Filed Pursuant to Rule 424(b)(3)
Under the Securities Act of 1933
Registration No. 333-131660
PROSPECTUS, DATED APRIL 24, 2006
ROO Group, Inc.
10,041,414 Shares of
Common Stock
This prospectus relates to the sale by the selling stockholders of
10,041,414 shares of our common stock, including 1,550,632 shares of common
stock issuable upon exercise of outstanding warrants and 380,000 shares of
common stock issuable upon conversion of outstanding Series A Preferred Stock.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock which they are offering. We will pay the expenses
of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, and is quoted on the OTC Bulletin Board under
the symbol RGRP. The closing sale price for our common stock on April 14, 2006
was $2.85 per share.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS.
SEE "RISK FACTORS," BEGINNING ON PAGE 2.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT PERMITTED.
TABLE OF CONTENTS
Page
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Prospectus Summary ..................................................... 1
Risk Factors ........................................................... 2
Forward Looking Statements ............................................. 8
Use of Proceeds ........................................................ 8
Selling Stockholders ................................................... 8
Plan of Distribution ................................................... 20
Market for Common Equity and Related Stockholder Matters ............... 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 23
Description of Business ................................................ 31
Description of Property ................................................ 41
Legal Proceedings ...................................................... 42
Management ............................................................. 42
Executive Compensation ................................................. 43
Certain Relationships and Related Transactions ......................... 45
Security Ownership of Certain Beneficial Owners and Management ......... 46
Description of Securities .............................................. 48
Indemnification for Securities Act Liabilities ......................... 49
Changes in Independent Registered Public Accountants ................... 49
Legal Matters .......................................................... 49
Experts ................................................................ 49
Available Information .................................................. 50
Index to Financial Statements .......................................... F-1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to the financial
statements.
ROO Group, Inc.
We are a digital media company in the business of providing products and
solutions that enable the broadcast of video content from Internet websites. Our
core activities include the aggregation of video content, media management,
traditional and online advertising, hosting, and content delivery.
We have incurred losses since our inception. For the years ended December
31, 2005 and 2004, we generated revenues of $6,619,000 and $3,937,000,
respectively, and incurred net losses of $8,957,000 and $4,226,000,
respectively. At December 31, 2005, we had a working capital surplus of
$5,007,000 and an accumulated deficit of $14,335,000. Our auditors, in their
report dated March 27, 2006, have expressed substantial doubt about our ability
to continue as going concern. Effective October 3, 2005, we amended our
Certificate of Incorporation to effect a one-for-50 reverse split of our issued
and outstanding shares of common stock. All numerical references in this
registration statement to shares of common stock, stock prices, exercise prices
and conversion prices have been adjusted to post-stock split numbers.
Our principal offices are located at 228 East 45th Street 8th Floor New
York, NY 10017, and our telephone number is (212) 661-4111. Our website is
www.roogroupinc.com. We are a Delaware corporation.
The Offering
Common stock outstanding before the offering............. 13,176,436 shares.
Common stock offered by selling stockholders.............. 10,041,414 shares, which includes 1,550,632 shares
issuable upon exercise of outstanding warrants and
380,000 shares issuable upon conversion of outstanding
Series A Preferred Stock.
Common stock to be outstanding after the offering......... 15,107,068 shares.
Use of proceeds........................................... We will not receive any proceeds from the sale of the
common stock hereunder. We will receive the sale price
of any common stock we sell to the selling stockholders
upon exercise of warrants. We expect to use the
proceeds received from the exercise of warrants, if
any, for general working capital purposes. However,
the selling stockholders are entitled to exercise the
warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered
pursuant to an effective registration statement. In
the event that the selling stockholders exercise the
warrants on a cashless basis, we will not receive any
proceeds.
OTCBB Symbol.............................................. RGRP
1
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. Each of the following risks may materially and
adversely affect our business, results of operations and financial condition.
These risks may cause the market price of our common stock to decline, which may
cause you to lose all or a part of the money you paid to buy our common stock
RISKS RELATED TO OUR BUSINESS:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT
OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We have incurred losses since our inception. For the years ended December
31, 2005 and 2004, we generated revenues of $6,619,000 and $3,937,000,
respectively, and incurred net losses of $8,957,000 and $4,226,000,
respectively. At December 31, 2005, we had a working capital surplus of
$5,007,000 and an accumulated deficit of $14,335,000. Our auditors, in their
report dated March 27, 2006, have expressed substantial doubt about our ability
to continue as going concern. There can be no assurance that future operations
will be profitable. Our failure to increase our revenues significantly or
improve our gross margins will harm our business. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If our revenues grow more slowly than
we anticipate, our gross margins fail to improve, or our operating expenses
exceed our expectations, our operating results will suffer. The prices we charge
for our products and services may decrease, which would reduce our revenues and
harm our business. If we are unable to sell our products or services at
acceptable prices relative to our costs, or if we fail to develop and introduce
on a timely basis new products and services from which we can derive additional
revenues, our financial results will suffer.
OUR OPERATING SUBSIDIARIES HAVE LIMITED OPERATING HISTORIES AND THEREFORE WE
CANNOT ENSURE THE LONG-TERM SUCCESSFUL OPERATION OF OUR BUSINESS OR THE
EXECUTION OF OUR BUSINESS PLAN.
Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by growing companies in new and rapidly
evolving markets, such as the digital media software markets in which we
operate. While to date we have not experienced these problems, we must meet many
challenges including:
o Establishing and maintaining broad market acceptance of our products and
services and converting that acceptance into direct and indirect sources
of revenue;
o Establishing and maintaining adoption of our technology on a wide variety
of platforms and devices;
o Establishing and maintaining our brand name;
o Timely and successfully developing new products, product features and
services and increasing the functionality and features of existing
products and services;
o Developing services and products that result in high degrees of customer
satisfaction and high levels of customer usage;
o Successfully responding to competition, including competition from
emerging technologies and solutions; and
o Developing and maintaining strategic relationships to enhance the
distribution, features, content and utility of our products and services.
Our business strategy may be unsuccessful and we may be unable to
address the risks we face in a cost-effective manner, if at all. If we are
unable to successfully address these risks our business will be harmed.
2
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR
ADVERTISING BUSINESS MODEL.
A significant part of our business model is to generate revenue by
providing interactive marketing solutions to advertisers, ad agencies and Web
publishers. The profit potential for this business model is unproven. To be
successful, both Internet advertising and our solutions will need to achieve
broad market acceptance by advertisers, ad agencies and Web publishers. Our
ability to generate significant revenue from advertisers will depend, in part,
on our ability to contract with Web publishers that have Web sites with adequate
available ad space. Further, these Web sites must generate sufficient user
traffic with demographic characteristics attractive to our advertisers. The
intense competition among Internet advertising sellers has led to the creation
of a number of pricing alternatives for Internet advertising. These alternatives
make it difficult for us to project future levels of advertising revenue and
applicable gross margin that can be sustained by us or the Internet advertising
industry in general.
Intensive marketing and sales efforts may be necessary to educate
prospective advertisers regarding the uses and benefits of, and to generate
demand for, our products and services. Enterprises may be reluctant or slow to
adopt a new approach that may replace, limit or compete with their existing
direct marketing systems. Acceptance of our new solutions will depend on the
continued emergence of Internet commerce, communication and advertising, and
demand for its solutions. We cannot assure you that demand for our new solutions
will emerge or become sustainable.
OUR RESOURCES MAY NOT BE SUFFICIENT TO MANAGE OUR EXPECTED GROWTH; FAILURE TO
PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR BUSINESS.
We may fail to adequately manage our anticipated future growth. Any growth
in our operations will place a significant strain on our administrative,
financial and operational resources, and increase demands on our management and
on our operational and administrative systems, controls and other resources. We
cannot assure you that our existing personnel, systems, procedures or controls
will be adequate to support our operations in the future or that we will be able
to successfully implement appropriate measures consistent with our growth
strategy. As part of this growth, we may have to implement new operational and
financial systems, procedures and controls to expand, train and manage our
employee base, and maintain close coordination among our technical, accounting,
finance, marketing, sales and editorial staff. We cannot guarantee that we will
be able to do so, or that if we are able to do so, we will be able to
effectively integrate them into our existing staff and systems. To the extent we
acquire other businesses, we will also need to integrate and assimilate new
operations, technologies and personnel. If we are unable to manage growth
effectively, such as if our sales and marketing efforts exceed our capacity to
install, maintain and service our products or if new employees are unable to
achieve performance levels, our business, operating results and financial
condition could be materially adversely affected.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES, OUR BUSINESS WILL
BE HARMED.
Our business and operating results would be harmed if we fail to develop
products and services that achieve widespread market acceptance or that fail to
generate significant revenue or gross profits to offset our operating and other
costs. We may successfully identify, develop and market new product and service
opportunities in a timely manner. If we introduce new products and services,
they may not attain broad market acceptance or contribute meaningfully to our
revenue or profitability. Competitive or technological developments may require
us to make substantial, unanticipated investments in new products and
technologies, and we may not have sufficient resources to make these
investments. Because the markets for our products and services are subject to
rapid change, we must develop new product and service offerings quickly. Delays
and cost overruns could affect our ability to respond to technological changes,
evolving industry standards, competitive developments or customer requirements.
3
IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW, OR IF THE INTERNET
INFRASTRUCTURE CANNOT SUPPORT DEMANDS PLACED ON IT BY SUCH CONTINUED GROWTH, OUR
BUSINESS WILL BE HARMED.
The growth of our business depends on the continued growth of the Internet
as a medium for media consumption, communications, electronic commerce and
advertising, and also on the growth of the wireless data market, including the
growth of devices with multimedia capability. Our business will be harmed if
Internet usage does not continue to grow, particularly as a source of media
information and entertainment and as a vehicle for commerce in goods and
services, or if widespread adoption of technology to access data and multimedia
content on wireless devices does not occur. If Internet usage grows, the
Internet infrastructure may not be able to support the demands placed on it by
such growth, specifically the demands of delivering high-quality media content.
If this were to occur, our business and financial condition would be harmed.
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR PROVIDING THIRD-PARTY PRODUCTS,
SERVICES OR CONTENT.
We have arrangements to offer third-party products, services, content or
advertising via distribution on our Web sites. We may be subject to claims
concerning these products, services, content or advertising by virtue of our
involvement in marketing, branding, broadcasting or providing access to them,
even if we do not ourselves host, operate, or provide access to these products,
services, content or advertising. While our agreements with these parties often
provide that we will be indemnified against such liabilities, such
indemnification may not be adequate. It is also possible that if any information
provided directly by us contains errors or is otherwise negligently provided to
users, third parties could make claims against us. Investigating and defending
any of these types of claims is expensive, even if the claims do not result in
liability. While to date we have not been subject to material claims, if any
potential claims do result in liability, we could be required to pay damages or
other penalties, which could harm our business and our operating results.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The market for software and services for media delivery over the Internet
is relatively new and constantly changing. We expect that competition will
continue to intensify. Increased competition may result in price reductions,
reduced margins, loss of customers, and a change in our business and marketing
strategies, any of which could harm our business. Many of our current and
potential competitors have longer operating histories, greater name recognition,
more employees and significantly greater financial, technical, marketing, public
relations and distribution resources than we do. In addition, new competitors
with potentially unique or more desirable products or services may enter the
market at any time. The competitive environment may require us to make changes
in our products, pricing, licensing, services or marketing to maintain and
extend our current brand and technology. Price concessions or the emergence of
other pricing, licensing and distribution strategies or technology solutions of
competitors may reduce our revenue, margins or market share, any of which will
harm our business. Other changes we have to make in response to competition
could cause us to expend significant financial and other resources, disrupt our
operations, strain relationships with partners, or release products and
enhancements before they are thoroughly tested, any of which could harm our
operating results and stock price.
ANY FAILURE OF OUR NETWORK COULD LEAD TO SIGNIFICANT DISRUPTIONS IN OUR SERVICES
BUSINESS, WHICH COULD DAMAGE OUR REPUTATION, REDUCE OUR REVENUES OR OTHERWISE
HARM OUR BUSINESS.
Our business is dependent upon providing our customers with fast,
efficient and reliable services. A reduction in the performance, reliability or
availability of our Web sites and network infrastructure may harm our ability to
distribute our products and services to our clients, as well as our reputation
and ability to attract and retain clients, customers, advertisers and content
providers. Our systems and operations are susceptible to, and could be damaged
or interrupted by outages caused by fire, flood, power loss, telecommunications
failure, Internet breakdown, earthquake and similar events. Our systems are also
subject to human error, security breaches, power losses, computer viruses,
break-ins, "denial of service" attacks, sabotage, intentional acts of vandalism
and tampering designed to disrupt our computer systems, Web sites and network
communications, and our systems could be subject to greater vulnerability in
periods of high employee turnover. A sudden and significant increase in traffic
on our Web sites could strain the capacity of the software, hardware and
telecommunications systems that we deploy or use. This could lead to slower
response times or system failures. Our failure to protect our network against
damage from any of these events will harm our business.
4
Our operations also depend on receipt of timely feeds from our content
providers, and any failure or delay in the transmission or receipt of such feeds
could disrupt our operations. We also depend on Web browsers, ISPs and online
service providers to provide Internet users access to our websites and the
websites of our customers on which we display advertising. Many of these
providers have experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems.
WE DEPEND ON VARIOUS THIRD PARTIES TO MAINTAIN OUR COMMUNICATIONS HARDWARE AND
PERFORM MOST OF OUR COMPUTER HARDWARE OPERATIONS. IF THE THIRD PARTIES' HARDWARE
AND OPERATIONS FAIL, OUR BUSINESS WE BE HARMED.
Substantially all of our communications hardware and most of our computer
hardware operations are located at AT&T and Speedera facilities in New York. If
either AT&T's or Speedera's hardware and operations fail, our reputation and
business will suffer. We do not have complete backup systems for these
operations. We have a limited disaster recovery plan in the event of damage from
fire, floods, hurricanes, earthquakes, power loss, telecommunications failures,
break-ins and similar events. Our operations are dependent on our ability to
protect our computer systems against these unexpected adverse events. If any of
the foregoing occurs, we may experience a complete system shutdown. We have
service level agreements in place with both Speedera and AT&T. A problem with,
or failure of, our communications hardware or operations could result in
interruptions or increases in response times on the Internet sites of our
customers. If we cannot maintain our system in the event of unexpected
occurrences, make necessary modifications and/or improvements to the technology,
such deficiencies could have a material adverse effect upon our business,
financial condition and results of operations.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES. IF WE ARE UNABLE TO
MAINTAIN THESE LICENSES, OUR OPERATIONS AND FINANCIAL CONDITION WILL BE
MATERIALLY ADVERSELY AFFECTED.
We license technology from third parties, including software that is
integrated with internally developed software and used in our products to
perform key functions. The loss of, or our inability to maintain, these licenses
could result in increased costs or delay sales of our products. We anticipate
that we will continue to license technology from third parties in the future.
This technology may not continue to be available on commercially reasonable
terms, if at all. Although we do not believe that we are substantially dependent
on any individual licensed technology, some of the software that we license from
third parties could be difficult for us to replace. The loss of any of these
technology licenses could result in delays in the license of our products until
equivalent technology, if available, is developed or identified, licensed and
integrated. The use of additional third-party software would require us to
negotiate license agreements with other parties, which could result in higher
royalty payments and a loss of product differentiation.
WE DEPEND ON CONTENT LICENSED TO US BY THIRD PARTIES. IF WE ARE UNABLE TO
MAINTAIN THESE LICENSES, OUR OPERATIONS AND FINANCIAL CONDITION WILL BE
MATERIALLY ADVERSELY AFFECTED.
We rely on content provided by third parties to increase market acceptance
of our products and services. If third parties do not develop or offer
compelling content to be delivered over the Internet, or grant necessary
licenses to us or our customers to distribute or perform such content, our
business will be harmed and our products and services may not achieve or sustain
broad market acceptance. We rely on third-party content providers to develop and
offer content in our formats that can be delivered using our server products. We
also rely entirely on third-party content for the programming and content
offerings. In some cases, we pay substantial fees to obtain content for these
services. We cannot guarantee that third-party content providers will continue
to support our technology or offer compelling content in our formats, nor can we
guarantee that we will be able to secure licenses to their content or that such
licenses will be available at commercially reasonable rates, to encourage and
sustain broad market acceptance of our products and services. The failure to do
so would materially adversely harm our business operations and financial
condition.
5
IF WE DO NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY
EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY HARMED.
A large majority of our software was acquired from third parties. We have
not registered copyrights on any of the software we have developed. We rely upon
confidentiality agreements signed by our employees, consultants and third
parties to protect our intellectual property. We cannot assure you that we can
adequately protect our intellectual property or successfully prosecute potential
infringement of our intellectual property rights. Also, we cannot assure you
that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of ours or that we will be able to successfully resolve these
types of conflicts to our satisfaction. Our failure to protect our intellectual
property rights would result in a loss of revenue and could materially adversely
affect our operations and financial condition.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF ROBERT PETTY AND ROBIN SMYTH OR IF WE
ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS.
Our success depends to a significant extent upon the continued service of
Robert Petty, our Chief Executive Officer and Chairman of our Board of
Directors, and Robin Smyth, our Chief Financial Officer and a member of our
Board of Directors. Loss of the services of Messrs. Petty or Smyth could have a
material adverse effect on our growth, revenues, and prospective business. We
have entered into employment agreements with Messrs. Petty and Smyth, the
material terms of which are described beginning on page 44 of this Prospectus.
We maintain key-man insurance on the life of Messrs. Petty and Smyth in the
amount of $1,000,000 for Mr. Petty and $500,000 for Mr. Smyth. If Messrs. Petty
or Smyth were to resign, the loss could result in loss of sales, delays in new
product development and diversion of management resources, and we could face
high costs and substantial difficulty in hiring qualified successors and could
experience a loss in productivity while any such successor obtains the necessary
training and experience. In addition, in order to successfully implement and
manage our business plan, we are dependent upon, among other things,
successfully recruiting qualified personnel who are familiar with the specific
issues facing the Internet media industry. In particular, we must hire and
retain experienced management personnel to help us continue to grow and manage
our business, and skilled software engineers to further our research and
development efforts. Competition for qualified personnel is intense. If we do
not succeed in attracting new personnel or in retaining and motivating our
current personnel, our business could be harmed.
OUR DIRECTORS AND EXECUTIVE OFFICERS CONTROL A SIGNIFICANT PORTION OF OUR
OUTSTANDING COMMON STOCK. THEIR INTERESTS MAY CONFLICT WITH OUR OUTSIDE
STOCKHOLDERS, WHO MAY BE UNABLE TO INFLUENCE MANAGEMENT AND EXERCISE CONTROL
OVER OUR BUSINESS.
As of April 14, 2006, our executive officers and directors beneficially
owned approximately 17.4% of our outstanding common stock and have voting
control over 70.9% of the outstanding shares of our equity. As a result, our
executive officers and directors have significant influence to: elect or defeat
the election of our directors, amend or prevent amendment of our articles of
incorporation or bylaws, effect or prevent a merger, sale of assets or other
corporate transaction, and control the outcome of any other matter submitted to
the shareholders for vote. Accordingly, our outside stockholders may be unable
to influence management and exercise control over our business.
6
RISKS RELATED TO OUR SECURITIES:
THE ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF
CONTROL AND COULD DILUTE THE VOTING POWER OF OUR COMMON STOCK AND REDUCE THE
MARKET PRICE OF OUR COMMON STOCK.
Our authorized capital stock includes 20,000,000 shares of preferred
stock, of which 10,000,000 shares are designated as Series A Preferred Stock.
The remaining 10,000,000 shares of authorized preferred stock is blank check
preferred stock. Our Board of Directors is authorized to designate such stock
with preferences and relative, participating, optional or other special rights
and qualifications, limitations or restrictions as they deem advisable without
shareholder approval. The effect of designating and issuing additional shares of
preferred stock upon the rights of our common stockholders cannot be stated
until our Board determines the specific rights of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, reducing the market
price of the common stock, or impairing the liquidation rights of the common
stock, without further action by our shareholders. The designation and issuance
of preferred stock could also have the effect of making it more difficult or
time consuming for a third party to acquire a majority of our outstanding voting
stock or otherwise effect a change of control. Shares of preferred stock may be
sold to third parties that indicate that they would support the Board in
opposing a hostile takeover bid. Our blank check preferred stock is not intended
to be an anti-takeover measure, and we are not aware of any present third party
plans to gain control of our company. Although we may consider issuing preferred
stock in the future for purposes of raising additional capital or in connection
with acquisition transactions, we currently have no binding agreements or
commitments with respect to the issuance of any additional shares of preferred
stock.
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET
FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR
YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for our common stock has historically been very
volatile. Over the last two completed fiscal years and subsequent quarterly
periods, the market price for our common stock has ranged from $0.50 to $17.50
(adjusted to reflect a one-for-50 reverse stock split effective October 3, 2005;
see "Market for Common Equity and Related Stockholder Matters on page 21 of this
Prospectus). Any future market price for our shares is likely to continue to be
very volatile. This price volatility may make it more difficult for you to sell
shares when you want at prices you find attractive. We do not know of any one
particular factor that has caused volatility in our stock price. However, the
stock market in general has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies. Broad market factors and the investing public's negative
perception of our business may reduce our stock price, regardless of our
operating performance. Further, the market for our common stock is limited and
we cannot assure you that a larger market will ever be developed or maintained.
Market fluctuations and volatility, as well as general economic, market and
political conditions, could reduce our market price. As a result, this may make
it difficult or impossible for you to sell our common stock for a positive
return on your investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 3a51-1 which
establishes the definition of a "penny stock," for purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share or with
an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased
IN ORDER TO APPROVE A PERSON'S ACCOUNT FOR TRANSACTIONS IN PENNY
STOCKS, THE BROKER OR DEALER MUST:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
7
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
FORWARD-LOOKING STATEMENTS
Information in this prospectus contains forward-looking statements. These
forward-looking statements can be identified by the use of words such as
"believes," "estimates," "could," "possibly," "probably," "anticipates,"
"projects," "expects," "may," or "should" or other variations or similar words.
No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that could
cause actual results to vary materially from the future results anticipated by
those forward-looking statements. A description of key factors that have a
direct bearing on our results of operations is provided above under "Risk
Factors" beginning on page 2 of this Prospectus.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the exercise price of any common stock we issue to the selling
stockholders upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, the selling stockholders are entitled to exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that the selling stockholders exercise the warrants on a
cashless basis, then we will not receive any proceeds.
SELLING STOCKHOLDERS
The following table sets forth the common stock ownership and other
information relating to the selling stockholders as of April 14, 2006. The
selling stockholders acquired their securities: (1) pursuant our August 2005
financing, the material terms of which are described beginning on page 26 of
this Prospectus; (2) pursuant to our October 2005 financing, the material terms
of which are described on page 27 of this Prospectus; (3) pursuant to our
December 2005 financing, the material terms of which are described beginning on
page 27 of this Prospectus; (4) upon conversion of secured convertible notes
issued to the selling stockholders by Robert Petty, our Chairman, President and
Chief Executive Officer, individually; (5) pursuant to the Stock Purchase
Agreement dated March 11, 2004 by and among ROO Group, Inc. and the shareholders
of Reality Group Pty Ltd. (the "Reality Group Stock Purchase Agreement"), as
amended, the material terms of which are described beginning on page 32 of this
Prospectus; and (6) as consideration for service as executive officers or
consultants. Other than as set forth in the following table, the selling
stockholders have not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years.
8
Shares of Common Stock
Beneficially Owned
Number of Shares of Common After the Offering (1)
Stock Beneficially Owned Number of Shares Offered ----------------------
Name Prior to the Offering Pursuant to this Prospectus Number Percent
- -------------------------------------------- --------------------------- ---------------------------- ------ -------
Act II Partners, LP (2) 233,334 233,334 0 0%
Alexandra Dawson Foundation (3) 90,930 90,930 0 0%
Austin Lewis (4) 6,080 6,080 0 0%
Blair Brewster (5) 148,667 148,667 0 0%
Bradley C. Reifler (6) 109,990 109,990 0 0%
Brian Wilkinson (7) 6,750 6,750 0 0%
Cass G Adelman Cust for Jasper Gunther 17,437 17,437 0 0%
Adelman UTMA (8)
Cass G Adelman Cust for Phillippa Gunther 17,437 17,437 0 0%
Adelman UTMA (9)
CGA Resources, LLC (10) 34,873 34,873 0 0%
Charles H. Brunie (11) 280,000 280,000 0 0%
Charles Hover IV (12) 1,750 1,750 0 0%
Cobble Creek Consulting, Inc. (13) 40,000 40,000 0 0%
Conrad N Hilton Foundation (14) 399,000 399,000 0 0%
Daniel Kaufman (15) 68,667 68,667 0 0%
Daniel Schneiderman (16) 500 500 0 0%
Dan Ly (17) 4,600 4,600 0 0%
Dekko Foundation (18) 144,900 144,900 0 0%
Edwin B Stimpson Co Inc Emp Ret Plan (19) 10,500 10,500 0 0%
Eric Singer (20) 389,766 389,766 0 0%
Estate of William D Witter (21) 21,620 21,620 0 0%
Gabelli Multimedia Partner, LP (22) 93,334 93,334 0 0%
Gary N. Moss (23) 14,000 14,000 0 0%
Gavin Campion atf the Campion Investment 35,928 35,928 0 0%
Trust (24)
9
Hanjiro "James" Kawai (25) 16,667 16,667 0 0%
Harman Stoller Capital Partners II Ltd. (26) 19,412 19,412 0 0%
Harman Stoller Capital Partners Master 84,147 84,147 0 0%
Fund, Ltd. (27)
Hebrides LP (28) 583,473 583,473 0 0%
Hebrides II Offshore Fund Limited (29) 140,293 140,293 0 0%
Hilary Bergman (30) 24,816 24,816 0 0%
Hyde Park Foundry & Machine Pension Fund 19,534 19,534 0 0%
(31)
Iroquois Master Fund, Ltd. (32) 116,668 116,668 0 0%
Jack Brimberg (33) 98,817 98,817 0 0%
Jason Adelman (34) 65,133 65,133 0 0%
Jay Tomlinson (35) 44,977 44,977 0 0%
Jesup & Lamont Securities Corp. (36) 1,400 1,400 0 0%
John Kaiser (37) 2,566 2,566 0 0%
Joshua Abram (38) 34,333 34,333 0 0%
Keith Davidson atf the K Davidson 35,928 35,928 0 0%
Investment Trust (24)
Kellogg Capital Group, LLC (39) 34,873 34,873 0 0%
Kevin Fisher (40) 46,666 46,666 0 0%
Laddcap Value Partners, LP (41) 303,620 303,620 0 0%
Lara Casano (42) 3,850 3,850 0 0%
Lewis Opportunity Fund, LP (43) 166,667 166,667 0 0%
Maple Tree Partners, L.P. (44) 116,666 116,666 0 0%
Matthew Balk (45) 21,306 21,306 0 0%
Matthew Pinkington (46) 10,300 10,300 0 0%
Meadowbrook Opportunity Fund LLC (47) 84,000 84,000 0 0%
Menderes and Linda Akdag (48) 41,740 41,740 0 0%
10
Michael Bollen atf the Bollen Investment 143,712 143,712 0 0%
Trust (24)
Nite Capital LP (49) 115,333 115,333 0 0%
North Shore Oral Surgery Group Ret. Plan 34,873 34,873 0 0%
Dated 2-9-00 FBO Lawrence Monaldo (50)
Olympus Securities, LLC (51) 26,250 26,250 0 0%
Pershing LLC FBO Theodore F. Marolda IRA 82,953 82,593 0 0%
(52)
Peter Davidson (53) 30,300 30,300 0 0%
Peter Michaelis (54) 41,200 41,200 0 0%
Peter R. McMullin (55) 14,000 14,000 0 0%
Robert McGrath (56) 5,000 5,000 0 0%
Robert Petty (57) 2,120,000 240,000 1,880,000 13.5%
Robin Smyth (58) 360,000 60,000 300,000 2.2%
Rubin Irrevocable Family Trust (59) 60,000 60,000 0 0%
Sage Master Investments Ltd. (60) 469,000 469,000 0 0%
Sage Opportunity Fund, LP (61) 172,900 172,900 0 0%
Schlumberger Master Pension Trust (62) 606,879 606,879 0 0%
SDS Capital Group SPC (63) 174,367 174,367 0 0%
Sheldon Sevinor Trust, Sheldon Sevinor TTEE 34,333 34,333 0 0%
DTD 9-26-95 (64)
Singer Congressional Fund LP (65) 40,840 40,840 0 0%
Singer Fund LP (66) 151,590 151,590 0 0%
Singer Opportunity Fund LP (67) 227,743 227,743 0 0%
SM Investors, LP (68) 82,496 82,496 0 0%
SM Investors II, LP (69) 162,374 162,374 0 0%
SM Investors Offshore, Ltd. (70) 62,564 62,564 0 0%
Smithfield Fiduciary LLC (71) 233,334 233,334 0 0%
Southpoint Fund LP (72) 133,160 133,160 0 0%
11
Southpoint Offshore Operating Fund LP (73) 609,623 609,623 0 0%
Southpoint Qualified Fund LP (74) 530,385 530,385 0 0%
Southside Hospital (75) 83,530 83,530 0 0%
Sovereign Bank (76) 170,100 170,100 0 0%
Sovereign Capital Advisors LLC (77) 80,340 80,340 0 0%
Stuart Subotnick (78) 348,733 348,733 0 0%
Theodore J. Marolda (79) 166,360 166,360 0 0%
Theodore Swindells (80) 80,000 80,000 0 0%
Truistic Pty Ltd atf Lee Investment Trust 143,712 143,712 0 0%
(24)
William A. Lewis IV (81) 13,500 13,500 0 0%
William W. Caldwell III & Priscilla V. 41,740 41,740 0 0%
Caldwell (82)
William D Witter Inc 401k Profit sharing 23,108 23,108 0 0%
(83)
W. Stewart Cahn (84) 57,167 57,167 0 0%
TOTAL SHARES OFFERED 10,041,414
==========
(1) Assumes that all shares of common stock registered will be sold and
that all shares of common stock underlying warrants will be issued and
sold.
(2) Represents: (a) 166,667 shares of common stock purchased pursuant to
our December 2005 financing; and (b) 66,667 shares of common stock
issuable upon exercise of warrants with an exercise price of $4.00 per
share and an expiration date of December 28, 2010 purchased pursuant to
our December 2005 financing.
(3) Represents: (a) 86,660 shares of common stock purchased pursuant our
August 2005 financing; and (b) 4,330 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(4) Represents 6,080 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010. At the time of our December
2005 financing, Mr. Lewis was a registered representative of Brimberg &
Co., a registered broker-dealer. The placement agent warrants were
received as compensation for placement agent services.
(5) Represents: (a) 80,000 shares of common stock acquired upon conversion
of $100,000 principal amount secured convertible notes issued by Robert
Petty individually; and (b) 66,667 shares of common stock purchased
pursuant to our October 2005 financing; and (c) 2,000 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the October 2005 financing.
(6) Represents: (a) 2,400 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.25 per share and
an expiration date of August 23, 2010; (b) 12,267 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of August 23,
2010; (c) 4,650 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2010; (d) 5,500 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010; (e) 40,000 shares of common stock acquired upon conversion of
$50,000 principal amount secured convertible notes issued by Robert
Petty individually; (f) 27,000 shares of common stock purchased
pursuant our August 2005 financing; (g) 16,333 shares of common stock
purchased pursuant to our October 2005 financing; and (h) 1,840 shares
of common stock acquired as liquidated damages in connection with
registration rights associated with the August 2005 and October 2005
financings. At the time of our August 2005, October 2005 and December
2005 financings, Mr. Reifler was a registered representative of Pali
Capital, Inc., a registered broker-dealer. The placement agent warrants
were received as compensation for placement agent services. The other
securities owned by Mr. Reifler were purchased by Mr. Reifler for
investment purposes.
12
(7) Represents: (a) 4,750 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; and (b) 2,000 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our August 2005 and December 2005 financings,
Mr. Wilkinson was a registered representative of Brimberg & Co., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(8) Represents: (a) 13,500 shares of common stock purchased pursuant our
August 2005 financing; (b) 3,167 shares of common stock purchased
pursuant to our October 2005 financing; and (c) 770 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
(9) Represents: (a) 13,500 shares of common stock purchased pursuant our
August 2005 financing; (b) 3,167 shares of common stock purchased
pursuant to our October 2005 financing; and (c) 770 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
(10) Represents: (a) 27,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 6,333 shares of common stock purchased
pursuant to our October 2005 financing; and (c) 1,540 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Cass G. Adelman has voting and dispositive control over the securities
held by CGA Resources, LLC.
(11) Represents: (a) 200,000 shares of common stock purchased pursuant to
our December 2005 financing; and (b) 80,000 shares of common stock
issuable upon exercise of warrants with an exercise price of $4.00 per
share and an expiration date of December 28, 2010 purchased pursuant to
our December 2005 financing.
(12) Represents 1,750 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010. At the time of our August 2005
financing, Mr. Hover was a registered representative of Brimberg & Co.,
a registered broker-dealer. The placement agent warrants were received
as compensation for placement agent services.
(13) Represents shares of common stock issuable upon conversion of 1,000,000
shares of Series A Preferred Stock. Each share of Series A Preferred
Stock is convertible into four one hundredth (0.04) of a share of
common stock.
(14) Represents: (a) 380,000 shares of common stock purchased pursuant our
August 2005 financing; and (b) 19,000 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the August 2005 financing.
(15) Represents: (a) 66,667 shares of common stock purchased pursuant our
October 2005 financing; and (b) 2,000 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the October 2005 financing.
(16) Represents 500 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010. At the time of our December
2005 financing, Mr. Schneiderman was a registered representative of
Pali Capital, Inc., a registered broker-dealer. The placement agent
warrants were received as compensation for placement agent services.
(17) Represents: (a) 3,100 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2005; and (b) 1,500 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our October 2005 and December 2005 financings,
Mr. Ly was a registered representative of Pali Capital, Inc., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(18) Represents: (a) 138,000 shares of common stock purchased pursuant our
August 2005 financing; and (b) 6,900 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
13
(19) Represents: (a) 10,000 shares of common stock purchased pursuant our
August 2005 financing; and (b) 500 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(20) Represents: (a) 38,400 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.25 per share and
an expiration date of August 23, 2010; (b) 196,266 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of August 23,
2010; (c) 65,100 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2010; and (d) 90,000 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our August 2005, October 2005 and December
2005 financings, Mr. Singer was a registered representative of Pali
Capital, Inc., a registered broker-dealer. The placement agent warrants
were received as compensation for placement agent services.
(21) Represents: (a) 20,590 shares of common stock purchased pursuant our
August 2005 financing; and (b) 1,030 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(22) Represents: (a) 66,667 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 26,667 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(23) Represents: (a) 10,000 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 4,000 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(24) Represents shares of common stock acquired pursuant to the Reality
Group Stock Purchase Agreement, as
amended.
(25) Represents shares of common stock acquired from Matthew Balk pursuant
to a private purchase transaction.
(26) Represents: (a) 7,333 shares of common stock purchased pursuant to our
October 2005 financing; (b) 11,600 shares of common stock acquired
from Paradigm Equities Fund II LLC pursuant to a private purchase
transaction; and (c) 479 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with our August 2005 and October 2005 financings. Matthew Harman has
voting and dispositive control over the securities held by Harman
Stoller Capital Partners II Ltd.
(27) Represents: (a) 7,333 shares of common stock purchased pursuant our
August 2005 financing; (b) 40,000 shares of common stock purchased
pursuant our October 2005 financing; (c) 33,733 shares of common stock
acquired from Paradigm Equities Fund II LLC pursuant to a private
purchase transaction; and (d) 3,081 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 and October 2005 financings. Matthew Harman has
voting and dispositive control over the securities held by Harman
Stoller Capital Partners Master Fund, Ltd.
(28) Represents: (a) 324,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 76,000 shares of common stock purchased
pursuant our October 2005 financing; (c) 18,480 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; (d)
117,852 shares of common stock purchased pursuant to our December 2005
financing; and (e) 47,141 shares of common stock issuable upon exercise
of warrants with an exercise price of $4.00 per share and an expiration
date of December 28, 2010 purchased pursuant to our December 2005
financing. Anthony Bune has voting and dispositive control over the
securities held by Hebrides LP.
(29) Represents: (a) 81,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 19,000 shares of common stock purchased
pursuant our October 2005 financing; (c) 4,620 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; (d) 25,481
shares of common stock purchased pursuant to our December 2005
financing; and (e) 10,192 shares of common stock issuable upon exercise
of warrants with an exercise price of $4.00 per share and an expiration
date of December 28, 2010 purchased pursuant to our December 2005
financing. Anthony Bune has voting and dispositive control over the
securities held by Hebrides II Offshore Fund Limited.
(30) Represents: (a) 2,400 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.25 per share and
an expiration date of August 23, 2010; (b) 12,266 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of August 23,
2010; (c) 4,650 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2010; and (d) 5,500 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our August 2005, October 2005 and December
2005 financings, Ms. Bergman was a registered representative of Pali
Capital, Inc., a registered broker-dealer. The placement agent warrants
were received as compensation for placement agent services.
14
(31) Represents: (a) 18,604 shares of common stock purchased pursuant our
August 2005 financing; and (b) 930 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(32) Represents: (a) 83,334 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 33,334 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(33) Represents: (a) 41,265 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; (b) 17,685 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of October 21,
2010; (c) 31,117 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010and (d) 8,750 shares of common
stock issuable upon exercise of warrants with an exercise price of
$3.00 per shares acquired as compensation for financial consulting
services. At the time of our August 2005 and October 2005 financings,
Mr. Brimberg was a registered representative of Brimberg & Co., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(34) Represents: (a) 4,800 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.25 per share and
an expiration date of August 23, 2010; (b) 24,533 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of August 23,
2010; (c) 9,300 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2010;(d) 6,500 shares of common stock
issuable upon exercise of placement agent warrants with an exercise
price of $3.00 per share and an expiration date of December 29, 2010;
and (e) 20,000 shares of common stock acquired upon conversion of
$25,000 principal amount secured convertible notes issued by Robert
Petty individually. At the time of our August 2005, October 2005 and
December 2005 financings, Mr. Adelman was a registered representative
of Pali Capital, Inc., a registered broker-dealer. The placement agent
warrants were received as compensation for placement agent services.
The other securities owned by Mr. Adelman were purchased by Mr. Adelman
for investment purposes.
(35) Represents: (a) 17,710 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; (b) 7,590 shares of common stock
issuable upon exercise of placement agent warrants with an exercise
price of $1.50 per share and an expiration date of October 21, 2010;
(c) 13,427 shares of common stock issuable upon exercise of placement
agent warrants with an exercise price of $3.00 per share and an
expiration date of December 29, 2010; and (d) 6,250 shares of common
stock issuable upon exercise of warrants with an exercise price of
$3.00 per shares acquired as compensation for financial consulting
services. At the time of our August 2005, October 2005 and December
2005 financings, Mr. Tomlinson was a registered representative of
Brimberg & Co., a registered broker-dealer. The placement agent
warrants were received as compensation for placement agent services.
(36) Represents 1,400 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010. Jesup & Lamont Securities
Corp. is a registered broker-dealer. The placement agent warrants were
received as compensation for placement agent services.
(37) Represents: (a) 1,750 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; and (b) 816 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our August 2005 and December 2005 financings,
Mr. Kaiser was a registered representative of Brimberg & Co., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(38) Represents: (a) 33,333 shares of common stock purchased pursuant our
October 2005 financing; and (b) 1,000 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the October 2005 financing.
15
(39) Represents: (a) 27,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 6,333 shares of common stock purchased
pursuant our October 2005 financing; and (c) 1,540 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Matthew Pilkington has voting and dispositive control over the
securities held by Kellogg Capital Group, LLC.
(40) Represents: (a) 33,333 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 13,333 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(41) Represents: (a) 80,000 shares of common stock acquired upon conversion
of $100,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 81,000 shares of common stock purchased
pursuant our August 2005 financing; (c) 4,620 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; (d) 19,000
shares of common stock purchased pursuant our October 2005 financing;
(e) 85,000 shares of common stock purchased pursuant to our December
2005 financing; and (f) 34,000 shares of common stock issuable upon
exercise of warrants with an exercise price of $4.00 per share and an
expiration date of December 28, 2010 purchased pursuant to our December
2005 financing. Robert Ladd has voting and dispositive control over the
securities held by Laddcap Value Partners, LP.
(42) Represents: (a) 3,100 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of October 21, 2010; and (b) 750 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our October 2005 and December 2005 financings,
Ms. Casano was a registered representative of Pali Capital, Inc., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(43) Represents: (a) 66,667 shares of common stock purchased pursuant our
August 2005 financing; (b) 66,667 shares of common stock purchased
pursuant our October 2005 financing; (c) 5,333 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; (d) 20,000
shares of common stock purchased pursuant to our December 2005
financing; and (e) 8,000 shares of common stock issuable upon exercise
of warrants with an exercise price of $4.00 per share and an expiration
date of December 28, 2010 purchased pursuant to our December 2005
financing. William A. Lewis IV has voting and dispositive control over
the securities held by Lewis Opportunity Fund, LP.
(44) Represents: (a) 83,333 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 33,333 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(45) Represents: (a) 10,333 shares of common stock purchased pursuant our
August 2005 financing; (b) 6,333 shares of common stock purchased
pursuant our October 2005 financing; (c) 1,540 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; and (d)
3,100 shares of common stock issuable upon exercise of placement agent
warrants with an exercise price of $1.50 per share and an expiration
date of October 21, 2010. At the time of our October 2005 financing,
Mr. Balk was a registered representative of Pali Capital, Inc., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services. The other securities owned
by Mr. Balk were purchased by Mr. Balk for investment purposes.
(46) Represents: (a) 10,000 shares of common stock purchased pursuant our
October 2005 financing; and (b) 300 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the October 2005 financing.
(47) Represents: (a) 14,000 shares of common stock acquired from Harman
Stoller Capital Partners II Ltd. pursuant to a private purchase
transaction; (b) 66,000 shares of common stock acquired from Harman
Stoller Capital Master Fund, Ltd. pursuant to a private purchase
transaction; and (c) 4,000 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(48) Represents: (a) 27,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 13,000 shares of common stock purchased
pursuant our October 2005 financing; and (c) 1,740 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
16
(49) Represents: (a) 66,667 shares of common stock purchased pursuant our
October 2005 financing; (b) 2,000 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the October 2005 financing; (c) 33,333 shares of common stock
purchased pursuant to our December 2005 financing; and (d) 13,333
shares of common stock issuable upon exercise of warrants with an
exercise price of $4.00 per share and an expiration date of December
28, 2010 purchased pursuant to our December 2005 financing. Keith
Goodman has voting and dispositive control over the securities held by
Nite Capital LP.
(50) Represents: (a) 27,000 share of common stock purchased pursuant to our
August 2005 financing; (b) 6,333 shares of common stock purchased
pursuant our October 2005 financing; and (c) 1,540 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
(51) Represents 26,250 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010. Olympus Securities, LLC is a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(52) Represents: (a) 27,667 shares of common stock purchased pursuant our
August 2005 financing; (b) 52,333 shares of common stock purchased
pursuant our October 2005 financing; (c) 1,383 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 financing; and (d) 1,570 shares of
common stock acquired as liquidated damages in connection with
registration rights associated with the October 2005 financing.
(53) Represents: (a) 20,000 shares of common stock acquired upon conversion
of $25,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 10,000 shares of common stock purchased
pursuant our October 2005 financing; and (c) 300 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the October 2005 financing.
(54) Represents: (a) 40,000 shares of common stock purchased pursuant our
October 2005 financing; and (b) 1,200 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the October 2005 financing.
(55) Represents: (a) 10,000 shares of common stock purchased pursuant to our
December 2005 financing; and (b) 4,000 shares of common stock issuable
upon exercise of warrants with an exercise price of $4.00 per share and
an expiration date of December 28, 2010 purchased pursuant to our
December 2005 financing.
(56) Represents: (a) 3,000 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; and (b) 2,000 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $3.00 per share and an expiration date of December
29, 2010. At the time of our August 2005 and December 2005 financings,
Mr. McGrath was a registered representative of Brimberg & Co., a
registered broker-dealer. The placement agent warrants were received as
compensation for placement agent services.
(57) Represents shares of common stock issuable upon conversion of 6,000,000
shares of Series A Preferred Stock. Each share of Series A Preferred
Stock is convertible into four one hundredth (0.04) of a share of
common stock. Robert Petty is our Chairman, President and Chief
Executive Officer.
(58) Represents shares of common stock issuable upon conversion of 1,500,000
shares of Series A Preferred Stock. Each share of Series A Preferred
Stock is convertible into four one hundredth (0.04) of a share of
common stock. Robin Smyth is one of our directors as well as our Chief
Financial Officer, Principal Accounting Officer, Secretary and
Treasurer.
(59) Represents: (a) 20,000 shares of common stock acquired upon conversion
of $25,000 principal amount secured convertible notes issued by Robert
Petty individually; and (b) 40,000 shares of common stock issuable upon
conversion of 1,000,000 shares of Series A Preferred Stock. Each share
of Series A Preferred Stock is convertible into four one hundredth
(0.04) of a share of common stock.
(60) Represents: (a) 335,000 shares of common stock purchased pursuant to
our December 2005 financing; and (b) 134,000 shares of common stock
issuable upon exercise of warrants with an exercise price of $4.00 per
share and an expiration date of December 28, 2010 purchased pursuant to
our December 2005 financing.
(61) Represents: (a) 123,500 shares of common stock purchased pursuant to
our December 2005 financing; and (b) 49,400 shares of common stock
issuable upon exercise of warrants with an exercise price of $4.00 per
share and an expiration date of December 28, 2010 purchased pursuant to
our December 2005 financing.
(62) Represents: (a) 577,980 shares of common stock purchased pursuant our
August 2005 financing; and (b) 28,899 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the August 2005 financing.
17
(63) Represents: (a) 135,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 31,667 shares of common stock purchased
pursuant our October 2005 financing; and (c) 7,700 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Steve Derby has voting and dispositive control over the securities held
by SDS Capital Group SPC.
(64) Represents: (a) 33,333 shares of common stock purchased pursuant our
October 2005 financing; and (b) 1,000 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the October 2005 financing.
(65) Represents: (a) 12,000 shares of common stock acquired upon conversion
of $15,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 28,000 shares of common stock purchased
pursuant our October 2005 financing; and (c) 840 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the October 2005 financing. Eric Singer has voting and
dispositive control over the securities held by Singer Congressional
Fund LP. At the time of our August 2005, October 2005 and December 2005
financings, Mr. Singer was a registered representative of Pali Capital,
Inc., a registered broker-dealer. The securities purchased by Singer
Congressional Fund LP were acquired for investment purposes.
(66) Represents: (a) 48,000 shares of common stock acquired upon conversion
of $60,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 53,000 shares of common stock purchased
pursuant our October 2005 financing; (c) 1,590 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the October 2005 financing; (d) 35,000 shares of common
stock purchased pursuant to our December 2005 financing; and (e) 14,000
shares of common stock issuable upon exercise of warrants with an
exercise price of $4.00 per share and an expiration date of December
28, 2010 purchased pursuant to our December 2005 financing.. Eric
Singer has voting and dispositive control over the securities held by
Singer Fund LP. At the time of our August 2005, October 2005 and
December 2005 financings, Mr. Singer was a registered representative of
Pali Capital, Inc., a registered broker-dealer. The securities
purchased by Singer Fund LP were acquired for investment purposes.
(67) Represents: (a) 40,000 shares of common stock acquired upon conversion
of $50,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 173,667 shares of common stock purchased
pursuant our October 2005 financing; (c) 5,210 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the October 2005 financing; (d) 6,333 shares of common
stock purchased pursuant to our December 2005 financing; and (e) 2,533
shares of common stock issuable upon exercise of warrants with an
exercise price of $4.00 per share and an expiration date of December
28, 2010 purchased pursuant to our December 2005 financing.. Eric
Singer has voting and dispositive control over the securities held by
Singer Opportunity Fund LP. At the time of our August 2005, October
2005 and December 2005 financings, Mr. Singer was a registered
representative of Pali Capital, Inc., a registered broker-dealer. The
securities purchased by Singer Opportunity Fund LP were acquired for
investment purposes.
(68) Represents: (a) 43,740 shares of common stock purchased pursuant our
August 2005 financing; (b) 35,504 shares of common stock purchased
pursuant our October 2005 financing; and (c) 3,252 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Salvatore Muoio has voting and dispositive control over the securities
held by SM Investors, LP.
(69) Represents: (a) 85,536 shares of common stock purchased pursuant our
August 2005 financing; (b) 70,448 shares of common stock purchased
pursuant our October 2005 financing; and (c) 6,390 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Salvatore Muoio has voting and dispositive control over the securities
held by SM Investors II, LP.
(70) Represents: (a) 32,724 shares of common stock purchased pursuant our
August 2005 financing; (b) 27,382 shares of common stock purchased
pursuant our October 2005 financing; and (c) 2,458 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
Salvatore Muoio has voting and dispositive control over the securities
held by SM Investors Offshore, Ltd.
18
(71) Represents: (a) 166,667 shares of common stock purchased pursuant to
our December 2005 financing; and (b) 66,667 shares of common stock
issuable upon exercise of warrants with an exercise price of $4.00 per
share and an expiration date of December 28, 2010 purchased pursuant to
our December 2005 financing.
(72) Represents: (a) 96,079 shares of common stock purchased pursuant to our
August 2005 financing; (b) 9,716 shares of common stock purchased
pursuant to our December 2005 financing; (c) 3,886 shares of common
stock issuable upon exercise of warrants with an exercise price of
$4.00 per share and an expiration date of December 28, 2010 purchased
pursuant to our December 2005 financing; (d) 16,800 shares of common
stock acquired from Southpoint Offshore Operating Fund LP pursuant to
private transactions; (e) 1,875 shares of common stock acquired from
Southpoint Qualified Fund LP pursuant to a private transaction; and (f)
4,804 shares of common stock acquired as liquidated damages in
connection with registration rights associated with the August 2005
financing.
(73) Represents: (a) 298,520 shares of common stock purchased pursuant to
our August 2005 financing; (b) 216,667 shares of common stock purchased
pursuant our October 2005 financing; (c) 26,873 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the August 2005 and October 2005 financings; (d) 48,259
shares of common stock purchased pursuant to our December 2005
financing; and (e) 19,304 shares of common stock issuable upon exercise
of warrants with an exercise price of $4.00 per share and an expiration
date of December 28, 2010 purchased pursuant to our December 2005
financing.
(74) Represents: (a) 361,262 shares of common stock purchased pursuant to
our August 2005 financing; (b) 18,157 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the August 2005 financing; (c) 42,025 shares of common stock
purchased pursuant to our December 2005 financing; (d) 16,810 shares of
common stock issuable upon exercise of warrants with an exercise price
of $4.00 per share and an expiration date of December 28, 2010
purchased pursuant to our December 2005 financing; and (e) 92,131
shares of common stock acquired from Southpoint Offshore Operating Fund
LP pursuant to a private transaction.
(75) Represents: (a) 79,552 shares of common stock purchased pursuant our
August 2005 financing; and (b) 3,978 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(76) Represents: (a) 162,000 shares of common stock purchased pursuant our
August 2005 financing; and (b) 8,100 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(77) Represents: (a) 78,000 shares of common stock purchased pursuant our
October 2005 financing; and (b) 2,340 shares of common stock acquired
as liquidated damages in connection with registration rights associated
with the October 2005 financing. Dan Tara has voting and dispositive
control over the securities held by Sovereign Capital Advisors LLC.
(78) Represents: (a) 270,000 shares of common stock purchased pursuant our
August 2005 financing; and (b) 63,333 shares of common stock purchased
pursuant our October 2005 financing; and (c) 15,400 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
(79) Represents: (a) 54,275 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010; (b) 31,725 shares of common
stock issuable upon exercise of placement agent warrants with an
exercise price of $1.50 per share and an expiration date of October 21,
2010; (c) 45,360 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $3.00 per share and
an expiration date of December 29, 2010; and (d) 35,000 shares of
common stock issuable upon exercise of warrants with an exercise price
of $3.00 per shares acquired as compensation for financial consulting
services. At the time of our August 2005, October 2005 and December
2005 financings, Mr. Marolda was a registered representative of
Brimberg & Co., a registered broker-dealer. The placement agent
warrants were received as compensation for placement agent services.
(80) Represents shares of common stock acquired upon conversion of $100,000
principal amount secured convertible notes issued by Robert Petty
individually.
(81) Represents 13,500 shares of common stock issuable upon exercise of
placement agent warrants with an exercise price of $1.50 per share and
an expiration date of August 23, 2010. At the time of our August 2005
financing, Mr. Lewis was a registered representative of Brimberg & Co.,
a registered broker-dealer. The placement agent warrants were received
as compensation for placement agent services.
(82) Represents: (a) 27,000 shares of common stock purchased pursuant our
August 2005 financing; (b) 13,000 shares of common stock purchased
pursuant our October 2005 financing; and (c) 1,740 shares of common
stock acquired as liquidated damages in connection with registration
rights associated with the August 2005 and October 2005 financings.
19
(83) Represents: (a) 22,008 shares of common stock purchased pursuant our
August 2005 financing; and (b) 1,100 shares of common stock acquired as
liquidated damages in connection with registration rights associated
with the August 2005 financing.
(84) Represents: (a) 40,000 shares of common stock acquired upon conversion
of $50,000 principal amount secured convertible notes issued by Robert
Petty individually; (b) 16,667 shares of common stock purchased
pursuant our October 2005 financing; and (c) 500 shares of common stock
acquired as liquidated damages in connection with registration rights
associated with the October 2005 financing.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other 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 stockholders 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 the purchaser;
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;
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 short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. 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.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
20
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify certain of the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "RGRP." For the periods indicated, the following table sets forth the
high and low bid prices per share of common stock. These prices represent
inter-dealer quotations without retail markup, markdown, or commission and may
not necessarily represent actual transactions.
Fiscal 2006 Fiscal 2005 Fiscal 2004
--------------------------- -------------------------- -----------------------
Quarter Ended (1) High Low High (2) Low (2) High (2) Low (2)
----------------------------- ------------- ------------- ------------ ------------- ----------- -----------
March 31 $3.65 $2.35 $4.00 $2.50 $12.50 $3.50
June 30 --- --- $3.00 $2.00 $17.50 $3.50
September 30 --- --- $2.50 $0.50 $12.00 $3.00
December 31 --- --- $4.20 $0.60 $4.00 $2.50
(1) On January 23, 2004, we changed our fiscal year end from July 31 to
December 31.
(2) Prices adjusted to reflect a one-for-50 reverse stock split
effective October 3, 2005.
As of April 14, 2006, our shares of common stock were held by
approximately 288 stockholders of record. The number of record holders was
determined from the records of our transfer agent and does not include
beneficial owners common stock whose shares are held in the names of various
securities brokers, dealers and registered clearing agencies. The transfer agent
of our common stock is Continental Stock Transfer and Trust Company.
Dividends
We have not declared any dividends to date. We have no present intention
of paying any cash dividends on our common stock in the foreseeable future, as
we intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
21
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2005. All common stock share
amounts and exercise prices in this section have been adjusted to reflect a
one-for-50 reverse split effective October 3, 2005.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans approved
by security holders -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders 1,783,050 $2.00 716,950
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Total 1,783,050 $2.00 716,950
- ------------------------------------ ------------------------ ----------------------- ---------------------------
On April 1, 2004 our Board of Directors adopted a stock option plan (the
"2004 Stock Option Plan"). Pursuant to this plan, which expires on April 1,
2014, incentive stock options or non-qualified options to purchase an aggregate
of 1,000,000 shares of common stock may be issued, as adjusted. The plan may be
administered by our Board of Directors or by a committee to which administration
of the plan, or part of the plan, may be delegated by our Board of Directors.
Options granted under the plan are not generally transferable by the optionee
except by will, the laws of descent and distribution or pursuant to a qualified
domestic relations order, and are exercisable during the lifetime of the
optionee only by such optionee. Options granted under the plan vest in such
increments as is determined by our Board of Directors or designated committee
thereof. To the extent that options are vested, they must be exercised within a
maximum of three months of the end of the optionee's status as an employee,
director or consultant, or within a maximum of 12 months after such optionee's
termination or by death or disability, but in no event later than the expiration
of the option term. The exercise price of all stock options granted under the
plan shall be determined by our Board of Directors or designated committee
thereof. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of our outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date.
On August 23, 2005 our Board of Directors of ROO Group, Inc. increased the
number of shares which may be issued under the 2004 Stock Option Plan to an
aggregate of 2,500,000 shares of common stock.
22
As of December 31, 2005, the following options have been granted under our
2004 Stock Option Plan:
- -------------------------------------------------------------------------------------------------------------------------------
Options Issued Under 2004 Stock Option Plan
- -------------------------------------------------------------------------------------------------------------------------------
Name Quantity Exercise Price Date Granted Vest Date Expiration Date
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Robert Petty 120,000 2.00 August 23, 2005 August 23, 2005 August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Robin Smyth 60,000 2.00 August 23, 2005 August 23, 2005 August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Robert Petty 400,000 2.00 August 23, 2005 Not yet vested August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Robin Smyth 200,000 2.00 August 23, 2005 Not yet vested August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Other Staff 99,050 2.00 August 23, 2005 August 23, 2005 August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Other Staff 904,000 2.00 August 23, 2005 Not yet vested August 23, 2007
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
Total 1,783,050
- ---------------- --------------- ------------------- ----------------------- ---------------------- ----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We operate as a digital media company in the business of providing
products and solutions that enable the broadcast of topical video content from
our customers' Internet websites. We specialize in providing the technology and
content required for video to be played on computers via the Internet as well as
emerging broadcasting platforms such as set top boxes and wireless devices
(i.e., mobile phones and PDAs). Our core activities include the aggregation of
video content, media management, traditional and online advertising, hosting,
and content delivery.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED
DECEMBER 31, 2004
REVENUE. Total revenues increased by $2,682,000 from $3,937,000 for the year
ended December 31, 2004 to $6,619,000 for the year ended December 31, 2005, an
increase of 68%. The increase is principally from inclusion of revenues of
acquisitions not included for the full prior year financial results and the
increasing sales revenue from operations.
EXPENSES
OPERATIONS. Operations expenses increased by $1,924,000 from $2,541,000 for the
year ended December 31, 2004 to $4,465,000 for the year ended December 31, 2005,
an increase of 76%. The increase over the periods reflects the inclusion of
operating expenses of acquisitions not fully included in the prior year results
and the increasing costs associated with increased revenue generation. These
expenses are primarily the costs directly associated with the generation of
revenues. They include content costs, photography and production costs and
printing of finished materials.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and related personnel costs and consulting fees associated with product
development. Research and development expenses increased by $279,000 from
$322,000 for the year ended December 31, 2004 to $601,000 for the year ended
December 31, 2005, an increase of 87%. The increase in research and development
expenses was primarily due to the increase in development activities associated
with enhancements to our management platform which was acquired in the
acquisition of Videodome.com Networks, Inc.
SALES AND MARKETING. Sales and marketing expenses consist primarily of expenses
for advertising, sales and marketing personnel, expenditures for advertising,
and promotional activities and expenses to bring our products and services to
market. These expenses increased by $1,376,000 from $841,000 for the year ended
December 31, 2004 to $2,217,000 for the year ended December 31, 2005, an
increase of 164%. This increase was primarily due to the inclusion of the sales
and marketing expenses of acquisitions not included for the full prior year
financial results and increased costs in the sales and marketing of our
products.
23
We believe that additional sales and marketing personnel and programs are
required to remain competitive. Therefore, we expect that our sales and
marketing expenses will continue to increase for the foreseeable future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of expenses for management, finance and administrative personnel,
legal, accounting, consulting fees, and facilities costs. These expenses
increased by $2,944,000 from $2,407,000 for the year ended December 31, 2004 to
$5,351,000 for the year ended December 31, 2005, an increase of 122%. This
increase was primarily due to providing administrative support to the increased
activity of operations and non cash costs associated with the issuance of stock
and options valued at $1,911,000 of which $750,000 were to our directors and
executive officers, Robert Petty and Robin Smyth, as performance bonuses and
$1,161,000 were to companies for consulting services.
NON CASH COST OF CAPITAL. During the years ended December 31, 2005 and 2004, non
cash cost of capital included options issued for capital raising services which
were valued using the Black-Scholes method totaling $ -0- and $512,000,
respectively.
REDEMPTION PREMIUM ON CONVERTIBLE NOTE. On May 19, 2005, we applied $200,000 of
the $600,000 gross proceeds from a loan from Mr. Petty (see "May 2005 Loan From
Robert Petty" below under "Liquidity and Capital Resources") to redeem $143,000
principal amount of the Company's outstanding $3,000,000 principal amount of
callable secured convertible notes. The difference between the amount paid and
the principal amount redeemed of $57,000 was expensed as a redemption premium on
the callable secured convertible notes. On August 23, 2005 the Company repaid
all outstanding amounts due pursuant to the callable secured convertible notes.
As part of the payment to the noteholders $744,000 was paid as a redemption
premium. The total amount of redemption premium paid for the year ended December
31, 2005 was $801,000.
INTEREST INCOME. Interest Income increased by $6,000 from $1,000 for the year
ended December 31, 2004 to $7,000 for the year ended December 31, 2005, an
increase of 600%.
INTEREST EXPENSE, RELATED PARTY. Interest expense, related party, includes
interest charges on our indebtedness to Robert Petty, our Chairman and Chief
Executive Officer. The expense increased by $30,000 from $51,000 for the year
ended December 31, 2004 to $81,000 for the year ended December 31, 2005, an
increase of 59%. The increase is due to the increase in the principal amount of
loan outstanding. The outstanding balance from loans from Mr. Petty as of
December 31, 2005 was $0.
INTEREST EXPENSE, OTHER. Interest expense, other, includes the interest payable
to callable secured convertible note holders. The expense increased by $118,000
from $70,000 for the year ended December 31, 2004 to $188,000 for the year ended
December 31, 2005, an increase of 169%. The increase is primarily due to the
increase in interest on the callable secured convertible notes outstanding for
approximately four months in the year ended December 31, 2004 and eight months
in the year ended December 31, 2005. On August 23, 2005 we repaid all
outstanding amounts due pursuant to the callable secured convertible notes.
FINANCING FEES CONVERTIBLE NOTES. Financing fees - convertible notes is the
amount the Company computed as the value of the beneficial conversion feature on
the callable secured convertible notes. It also includes the discount for the
value of warrants issued in connection with the callable secured convertible
notes together with the placement fees payable on the drawdown of the callable
secured convertible notes. The expense decreased by $315,000 from $1,074,000 for
the year ended December 31, 2004 to $759,000 for the year ended December 31,
2005, a decrease of 29%. The decrease is primarily due to the decrease in the
amount expensed as the value of the beneficial conversion feature on the
callable secured convertible notes from $1,054,000 to $351,000, or a decrease of
$703,000, for the years ended December 31, 2004 and 2005, respectively, offset
by the increase in the discount for the value of the warrants and the placement
fees from $20,000 to $408,000, or an increase of $388,000, for the years ended
December 31, 2004 and 2005, respectively.
NET LOSS BEFORE INCOME TAXES. Net loss before income taxes was $8,765,000 for
the year ended December 31, 2005, compared to a net loss of $4,162,000 for the
year ended December 31, 2004, an increase of $4,603,000 or 111%. The increase in
our net loss is due to the increase in activities to develop products for
revenue generation, sales and marketing expenses in generating revenue and the
increase in administrative expenses to support these activities, which are
described above. The increase also includes the costs associated with the
repayment of the callable secured convertible notes.
24
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had working capital of approximately
$5,007,000 with a cash balance of $5,274,000. Our cash balance as at December
31, 2005, is greater than the cash used in operations for the year ended
December 31, 2005. Management believes that there will be an increase in overall
expenses to expand the operations on a global basis during 2006. Although
revenues are expected to increase, it is unclear whether additional cash
resources will be required during the next twelve months. We expect to undertake
additional debt or equity financings if needed to better enable us to grow and
meet our future operating and capital requirements. However, we cannot guarantee
that any additional equity or debt financing will be available in sufficient
amounts or on acceptable terms when needed. If such financing is not available
in sufficient amounts or on acceptable terms, our results of operations and
financial condition may be adversely affected. In addition, equity financing may
result in dilution to existing stockholders and may involve securities that have
rights, preferences, or privileges that are senior to our common stock, and any
debt financing obtained must be repaid regardless of whether or not we generate
profits or cash flows from our business activities.
Net cash used in operating activities was $4,917,000 for the year ended
December 31, 2005, compared to $1,470,000 for the year ended December 31, 2004,
an increase of 234%. The increase in net cash used in operating activities is
primarily the result of our increased expenses with our expanded operations.
Net cash used in investing activities was $714,000 for the year ended
December 31, 2005, compared to net cash used in investing activities for the
year ended December 31, 2004 of $607,000, an increase in net cash used in
investing activities of $107,000. The net cash used in investing activities
increased primarily due to an increase in the purchases of equipment of
approximately $123,000, the capitalization of content costs which amounted to
approximately $114,000, offset by the decrease in the cost of acquisitions of
approximately $167,000 and proceeds from sale of equipment of approximately
$44,000 in the year ended December 31, 2004.
Net cash provided by financing activities was $10,597,000 for the year
ended December 31, 2005 compared to $2,404,000 for the year ended December 31,
2004, an increase of $8,193,000 or 341%. The increase in net cash provided by
financing activities was primarily due to the net amount received from private
equity placements of approximately $11,116,000 offset against the net received
and repaid from our callable secured convertible notes of approximately
$2,743,000.
Below is a description of significant financings we completed during the
fiscal year ended December 31, 2005 and through April 14, 2006.
MAY 2005 LOAN FROM ROBERT PETTY
On May 18, 2005, we entered into a Note Purchase Agreement with Robert
Petty, our Chairman and Chief Executive Officer. Mr. Petty loaned us $600,000
pursuant to the Note Purchase Agreement. In connection with this, we paid
transaction fees totaling $92,500, which includes a $60,000 placement agent fee
in connection with the sale by Mr. Petty of $600,000 principal amount of secured
convertible promissory notes (described below) and $32,500 in legal fees in
connection with the transaction. As evidence of the $600,000 loan and a prior
existing loans from Mr. Petty totaling $500,000, we issued Mr. Petty a
promissory note in the principal amount of $1,100,000. The principal sum of
$1,100,000 plus interest at the rate of 10% per annum calculated beginning
September 1, 2005 was re-paid by December 31, 2005. Our obligations under the
promissory note were secured by a security interest in all of our assets.
On May 19, 2005, we applied $200,000 of the $600,000 gross proceeds from
Mr. Petty's loan to redeem $142,857 principal amount of outstanding callable
secured convertible notes. As consideration for the redemption, the holders of
the callable secured convertible notes agreed not to convert any amount due
under the callable secured convertible notes at a conversion price less than
$0.10 per share for a 60-day period that ended on July 18, 2005.
25
In connection with the above loan from Mr. Petty, Mr. Petty personally
sold an aggregate of $600,000 principal amount of secured convertible promissory
notes to certain accredited investors. The secured convertible promissory notes
were convertible into common stock held by Mr. Petty at a price of $1.25 per
share. Mr. Petty's obligations under the secured convertible promissory notes
were secured by the $1,100,000 principal amount promissory note payable by us to
Mr. Petty. The secured convertible promissory notes accrued interest at a rate
of 8% per annum.
As partial consideration for the loan from Mr. Petty, we entered into a
registration rights agreement, pursuant to which we agreed to prepare and file a
registration statement providing for the resale of the shares of common stock
issuable upon conversion of the secured convertible promissory notes, including
shares of common stock that may be issued as interest payments under the secured
convertible promissory notes
JULY 2005 FINANCING
On July 18, 2005, we entered into a Securities Purchase Agreement with
four accredited investors for the sale of: (i) up to $2,500,000 in callable
secured convertible notes; and (ii) warrants to purchase up to 100,000 shares of
common stock. On July 19, 2005, the investors provided us $550,000 of gross
proceeds from the sale of $550,000 in principal amount of callable secured
convertible notes and warrants to purchase 22,000 shares of our common stock.
The callable secured convertible notes allowed us to prepay them in full if we
paid the investors an amount in cash equal to either: (i) 125% for prepayments
occurring within 30 days of the issue date; (ii) 135% for prepayments occurring
between 31 and 60 days of the issue date; or (iii) 150% for prepayments
occurring after the 60th day following the issue date. As further described
below under "August 2005 Equity Financing," on August 23, 2005, we prepaid all
outstanding amounts under the $550,000 principal amount callable secured
convertible notes and under the other outstanding callable secured convertible
notes.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $10.00 per share. The investors may exercise the warrants on
a cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of: (i) any securities issued as of the date of the warrants; (ii) any
stock or options which may be granted or exercised under any employee benefit
plan; or (iii) any shares of common stock issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement.
The exercise price of the warrants may also be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the investors'
position. The investors have agreed to restrict their ability to exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them in the aggregate and their affiliates after such
exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock.
We are required to file a registration statement with the Securities
and Exchange Commission, which will include the common stock underlying the
warrants, within 30 days from receipt of a written demand from the investors for
us to do so. As of the date this report was filed with the Securities and
Exchange Commission the warrant holders have not demanded that we register the
shares issuable upon exercise of such warrants.
AUGUST 2005 EQUITY FINANCING
On August 23, 2005, we sold 3,833,333 shares of common stock to accredited
investors in a private placement pursuant to Rule 506 promulgated under the
Securities Act of 1933, as amended. The common stock was sold at a price of
$1.50 per share resulting in gross proceeds of $5,750,000. $3,400,000 of the
proceeds was used to prepay all of our outstanding callable secured convertible
notes. In connection with the sale of the common stock, we were required to
effect a 1-for-50 reverse split of our outstanding shares of common stock, which
was completed on October 3, 2005.
26
We agreed to prepare and file a registration statement with the Securities
and Exchange Commission registering the resale of the shares of common stock
sold in the private placement on or prior to 45 days following the closing date.
If the registration statement is not filed within such time or if the
registration statement is not declared effective within 120 days following the
closing date, we must pay liquidated damages to the investors equal to 2% of the
dollar amount of their investment for each calendar month or portion thereof
that the registration statement is not filed or declared effective. The company
has issued 191,666 shares of common stock as settlement of liquidated damages
accrued and accruing through April 30, 2006. Liquidated damages will continue
accruing if the registration statement is not declared effective on or before
April 30, 2006.
Pali Capital, Inc. and Brimberg & Co. acted as placement agents in
connection with the August 2005 private placement. In connection with the
closing, we paid the placement agents a cash fee of $520,000, calculated as 10%
of the gross proceeds up to $3,000,000 and 8% of the gross proceeds in excess of
$3,000,000. In addition, we issued the placement agents warrants to purchase
383,332 shares of common stock (10% of the shares of common stock sold in the
private placement) with an exercise price of $1.50 per share exercisable for a
period of five years. The placement agents have piggyback registration rights
with respect to the shares of common stock issuable upon exercise of the
placement agent warrants.
OCTOBER 2005 EQUITY FINANCING
On October 20, 2005, we sold 1,500,000 shares of common stock to
accredited investors in a private placement pursuant to Rule 506 promulgated
under the Securities Act of 1933, as amended. The shares of common stock were
sold at a price of $1.50 per share resulting in gross proceeds of $2,250,000.
We agreed to prepare and file a registration statement with the Securities
and Exchange Commission registering the resale of the shares of common stock
sold in the private placement on or prior to 30 days following the closing date.
If the registration statement is not filed within such time or if the
registration statement is not declared effective within 120 days following the
closing date, we must pay liquidated damages to the investors equal to 2% of the
dollar amount of their investment for each calendar month or portion thereof
that the registration statement is not filed or declared effective. The company
has issued 45,001 shares of common stock as settlement of liquidated damages
accrued and accruing through April 30, 2006. Liquidated damages will continue
accruing if the registration statement is not declared effective on or before
April 30, 2006.
Pali Capital, Inc. and Brimberg & Co. acted as placement agents in
connection with this private placement. In connection with the closing, we paid
the placement agents a cash fee of $180,000, calculated as 8% of the gross
proceeds from the private placement. In addition, we issued the placement agents
warrants to purchase 150,000 shares of common stock (10% of the shares of common
stock sold in the private placement) with an exercise price of $1.50 per share
exercisable for a period of five years. The placement agents have piggyback
registration rights with respect to the shares of common stock issuable upon
exercise of the placement agent warrants.
DECEMBER 2005 EQUITY FINANCING
On December 28, 2005, we sold 1,701,500 shares of common stock and 680,600
warrants to purchase shares of common stock to accredited investors. The shares
of common stock were sold at a price of $3.00 per share, resulting in $5,104,500
of gross proceeds. Each investor was issued warrants to purchase a number of
shares of common stock equal to 40% of the number of shares of common stock
purchased. The warrants have an exercise price of $4.00 per share and a term of
five years.
In connection with this private placement, we agreed with the investors
that within 60 days of meeting the listing requirements of The Nasdaq SmallCap
Market, we will file an initial listing application for our common stock to be
listed on The Nasdaq SmallCap Market and that within 60 days of meeting the
listing requirements of The Nasdaq National Market, we will file an initial
listing application for our common stock to be listed on The Nasdaq National
Market.
We also granted investors a right to participate in subsequent financings
until June 28, 2007.
27
We agreed to prepare and file a registration statement with the Securities
and Exchange Commission registering the resale of the shares of common stock
sold in the private placement on or prior to 30 days following the closing date.
Such registration statement was filed on February 8, 2006. If the registration
statement is not declared effective within 120 days following the closing date,
we must pay liquidated damages to the investors equal to 2% of the dollar amount
of their investment for each calendar month or portion thereof that the
registration statement is not declared effective.
Pali Capital, Inc. and Brimberg & Co., both registered broker-dealers,
acted as placement agents for this private placement. In connection with the
closing, we paid the placement agents a cash fee of $408,360, calculated as 8%
of the gross proceeds. In addition, we issued the placement agents warrants to
purchase 238,700 shares of common stock (10% of the securities sold in the
private placement) with an exercise price of $3.00 per share exercisable for a
period of five years. The placement agents have piggyback registration rights
with respect to the shares of common stock issuable upon exercise of the
placement agent warrants.
MARKET RISKS
We conduct our operations in primary functional currencies: the United
States dollar, the British pound and the Australian dollar. Historically,
neither fluctuations in foreign exchange rates nor changes in foreign economic
conditions have had a significant impact on our financial condition or results
of operations. We currently do not hedge any of our foreign currency exposures
and are therefore subject to the risk of exchange rate fluctuations. We invoice
our international customers primarily in U.S. dollars, except in the United
Kingdom and Australia, where we invoice our customers primarily in pounds and
Australian dollars, respectively. In the future we anticipate billing certain
European customers in Euros, though we have not done so to date.
We are exposed to foreign exchange rate fluctuations as the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation and as our foreign currency consumer receipts are converted into
U.S. dollars. Our exposure to foreign exchange rate fluctuations also arises
from payables and receivables to and from our foreign subsidiaries, vendors and
customers. Foreign exchange rate fluctuations did not have a material impact on
our financial results in the years ended December 31, 2005 and 2004.
Financial instruments which potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. We place our cash and cash equivalents with high credit quality
institutions to limit credit exposure. We believe no significant concentration
of credit risk exists with respect to these investments.
Concentrations of credit risk with respect to trade accounts receivable
are limited due to the wide variety of customers who are dispersed across many
geographic regions. As of December 31, 2005, two customers each accounted for
approximately 11% of our trade accounts receivable portfolio, for approximately
22% in total. We routinely assess the financial strength of customers and, based
upon factors concerning credit risk, we establish an allowance for uncollectible
accounts. Management believes that accounts receivable credit risk exposure
beyond such allowance is limited.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have incurred net operating losses of approximately $6,015,000
for the year ended December 31, 2005, compared to $2,174,000 for the year ended
December 31, 2004. Additionally, as of December 31, 2005, we had a net working
capital of approximately $5,007,000 and negative cash flows from operating
activities of approximately $4,917,000. Since ROO Media Corporation's inception,
we have incurred losses, had an accumulated deficit, and have experienced
negative cash flows from operations. The expansion and development of our
business may require additional capital. This condition raises substantial doubt
about our ability to continue as a going concern. Our management expects cash
flows from operating activities to improve in fiscal 2006, primarily as a result
of an increase in sales, although there can be no assurance thereof. The
accompanying consolidated financial statements do not include any adjustments
that might be necessary should we be unable to continue as a going concern. If
we fail to generate positive cash flows or obtain additional financing when
required, we may have to modify, delay or abandon some or all of our business
and expansion plans.
28
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The policies discussed below are considered by our management to be
critical to an understanding of our financial statements because their
application places the most significant demands on our management's judgment,
with financial reporting results relying on estimation about the effect of
matters that are inherently uncertain. Specific risks for these critical
accounting policies are described below. For these policies, our management
cautions that future events rarely develop as forecast, and that best estimates
may routinely require adjustment.
The SEC has issued cautionary advice to elicit more precise disclosure
about accounting policies management believes are most critical in portraying
our financial results and in requiring management's most difficult subjective or
complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts and determining the recoverability of our long-lived assets.
The basis for our estimates are historical experience and various assumptions
that are believed to be reasonable under the circumstances, given the available
information at the time of the estimate, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily available from other sources. Actual results may differ from the
amounts estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition: Revenues are derived principally from professional
services, digital media management and advertising. Revenue is recognized when
service has been provided. We may enter into agreements whereby we guarantee a
minimum number of advertising impressions, click-throughs or other criteria on
our websites or products for a specified period. To the extent these guarantees
are not met, we may defer recognition of the corresponding revenue until
guaranteed delivery levels are achieved.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from our customers not making their
required payments. Based on historical information, we believe that our
allowance is adequate. Changes in general economic, business and market
conditions could result in an impairment in the ability of our customers to make
their required payments, which would have an adverse effect on cash flows and
our results of operations. The allowance for doubtful accounts is reviewed
monthly and changes to the allowance are updated based on actual collection
experience. We use a combination of the specific identification method and
analysis of the aging of accounts receivable to establish an allowance for
losses on accounts receivable.
Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
asset is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets. We adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," (FAS 142) effective January 1,
2002, and are required to analyze goodwill and indefinite lived intangible
assets for impairment on at least an annual basis.
29
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 153, "Exchanges of Nonmonetary Assets," (SFAS No. 153). SFAS No.
153 amends Accounting Principles Board ("APB") Opinion No. 29, "Accounting for
Nonmonetary Transactions," to require exchanges of nonmonetary assets be
accounted for at fair value, rather than carryover basis. Nonmonetary exchanges
that lack commercial substance are exempt from this requirement. SFAS 153 is
effective for nonmonetary exchanges entered into in fiscal years beginning after
June 15, 2005. We do not routinely enter into exchanges that could be considered
nonmonetary, accordingly we do not expect the adoption of SFAS 153 to have a
material impact on our financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock
Based Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R is
the first reporting period beginning after December 15, 2005, although early
adoption is allowed. SFAS 123R requires companies to adopt its requirements
using a "modified prospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS 123R. The
"modified retrospective" method also permits entities to restate financial
statements of previous periods based on proforma disclosures made in accordance
with SFAS 123.
We will adopt SFAS 123R effective January 1, 2006. We currently utilize a
standard option pricing model (i.e., Black-Scholes) to measure the fair value of
stock options granted to employees. SFAS 123R permits us to continue to use such
a model.
SFAS 123R also requires that the benefits associated with the tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under current
literature. We have not yet determined what effect, if any, this change will
have on future periods.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), "Accounting
for Conditional Asset Retirement Obligations--an interpretation of FASB
Statement No. 143." FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the liability's fair value can be reasonably estimated. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 was adopted in
the fourth quarter of 2005 and has had no significant impact on our financial
position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application as the
required method for reporting a change in accounting principle, unless
impracticable or a pronouncement includes specific transition provisions. SFAS
No. 154 also requires that a change in depreciation, amortization or depletion
method for long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. This statement
carries forward the guidance in APB Opinion No. 20, "Accounting Changes," for
the reporting of the correction of an error and a change in accounting estimate.
SFAS No. 154 is effective beginning January 1, 2006. SFAS No. 154 is not
expected to have a significant impact on our financial position, results of
operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business
Combination" ("EITF 05-6"). EITF 05-6 requires that leasehold improvements that
are placed in service significantly after and not contemplated at or near the
beginning of the lease term be amortized over the shorter of the useful life of
the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 was adopted in the fourth quarter of 2005. EITF 05-6 did
not have a significant impact on our financial position, results of operations
or cash flows.
30
In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB 133, Accounting for Derivative
Instruments and Hedging Activities , and FASB 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities . FASB 155,
provides the framework for fair value remeasurement of any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation as well as establishes a requirement to evaluate interests in
securitized financial assets to identify interests. FASB 155 further amends FASB
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. The guidance FASB 155 also
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of FASB 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins September 15, 2006. FASB 155 is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140. FASB 156 requires the
recognition of a servicing asset or servicing liability under certain
circumstances when an obligation to service a financial asset by entering into a
servicing contract. FASB 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value
utilizing the amortization method or fair market value method . FASB 156 is
effective at the beginning of the first fiscal year that begins after September
15, 2006. FASB 156 is not expected to have a material impact on the Company's
consolidated financial statements.
DESCRIPTION OF BUSINESS
BACKGROUND
ROO Group, Inc. was incorporated on August 11, 1998 under the laws of the
State of Delaware as Virilitec Industries, Inc. We were formed to license and
distribute a line of bioengineered virility nutritional supplements designed to
enhance human male sperm count and potency. We were not successful in
implementing our business plan, and after looking at other possible products to
expand our product line, our management determined that it was in the best
interests of our shareholders to attempt to acquire an operating company. As a
result, we terminated all of our existing contracts and were inactive until we
acquired ROO Media Corporation, a Delaware corporation.
ACQUISITION OF ROO MEDIA CORPORATION
On December 2, 2003, Virilitec Industries, VRLT Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Virilitec Industries, ROO
Media, Jacob Roth and Bella Roth, entered into an Agreement and Plan of Merger.
Upon the terms and subject to the conditions set forth in the Agreement and Plan
of Merger, VRLT Acquisition Corp. was merged with and into ROO Media. As a
result of the merger, Virilitec Industries, through VRLT Acquisition Corp.,
acquired 100% of the capital stock of ROO Media. All of the issued and
outstanding shares of capital stock of ROO Media held by the stockholders of ROO
Media were cancelled and converted into the right to receive an aggregate of
2,960,000 shares of common stock of Virilitec Industries. The separate corporate
existence of VRLT Acquisition Corp. ceased, and ROO Media continued as the
surviving corporation in the merger, as a wholly owned subsidiary of Virilitec
Industries.
In connection with the merger, we agreed to cause the resignation of all
of the members of our Board of Directors and appoint new Directors as designated
by the Chairman of the Board of Directors of ROO Media. As additional
consideration for the 2,960,000 shares of common stock of Virilitec Industries,
(1) ROO Media paid to Virilitec Industries $37,500 cash prior to the execution
of the Agreement and Plan of Merger, (2) ROO Media paid an aggregate of $100,000
of Virilitec Industries' total $162,500 of liabilities as reflected on Virilitec
Industries' balance sheet on the closing date of the merger, and (3) ROO Media
paid Virilitec Industries' $62,500 debt to Jacob Roth, Virilitec Industries'
former Chief Executive Officer. In connection with the $62,500 payment to Mr.
Roth, ROO Media entered into an agreement to pay such debt within 90 days after
the effective date of the merger, which was December 3, 2003. The $62,500 debt
to Jacob Roth was paid during the first quarter of 2004.
31
OTHER ACQUISITIONS: REALITY GROUP PTY LTD., UNDERCOVER MEDIA PTY LTD. BICKHAMS
MEDIA, INC. AND FACTORY 212 PTY LTD.
REALITY GROUP PTY LTD.
On April 30, 2004, we purchased 80 shares of the common stock of Reality
Group Pty Ltd ("Reality Group") which represented 80% of the issued and
outstanding common stock of Reality Group, a corporation formed under the laws
of Australia, from the shareholders of Reality Group. The consideration for the
Reality Group common shares was the issuance of an aggregate of 167,200 shares
of our common stock. As additional consideration for the Reality Group shares,
we paid an aggregate of 200,000 Australian Dollars to the Reality Group
shareholders. Further, the Reality Group shareholders agreed to cause Reality
Group to increase the number of directors on its Board of Directors to allow us
to appoint up to four nominees to its Board.
The Reality Group shareholders also agreed to grant us an option to
purchase the remaining 20 shares of the issued and outstanding common stock of
Reality Group over the next two years. The terms of the option shall be
negotiated in good faith. Notwithstanding this, the option is exercisable by us
on July 30, 2004, January 30, 2005, July 30, 2005 and January 30, 2006, and
shall expire on March 5, 2006. On October 28, 2005 the terms of the Purchase
Agreement were amended as further described on page 33 of this prospectus.
Pursuant to the purchase agreement, we guaranteed that the Reality Group
shareholders will be able to sell the shares of our common stock that they
received, subject to the requirements of Rule 144, for greater than or equal to
$15.00 per share for a period of twelve months after the Reality Group
shareholders have satisfied the Rule 144 requirements. The foregoing guarantee
was predicated upon the assumption that the Reality Group shareholders will be
able to sell the greater of (a) 1/4 of their respective exchange shares per
quarter of the guarantee period or (b) such maximum number of exchange shares
permissible under Rule 144 per quarter of the guarantee period. If the Reality
Group shareholders do not sell their quarterly allotment during any one quarter
of the guarantee period, the guarantee shall not be effective for the number of
shares not sold during that quarter.
During the guarantee period, the Reality Group shareholders have the
option to buy back an aggregate of 29 Reality Group shares, or such number of
shares as shall decrease our ownership percentage in Reality Group to 51%. The
consideration for such buy-back shares shall be 2,280 shares of our common stock
for each share of Reality Group common stock. The earliest date for exercising
this buy-back provision is September 1, 2004. On October 28, 2005 the terms of
the Purchase Agreement were amended as further described on page 33 of this
prospectus.
In the event that the Reality Group shareholders are not able to sell
their shares of our common stock for greater than or equal to $15.00 per share
during the guarantee period, a share variance shall be determined based on the
difference between (a) the number of exchange shares to be sold multiplied by
$15.00 per share and (b) the number of exchange shares to be sold multiplied by
the closing sale price of the exchange shares on the trading day immediately
prior to the day that a Reality Group shareholder notifies us of its enforcement
of the guarantee. In the event that a Reality Group shareholder enforces the
guarantee, we, in our sole discretion, may pay the share variance to the Reality
Group shareholder in one of the following ways: (1) in cash; (2) we shall
authorize the escrow agent (as defined in the purchase agreement) to return to
the Reality Group shareholders on a pro rata basis that amount of shares, based
on a share valuation of $20,900 per Reality Group ordinary share, that shall
constitute the share variance; or (3) if mutually agreeable to the Reality Group
shareholders, in shares of our common stock based on the average closing sale
price of shares of our common stock during the previous 15 trading days. To
ensure the guarantee, we agreed to not offer or negotiate, either in writing or
orally, the sale of the Reality Group shares or any Reality Group option shares
acquired by us with any other party during the guarantee period.
If during the guarantee period: (a) we undergo a voluntary or involuntary
dissolution, liquidation or winding up; (b) our shares of common stock cease
trading for more than 15 business days; or (c) the quotation of our common stock
is removed or suspended from the Over-the-Counter Bulletin Board for a
continuous period of greater than 30 days (other than as a consequence of the
quotation of our securities on an internationally recognized stock exchange),
then the following shall occur: (1) the Reality Group shares shall revert back
to the Reality Group shareholders; (2) the shares of our common stock exchanged
for 80% of the Reality Group shares shall revert back to us; (3) the option
shall be revoked; and (4) our nominees to the Reality Group's Board of Directors
shall immediately resign.
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Pursuant to the terms of the purchase agreement, each Reality Group
shareholder agreed to not, unless permitted by our Board of Directors, sell more
than 25% of their exchange shares during any three-month period for a period of
two years after the effective date of the purchase agreement. Furthermore, each
Reality Group shareholder granted to us a right of first refusal with respect to
the purchase of the Reality Group shareholders' exchange shares for a period of
one year after the first date on which the exchange shares are eligible for sale
by the Reality Group shareholders in accordance with Rule 144 or any other
applicable legislation, regulation or listing rule. If we elect to purchase the
shares, such shares shall be purchased at the highest closing sale price for the
period commencing on the trading day immediately prior to our receipt of notice
of intent to sell from the Reality Group shareholders until the trading day
immediately prior to the date on which we give notice to the selling Reality
Group shareholder of its election to purchase.
Reality Group provides integrated communication solutions, including
direct marketing, Internet advertising and sales promotion. Reality Group was
formed as a result of the change in direction of marketing with the advent of
the Internet and a need for more accountable, integrated advertising. Reality
Group believes that it is a pioneer of integrated communication, with an
emphasis on web-based solutions and customer relationship management systems
built to manage the inquiries generated through their web based campaigns. Its
clients include Saab Automobile Australia, BP Australia, Bob Jane T-Marts,
Tontine, Dennis Family Corporation, Tabaret, Superannuantion Trust of Australia,
Federal Hotels & Resorts, and CityLink.
To help identify the most effective way to communicate with each client's
audience, Reality Group created a proprietary management tool that provides
specific costs per response for each media channel. The management tool allows
Reality Group to focus on effective media channels and eliminate the rest by
identifying the parts of a client's budget that are working.
AMENDMENT TO REALITY GROUP PURCHASE AGREEMENT
On October 28, 2005, we entered into an amendment (the "Amendment") to the
Stock Purchase Agreement (the "Reality Purchase Agreement") dated as of March
11, 2004 among the Company and the shareholders of Reality Group Pty Ltd.
("Reality Group"). Pursuant to the Amendment, the Reality Group shareholders
agreed to exercise their buyback option effective January 1, 2006 at which date
we must sell to the Reality Group shareholders such number of shares of Reality
Group's common stock so as to reduce our ownership of Reality Group to 51%. The
Reality Group shareholders further agreed that the Share Variance (as defined in
the Reality Purchase Agreement and as described in a Form 8-K filed by the
Company on May 17, 2004) shall be calculated based upon a closing sale price of
$2.50 and the Share Variance equals $1,263,500.
We paid $200,000 of the $1,263,500 Share Variance in cash and issued
425,400 shares (the "Variance Shares") of common stock as payment of the
remaining $1,063,500 based on a stock price of $2.50 per share. We guaranteed
(the "Variance Guarantee") the Reality Group shareholders that they will be able
to sell their Exchange Shares (as defined in the Reality Purchase Agreement and
as described in a Form 8-K filed by the Company on May 17, 2004) and Variance
Shares for a price equal to or greater than $2.50 per share for a period of 14
days after the earliest date that the Reality Group shareholders can publicly
sell their shares of our common stock (the "Variance Guarantee Period"). In the
event the Reality Group shareholders are unable to sell any of the Exchange
Shares or the Variance Shares for a price equal to or greater than $2.50 per
share during the Variance Guarantee Period, then we must issue them such number
of shares of common stock equal to: (x) the applicable number of Variance and/or
Exchange Shares multiplied by $2.50, less (y) the applicable number of Variance
and/or Exchange Shares multiplied by the average closing sale price of our
common stock on the OTC Bulletin Board during the Variance Guarantee Period,
divided by (z) the average closing sale price of our common stock on the OTC
Bulletin Board during the Variance Guarantee Period. Notwithstanding the above
agreements, if at any time during the Variance Guarantee Period an offer is
presented to a Reality Group shareholder to purchase their Variance Shares for a
price equal to or greater than $2.50 per share and such shareholder does not
accept the offer, then our obligations pursuant to the Variance Guarantee shall
be automatically terminated with respect to such shareholder. We agreed to
prepare and file a registration statement providing for the resale of 359,280 of
the Variance Shares by November 27, 2005.
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UNDERCOVER MEDIA PTY LTD.
On May 26, 2004, we entered into an asset purchase agreement to purchase
the business and business assets of Undercover Media Pty Ltd. ("Undercover
Media"), a Victorian, Australia corporation. The purchase price for Undercover
Media's assets consisted of 20,000 shares of our common stock. We also agreed to
issue additional shares of our common stock upon Undercover Media attaining
performance milestones as follows: (a) upon the commercial launch of a broadband
music portal suitable for operation as a stand alone site that is capable of
worldwide syndication, the issuance of that number of shares of common stock
that is equal to the quotient of (x) $75,000 divided by (y) the average closing
sale price of the shares of common stock for the five trading days prior to such
commercial launch; (b) upon the execution of an agreement for the supply and
worldwide syndication of music videos with an aggregate of four mutually
acceptable major music labels, the issuance of that number of shares of common
stock that is equal to the quotient of (x) $75,000 divided by (y) the closing
sale price prior to the execution of the last of the four of such agreements;
(c) upon the generation of at least $30,000 per month in revenues for three
consecutive months attributable to the company's music subdivision, the issuance
of that number of shares of common stock that is equal to the quotient of (x)
$75,000 divided by (y) the closing sale price prior to the determination that
such revenues have been achieved; and (d) upon obtaining an aggregate of thirty
video interviews with mutually acceptable recognized artists; the issuance of
that number of shares of common stock that is equal to the quotient of (x)
$75,000 divided by (y) the closing sale price prior to the last of the thirty
interviews.
Included in the purchase is the www.undercover.com.au web site, which
currently serves over 500,000 visitors per month with 55% from the United
States, 18% from Europe, 7% from Asia and 20% from other countries throughout
the world. The Undercover Media website, through its relationship with HMV,
clearly displays the link between music content and the sale of music; the user
reads the article or interview and can then click through to purchase the
artist's CD from HMV's web site.
Undercover Media features original music content ranging from raw
interview footage to propriety editorial content combined with industry released
footage. Undercover Media has served both the music industry and music community
with daily music news, reviews and editorial bulletins. Undercover Media's
clients include Telstra Corporation, AAP and Coca Cola, and its distribution
partners include Google, VH1, Nova, Artist Direct and News Now. In addition,
Undercover has a strategic online partnership with HMV for online music sales.
BICKHAMS MEDIA, INC.
On September 10, 2004, we entered into an agreement to purchase all of the
outstanding shares of common stock of Bickhams Media, Inc. ("Bickhams") from
Avenue Group, Inc. pursuant to a Stock Purchase Agreement dated September 10,
2004. The only business of Bickhams is its ownership interest in VideoDome.com
Networks, Inc. ("VideoDome"), a California corporation. In consideration for the
purchase, we agreed to: (1) pay Avenue Group $300,000 cash; (2) issue Avenue
Group 80,000 shares of our common stock; and (3) guaranty all of the obligations
of VideoDome.com Networks, Inc. under a promissory note of VideoDome that was
issued to Avenue Group in October 2003 in the principal amount of $290,000. In
addition, we agreed to issue Avenue Group 60,000 shares of our common stock in
consideration for a termination letter which shall serve to terminate a
Registration Rights Agreement dated as of November 28, 2003.
As of November 1, 2004, we entered into an agreement with Bickhams and
Daniel and Vardit Aharonoff for Bickhams to purchase 50% of the outstanding
common stock of VideoDome.com Networks, Inc. Prior to November 1, 2004, Bickhams
already owned the other 50% of the outstanding common stock of VideoDome. As a
result of this transaction, Bickhams now owns 100% of the outstanding common
stock of VideoDome. Under the agreement, we agreed to: (1) issue 100,000 shares
of our common stock to Daniel Aharonoff on the closing date; (2) issue an
additional 60,000 shares of our common stock to Daniel Aharonoff upon meeting
jointly agreed milestones; and (3) pay up to $220,000 in cash to Daniel
Aharonoff upon meeting jointly agreed milestones.
The jointly agreed milestones are as follows: (1) upon the commercial
launch of VideoDome's embedded player and music player, we agreed to pay Mr.
Aharonoff $100,000 cash and issue Mr. Aharonoff 20,000 shares of our common
stock; (2) upon the commercial launch of a combined ROO Media and VideoDome
Media Manager platform, we agreed to pay Mr. Aharonoff $100,000 cash and issue
Mr. Aharonoff 40,000 shares of our common stock; and (3) after the combined
platform has delivered a minimum of 50,000,000 video views for two consecutive
months excluding mini player views, we agreed to pay Mr. Aharonoff $20,000 cash.
On December 21, 2004 the first milestone was reached and we issued 20,000 shares
and $100,000 to Mr. Aharonoff. On May 9, 2005 the requirements of the second
milestone was reached and we issued 40,000 shares of common stock paid $100,000
to Mr. Aharonoff.
34
In connection with the agreement, Mr. Aharonoff agreed not to directly or
indirectly agree or offer to sell, grant an option for the purchase or sale of,
transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of the shares of our common stock acquired by him under the agreement
until the earlier of: (a) two years from the respective issuance(s) of such
shares; or (b) the date that holders (the "Holders") of certain Callable Secured
Convertible Notes (the "Notes") and Stock Purchase Warrants (the "Warrants"),
issued by us on September 10, 2004, no longer hold the Notes and the Warrants
and no longer beneficially own any shares of our common stock issuable upon
conversion or exercise of the Notes or the Warrants, without the prior written
consent of such Holders of the Notes and the Warrants. The Holders agreed to
waive any adjustment that otherwise would have been required to the conversion
and exercise prices of the Notes and the Warrants due to the issuance of shares
of common stock to Mr. Aharonoff.
VideoDome is a Los Angeles based company that provides a range of Media
Management solutions through its flagship 5th generation ASP application,
VideoDome Media Manager(R). VideoDome customers have direct access to their
individual accounts, media inventory, customized media delivery method and
style, as well as the ability to add, edit, delete, schedule and track streaming
media from any Internet enabled browser. Some of VideoDome's clients include
Kenneth Cole, L'Oreal Cosmetics, Redken, and Stanley Tools. VideoDome provides
its media management application to these customers which allows them the
ability to manage and publish video on their web sites. The VideoDome Publishing
Platform is a database driven, web-based application that allows clients to
upload, organize and publish streaming media through unified interface.
The most current version of VideoDome Media Manager is Media Manager 4.0,
which offers VideoDome customers direct access to their individual accounts,
media inventory, customized media delivery method and style, as well as the
ability to add, edit, delete, schedule & track streaming media from any Internet
enabled browser. The features of Media Manager 4.0 include:
o VideoDome Tracker(R) - Generate colorful user reports/statistics and
find out what your viewing audience is experiencing.
o VideoDome Scheduler(R) - Schedule when you would like certain media
to be available on your web site.
o VideoDome AutoSense(R) - AutoSense technology automatically takes
the guess work out of the equation by detecting installed media
player & available bandwidth across all media formats.
o VideoDome Skin Wizard(R) - Create a compelling branded media player
or video portal within minutes using our skin wizard system.
o VideoDome Syndication Manager(R) - Powerful syndication module
allows you to replicate then syndicate streaming content to your
partners in a completely controlled environment.
FACTORY 212 PTY LTD.
On October 28, 2005, we entered into an agreement with ROO Broadcasting
Limited, a wholly owned subsidiary of the Company ("ROO Broadcasting"), and the
shareholders of Factory 212 Pty Ltd. ("Factory212"), pursuant to which ROO
Broadcasting acquired 51% of the outstanding ordinary shares of Factory212.
Factory212 is an Australian based interactive marketing agency. As consideration
for the ordinary shares of Factory212, we issued 10,000 shares (the "Initial
Shares") of common stock to the Factory212 shareholders. Subject to the
conditions described below, we may issue additional shares ("Additional Shares")
of common stock to the Factory212 shareholders, issuable after December 31,
2007, calculated as follows:
51% of [(1 * Factory212 Revenue) + (4 * Factory212 Earnings)]
-------------------------------------------------------------
Average ROO Share Price
35
where: "Factory212 Revenue" means the billings less all media and third party
supplier costs of Factory212 for the twelve month period ending December 31,
2007; "Factory212 Earnings" means the earnings of Factory212 before tax and
after deduction of interest and all other expenses for the twelve month period
ending December 31, 2007; and "Average ROO Share Price" means the average price
of our common stock during the final five trading days of December 2007.
If we do not issue the maximum number of Additional Shares, ROO Media's
51% ownership of Factory212 will be reduced on a pro rata basis by the
difference between the maximum number of Additional Shares and the actual number
of Additional Shares issued. If we do not issue any Additional Shares, ROO Media
will relinquish all of its 51% ownership of Factory212. However, if the
Factory212 Earnings are greater than 15% of the Factory212 Revenue and the
number of Additional Shares to be issued are less than 4.9% of the then current
outstanding shares of our common, we must proceed with issuing the maximum
number of Additional Shares in accordance with the above formula.
The acquisition of Factory212 was conditioned upon the parties entering
into the Amendment described above under "Amendment to Reality Group Purchase
Agreement." If we fail to meet our material obligations under the terms of the
Amendment, then together with ROO Media, we agreed that the Factory212
shareholders may in their sole discretion require ROO Media to relinquish all of
its ownership of Factory212. In such event, we agreed that the Factory 212
shareholders shall be entitled to retain ownership of their Initial Shares.
OVERVIEW OF OUR BUSINESS
We, through our operating subsidiaries, are a digital media company in the
business of providing products and solutions that enable the broadcast of
topical video content from our customers' Internet websites. We specialize in
providing the technology and content required for video to be played on
computers via the Internet as well as emerging broadcasting platforms such as
set top boxes and wireless devices (i.e., mobile phones and PDAs). Our core
activities include the aggregation of video content, media management,
traditional and online advertising, hosting, and content delivery. We also
operate a global network of individual destination portals under the brand ROO
TV, that enables end users in different regions around the world to view video
content over the Internet that is topical, informative, up to date, and specific
to the region in which they live. In conjunction with our subsidiaries, we
currently service websites based in Europe, Australia, the United States and
South Africa. As of January 2006, our network of websites includes approximately
100 web sites based in the United States, Australia and the United Kingdom. An
independent research report which tracks the video streams sent to users per
month placed us as the 10th largest broadcaster of video in the world. Source:
iBroadcast Stream report released November 21, 2005 prepared by AccuStream
iMedia Research.
HISTORY OF THE DEVELOPMENT OF OUR BUSINESS
Our consolidated financial statements include the accounts of ROO Group,
Inc., its wholly owned subsidiary ROO Media Corporation, its wholly owned
subsidiary Bickhams and its 80% owned subsidiary Reality Group. Included in the
consolidation with ROO Media Corporation are ROO Media Corporation's wholly
owned subsidiary ROO Media (Australia) Pty Ltd. and ROO Media (Australia) Pty
Ltd.'s wholly owned subsidiary Undercover Media, its 100%-owned subsidiary ROO
Media Europe Pty Ltd, its wholly owned subsidiary ROO Broadcasting Limited, its
51% owned subsidiary Factory212 Pty. Ltd. and its wholly owned subsidiary ROO TV
Pty Ltd. Included in the consolidation with Bickhams is Bickhams' wholly owned
subsidiary VideoDome, Inc. ROO Media Europe Pty Ltd. was 76% owned by ROO Media
Corporation until January 27, 2006 when ROO Media Corporation purchased the
remaining 24% of ROO Media Europe Pty Ltd. for $90,000. We provide topical video
content, including news, business, entertainment, fashion, video games, movies,
music, sport and travel video, and associated services for broadcasting video
over the Internet to a global base of clients. ROO Media's delivery platform
supports worldwide syndication and television-style advertising. During 2001 and
2002, ROO Media focused on developing and refining its products and solutions,
and commenced the commercial selling of its solutions in late 2003. ROO Media
developed a technology platform specifically designed to provide a cost
effective, robust, and scaleable solution to manage and syndicate video content
over the Internet.
Our media operations management and updating functions are partially based
in Australia and partially in the United States and United Kingdom. We believe
that our Australian presence is beneficial due to lower currency costs and
because the time differences between the eastern and western hemispheres allow
daily media content to be processed during the evening in the United States and
the United Kingdom and during the daytime in Australia. As a result, we believe
we have a strategic cost benefit over our competitors.
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Our business plan is to develop a worldwide network of websites that
utilize our technology and content to broadcast video from individual websites.
The network of websites includes third party websites that license our
technology and content as well as our own network of websites, which are branded
as ROO TV. The network is designed to be similar to traditional satellite or
cable networks that distribute content throughout the world, with the difference
being it is broadcasted over the Internet rather than via television. Our
technology platform allows access to over 5,000 videos that can be viewed on a
daily basis by computer users. The video content available for viewing includes
topical content such as news, business, entertainment, fashion, music, movies
and travel. We update the video content and distribute the content to websites
receiving our services on a daily basis. We generate revenue from fees paid by
the websites for our content and technology services and, like traditional media
companies, from TV style ads which play before the topical videos across our
network of websites.
OPERATIONS STRATEGY
Our operations strategy for the next twelve months is broken into the
following core areas:
o Expanding content database and developing new products based on our
existing pool of video content for emerging markets such as wireless
and set top boxes;
o Increasing market penetration and growing market share and
distribution in the United States, Europe, Asia and Australia;
o Expanding the network of websites in which we provide content and
technology by expanding the ROO branded network of websites to more
countries, and activating new customers to our content solutions
using our direct sales force and resellers of our products and
services in markets in the United States, Australia, United Kingdom,
Europe and Asia;
o Acquiring commercially viable companies or businesses that have the
potential for accelerating or enhancing our business model;
o Investing in research and development of products, platform and
technology to offer a wider range of video content and improved user
experience for users viewing videos from our platform; and
o Developing awareness and relationships with advertising agencies and
advertisers of the benefits of advertising on our network of
websites.
The implementation of our operational strategies will depend on our
capital and we cannot be sure that such operational strategies will be achieved.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 23 of this prospectus.
SALES AND MARKETING
Our products and services are sold by our direct sales force and appointed
resellers. Our syndication and video solutions products are sold by our direct
sales force based in the United States, Australia and Europe, our online
advertising is sold by our direct sales force and through appointed interactive
online advertising agencies.
Our direct sales force targets the following market segments for our
content syndication products: (1) media and newspaper chains; (2) Internet
service providers; and (3) dedicated vertical websites such as entertainment
websites that are potential purchasers of entertainment video content. Through
our direct sales force and third party advertising agencies, we target potential
advertisers to advertise on our network of websites. We manage our sales
database through a customer relationship management system, which allows for
access and tracking from any ROO Media sales staff connected to the Internet.
Marketing of our products and services is done through traditional public
relations, print media and web-based marketing.
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TECHNOLOGY
Our proprietary technology platform and infrastructure is largely based in
the United States and is designed to be accessed and maintained from satellite
offices anywhere in the world via a Virtual Private Network (VPN) over the
Internet. The technology platform has been specifically designed to provide a
cost effective, robust, scaleable solution to manage and syndicate video content
over the Internet. The platform architecture allows for the flexible use of
third party software, hardware and internally developed applications. Components
forming the platform are housed with various third party service providers
located within the United States and Australia.
The key features of our technology platform include:
o Full screen video viewing;
o Viewing of all content via either a narrowband (Dial up) or
broadband connection;
o Platform supporting Real Networks and Microsoft Windows Media
formats;
o Global delivery and hosting allowing for video viewing throughout
the world by anyone connected to the Internet;
o Ability to program TV commercials to be played before selected
videos on selected web sites;
o Secure storage and protection of media files;
o Full reporting on videos viewed by type, date, country, web site,
etc.;
o The ability to present the videos in players and templates which
match the branding of the multiple web sites on which the content is
syndicated; and o Central technology platform allowing videos to be
automatically updated across the multiple web sites in which they
are displayed.
SPEEDERA NETWORKS NETWORK SERVICES AGREEMENT
On June 1, 2004, we entered into a Network Services Agreement with
Speedera Networks Inc. Speedera Networks provides us network services, which
includes account setup, customer configuration and assistance with content
streaming and download services. We are billed by Speedera Networks based on the
amount of data that is transferred each month. The initial term of the Network
Services Agreement ended May 31, 2005. The agreement automatically renewed for
an additional one year and will continue to renew for additional one-year terms
unless and until either party notifies the other party in writing of its intent
to terminate at least 60 days prior to the expiration of the then current term.
Either party may terminate the agreement in the event that the other party
materially defaults in performing their respective obligations under the
agreement and such default continues uncured for a period of 30 days following
written notice of default, except that Speedera Networks may immediately
terminate the agreement where a delay in termination would have a material
adverse effect on Speedera Networks. In addition, the agreement will terminate,
effective upon delivery of written notice by either party to the other party
upon (i) the institution of insolvency, receivership or bankruptcy proceedings
or any other proceedings for the settlement of debts of the other party; (ii)
the making of an assignment for the benefit of creditors by the other party; or
iii) the dissolution of the other party. Further, we may cancel the agreement at
any time for convenience upon written notice to Speedera Networks, in which case
we must pay to Speedera Networks all accrued and unpaid fees as of the
cancellation date plus an early cancellation fee. In 2005 Speedera Networks was
sold to Akamai Technologies, Inc.
INTELLECTUAL PROPERTY
On June 14, 2005, we applied with the U.S. Patent and Trademark Office for
a service mark of the name "ROO" (Serial No. 78649958). We have also applied for
a trademark of the name "ROO" in the European Union (European Community
Application No. 004758488). Both of these applications are pending.
Through our subsidiary, VideoDome.com Networks, Inc., we have the rights
to a registered service mark of the name "VideoDome.com Network" (Reg. No.
2,214,202). This service mark was registered with the U.S. Patent and Trademark
Office on December 29, 1998. We do not have any registered copyrights on any
software and do not have the rights to any other registered trademarks or
service marks. A portion of our software is licensed from third parties and a
large portion is developed by our own team of developers. We rely upon
confidentiality agreements signed by our employees, consultants and third
parties to protect our intellectual property.
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We depend on a portion of technology licensed to us by third parties and a
portion owned and developed by us. We license technology from third parties,
including software that is integrated with internally developed software and
used in our products to perform key functions. We anticipate that we will
continue to license technology from third parties in the future. Although we do
not believe that we are substantially dependent on any individual licensed
technology, some of the software that we license from third parties could be
difficult for us to replace. The effective implementation of our products
depends upon the successful operation of third-party licensed products in
conjunction with our products, and therefore any undetected errors in these
licensed products could prevent the implementation of our products, impair the
functionality of our products, delay new product introductions, and/or damage
our reputation.
OUR PRODUCTS
Our products and services, including those of our subsidiaries, are broken
into the following core areas:
ROO VIDEO SOLUTIONS. We utilize our expertise in video broadcasting over
the Internet to build customized video solutions for specific customers or
industry segments. Our platform has been designed to be flexible in
accommodating various opportunities for activating video for broadcast over the
Internet and accommodating emerging technologies such as wireless devices (i.e.,
mobile phones and PDAs) and set top boxes. The same platform, or components
thereof, used by us to run our network of websites can be adapted to suit the
individual needs of clients with specific objectives in mind. As our profile
within the market segment increases, organizations have increasingly approached
us to aid them in addressing a variety of individual Internet broadcasting
requirements. An example is B & T Weekly, a Reed Business Information
publication targeted to the advertising and marketing industry; we utilize our
platform and solutions to provide a wide range of television commercials for the
advertising industry, which can be viewed from the B & T website located at
www.bandt.com.au.
We also maintain a web site targeting wireless users at www.roomobile.com
which allows wireless users with the Microsoft Windows Mobile operating system
to access and view videos on news, business, entertainment and other topics via
their wireless device.
ROO SYNDICATION OF LICENSED VIDEO CONTENT. We provide a turnkey solution
for customers located throughout the world to activate licensed topical video
content on their web sites. ROO Media supplies our wholesale clients with a
cost-effective turnkey solution whereby the client receives the licensed video
content it selects, such as news, business, music, fashion, entertainment,
travel, etc., the technology to integrate the video into its website, daily
management and updating of the content, and regular reporting on which content
is being viewed. We generally receive a base fee per month from the client and a
share of the advertising revenue generated on the client's website. Samples of
current customers for this service include Verizon
(http://broadbandbeat.verizon.net/) in the United States, Bulldog Broadband a
cable and wireless company in the United Kingdom
(http://www.bulldoglounge.com/tv.asp) and News Interactive a subsidiary of News
Corp (http://video.news.com.au/) in Australia.
ROO'S ONLINE ADVERTISING NETWORK. Through our syndication clients, we have
developed a network of web sites across which we can sell advertising inventory.
Specifically, we have developed and implemented an advertising platform
specifically designed to simultaneously provide advertisers with a targeted
demographic and calculated success, and ROO Media, our content providers and our
wholesale clients with a substantial and additional incremental revenue stream.
The advertising includes traditional banner ads and television-style 15 second
and 30 second commercials, which can be programmed to play before and after
topical video clips that are most likely to be viewed by the advertisers' chosen
demographic. The platform has also been designed to allow for two to three
minute advertorials to be included on a wholesale client's website, or as a
standalone clip within certain content categories of our content bank.
Advertising inventory across our network of web sites is sold by our direct
sales force and through appointed interactive online advertising agents. Revenue
is generated for us every time an advertising clip is viewed. Our syndication
clients can receive a percentage of the advertising revenue generated on their
websites by our online advertising.
39
Our platform provides the ability to:
o Program an advertisement to run only on selected web sites in
selected countries;
o Program a commercial to run a specific amount of times or between a
selected range of dates;
o Program a commercial to run within a selected content category; and
o Provide reports on how many times the advertisement was viewed.
Recent advertisers over our network of websites utilizing our in-stream
advertising have included Microsoft, Apple, Honda, Hyundai, Target, Proctor &
Gamble and Pfizer.
INDUSTRY
We focus on providing technology and content solutions to the emerging and
growing segment of broadcasting video over the Internet and emerging
broadcasting platforms such as wireless and set top boxes. Through technology
advancements and the expansion of broadband services worldwide, the Internet now
enables the viewing of video from a computer connected to the Internet. This
creates a fundamental change in the way people can view media and transforms the
Internet into a broadcasting platform similar to television and radio platforms.
Internet access and audio and video use over the Internet have grown
substantially over the past twelve months as broadband access by end users
expands.
COMPETITION
The provisioning and streaming of digital media content over the Internet
is rapidly becoming a competitive industry. The key barriers to new firms to
enter and compete against existing companies within the digital media segment
are (1) the timeframe and costs to develop a commercially robust, feature rich
media delivery platform, and (2) the time involved to build a digital media data
base of licensed topic videos. While there are only a few industry participants
similar to us that provide a full suite of associated products and services,
there are a number of traditional content syndicators who have entered the
industry by providing their own content for streaming over their own portals.
For example, Disney, Time Warner and CNN all provide access to their own content
in digital format over their own destination Internet portals. There are also a
number of smaller operations that provide wholesale syndication services such as
The FeedRoom (www.feedroom.com), which provides a destination service similar to
that of ROO TV. Other competitors on select products of ROO Media include: Real
Networks, Inc., a global provider of network-delivered digital media service and
the technology that enables digital media creation, distribution and
consumption; and Loudeye Corporation, a service provider facilitating the use of
digital media for live and on-demand applications for enterprise communication,
marketing and entertainment. We believe that as the market segment continues to
grow, new competitors will enter the market and compete directly with us. We
compete with these firms and emerging competitors by offering competitive
pricing, unique products, flexible business models for our customers to generate
revenue, and continually developing and adding new functionality to our media
management platform. We also complete by continuing to expand our media database
and the amount of content categories and videos available.
GOVERNMENT REGULATION
We are subject to risks associated with governmental regulation and legal
uncertainties. Few existing laws or regulations specifically apply to the
Internet, other than laws and regulations generally applicable to businesses.
Many laws and regulations, however, are pending and may be adopted in the United
States, individual states and local jurisdictions and other countries with
respect to the Internet. These laws may relate to many areas that impact our
business, including content issues (such as obscenity, indecency and
defamation), caching of content by server products, sweepstakes, promotions, and
the convergence of traditional communication services with Internet
communications, including the future availability of broadband transmission
capability and wireless networks. These types of regulations are likely to
differ between countries and other political and geographic divisions. Other
countries and political organizations are likely to impose or favor more and
different regulation than that which has been proposed in the United States,
thus furthering the complexity of regulation. In addition, state and local
governments may impose regulations in addition to, inconsistent with, or
stricter than federal regulations. The adoption of such laws or regulations, and
uncertainties associated with their validity, interpretation, applicability and
enforcement, may affect the available distribution channels for and costs
associated with our products and services, and may affect the growth of the
Internet. Such laws or regulations may harm our business. Our products and
services may also become subject to investigation and regulation of foreign data
protection authorities, including those in the European Union. Such activities
could result in additional product and distribution costs for us in order to
comply with such regulation.
40
There is uncertainty regarding how existing laws governing issues such as
illegal or obscene content and retransmission of media apply to the Internet.
The vast majority of such laws were adopted before the advent of the Internet
and related technologies and do not address the unique issues associated with
the Internet and related technologies. Most of the laws that relate to the
Internet have not yet been interpreted. In addition to potential legislation
from local, state and federal governments, labor guild agreements and other laws
and regulations that impose fees, royalties or unanticipated payments regarding
the distribution of media over the Internet may directly or indirectly affect
our business. While we and our customers may be directly affected by such
agreements, we are not a party to such agreements and have little ability to
influence the degree such agreements favor or disfavor Internet distribution or
our business models.
The Child Online Protection Act and the Child Online Privacy Protection
Act impose civil and criminal penalties on persons distributing material harmful
to minors (e.g., obscene material) over the Internet to persons under the age of
17, or collecting personal information from children under the age of 13. We do
not knowingly distribute harmful materials to minors or collect personal
information from children under the age of 13. The manner in which these Acts
may be interpreted and enforced cannot be fully determined, and future
legislation similar to these Acts could subject us to potential liability if we
were deemed to be non-compliant with such rules and regulations, which in turn
could harm our business.
RESEARCH AND DEVELOPMENT
We continue to pursue opportunities to improve and expand our products and
services and have dedicated resources which continue to review and enhance our
technology platform and the products and solutions we offer. Currently, research
and development is conducted internally as well as through outsourcing
agreements. We plan to consider opportunities to expand our current content
categories to offer specific lifestyle, children's content, sport, science and
educational content. We also plan to explore opportunities to further enhance
our distribution and technological infrastructures to maintain our competitive
position. Furthermore, we are planning to launch a new upgraded version of our
platform offering improved user features and to improve operational process and
costs for maintaining and uploading our database on a daily basis. We cannot
assure you, however, that we will achieve our research and development goals.
EMPLOYEES
As of April 14, 2006, we had 75 full time employees and 5 part time
employees, based in Australia and the United States. We consider our relations
with our employees to be good.
DESCRIPTION OF PROPERTY
Our principal office and operations are located at 228 East 45th Street
8th Floor New York, NY 10017. These premises consist of 5,932 square feet of
office space. The related sublease agreement expires November 29, 2008. Rent on
the premises is currently $10,300 per month until December 31, 2006, and is
scheduled to increase each year as follows: from January 1, 2007 to December 31,
2007, $10,609 per month; and from January 1, 2008 to November 29, 2008,
approximately $11,920 per month.
We also rent property located at 11-15 Buckhurst St South Melbourne 3205,
Victoria, Australia. Rent at the Victoria, Australia location is $10,500 per
month. The Australian lease expired on January 30, 2006 and we are continuing on
a month to month basis until we secure the appropriate property on a long term
lease.
We also have an office at 42 Barky Street, St. Kilda, Victoria 3182,
Australia, an office at 17547 Ventura Blvd., Suite 305, Encino, California 91316
and a serviced office at 131-151 Great Tichfield Street London W1W5BB. Rent for
the Australia office is $10,744 per month, rent for the California office is
$2,768 per month and rent for the London office is (pound) 1,500 per month.
These leases are on a month-to-month basis.
41
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding, nor is our property
the subject of a pending legal proceeding, that is not in the ordinary course of
business or otherwise material to the financial condition of our business
MANAGEMENT
The following table sets forth the names and ages of the members of our
Board of Directors and our executive officers and the positions held by each.
-------------------------------- ---------------- --------------------------------------------------------
Name Age Position
-------------------------------- ---------------- --------------------------------------------------------
Robert Petty 41 Chief Executive Officer, President and Chairman of the
Board of Directors
-------------------------------- ---------------- --------------------------------------------------------
Robin Smyth 52 Chief Financial Officer and Director
-------------------------------- ---------------- --------------------------------------------------------
ROBERT PETTY. Mr. Petty was appointed Chief Executive Officer, President
and Chairman of the Board of Directors on December 3, 2003, the effective date
of the merger with ROO Media Corporation. Mr. Petty has also served as the
President, Chief Executive Officer and Chairman of the Board of Directors of ROO
Media Corporation since May 2001. From December 2002 to June 30, 2003, Mr. Petty
was a Director of A. Cohen & Co, Plc. From 1999 to 2002, Mr. Petty worked in New
York in various positions, including Chairman and Chief Executive Officer of
Avenue Group, Inc. (AVNU) (formerly I.T. Technology Inc.) and President of
VideoDome.com Networks, Inc, a middleware streaming media service provider. From
1997 to 1999, Mr. Petty was Manager of Electronic Business Services for
e-commerce products for Telstra Corp. Mr. Petty is also on the Board of
Directors of Reality Group Pty Ltd, Undercover Media Pty Ltd, Petty Consulting
Inc., ROO Media (Australia) Pty Ltd, ROO Media Europe Ltd, Bickhams Media Inc,
VideoDome.com Networks Inc, BAS Digital Pty Ltd, ROO Broadcasting Ltd, and ROO
TV Pty Ltd.
ROBIN SMYTH. Mr. Smyth was appointed Chief Financial Officer, Secretary,
Treasurer, Principal Accounting Officer and a Director on December 3, 2003, the
effective date of the merger with ROO Media Corporation. Mr. Smyth became
involved with ROO Media Corporation in 2002 and was appointed a Director in
2003. Since 1998 he was a partner at Infinity International, a consulting and IT
recruitment operation. During the period from 1990 to 1998 Mr. Smyth worked for
three years as EVP of Computer Consultants International in the U.S. and for
five years in London as CEO of Computer Consultants International's European
operations. Mr. Smyth was Secretary and a Director of the All-States group of
companies involved in merchant banking operations, where he was responsible for
corporate banking activities. Mr. Smyth is also on the Board of Directors of
Reality Group Pty Ltd, Undercover Media Pty Ltd ROO Media (Australia) Pty Ltd,
ROO Media Europe Ltd, Bickhams Media Inc, ROO Broadcasting Ltd, ROO TV Pty Ltd,
VideoDome.com Networks Inc, and Corporate Advice Pty Ltd.
Board Composition
At each annual meeting of our stockholders, all of our directors are
elected to serve from the time of election and qualification until the next
annual meeting of stockholders following election. The exact number of directors
is to be determined from time to time by resolution of the board of directors.
Each officer is elected by, and serves at the discretion of the board of
directors. Each of our officers and directors devotes his full time to our
affairs.
Audit Committee Financial Expert
We do not have an audit committee financial expert as that term is defined
in Item 401 of Regulation S-B. We have not been able to identify a suitable
nominee to serve as an audit committee financial expert.
42
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation of our Chief Executive Officer and the other named
executive officer, for services as executive officers for the last three fiscal
years.
Executive Compensation Table
Long-Term
Compensation
---------------------------------------
Annual Compensation Awards Payouts
------------------------------------- --------------------------- -----------
Other Securities All
Annual Restricted Under-lying LTIP Other
Name and Compen- Stock Options/ Payouts Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s) ($) SARs (#) ($) sation ($)
- --------------------------------- ------- ----------- ----------- ------------- --------------- ----------- ----------- ------------
Robert Petty (1), 2005 $253,846 0 0 $600,000(3) 0 0 0
Chief Executive Officer, 2004 $192,501 0 0 0 0 0 0
President and Chairman of 2003 $10,000 0 0 0 0 0 0
the Board
Robin Smyth (2), 2005 $152,307 0 $5,000 $150,000(4) 0 0 0
Chief Financial Officer, 2004 $101,619 0 0 0 0 0 0
Secretary, Treasurer, 2003 $5,000 0 0 0 0 0 0
Principal Accounting Officer
and Director
(1) Mr. Petty became our Chief Executive Officer, President and Chairman
on December 3, 2003.
(2) Mr. Smyth became our Chief Financial Officer, Secretary, Treasurer,
Principal Accounting Officer and a Director on December 3, 2003.
(3) On March 17, 2005, we issued 6,000,000 shares of Series A Preferred
Stock to Robert Petty as a performance bonus. These shares have been
valued at the equivalent of common shares valued as at the issue
date.
(4) On March 17, 2005, we issued 1,500,000 shares of Series A Preferred
Stock to Robin Smyth as a performance bonus. These shares have been
valued at the equivalent of common shares valued as at the issue
date
Options Grant Table
The following table sets forth information with respect to the named
executive officers concerning the grant of stock options during the fiscal year
ended December 31, 2005. We did not have during such fiscal year, and currently
do not have, any plans providing for the grant of stock appreciation rights
("SARs").
Option/SAR Grants in Last Fiscal Year
- --------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
% of Total
Options/
Number of SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/ SARs in Fiscal Price Expiration
Name Granted (#) Year ($/Sh) Date
- --------------------------- --------------- ------------- ---------- -----------
Robert Petty 520,000 29.2% $2.00 8/23/2007
Robin Smyth 260,000 14.6% $2.00 8/23/2007
- --------------------------------------------------------------------------------
Aggregate Option Exercises in Last Fiscal Year
No options were exercised by the named executive officers during the most
recent fiscal year.
43
Compensation of Directors
With the exception of Robert Petty pursuant to his employment agreement
described below, no Director receives any cash compensation for their service as
a Director. All directors are reimbursed for their reasonable out-of-pocket
expenses incurred in connection with their duties to us.
Employment Agreements
On April 1, 2004, we entered into an employment agreement with Robert
Petty. Under the agreement, Mr. Petty agreed to serve as our President, Chief
Executive Officer and Chairman of our Board of Directors. The expiration date of
the agreement is March 31, 2006, but will automatically be extended for two
additional years unless at least 90 days prior to such time either party
notifies the other party that the term will not be extended. Mr. Petty's base
salary under the agreement is $200,000 annually and will increase 10% each year.
Mr. Petty's base salary will also be reviewed at least annually for merit
increases and may, by action and in the discretion of the Board, be increased at
any time or from time to time. Mr. Petty is entitled to receive bonus payments
or incentive compensation as may be determined by our Board of Directors. In
addition, Mr. Petty was granted an incentive stock option to purchase 120,000
shares of our common stock, which is exercisable at $2.00 per share and expires
on August 23, 2007, as amended.
On November 1, 2004, we entered into an employment agreement with Robert
Petty that supersedes the April 1, 2004 employment agreement except as it
relates to the options that were issued to Mr. Petty. This agreement is also for
the employment of Mr. Petty as our President, Chief Executive Officer and
Chairman of our Board of Directors. The expiration of the agreement is October
31, 2007, but will automatically be extended for two additional years unless at
least 90 days prior to such time either party notifies the other party that the
term will not be extended. Mr. Petty's base salary under the agreement is
$250,000 annually and will increase 10% each year. Mr. Petty's base salary will
also be reviewed against milestones set by our Board of Directors, and be
increased in line with these milestones at any time or from time to time. The
agreement provides that we will provide Mr. Petty with the use of a motor
vehicle and we will contribute 10% of Mr. Petty's base salary to a 401K or
similar plan. In addition, Mr. Petty is entitled to receive bonus payments or
incentive compensation as may be determined by our Board of Directors.
On April 1, 2004, we entered into an employment agreement with Robin
Smyth. Under the agreement, Mr. Smyth agreed to serve as our Chief Financial
Officer. The expiration date of the agreement is March 31, 2006, but will
automatically be extended for two additional years unless at least 90 days prior
to such time either party notifies the other party that the term will not be
extended. Mr. Smyth's base salary under the agreement is $120,000 annually and
will increase 10% each year. Mr. Smyth's base salary will also be reviewed at
least annually for merit increases and may, by action and in the discretion of
the Board, be increased at any time or from time to time. Mr. Smyth is entitled
to receive bonus payments or incentive compensation as may be determined by our
Board of Directors. In addition, Mr. Smyth was granted an incentive stock option
to purchase 60,000 shares of our common stock, which is exercisable at $2.00 per
share and expires on August 23, 2007, as amended.
On November 1, 2004, we entered into an employment agreement with Robin
Smyth that supersedes the April 1, 2004 employment agreement except as it
relates to the options that were issued to Mr. Smyth. This agreement is also for
the employment of Mr. Smyth as our Chief Financial Officer. The expiration of
the agreement is October 31, 2007, but will automatically be extended for two
additional years unless at least 90 days prior to such time either party
notifies the other party that the term will not be extended. Mr. Smyth's base
salary under the agreement is $150,000 annually and will increase 10% each year.
Mr. Smyth's base salary will also be reviewed against milestones set by our
Board of Directors, and be increased in line with these milestones at any time
or from time to time. The agreement provides that we will provide Mr. Smyth with
the use of a motor vehicle and we will contribute 10% of Mr. Smyth's base salary
to a 401K or similar plan. In addition, Mr. Smyth is entitled to receive bonus
payments or incentive compensation as may be determined by our Board of
Directors.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting Agreement with our Chief Executive Officer/Director
ROO Media entered into a consulting agreement with Petty Consulting, Inc.
on August 1, 2001, whereby Petty Consulting, Inc. made Robert Petty available to
ROO Media to serve as its Chairman, President and Chief Executive Officer. The
agreement expired on August 1, 2004. Mr. Petty is the President of Petty
Consulting, Inc. Mr. Petty was paid $10,000 per month for his services to ROO
Media pursuant to the consulting agreement. In April 2004 this agreement was
terminated and Robert Petty entered into an employment agreement directly with
us. Our management believes that this agreement was on terms at least as
favorable as could have been obtained from an unrelated third party.
Loans from our Chief Executive Officer/Director
On January 7, 2003, ROO Media entered into a new loan agreement with Mr.
Petty to replace the loan agreement entered into with Mr. Petty dated July 29,
2001. The interest on the loan is 10% per annum and the outstanding balance as
of December 31, 2003 was $514,164. Mr. Petty has agreed that no demand for
payment will be made to the company over the following 12 months and any
principle repayment during any month above $20,000 will require board approval.
The loan is secured by all of the assets of ROO Media. Our management believes
that this loan is on terms at least as favorable as could have been obtained
from an unrelated third party.
We have periodically received cash advances from our Chief Executive
Officer and director, Robert Petty. These amounts are recorded as a loan
payable. The interest on the loan is 10% per annum and the outstanding balance
as of December 31, 2005 was $0. Interest expense for this loan amounts to $81
and $51 for the twelve months ended December 31, 2005 and 2004, respectively.
On May 18, 2005, we entered into a note purchase agreement with our Chief
Executive Officer and director, Robert Petty. As consideration for a loan of
$600,000, we incurred a debt payable to Mr. Petty in the amount of $600,000. In
connection with this loan, we paid transaction fees totaling $92,500, which
includes a $60,000 placement agent fee in connection with the sale by Mr. Petty
of $600,000 principal amount of secured convertible promissory notes (described
below) and $32,500 in legal fees in connection with such transaction. As
evidence of the $600,000 debt and a prior existing $500,000 debt payable to Mr.
Petty, we issued Mr. Petty a promissory note in the principal amount of
$1,100,000. The principal sum of $1,100,000 plus interest at the rate of 10% per
annum calculated beginning June 1, 2005 was due to be repaid on December 31,
2005. Our obligations under the promissory note were secured by a subordinated
security interest in all of our assets. In October 2005, Mr. Petty converted
$600,000 of the $1,100,000 principal amount promissory note into shares of our
common stock at a price of $1.50 per share.
In connection with the May 18, 2005 loan from Mr. Petty, Mr. Petty
personally sold an aggregate of $600,000 principal amount of secured convertible
promissory notes to certain investors. The secured convertible promissory notes
were convertible into common stock held by Mr. Petty at a price of $1.25 per
share, as adjusted. Mr. Petty's obligations under the secured convertible
promissory notes were secured by a security interest in the $1,100,000 principal
amount promissory note payable by us to Mr. Petty. The secured convertible
promissory notes bear interest at a rate of 8% per annum.
As partial consideration for the loan from Mr. Petty, we entered into a
registration rights agreement, pursuant to which we agreed to prepare and file a
registration statement providing for the resale of the shares of common stock
issuable upon conversion of the secured convertible promissory notes, including
shares of common stock that may be issued as interest payments under the secured
convertible promissory notes.
In connection with Mr. Petty's sale of the $600,000 principal amount
secured convertible promissory notes Mr. Petty was personally obligated to issue
warrants exercisable into shares of ROO Group, Inc. common stock owned by Mr.
Petty to placement agents. On August 23, 2005 we assumed the liability for such
warrants. This resulted in the issuance by us of warrants to purchase 48,000
shares of our common stock exercisable for five years with an exercise price of
$1.25 per share.
45
ROO Media
Pursuant to the terms of an Agreement and Plan of Merger, dated December
2, 2003, between Virilitec, VRLT Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Virilitec, ROO Media, and Jacob Roth and Bella Roth,
each an individual, ROO Media entered into an agreement to pay within 90 days
after December 3, 2003, the effective date of the Merger, Virilitec's $62,500
debt to Jacob Roth, Virilitec's former Chief Executive Officer. The obligation
to pay such debt is secured by the pledge of the 72,000,000 shares of the
Virilitec Common Stock issued to Robert Petty, the Chief Executive Officer of
ROO Media, after the merger. Our management believes that this agreement was on
terms at least as favorable as could have been obtained from an unrelated third
party. The final payment on this debt was made on May 10, 2004.
Bickhams Media, Inc.
On September 10, 2004, we entered into an agreement to purchase all of the
outstanding shares of common stock of Bickhams Media, Inc. from Avenue Group,
Inc. Avenue Group is a founding shareholder of ROO Group, Inc. and as of
September 10, 2004 owned over 20% of our outstanding common stock. Also, in
connection with the purchase of Bickhams Media, we agreed to guaranty all of the
obligations of VideoDome.com Networks, Inc. under a promissory note of VideoDome
that was issued to Avenue Group in October 2003 in the principal amount of
$290,000. Our management believes that the terms of this transaction were at
least as favorable as could have been obtained from an unrelated third party.
Series A Preferred Stock
On March 17, 2005, we issued 6,000,000 shares of Series A Preferred Stock
to our Chief Executive Officer and director, Robert Petty, and 1,500,000 shares
of Series A Preferred Stock to our Chief Financial Officer and director, Robin
Smyth. These shares have a combined valuation of $750,000. These shares were
issued as a performance bonus to Messrs. Petty and Smyth for, among other
things, their role in helping expand and grow our business operations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 14, 2006. The information in this
table provides the ownership information for: each person known by us to be the
beneficial owner of more than 5% of our common stock; each of our directors;
each of our executive officers; and our executive officers and directors as a
group.
Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to the number of shares indicated as
beneficially owned by them. Furthermore, unless otherwise indicated, the address
of the beneficial is c/o ROO Group, Inc., 228 East 45th Street, 8th Floor, New
York, NY 10017.
Percentage
Common Stock of Series A Preferred Percentage of
Name and Address Beneficially Common Stock Beneficially Series A Percentage of
of Beneficial Owner Owned (1) Stock (1) Owned (2) Preferred Stock Total Vote (1)(2)
- ------------------------------------- ----------------- ------------ -------------------- ---------------- ------------------
Robert Petty 2,120,000(3) 15.2% 6,000,000 63.2% 57.0%
Robin Smyth 360,000(4) 2.7% 1,500,000 15.8% 14.2%
Avenue Group, Inc.
15303 Ventura Blvd.
9th Floor
Sherman Oaks, CA 91403 673,210 5.1% 0 0% < 1%
Cobble Creek Consulting, Inc.
445 Central Ave.
Cedarhurst, NY 11516 40,000(5) < 1% 1,000,000 10.5% 9.2%
Rubin Irrevocable Family Trust
25 Highland Blvd.
Dix Hills, NY 11746 60,000(6) < 1% 1,000,000 10.5% 9.3%
Southpoint Capital Advisors LP
Southpoint GP, LP
Southpoint Capital Advisors LLC
Southpoint GP, LLC
Robert W. Butts
John S. Clark II
237 Park Avenue
Suite 900
New York, NY 10017 866,667(7) 6.6% 0 0% < 1%
William D. Witter, Inc.
Walter Pendergrast
Victor Ugolyn
One Citicorp Center
153 East 53rd Street
New York, NY 10022 1,323,333(8) 10.0% 0 0% 1.2%
- ------------------------------------- ----------------- ------------ -------------------- ---------------- -----------------
All Directors and Executive 2,480,000 17.4% 7,500,000 79.0% 70.9%
Officers as a Group (2 persons)
- ------------------------------------- ----------------- ------------ -------------------- ---------------- -----------------
46
(1) Applicable percentage ownership is based on 13,176,436 shares of common
stock outstanding as of April 14, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days
of April 14, 2006 for each stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with
respect to securities. Shares of common stock that are currently
exercisable or exercisable within 60 days of April 14, 2006 are deemed
to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Holders of Series A Preferred Stock are entitled to vote on all matters
submitted to shareholders of the Company and are entitled to ten votes
for each share of Series A Preferred Stock owned. Holders of shares of
Series A Preferred Stock vote together with the holders of common stock
on all matters and do not vote as a separate class. As of April 14,
2006 there were 9,500,000 outstanding shares of Series A Preferred
Stock.
(3) Represents: (a) 1,360,000 shares of common stock; (b) 120,000 shares of
common stock issuable upon the exercise of vested stock options with an
exercise price of $2.00 per share and an expiration date of August 23,
2007; (c) 400,000 shares of common stock issuable upon the exercise of
stock options which vest upon completion of certain milestones with an
exercise price of $2.00 per share and an expiration date of August 23,
2007; and (d) 240,000 shares of common stock issuable upon the
conversion of outstanding shares of Series A Preferred Stock.
(4) Represents: (a) 32,000 shares of common stock owned directly by Mr.
Smyth; (b) 8,000 shares of common stock owned indirectly through the
Smyth Family Superannuation Fund; (c) 60,000 shares of common stock
issuable upon the exercise of vested stock options with an exercise
price of $2.00 per share and an expiration date of August 23, 2007; (d)
200,000 shares of common stock issuable upon the exercise of stock
options which vest upon completion of certain milestones with an
exercise price of $2.00 per share and an expiration date of August 23,
2007; and (e) 60,000 shares of common stock issuable upon the
conversion of outstanding shares of Series A Preferred Stock.
(5) Represents 40,000 shares of common stock issuable upon the conversion
of outstanding shares of Series A
Preferred Stock.
(6) Represents: (a) 20,000 shares of common stock; and (b) 40,000 shares of
common stock issuable upon the conversion of outstanding shares of
Series A Preferred Stock.
47
(7) As reported in a Schedule 13G filed with the Securities and Exchange
Commission on September 1, 2005, Southpoint Capital Advisors LP,
Southpoint GP LP, Southpoint Capital Advisors LLC, Southpoint GP LLC,
Robert W. Butts and John S. Clark II have the sole power to vote and
dispose of approximately 866,667 shares of common stock.
(8) As reported in a Schedule 13G filed with the Securities and Exchange
Commission on January 24, 2006, William D. Witter, Inc., Walter
Pendergrast and Victor Ugolyn have the sole power to vote 1,304,729
shares of common stock and the sole power to dispose of 1,323,333
shares of common stock. William D. Witter, Inc. is a New York
corporation registered as an investment adviser under the Investment
Advisers Act of 1940. Walter Pendergrast is a Managing Director of
William D. Witter, Inc. and Victor Ugolyn is the President of William
D. Witter, Inc.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Dividend Policy
We have not declared any dividends to date. We have no present intention
of paying any cash dividends on our common stock in the foreseeable future, as
we intend to use earnings, if any, to generate growth. The payment by us of
dividends, if any, in the future, rests within the discretion of our Board of
Directors and will depend, among other things, upon our earnings, our capital
requirements and our financial condition, as well as other relevant factors.
There are no restrictions in our articles of incorporation or bylaws that
restrict us from declaring dividends.
Capital Structure
Our authorized capital consists of 500,000,000 shares of common stock, par
value $.0001 per share, and 20,000,000 shares of preferred stock, par value
$.0001 per share, of which 10,000,000 shares have been designated as Series A
Preferred Stock. As of April 14, 2006, we had 13,176,436 shares of common stock
outstanding and 9,500,000 shares of Series A Preferred Stock outstanding.
Holders of our common stock: (i) have equal ratable rights to dividends
from funds legally available therefor, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all of our assets available for
distribution to shareholders upon liquidation, dissolution or winding up of our
business; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per share on all matters on which shareholders may vote
at all shareholder meetings. The common stock does not have cumulative voting
rights.
The Series A Preferred Stock has a stated value of $.0001 and a
liquidation preference over the common stock and any other class or series of
capital stock whose terms expressly provide that the holders of Series A
Preferred Stock should receive preferential payment. Holders of Series A
Preferred Stock are entitled to vote on all matters submitted to shareholders
and are entitled to ten votes for each share of Series A Preferred Stock owned.
Holders of shares of Series A Preferred Stock vote together with the holders of
common stock on all matters and do not vote as a separate class. Beginning two
years from the date of issuance of the Series A Preferred Stock, each one share
of Series A Preferred Stock is convertible, at the option of the holder, into
0.04 shares of common stock, as adjusted. However, holders cannot convert any
share of Series A Preferred Stock if the market price of the Common Stock is
below $3.00 per share. If prior to two years from the date of issuance, there is
a sale or other disposition of all or substantially all of the Company's assets,
a transaction or series of related transactions in which more than 50% of the
voting power of security holders is disposed of, or upon a consolidation, merger
or other business combination where we are not the survivor, then immediately
prior to such event each holder of Series A Preferred Stock may convert any or
all of such holder's shares of Series A Preferred Stock into Common Stock as
described above.
48
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as amended,
authorizes us to Indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorney's fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which a person is a party by reason of being
one of our directors or officers if it is determined that such person acted in
accordance with the applicable standard of conduct set forth in such statutory
provisions. Our Certificate of Incorporation contains provisions relating to the
indemnification of director and officers and our By-Laws extends such
indemnities to the full extent permitted by Delaware law. We may also purchase
and maintain insurance for the benefit of any director or officer, which may
cover claims for which the Company could not indemnify such persons.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
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 Act and is, therefore, unenforceable.
CHANGES IN INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
On January 30, 2004, Mark Cohen C.P.A. was dismissed as approved by our
Board of Directors. Mark Cohen's report on the financial statements for either
of the past two years did not contain an adverse opinion or disclaimer of
opinion, and was not modified as to uncertainty, audit scope, or accounting
principles. During the fiscal years ended July 31, 2003 and 2002, the reports by
Mark Cohen on our financial statements contained a going concern opinion. During
our two most recent fiscal years and subsequent period up to January 30, 2004,
there were no disagreements with Mark Cohen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to Mark Cohen's satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
On January 30, 2004, subsequent to approval of our Board of Directors, we
engaged Moore Stephens, P.C. to serve as our independent auditors. During our
two most recent fiscal years, and during any subsequent period through January
30, 2004, we did not consult with Moore Stephens on any accounting or auditing
issues.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
ROO Group, Inc. by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Moore Stephens, P.C., independent registered public accounting firm, have
audited, as set forth in their report, which report includes an explanatory
paragraph related to the Company's ability to continue as a going concern,
thereon appearing elsewhere herein, our financial statements at December 31,
2005 and 2004 and for each of the two years then ended that appear in the
Prospectus. The financial statements referred to above are included in this
prospectus with reliance upon the independent registered public accounting
firm's opinion based on their expertise in accounting and auditing.
49
AVAILABLE INFORMATION
ROO Group, Inc. is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
ROO Group, Inc. has filed with the Commission a registration statement on
Form SB-2 under the Securities Act of 1933, as amended, with respect to the
common stock being offered hereby. As permitted by the rules and regulations of
the Commission, this prospectus does not contain all the information set forth
in the registration statement and the exhibits and schedules thereto. For
further information with respect to Phantom Fiber Corporation and the common
stock offered hereby, reference is made to the registration statement, and such
exhibits and schedules. A copy of the registration statement, and the exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at the addresses set forth above, and
copies of all or any part of the registration statement may be obtained from
such offices upon payment of the fees prescribed by the Commission. In addition,
the registration statement may be accessed at the Commission's web site.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
50
INDEX TO FINANCIAL STATEMENTS
ROO GROUP, INC. AND SUBSIDIARIES
Page(s)
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of December 31, 2005 F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended December 31, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 2005 and 2004 F-5 - F-6
Consolidated Statements of Cash Flows for the years
ended December 31,
2005 and 2004 and Supplemental Disclosure of
Non-Cash Investing and Financing Activities F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-31
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of ROO Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of ROO Group, Inc.
and Subsidiaries as of December 31, 2005, and the related consolidated
statements of operations, and comprehensive income (loss), stockholders' equity
and cash flows for each of the two years in the period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ROO Group, Inc. and
Subsidiaries as of December 31, 2005, and the results of their operations and
their cash flows for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows from operations that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Moore Stephens, P.C.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
March 27, 2006
F-2
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2005
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 5,274
Accounts receivable, net 1,499
Other current assets 330
--------
TOTAL CURRENT ASSETS 7,103
--------
Property and equipment, net 475
Deferred tax assets 24
Content, net 175
Software, net 1,013
Customer list, net 398
Domain names, net 52
Goodwill 1,990
--------
TOTAL ASSETS $ 11,230
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,100
Accrued expenses 382
Income tax payable 132
Accrued employee benefits 44
Other current liabilities 438
--------
TOTAL CURRENT LIABILITIES 2,096
--------
NON-CURRENT LIABILITIES 47
--------
TOTAL LIABILITIES 2,143
--------
COMMITMENTS --
--------
MINORITY INTEREST 89
--------
STOCKHOLDERS' EQUITY:
Series A Preferred shares, $0.0001 par value:
authorized 10,000,000 shares; issued and
outstanding 9,500,000 1
Common stock, $0.0001 par value: authorized 500,000,000
shares; issued and outstanding 13,176,436 1
Additional paid-in capital 23,366
Accumulated deficit (14,335)
Accumulated other comprehensive loss (35)
--------
TOTAL STOCKHOLDERS' EQUITY 8,998
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,230
========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-3
ROO GROUP, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- ---------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED
DECEMBER 31,
--------------------------
2005 2004
----------- -----------
REVENUE $ 6,619 $ 3,937
----------- -----------
EXPENSES:
Operations 4,465 2,541
Research and development 601 322
Sales and marketing 2,217 841
General and administrative 3,440 2,407
General and administrative (non-cash) 1,911 --
----------- -----------
TOTAL EXPENSES 12,634 6,111
----------- -----------
(LOSS) FROM OPERATIONS (6,015) (2,174)
Non-cash cost of capital -- (512)
Cost of capital -- (72)
Commission on loan procurement (60) --
Cost of Omnibus Consent and Waiver
agreement (78) --
Redemption premium on convertible notes (801) --
Agreement termination costs -- (210)
Interest income 7 1
Interest expense - related party (81) (51)
Non-cash interest expense - related party (62) --
Interest expense - other (188) (70)
Financing fees - convertible notes (759) (1,074)
Issue of stock for registration rights liquidated damages (710) --
Loss on sale of marketable securities (18) --
----------- -----------
NET (LOSS) BEFORE INCOME TAXES (8,765) (4,162)
INCOME TAXES (124) (49)
----------- -----------
NET (LOSS) BEFORE MINORITY INTEREST (8,889) (4,211)
MINORITY INTEREST (68) (15)
----------- -----------
NET (LOSS) $ (8,957) $ (4,226)
=========== ===========
BASIC AND DILUTED NET (LOSS) PER COMMON SHARE $ (1.40) $ (1.21)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 6,403,458 3,502,789
=========== ===========
COMPREHENSIVE (LOSS):
Net (loss) $ (8,957) $ (4,226)
Foreign currency translation (38) 16
Fair market value adjustment for available for sale securities 10 (10)
----------- -----------
COMPREHENSIVE (LOSS) $ (8,985) $ (4,220)
=========== ===========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-4
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREFERRED COMMON
SERIES A SHARES COMMON STOCK
PREFERRED SHARES PAR VALUE STOCK PAR VALUE
---------------- ---------------- ---------------- ----------------
BALANCE JANUARY 1, 2004 -- $ -- 3,153,399 $ --
Issue of stock in private placements -- -- 166,234 --
Issue of stock for services -- -- 136,043 --
Issue of stock for investments -- -- 8,807 --
Issue of stock as compensation for the
termination of an agreement -- -- 60,000 --
Issue of stock for the acquisition of Reality
Group, Pty, Ltd -- -- 167,200 --
Issue of stock for the acquisition of Undercover
Media, Pty, Ltd -- -- 20,000 --
Issue of stock for the acquisition of Bickhams
Media, Inc. -- -- 80,000 --
Issue of stock for the acquisition of Videodome
Networks.com, Inc. -- -- 120,000 --
Issue of options for services -- -- -- --
Computed discount on convertible debt -- -- -- --
Beneficial conversion feature of convertible debt -- -- -- --
Foreign currency translation adjustment -- -- -- --
Fair market value adjustment for available for
sale securities -- -- -- --
Net (loss) -- -- -- --
---------------- ---------------- ---------------- ----------------
BALANCE - DECEMBER 31, 2004 -- $ -- 3,911,683 $ --
================ ================ ================ ================
Issue of stock in private placements -- -- 7,034,834 1
Issue of stock for registration rights
liquidated damages -- -- 236,667 --
Issue of Series A Preferred shares for services 2,000,000 -- -- --
Issue of Series A Preferred shares as
Performance Bonuses 7,500,000 1 -- --
Issue of stock for services -- -- 5,818 --
Issue of stock for share price guarantee related
to Reality Group, Pty, Ltd -- -- 359,280 --
Issue of stock for achievement of milestones
related to Videodome Networks.com, Inc. -- -- 40,000 --
Issue of stock for the acquisition of Factory212 -- -- 10,000 --
Issue of options for services -- -- -- --
Computed discount on convertible debt -- -- -- --
Beneficial conversion feature of convertible debt -- -- -- --
Issue of stock on conversion of convertible debt -- -- 1,178,154 --
Issue of warrants on conversion of convertible debt -- -- -- --
Issue of warrants for Omnibus Consent and
Waiver agreement -- -- -- --
Issue of stock upon conversion of stockholder
loan payable -- -- 400,000 --
Issue of warrants for stockholder funding -- -- -- --
Issue of warrants for services -- -- -- --
Foreign currency translation adjustment -- -- -- --
Fair market value adjustment for available for
sale securities -- -- -- --
Net (loss) -- -- -- --
---------------- ---------------- ---------------- ----------------
BALANCE - DECEMBER 31, 2005 9,500,000 $ 1 13,176,436 $ 1
================ ================ ================ ================
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-5
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ACCUMULATED
OTHER OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
PAID-IN ACCUMULATED INCOME EQUITY
CAPITAL (DEFICIT) (LOSS) (DEFICIT)
---------------- ---------------- ---------------- ----------------
BALANCE JANUARY 1, 2004 $ 409 $ (1,152) $ (13) $ (756)
Issue of stock in private placements 872 -- -- 872
Issue of stock for services 576 -- -- 576
Issue of stock for investments 25 -- -- 25
Issue of stock as compensation for the
termination of an agreement 210 -- -- 210
Issue of stock for the acquisition of Reality
Group, Pty, Ltd 2,508 -- -- 2,508
Issue of stock for the acquisition of Undercover
Media, Pty, Ltd 150 -- -- 150
Issue of stock for the acquisition of Bickhams
Media, Inc. 280 -- -- 280
Issue of stock for the acquisition of Videodome
Networks.com, Inc. 330 -- -- 330
Issue of options for services 426 -- -- 426
Computed discount on convertible debt 89 -- -- 89
Beneficial conversion feature of convertible debt 1,055 -- -- 1,055
Foreign currency translation adjustment -- -- 16 16
Fair market value adjustment for available for
sale securities -- -- (10) (10)
Net (loss) -- (4,226) -- (4,226)
---------------- ---------------- ---------------- ----------------
BALANCE - DECEMBER 31, 2004 $ 6,930 $ (5,378) $ (7) $ 1,545
================ ================ ================ ================
Issue of stock in private placements 11,900 -- -- 11,901
Issue of stock for registration rights
liquidated damages 710 -- -- 710
Issue of Series A Preferred shares for services
Issue of Series A Preferred shares as
Performance Bonuses 749 -- -- 750
Issue of stock for services 19 -- -- 19
Issue of stock for share price guarantee related
to Reality Group, Pty, Ltd (200) -- -- (200)
Issue of stock for achievement of milestones
related to Videodome Networks.com, Inc. 44 -- -- 44
Issue of stock for the acquisition of Factory212 25 -- -- 25
Issue of options for services 849 -- -- 849
Computed discount on convertible debt 32 -- -- 32
Beneficial conversion feature of convertible debt 351 -- -- 351
Issue of stock on conversion of convertible debt 807 -- -- 807
Issue of warrants on conversion of convertible debt 117 -- -- 117
Issue of warrants for Omnibus Consent and
Waiver agreement 78 -- -- 78
Issue of stock upon conversion of stockholder
loan payable 600 -- -- 600
Issue of warrants for stockholder funding 62 -- -- 62
Issue of warrants for services 93 -- -- 93
Foreign currency translation adjustment -- -- (38) (38)
Fair market value adjustment for available for
sale securities -- -- 10 10
Net (loss) -- (8,957) -- (8,957)
---------------- ---------------- ---------------- ----------------
BALANCE - DECEMBER 31, 2005 $ 23,366 $ (14,335) $ (35) $ 8,998
================ ================ ================ ================
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-6
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
------------------
2005 2004
------- -------
OPERATING ACTIVITIES:
Net (loss) $(8,957) $(4,226)
------- -------
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Provision for doubtful accounts 31 35
Depreciation 147 65
Amortization of intangible assets 581 230
Non cash cost of capital -- 512
Non cash cost of Omnibus Consent and Waiver agreement 78 --
Non cash termination of registration rights -- 210
Non cash legal expenses -- 93
Non cash stock, warrants and options for services 961 33
Non cash preferred stock for consulting services 200 --
Non cash preferred stock issued as performance bonuses 750 --
Non cash interest expense related party 62 --
Non cash stock for registration rights liquidated damages 710 --
Non cash marketing expenses -- 450
Non cash financing fees on convertible note 759 1,074
Loss on sale of marketable securities 18 --
Minority interest in subsidiaries 68 15
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (449) (52)
Other assets 1 (118)
Increase (decrease) in:
Accounts payable 381 (277)
Accrued expenses (22) 139
Income tax payable 54 (3)
Accrued employee benefits (74) 68
Other liabilities (217) 282
------- -------
Total adjustments 4,040 2,756
------- -------
NET CASH (USED) BY OPERATING ACTIVITIES - FORWARD (4,917) (1,470)
------- -------
INVESTING ACTIVITIES:
Investment Bickhams/Videodome (100) (400)
Investment in Reality (200) (144)
Net cash received in acquisition of Reality and Videodome -- 86
Net cash received in acquisition of Factory212 9 --
Proceeds from sale of marketable securities 7 --
Creation of content (194) (80)
Purchase of equipment (236) (113)
Proceeds from sale of equipment -- 44
------- -------
NET CASH (USED) BY INVESTING ACTIVITIES - FORWARD $ (714) $ (607)
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements.
F-7
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
2005 2004
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES - FORWARDED $ (4,917) $ (1,470)
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES - FORWARDED (714) (607)
-------- --------
FINANCING ACTIVITIES:
Proceeds from private placements, net 11,901 785
Bank overdraft (260) 197
Increase in related party loans 225 116
(Decrease) in related party loans (51) (452)
Convertible note 1,465 1,896
Repayment of convertible note (2,743) --
Increase in stockholder loan 600 88
(Decrease) in stockholder loan (500) (102)
Note payable -- (72)
(Decrease) in capital leases (40) (52)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,597 2,404
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (14) (31)
-------- --------
NET INCREASE IN CASH 4,952 296
CASH - BEGINNING OF YEAR 322 26
-------- --------
CASH - END OF YEAR $ 5,274 $ 322
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Income taxes $ 72 $ 25
Interest $ 279 $ 108
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 2005 the Company issued 50,000 warrants at an
exercise price of $3.00 to Brimberg & Co for investor relations services. These
warrants were valued under the Black-Scholes method as $93 [See Note 13]. Also,
during the year ended December 31, 2005, the Company issued 5,818 shares of
common stock to a Company for investor relations services for a value of $19
[See Note 13]. During the year ended December 31, 2004 the Company issued
100,000 shares in the common stock of the Company for a value of $450 for
marketing services and 44,045 shares in the common stock of the Company for a
value of $126 for other services. In addition the Company issued 8,807 shares
with a value of $25 of shares in the common stock of the Company in exchange for
200,000 shares in A. Cohen & Co. The directors believe that all the non-cash
financing and investing activities were for fair value.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-8
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
ROO Group, Inc. ("we," "us," "our," the "Company" or "ROO Group"), through our
operating subsidiaries, is a digital media company in the business of providing
products and solutions that enable the broadcast of topical video content from
our customers' Internet websites. We specialize in providing the technology and
content required for video to be played on computers via the Internet as well as
emerging broadcasting platforms such as set top boxes and wireless devices
(i.e., mobile phones and PDAs). Our core activities include the aggregation of
video content, media management, traditional and online advertising, hosting,
and content delivery. We also operate a global network of individual destination
portals under the brand ROO TV, that enables end users in different regions
around the world to view video content over the Internet that is topical,
informative, up to date, and specific to the region in which they live. In
conjunction with our subsidiaries, we currently service websites based in
Europe, Australia, the United States and South Africa. We also generate revenues
through the operation of Reality Group Pty. Ltd ("Reality"), our 80% owned
subsidiary. Reality is a provider of integrated communication solutions,
including direct marketing, internet advertising and sales promotion. Reality
generates revenue through traditional and online services to its clients
including strategy, creative and media placement.
In prior years, we were in the development stage. During 2004, our principal
operations generated significant revenues. As such, we no longer consider
ourselves a development stage company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of ROO Group, Inc., its wholly owned subsidiary ROO Media
Corporation, its wholly owned subsidiary Bickhams (included since November 1,
2004) and its 80% subsidiary Reality Group Pty. Ltd. ("Reality") (included since
May 1, 2004). Included in the consolidation with ROO Media Corporation are ROO
Media Corporation's wholly owned subsidiary ROO Media (Australia) Pty Ltd. and
ROO Media (Australia) Pty Ltd.'s wholly owned subsidiary Undercover Media Pty
Ltd. ("Undercover") (included since June 1, 2004) , its 76%-owned subsidiary ROO
Media Europe Pty Ltd, its wholly owned subsidiary ROO Broadcasting Limited and
its wholly owned subsidiary ROO TV Pty Ltd and its 51% subsidiary Factory 212
Pty Ltd.(Factory212) (included since November 1, 2005). Included in the
consolidation with Bickhams is Bickhams' wholly owned subsidiary VideoDome, Inc
(included since November 1, 2004).
(B) MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Certain amounts included in the financial statements are
estimated based on currently available information and management's judgment as
to the outcome of future conditions and circumstances. Changes in the status of
certain facts or circumstances could result in material changes to the estimates
used in the preparation of financial statements and actual results could differ
from the estimates and assumptions. Every effort is made to ensure the integrity
of such estimates.
F-9
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) FOREIGN CURRENCY TRANSLATION - Assets and liabilities of ROO Group's foreign
subsidiaries are translated at current exchange rates and related revenues and
expenses are translated at average exchange rates in affect during the period.
Resulting translation adjustments are recorded as a component of accumulated
comprehensive income (loss) in stockholders' equity.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheet for cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their fair values because of the
immediate or short-term maturity of these financial instruments.
(E) CASH AND CASH EQUIVALENTS - ROO considers all highly liquid investments with
original maturities of ninety days or less to be cash and cash equivalents. Such
investments are valued at quoted market prices.
(F) ACCOUNTS RECEIVABLE - Accounts receivable are recorded at the invoiced
amount and are non-interest bearing. At each reporting period the Company
evaluates, on a specific basis, the economic condition of its customers and
their ability and intent to pay their debt. If such evaluation shows that it is
probable that a customer will not settle his full obligation, a reserve against
accounts receivable in general and administrative expense is recorded for the
non recoverable amount. The Company also maintains a general bad debt reserve
based on the aging of its customer's receivables and historical trends. The
allowance for doubtful accounts as of December 31, 2005 was $ 47.
(G) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided for using the straight-line and declining balance
methods of accounting over the estimated useful lives of the assets [See Note
5].
(H) INTANGIBLE ASSETS - Intangible assets of the Company are recorded at cost
less accumulated amortization. Amortization is computed using the straight-line
method over the estimated useful lives of the assets, with periods of up to five
years. All intangible assets are reviewed for impairment annually or more
frequently if deemed necessary and no impairment write-offs were recorded in
2004 and 2005 [See Note 9].
(I) IMPAIRMENT OF LONG-LIVED ASSETS - We review our long-lived assets and
identifiable intangibles for impairment at least annually whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When such factors and circumstances exist, we compare the
projected undiscounted future cash flows associated with the future use and
disposal of the related asset or group of assets to their respective carrying
amounts. Impairment, if any, is measured as the excess of the carrying amount
over the fair value based on market value (when available) or discounted
expected cash flows of those assets, and is recorded in the period in which the
determination is made.
(J) RISK CONCENTRATIONS - Financial instruments which potentially subject us to
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. We place our cash and cash equivalents with high
credit quality institutions to limit credit exposure. We believe no significant
concentration of credit risk exists with respect to these investments.
F-10
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the wide variety of customers who are dispersed across many
geographic regions. As of December 31, 2005, two customers each accounted for
approximately 11% of our trade accounts receivable portfolio, for approximately
22% in total. We routinely assess the financial strength of customers and, based
upon factors concerning credit risk, we establish an allowance for uncollectible
accounts. Management believes that accounts receivable credit risk exposure
beyond such allowance is limited.
We generally do not require collateral for our financial instruments.
(K) REVENUE RECOGNITION - Revenues are derived principally from professional
services, digital media management and advertising. Revenue is recognized when
service has been provided.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provide guidance for disclosures related to revenue
recognition policies. Management believes that ROO Group's revenue recognition
practices are in conformity with the guidelines of SAB 101 as amended by SAB
104.
(L) EARNINGS (LOSS) PER SHARE CALCULATION - Net loss per share is based on the
weighted average number of shares outstanding reflecting the shares issued in
the merger as outstanding for all periods presented. Earnings (loss) per common
share are calculated under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," which establishes standards for
computing and presenting earnings per share. SFAS No. 128 requires ROO Group to
report both basic earnings (loss) per share, which is based on the weighted
average number of common shares outstanding during the period, and diluted
earnings (loss) per share, which is based on the weighted average number of
common shares outstanding plus all potential dilutive common shares outstanding.
Options and warrants are not considered in calculating diluted earnings (loss)
per share since considering such items would have an anti-dilutive effect.
(M) STOCK-BASED COMPENSATION - We account for stock-based compensation utilizing
the intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, no compensation expense is
recognized because the exercise prices of these employee stock options equal or
exceed the estimated fair market value of the underlying stock on the dates of
grant.
F-11
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) STOCK-BASED COMPENSATION (CONTINUED) - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment". SFAS No. 123R is a revision
of SFAS No. 123, "Accounting for Stock Based Compensation", and supersedes APB
25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic
value method of accounting, and requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments, based
on the grant date fair value of those awards, in the financial statements. The
effective date of SFAS 123R for public entities that file as small business
issuers is the first reporting period beginning after December 15, 2005, which
is first quarter 2006 for calendar year companies, although early adoption is
allowed. SFAS 123R requires companies to adopt its requirements using a
"modified prospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all unvested awards granted prior to the effective date of SFAS 123R. The
"modified retrospective" method also permits entities to restate financial
statements of previous periods based on proforma disclosures made in accordance
with SFAS 123.
We currently utilize a standard option pricing model (i.e., Black-Scholes) to
measure the fair value of stock options granted to employees for proforma
purposes. While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. We have not yet determined
which model we will use to measure the fair value of employee stock options upon
the adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with the tax deductions in
excess of recognized compensation cost be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. We
have not yet determined what effect, if any, this change will have on future
periods. We currently expect to adopt SFAS 123R effective January 1, 2006;
however, we have not yet determined which of the aforementioned adoption methods
we will use.
(N) NON CASH COST OF CAPITAL - During the years ended December 31, 2005 and
2004, non cash cost of capital included options issued for capital raising
services which were valued using the Black-Scholes method totaling $ -0- and
$512, respectively.
(O) ADVERTISING EXPENSE - Our policy is to expense advertising costs as
incurred. We incurred no significant advertising expense in 2005 or 2004.
(P) RESTATEMENT OF SHARES - Effective October 3, 2005, the Company amended its
Certificate of Incorporation to effect a one-for-fifty reverse split of the
Company's issued and outstanding shares of common stock. All references to
numbers or values of the Company's shares have been adjusted to reflect this
one-for-fifty reverse split. All option amounts and exercise prices have been
adjusted to reflect the stock split.
(Q) FINANCING FEES CONVERTIBLE NOTES - Financing Fees Convertible Notes
reclassifies non cash expenses relating to the issuance of various convertible
notes to investors in the Company. All such convertible securities were retired
prior to December 31, 2005.
(R) RECLASSIFICATION - Certain prior period amounts have been reclassified to
conform with the current presentation.
F-12
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(S) RECENT ACCOUNTING PRONOUNCEMENTS - In March 2005, the FASB issued
Interpretation No. 47 (FIN 47), "Accounting for Conditional Asset Retirement
Obligations--an interpretation of FASB Statement No. 143." FIN 47 clarifies that
an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability's fair
value can be reasonably estimated. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 was adopted in the fourth quarter of 2005 and has
had no significant impact on our financial position, results of operations or
cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 requires retrospective application as the
required method for reporting a change in accounting principle, unless
impracticable or a pronouncement includes specific transition provisions. SFAS
No. 154 also requires that a change in depreciation, amortization or depletion
method for long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. This statement
carries forward the guidance in APB Opinion No. 20, "Accounting Changes," for
the reporting of the correction of an error and a change in accounting estimate.
SFAS No. 154 is effective beginning January 1, 2006. SFAS No. 154 is not
expected to have a significant impact on our financial position, results of
operations or cash flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business
Combination" ("EITF 05-6"). EITF 05-6 requires that leasehold improvements that
are placed in service significantly after and not contemplated at or near the
beginning of the lease term be amortized over the shorter of the useful life of
the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 was adopted in the fourth quarter of 2005. EITF 05-6 did
not have a significant impact on our financial position, results of operations
or cash flows.
In February 2006, FASB issued FASB 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB 133, Accounting for Derivative Instruments and
Hedging Activities, and FASB 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. FASB 155, provides the
framework for fair value remeasurement of any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation as well
as establishes a requirement to evaluate interests in securitized financial
assets to identify interests. FASB 155 further amends FASB 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. The guidance FASB 155 also clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of FASB 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins September 15, 2006. FASB 155 is not expected to
have a material impact on the Company's consolidated financial statements.
In March 2006, FASB issued FASB 156, Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140 . FASB 156 requires the
recognition of a servicing asset or servicing liability under certain
circumstances when an obligation to service a financial asset by entering into a
servicing contract. FASB 156 also requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value
utilizing the amortization method or fair market value method . FASB 156 is
effective at the beginning of the first fiscal year that begins after September
15, 2006. FASB 156 is not expected to have a material impact on the Company's
consolidated financial statements.
F-13
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(3) GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. We
have incurred net operating losses of approximately $6,015 for the year ended
December 31, 2005, compared to $2,174 for the year ended December 31, 2004.
Additionally, as of December 31, 2005, we had a net working capital of
approximately $5,007 and negative cash flows from operating activities of
approximately $4,917. Since ROO Media Corporation's inception, we have incurred
losses, had an accumulated deficit, and have experienced negative cash flows
from operations. The expansion and development of our business may require
additional capital. This condition raises substantial doubt about our ability to
continue as a going concern. Our management expects cash flows from operating
activities to improve in fiscal 2006, primarily as a result of an increase in
sales, although there can be no assurance thereof. The accompanying consolidated
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern. If we fail to generate
positive cash flows or obtain additional financing when required, we may have to
modify, delay or abandon some or all of our business and expansion plans.
(4) MARKETABLE SECURITIES - AT FAIR VALUE
The Company had classified its investments in marketable securities as available
for sale in conformity with generally accepted accounting principles. Available
for sale securities are valued at fair value, with unrealized gains and losses
shown as a separate component of stockholders' equity. Realized gains and losses
are determined on the basis of sales price compared to original cost. Cost is
determined under the specific identification method. In December 2005 the
Company sold all its marketable securities with a cost basis of $25 for a net
consideration of $7 resulting in a realized loss of $18.
(5) ACQUISITIONS
(i) On April 30, 2004 the Company completed the acquisition of 80% of the
outstanding ordinary shares (the "Shares") of The Reality Group Pty Ltd.
("Reality"). Reality is a provider of integrated communication solutions,
including direct marketing, internet advertising and sales promotion.
The consideration for the Shares was the issuance of an aggregate of 167,200
shares of common stock, par value $.0001 per share, of ROO Group, Inc. to the
Reality shareholders, pro rata based on the Reality shareholders' ownership
interest in Reality. As additional consideration for the Shares, ROO Group, Inc.
agreed to pay an aggregate of US$144 ($200 Australian Dollars) to the Reality
shareholders on or before September 30, 2004, to be divided proportionally to
each Reality shareholder based on the Reality shareholder's current ownership
percentage in Reality. The shares were valued at time of issuance at $15 per
share as this was the price that the Company guaranteed the closing market price
of the Company's common stock would be one year from the date of the closing of
the Reality acquisition and, together with the deferred cash payment, placed a
value on the Reality acquisition of $2,653. Unless the trading price of the
Company's common stock is at least $15 per share for a period of twelve months
commencing one year from the closing of the Reality acquisition, the Company
will be required to pay the difference between the closing share price per share
and $15 per share (a) in cash, (b) by returning a number of shares in Reality to
the original Reality shareholders on a pro rata basis based upon an agreed
valuation of the Reality ordinary shares or (c) with the agreement of the
Reality shareholders, by issuing additional common shares of ROO Group, Inc.
proportionately to the Reality shareholders.
The operations of Reality during the period from May 1, 2004 to December 31,
2005 have been included in the consolidated statements.
F-14
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(5) ACQUISITIONS (CONTINUED)
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (April 30, 2004).
Current assets $ 962
Property, Plant and Equipment 327
Deferred Tax Assets 13
Intangible Asset - Customer List 650
Goodwill 1,990
------------
Total Assets Acquired 3,942
------------
Current Liabilities 1,160
Non Current Liabilities 124
Minority Interest 5
------------
Total Liabilities Assumed 1,289
------------
NET ASSETS ACQUIRED $ 2,653
------------------- ============
On October 28, 2005, the Company entered into an amendment (the "Amendment") to
the Stock Purchase Agreement (the "Reality Purchase Agreement") dated as of
March 11, 2004 among the Company and the shareholders of Reality Group Pty Ltd.
("Reality Group"). Pursuant to the Amendment, the Reality Group shareholders
agreed to exercise their buyback option effective January 1, 2006 at which date
the Company must return 29% of the shares in Reality Group to Reality Group
shareholders reducing the Company's ownership of Reality Group to 51% in
exchange for 66,200 shares of the common stock of the Company (exchange shares).
The Reality Group shareholders further agreed that the Share Variance (as
defined in the Reality Purchase Agreement and as described in a Form 8-K filed
by the Company on May 17, 2004) shall be calculated based upon a closing sale
price of $2.50 and the Share Variance equals $1,264.
The Company paid $200 of the $1,264 Share Variance in cash and issued 425,400
shares (the "Variance Shares") of the Company's common stock as payment of the
remaining $1,064 based on a stock price of $2.50 per share. These shares were a
variance of shares and are included in the value at the time of acquisition of
$2,653. The Company guaranteed (the "Variance Guarantee") the Reality Group
shareholders that they will be able to sell their Exchange Shares (as defined in
the Reality Purchase Agreement and as described in a Form 8-K filed by the
Company on May 17, 2004) and Variance Shares for a price equal to or greater
than $2.50 per share for a period of 14 days after the earliest date that the
Reality Group shareholders can publicly sell their shares of the Company's
common stock (the "Variance Guarantee Period"). In the event the Reality Group
shareholders are unable to sell any of the Exchange Shares or the Variance
Shares for a price equal to or greater than $2.50 per share during the Variance
Guarantee Period, then the Company must issue them such number of shares of
common stock equal to: (x) the applicable number of Variance and/or Exchange
Shares multiplied by $2.50, less (y) the applicable number of Variance and/or
Exchange Shares multiplied by the average closing sale price of the Company's
common stock on the OTC Bulletin Board during the Variance Guarantee Period,
divided by (z) the average closing sale price of the Company's common stock on
the OTC Bulletin Board during the Variance Guarantee Period. Notwithstanding the
above agreements, if at any time during the Variance Guarantee Period an offer
is presented to a Reality Group shareholder to purchase their Variance Shares
for a price equal to or greater than $2.50 per share and such shareholder does
not accept the offer, then the Company's obligations pursuant to the Variance
Guarantee shall be automatically terminated with respect to such shareholder.
The Company agreed to prepare and file a registration statement providing for
the resale of 359,280 shares of common stock of the Company being the Variance
Shares less the exchange shares by November 27, 2005.
F-15
ROO GROUP, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(5) ACQUISITIONS (CONTINUED)
(ii) On June 1, 2004 the Company completed the acquisition of the business and
business assets of Undercover Media Pty Ltd. ("Undercover"). Included in the
purchase is the www.undercover.com.au website, which currently serves over 500
visitors per month with 55% from the USA, 18% from Europe, 7% from Asia and 20%
from other countries around the world. The Undercover website, through its
relationship with HMV, exemplifies the link between music content and the sale
of music; the user reads the article or interview and can then click through and
purchase the artist's CD from HMV's web site.
The consideration for the business was 20,000 shares of common stock, par value
$.0001 per share, of ROO Group, Inc. In determining a fair value for the cost of
the acquisition of Undercover, the Company considered the effects of price
fluctuations in the common stock during the period prior to negotiations through
the period subsequent to the closing of the acquisition, quantities traded,
issue costs and the like. The Company considers the fair value for the stock
issued to be $7.50 per share, for a total cost of $150.
The estimated fair value of the assets acquired was $150 for music, audio, video
and photographic content acquired. There were no liabilities assumed in the
acquisition.
The operations of the business of Undercover for the period from June 1, 2004 to
December 31, 2005 have been included in the consolidated statements.
(iii) On September 10, 2004, the Company entered into an agreement to purchase
all of the outstanding shares of common stock of Bickhams Media, Inc. from
Avenue Group, Inc pursuant to a Stock Purchase Agreement dated September 10,
2004. In consideration for the purchase, the Company agreed to: (1) pay Avenue
Group $300 cash; (2) issue Avenue Group 80,000 shares of our common stock; and
(3) guaranty all of the obligations of VideoDome.com Networks, Inc. under a
promissory note of VideoDome that was issued to Avenue Group in October 2003 in
the principal amount of $290. In addition, the Company agreed to issue Avenue
Group 60,000 shares of our common stock in consideration for a letter which
terminated a Registration Rights Agreement dated as of November 28, 2003.
As of November 1, 2004, the Company entered into an agreement with Bickhams
Media and Daniel and Vardit Aharonoff for Bickhams Media to purchase 50% of the
outstanding common stock of VideoDome.com Networks, Inc. Prior to November 1,
2004, Bickhams Media already owned the other 50% of the outstanding common stock
of VideoDome. As a result of this transaction, Bickhams Media now owns 100% of
the outstanding common stock of VideoDome. Under the agreement, the Company
agreed to: (1) issue 80,000 shares of our common stock to Daniel Aharonoff on
the closing date; (2) issue an additional 60,000 shares of our common stock to
Daniel Aharonoff upon meeting jointly agreed milestones; and (3) pay up to $220
in cash to Daniel Aharonoff upon meeting jointly agreed milestones. In December
2005, 20,000 shares of common stock and $100 in cash were issued to Daniel
Aharonoff upon meeting jointly agreed milestones. In May 2005, 40,000 shares of
common stock and $100 in cash were issued to Daniel Aharonoff upon meeting
jointly agreed milestones. As at December 31, 2005, $20 in cash is still due and
payable upon meeting jointly agreed milestones.
The operations of Bickhams and VideoDome during the period from November 1, 2004
to December 31, 2005 have been included in the consolidated statements.
F-16
ROO GROUP, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(5) ACQUISITIONS (CONTINUED)
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (November 1, 2004) and is
inclusive of milestone payments made subsequent to that date.
Current Assets $ 133
Property, Plant and Equipment 26
Software 1,300
-------------
Total Assets Acquired 1,459
-------------
Current Liabilities 305
Non Current Liabilities --
-------------
Total Liabilities Assumed 305
-------------
NET ASSETS ACQUIRED $ 1,154
------------------- =============
Selected unaudited pro forma combined results of operations for the twelve
months ended December 31, 2004, assuming the Reality, Undercover and Bickhams
acquisitions occurred on January 1, 2004 using actual unaudited figures from
each entity prior to acquisition, are presented as follows:
Total Revenues $ 5,682
Net (Loss) $ (3,991)
Net (Loss) per Common and Common Equivalent Share $ (0.02)
(iv) On October 28, 2005, ROO Broadcasting Limited, a wholly owned subsidiary of
the Company ("ROO Broadcasting"), and the shareholders of Factory 212 Pty Ltd.
("Factory212") entered into an agreement, pursuant to which ROO Broadcasting
acquired 51% of the outstanding ordinary shares of Factory212. Factory212 is an
Australian based interactive marketing agency. As consideration for the ordinary
shares of Factory212, the Company issued 10,000 shares (the "Initial Shares") of
the Company's common stock to the Factory212 shareholders. Subject to the
conditions described below, the Company may issue additional shares ("Additional
Shares") of common stock to the Factory212 shareholders, issuable after December
31, 2007, calculated as follows:
51% of [(1 * Factory212 Revenue) + (4 * Factory212 Earnings)]
-------------------------------------------------------------
Average ROO Share Price
where: "Factory212 Revenue" means the billings less all media and third party
supplier costs of Factory212 for the twelve month period ending December 31,
2007; "Factory212 Earnings" means the earnings of Factory212 before tax and
after deduction of interest and all other expenses for the twelve month period
ending December 31, 2007; and "Average ROO Share Price" means the average price
of the Company's common stock during the final five trading days of December
2007.
If the Company does not issue the computed number of Additional Shares, ROO
Media's 51% ownership of Factory212 will be reduced on a pro rata basis by the
difference between the computed number of Additional Shares and the actual
number of Additional Shares issued. If the Company does not issue any Additional
Shares, ROO Media will relinquish all of its 51% ownership of Factory212.
However, if the Factory212 Earnings are greater than 15% of the Factory212
Revenue and the number of Additional Shares to be issued are less than 4.9% of
the then current outstanding shares of common stock of the Company, the Company
must proceed with issuing the maximum number of Additional Shares in accordance
with the above formula.
F-17
ROO GROUP, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(5) ACQUISITIONS (CONTINUED)
The acquisition of Factory212 was conditioned upon the parties entering into the
Amendment described above under "Amendment to Reality Group Purchase Agreement."
If the Company fails to meet its material obligations under the terms of the
Amendment, then the Company and ROO Media agreed that the Factory212
shareholders may in their sole discretion require that ROO Media to relinquish
all of its ownership of Factory212. In such event, the Company agreed that the
Factory 212 shareholders shall be entitled to retain ownership of their Initial
Shares.
The above transactions were exempt from registration requirements pursuant to
Regulation S, promulgated pursuant to the Securities Act of 1933, as amended.
The operations of Factory212 during the period from November 1, 2005 to December
31, 2005 have been included in the consolidated statements.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (October 28, 2005).
Current assets $ 324
Property, Plant and Equipment 3
Intangible Asset - Customer List 19
------------
Total Assets Acquired 346
------------
Current Liabilities 315
Minority Interest 6
------------
Total Liabilities Assumed 321
------------
NET ASSETS ACQUIRED $ 25
------------------- ============
(6) LEASES
The Company is a party to a number of noncancelable lease agreements primarily
involving office premises and computer equipment. Computer equipment leases are
generally for three year periods. There are two leases of office premises. The
first is in Australia and is for a four year period ending in April 2006 with a
renewal option for an additional three year term. The second is in New York and
is for three years and ten months ending in November 2008 with no renewal
options.
F-18
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(6) LEASES (CONTINUED)
The following is a schedule of future minimum payments under capital leases and
operating leases and obligations under capital leases as of December 31, 2005.
Periods January to December Operating
unless stated otherwise Capital Property Total
----------------------- -------- --------- ---------
2006 $ 22 $ 288 $ 310
2007 31 190 221
2008 31 181 212
Thereafter -- -- --
--------- --------- ---------
Total Minimum Lease Payments 84 $ 659 $ 743
========= =========
Less Amount Representing Interest 5
---------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES $ 79
-------------------------------------- =========
Rent expense amounted to $336 and $160 for the years ended December 31, 2005 and
2004, respectively.
(7) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 consists of the following:
Plant and Motor
Equipment Vehicles
Plant and Capital Motor Capital
Equipment Lease Vehicles Lease
------------ ------------ ------------ ------------
Cost $ 175 $ 9 $ 4 $ 102
Accumulated
Depreciation (54) (2) (1) (24)
------------ ------------ ------------ ------------
Net $ 121 $ 7 $ 3 $ 78
============ ============ ============ ============
Estimated Useful Life 10 years 3 years 6 years 7 years
Computer Leasehold Office
Software Improvements Equipment Total
------------ ------------ ------------ ------------
Cost $ 35 $ 42 $ 299 $ 666
Accumulated
Depreciation (19) (7) (84) (191)
------------ ------------ ------------ ------------
Net $ 16 $ 35 $ 216 $ 475
============ ============ ============ ============
Estimated Useful Life 2 years 5 years 4 years
Depreciation expense (including depreciation of capital lease assets) amounts to
$147 and $65 for the years ended December 31, 2005 and 2004, respectively.
F-19
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(8) INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Years ended
December 31,
---------------------------
2005 2004
------------ ------------
Current:
Australian Federal Tax Expense $ 105 $ 83
Non-Current:
Australian Federal Tax Expense 19 (34)
------------ ------------
TOTALS $ 124 $ 49
---------- ============ ============
The reconciliation of reported income tax expense to the amount of income tax
expense that would result from applying Australian federal tax rates to pretax
income is as follows:
Statutory Federal Income Tax $ 117 $ 38
Other (Non Allowable Deductions) 7 11
============ =============
TOTALS $ 124 $ 49
---------- ============ =============
The components of deferred tax assets and liabilities were as follows:
Years ended
December 31,
----------------------------
2005 2004
------------ -------------
Deferred Tax Assets:
Provision Accounts $ 17 $ 26
Depreciation (--) (--)
Other Liabilities 7 17
============ =============
TOTALS $ 24 $ 43
---------- ============ =============
(9) GOODWILL AND INTANGIBLE ASSETS
Goodwill of $1,990 represents the excess of acquisition costs over the fair
value of net assets of the Reality acquisition.
At December 31, 2005 intangible assets include the following:
Customer List Software Content Domain Name
------------- ------------- ------------- -------------
Cost $ 669 $ 1,300 $ 336 $ 54
Less Amortization (271) (287) (161) (2)
------------- ------------- ------------- -------------
TOTALS $ 398 $ 1,013 $ 175 $ 52
------ ============= ============= ============= =============
F-20
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(9) GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
The customer lists were acquired as a component of the Reality and Factory212
acquisitions and are being amortized over a 4 year period on a straight line
basis. It is estimated that the aggregate annual amortization expense for each
of the next 3 years will be $163 for customer lists. The software is being
amortized over a 5 year period on a straight line basis. It is estimated that
the minimum aggregate annual amortization expense for each of the next 4 years
will be $260 for software. Content is made up of digital videos, audio and
photographs and is capitalized at the cost of production. Content is amortized
over a 2 year period on a straight line basis. It is estimated that the minimum
amortization of content costs will total $127 and $48 for the years ending
December 31, 2006 and 2007, respectively. The company purchased the domain name
www.roo.com in November 2005 and it is being amortized over a 5 year period on a
straight line basis. It is estimated that the aggregate annual amortization
expense for each of the next 4 years will be $11 for domain names.
The Company's policy is to regularly review goodwill and intangible assets to
determine if they have been permanently impaired by adverse conditions. As at
December 31, 2005 management does not believe the goodwill or intangible assets
to be impaired
(10) SHAREHOLDER LOAN PAYABLE
The Company has periodically received cash advances from its Chief Executive
Officer. These amounts are recorded as a loan payable by the Company. The
interest on the loan is 10% per annum and the outstanding balance as of December
31, 2005 was $-0-. Interest expense for this loan amounts to $81 and $51 for the
years ended December 31, 2005 and 2004, respectively.
On August 23, 2005 the Company assumed the liability for warrants issuable to
the funding agents for the $600 loan made to the Company by the Chief Executive
Officer on May 23, 2005. This resulted in the Company issuing 48,000 warrants.
The warrants were valued at $62 under the Black-Scholes method and the amount
was expensed as a non cash interest expense - related party.
On October 21, 2005, Robert Petty, the Company's Chief Executive Officer,
converted $600 of the amount owing to him as Shareholder Loan Payable to 400,000
shares which were issued at a price of $1.50 per share.
(11) CALLABLE SECURED CONVERTIBLE NOTES
On September 10, 2004, the Company entered into a Securities Purchase Agreement
with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC for the sale of (i) $3,000,000 in callable
secured convertible notes and (ii) warrants to purchase 3,000,000 shares of our
common stock.
These investors were obligated to provide us with the funds as follows:
o $1,000 was disbursed on September 13, 2004;
o $1,000 was disbursed on November 26, 2004; and
o $1,000 was disbursed on February 9, 2005.
F-21
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(11) CALLABLE SECURED CONVERTIBLE NOTES (CONTINUED)
The callable secured convertible notes bear interest at 8%, mature two years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $10.00; or
o 65% of the average of the three lowest intraday trading prices for the common
stock on the Over-The-Counter Bulletin Board for the 20 trading days before but
not including the conversion date.
Upon placement of the $3,000 callable secured convertible notes and the issuance
of 3,000,000 detachable warrants the Company recorded this event under the
guidance of the Emerging Issues Task Force (EITF) issue number 00-27
"Application of issue No. 98-5 to Certain Convertible Instruments".
The Company computed the value of the beneficial conversion feature as $585 for
first placement, $469 for the second placement and $351 for the third placement;
the expense from the third placement was recorded as financing fees -
convertible notes during the year ended December 31, 2005 while the other
placements were expensed during the year ended December 31, 2004. The Company
also recorded a discount of $46 for the first placement, $43 for the second
placement and $32 for the third placement for the detachable warrants issued in
conjunction with the callable secured convertible notes.
On May 19, 2005, we applied $200 of the $600 gross proceeds from a loan from Mr.
Petty to redeem $143 principal amount of the Company's outstanding $3,000
principal amount of callable secured convertible notes. The difference between
the amount paid and the principal amount redeemed of $57 was expensed as a
redemption premium on the callable secured convertible notes.
On July 18, 2005, the Company entered into a Securities Purchase Agreement with
AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC for the sale of: (i) $2,500 in callable
secured convertible notes; and (ii) warrants to purchase 100,000 shares of the
Company's common stock. The callable secured convertible notes and the warrants
will be issued to the investors pursuant to the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder. The warrants were valued under the Black-Scholes method
of $117.
The investors are obligated to provide the Company initially with $550 of funds
which was disbursed on July 19, 2005.
On August 18, 2005, the Company entered into an Omnibus Consent and Waiver
agreement with the holders of the Company's outstanding callable secured
convertible notes. Under the agreement, the Noteholders consented to a private
placement of up to 5,333,333 shares of the Company's common stock at a purchase
price of $1.50 per share in one or more closings. The Noteholders also agreed to
amend the amount of consideration required to prepay the callable secured
convertible notes in full to: (a) payment of $3,400 in cash within five business
days of the date of the agreement; and (b) issuance of warrants entitling the
Noteholders to purchase 60,000 shares of the Company's common stock with a fixed
exercise price of $1.50 per share exercisable for a period of five years from
the issue date. The warrants were valued under the Black-Scholes method at $78.
In addition, the Noteholders waived certain notice and other requirements in
order to facilitate prepayment of the outstanding callable secured convertible
notes. The warrants were issued by the Company on October 11, 2005.
F-22
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
On August 23, 2005, the Company repaid the holders of the Company's outstanding
callable secured convertible notes $3,400, which repaid the callable secured
convertible notes plus interest in full. This negotiated settlement was
considered to be in the best interest of the Company and included $2,600
callable secured convertible notes principal outstanding, $56 interest due and
payable and a $744 premium on the redemption.
(12) PREFERRED SHARES
On March 9, 2005, the Board of Directors of the Company amended the Company's
Certificate of Incorporation to designate the rights of Series A Preferred
Stock. The Certificate of Designation authorizes the Company to issue up to
10,000,000 shares of Series A Preferred Stock, par value $.0001 per share. The
Series A Preferred Stock has a stated value of $.0001 and a liquidation
preference over the Company's common stock and any other class or series of
capital stock whose terms expressly provide that the holders of Series A
Preferred Stock should receive preferential payment. Holders of Series A
Preferred Stock are entitled to vote on all matters submitted to shareholders of
the Company and are entitled to ten votes for each share of Series A Preferred
Stock owned. Holders of shares of Series A Preferred Stock vote together with
the holders of common stock on all matters and do not vote as a separate class.
Beginning two years from the date of issuance of the Series A Preferred Stock,
each one share of Series A Preferred Stock is convertible, at the option of the
holder, into two shares of the Company's common stock. However, holders cannot
convert any share of Series A Preferred Stock if the market price of the
Company's common stock is below $0.40 per share.
On March 17, 2005, ROO Group, Inc. (the "Company") issued 6,000,000 shares of
Series A Preferred Stock to its Chief Executive Officer, Robert Petty, and
1,500,000 shares of Series A Preferred Stock to its Chief Financial Officer,
Robin Smyth. These shares have been valued at the equivalent number (2:1) of
common shares valued as at the issue date to a combined valuation of $750. These
shares were issued as a performance bonus to Messrs. Petty and Smyth for, among
other things, their role in helping expand and grow the Company's business
operations. These shares were issued pursuant to the exemption from registration
provided by Rule 506 under the Securities Act of 1933.
Also on March 17, 2005, the Company issued and aggregate of 2,000,000 shares of
Series A Preferred Stock to two accredited investors as consideration for
investor relations services. These shares have been valued at the equivalent
number (2:1) of common shares valued as at the issue date to a combined
valuation of $200. These shares were issued pursuant to the exemption from
registration provided by Rule 506 under the Securities Act of 1933.
On September 30, 2005, the Company amended the terms of its Series A Preferred
Stock to provide that: (1) the holders thereof may not convert shares of Series
A Preferred Stock if the market price of the Common Stock is below $3.00 per
share; and (2) removing the following restriction on the holders thereof from
converting shares of Series A Preferred Stock immediately prior to a change in
control of the Company:
"if at the time of a conversion under this Section 5.2 the market price of the
Common Stock is below $0.40 per share, then each share of Series A Preferred
Stock shall convert into such number of shares of Common Stock equal to (x) two
(2), multiplied by (y) the closing price of the Common Stock on the date of the
event triggering an automatic conversion under this Section 5.2 divided by
$0.20."
F-23
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES
On February 8, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.89 per share to reduce the amount owing on the convertible notes by
a total of $11.
On February 9, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.85 per share to reduce the amount owing on the convertible notes by
a total of $11.
On February 17, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.72 per share to reduce the amount owing on the convertible notes by
a total of $10.
On February 28, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.57 per share to reduce the amount owing on the convertible notes by
a total of $9.
On March 1, 2005 the Company issued 140,000 options to purchase common stock to
a consultant with an exercise price of $10.00. Under the agreement, upon the
repayment of the callable secured convertible notes the exercise price reverted
to $5.00 and upon a reverse split of the Company's stock the number of options
outstanding shall not be less than 500,000 options. Upon the one-for-50 reverse
split of the Company's issued and outstanding shares of common stock effective
October 3, 2005, the issued options were adjusted to 500,000. As at December 31,
2005, 500,000 options with an exercise price of $5.00 were outstanding. These
options were valued under the Black-Scholes method at $849 as payment for
investor relations consulting services.
On March 3, 2005 the Company issued 6,000 shares of common stock converted under
the callable secured convertible notes agreement. The stock issued was valued at
$1.57 per share to reduce the amount owing on the convertible notes by a total
of $9.
On March 8, 2005 the Company issued 6,000 shares of common stock converted under
the callable secured convertible notes agreement. The stock issued was valued at
$1.57 per share to reduce the amount owing on the convertible notes by a total
of $9.
On March 18, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.52 per share to reduce the amount owing on the convertible notes by
a total of $9.
On March 29, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.52 per share to reduce the amount owing on the convertible notes by
a total of $9.
On April 6, 2005 the Company issued 6,000 shares of common stock converted under
the callable secured convertible notes agreement. The stock issued was valued at
$1.44 per share to reduce the amount owing on the convertible notes by a total
of $9.
On April 13, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.26 per share to reduce the amount owing on the convertible notes by
a total of $8.
F-24
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES (CONTINUED)
On April 20, 2005 the Company issued 6,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.11 per share to reduce the amount owing on the convertible notes by
a total of $7.
On April 29, 2005 the Company issued 96,154 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $1.04 per share to reduce the amount owing on the convertible notes by
a total of $100.
On May 9, 2005 the requirements for the second milestone in the stock purchase
agreement with Bickhams Media and Daniel and Vardit Aharonoff dated November 1,
2004 was met. Therefore, the Company authorized the payment of $100 and issued
40,000 shares of common stock. The shares were valued at $1.10 per share with a
total value of $44.
On May 10, 2005 the Company issued 138,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $0.69 per share to reduce the amount owing on the convertible notes by
a total of $95.
On May 13, 2005 the Company issued 206,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $0.605 per share to reduce the amount owing on the convertible notes
by a total of $125.
On July 19, 2005 the Company issued 216,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $0.65 per share to reduce the amount owing on the convertible notes by
a total of $140.
On July 22, 2005 the Company issued 228,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $0.57 per share to reduce the amount owing on the convertible notes by
a total of $130.
On July 29, 2005 the Company issued 228,000 shares of common stock converted
under the callable secured convertible notes agreement. The stock issued was
valued at $0.505 per share to reduce the amount owing on the convertible notes
by a total of $115.
F-25
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES (CONTINUED)
On August 23, 2005, the Company entered into a Common Stock Purchase Agreement
and sold 3,833,334 shares of the Company's common stock to accredited investors
in a private placement pursuant to Rule 506 promulgated under the Securities Act
of 1933, as amended. The common stock was sold at a price of $1.50 per share
resulting in gross proceeds of $5,750. $3,400 of the proceeds was used to prepay
all of the Company's outstanding callable secured convertible notes. In
connection with the sale of the common stock, the Company was required to
perform a 1-for-50 reverse split of its outstanding shares of common stock
within 45 days following the closing date [See Note 2]. In addition, the
investors acknowledged and agreed that the Company may sell up to an additional
$2,250 of shares of common stock on substantially identical terms or on terms
more favorable to the Company within 45 days of the closing, which the investors
have a right of first refusal to participate. The Company's Chairman and Chief
Executive Officer also agreed to convert at least $600 of a promissory note
issued to him by the Company on May 18, 2005 in the aggregate principal amount
of $1,100 into shares of the Company's common stock at a price of $1.50 per
share within five business days of the reverse stock split. The Company agreed
to prepare and file a registration statement with the Securities and Exchange
Commission registering the resale of the shares of common stock sold in the
private placement on or prior to 45 days following the closing date. If the
registration statement was not filed within such time or if the registration
statement was not declared effective within 120 days following the closing date,
the Company would be required to pay liquidated damages to the investors equal
to 2% of the dollar amount of their investment for each calendar month or
portion thereof that the registration statement is not filed or declared
effective. Pali Capital, Inc. and Brimberg & Co., both registered
broker-dealers, acted as placement agents for the sale of the Company's common
stock. In connection with the closing, the Company paid the placement agents a
cash fee equal to 10% of the gross proceeds up to $3,000 and 8% of the gross
proceeds in excess of $3,000. In addition, the Company was required to issue the
placement agents warrants to purchase a number of shares of common stock equal
to 10% of the shares of common stock sold in the private placement with an
exercise price of $1.50 per share exercisable for a period of five years. The
placement agents have piggyback registration rights with respect to the shares
of common stock issuable upon exercise of the placement agent warrants. The
placement agents warrants totaling 383,333 were issued on August 23, 2005 with
an exercise price of $1.50 and were valued under the Black-Scholes method as
$498. The net proceeds of $5,201 were received after deducting placement agent
fees $525 and legal fees of $24.
On August 23, 2005 the Company issued 48,000 warrants with an exercise price of
$1.25 and valued these under the Black-Scholes method as $62 in relation to
assuming the liability for warrants issuable to Pali Capital, Inc. for the $600
loan the Chief Executive Officer made to the Company on May 23, 2005.
Effective October 3, 2005, the Company amended its Certificate of Incorporation
to effect a one-for-fifty reverse split of the Company's issued and outstanding
shares of common stock. As of that date, every fifty outstanding shares of
common stock were changed into one share of common stock. Any shareholder who
beneficially owns a fractional share of common stock after the reverse stock
split received one additional share of common stock in lieu of such fractional
share [See Note 2].
F-26
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES (CONTINUED)
On October 20, 2005, the Company entered into a Common Stock Purchase Agreement
pursuant to which the Company sold 1,500,000 shares of its common stock to
accredited investors. The shares of common stock were sold at a price of $1.50
per share resulting in gross proceeds of $2,250. The transaction was exempt from
registration requirements pursuant to Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended. The Company agreed to prepare and file a
registration statement with the Securities and Exchange Commission registering
the resale of the shares of common stock sold in the private placement on or
prior to 30 days following the closing date. If the registration statement was
not filed within such time or if the registration statement was not declared
effective within 120 days following the closing date, the Company would be
required to pay liquidated damages to the investors equal to 2% of the dollar
amount of their investment for each calendar month or portion thereof that the
registration statement is not filed or declared effective. Pali Capital, Inc.
and Brimberg & Co., both registered broker-dealers, acted as placement agents
for the sale of the Company's common stock. In connection with the closing, the
Company paid the placement agents a cash fee equal to 8% of the gross proceeds.
In addition, the Company was required to issue the placement agents warrants to
purchase a number of shares of common stock equal to 10% of the shares of common
stock sold in the private placement with an exercise price of $1.50 per share
exercisable for a period of five years. The placement agents have piggyback
registration rights with respect to the shares of common stock issuable upon
exercise of the placement agent warrants. The placement agents warrants totaling
150,000 were issued on October 20, 2005 with an exercise price of $1.50 and were
valued under the Black-Scholes method as $286. The net proceeds of $2,043 were
received after deducting placement agent fees $180 and legal fees of $27.
On October 21, 2005 Robert Petty the Company's Chief Executive Officer converted
$600 of the amount owing to him as Shareholder Loan Payable to 400,000 shares,
which were issued at a price of $1.50 per share.
On October 23, 2005 the Company issued 50,000 warrants at an exercise price of
$3.00 to Brimberg & Co for Investor Relations services. These warrants were
valued under the Black-Scholes method as $93.
On October 28, 2005, the Company entered into an amendment (the "Amendment") to
the Stock Purchase Agreement (the "Reality Purchase Agreement") dated as of
March 11, 2004 among the Company and the shareholders of Reality Group Pty Ltd.
("Reality Group"). Pursuant to the Amendment, the Reality Group shareholders
agreed to exercise their buyback option effective January 1, 2006 at which date
the Company must sell to the Reality Group shareholders such number of shares of
Reality Group's common stock so as to reduce the Company's ownership of Reality
Group to 51%. The Reality Group shareholders further agreed that the Share
Variance (as defined in the Reality Purchase Agreement and as described in a
Form 8-K filed by the Company on May 17, 2004) shall be calculated based upon a
closing sale price of $2.50, and the Share Variance equals $1,264.
F-27
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES (CONTINUED)
The Company paid $200 of the $1,264 Share Variance in cash and issued 425,400
shares (the "Variance Shares") of the Company's common stock as payment of the
remaining $1,064 based on a stock price of $2.50 per share. These shares were a
variance of shares and are included in the value at the time of acquisition of
$2,653. The Company guaranteed (the "Variance Guarantee") the Reality Group
shareholders that they will be able to sell their Exchange Shares (as defined in
the Reality Purchase Agreement and as described in a Form 8-K filed by the
Company on May 17, 2004) and Variance Shares for a price equal to or greater
than $2.50 per share for a period of 14 days after the earliest date that the
Reality Group shareholders can publicly sell their shares of the Company's
common stock (the "Variance Guarantee Period"). In the event the Reality Group
shareholders are unable to sell any of the Exchange Shares or the Variance
Shares for a price equal to or greater than $2.50 per share during the Variance
Guarantee Period, then the Company must issue them such number of shares of
common stock equal to: (x) the applicable number of Variance and/or Exchange
Shares multiplied by $2.50, less (y) the applicable number of Variance and/or
Exchange Shares multiplied by the average closing sale price of the Company's
common stock on the OTC Bulletin Board during the Variance Guarantee Period,
divided by (z) the average closing sale price of the Company's common stock on
the OTC Bulletin Board during the Variance Guarantee Period. Notwithstanding the
above agreements, if at any time during the Variance Guarantee Period an offer
is presented to a Reality Group shareholder to purchase their Variance Shares
for a price equal to or greater than $2.50 per share and such shareholder does
not accept the offer, then the Company's obligations pursuant to the Variance
Guarantee shall be automatically terminated with respect to such shareholder.
The Company agreed to prepare and file a registration statement providing for
the resale of 359,280 of the Variance Shares by November 27, 2005.
On October 28, 2005, the Company entered into an agreement with ROO Broadcasting
Limited, a wholly owned subsidiary of the Company ("ROO Broadcasting"), and the
shareholders of Factory 212 Pty Ltd. ("Factory212"), pursuant to which ROO
Broadcasting acquired 51% of the outstanding ordinary shares of Factory212.
Factory212 is an Australian based interactive marketing agency. As consideration
for the ordinary shares of Factory212, the Company issued 10,000 shares (the
"Initial Shares") of the Company's common stock to the Factory212 shareholders
[See Note 5].
The above transactions were exempt from registration requirements pursuant to
Regulation S, promulgated pursuant to the Securities Act of 1933, as amended.
F-28
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(13) STOCK ISSUANCES (CONTINUED)
On December 28, 2005, the Company entered into a Common Stock Purchase Agreement
pursuant to which the Company sold 1,701,500 shares of its common stock and
680,600 warrants to purchase shares of common stock to accredited investors. The
warrants were valued under the Black-Scholes method as $1,922. The shares of
common stock were sold at a price of $3.00 per share resulting in gross proceeds
of $5,105. Each investor was issued warrants to purchase a number of shares of
common stock equal to 40% of the number of shares of common stock purchased. The
warrants have an exercise price of $4.00 per share and a term of five years. The
transaction was exempt from registration requirements pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended. The
investors were also granted a right to participate in subsequent financings
until June 28, 2007. The Company agreed to prepare and file a registration
statement with the Securities and Exchange Commission registering the resale of
the shares of common stock sold in the private placement on or prior to 30 days
following the closing date. If the registration statement was not filed within
such time or if the registration statement was not declared effective within 120
days following the closing date, the Company would be required to pay liquidated
damages to the investors equal to 2% of the dollar amount of their investment
for each calendar month or portion thereof that the registration statement is
not filed or declared effective. In connection with this private placement, we
agreed with the investors that within 60 days of meeting the listing
requirements of The Nasdaq SmallCap Market, the Company will file an initial
listing application for its common stock to be listed on The Nasdaq SmallCap
Market and that within 60 days of meeting the listing requirements of The Nasdaq
National Market, the Company will file an initial listing application for its
common stock to be listed on The Nasdaq National Market. Pali Capital, Inc. and
Brimberg & Co., both registered broker-dealers, acted as placement agents for
the sale of the Company's common stock. In connection with the closing, the
Company paid the placement agents a cash fee equal to 8% of the gross proceeds.
In addition, the Company is required to issue the placement agents warrants to
purchase a number of shares of common stock equal to 10% of the shares of common
stock sold and warrants issued in the private placement with an exercise price
of $3.00 per share exercisable for a period of five years. The placement agents
have piggyback registration rights with respect to the shares of common stock
issuable upon exercise of the placement agent warrants. The placement agents
warrants totaling 238,700 were issued on December 28, 2005 with an exercise
price of $3.00 and were valued under the Black-Scholes method as $680. The net
proceeds of $4,657 were received after deducting placement agent fees $408 and
legal fees of $40.
On December 31, 2005, the Company issued 236,667 shares of common stock to the
investors of the August 2005 and October 2005 private placements as satisfaction
of the total liquidated damages owed and anticipated due to the Company failing
to file a Registration Statement within the terms of the Registration Rights
Agreements dated August 23, 2005 and October 20, 2005. The shares issued to the
investors as payment of liquidated damages were considered Registrable
Securities for purposes of the Registration Rights Agreement and such shares
were included in the Registration Statement. The shares were valued at $3.00 per
share with a total value of $710.
On December 31, 2005 the Company issued 5,818 shares of common stock to a
company for investor relation services which were valued at $19.
F-29
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(14) STOCK OPTION PLAN
On August 23, 2005 the Board of Directors of ROO Group, Inc. increased the
number of incentive stock options or non-qualified options to purchase an
aggregate of 2,500,000 shares of common stock may be issued Stock Option Plan
(the "Plan"). Pursuant to the Plan, which expires on April 1, 2014, incentive
stock options or non-qualified options to purchase shares of common stock have
been issued to officers, directors, employees and consultants of ROO Group.
The Board of Directors have also determined that the currently outstanding
incentive stock options or non-qualified options be reissued on terms in line
with the Company's current position to reinstate the incentive nature of the
Plan for officers, directors, employees and consultants. On August 23, 2005 the
Board of Directors reissued the 277,000 outstanding stock options under the Plan
for two years and at an exercise price of $2.00 per share. On August 23, 2005
the Board of Directors also issued a further 1,506,050 stock options under the
Plan for two years and at an exercise price of $2.00 per share. At December 31,
2005 279,050 stock options under the Plan had vested with the remaining
1,504,000 still to vest under milestones.
The Plan is administered by the Board of Directors of ROO Group (the "Board") or
by a committee to which administration of the Plan, or of part of the Plan, may
be delegated by the Board (in either case, the "Administrator"). Options granted
under the Plan are not generally transferable by the optionee except by will,
the laws of descent and distribution or pursuant to a qualified domestic
relations order, and are exercisable during the lifetime of the optionee only by
such optionee. Options granted under the Plan vest in such increments as is
determined by the Administrator. To the extent that options are vested, they
must be exercised within a maximum of three months of the end of optionee's
status as an employee, director or consultant, or within a maximum of 12 months
after such optionee's termination by death or disability, but in no event later
than the expiration of the option term. The exercise price of all stock options
granted under the Plan shall be determined by the Administrator. With respect to
any participant who owns stock possessing more than 10% of the voting power of
all classes of ROO Group's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date.
If the compensation cost for the stock-based employee compensation plans had
been determined based on fair values of awards on the grant date, estimated
using the Black-Scholes option pricing model, which would be consistent with the
method described in SFAS No. 123, the Company's reported net (loss) and (loss)
per share would have changed to the pro forma amounts shown below:
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Net (Loss) as reported (8,957) (4,226)
Deduct: Amount by which stock-based employee
compensation as determined under fair
value based method for all awards
exceeds the compensation as determined
under the intrinsic value method (357) (1,079)
Pro Forma Net(Loss) (9,314) (5,305)
Basic and Diluted (Loss) Per Share as Reported (1.40) (1.21)
Pro Forma Basic and Diluted (Loss) Per Share (1.45) (1.51)
F-30
ROO GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
(14) STOCK OPTION PLAN (CONTINUED)
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Year Ended Year Ended
December 31, December 31,
2005 2004
----------- -----------
Expected life (in years) 2.0 2.0
Risk-free interest rate 4.75 % 4.75 %
Volatility 351 % 135 %
Dividend yield 0.0 % 0.0 %
(15) SUBSEQUENT EVENTS
Effective January 1, 2006, the Company returned 29% of the shares in Reality
Group to Reality Group shareholders, reducing the Company's ownership of Reality
Group to 51%, in exchange for 66,200 shares of the common stock of the Company.
On January 27, 2006 ROO Media Corporation purchased 24% of ROO Media Europe
Limited for $90. ROO Media Europe is now a wholly owned subsidiary of ROO Media
Corporation.
. . . . . . . . . .
F-31
10,041,414
Shares of
Common Stock
of
ROO Group, Inc.
PROSPECTUS
The date of this prospectus is April 24, 2006