiscal year. Along with the reduction in our debt and in
our selling, general and administrative expenses, we recovered $320,394 in
production costs relating to licenses for various works of anime.
INTEREST EXPENSE
Interest expense decreased $81,402, or 38%, due to the repayment of
debt, reduction in the interest rates on debt due to changes in the prime rate
of borrowing, and lower interest rates on new borrowings.
Years Ended
Increase
12/31/2003 12/31/2002 (Decrease) %
---------- ---------- ---------- ----
Interest Expense $133,282 $214,684 $(81,402) (38%)
OTHER INCOME (EXPENSE)
Our other income is comprised of the following:
Cost recovery, KSS contract $320,394
Cancellation of debt 169,868
Loss on disposal of asset (4,820)
-------
Total Other Income $485,442
========
Cost recovery, KSS Contract - We license certain digital masters from
KSS and we are permitted to recover from KSS any costs we incur for developing
DVD masters, advertising and related costs. During the year ended December 31,
2003, we offset a total of $320,394 in such costs against license royalties that
are due to KSS. These costs are recorded as advance royalty payments and will be
used to offset future royalties, as they accrue.
Cancellation of Debt - During the year ended December 31, 2003, we were
able to negotiate reductions in accounts and notes payable in the amount of
$169,868.
14
CORPORATION INCOME TAXES (BENEFIT)
Years Ended
12/31/2003 12/31/2002
Corporation Income Taxes (Benefit)
Federal income tax $ 0 $(20,225)
State of California franchise tax
--------
800 800
-------- --------
Total Corporation Income Taxes (Benefit) $ 800 $(19,225)
======== ========
During the year ended December 31, 2002 we experienced a tax net
operating loss and as a result, carried-back a portion of the loss and obtained
a refund from the Internal Revenue Service in the amount of $20,025. For the
year ended December 31, 2003 we will apply a portion of this net operating loss
carryforward to our net income and owe no federal or state tax. Each year we are
responsible for an $800 minimum franchise tax to the State of California.
NET INCOME (LOSS)
Our net loss decreased from $918,373 in the year ended December 31,
2002 to a profit of $307,251 in the year ended December 31, 2003. The change of
$1,225,624 was due to our improvement in our gross profit on items sold, our
cost containment programs, our costs recovered on the KSS contract and our
cancellation of debt.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with cash from our operating
activities, a bank line of credit, a loan from the Small Business
Administration, various loans from individuals and a private offering of our
securities.
Our capital requirements, particularly as they relate to the production
of popular music concerts and expanding our film and anime library, have been
and will continue to be significant. Our future cash requirements and the
adequacy of available funds will depend on many factors, including the pace at
which we expand our business generally, and our film library in particular, the
general state of the economy, which impacts the amount of money that may be
spent for entertainment, our ability to negotiate favorable license agreements
with producers and copyright holders of various works, the continued popularity
of anime and whether or not the works we acquire appeal to consumers and whether
or not the production and distribution of popular music concerts proves to be
lucrative.
Because of our tight cash flow it is likely that, during the next 12
month period we will seek financing from one or more sources such as lending
institutions, private individuals, including our President and Chief Executive
Officer, Mr. Lee Kasper, or by sales of our securities. Additional financing may
not be available on acceptable terms, or at all.
15
At December 31, 2003 cash amounted to $30,827. Our primary sources of
cash in fiscal 2003 consisted of cash provided by operating activities and
loans.
The primary uses of cash for the fiscal year ended December 31, 2003
consisted of licensing costs and general operating costs. We believe that cash
generated by our current operations will be sufficient to continue our business
for the next 12 months, however cash generated by current operations will not
provide the means to allow us to expand operations by licensing a significant
number of new works of anime, which are costly to obtain, and to continue
producing popular music concerts. In February 2004 we raised gross proceeds of
$2,500,000 through a private offering of our securities. A portion of these
funds have been used to repay loans made to us by Mr. Kasper and his affiliates.
The remainder of the proceeds will be used in our general operations, primarily
for the licensing of additional anime titles and the production of popular music
concerts.
Years Ended
Working Capital 12/31/2003 12/31/2002 Increase
----------- ----------- -----------
(Decrease)
Current Assets $ 1,436,826 $ 1,480,431 $ (43,605)
Current Liabilities 2,158,368 2,659,151 500,783
----------- ----------- -----------
Deficit Working Capital $ (721,542) $(1,178,720) $ 457,178
=========== =========== ===========
Long-term Debt $ 1,187,880 $ 1,094,230 $ 93,650
=========== =========== ===========
Stockholders' Equity Increase $ 605,830 $ 334,568 $ 271,262
=========== =========== ===========
The positive changes in our working capital resulted from our 2003
profit, settlement of debt with common stock and issuance of common stock for
cash.
STOCKHOLDERS' EQUITY
Stockholders' equity increased by $940,398 in the 2003 fiscal year,
primarily due to our net income of $307,251 and because we succeeded in
obtaining a waiver from a shareholder of certain rights it was granted in
connection with the acquisition of our common stock.
STATEMENTS OF CASH FLOWS SELECT INFORMATION
Years Ended
12/31/2003 12/31/2002
---------- ----------
Net Cash Provided (Used) By:
Operating Activities $(130,945) $ 379,008
Investing Activities $(327,013) $(588,181)
Financing Activities $ 479,548 $ 135,432
16
OPERATING ACTIVITIES
During the year ended December 31, 2003, cash was provided by net
profits, reductions in inventory and tax refunds. Cash was used by operations to
fund increases in accounts receivable, to make advances to employees, to pay
advance royalties, to prepay expenses and to reduce accounts payable and accrued
liabilities. During the year ended December 31, 2002, net cash provided by
operating activities was provided by accounts receivable, inventories, advance
royalties, and increases in accounts payable and accrued liabilities, while cash
was used by operations from the net loss, tax refund, prepaid expenses and
corporate income taxes.
INVESTING ACTIVITIES
During the year ended December 31, 2003, net cash used by investing
activities was $327,013 as compared to $588,181 for the year ended December 31,
2002. Cash used by investing activities was used principally for the acquisition
of property and equipment.
FINANCING ACTIVITIES
Net cash provided by financing activities was $479,548 for the year
ended December 31, 2003 as compared to $135,432 of net cash provided by
financing activities during the year ended December 31, 2002. During the year
ended December 31, 2003, we received $900,000 from the proceeds of new loans,
all of them from our President and Chief Executive Officer, Mr. Lee Kasper, and
$150,000 from issuance of our common stock. We used funds totaling $570,452 for
reduction of debt, including the repayment of promissory notes to third parties,
payment of a loan to an officer, and payments made toward capital leases. During
the year ended December 31, 2002, we received $207,282 from issuance of our
common stock and debt financing, and we used our funds to repay $71,850 on notes
and capital leases payable.
SOURCES OF CASH
On February 2, 2004 and again on February 27, 2004 we completed a
private sale of units to accredited investors. The units consisted of one share
of common stock and a warrant to purchase two shares of common stock. Through
these offerings we raised a total of $750,000 and $1,750,000 in gross proceeds,
respectively. The price per unit was $0.40 and the warrant conversion price is
$0.75.
In 2002 we had a bank line of credit in the amount of $650,000. Our
agreement with the lender, U.S. Bank, N.A., required us to comply with stringent
financial covenants, including debt to equity ratios, a tangible net worth
covenant and a working capital covenant. Because we breached the covenants, U.S.
Bank asked us to make arrangements to pay the line of credit in full. On
November 7, 2002, U.S. Bank, N.A. agreed to make a loan in the amount of
$640,000 to Lee Kasper, our President, who used the proceeds to pay-off our line
of credit. The loan to Mr. Kasper requires 30 monthly payments of $21,333 plus
interest at 3% over prime. The Company pledged all of its assets as collateral
for repayment of the loan and has guaranteed repayment of the loan.
The principal amount of the loan we received through the Small Business
Administration is $900,000. Interest is adjusted at least once each year. The
interest rate was 2% above the prime rate. The loan had a 10-year term. In July
2003, we renegotiated the loan, reducing the monthly payments to $6,415,
including interest, and extending the due date to July 14, 2018.
17
In February 2003 our President and majority shareholder, Mr. Lee
Kasper, received a personal loan in the amount of $500,000. The interest rate on
the loan is 3% and the loan is scheduled to be repaid over 36 months. Mr. Kasper
loaned these funds to us on identical terms. We used these funds to expand our
library of anime titles.
In September 2003 we also borrowed $360,000 from Mr. Kasper and a total
of $100,000 from trusts created for the benefit of his children. All of these
loans had a term of one year and bore simple interest at the rate of 10%. We
repaid these loans with part of the proceeds we received from the financing we
undertook in February 2004.
We committed to royalties ranging from 20% to 30% on specific royalty
contracts.
In August 1998 we entered into an agreement with Ritek Corporation
whereby we received an advance in the amount of $400,000 against royalties to be
earned through the sale of the children's game, "Shadoan". We also agreed to pay
simple interest of 8.5% per year on the advance amount. We used this money to
acquire the license for the game as well as for working capital. As
consideration for the advance, we agreed that, so long as the advance amount was
outstanding, our ownership of the license to the game would be shared equally
with Ritek Corporation. We further agreed to retain the services of Ritek
Corporation to replicate the game, at a per disc price that was competitive in
our industry. Ritek Corporation agreed that we could repay the advance by paying
a per-disc charge of $2 over the replication price. If we fail to make payments
in accordance with our agreement, Ritek Corporation is entitled to give us
notice of default. If we fail to pay the principal amount within 10 days after
we receive the notice, we are required to forfeit our ownership rights in the
license to Ritek Corporation. We have derived minimal revenues from the game and
we have not repaid the advance in accordance with our agreement. As of December
31, 2003, the unpaid balance of the advance was $400,000. We failed to pay all
of the interest that accrued during the past two fiscal years, and we have
recorded a liability for unpaid interest totaling $65,167 for the fiscal year
ended December 31, 2003. Ritek Corporation has not given us notice of default
and has not asked us to transfer our rights to the license. If we were required
to transfer our license to the game to Ritek Corporation, it would not have a
significant impact on our revenues or the results of our operations.
Currently, we have no commitments for additional financing.
18
DESCRIPTION OF BUSINESS
HISTORY AND DEVELOPMENT OF THE COMPANY
In 1993 NuTech Entertainment, Inc. was founded for the purpose of
licensing and distributing karaoke software. In 1997, NuTech Digital, Inc. was
founded for the purpose of licensing and distributing films. In 1999 the
business of NuTech Entertainment, Inc. was combined with the business of NuTech
Digital, Inc. by distributing the assets of NuTech Entertainment, Inc. to its
sole shareholder, Mr. Lee Kasper, who subsequently transferred the assets into
NuTech Digital, Inc. NuTech Entertainment, Inc. ceased doing business in 1999
and was dissolved in 2001.
NuTech Digital, Inc. (as used in this prospectus, unless the context
otherwise requires, the terms "we," "us," and "NuTech" refer to NuTech Digital,
Inc.) engages in licensing and distributing general entertainment products for
children and adults. Our products include children's animated films, karaoke
software, Japanese anime and late night programming. We recently began producing
contemporary music concerts, which we also intend to distribute. During the
fiscal year ended December 31, 2003, our primary source of revenue came from our
sales of adult entertainment, which includes late night programming and hentai,
a form of Japanese anime for adults. During 2003, hentai accounted for
approximately 51.8% of our sales, late night programming accounted for
approximately 10.23% of our sales and karaoke products accounted for
approximately 29% of our sales. We distribute our products throughout the world
via retail stores, the Internet, and wholesale distributors. Approximately 3% of
our products are distributed outside the United States, with no concentration in
any particular country or geographic area. Approximately 2% of our sales are
made over the Internet. We also facilitate authoring services to content
providers in the entertainment industry. Our products are replicated for us by
third parties.
OUR PRODUCTS
Our film products are sold in digital versatile disc format, commonly
known as "DVD". Our karaoke products are sold in two formats, DVD and compact
disc with graphics, commonly known as "CD + G". In 2003, sales of our DVD film
products totaled 517,347 units, which accounted for approximately 38.08% of our
sales. Of these amounts, sales of Japanese anime, including hentai, represented
approximately 25.73% of all DVDs sold. In 2003, sales of our CD + G karaoke
products totaled 833,663 units, which accounted for approximately 61.37% of our
sales, while sales of our DVD karaoke products totaled 7,461 units, which
accounted for less than 1% of our sales.
DIGITAL RIGHTS MANAGEMENT
In January 2004 we implemented a technology that will allow visitors to
our website to download films and music videos for rent or purchase. Downloaded
works have DVD and high definition quality audio and video. Because the content
is electronically packaged and delivered with an encrypted license, we do not
believe that it can be copied illegally. During the 2004 fiscal year, we expect
to be able to apply this technology to DVDs. The DVD will be licensed to a
consumer for a period of time (for example, 1, 3 or 5 days). After the
expiration of the license, the DVD will no longer play. Visitors to our website
can try out this new technology at WWW.DEMO.NUTECHDIGITAL.TV.
19
We believe that this easy method of acquiring our products will be
attractive to users of our website and will grow in popularity since it provides
immediate access to the desired product without the delays and costs that would
be incurred if the product is shipped. We believe that immediate access to our
products may encourage more spontaneous purchases by our customers.
CONTEMPORARY MUSIC CONCERTS
In March 2004 we produced our first contemporary music concert using
high definition technology. Our agreement with Juggernaut Media, LLC granted us
worldwide rights to the concert in all media, including DVD, television and any
ancillary markets. The concert was performed by a prominent hip-hop artist,
Russell Jones, whose stage name is Ol' Dirty Bastard. We believe that the
distribution of contemporary music complements our product offerings and we
intend to expand this facet of our business.
CHILDREN'S ANIMATED FILMS
We acquired 26 classic children's animation titles and produced these
in DVD format, including Alice In Wonderland, Black Beauty, Tom Sawyer and
20,000 Leagues Under the Sea. Our anime products targeted to children and teens
come to us in English. We enhance the soundtrack by adding DTS sound, create
menus, add interactive games, and create the artwork for the packaging. Once
this is complete, we create the new master for replication. Our children's
products accounted for approximately $340,936 in sales during 2003, which
represented approximately 9.1% of our revenues for the year.
KARAOKE
Karaoke is a pre-recorded song in which the lead vocals have been
eliminated or re-mixed out, and the voice of the individual performing is
substituted on the sound track. The back-up singers and musicians are left in
the song for accompaniment. The goal of karaoke is to make each singer feel like
a star and sound like a professional vocalist. This is achieved through a DVD or
CD + G player and an on-stage television monitor that prompts the singer with
the lyrics and rhythm of the song being sung. If a song is recorded on CD + G,
the lyrics are displayed on a colored background. If a song is recorded on DVD,
the lyrics are displayed over moving images.
We license and distribute 239 volumes of karaoke software in DVD and
CD+G formats for use with karaoke recording equipment. One track offers complete
music and vocals for practice and the other track is instrumental-only for
performance by the participant. Most of the music sold by us is accompanied by
printed lyrics. Our CD + G and DVD products include lyrics that appear on a
video or television screen. The music for our karaoke products is produced by us
or by an independent producer.
20
During 2003, karaoke products accounted for approximately $1,078,185 in
sales, which made up approximately 28.8% of our total revenues.
GENERAL PRODUCTION SERVICES
When businesses offering DVD products obtain a license to duplicate a
film or other work of art, they receive the work as an analog or digital tape.
In order to replicate the film on DVD, the licensee must create a digital linear
tape. This process is known as "authoring". After the digital linear tape is
created, it is shipped to a factory where it is replicated onto a "stamper". The
stamper is used to make the DVDs. We facilitate DVD authoring and menu designs
to complete product replication and packaging for other content providers in the
entertainment industry.
JAPANESE ANIMATED FILMS
The animated film art form known as "anime" had its start in Japan
around 1963, the product of animators Osamu Tezuka and Mitsuteru Yokoyama. Anime
has a distinctive look, including highly stylized and realistic background
images, which "play-off" the often whimsically drawn characters. Since the early
1990s, anime has begun to find an audience in the United States. Even though
these films are animated, they generally have broad audience appeal due to their
complex story lines. Anime encompasses many genres, including action/adventure
films targeted to young girls ("shojo") and young boys ("shonen"), horror,
fantasy and science fiction films, comedy, and films produced solely for adults
("hentai").
We believe that anime has a strong and growing fan base, both in Asia
and the United States and that anime, and particularly hentai, is continuing to
grow in popularity. This is evidenced by the increase in the number of anime
titles now available for purchase or rental and by the recognition now being
accorded to anime by the entertainment industry. (For example, recently the
Japanese anime film "Spirited Away" won the Oscar(TM) for Best Animated Feature
Film.) Currently, we have invested in licensing rights to 143 anime titles,
including erotic feature films, action/adventure films, horror films and
children's films.
Anime comes to us as an original completed master and artwork with
Japanese dialogue tracks. We have the script translated into English, we hire
voice-over actors to dub the dialogue in English or we subtitle the work, and we
create a finished master for DVD format. We also create menus for the DVD
products and redesign the artwork for the packaging. Revenues from sales of
anime, including hentai, totaled approximately $1,942,996 in 2003, which
represented approximately 25.7% of our total sales.
LATE NIGHT FILMS
We license over 260 late night films, which are distributed through the
Internet as well as through retailers and wholesale outlets. We receive the
original completed master and artwork of a film. We send the master to a
replicator to produce a tape that is then used to manufacture the work in DVD
and VHS formats. Fans of anime enjoy our collection of "hentai", a combination
of late night programming with animated characters. Revenues from late night
programming (not including hentai) totaled approximately $383,180 in 2003, which
represented approximately 10.2% of our total sales.
21
OUR SUPPLIERS AND CUSTOMERS
We do not have long-term or exclusive agreements with our suppliers or
our customers. Business generation is based primarily on customer satisfaction
with reliability, quality and price, which has allowed us to establish long-term
relationships with many of our customers.
We obtain exclusive rights to our Japanese anime products primarily
from studios that produce the works and license them outside of Japan. During
2003, two suppliers accounted for 42% of our anime licensing activity. We
license our late night entertainment and our karaoke products from the producers
or other copyright holders of those works. We replicate our films and music on
DVD through four suppliers, U-Tech Media, Media Factory, L & M and Fortune Disc.
If all of our replicating suppliers were to become unable to provide the volume
of replication services necessary for our business, we believe that we could
find other suppliers who would be able to provide these services to us at
competitive prices.
We distribute our products throughout the world via retail outlets,
wholesale distributors and the Internet. We do not have distribution agreements
with the retail outlets or the wholesale distributors. We sell our products
directly to approximately 267 retail outlets that, in turn, sell our products to
consumers. Approximately 39.3% of the retail outlets in which we sell our
products are located in California, approximately 4.8% are located in Texas and
approximately 4.5% are located in New York and Illinois. The remaining retail
outlets are located throughout the United States and are not concentrated in any
particular area. Approximately 59.31% of our retail sales are made in
California, New Jersey and Iowa. Retailers account for approximately 35% of our
sales. We also sell our products to approximately 49 distributors. In turn,
these distributors sell our products to other retailers or to consumers through
their websites. This method of distribution accounts for approximately 60.6% of
our sales. Approximately 2% of our sales are made over the Internet, through our
websites. We sell our adult products through our websites, WWW.KARAOKEDVD.NET
and WWW.NUTECHDVD.COM, and we sell our children's films through
WWW.DIGITALVERSATILEDISC.COM. Approximately 4% of our sales revenues are derived
from retail sales made outside the United States. Except as described above,
sales of our products, including those distributed outside the United States,
are not concentrated in any particular geographic area.
Sales made to a single distributor of karaoke software represented
approximately 14% of all revenues earned from sales for the fiscal year ended
December 31, 2003. If we were to lose this distributor, we believe that we would
be able to find other distributors to sell our karaoke products, or that we
would be successful in marketing these products directly.
THE EFFECT OF GOVERNMENT REGULATION ON OUR BUSINESS
While production of our products does not require government approval,
the sale of our late night programming is subject to regulation by the federal
government, as well as by various state and municipal governments. Several
states and communities in which our products are distributed have enacted laws
regulating the distribution of late night programming with some offenses
designated as misdemeanors and others as felonies, depending on numerous
factors. The consequences for violating the state statutes are varied. There is
also a federal prohibition with respect to the dissemination of late night
programming, and the potential penalties for individuals (including corporate
directors and officers) violating these federal laws include fines, community
service, probation, forfeiture of assets and incarceration. We attempt to comply
with all applicable statutes and regulations relating to the sale of late night
programming.
22
We are subject to the same federal, state, and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online sales. However, due to the increasing
popularity and use of the Internet and online sales, it is possible that laws
and regulations will be adopted in the future governing the Internet or online
sales. These laws and regulations could cover issues such as online contracts,
user privacy, freedom of expression, pricing, fraud, content and quality of
products and services, taxation, advertising, intellectual property rights, and
information security. Applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity, and personal privacy is still evolving.
Due to the global nature of the Internet, it is possible that the
governments of foreign countries might attempt to regulate our activity or
prosecute us for violations of their laws.
LICENSES AND OTHER INTELLECTUAL PROPERTY
We do not have patents, franchises or concessions and we have not
entered into labor contracts. However, many of our film and music titles are
licensed from third parties. License periods are generally no shorter than five
years and no more than 10 years. Most of the license agreements require us to
pay an advance royalty, which we recoup through sales. Some of the license
agreements require us to pay royalties during the term of the license. The
computation of royalties varies, depending on our determination of the
importance of the title to our product offerings. Royalties are primarily
computed as a percentage of gross sales and may include guaranteed payments of
royalties. We also purchase the rights to certain of our film and music titles
for a one-time fee, rather than for the payment of on-going royalties.
While we have not registered our trade names or our logo with the
United States Patent and Trademark Office, we believe that the name recognition
and image that we have developed in each of our markets significantly enhance
customer response to our sales promotions. Accordingly, our trademarks are
important to our business and we intend to aggressively defend them.
COMPETITION
All of our products compete with other products and services that
utilize free time or disposable income. The entertainment industry is, in
general, highly competitive and many of our competitors, such as major motion
picture studios and recording labels, have much larger selections of products,
the ability to spend significant sums on advertising and promotion and much
greater distribution capacities than we have. We do not represent a significant
presence in our markets. We cannot guarantee you that we can compete
successfully.
23
EMPLOYEES
As of December 31, 2003 we had 13 full-time employees and six part-time
employees. Of these employees, two were in administration, one was in sales, one
was in accounting, one was in artistic production, one was in management
information systems and the remainder were in administration and general
operations.
DESCRIPTION OF PROPERTY
Our offices, operations and warehouse facilities are located at 7900
Gloria Avenue, Van Nuys, California 91406. We lease this facility at market
rates. Our facility is approximately 9,500 square feet in size. Our lease term
began on May 1, 2001 and will continue until July 31, 2006. We have one option
to renew the lease, at the end of the least term, for an additional period of
five years. The facility is adequate for our current operations, and management
believes that it will continue to be adequate through the initial lease term.
24
SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders
who may sell their shares using this prospectus. No selling shareholder has, or
within the past three years has had, any position, office or other material
relationship with us or any of our predecessors or affiliates, except for Lee
Kasper, who is our President, Chief Executive Officer and a director, Joseph
Giarmo, who is our Vice-President and a director, Jay S. Hergott,, selling as
the Jay S. Hergott Revocable Trust, who is a director, and Kevin Friedmann,
Nimish Patel, Erick Richardson and Adam Grant, selling as the Grant Family Trust
dated November 25, 1994, who are attorneys with the law firm of Richardson &
Patel LLP, which serves as our legal counsel. Richardson & Patel LLP is also
registering shares of common stock for sale in this offering.
The following table also sets forth certain information as of the date
of this prospectus, to the best of our knowledge, regarding the ownership of our
common stock by the selling shareholders. Because the selling shareholders can
offer all, some or none of their shares of our common stock, we have no way of
determining the number they will hold after this offering. Therefore, we have
prepared the table below on the assumption that they will sell all shares
covered by this prospectus.
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
SHARES HELD BEFORE
SELLING THE SHARES HELD AFTER PERCENTAGE OWNED
SHAREHOLDER OFFERING SHARES BEING OFFERED THE OFFERING AFTER THE OFFERING
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Lee Kasper(1) 8,703,178 495,500 8,207,678 37%
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Joseph Giarmo(2) 565,000 195,250 369,750 1.6%
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Lebron H. Barkstelle 750,000 750,000(3) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Broumand Family Trust dated
1/16/86 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Mona Buchanan 37,500 37,500(5) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Michael J. Cavalier 937,500 937,500(6) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Michael Cavalier, Jr. 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Walter W. Cruttenden, III 600,000 600,000(7) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Seth Farbman 131,250 131,250(8) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
MF Ventures, LLC 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Kevin Friedmann 75,000 75,000(11) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Stephanie Glaser 93,750 93,750(9) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Eyal Goldstein 93,750 93,750(9) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Grant Family Trust dated
11/25/94 56,250 56,250(12) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
John Guerrero 93,750 93,750(9) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Kirk L. Haney 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Jud Hogan 112,500 112,500(13) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Benjamin Padnos 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Jeffrey Padnos 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Nimish P. Patel 196,250 187,500(4) 8,750 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Palisades Master Fund, L.P. 750,000 750,000(3) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Erick Richardson 406,000 375,000(10) 31,000 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Shai Stern 131,250 131,250(8) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
1141105 Ontario, Inc. 750,000 750,000(3) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
25
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
James C. Ackerman Simple IRA 75,000 75,000(11) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Morton S. Ackerman 150,000 150,000(14) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
The Amara Group, Inc. 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
AS Capital Partners, LLC 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Chana Bruan 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Carl S. Bronstein 75,000 75,000(11) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
John Chan 37,500 37,500(5) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Chris Cruttenden 37,500 37,500(5) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Rian P. Cruttenden 75,000 75,000(11) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
The Ezra Charitable Trust 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
F Berdon Co., LP 300,000 300,000(15) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Gus Ghusayni 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
The Gross Foundation, Inc. 750,000 750,000(3) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
HCFP Brenner Securities LLC 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Jay S. Hergott Revocable Trust 247,500(25) 187,500(4) 60,000 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Jason Lyons 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Marketwise Trading, Inc. 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
MEL Enterprises, Ltd. 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Shervin Mirhashemi 37,500 37,500(5) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Sidney Niekerk 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Ocean Drive Holdings, LLC 637,500 637,500(16) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Omega Capital Small Cap Fund,
Ltd. 1,012,500 1,012,500(17) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Omicron Master Trust 1,875,000 1,875,000(18) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Platinum Partners Value
Arbitrage Fund, LP 2,212,500 2,212,500(19) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Mark S. Pollack Btt Capital
Profit Sharing Keough 75,000 75,000(11) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
William J. Ritger(26) 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Alan J. Rubin 600,000 600,000(7) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Abraham Schwartz 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Teltek Trading, L.P. 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
TZ Microcomputing, Inc. 262,500 262,500(20) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Vintage Filings, LLC 187,500 187,500(4) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Vitel Ventures Corporation 375,000 375,000(10) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
MarketByte, LLC 110,000 110,000 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
CEOcast, Inc. 110,000 110,000 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Trilogy Capital Partners, Inc. 150,000 150,000 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
The Research Works, Inc. 250,000 250,000 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Brighton Capital, Ltd. 170,000 170,000(21) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Redwood Consultants, LLC 555,000 555,000(22) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Richardson & Patel LLP 1,041,419(23) 691,419(24) 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
Queenstone Financial
Corporation 600,000 600,000 0 *
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
TOTAL 31,199,347 22,152,169
- ------------------------------- -------------------- ---------------------- ---------------------- -------------------
*Less than 1%.
(1) Lee Kasper is our President, Chief Executive Officer and a director. We have
included in this calculation 1,200,000 shares of our common stock that may be
purchased by Mr. Kasper upon the exercise of vested options and 150,000 shares
of our common stock held by Mr. Kasper as custodian or trustee for his children.
26
(2) Joseph Giarmo is our Vice-President and a director. We have included in this
calculation 175,000 shares of our common stock that may be purchased by Mr.
Giarmo upon the exercise of vested options.
(3) Includes 250,000 shares of common stock and a warrant to purchase an
additional 500,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(4) Includes 62,500 shares of common stock and a warrant to purchase an
additional 125,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(5) Includes 12,500 shares of common stock and a warrant to purchase an
additional 25,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(6) Includes 312,500 shares of common stock and a warrant to purchase an
additional 625,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(7) Includes 200,000 shares of common stock and a warrant to purchase an
additional 400,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(8) Includes 68,750 shares of common stock and a warrant to purchase an
additional 62,500 shares of common stock. The exercise price of the warrant is
$0.75 per share. Of the 68,750 shares being offered, 31,250 shares and the
shares underlying the warrant were issued in a private sale of our securities
that we completed in February 2004.
(9) Includes 31,250 shares of common stock and a warrant to purchase an
additional 62,500 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(10) Includes 125,000 shares of common stock and a warrant to purchase an
additional 250,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(11) Includes 25,000 shares of common stock and a warrant to purchase an
additional 50,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(12) Includes 18,750 shares of common stock and a warrant to purchase an
additional 37,500 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(13) Includes 37,500 shares of common stock and a warrant to purchase an
additional 75,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(14) Includes 50,000 shares of common stock and a warrant to purchase an
additional 100,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(15) Includes 100,000 shares of common stock and a warrant to purchase an
additional 200,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(16) Includes 212,500 shares of common stock and a warrant to purchase an
additional 425,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(17) Includes 337,500 shares of common stock and a warrant to purchase an
additional 675,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(18) Includes 625,000 shares of common stock and a warrant to purchase an
additional 1,250,000 shares of common stock. The exercise price of the warrant
is $0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(19) Includes 737,500 shares of common stock and a warrant to purchase an
additional 1,475,000 shares of common stock. The exercise price of the warrant
is $0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
27
(20) Includes 87,500 shares of common stock and a warrant to purchase an
additional 175,000 shares of common stock. The exercise price of the warrant is
$0.75 per share. These securities were issued in a private sale of our
securities that we completed in February 2004.
(21) This warrant was issued to Brighton Capital, Ltd. in conjunction with the
private sale of our securities that we completed in February 2004. The warrant
exercise price is $0.75.
(22) The common stock being registered consists of 75,000 issued and outstanding
shares of common stock, 300,000 shares of common stock that may be issued upon
the exercise of a warrant and 180,000 shares of common stock that may be issued
to the shareholder during the months of May, June, July and August 2004 in
exchange for services rendered in connection with stock promotion activities.
The warrant exercise price is $1.15 as to 100,000 shares, $1.50 as to 100,000
shares and $1.80 as to 100,000 shares.
(23) Does not include common stock owned by Erick Richardson, Nimish Patel,
Kevin Friedmann, Addison Adams or Ronald Guttman, who are the principles of the
firm. Erick Richardson, Nimish Patel and Kevin Friedmann participated in the
private sale of our securities that we completed in February 2004.
(24) Includes 230,473 shares of common stock and a warrant to purchase an
additional 460,946 shares of common stock. The exercise price of the warrant is
$0.75 per share.
(25) The Jay S. Hergott Trust is a trust established for the benefit of our
director, Jay S. Hergott. The number of shares beneficially owned by Jay S.
Hergott and the Jay S. Hergott Trust includes 35,000 shares of common stock
transferred to Mr. Hergott in connection with the services he rendered to us as
a director, the right to purchase 25,000 shares of our common stock upon the
exercise of a vested option, also granted as compensation to him, and 62,500
shares and the right to purchase 125,000 shares of our common stock pursuant to
the terms of a warrant that was granted as part of a unit offering undertaken by
us in February 2004.
(26) Mr. Ritger is a principle of The Research Works, Inc., a private
corporation, that also owns our common stock.
We will pay all expenses to register the shares. The selling
shareholders will pay any underwriting and brokerage discounts, fees and
commissions and other expenses to the extent applicable to them.
PLAN OF DISTRIBUTION
We are registering a total of 22,152,169 shares of our common stock
that are being offered by the selling shareholders. As used in this prospectus,
"selling shareholders" includes the pledgees, donees, transferees or others who
may later hold the selling shareholders' interests in the common stock. We will
pay the costs and fees of registering the common shares, but the selling
shareholders will pay any brokerage commissions, discounts or other expenses
relating to the sale of the common shares. We will not receive the proceeds from
the sale of the shares by the selling shareholders. However, some of the shares
we are registering will be issued upon the exercise of warrants held by the
selling shareholders. Although the selling shareholders are not required to
exercise the warrants, if they do so we will receive the proceeds from the
exercise.
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
28
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o broker-dealers may agree with the selling shareholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling shareholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling shareholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling shareholders may from time to time pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, amending the list of selling shareholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
The selling shareholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling shareholders have
informed us that none of them have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
We are required to pay all fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
29
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock
offered by the selling shareholders. If the selling shareholders were to
exercise their warrants, we would receive the proceeds from the exercise, which
would total $10,293,209.50. With the exception of Redwood Consultants, LLC, none
of the selling shareholders is required to exercise their warrants. We may
require Redwood Consultants, LLC to exercise its warrant if the price of our
common stock closes at a price that is at least $0.50 above the warrant exercise
price. The warrant exercise price if $1.15 as to 100,000 shares, $1.50 as to
100,000 shares and $1.80 as to 100,000 shares.
LEGAL PROCEEDINGS
Occasionally we are named as a party in claims and legal proceedings
arising out of the normal course of our business. These claims and legal
proceedings may relate to contractual rights and obligations, employment
matters, or to other matters relating to our business and operations. In
addition to legal proceedings arising out of the normal course of our business,
we have been named as a party in, or we have instituted, the following actions.
Urbach Kahn & Werlin Advisors, Inc. v. NuTech Digital, Inc., et al.: On
September 30, 2003, plaintiff Urbach Kahn & Werlin Advisors, Inc. filed an
action against us in Los Angeles Superior Court, Case Number BC303285 alleging
causes of action for breach of contract. In March 2002, we agreed to pay an
outstanding invoice owed to the plaintiff by issuing shares of our common stock.
The plaintiff alleges that we still owed a balance on the invoice, due to a
decline in the stock price. We filed an answer to the complaint on October 23,
2003, generally denying all the allegations in the complaint. The plaintiff is
seeking $80,000 plus fees and costs, including attorney's fees.
NuTech Digital Inc. v. Roan Meyers Associates LP a/k/a Meyers
Associates. In July 2003 we initiated this arbitration proceeding against
respondent Roan Meyers Associates LP before the National Association of
Securities Dealers in connection with $35,000 we paid to the respondent for
services that we allege were never provided. We seek to recover the entire
amount.
NuTech Digital Inc. v. National Capital Securities, Inc. d/b/a National
Capital Investment Banking and Barry Migliorini. On March 12, 2004 we filed an
action in the Northwest District of the Los Angeles County Superior Court
against National Capital Securities, Inc. and Barry Migliorini for breach of
written contract, fraud by intentional misrepresentation, and fraud by negligent
misrepresentation. We have alleged that the defendants fraudulently induced us
to enter into a written agreement for services that the defendants never
intended to provide or should have known that they could not provide. We are
demanding an order requiring the defendants to return 75,000 shares of our
common stock or damages for the monetary equivalent thereof, punitive damages,
attorneys' fees and pre-judgment interest.
30
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Moffitt & Company, P.C., the independent accountants whom we had
engaged as the principal accountants to audit our consolidated financial
statements for the periods ended December 31, 2001 and December 31, 2000,
resigned effective October 11, 2002. On November 11, 2002, we engaged Farber &
Hass LLP as our new principal independent accountants to audit our consolidated
financial statements for the year ending December 31, 2002.
The report of Moffitt & Company, P.C. on our financial statements as of
and for the years ended December 31, 2000 and December 31, 2001 did not contain
an adverse opinion, or a disclaimer of opinion. During the one-year period ended
December 31, 2001, and the interim period from January 1, 2002 through the date
of resignation by Moffitt & Company, P.C., we did not have any disagreements
with Moffitt & Company, P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moffitt & Company, P.C.,
would have caused it to make a reference to the subject matter of the
disagreements in connection with its reports.
Prior to engaging Farber & Hass LLP, we did not consult Farber & Hass
LLP regarding the application of accounting principles to a specified
transaction, completed or proposed, or the type of audit opinion that might be
rendered on our financial statements.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information regarding our
directors and executive officers.
- ---------------------- ----- ---------------------------------------------------
Name Age Position
- ---------------------- ----- ---------------------------------------------------
- ---------------------- ----- ---------------------------------------------------
Lee Kasper 58 Chief Executive Officer, President, Chief Financial
Officer, Director
- ---------------------- ----- ---------------------------------------------------
Joseph Giarmo 35 Vice President, Director
- ---------------------- ----- ---------------------------------------------------
Yegia Eli Aramyan 51 Accountant, Director
- ---------------------- ----- ---------------------------------------------------
Jay S. Hergott 57 Director
- ---------------------- ----- ---------------------------------------------------
There are no family relationships among any of the directors or
officers of the Company.
None of our directors or executive officers has, during the past five
years,
31
o had any bankruptcy petition filed by or against any business
of which such person was a general partner or executive
officer, either at the time of the bankruptcy or within two
years prior to that time,
o been convicted in a criminal proceeding and none of our
directors or executive officers is subject to a pending
criminal proceeding,
o been subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in
any type of business, securities, futures, commodities or
banking activities, or
o been found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the
Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.
BUSINESS EXPERIENCE
Lee Kasper. President, Chief Executive Officer, Chief Financial
Officer, founder and director. Mr. Kasper began his career in the entertainment
industry in 1982 by co-founding Image Entertainment, a publicly traded company.
Image Entertainment distributes video programming on laserdisc and DVD. During
his years with Image Entertainment, Mr. Kasper was a director as well as the
Executive Vice President. He was responsible for business development as well as
for licensing, manufacturing, and product fulfillment. His major accomplishments
while he was at Image Entertainment included building a team of international
manufacturers, acting as primary negotiator of licensing agreements with over
one hundred studios, developing sales relationships with major retailers and
raising over $6,000,000 from Mitsubishi and Mitsui. When Mr. Kasper left Image
Entertainment in 1993, its annual sales had grown to $60,000,000. Mr. Kasper
left Image Entertainment to found NuTech Entertainment, Inc., a producer of
karaoke music software, which is now included in the operations of NuTech. In
1997 Mr. Kasper formed NuTech for the purpose of licensing, manufacturing and
distributing DVD products worldwide. Mr. Kasper has been a director since our
inception.
Joseph Giarmo. Vice-President and director. Mr. Giarmo joined us as
Vice President on December 1, 1998. Since that time, he has developed numerous
DVD product lines, award nominated productions and e-commerce Web sites. Mr.
Giarmo is in charge of production of our products, and has been personally
responsible for the production of our anime products. We received the AVN 2002
Award for best DVD menus primarily as a result of Mr. Giarmo's efforts. Prior to
joining NuTech, Mr. Giarmo was employed by Metro Global Media, Inc. ("Metro").
Mr. Giarmo joined Metro in September 1995 as a CD-Rom Specialist, creating
interactive games and developing products based on Mac/PC formats. In 1996 Mr.
Giarmo was promoted to Managing Director after launching and marketing various
award winning product lines. In 1997 Mr. Giarmo was promoted to Vice President,
Product Development. During his last year with Metro, Mr. Giarmo created the
first true perspective multi-angle DVD. From 1988 until he joined Metro, Mr.
Giarmo was employed by the company he founded, Compu-Doc, a computer service
company that provided services primarily to military and educational facilities.
Working closely with state educational facilities, Mr. Giarmo became a licensed
authorized service center for IBM, HP, Digital and Zenith data systems, among
others. After becoming one of the largest service centers for Zenith data
systems, and earning Factory Service Status, Compu-Doc eventually became the
sole provider of all service for the tri-state military installations. Compu-Doc
opened a retail division in 1992, the focus of which was custom-built, high
performance computer systems. Mr. Giarmo has been a director of NuTech since May
2001.
32
Yegia Eli Aramyan. Accountant and director. Mr. Aramyan joined NuTech
in 2001 as an accountant, responsible for maintaining our general ledger,
preparing financial statements, undertaking internal auditing and working with
our independent auditors on our financial statement preparation. Prior to
joining NuTech, Mr. Aramyan worked for 20 years as Group Controller and
Accounting Manager for various companies in an investment group, including Morfi
International and Sobleski USA. His responsibilities included budgeting,
control, tax, audit, consolidations and general ledger and supporting work. On a
consulting basis, Mr. Aramyan has worked for a number of high technology firms,
performing accounting and implementing information systems. Mr. Aramyan earned
his Bachelor of Arts and Masters of Arts degrees in Economics and Finance from
the University of Armenia. Mr. Aramyan became a director in June 2002.
Jay S. Hergott, director. Mr. Hergott was appointed to the Company's
Board of Directors in March 2003. Mr. Hergott is a practicing attorney and has
been a member of the Illinois Bar Association since 1973 and a member of the
California Bar Association since 1976. In 1985 he founded, and is the President
of, Castlewood Development Company, a real estate development and residential
construction firm which is located in Northbrook, Illinois. From 1977 to 1981
Mr. Hergott was a member of the Midwest Stock Exchange and since 1976 he has
been a member of the Chicago Board Options Exchange. Mr. Hergott received his
B.A. degree in Government from Southern Illinois University in 1969 and his
Juris Doctor from the Illinois Institute of Technology in 1972.
No individual on our Board of Directors possesses all of the attributes
of an audit committee financial expert and no one on our Board of Directors is
deemed to be an audit committee financial expert. In forming our Board of
Directors, we sought out individuals who would be able to guide our operations
based on their business experience, both past and present, or their education.
Our business model is not complex and our accounting issues are straightforward.
Responsibility for our operations is centralized within management, which is
comprised of four people. We rely on the assistance of others, such as our
accountant, to help us with the preparation of our financial information. We
recognize that having a person who possesses all of the attributes of an audit
committee financial expert would be a valuable addition to our Board of
Directors, however, we are not, at this time, able to compensate such a person
therefore, we may find it difficult to attract such a candidate.
Our directors are elected at each annual meeting of the shareholders,
and their term of office runs until the next annual meeting of the shareholders
and until their successors have been elected.
33
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 19, 2004, information
regarding the beneficial ownership of our common stock with respect to each of
our executive officers, each of our directors, each person known by us to own
beneficially more than 5% of the common stock; and all of our directors and
executive officers as a group. The term "executive officer" is defined as the
Chief Executive Officer/President, Chief Financial Officer and the
Vice-President. Each individual or entity named has sole investment and voting
power with respect to shares of common stock indicated as beneficially owned by
them, subject to community property laws, where applicable, except where
otherwise noted.
- ----------------------- ----------------------------------------- --------------- --------------
Number of
Shares of
Common Stock Percentage
Title of Class of Beneficially of Common
Security Name and Address(1) Owned(2) Stock
- ----------------------- ----------------------------------------- --------------- --------------
Common Stock Lee Kasper (3)(4)(5) 8,703,178(6) 41.6%
Common Stock Joseph Giarmo (3)(4) 565,000(7) 2.8%
Common Stock Yegia Eli Aramyan(4) 200,000(8) 1.0%
Common Stock Jay S. Hergott(4) 247,500(9) 1.2%
All Officers, Directors and 5%
Shareholders 9,715,678 46.6%
- ----------------------- ----------------------------------------- --------------- --------------
* Less than 1%.
(1) Unless otherwise indicated, the address of the persons named in this
column is c/o NuTech Digital, Inc., 7900 Gloria Avenue, Van Nuys,
California 91406.
(2) Included in this calculation are shares deemed beneficially owned by
virtue of the individual's right to acquire them within 60 days of the
date of this report that would be required to be reported pursuant to
Rule 13d-3 of the Securities Exchange Act of 1934.
(3) Executive Officer.
(4) Director.
(5) 5% Shareholder.
(6) Includes shares of our common stock owned by Michele Kasper as her
community property. Also includes the right to purchase 1,200,000
shares of our common stock upon the exercise of vested options and
150,000 shares of our common stock held by Mr. Kasper as custodian or
trustee for his children.
(7) Includes the right to purchase 175,000 shares of our common stock upon
the exercise of vested options.
(8) Includes the right to purchase 200,000 shares of our common stock upon
the exercise of vested options.
(9) Includes the right to purchase 25,000 shares of our common stock upon
the exercise of a vested option and the right to purchase 125,000
shares of our common stock pursuant to the terms of a warrant that was
granted as part of a unit offering undertaken by us in February 2004.
Stock owned by the Jay S. Hergott Revocable Trust is included in the
number of shares of common stock reported as being beneficially owned
by Mr. Hergott.
34
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
The securities being offered by the selling shareholders are shares of
our common stock. We are authorized by our Articles of Incorporation to issue
one class of capital stock, namely 100,000,000 shares of common stock, without
par value. Our common stock is traded on the Over-the-Counter Bulletin Board
under the symbol "NDTL".
We presently have issued and outstanding 19,725,748 shares of common
stock. Holders of the common stock are entitled to one vote per share on all
matters subject to shareholder vote. If the Board of Directors were to declare a
dividend out of funds legally available therefore, all of the outstanding shares
of common stock would be entitled to receive such dividend ratably. Except for
dividends declared to Mr. Lee Kasper, our Chief Executive Officer, during the
period we were an S corporation for income tax purposes, we have never declared
dividends and we do not intend to declare dividends in the foreseeable future.
If our business was liquidated or dissolved, holders of shares of common stock
would be entitled to share ratably in assets remaining after satisfaction of our
liabilities.
Holders of common stock may elect directors using cumulative voting.
WARRANTS ISSUED THROUGH OUR PRIVATE OFFERING
On February 2, 2004 and on February 27, 2004 we completed a private
offering of units, valued at $0.40 each, consisting of one share of common stock
and a warrant to purchase two shares of common stock at an exercise price of
$0.75 per share. In the first offering we sold a total of 1,875,000 shares of
common stock and warrants to purchase an additional 3,750,000 shares of common
stock and in the second offering we sold 4,375,000 shares of common stock and
warrants to purchase an additional 8,750,000 shares of common stock. The
warrants are immediately exercisable. The warrants will expire ten years from
the date of grant. The exercise price and the number of shares issuable upon
exercise of the warrants will be adjusted upon the occurrence of certain events,
including the issuance of common stock as a dividend on shares of common stock,
subdivisions, reclassifications or combinations of the common stock. The
warrants do not contain provisions protecting against dilution resulting from
the sale of additional shares of common stock for less than the exercise price
of the warrants or the current market price of our securities and do not entitle
the warrant holders to any voting or other rights as a shareholder until the
warrants are exercised and the common stock is issued.
At all times that the warrants are outstanding, we will authorize and
reserve at least that number of shares of common stock equal to the number of
shares of common stock issuable upon exercise of all outstanding warrants.
For the term of the warrants, the holders are given the opportunity to
profit from an increase in the per share price of our common stock, with a
resulting dilution in the interests of all other shareholders.
WARRANT ISSUED TO RICHARDSON & PATEL LLP
On March 17, 2004 we agreed to issue to our legal counsel, Richardson &
Patel LLP a warrant to purchase 460,946 shares of our common stock. The terms of
this warrant are identical to the terms of the warrants issued in the private
offerings we completed on February 2, 2004 and February 27, 2004.
35
WARRANTS ISSUED TO REDWOOD CONSULTANTS, LLC
We entered into an agreement for consulting services relating to
capital raising and stock promotion activities in February 2004 with Redwood
Consultants, LLC. Pursuant to this agreement, we have agreed to compensate
Redwood Consultants, LLC with $7,500, 75,000 shares of our common stock, and a
warrant to purchase an additional 300,000 shares of our common stock. The term
of the warrant is two years. The warrant is exercisable as to 100,000 shares at
$1.15 a share, as to 100,000 shares at $1.50 a share and as to 100,000 shares at
$1.80 a share. So long as the shares underlying the warrant are registered, we
may require Redwood Consultants, LLC to exercise the warrant if our common stock
trades, for a period of 5 consecutive days, at a price that is $0.50 higher than
the warrant exercise price. We also agreed to pay Redwood Consultants, LLC for
its monthly services at the rate of 45,000 shares of our common stock per month.
Redwood Consultants, LLC will perform services for four months. We agreed that
we would register the stock we are issuing pursuant to this agreement, along
with the stock underlying the warrants, on any registration statement we filed
pursuant to the Securities Act of 1933 (with the exception of an S-4
registration statement or an S-8 registration statement) during the two year
period following the date of the agreement.
CERTAIN TRANSACTIONS
In order to fund working capital requirements, we have from time to
time borrowed money on an unsecured basis from persons who are executive
officers, directors and/or beneficial holders of 5% or more of our common stock,
or their affiliates. Our unpaid principal indebtedness to these persons is set
forth below.
In October 2000, we received an unsecured loan in the amount of
$100,000 from Mrs. Elynor Kasper, Mr. Lee Kasper's mother. Simple interest
accrued on this loan at the rate of 10% per year. The unpaid principal balance
of this loan was $60,000. This loan was paid in full in February 2004.
In March 2001, we entered into an arrangement with our Vice-President,
Mr. Joseph Giarmo, whereby Mr. Giarmo advanced funds in the amount of $60,000
for the acquisition of licensing rights to certain films. Mr. Giarmo receives
$0.25 for each unit of the films that are sold. To date, we have paid $65,000 of
this obligation.
In May 2001, we obtained an unsecured loan from Brandon Kasper in the
amount of $7,418, which accrued interest at the rate of 7% and was due to be
paid on demand. Brandon Kasper is Mr. Lee Kasper's son. We paid this loan in
full in April 2003.
In May 2001, we obtained an unsecured loan from Ryan Kasper in the
amount of $7,467, which accrued interest at the rate of 7% and was due to be
paid on demand. Ryan Kasper is Mr. Lee Kasper's son. We paid this loan in full
in April 2003.
In May 2001, we obtained an unsecured loan from Jordan Kasper in the
amount of $3,555, which accrued interest at the rate of 7% and was due to be
paid on demand. Jordan Kasper is Mr. Lee Kasper's son. We paid this loan in full
in April 2003.
36
On September 15, 2003 we received an unsecured loan from Mr. Lee Kasper
in the amount of $300,000. The term of the loan was one year. Simple interest
accrued on the unpaid principal at the rate of 10% per year. The loan was paid
in full in February 2004.
On September 18, 2003 we received an unsecured loan from the Brandon G.
Kasper Trust, a trust created for the benefit of Mr. Kasper's child. The amount
of the loan was $33,334. The term of the loan was one year. Simple interest
accrued on the unpaid principal at the rate of 10% per year. The loan was paid
in full in February 2004.
On September 18, 2003 we received an unsecured loan from the Ryan S.
Kasper Trust, a trust created for the benefit of Mr. Kasper's child. The amount
of the loan was $33,333. The term of the loan was one year. Simple interest
accrued on the unpaid principal at the rate of 10% per year. The loan was paid
in full in February 2004.
On September 18, 2003 we received an unsecured loan from the Jordan M.
Kasper Trust, a trust created for the benefit of Mr. Kasper's child. The amount
of the loan was $33,333. The term of the loan was one year. Simple interest
accrued on the unpaid principal at the rate of 10% per year. The loan was paid
in full in February 2004.
On September 18, 2003 we receive an unsecured loan from Mr. Lee Kasper
in the amount of $60,000. The term of the loan was one year. Simple interest
accrued on the unpaid principal at the rate of 10% per year. The loan was paid
in full in February 2004.
Aside from the foregoing loans, we have also entered into the following
transactions with our President and Chief Executive Officer, Mr. Lee Kasper.
In July 2000, Mr. Kasper provided both his personal residence and his
personal guaranty as security for a loan in the amount of $900,000 that we
borrowed through the Small Business Administration. We make monthly payments of
principal and interest in the amount of $6,414.
In March 2002, Mr. Kasper also agreed to personally guarantee our bank
line of credit in the amount of $650,000. We breached certain covenants of the
loan agreement and our lender, U.S. Bank, N.A. wanted us to repay the loan. On
November 7, 2002, U.S. Bank, N.A. agreed to make a loan in the amount of
$640,000 to Mr. Lee Kasper, who used the proceeds to pay-off our line of credit.
The loan to Mr. Kasper requires 30 monthly payments of $21,000 plus interest at
3% over prime. We pledged all of our assets as collateral for repayment of the
loan and we have guaranteed repayment of the loan.
In February 2003, Mr. Kasper received a personal loan of $500,000. The
interest rate of the loan is 3% and the term is 36 months. Mr. Kasper loaned
these funds to use on terms identical to the terms he received.
37
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our common stock is quoted on the National Association of Securities
Dealers, Inc. Electronic Bulletin Board (the "OTC Bulletin Board"), and is
traded under the symbol "NTDL". Our common stock began trading on January 17,
2003, but the market for it has been extremely limited and sporadic.
The table below sets forth the range of high and low bid quotes of our
common stock for each quarter for the last fiscal year, the only full fiscal
year during which our common stock traded, as reported by Yahoo Finance. The bid
prices represent inter-dealer quotations, without adjustments for retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.
PERIOD HIGH LOW
--------------- --------- ----------
Fiscal Year Ended December 31, 2003 First Quarter $1.50 $0.20
Second Quarter $0.49 $0.11
Third Quarter $0.80 $0.12
Fourth Quarter $0.80 $0.45
As of March 19, 2004, there were approximately 104 holders of record of
our common stock. This number does not include an indeterminate number of
shareholders whose shares are held by brokers in street name.
Mr. Lee Kasper, our President and Chief Executive Office, and Mr. Joe
Giarmo, our Vice President, collectively own a total of 7,893,178 shares of our
common stock that may be traded under Rule 144. Furthermore, as of the date of
this prospectus, we have granted options to purchase a total of 2,635,000 shares
of our common stock to various employees, officers, directors, agents and
consultants under our NuTech Digital, Inc. 2001 Equity Incentive Plan. The
common stock underlying these options is registered, therefore, if the options
are exercised, the stock can be immediately sold. As part of this offering, we
are registering a total of 13,420,946 shares of common stock that may be issued
upon the exercise of warrants. From time-to-time we may also grant other options
or warrants, or promise registration rights to certain shareholders. We have no
control over the number of shares of our common stock that our shareholders
sell. The price of our common stock may be adversely affected if large amounts
are sold in a short period of time.
Since becoming a reporting company, we have never declared or paid any
cash dividends on our common stock and do not expect to declare or pay any cash
dividends in the foreseeable future. Prior to becoming a reporting company, we
were an S corporation for tax reporting purposes and we paid dividends to our
sole shareholder, Mr. Lee Kasper.
38
On May 15, 2001 our Board of Directors adopted and our shareholders
approved the NuTech Digital, Inc. 2001 Equity Incentive Plan (the "Equity
Incentive Plan"). The Equity Incentive Plan has a term of 10 years and is
administered by our Board of Directors. Pursuant to the Equity Incentive Plan,
the Board of Directors may grant to eligible persons, which include employees,
officers, directors, consultants and agents, awards of options (which may be
qualified or non-qualified) or common stock. 3,500,000 shares of our common
stock were originally set aside for grants made under the Equity Incentive Plan.
Pursuant to the terms of the Equity Incentive Plan, the number of shares
available for issuance may be increased on the first day of each fiscal year by
a number that will increase the total number of shares reserved to 30% of our
issued and outstanding common stock. As of December 31, 2003, we had issued
options to employees to purchase a total of 1,975,000 shares of our common
stock. The options will expire 10 years from the date of grant, with the
exception of options granted to our Chief Executive Officer and President, Mr.
Lee Kasper, whose options will expire 5 years from the date of grant. The price
for each share of common stock purchased pursuant to the options varies. With
the exception of the exercise price of the options granted to Mr. Kasper, which
equals 110% of the fair market value of our common stock on the date of grant,
the exercise price per share for the options granted is the fair market value of
our common stock on the date of grant. The following table sets forth, as of
December 31, 2003, the number of securities to be issued upon exercise of
outstanding options, the weighted average exercise price of the outstanding
options and the number of securities remaining available for future issuance
under the Equity Incentive Plan.
On July 11, 2003 our Board of Directors adopted the NuTech Digital,
Inc. 2003 Consultant Stock Plan (the "Consultant Plan"). The Consultant Plan has
not been approved by our shareholders. We have reserved 5,000,000 shares of our
common stock to grant as awards under the Consultant Plan. As originally
drafted, only shares of our common stock were permitted to be granted as awards
to eligible persons, however the Board of Directors amended the Consultant Plan
on February 13, 2004 to allow grants of stock options, also. Awards are granted
to individuals who render bona fide services to us, so long as the services do
not relate to capital raising or stock promotion activities. Like the Equity
Incentive Plan, the Consultant Plan is administered by the Board of Directors.
The term of the Consultant Plan is also 10 years. As of December 31, 2003, we
had issued 1,315,000 shares of our common stock to various outside consultants.
The exercise price of the options granted under the Consultant Plan during the
2003 fiscal year varied between fair market value on the date of grant and 85%
of the fair market value on the date of grant. The following table sets forth,
as of December 31, 2003, the number of securities to be issued upon exercise of
outstanding options, the weighted average exercise price of the outstanding
options and the number of securities remaining available for future issuance
under the Consultant Plan.
EQUITY COMPENSATION AND CONSULTANT PLAN INFORMATION
- ------------------------- ----------------------- ----------------------- -----------------------
Number of securities Number of securities
to be issued upon Weighted average remaining available
exercise of exercise price of for future issuance
outstanding options, outstanding options under the equity
warrants and rights warrants and rights compensation plan
(excluding securities
Plan Category reflected in column(a)
(a) (b) (c)
- ------------------------- ----------------------- ----------------------- -----------------------
Shareholder Approved 1,975,000 $0.78 1,525,000(1)(2)
- ------------------------- ----------------------- ----------------------- -----------------------
Not Approved by
Shareholders 0(3) N/A 3,685,000(3)
- ------------------------- ----------------------- ----------------------- -----------------------
(1) Pursuant to the terms of the NuTech Digital, Inc. 2001 Equity Incentive
Plan, awards may be granted for options (both incentive stock options and
non-qualified stock options) and for restricted stock and stock bonuses.
(2) The number of shares of common stock included in the NuTech Digital, Inc.
2001 Equity Incentive Plan may be increased on the first day of January of each
year so that the total number of shares of all common stock available for awards
shall equal 30% of our issued and outstanding shares, which is the maximum
amount allowable under Regulation 260.140.45 of Title 10 of the California Code
of Regulations. As of January 1, 2004, the number of shares of common stock was
increased by 252,747.
(3) As of December 31, 2003, no options had been granted from the NuTech
Digital, Inc. 2003 Consultant Stock Plan, however, grants of 1,315,000 shares
had been made.
39
EXECUTIVE COMPENSATION
REMUNERATION OF DIRECTORS AND OFFICERS
During the 2003 fiscal year, Mr. Lee Kasper, our Chief Executive
Officer and President, and Mr. Joseph Giarmo, our Vice President, were the only
executive officers receiving compensation of at least $100,000 per year. The
following table sets forth information as to the compensation paid or accrued to
Mr. Kasper and Mr. Giarmo, as well as to compensation paid to our director, Mr.
Jay Hergott, for his services as a director, and to Mr. Yegia Eli Aramyan,
another of our directors, for his services as an officer, for the three years
ended December 31, 2003, December 31, 2002 and December 31, 2001:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------
OTHER SECURITIES ALL OTHER
ANNUAL RESTRICTED UNDERLYING LTIP COMPEN
COMPEN STOCK OPTIONS/ PAYOUT -SATION
NAME AND PRINCIPAL SALARY BONUS -SATION AWARDS SARS(1) ($) ($)
POSITION YEAR ($) ($) ($) ($)
- -------------------- ---- ---------- ----- -------- ---------- ---------- ------ ----------
Lee Kasper, 2003 $413,077 --- --- --- 700,000 --- $39,600(4)
Director, CEO, 2002 $410,769(1) --- --- --- 500,000(3) --- $39,600(4)
President, CFO 2001 $542,673(2) --- --- --- --- --- $39,600(4)
Joseph Giarmo, 2003 $128,349 --- --- --- 350,000 --- 12,750(5)
Director 2002 $159,228 --- --- --- 300,000(3) ---
Vice President 2001 $131,553 --- --- --- --- --- 5,000(5)
Secretary
Jay S. Hergott 2003 $10,000 --- --- --- 25,000
Director 2002 $5,000 --- --- --- --- --- ---
2001 0 --- --- --- --- --- ---
Yegia Eli Aramyan 2003 $62,838 --- --- --- 200,000
Director, Accountant 2002 $56,461 $750 --- --- 75,000(3)
2001 $21,635 $1,000 --- ---
(1) Of the amount shown as compensation paid to Mr. Kasper in 2002, the payment
of $41,538 was deferred at Mr. Kasper's election. This amount was paid in the
2003 fiscal year.
(2) Of the amount shown as compensation paid to Mr. Kasper in
2001, $362,673 was paid to him as a dividend and $180,000 was paid as salary.
(3) This option grant was cancelled, without exercise, on December 10, 2003.
(4) These amounts represent expenses paid in connection with Mr. Kasper's
automobile.
(5) This amount constitutes payments made to Mr. Giarmo pursuant to
a joint venture agreement he entered into with the Company whereby he advanced
funds in the amount of $60,000 for the acquisition of licensing rights to
certain anime products. Mr. Giarmo is repaid at the rate of $0.25 for each unit
of the product sold. This agreement will terminate once Mr. Giarmo is paid a
total of $120,000.
40
We do not have a long term incentive plan or arrangement of
compensation with any individual in the group of officers and directors.
EMPLOYMENT AGREEMENTS
Our Board of Directors is currently considering an employment agreement
for Mr. Lee Kasper. As of January 1, 2004, we have paid Mr. Kasper the salary
required under the employment agreement, even though the Board of Directors has
not yet approved the agreement.
EQUITY INCENTIVE PLAN
Our Board of Directors and our shareholders have approved the NuTech
Digital, Inc. 2001 Equity Incentive Plan which permits us to grant, for a ten
year period, both stock purchase rights and stock options. We had originally
reserved 3,500,000 shares of our common stock for issuance to our directors,
employees and consultants under the Plan. In January of each year we are
permitted to increase the number of shares of common stock reserved for awards
to an amount that does not exceed 30% of all of our issued and outstanding
shares. On January 1, 2004, we increased the number of shares of common stock
reserved for awards by 252,747 shares. The Plan is administered by the Board of
Directors. As the administrator of the Plan, the Board of Directors has the
authority and discretion, subject to the provisions of the Plan, to select
persons to whom stock purchase rights or options will be granted, to designate
the number of shares to be covered by each option or stock purchase right, to
specify the type of consideration to be paid, and to establish all other terms
and conditions of each option or stock purchase right. Options granted under the
Plan will not have a term that exceeds ten years from date of grant. As of
December 31, 2003, we granted options to purchase a total of 1,975,000 shares of
our common stock under the Plan.
The following tables set forth certain information concerning the
granting and exercise of stock options during the last completed fiscal year by
each of the named executive officers and our directors, Mr. Jay Hergott and Mr.
Yegia Eli Aramyan, and the fiscal year-end value of unexercised options on an
aggregated basis:
41
OPTION/SAR GRANTS FOR LAST
FISCAL YEAR-INDIVIDUAL GRANTS(1)
Number of
Securities % of Total
Underlying Options/SARs Granted
Options/SARs to Employees in
Name Granted (#) Fiscal Year Exercise Price ($/sh) Expiration Date
- --------------------------------------------------------------------------------------------------------------------
Lee Kasper 700,000 35.4% $0.176/share May 29, 2008
Joseph Giarmo 300,000 15.2% $0.16/share May 29, 2013
50,000 2.5% $0.50/share October 6, 2013
Jay S. Hergott 25,000 1.3% $0.16/share May 29, 2013
Yegia Eli Aramyan 100,000 5% $0.16/share May 29, 2013
100,000 5% $0.50/share October 6, 2013
- --------------------------------------------------------------------------------------------------------------------
(1) Option grants made to Mr. Kasper, Mr. Giarmo and Mr. Aramyan were incentive
stock option grants. The grant made to Mr. Hergott was a non-qualified stock
option grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES(1)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(2)
Shares Acquired Value Realized(1) Unexercisable/ Unexercisable/
Name on Exercise (#) ($) Exercisable Exercisable
- --------------------------------------------------------------------------------------------------------------------
Lee Kasper -0- -0- 700,000/0 $0/$345,000
Joseph Giarmo -0- -0- 175,000/175,000 $89,250/$89,250
-0- -0- 25,000/25,000 $4,250/$4,250
Jay S. Hergott -0- -0- 0/25,000 $0/$12,750
Yegia Eli Aramyan -0- -0- 0/100,000 $0/$51,000
0/100,000 $0/$17,000
(1) Value realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market value of
the common stock on the date the options are exercised.
(2) The value of
unexercised options is determined by calculating the difference between the fair
market value of the securities underlying the options at fiscal year end and the
exercise price of the options.
42
WHERE YOU CAN FIND FURTHER INFORMATION ABOUT US
We filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the shares being
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement, certain items of which are
omitted in accordance with the rules and regulations of the Commission. The
omitted information may be inspected and copied, at prescribed rates, at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. Statements
contained in this prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are not necessarily
complete, and in each instance where reference is made to the copy of the
document filed as an exhibit to the registration statement, each such statement
is qualified in all respects by such reference. For further information with
respect to our company and the securities being offered in this offering,
reference is hereby made to the registration statement, including the exhibits
thereto and the financial statements, notes, and schedules filed as a part
thereof.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The law firm of Richardson & Patel, LLP, or its various principles,
collectively own or have the right to receive 1,105,544 shares of our common
stock. Richardson & Patel LLP will render an opinion regarding the validity of
the securities offered in this offering. Richardson & Patel LLP is included as a
selling shareholder in this prospectus.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 317 of the California General Corporation Law permits the
indemnification of a corporation's agents (which includes officers and
directors) because he is a party (or he is threatened to be made a party) to any
action or proceeding by reason of the fact that the person is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense.
Article V of our Articles of Incorporation provides that the liability
of directors for monetary damages shall be eliminated to the fullest extent
permissible under California law. This provision requires us to indemnify its
directors, as permitted by law, in excess of Section 317 of the California
General Corporation Law.
43
Our bylaws permit us to indemnify our officers and directors, to the
maximum extent permitted by the California General Corporation Law, against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact any person is or was one of our officers or directors. In this regard, we
have the power to advance to any officer or director expenses incurred in
defending any such proceeding to the maximum extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
EXPERTS
Farber & Hass, LLP audited our financial statements at December 31,
2003 and December 31, 2002, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statements in reliance on the report of Farber & Hass, LLP, given on their
authority as experts in accounting and auditing.
Richardson & Patel LLP has given us an opinion relating to the due
issuance of the common stock being registered.
44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of NuTech Digital, Inc.:
We have audited the accompanying balance sheet of NuTech Digital, Inc. (the
"Company") as of December 31, 2003 and the related statements of operations,
stockholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NuTech Digital, Inc. as of
December 31, 2003 and the results of its operations and its cash flows for the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Farber & Hass, LLP
Camarillo, California
March 9, 2004, except for Note 22
as to which the date is March 25, 2004
45
NUTECH DIGITAL, INC.
BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 30,827
Accounts receivable, net 475,691
Other receivables 3,250
Inventories 630,739
Royalty advances, current portion 235,990
Prepaid expenses, current portion 60,329
----------
TOTAL CURRENT ASSETS 1,436,826
----------
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 1,482,169
----------
OTHER ASSETS
Royalty advances, long-term portion 1,409,010
Prepaid loan costs, long-term portion 30,841
Deposits 7,800
----------
TOTAL OTHER ASSETS 1,447,651
----------
TOTAL ASSETS $4,366,646
==========
F-1
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 653,074
Accrued liabilities 58,608
Accrued interest 113,410
Capital leases payable, current portion 25,117
Notes payable, related parties, current portion 876,248
Notes payable, other, current portion 431,911
-----------
TOTAL CURRENT LIABILITIES 2,158,368
-----------
LONG-TERM LIABILITIES
Capital leases payable, long-term portion 8,835
Notes payable, related parties, long-term portion 339,325
Notes payable, other, long-term portion 702,154
Convertible promissory notes 137,566
-----------
TOTAL LONG-TERM LIABILITIES 1,187,880
-----------
REDEEMABLE COMMON STOCK 80,000
-----------
STOCKHOLDERS' EQUITY
Preferred stock
Authorized - 50,000,000 shares
Issued and outstanding -0- shares 0
Common stock
Authorized 100,000,000 shares, no par value
Issued and outstanding - 12,883,248 shares 1,519,902
Accumulated (deficit) (579,504)
-----------
TOTAL STOCKHOLDERS' EQUITY 940,398
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,366,646
===========
See Accompanying Notes.
F-2
NUTECH DIGITAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
SALES $ 3,745,297 $ 4,292,510
COSTS OF SALES 1,100,840 1,403,210
----------- -----------
GROSS PROFIT 2,644,457 2,889,300
----------- -----------
EXPENSES
SELLING EXPENSES 515,495 904,206
GENERAL AND ADMINISTRATIVE
EXPENSES 2,173,071 2,708,008
----------- -----------
TOTAL EXPENSES 2,688,566 3,612,214
----------- -----------
OPERATING (LOSS) (44,109) (722,914)
INTEREST EXPENSE 133,282 214,684
----------- -----------
(LOSS) BEFORE OTHER INCOME (177,391) (937,598)
----------- -----------
OTHER INCOME (EXPENSE)
Cost recovery, KSS contract 320,394 0
Cancellation of debt 169,868 0
Loss on disposal of asset (4,820) 0
----------- -----------
TOTAL OTHER INCOME 485,442 0
----------- -----------
INCOME (LOSS) BEFORE
CORPORATION INCOME TAXES 308,051 (937,598)
CORPORATION INCOME TAXES (BENEFIT) 800 (19,225)
----------- -----------
NET INCOME (LOSS) $ 307,251 $ (918,373)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ .03 $ (.09)
=========== ===========
DILUTED $ .03 $ (.09)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC 11,290,644 10,257,979
=========== ===========
DILUTED 12,068,727 10,257,979
=========== ===========
See Accompanying Notes.
F-3
NUTECH DIGITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
PREFERRED STOCK COMMON STOCK
------------------------------ -------------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------------- ------------- -------------- --------------- -------------- -----------
BALANCE, JANUARY 1, 2002 0 $ 0 10,018,550 $ 1,008,643 $ 31,618 $ 1,040,261
ISSUANCE OF COMMON STOCK FOR:
CASH-PRIVATE PLACEMENT 0 0 16,666 25,000 0 25,000
NOTES PAYABLE (INCLUDED IN
REDEEMABLE COMMON STOCK) 0 0 218,333 0 0 0
PREPAID OFFERING COSTS 0 0 126,620 189,930 0 189,930
COSTS INCURRED FOR PRIVATE
PLACEMENT
PAID BY CASH 0 0 0 (2,250) 0 (2,250)
NET (LOSS) FOR THE YEAR ENDED
DECEMBER 31, 2002 0 0 0 0 (918,373) (918,373)
------------- ------------- -------------- -------------- -------------- -----------
BALANCE, DECEMBER 31, 2002 0 $ 0 10,380,169 1,221,323 (886,755) 334,568
ISSUANCE OF COMMON STOCK FOR:
SERVICES UNDER 2003
CONSULTANT STOCK PLAN 0 0 1,315,000 195,300 0 195,300
OTHER SERVICES 0 0 603,079 121,666 0 121,666
ACCOUNTS PAYABLE 0 0 210,000 83,125 0 83,125
CASH - PRIVATE PLACEMENTS 0 0 375,000 150,000 0 150,000
ALLOCATION OF OFFERING COST-
PRIMARILY LEGAL FEES 0 0 0 (499,012) 0 (499,012)
REDEEMABLE COMMON STOCK 0 0 0 247,500 0 247,500
NET INCOME FOR THE YEAR ENDED
DECEMBER 31, 2003 0 0 0 0 307,251 307,251
------------- ------------- -------------- --------------- -------------- -----------
BALANCE, DECEMBER 31, 2003 0 $ 0 12,883,248 $ 1,519,902 $ (579,504) $ 940,398
============= ============= ============== =============== ============== ===========
See Accompanying Notes.
F-4
NUTECH DIGITAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 307,251 $(918,373)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 316,649 623,067
Cost recovery, KSS contract (320,394) 0
Cancellation of debt (169,868) 0
Loss on disposal of asset 4,820 0
Allowance for doubtful accounts 31,665 36,998
Issuance of common stock for services 226,966 0
Issuance of common stock for interest 0 37,500
Allowance for royalty losses 5,000 0
Deferred tax assets/liabilities 0 (1,400)
Changes in operating assets and liabilities:
Accounts receivable (140,627) 535,439
Corporation income tax refund 40,669 (40,669)
Advance to employees and other receivables (3,250) 0
Inventories 238,812 28,448
Royalty advances (178,475) 90,239
Prepaid expenses (27,475) (237,768)
Accounts payable (237,860) 214,540
Accrued liabilities (224,828) 44,496
Corporation income taxes payable 0 (33,509)
--------- ---------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (130,945) 379,008
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (327,013) (588,181)
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (327,013) (588,181)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 150,000 22,750
Proceeds from notes payable, other 900,000 33,335
Repayments of notes payable (517,590) (62,348)
Proceeds from bank line of credit and officer's loan 0 121,831
Changes in loans payable, officer (33,482) 29,366
Payments on capital leases payable (19,380) (9,502)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 479,548 135,432
--------- ---------
See Accompanying Notes.
F-5
NUTECH DIGITAL, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
--------- ---------
NET INCREASE (DECREASE) IN CASH $ 21,590 $ (73,741)
CASH BALANCE, AT BEGINNING OF YEAR 9,237 82,978
--------- ---------
CASH BALANCE, AT END OF YEAR $ 30,827 $ 9,237
========= =========
SUPPLEMENTARY DISCLOSURE OF
CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 65,869 $ 243,330
========= =========
Taxes $ 0 $ 33,509
========= =========
NON-CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for services and consulting fees $ 295,966 $ 0
========= =========
Issuance of common stock for accounts payable, notes
payable and accrued interest $ 104,125 $ 327,500
========= =========
Issuance of common stock for offering costs $ 459,474 $ 189,930
========= =========
See Accompanying Notes.
F-6
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
NuTech Digital, Inc. was organized on June 12, 1997, under the laws of
the state of California. The Company is engaged in licensing and
distributing general entertainment products, most of which are made
available through digital versatile disc ("DVD"). The Company's
products include children's animated films and video games, karoake
software, Japanese anime and late night programming.
BASIS OF PRESENTATION
The Company's financial statements have been prepared on an accrual
basis of accounting, in conformity with accounting principles
generally accepted in the United States of America. These principles
contemplate the realization of assets and liquidation of liabilities
in the normal course of business.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the customers' outstanding
balances less any allowance for doubtful accounts. Interest is not
included on overdue accounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts on accounts receivables is charged
to income in amounts sufficient to maintain the allowance for
uncollectible accounts at a level management believes is adequate to
cover any probable losses. Management determines the adequacy of the
allowance based on historical write-off percentages and information
collected from individual customers. Accounts receivable are charged
off against the allowance when collectibiltiy is determined to be
permanently impaired (bankruptcy, lack of contact, account balance
over one year old, etc).
ROYALTY ADVANCES
Royalty advances are stated at cost, less royalties accrued on the
contracts and less an allowance for potential obsolescence.
F-7
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and
improvements are charged to the asset accounts while replacements,
maintenance and repairs, which do not improve or extend the lives of
the respective assets, are expensed. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable
amounts. Gains or losses from retirements or sales are credited or
charged to income.
The Company depreciates its property and equipment for financial
reporting purposes using the straight-line method based upon the
following useful lives of the assets:
Completed masters 7 years
Office furniture and equipment 7 years
Computer equipment 5-7 years
Computer software 3 years
Warehouse equipment 7-10 years
Trade show equipment 7 years
Leasehold improvements 5-10 years
ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted
in the United States of America. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when the goods are
shipped and title passes to customers. The Company recognizes revenue
in accordance with SEC Staff Accounting Bulletin 101.
F-8
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments, none of which are held for
trading purposes. The Company estimates that the fair value of all
financial instruments at December 31, 2003 as defined in FASB 107,
does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to
develop the estimates of fair value, and accordingly, the estimates
are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
NET EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128 that requires the reporting of both basic and diluted earnings
(loss) per share. Basic earnings (loss) per share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. In accordance with FASB
128, any anti-dilutive effects on net income (loss) per share are
excluded.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed in FASB Statement No. 109, Accounting for Income
Taxes. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
COMMON STOCK ISSUED FOR NON-CASH TRANSACTIONS
It is the Company's policy to value stock issued for non-cash
transactions, such as services, at the fair market value of the goods
or services received or the consideration granted, whichever is more
readily determinable, at the date of the transaction.
F-9
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the historical cost-carrying value of an asset may no longer be
appropriate. The Company assesses the recoverability of the carrying
value of an asset by estimating the future net cash flows expected to
result from the asset, including eventual disposition. If the future
net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the
asset's carrying value and fair value.
SHIPPING AND HANDLING COSTS
The Company's policy is to classify shipping and handling costs as
part of selling, general and administrative costs in the statements of
operations. These costs for the year ended December 31, 2003 and 2002
amounted to $68,003 and $88,949, respectively.
SEGMENT INFORMATION
The Company sells its products primarily to retail stores and
distributors. Approximately 6% of the Company's revenues in 2003 were
to customers outside of the United States of America (no specific
concentration). The Company had one customer whose sales exceeded 10%
of revenue.
RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies EITF
Issue 94-3. SFAS 146 is effective for exit and disposal activities
that are initiated after December 31, 2002 and requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred in contrast to the date of
an entity's commitment to an exit plan, as required by EITF Issue
94-3. The Company adopted this pronouncement on January 1, 2003.
In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based
Compensation" an amendment to SFAS 123. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for fiscal years ending
after
F-10
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 15, 2002 for transition guidance and annual disclosure
provisions; for financial reports containing financial statements for
interim periods beginning after December 15, 2002 for interim
disclosure provisions.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Statements with Characteristics of both Liabilities and
Equity". This Statement establishes standards for how an issuer of
debt classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify certain financial instruments as a liability (or an
asset in some circumstances) instead of equity. The Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company will adopt
this Statement on July 1, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation 46 "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51". This Interpretation requires a
Company to consolidate the financial statements of a "Variable
Interest Entity" ("VIE"), sometimes also known as a "special purpose
entity", even if the entity does not hold a majority equity interest
in the VIE. The Interpretation requires that if a business enterprise
has a "controlling financial interest" in a VIE, the assets,
liabilities, and results of the activities of the VIE should be
included in consolidate financial statements with those of the
business enterprise, even if it holds a minority equity position. This
Interpretation was effective immediately for all VIE's created after
January 31, 2003; for the first fiscal year or interim period
beginning after June 15, 2003 for VIE's in which a Company holds a
variable interest that it acquired before February 1, 2003.
In December 2003, the FASB issued SFAS 132R. This Statement revises
employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans required by FASB Statements No. 87, Employers' Accounting
for Pensions, No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This Statement retains the disclosure
requirements contained in FASB Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it
replaces. It requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. The Company will adopt the
provisions of SFAS 132R on January 1, 2004.
The Company does not believe that any of these recent accounting
pronouncements will have a material impact on their financial position
or results of operations.
F-11
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 2 ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful accounts
is as follows:
Accounts receivable $ 522,424
Allowance for doubtful accounts (46,733)
----------------
Net accounts receivable $ 475,691
================
At December 31, 2003 two customers owed the Company $135,924,
which was 27% (14% and 13%), of total accounts receivable.
Allowance for doubtful accounts
Balance, January 1, 2003 $ 15,000
Increase to allowance 31,733
----------------
Balance, December 31, 2003 $ 46,733
================
NOTE 3 MAJOR CUSTOMERS
For the year ended December 31, 2003, the Company had one customer
that accounted for 14% of total revenue. For the year ended December
31, 2002, the Company had no customer whose sales were 10% of the
total revenue.
NOTE 4 INVENTORIES
The inventories are comprised of completed DVDs and Karoake CDs.
NOTE 5 ADVANCE ROYALTIES
The Company has acquired the licensing, manufacturing and distribution
rights to various movies from the owners of the titles. The Company
pays royalties from 20% - 30% of the net sales proceeds. Royalty costs
for the years ended December 31, 2003 and 2002 were $305,160 and
$655,238, respectively.
F-12
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation consists of :
Completed masters $ 3,967,657
Masters in process 26,764
Office furniture and equipment 109,417
Computer equipment 185,189
Computer software 48,801
Warehouse equipment 121,850
Trade show equipment 25,855
Leasehold improvements 112,041
-----------
4,597,574
Less accumulated depreciation 3,115,405
-----------
$ 1,482,169
===========
NOTE 7 ACCOUNTS PAYABLE
Accounts payable consists of the following:
U-Tech Media Corporation $ 102,418
Other 550,656
-----------
$ 653,074
===========
NOTE 8 MAJOR SUPPLIERS
For the year ended December 31, 2003, the Company purchased 42% (31%
and 11%) of its products from two suppliers.
For the year ended December 31, 2002, the Company purchased 43% (27%
and 16%) of its products from two suppliers.
NOTE 9 INCOME TAXES
The income tax provisions differ from the amount computed by applying
the federal graduated rate to income before income taxes. A
reconciliation to the graduated federal income tax rate is as follows:
Tax at U.S. federal statutory income tax rates $ 108,000
Less availability of net operating less carryforward 108,000
--------------
Tax Provision $ 0
==============
F-13
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 9 INCOME TAXES (CONTINUED)
The following is a summary of the significant components of the
Company's deferred tax assets and liabilities:
Net operating loss carryforwards $ 249,000
Accrued expenses and miscellaneous 28,800
--------------
277,800
Less valuation allowance (277,800)
--------------
Net deferred tax asset $ 0
==============
A reconciliation of the valuation allowance is as follows:
Balance, at January 1, 2003 $ 361,027
Reduction for the period (83,227)
--------------
Balance at December 31, 2003 $ 277,800
==============
Realization of the net deferred tax assets is dependent on
future reversals of existing taxable temporary differences and
adequate future taxable income, exclusive of reversing
temporary differences and carryforwards.
Net Operating Loss Carryforwards
Corporation Income Taxes
Year of Loss Amount Expiration Date
------------------------- --------------------- -------------------------
December 31, 2002 $ 631,612 December 31, 2022
NOTE 10 CAPITAL LEASES PAYABLE
The Company has two capital leases for computer hardware and software.
The leases are for 36 months with monthly rentals of $2,353 plus
taxes, including interest at 13.2% and 14.2%. Future minimum lease
payments on the lease are as follows:
December 31, 2004 $ 29,475
December 31, 2005 19,004
---------------
48,479
Less amount representing interest (14,527)
---------------
Present value of future minimum
lease payments 33,952
Less current portion 25,117
---------------
Long-term portion $ 8,835
===============
F-14
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 11 NOTE PAYABLE, RELATED PARTIES
CURRENT
TOTAL PORTION
--------- ------------
LEE KASPER (PRESIDENT OF THE COMPANY)
On November 7, 2000, U.S. Bank, N.A. loaned the president of the
Company $640,000, which was used to pay-off the corporation's
line of credit to U.S. Bank, N.A.
The terms of the loan from the president are the same as the
terms of the loan from U.S. Bank, N.A. to the president, as
follows:
1. The corporation guaranteed the president's loan from the bank.
2. Security - all of the corporation's assets.
3. Interest - prime plus 3% (7.00% at December 31, 2003).
4. Twenty-nine monthly principal payments of $21,333, plus
accrued interest beginning December 15, 2002, plus a final
payment equal to all unpaid principal on May 15, 2005, the
maturity date.
5. Principal balance at December 31, 2003 is: $ 362,671 $ 255,996
F-15
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 11 NOTE PAYABLE, RELATED PARTIES (CONTINUED)
CURRENT
TOTAL PORTION
--------- ----------
LEE KASPER (PRESIDENT OF THE COMPANY)
On February 19, 2003, the President of the Company received a
$500,000 loan from Skura Intercontinental Trading Company and
loaned the $500,000 proceeds to the corporation. The terms of
the loan are the same as the terms of the loan from Skura
Intercontinental Trading Company to the President as follows:
l. The loan is secured by a deed of trust on the President's
personal residence.
2. Interest - 3%.
3. Thirty-six monthly payments of principal and interest in
the amount of $14,541.
4. Principal balance at December 31, 2003 is $ 374,527 $ 141,877
LEE KASPER (PRESIDENT OF THE COMPANY)
The Company has two unsecured loans dated December 31, 2003 from
the President of the Company. The notes require twelve monthly
payments of $31,650, including interest at 10%. This loan was
repaid in full in February 2004. 336,125 336,125
BRANDON, RYAN AND JORDAN TRUSTS (CHILDREN OF THE PRESIDENT OF
THE COMPANY)
The Company has three unsecured loans dated December 31, 2003
from three trusts established for the children of the President
of the Company. The notes require twelve monthly payments of
$8,793, including interest at 10%. This loan was repaid in full
in February 2004. 100,000 100,000
F-16
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 11 NOTE PAYABLE, RELATED PARTIES (CONTINUED)
CURRENT
TOTAL PORTION
--------- ----------
JOE GIARMO (AN OFFICER OF THE COMPANY)
The Company is required to repay this loan on a monthly basis
determined by paying $0.25 for each VHS or DVD sold pursuant to
a license until $120,000 is repaid. This loan was repaid in full
on February 2004. $ 42,250 $ 42,250
---------- ----------
$1,215,573 $ 876,248
========== ==========
Future minimum principal payments on the notes payable to
Related Parties are as follows:
December 31, 2004 $ 876,248
December 31, 2005 276,600
December 31, 2006 62,725
----------
$1,215,573
==========
NOTE 12 NOTES PAYABLE, OTHER
CURRENT
TOTAL PORTION
--------- ----------
RITEK CORP
In August, 1998, the Company received a $400,000 loan from
Ritek Corp. The loan accrues interest at 8.5% per annum and
entitles Ritek Corp. 50% ownership in the licensing rights in
the Shadoan DVD Game. The loan requires monthly payments of
interest and principal with the agreement that the total loan
and interest was to be paid on June 10, 1999. If the loan was
not paid on that date, then Ritek would become 100% owner and
license holder of the Title "Shadoan". As of the date of this
report, Ritek has not asked for the ownership rights to
Shadoan. $ 400,000 $ 400,000
F-17
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 12 NOTES PAYABLE, OTHER (CONTINUED) CURRENT TOTAL PORTION
SMALL BUSINESS ADMINISTRATION AND COMERICA BANK LOAN
On July 12, 2000, the Company received a $900,000 Small Business
Administration loan with Comerica Bank participation. The loan
requires monthly payments of $6,414, including interest at 2%
over prime. The loan is secured by all assets of the Company and
the major stockholder's personal residence and personal
guaranty. The loan matures on July 14, 2018. Effective interest
rate at December 31, 2003 was 6%. $ 734,065 $ 31,911
---------- ----------
$1,134,065 $ 431,911
========== ==========
Future minimum principal payments on the notes payable to
others are as follows:
December 31, 2004 $ 431,911
December 31, 2005 33,964
December 31, 2006 36,148
December 31, 2007 38,473
Thereafter 593,569
----------
$1,134,065
==========
NOTE 13 CONVERTIBLE PROMISSORY NOTES
The Company issued two convertible promissory notes totaling $137,566
with the following terms and conditions:
a. Unsecured
b. Due date July 7, 2005
c. Interest rate - minimum rate permitted by the
Internal Revenue Service (4.0% @ December 31, 2003).
d. Voluntary conversion - note can be converted after
July 7, 2004 into common stock of the Company at a
conversion price of $0.25 per share (550,264 shares).
F-18
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 14 ADVERTISING
The Company expenses all advertising as incurred. Advertising expenses
for the year ended December 31, 2003 and 2002 were $5,611 and $39,510,
respectively.
NOTE 15 REAL ESTATE LEASE
On May 1, 2001, the Company leased its office and warehouse facilities
for five years and three months. The details on the lease are as
follows:
A. Base rentals - $7,800 per month plus operating costs
with cost of living adjustments in May of each year.
B. Termination date - July 31, 2006
C. Option - one option for an additional 60 month period
with rent at the base rental amount plus cost of living
adjustments.
As of December 31, 2003, future minimum lease payments
excluding operating expenses are as follows:
December 31, 2004 $ 96,312
December 31, 2005 96,312
December 31, 2006 56,182
----------
$ 248,806
==========
The rent expense for the years ended December 31, 2003 and 2002 was
$109,471 and $107,670, respectively.
NOTE 16 EMPLOYEE STOCK OPTIONS
The Board of Directors and stockholders approved the NuTech Digital,
Inc. 2001 Equity Incentive Plan which permits the Board of Directors
to grant, for a ten year period, both stock purchase rights and stock
options. The Company has reserved 3,500,000 shares of its common stock
for issuance to the directors, employees and consultants under the
Plan. The Plan is administered by the Board of Directors.
F-19
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 16 EMPLOYEE STOCK OPTIONS (CONTINUED)
The administrator has the authority and discretion, subject to the
provisions of the Plan, to select persons to whom stock purchase
rights or options will be granted, to designate the number of shares
to be covered by each option or stock purchase right, to specify the
type of consideration to be paid, and to establish all other terms and
conditions of each option or stock purchase right. Options granted
under the Plan will not have a term that exceeds ten years from date
of grant.
The stock subject to the plan and issuable upon exercise of options
granted under the plan are shares of the corporation's common stock,
no par value, which may be either unissued, restricted or grants of
options to purchase shares of common stock.
The exercise price is the fair market value of the shares at the date
of the grant of the options.
Vesting terms of the options range from immediate to ten years.
The Company has elected to continue to account for stock-based
compensation under the "Intrinsic Value" method of APB Opinion No. 25,
under which no compensation expense has been recognized for stock
options granted to employees at fair market value.
A summary of the option activity for the year ended December 31, 2003,
pursuant to the terms of the plan is as follows:
WEIGHTED
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
---------- ----------
Options outstanding at January 1, 2003 1,705,000 $ 1.54
Granted 1,920,000 .17
Exercised 0 0
Cancelled and expired (1,090,000) 1.50
----------
Options outstanding at December 31, 2003 2,535,000
==========
1,355,000 shares are exercisable at December 31, 2003.
F-20
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 16 EMPLOYEE STOCK OPTIONS (CONTINUED)
Information regarding stock options outstanding as of December
31, 2003 is as follows:
Price range $ .11 - $ 1.65
Weighted average exercise price $ .78
Weighted average remaining contractual life 7 years, 8 months
Options exercised
Price range 0
Shares 0
Weighted average exercise price 0
The weighted average fair value of options granted in the year
ended December 31, 2003 were estimated as of the date of grant
using the Black-Scholes stock option pricing model, based on
the following weighted average assumptions:
Dividend yield 0
Expected volatility 50 %
Risk free interest rate 3.35 % - 5.13 %
Expected life 5 - 10 years
For purposes of proforma disclosures, the estimated fair value
of the options is amortized to expense over the options'
vesting periods. The Company's proforma information follows:
Net income (loss) from continuing operations
As reported $ 307,251
Proforma $ (6,436)
Income (Loss) per share attributable
to common stock
Basic
As reported $ .03
Proforma $ ( .00)
Diluted
As reported $ .03
Proforma $ ( .00)
F-21
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 17 COMMON STOCK PURCHASE WARRANTS
The following is a summary of the stock purchase warrants outstanding
as of December 31, 2003:
Number of shares 750,000
Price per share $ 0.75
Expiration date December 31, 2013
NOTE 18 2003 CONSULTANT STOCK PLAN
In July 2003, the Company adopted the 2003 Consultant Stock Plan and
reserved 5,000,0000 shares for issuance of common stock to consultants
for the Company. The shares will be issued at the fair market value on
the date the shares are awarded.
The following is a summary of the shares covered by the plan as of
December 31, 2003:
Total shares authorized 5,000,000
Shares issued ($0.12 - $0.18 per share) 1,315,000
------------
Shares available for future issuance 3,685,000
============
NOTE 19 LITIGATION (REDEEMABLE COMMON STOCK)
In 2002, the Company issued 53,333 shares in full payment of a note
payable. The stock issuance was subject to an agreement that the
Company's common stock must be registered with the Securities and
Exchange Commission by October 1, 2002 and must be offered for sale at
a price of a least $1.50 per share. If neither of these conditions are
met, then the creditor may rescind the agreement by returning all or a
portion of their common stock. In September 2003, the stockholder
filed a lawsuit against the Company to demand the rescission of the
agreement and the payment of $80,000 plus accrued interest.
F-22
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 20 4TH QUARTER INTERIM RESULTS OF OPERATIONS (UNAUDITED)
Sales $ 735,906
Costs of sales 211,276
------------
Gross profit 524,630
Selling, general and
administrative expenses 718,141
------------
Operating (loss) ( 193,511)
Interest expense 18,434
Loss on disposal of asset 4,820
------------
(Loss) before corporation income taxes (216,765)
Corporation income taxes benefit 0
------------
Net (loss) $ ( 216,765)
============
NOTE 21 COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement with Wellspring Media,
Inc. at December 31, 2003 to purchase $750,000 of titles;
however no liability is recorded since the Company has not
received any of the titles at December 31, 2003.
NOTE 22 SUBSEQUENT EVENTS (UNAUDITED)
PRIVATE PLACEMENTS
On February 2, 2004, the Company completed a private sale of
1,875,000 shares of common stock to accredited investors at a
price of $.40 per share. In conjunction with the sale of the
common stock, the Company issued warrants having an exercise
price of $0.75 per share. For each share of common stock
purchased, each investor received warrants to purchase two
shares of the Company's common stock. The warrants expire in
ten years.
On February 24, 2004, the Company completed a private sale of
4,375,000 shares of common stock to accredited investors at a
price of $.40 per share. In conjunction with the sale of the
common stock, the Company issued warrants having an exercise
price of $0.75 per share. For each share of common stock
purchased, each investor received warrants to purchase two
shares of the Company's common stock. The warrants expire in
ten years. In addition to the shares sold, the Company issued a
warrant for the purchase of 170,000 shares of common stock to
Brighton Capital, Ltd. for assistance with this offering.
SHARES ISSUED FOR SERVICES
On January 30, 2004 the Company issued 50,000 shares of common
stock to MarketByte, LLC for services rendered in connection
with stock promotion activities. The Company valued the
services at $53,000 or $1.06 per share.
On February 5, 2004 the Company issued 110,000 shares of common
stock to CEOcast, Inc. for services rendered in connection with
stock promotion activities. The Company valued the services at
$115,500 or $1.05 per share.
On March 12, 2004 the Company issued 15,000 shares of common
stock to Andreas Dautzenberg for assisting with the acquisition
of a license. The Company valued these services at $13,050 or
$0.87 per share.
On March 12, 2004 the Company issued 75,000 shares of common
stock to Redwood Consultants, LLC ("Redwood") for services
rendered in connection with a contract for stock promotion
activities. The agreement with Redwood also requires the
Company to issue 45,000 shares of common stock per month for
services to be rendered over a four month period. In
conjunction with the execution of the agreement, the Company
gave Redwood a warrant to purchase a total of 300,000 shares of
its common stock. The warrant has a two year term. The warrant
exercise price is $1.15 as to 100,000 shares, $1.50 as to
100,000 shares and $1.80 as to 100,000 shares. The Company may
require Redwood to exercise the warrant if the market price of
its common stock exceeds the exercise price of the warrant for
a period of five consecutive trading days. The value of the
shares granted was $62,250 or $0.87 per share.
On March 12, 2004 the Company issued 600,000 shares of common
stock to Queenstone Financial Corporation for assistance with
financing activities. The Company valued these services at
$522,000 or $0.87 per share.
F-23
NUTECH DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 22 SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
REPAYMENT OF RELATED PARTY DEBT
In February, 2004, the Company repaid the following related
party debt:
PRINCIPAL INTEREST TOTAL
-------------- -------------- ---------------
Lee Kasper $ 336,125 $ 4,801 $ 340,926
Brandon, Ryan and
Jordan Kasper Trusts 100,000 2,889 102,889
Joe Giarmo 42,250 0 42,250
-------------- -------------- ---------------
$ 478,375 $ 7,690 $ 486,065
============== ============== ===============
2001 EQUITY INCENTIVE PLAN
On January 1, 2004, the Company increased the number of shares
reserved under the 2001 Equity Incentive Plan from 3,500,000 shares to
3,752,747 shares.
F-24
No person is authorized to give any information or to make any representation
other than those contained in this prospectus, and if made such information or
representation must not be relied upon as having been given or authorized. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the Securities offered by this prospectus or an
offer to sell or a solicitation of an offer to buy the Securities in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any
implication that there has been no changes in the affairs of the Company since
the date of this prospectus. However, in the event of a material change, this
prospectus will be amended or supplemented accordingly
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The only statute, charter provision, bylaw, contract, or other
arrangement under which any controlling person, director or officer of the
registrant is insured or indemnified in any manner against any liability which
he may incur in his capacity as such, is as follows:
a. Section 317 of the California General Corporation Law permits the
indemnification of a corporation's agents (which includes officers and
directors) because the agent is a party (or he is threatened to be made a party)
to any action or proceeding by reason of the fact that he is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense.
b. Article V of the Registrant's Articles of Incorporation provides
that the liability of directors for monetary damages shall be eliminated to the
fullest extent permissible under California law. This provision requires the
Registrant to indemnify directors, as permitted by law, in excess of Section 317
of the California General Corporation Law.
c. Article VI of the Registrant's bylaws provides that the Registrant
shall, to the maximum extent permitted by the California General Corporation
Law, have power to indemnify each of its agents (which is defined to include any
person who is or was a director, officer or employee of the Registrant) against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding to the maximum extent
permitted by law. In this regard, the Registrant has the power to advance to any
officer or director expenses incurred in defending any such proceeding to the
maximum extent permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by
the Registrant, are as follows:
SEC Filing Fee $2331.78
Printing Expenses* 500.00
Accounting Fees and Expenses* 2,500.00
Legal Fees and Expenses 7,500.00
Blue Sky Fees and Expenses* 3,000.00
Registrar and Transfer Agent Fee* 300.00
Miscellaneous* 1,500.00
---------------------------------------------------------
Total* $17,631.78
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On July 31, 2000 the Registrant's Board of Directors issued to Mr. Joseph
Giarmo, the Registrant's Vice-President and a director, 50 shares of the
Registrant's common stock as compensation for extraordinary services rendered by
Mr. Giarmo to the Company, such services having a value of $250. The securities
were issued in reliance upon the exemption provided in Section 4(2) of the
Securities Act. These shares were issued prior to the stock split that the
Registrant effected on May 4, 2001. After giving effect to the stock split, Mr.
Giarmo owned 392,250 shares of the Registrant's common stock.
On May 4, 2001 the Registrant's Articles of Incorporation were amended to
increase the authorized number of shares of our common stock from 2,000,000 to
100,000,000 and to split each share of outstanding common stock from one share
into 7,905 shares.
On May 31, 2001, the Registrant issued 100,000 shares of its common stock to
Elynor Kasper in exchange for the release of certain contract rights. The
Registrant determined that the value of the contract rights was $3,000. On May
31, 2000, the Registrant also issued 350,000 shares of its common stock to Leora
Kimble, in exchange for bookkeeping services rendered to the Registrant having a
value of $10,500. Finally, on May 31, 2000, the Registrant issued 400,000 shares
of its common stock to Saratoga Capital Corporation, its distributor in Asia,
for services rendered to the Registrant having a value of $12,000. The
Registrant determined that the value of the common stock on May 31, 2000 was $
..03 per share. The securities were issued in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
On June 1, 2001, the Registrant began a private offering of its securities,
pursuant to the exemption provided in Section 4(2) of the Securities Act and
section 506 of Regulation D promulgated thereunder. In selling the securities,
the Registrant provided non-financial and financial statement information to the
investors, did not offer or sell the securities by any form of general
solicitation or general advertising, and advised each investor that the
securities could not be resold without registration under the Securities Act or
an exemption therefrom. The securities were sold with the assistance of
broker-dealers to persons who represented that they were accredited investors,
as that term is defined in Rule 501 of Regulation D. Each investor who purchased
shares of common stock in this offering received a warrant to purchase a like
number of additional shares. The unit price was $1.50 per share. The warrant
exercise price is $3.00 per share. The warrants, if not exercised, will expire
on November 1, 2002. The Registrant sold a total of 703,444 shares of its common
stock to 38 investors in the offering. In addition to the shares sold, the
Registrant issued a total of 208,142 shares of common stock to broker-dealers
and advisors in connection with the offering. Broker-dealers were also paid a
commission of 10%.
On September 13, 2001 the Registrant agreed to convert $100,000 of debt owed to
Sarah and LeBron Barkstelle to common stock. The debt was converted at the rate
of one share of common stock for each $1.00 converted. The securities were
issued in reliance upon the exemption provided in Section 4(2) of the Securities
Act.
On March 4, 2002, Urbach Kahn & Werlin, Inc. agreed to convert $80,000 of debt
for services rendered to the Registrant to the Registrant's common stock on the
condition that (i) the Registrant file a registration statement which includes
Urback Kahn & Werlin, Inc. as a shareholder selling 53,333 shares of common
stock, and (ii) the Registration statement is declared effective by the
Securities Exchange Commission before October 1, 2002. The conversion was made
at $1.50 per share. The securities were issued in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
Also on March 4, 2002, Advanced Media Post, LLC agreed to convert $247,500 of
debt for services rendered to the Registrant to the Registrant's common stock on
the condition that (i) the Registrant file a registration statement which
includes Advanced Media Post, LLC as a shareholder selling 165,000 shares of
common stock, and (ii) the registration statement is declared effective by the
Securities Exchange Commission before October 1, 2002. The conversion was made
at $1.50 per share. The securities were issued in reliance upon the exemption
provided in Section 4(2) of the Securities Act.
On August 7, 2003 the Registrant issued to Mr. Shai Stern 100,000 shares of
common stock for services rendered in connection with stock promotion and
financing activities. The value of the securities on the date of grant was $0.17
per share. The securities were issued in reliance upon the exemption provided in
Section 4(2) of the Securities Act of 1933.
On August 20, 2003 the Registrant issued to Hanover Capital Corporation 125,000
shares of common stock for services rendered in connection with stock promotion
activities. The value of the securities on the date of grant was $0.35 per
share. The securities were issued in reliance upon the exemption provided in
Section 4(2) of the Securities Act of 1933.
On September 3, 2003 the Registrant issued to The Research Works 250,000 shares
of common stock for services rendered in connection with stock promotion
activities. The value of the securities on the date of grant was $0.39 per
share. The securities were issued in reliance upon the exemption provided in
Section 4(2) of the Securities Act of 1933.
On September 30, 2003 the Registrant issued to Advanced Media Post, LLC 210,000
shares of common stock as full payment for outstanding invoices relating to
products manufactured for us. The value of the securities on the date of grant
was $0.51 per share. The securities were issued in reliance upon the exemption
provided in Section 4(2) of the Securities Act of 1933.
On November 5, 2003 the Registrant issued to Trilogy Capital Partners, Inc.
150,000 shares of common stock for services rendered. The value of the
securities on the date of grant was $0.70 per share. The Registrant also granted
warrants to Trilogy Capital Partners, Inc. to purchase an additional 150,000
shares of our common stock. The warrants were exercisable for $0.01 per share
and have been exercised. These securities were issued in reliance upon the
exemption provided in Section 4(2) of the Securities Act of 1933.
On January 30, 2004 the Registrant issued to MarketByte, LLC 50,000 shares of
common stock for services rendered in connection with stock promotion
activities. The value of the securities on the date of grant was $1.06. The
securities were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act of 1933.
On February 2, 2004 the Registrant closed a private offering of its securities
pursuant to an exemption provided in Section 4(2) of the Securities Act and
section 506 of Regulation D promulgated thereunder. In selling the securities,
the Registrant provided non-financial and financial statement information to the
investors, did not offer or sell the securities by any form of general
solicitation or general advertising, and advised each investor that the
securities could not be resold without registration under the Securities Act or
an exemption therefrom. The securities were sold to persons who represented that
they were accredited investors, as that term is defined in Rule 501 of
Regulation D.
On February 5, 2004 the Registrant issued to CEOcast, Inc. 110,000 shares of
common stock for services rendered in connection with stock promotion
activities. The value of the securities on the date of grant was $1.05. The
securities were issued in reliance upon the exemption provided by Section 4(2)
of the Securities Act of 1933. Each investor received a warrant to purchase an
additional two shares of common stock for each single share of common stock
purchased. The unit price was $0.40 per share. The warrant exercise price is
$0.75 per share. The warrants, if not exercised, will expire 10 years from the
date of grant. The Registrant sold a total of 1,875,000 shares of its common
stock in the offering, and warrants to purchase an additional 3,750,000 shares.
On February 27, 2004 the Registrant closed a private offering of its securities,
pursuant to the exemption provided in Section 4(2) of the Securities Act and
section 506 of Regulation D promulgated thereunder. In selling the securities,
the Registrant provided non-financial and financial statement information to the
investors, did not offer or sell the securities by any form of general
solicitation or general advertising, and advised each investor that the
securities could not be resold without registration under the Securities Act or
an exemption therefrom. The securities were sold with the assistance of
broker-dealers to persons who represented that they were accredited investors,
as that term is defined in Rule 501 of Regulation D. Each investor received a
warrant to purchase an additional two shares of common stock for each single
share of common stock purchased. The unit price was $0.40 per share. The warrant
exercise price is $0.75 per share. The warrants, if not exercised, will expire
10 years from the date of grant. The Registrant sold a total of 4,375,000 shares
of its common stock in the offering, and warrants to purchase an additional
8,750,000 shares. In addition to the shares sold, the Registrant paid to
Brighton Capital, Ltd. the sum of $17,000 and issued to Brighton Capital, Ltd. a
warrant for the purchase of 170,000 shares of common stock for assistance with
the offering. The warrant issued to Brighton Capital, Ltd. was identical to the
warrants issued to the participants in the private offerings. Broker-dealers or
others who assisted with the offerings were also paid cash compensation totaling
$81,000.
On March 12, 2004 the Registrant issued to Andreas Dautzenberg 15,000 shares of
common stock for assisting with the acquisition of a license. The value of the
securities on the date of grant was $0.87. The securities were issued in
reliance upon the exemption provided by Section 4(2) of the Securities Act of
1933.
On March 12, 2004 the Registrant issued to Redwood Consultants, LLC 75,000
shares of common stock for services rendered in connection with stock promotion
activities. The agreement with Redwood Consultants, LLC also anticipates that
the Registrant will pay Redwood Consultants, LLC 45,000 shares of common stock
for monthly services to be rendered over a four month period. In conjunction
with the execution of the agreement, the Registrant gave Redwood Consultants,
LLC a warrant to purchase a total of 300,000 shares of its common stock. The
warrant has a two year term. The warrant exercise price is $1.15 as to 100,000
shares, $1.50 as to 100,000 shares and $1.80 as to 100,000 shares. The
Registrant may require Redwood Consultants, LLC to exercise the warrant if the
market price of its common stock exceeds the exercise price of the warrant for a
period of five consecutive trading days. The value of the securities on the date
of grant was $0.87. The securities were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933.
On March 12, 2004 the Registrant issued to Queenstone Financial Corporation
600,000 shares of common stock for assisting with financing activities. The
value of the securities on the date of grant was $0.87. The securities were
issued in reliance upon the exemption provided by Section 4(2) and Regulation S
of the Securities Act of 1933.
On March 17, 2004 the Registrant agreed to issue to Richardson & Patel LLP
230,473 shares of common stock and a warrant to purchase an additional 460,946
shares of common stock in exchange for legal services rendered or to be rendered
having a value of $274,888. The warrant exercise price is $0.75 per share. The
warrant, if not exercised, will expire 10 years from the date of grant. The
securities were issued in reliance upon the exemption provided by Section 4(2)
and Regulation S of the Securities Act of 1933.
ITEM 27. EXHIBITS.
a. The following Exhibits are filed as part of this Registration
Statement pursuant to Item 601 of Regulation S-B:
Exhibit No. Title*
3.1 Articles of Incorporation, as amended.(1)
3.2 Bylaws of NuTech Digital, Inc (1)
5.0 Legal Opinion from Richardson & Patel LLP. (5)
10.1 2001 NuTech Digital Inc. Equity Incentive Plan, as amended August 13, 2003.(3)
10.2 Business Security Loan Agreement between NuTech Digital, Inc. and U.S. Bank N.A.,
dated as of March 20, 2002including the Addendum and Amendment thereto. (1)
10.3 Letter of Intent between NuTech Digital, Inc. and Ritek Corp. dated as of August 6,
1996 (including Letter of Intent A). (1)
10.4 Promissory Note and Commercial Security Agreement memorializing Small Business
Administration Loan between NuTech Digital, Inc. and Imperial Bank, SBA Department,
dated as of July 12, 2000. (1)
10.5 Unconditional Guarantee signed by Lee Kasper in favor of Imperial Bank dated July 12,
2000. (1)
10.6 Lease Agreement between Kathy Schreiber, Todd Lorber and Hiroko ("Lessor") and
NuTech Digital, Inc. ("Lessee") for the premises located at 7900 Gloria Avenue, Los
Angeles, CA, dated as of March 10, 2001. (1)
10.7 Joint Venture Agreement by and between NuTech Digital, Inc., and Joseph Anthony
Giarmo. (1)
10.8 Note Secured by Deed of Trust by and between Lee H. and Michelle Kasper and Skura
Intercontinental Trading Company dated February 19, 2003. (2)
10.9 Deed of Trust dated February 19, 2003 by Lee H. Kasper and Michelle Kasper in favor
of Skura Intercontinental Trading Company. (2)
10.10 Term Loan Agreement dated November 7, 2002 between Lee Kasper and U.S Bank, N.A. (2)
10.11 Addendum to Term Loan Agreement dated November 7, 2002 between U.S. Bank N.A. and Lee
Kasper. (2)
10.12 Continuing Guaranty dated November 7, 2002 executed by NuTech Digital, Inc. in favor
of U.S. Bank N.A. (2)
10.13 Business Security Agreement dated November 7, 2002 in favor of U.S. Bank N.A. and
NuTech Digital, Inc. (2)
10.14 Article 9 Certificate dated November 7, 2002 and executed by Lee Kasper in favor of
U.S. Bank N.A. (2)
10.15 Insurance Coverage for benefit of Bank dated November 7, 2002 and executed by NuTech
Digital, Inc. in favor of U.S. Bank. N.A. (2)
10.16 Promissory Note in the amount of $60,000 dated September 18, 2003 in favor of Lee
Kasper. (3)
10.17 Promissory Note in the amount of $300,000 dated September 2003 in favor of Lee
Kasper. (3)
10.18 Promissory Note in the amount of $33,334 dated September 18, 2003 in favor of Brandon
G. Kasper Trust, Lee Kasper, Trustee. (3)
10.19 Promissory Note in the amount of $33,333 dated September 18, 2003 in favor of Ryan S.
Kasper Trust, Lee Kasper, Trustee. (3)
10.20 Promissory Note in the amount of $33,333 dated September 18, 2003 in favor of Jordan
M. Kasper Trust, Lee Kasper, Trustee. (3)
10.21 Form of Common Stock Purchase Agreement. (3)
10.22 Form of Warrant. (3)
10.23 Warrant issued to Brighton Capital, Ltd.(3)
10.24 Amended and Restated NuTech Digital, Inc. 2003 Consultant Stock Plan. (3)
10.25 Consulting Agreement dated February 18, 2004 between NuTech Digital, Inc. and Redwood
Consultants, LLC
10.26 Agreement dated February 4, 2004 between NuTech Digital, Inc. and Brighton Capital, Ltd. (3)
10.27 Agreement dated January 29, 2004 between NuTech Digital, Inc. and Lyons Capital, LLP. (3)
10.28 Agreement dated February 2, 2004 between NuTech Digital, Inc. and Sloan Securities Corp. (3)
10.29 Agreement dated December 4, 2003 between NuTech Digital, Inc. and Queenstone Financial Corp.,
including an amendment thereto dated February 22, 2004. (3)
16. Letter on Change in Certifying Accountant.(4)
23.1 Consent of Farber & Hass, LLP.(5)
23.2 Consent of Richardson & Patel LLP (included in Exhibit 5.0).(5)
(1) Incorporated by reference to the respective exhibits filed with registrant's
Registration Statement on Form SB-2 (Commission File No. 333-88550).
(2) Incorporated by reference from the Registrant's Form 10-KSB for the fiscal
year ended December 31, 2002 filed on March 31, 2003, as amended on April 10,
2003.
(3) Incorporated by reference from the Registrant's Form 10-KSB for the fiscal
year ended December 31, 2003 filed on March 24, 2004, as amended on March 26,
2004.
(4) Incorporated by reference from the Registrant's Form 8-K filed on October
15, 2002.
(5) Filed herewith.
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ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel that 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 Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement;
(iii) To include any additional or changed material information on
the plan of distribution.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each 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.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant 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.
SIGNATURES
Pursuant to the requirements of the 1933 Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Van Nuys, State of California on the 26th day of
March 2004.
NUTECH DIGITAL, INC.,
a California corporation
By: /s/ Lee Kasper
-----------------------------------
Lee Kasper, President, Chief Executive
Officer, and Chief Financial Officer
Pursuant to the requirements of the 1933 Securities Act, this SB-2
Registration Statement has been signed by the following persons in the
capacities with NuTech Digital, Inc. and on the dates indicated.
Dated: March 26, 2004
/s/Lee Kasper
-----------------------------------
Lee Kasper, President, Chief Executive
Officer, Chief Financial Officer,
Chairman of the Board of Directors
Dated: March 26, 2004
/s/Joseph Giarmo
-----------------------------------
Joseph Giarmo, Vice President,
Secretary, Director
Dated: March 26, 2004
/s/Yegia Eli Aramyan
-----------------------------------
Yegia Eli Aramyan, Accountant,
Director
Dated: March 26, 2004
/s/Jay S. Hergott
-----------------------------------
Jay S. Hergott, Director