As filed with the Securities and Exchange Commission on November 24, 2004
Registration No. 333- ________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMEDIA NETWORKS, INC.
(Name of small business issuer in its charter)
DELAWARE 3577
(State or jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number
11-3223672
(I.R.S. Employer
Identification No.)
101 CRAWFORDS CORNER ROAD,
HOLMDEL, NEW JERSEY 07733
(732) 949-2350
(Address and telephone number of principal executive offices)
FRANK GALUPPO
AMEDIA NETWORKS, INC.
101 CRAWFORDS CORNER ROAD,
HOLMDEL, NEW JERSEY 07733
(732) 949-2350
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent to the agent
for service, should be sent to:
LAWRENCE KALLAUR,ESQ. DAVID ABOUDI, ESQ.
C/O AMEDIA NETWORKS, INC. ABOUDI & BROUNSTEIN
101 CRAWFORDS CORNER, ROAD 3 GAVISH STREET
HOLMDEL, NEW JERSEY 07733 KFAR SABA, 44641, ISRAEL
(732) 949-2350 972-9-764-4833
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
====================================================================================
Proposed
maximum Proposed
Title of each offering maximum
class of securities price aggregate Amount of
to be registered Amount to be per offering registration
registered (1) share price fee
- ------------------------------------------------------------------------------------
Common Stock ......... 10,017,032 (2) $1.31 (7) $13,122,311.92 $1,672.44
......... 3,500,000 (3) $1.50 (8) $ 5,775,000 734.86
......... 3,500,000 (3) $2.50 (8) $ 9,625,000 1,229
840,000 (4) $1.31 (7) $ 1,100,400 152.04
350,000 (5) $1.50 (8) $ 525,000 126.70
350,000 (5) $2.50 (8) $ 875,000 126.70
428,812 (6) $1.31 (7) $ 561,743 126.70
TOTAL 18,985,844 $31,584,454.92 $4,168
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended,
this Registration Statement also covers such indeterminate number of additional
shares of Common Stock as may be issuable upon conversion of the Convertible
Preferred Stock and exercise of the Warrants and the Other Warrants (as defined
below) to prevent dilution resulting from stock splits, stock dividends or
similar transactions.
(2) Represents (a) up to 7,000,000 shares of Registrant's Common Stock,
par value $0.001 (the "Common Stock"), issuable upon conversion of 52,500 shares
of our Series A 7% Convertible Preferred Stock, par value $0.001 (the
"Convertible Preferred Stock") having a stated value of $100 per share, at a per
share conversion price of $0.75 and (b) up to 1,470,000 shares of Common Stock
issuable in respect of dividends thereon accrued through the third anniversary
of issuance. We are also registering an additional 1,547,032 shares of Common
Stock representing our current good faith estimate of additional shares that we
might be required to issue to such selling stockholder (A) based on adjustments
to the conversion price of the unconverted preferred stock and/or to the number
of shares covered by its unexercised Warrants (as defined below) referred to in
footnote 3 in the event that, on or prior to the one hundred eightieth day after
the effective date of this Registration Statement, we subsequently offer or
issue securities at a purchase price or conversion price lower than $0.75 per
share or warrants having an exercise price below the exercise price of the
Warrants (as defined below) held by the selling stockholder and (B) as
liquidated damages through the projected effective date of this Registration
Statement.
(3) Represents shares of Common Stock issuable upon exercise of warrants
("Warrants") issued to the holders of the Convertible Preferred Stock in
connection with the issuance of such preferred stock.
(4) Represents 700,000 shares of Common Stock issuable upon exercise of
warrants issued to placement agents in connection with the issuance of the
Convertible Preferred Stock. We are also registering an additional 140,000
shares of Common Stock representing our current good faith estimate of
additional shares that we might be required to issue to such selling
stockholders based on adjustments to the number of shares covered thereby and
those referred to in footnote 5 below in the event that, on or prior to the one
hundred eightieth day after the effective date of this Registration Statement,
we subsequently offer or issue securities at a purchase price or conversion
price lower than $0.75 per share or warrants having an exercise price below the
exercise price of the Warrants held by such selling stockholders.
(5) Represents shares of Common Stock issuable upon exercise of warrants
issued to placement agents in connection with the issuance of the Convertible
Preferred Stock and held by certain selling stockholders who are not holders of
the Convertible Preferred Stock.
(6) Represents shares of Common Stock issuable upon exercise of certain
other warrants and options held by certain selling stockholders who are not
holders of the Convertible Preferred Stock (together with the warrants referred
to in footnotes 4 and 5 above the "Other Warrants").
(7) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon
the average of the high and low sale price of the Common Stock as reported on
the OTC Electronic Bulletin Board on November 19, 2004.
(8) Pursuant to Rule 457(c) and (g), the proposed maximum offering price
per share is based on the exercise price therefor on the date hereof.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004
PROSPECTUS
AMEDIA NETWORKS, INC.
18,985,844 shares of Common Stock
This prospectus relates to the sale by the selling stockholders of
18,985,844 shares of our common stock, par value $0.001 (the "Common Stock").
The selling stockholders may sell the shares from time to time at the prevailing
market price or in negotiated transactions.
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders.
Each of the selling stockholders may be deemed to be an "underwriter,"
as such term is defined in the Securities Act of 1933.
Our common stock is quoted on the OTC Electronic Bulletin Board under
the trading symbol "AANI". The last reported sales price per share of our Common
Stock as reported by the Over-The-Counter Bulletin Board on November 23, 2004,
was $1.83.
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission (the "SEC") nor any state
securities commission has approved or disapproved of these securities or passed
on the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is _________, 2004
PRINCIPAL EXECUTIVE OFFICE:
Amedia Network, Inc.
101 Crawfords Corner Road,
Holmdel, New Jersey 07733
(732) 949-2350
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................1
Risk Factors...................................................................4
Use of Proceeds...............................................................17
Description of the Agreements with the Holders of the Convertible
Preferred Stock...............................................................18
Dividend Policy...............................................................22
Price Range of Common Stock ..................................................22
Management's Discussion and Analysis of Financial Condition and Results
of Financial Operation .......................................................23
Business......................................................................26
Description of Property.......................................................43
Legal Proceedings.............................................................43
Management....................................................................44
Executive Compensation........................................................47
Beneficial Ownership of Certain Shareholders, Directors and
Executive Officers............................................................50
Certain Relationships and Related Transactions................................52
Selling Stockholders..........................................................53
Plan of Distribution..........................................................62
Description of Securities.....................................................64
Auditor Change ...............................................................65
Disclosure of Commission Position of Indemnification for Securities
Act Liabilities...............................................................66
Interest of Named Expert and Counsel..........................................66
Legal Matters.................................................................66
Experts.......................................................................66
Where You can find more Information...........................................66
Index to Financial Statements................................................Q-1
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF ANY
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY "RISK
FACTORS" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS
PROSPECTUS, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
AMEDIA NETWORKS, INC.
We are a development stage company that designs, develops and intends to
market technology-based broadband access solutions for voice, video and data
services, focusing on fiber-based and Ethernet-based solutions, including
Fiber-to-the-Premises (FTTP). Our initial products are being designed to provide
a cost-effective advanced FTTP broadband access solution that leverages existing
network structures, minimizes operation costs and satisfies subscriber demand
for advanced Internet, video and entertainment services. The core technologies
underlying our initial products have been co-developed with Lucent Technologies,
Inc. ("Lucent") at Lucent's Bell Labs in New Jersey. We and Lucent entered into
a Development and Licensing Agreement as of January 6, 2004 (the "Development
and Licensing Agreement") relating to the development and licensing by Lucent to
us of specified core FTTP technologies. Our initial products will utilize Lucent
owned FTTP technologies as well as technologies developed jointly by us and
Lucent. Under the Development and Licensing Agreement, Lucent has granted to us
a worldwide, perpetual and non-exclusive license to manufacture, develop and
sell products utilizing the Lucent owned technologies and related patents.
We intend to sell or license our proposed products to telecommunications
carriers, cable and video providers, governments, public utilities, and
municipalities around the globe. We currently do not intend to market any
products directly to end-users. To date, we have not generated any revenues and,
due to the long selling cycle and nature of the broadband access solutions
market, we do not anticipate generating any significant revenues during 2005. We
have shipped selected products for evaluation by prospective customers in
November 2004 and anticipate being able to provide selected products for
commercial deployment in December 2004. These initial products, currently
marketed under the name "QoStream(TM)", are being designed for deployment on an
all fiber based system.
We have been engaged in the broadband access solutions business only
since March 2004. From our inception in August 1994 through October 2002, we
were engaged solely in the business of designing and developing digital security
technologies that provide copy protection for electronic content distributed on
optical media and the Internet (the "Copy Protection Business") under the name
of "TTR Technologies, Inc." We sold our Copy Protection Business in May 2003. We
entered into the Development and Licensing Agreement in January 2004, following
our stockholders' approval in March 2004 of such agreement and the general
change in business direction. In May 2004, We changed our name to "Amedia
Networks, Inc."
We have a history of operating losses and have incurred net losses in
1
each fiscal quarter since our inception. These losses are primarily attributable
to our previous Copy Protection Business. We expect to continue operating at a
loss through at least 2005 as we expect to incur significant outlays and
expenses in connection with our new business direction. As a result of recurring
losses from operations and a net deficit in both working capital and
stockholders equity, our independent registered accountants have included a
"going concern" explanatory paragraph in their audit reports on our audited 2003
and 2002 financial statements that expresses substantial doubt about our ability
to continue as a going concern. We anticipate that our existing cash resources
will enable us to maintain operations through the end of the first fiscal
quarter of 2005. Our existing resources may not be sufficient to support the
commercial introduction, production and marketing of our contemplated initial
products. Unless we raise additional funds, we may need to curtail expenditures
which may result in a delay in our initial product testing or marketing efforts,
all of which can have a material adverse effect on our business and prospects.
We will need to raise additional capital in order to complete our prospective
product offerings, expand business applications and realize our business plan.
We have no commitments for any such financing and there can be no assurance that
we will successfully raise any of the needed amounts on commercially acceptable
terms or at all. Even if we are successful in raising the needed capital, no
assurance can be provided that we will successfully commercialize our products
or become profitable.
Mr. Frank Galuppo, our Chief Executive Officer, was appointed in March
2004 to lead our company. Mr. Galuppo has nearly 40 years experience in the
telecommunication and related fields. Mr. Galuppo has also been appointed to our
Board of Directors. We currently have thirteen full time employees.
Our principal offices are located at 101 Crawfords Corner Road in
Holmdel New Jersey, 07733 and our telephone number is 732-949-2350.
RISK FACTORS
Investing in shares of our Common Stock involves significant risk. You
should consider the information under the caption "Risk Factors" beginning on
page 6 of this Prospectus in deciding whether to purchase the Common Stock
offered under this Prospectus.
THE OFFERING
Securities offered by the
selling stockholders 18,985,844 shares of Common Stock. (1)
Shares outstanding before the
Offering 16,440,630 shares of Common Stock. (2)
Use of Proceeds We will not receive any proceeds from the
Sale of the Common Stock by the selling
stockholders.
1) Includes up to (i) (a) 7,000,000 shares of our Common Stock issuable
upon conversion of 52,500 shares of our Series A 7% Convertible Preferred Stock,
par value $0.001 (the "Convertible Preferred Stock") having a stated value of
2
$100 per share at a per share conversion price of $0.75, (b) up to 1,470,000
shares of Common Stock issuable in respect of dividends on the Convertible
Preferred Stock accrued and accruing through the third anniversary of issuance
and (c) 7,000,000 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Convertible Preferred Stock (the "Warrants") and
(d) an additional 1,547,032 shares of Common Stock, representing our current
good faith estimate of additional shares that we might be required to issue to
such selling stockholders (x) based on adjustments to the conversion price of
the unconverted preferred stock and/or to the number of shares covered by their
unexercised warrants in the event that, on or prior to the one hundred eightieth
day after the effective date of this Registration Statement, we subsequently
offer or issue securities at a purchase price or conversion price lower than
$0.75 per share or warrants having an exercise price below the exercise price of
the warrants held by the selling stockholders and (y) as liquidated damages
through the projected effective date of this Registration Statement, in each
case as contemplated by terms of agreements between us and such selling
stockholders, (ii) (a) 1,400,000 shares of Common Stock issuable upon exercise
of certain other warrants issued to placement agents in connection with the
issuance of the Convertible Preferred Stock and (b) an additional 140,000 shares
of Common Stock, representing our current good faith estimate of additional
shares that we might be required to issue to such selling stockholders (x) based
on adjustments to the conversion price of the unconverted preferred stock and/or
to the number of shares covered by their unexercised warrants in the event that,
on or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholders and (y) as liquidated damages through the projected effective date
of this Registration Statement, in each case as contemplated by terms of
agreements between us and such selling stockholders and (iii) 428,812 shares of
Common Stock issuable upon exercise of certain other warrants and options
(together with the warrants in (ii) above the "Other Warrants"). For a
description of the agreement between us and the holders of the Convertible
Preferred Stock, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(2) As of November 17, 2004. Does not include (a) up to an aggregate of
4,220,414 shares of Common Stock issuable upon exercise of options granted under
our 1996 Stock Option Plan, the 2000 Equity Incentive Plan and the 2002
Non-Employee Directors Stock Option Plan, (b) any of the shares described in
clauses (i) and (ii) in footnote (1) above and (c) 2,358,218 shares of Common
Stock issuable upon exercise of certain other outstanding options and warrants.
3
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU
PURCHASE ANY OF OUR COMMON STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES
ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE MATERIALLY ADVERSELY AFFECTED. IN THIS EVENT YOU COULD LOSE ALL OR PART
OF YOUR INVESTMENT.
RISKS CONCERNING OUR BUSINESS
OUR COMPANY HAS A HISTORY OF LOSSES AND WE EXPECT TO INCUR LOSSES FOR
THE FORESEEABLE FUTURE, THUS RAISING SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Since inception, we have sustained substantial losses, primarily
associated with our previous Copy Protection Business which we sold in May 2003.
We will continue to incur losses attributable to operations associated with our
new broadband communication business direction and a lack of revenues sufficient
to offset these operating expenses. We expect these losses to continue for the
foreseeable future as we anticipate that our operating expenses will
substantially increase as we continue to develop, enhance and commence the
commercialization of our evolving product line. We have not generated any
revenues and do not anticipate generating any significant revenues through at
least fiscal 2005. We have raised capital to fund ongoing operations by private
sales of the Convertible Preferred Stock in August 2004 at a considerable
expense to us and resulting in dilution to existing stockholders.
We incurred a net loss of $4,211,446 for the nine months ended September
30, 2004 and a net income (loss) of $3,466,602 and $(5,244,751) for the fiscal
years ended 2003 and 2002, respectively. The net income for 2003 was
attributable to the sale of our Copy Protection Business in May 2003 for net
cash proceeds of $5 million. As of September 30, 2004, we had an accumulated
deficit of $43,163,431.
Subject to raising additional capital, our business plan contemplates
that we will be expanding our research and development efforts in order to
expand applications of our initial product offerings to provide for added
business applications, diverse in-house wiring and otherwise respond to
perceived market demands. As a result, we will need to generate significant
revenue to achieve profitability or to conclude significant sales of our
securities in order to maintain our operations and realize our business plan. We
do not expect to generate any significant revenues in the near term, and we plan
to operate at a loss through at least 2005. We cannot predict when or to what
extent our contemplated initial products will begin to produce revenues, or
whether we will ever reach profitability. If we are unable to achieve
significant levels of recurring revenue from our broadband communications
business, our losses will likely continue indefinitely. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. If we do not achieve and maintain profitability, the
market price for our Common Stock may further decline, perhaps substantially,
and we may have to curtail or cease our operations.
4
The independent registered public accounting firm and independent
certified public accountants' reports for our financial statements for the years
ended December 31, 2003 and 2002, respectively, include explanatory paragraphs
regarding substantial doubt about our ability to continue as a going concern.
This "going concern" paragraph may have an adverse effect on our ability to
obtain financing for operations and to further develop and market products. If
we do not receive additional capital when and in the amounts needed in the near
future, our ability to continue as a going concern is in substantial doubt.
If we are not able to obtain adequate financing when and in the amounts
needed, and on terms that are acceptable, our operations, financial condition
and prospects could be materially and adversely affected, and we could be forced
to curtail our operations or sell part or all of our assets or seek protection
under bankruptcy laws.
WE DO NOT HAVE SUFFICIENT WORKING CAPITAL TO MAINTAIN OUR OPERATIONS AS
CURRENTLY PLANNED BEYOND THE END OF THE FIRST FISCAL QUARTER IN 2005 AND WE MAY
BE UNABLE TO OBTAIN ADDITIONAL CAPITAL. IF WE OBTAIN ADDITIONAL FINANCING, YOU
MAY SUFFER SIGNIFICANT DILUTION.
As of September 30, 2004, cash and cash equivalents were approximately
$3.5 million. We believe that our existing cash resources will be sufficient to
maintain operations through the first quarter of 2005. Our existing resources
may not be sufficient to support the commercial introduction, production and
marketing of our contemplated initial products. Unless we raise additional
funds, we may need to curtail expenditures which may result in a delay in our
initial product testing or marketing efforts, all of which can have a material
adverse effect on our business and prospects. We intend to seek to raise
additional funds through public or private sales of equity securities or
borrowings. We estimate that we will need to raise between $3 to $5 million in
order to complete the design and development and commence the marketing of our
contemplated initial FTTP products, expand business applications and provide for
diverse in-house wiring options, establish a marketing presence and otherwise
realize our business plan through the end of 2005. At the present time, we have
no commitments for any such financing, and there can be no assurance that
additional capital will be available to us on commercially acceptable terms or
at all. The extent and timing of our future capital requirements will depend
upon several factors, including the rate of market acceptance of our initial
FTTP products, the degree of competition that we will face, and our level of
expenditures, including those for product development, sales and marketing. If
we cannot raise funds on acceptable terms, we may not be able to develop or
upgrade our products or complete our product line, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which could have a material adverse effect on our ability to establish
our market presence or grow our business. If we are unable to secure such
additional financing, we will have to curtail or suspend our business activities
and may have to seek protection of the bankruptcy courts. If that happens, you
could lose your entire investment. If we cannot raise additional financing on
acceptable terms, we may not be able to continue to operate our business as a
going concern.
5
Further, if we issue equity securities, our shareholders may experience
severe dilution of their ownership percentage, and the new equity securities may
have rights, preferences or privileges senior to those of our common stock.
Further, our board of directors (the "Board of Directors") and our
shareholders have approved at our 2004 annual stockholders meeting a proposal
granting to our Board of Directors the authority to effect a reverse stock split
of our issued and outstanding common stock in the range of 1:3 to 1:6, at the
Board's discretion solely for the purpose of qualifying for quotation of the
Nasdaq National Market, the SmallCap Market or the American Stock Exchange and
only following satisfaction of all listing requirements but for the minimum per
share price. The Board of Directors may exercise this authority at any time or
before the date of our 2005 annual meeting of stockholders. The Board of
Directors also has the authority not to effect the reverse split in such
timeframe. If effected, the reverse stock split would result in a reduction in
the number of shares of our Common Stock issued and outstanding and an
associated increase in the number of authorized shares which would be unissued
and available for future issuance after the reverse stock split. Such shares
could be used for any proper corporate purpose including, among others, future
financing transactions.
WE HAVE ENTERED INTO THE DEVELOPMENT AND LICENSING AGREEMENT AND
ADDITIONAL SUBSEQUENT SUPPLEMENTAL DEVELOPMENT AGREEMENTS TO OBTAIN THE
DEVELOPMENT OF AND LICENSES TO MANUFACTURE, DEVELOP AND SELL OUR INITIAL FTTP
PRODUCTS AND, IF THESE LICENSE WERE TO BE TERMINATED FOR ANY REASON, OUR
OPERATIONS MAY BE ADVERSELY IMPACTED.
We entered in January 2004 into the Development and Licensing Agreement
for the purpose of obtaining the development of and licenses to specified FTTP
enabling technologies and related solutions. We and Lucent entered into several
subsequent additional supplemental development agreements to upgrade and enhance
these technologies and solutions. Under these agreements we are required to pay
to Lucent certain royalties and other revenue based fees. Subject to timely
payment of all amounts due under the Development and Licensing Agreement
(including the royalties and revenue fees), the licenses granted to us under the
Development and Licensing Agreement with respect to Lucent technologies and
solutions continue in perpetuity. If, however, we are in material breach of the
Development and Licensing Agreement, then Lucent is entitled to terminate such
agreement, provided, that if the payments required under the Development
Licensing Agreement have been timely paid, the licenses granted to us to
manufacture, develop and sell these products continue in full force and effect.
To date, we have made all payments required under the Development and Licensing
Agreement. Nonetheless, if Lucent elects for whatever reasons to terminate the
licenses granted to us, our business will be negatively impacted and we may be
forced to cease operations.
WE ARE CURRENTLY DEPENDENT ON A SINGLE LINE OF BUSINESS THAT IS
CURRENTLY SUBJECT TO FURTHER DEVELOPMENT AND TESTING AND WE HAVE GENERATED NO
REVENUES. WE CANNOT PREDICT FUTURE RESULTS BECAUSE OUR BUSINESS HAS NO OPERATING
HISTORY.
We have been engaged in the broadband access solutions business since
only March 2004. We are in the process of developing and testing our
6
contemplated initial FTTP products and consequently there are currently no
revenues from this line of business. Given our lack of operating history, it is
difficult to predict our future results. Investors should consider the risks and
uncertainties that we may encounter as a pre-revenue-stage company in a new and
unproven market. These uncertainties include:
o our ability to design and engineer products having the desired
technological features in a cost efficient manner;
o consumer demand for, and acceptance of products utilizing our
technologies;
o our ability to demonstrate the benefits of our products and
services to end users;
o our unproven and evolving products;
o our ability to expand the product offering and technological
interface of our initial FTTP product base to encompass
sophisticated business applications and other in-house wiring
options;
o unfavorable economic conditions in the technology industry;
o our ability to raise funds when needed on commercially
acceptable terms;
o decreased capital spending on technology due to adverse economic
conditions; and
o global economic conditions.
WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS AND
BECAUSE OF COMPETITION FOR QUALIFIED PERSONNEL WE MAY NOT BE ABLE TO RECRUIT OR
RETAIN NECESSARY PERSONNEL.
Our continued growth and success depend to a significant degree on the
continued services of our Chief Executive Officer, Mr. Frank Galuppo, and other
key employees and our ability to attract and retain highly skilled and
experienced technical, managerial, sales and marketing personnel. While we have
recruited a management team with significant experience and expertise in the
broadband access field, as we enter this new line of business, we also expect to
encounter new product development challenges, new customer requirements, new
competitors and other new business challenges, with which our existing
management may be unfamiliar. There can be no assurance that we will be
successful in recruiting new personnel or in retaining existing personnel.
Except for our Chief Executive Officer, none of our current employees is subject
to a long-term employment agreement. The loss of one or more key employees or
our inability to attract additional qualified employees could have a material
adverse effect on our business, results of operations and financial condition.
In addition, we may experience increased compensation costs in order to attract
and retain skilled employees.
7
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE AND
RAPIDLY EVOLVING BROADBAND COMMUNICATIONS MARKET.
The market for fiber optic subsystems and modules is highly competitive
and we expect competition to intensify in the future. Competition falls into
several categories. The companies that offer a solution similar to the one that
will be utilized in our contemplated initial FTTP products include World Wide
Packets and Allied Telesyn. Other competitors are positioning solutions
employing a different technology approach and include Alcatel, Salira, Optical
Solutions, Motorola, Huawei and Wave 7 Optics. We will also face indirect
competition from public and private companies providing products that address
the same fiber optic network problems that our contemplated initial FTTP
products are being designed to address. The development of copper based
alternative solutions to fiber optic transmission by competitors, particularly
systems companies that also manufacture modules, could significantly limit our
prospects and harm our competitive position. There is also a possibility that
certain wireless technologies could provide some measure of competition.
Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. In addition, many of our competitors have
much greater brand name recognition, more extensive customer bases, more
developed distribution channels and broader product offerings than we do. These
companies can use their broader customer bases and product offerings and adopt
aggressive pricing policies to gain market share.
We expect competitors to introduce new and improved products with lower
prices, and we will need to do the same to remain competitive. We may not be
able to compete successfully against either current or future competitors with
respect to new products.
Additionally, under the Development and Licensing Agreement, we have a
non-exclusive, worldwide and perpetual license to develop and market FTTP
products utilizing Lucent technologies and solutions. Lucent has agreed, through
January 2014, not to use technologies specifically developed under the
Development and Licensing Agreement and subsequent supplemental agreements for
the purpose of developing or selling any products that may directly compete with
our products. Lucent is not restricted from using pre-existing Lucent
technologies or information contained in these products. We can provide no
assurance that Lucent will not in fact design, develop and market technologies
or products that serve the same functionality as our contemplated initial FTTP
products. We cannot predict the ease with which Lucent would be able to develop
and market products substantially similar in function or design to our
contemplated product line. Additionally, if for whatever reason Lucent elects to
terminate the Development and Licensing Agreement, then no assurance can be
provided that it will be bound by this no-compete provision. If Lucent were to
8
successfully develop and market such similar products, then our prospects and
proposed business would be materially adversely affected.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR MAINTAINING STRONG
DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
We intend to market our prospective products to communications carriers
and other providers of broadband access solutions and services. The success of
our current business plan depends, in large part, on developing strong
relationships with telecommunications carriers and other broadband
communications providers who are selling products and services to end-users. If
we are not successful in creating a strong distribution channel in a timely
manner, we may not be able to establish our marketing presence or gain
significant sales.
LEGAL AND REGULATORY DEVELOPMENTS COULD HAVE ADVERSE CONSEQUENCES FOR
OUR BUSINESS.
The jurisdiction of the Federal Communications Commission (FCC) extends
to the entire communications industry, including potential customers for
products utilizing our solutions. Future FCC regulations affecting the broadband
access industry may harm our business. For example, FCC regulatory policies
affecting the availability of data and Internet services may impede the
penetration of our prospective product line into certain markets or affect the
prices that may be charged in such markets. In addition, international
regulatory bodies are beginning to adopt standards and regulations for the
broadband access industry. These domestic and foreign standards, laws and
regulations address various aspects of Internet, telephony and broadband use,
including issues relating to liability for information retrieved from or
transmitted over the Internet, online content regulation, user privacy,
taxation, consumer protection, security of data, access by law enforcement,
tariffs, as well as intellectual property ownership, obscenity and libel.
Changes in laws, standards and/or regulations, or judgments in favor of
plaintiffs in lawsuits against service providers, e-commerce and other Internet
companies, could adversely affect the development of e-commerce and other uses
of the Internet. This, in turn, could directly or indirectly materially
adversely impact the broadband telecommunications industry in which our
customers operate. To the extent our customers are adversely affected by laws or
regulations regarding their business, products or service offerings, this could
result in a material and adverse effect on our business, financial condition and
results of operations.
In addition, many of our potential customers will require that our
products be designed to interface with their customers' existing networks, each
of which may have different specifications, utilize multiple protocol standards
and contain multiple generations of products from different vendors. If our
products cannot operate in such an environment, they may not achieve market
acceptance and our ability to generate revenue would be seriously impaired.
THE BROADBAND ACCESS SOLUTIONS MARKET IS HIGHLY CYCLICAL.
We are engaged in the broadband access solutions industry, which is
cyclical and subject to rapid technological change. Recently, the industry has
begun to emerge
9
from a significant downturn characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. The current
downturn and future downturns in the industry may be severe and prolonged.
Future downturns in the broadband communications industry, or any failure of
this industry to fully recover from its recent downturn, could seriously impact
our business plan. This industry also periodically experiences increased demand
and production capacity constraints, which may affect our ability to ship
products in future periods.
WE MAY BE REQUIRED TO PAY SIGNIFICANT AMOUNTS TO THE PURCHASER OF OUR
COPY PROTECTION BUSINESS BECAUSE OF OUR INDEMNITY OBLIGATIONS TO THAT PURCHASER.
Under our agreement with purchaser of the Copy Protection Business, we
undertook to indemnify such purchaser for certain losses as set forth in such
agreement. Our indemnification obligations continue through December 28, 2004
and are limited by an overall cap of $5.25 million, except with respect to
matters relating to any bulk sales laws, fraudulent conveyance laws, or certain
pre-sale contractual liabilities. The payment of any such indemnification
obligations may adversely impact our cash resources and materially adversely
affect our business and prospects.
THERE MAY BE SIGNIFICANT LIMITATIONS TO THE UTILIZATION OF NET OPERATING
LOSSES TO OFFSET FUTURE TAXABLE INCOME.
We estimate that we have a net operating loss carry-forward (NOL) of
approximately $20 million, which will be available to offset future U.S. taxable
income subject to limitations under Section 382 of the Internal Revenue Code
pertaining to changes in stock ownership. TTR Ltd., the Company's wholly owned
Israeli subsidiary, has a net operating loss carryforward of approximately $6
million available to offset future taxable income in Israel.
No assurance can be provided that under prevailing law all, or even any
part, of the NOL will be available to offset future income.
RISKS CONCERNING OUR PROSPECTIVE PRODUCTS
OUR CONTEMPLATED INITIAL FTTP PRODUCTS ARE NOT FULLY TESTED AND REMAIN
SUBJECT TO SIGNIFICANT UNCERTAINTY.
Our contemplated initial FTTP products are designed to deliver broadband
access over a deployed FTTP system. Certain of these products have been
delivered to prospective customers for their evaluation These products are
subject to further testing and have not been commercially proven. The market for
products related to broadband access is characterized by uncertain user and
customer requirements, and the emergence of new communications standards and
practices. Each of these characteristics could impact our evolving product line
and prospective products, intellectual property and system designs. The
successful development of our products is subject to the risks that:
o our proposed products are found to be ineffective for the
intended purposes;
10
o the proposed products are uneconomical to manufacture or market
or do not achieve broad market acceptance; and
o third parties hold proprietary rights that preclude us from
marketing our proposed products.
Significant undetected errors or delays in new products or releases may
affect market acceptance of our proposed products. There can be no assurance
that, despite extensive testing, errors will not be found in our initial
products or subsequent releases after the commencement of commercial shipments,
resulting in loss of customers or failure to achieve market acceptance. In
addition, the technologies utilized in evolving QoStream product line will need
to be compatible with a broad array of disparate technologies in order to be
interoperable with other products routinely used in the broadband communications
industry such as routers, switches and operating systems. Without compatibility,
we may not achieve market acceptance or demand for our proposed products within
our target base of customers because they will not inter-operate with many of
the applications the target customers currently use.
OUR CONTEMPLATED INITIAL FTTP PRODUCTS THAT WE EXPECT TO MARKET ARE NOT
READY FOR COMMERCIAL RELEASE AND UNEXPECTED DELAYS COULD HAMPER OUR MARKETING
EFFORTS.
Our customer premises unit, an integral component for provisioning
broadband access directly to the subscriber, is currently available for
commercial release and we anticipate that by December 31, 2004 we will have
available for acceptance testing by prospective customers our aggregator switch,
which is the unit that routes data to and from the subscriber's premises. These
two products comprise a significant portion of our prospective initial FTTP
based proposed products. We currently have a network management system under
development with a third party contractor and we anticipate that such unit will
be available for customer testing and commercial release in the first fiscal
quarter of 2005. If we do not receive the various contemplated releases of the
premises gateway or the aggregator switch or, to a lesser extent, the network
director, within the contemplated timeframes, then we may not be able to bid for
certain FTTP municipal requests for proposals or meet the delivery requirements
of communications carriers. This development could materially adversely affect
our business prospects.
In addition, we do not currently contemplate that we will have an
Ethernet MPLS core switch when we commence the marketing of our initial FTTP
capable product line. While our contemplated initial FTTP products are being
designed to be interoperable with commercially available core switches and other
Ethernet routing equipment, we cannot currently assess the impact, if any, on
our business or prospects, of the absence from our emerging product line of an
active Ethernet switch.
WE WILL RELY ON THIRD PARTIES TO PROVIDE CERTAIN COMPONENTS FOR OUR
PROPOSED PRODUCTS. IF OUR VENDORS FAIL TO DELIVER THEIR PRODUCTS IN A RELIABLE,
TIMELY AND COST-EFFICIENT MANNER, OUR BUSINESS WILL SUFFER.
We expect to depend on relationships with third parties such as contract
manufacturing companies, chip design companies and others who may be sole source
11
providers of key, leading edge technology components critical for our proposed
products. If these service providers or other providers of exclusive proprietary
technology do not produce these components on a timely basis, if the components
do not meet our specifications and quality control standards, or if the
components are otherwise flawed, we may have to delay product delivery, or
recall or replace unacceptable products. In addition, such failures could damage
our reputation and could adversely affect our operating results. As a result, we
could lose potential customers and any revenues that we may have at that time
may decline dramatically.
WE MAY NOT BE ABLE TO MEET OUR PRODUCT DEVELOPMENT OBJECTIVES OR MARKET
EXPECTATIONS.
Our product development and enhancement efforts are inherently difficult
to manage and keep on schedule and there can be no assurance that we will be
able to meet our development objectives or to meet market expectations. In
addition to development delays, we may experience substantial cost overruns in
completing development of our products. The technological feasibility for some
aspects of the product line that we envision is not completely established. The
FTTP Solutions may contain undetected flaws when introduced. There can be no
assurance that, despite testing by us and by potential customers, flaws will not
be found in the FTTP Solutions or our contemplated initial products, resulting
in loss of or delay in market acceptance. We may be unable, for technological or
other reasons, to develop and introduce our proposed products in a timely manner
in response to changing customer requirements. Further, there can be no
assurance that while we are attempting to finish development of our products, a
competitor will not introduce similar products. The introduction by a competitor
of either similar products before we introduce our proposed product line, or a
superior alternative, may diminish our technological advantage, render our
proposed products and technologies partially or wholly obsolete, or require
substantial re-engineering of these products in order to become commercially
acceptable. Our failure to maintain our product development schedules, avoid
cost overruns and undetected errors or introduce products that are superior to
competing products would have a materially adverse effect on our business,
financial condition and results of operations.
LUCENT IS NOT INDEMNIFYING US FOR THIRD-PARTY PATENT OR COPYRIGHT
INFRINGEMENT CLAIMS RELATING TO LUCENT TECHNOLOGY CONTAINED IN OUR PRODUCTS AND
ANY SUCH SUIT OR CLAIM COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS.
Our initial products as well as further applications will include
various and complex technologies, some of which are solely owned by Lucent.
While Lucent has represented to us that it has not received any notice of a
claim of infringement of any patent, copyright or other intellectual property
right of a third party with reference to the technologies or other material or
information included or to be incorporated into our contemplated initial
products, and that, to the best knowledge and belief of its employees actually
involved in the work contemplated by the Development and Licensing Agreement
such technologies or information or other materials do not infringe on any
patent, copyright, or other proprietary rights of a third party, no assurance
can be given that we will not be subject to intellectual property infringement
claims that are costly to defend and that could limit our ability to market and
sell our proposed products. Lucent is under no obligation to indemnify us in the
12
event of such suit. We did not perform a technical due diligence investigation
relating to the technologies included or to be included in our contemplated
products.
The broadband access solutions field is characterized by significant
patent infringement litigation. We could be subject to litigation alleging
infringement of a third party's right. Litigation could be expensive, lengthy
and disruptive to management's attention and detract resources from normal
business operations. Adverse determinations could prevent us from manufacturing
or selling our proposed products or any future derivative products. It may also
subject us to significant liabilities and require that we seek licenses from
third parties. In such case, no assurance can be furnished that licenses will be
available on commercially reasonable terms, if at all, from any third party that
asserts intellectual property claims against us. Any inability to obtain third
party licenses required to manufacture or sell our proposed or derivative
products could materially adversely affect our business and its prospects.
WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY INHERENT IN OUR
PROPOSED PRODUCTS AGAINST THIRD-PARTY INFRINGEMENTS OR CLAIMS OF INFRINGEMENT.
Under the Development and Licensing Agreement, we and Lucent jointly
hold the rights to any intellectual property that may be developed in the course
of the development of the technologies underlying our proposed products. Lucent
owns rights to pre-existing Lucent technologies included in any product that we
market. The failure to protect these intellectual property rights may result in
a loss of the right to use these technologies. We plan to rely on patent, trade
secret, trademark and copyright law to protect these intellectual property
rights. Our patent position is subject to complex factual and legal issues that
may give rise to uncertainty as to the validity, scope and enforceability of a
particular patent. Accordingly, there can be no assurance that any patents will
be issued pursuant to any patent application or that patents issued pursuant to
such application will not be invalidated, circumvented or challenged. Moreover,
there can be no assurance that the rights granted under any such patents will
provide competitive advantages to us or be adequate to safeguard and maintain
our proprietary rights. In addition, effective patent, trademark, copyright and
trade secret protection may be unavailable, limited or not applied for in
certain foreign countries.
We also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventor's rights agreements with
our current and future strategic partners and employees. We cannot assure you
that these agreements will not be breached, that we will have adequate remedies
for any breach or that such persons or institutions will not assert rights to
intellectual property arising out of these relationships.
Some of our intellectual property includes technologies and processes
that may be similar to the patented technologies and processes of third parties.
If we do not adequately secure our freedom to use our technology, we may have to
pay others for rights to use their intellectual property, pay damages for
infringement or misappropriation or be enjoined from using such intellectual
property. If we are found to be infringing third-party patents, we do not know
whether we will be able to obtain
13
licenses to use such patents on acceptable terms, if at all. While we are not
currently engaged in any material intellectual property disputes or litigation,
we could become subject to lawsuits in which it is alleged that we have
infringed the intellectual property rights of others or commence lawsuits
against others who we believe are infringing upon our rights. Our involvement in
intellectual property litigation could result in significant expense to us,
adversely affecting the development of the challenged product or intellectual
property and diverting the efforts of our technical and management personnel,
whether or not such litigation concludes favorably for our company.
RISKS CONCERNING THIS OFFERING AND CAPITAL STRUCTURE
THIS OFFERING MAY HAVE AN ADVERSE IMPACT ON THE MARKET VALUE OF OUR
STOCK.
This prospectus relates to the sale or distribution of up to 18,985,844
shares of Common Stock by the selling security holders. We will not receive any
proceeds from these sales and have prepared this prospectus principally in order
to meet our contractual obligations to some of the selling security holders. The
sale of this block of stock, or even the possibility of its sale, may adversely
affect the trading market for our Common Stock and reduce the price available in
that market.
FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY
AFFECT PREVAILING MARKET PRICES FOR OUR COMMON STOCK.
As of November 17, 2004, we had 16,440,630 shares of our Common Stock
issued and outstanding. As of that date, an additional 4,713,642 shares of
Common Stock were reserved for issuance upon the exercise of outstanding
options. The exercise prices of those options range from $0.16 to $7.00 per
share. Those options also contain provisions which require the issuance of
increased numbers of shares of Common Stock upon exercise in the event of stock
splits, redemptions, mergers or other transactions. The occurrence of any such
event or the exercise of any of those options would dilute the interest in our
company represented by each share of Common Stock and may adversely affect the
prevailing market price of our Common Stock.
Additionally, we are registering up to 17,017,032 shares of our Common
Stock, which will be issuable upon the conversion of the Convertible Preferred
Stock, in payment of dividends on the Convertible Preferred Stock, upon exercise
of the Warrants issued in connection with the Convertible Preferred Stock or as
additional shares issuable to the holders of the Convertible Preferred Stock or
the Warrants as liquidated damages through the projected effective date of this
Registration Statement as contemplated by our agreements with these holders. The
Convertible Preferred Stock is convertible into our Common Stock at a conversion
price of $0.75 per share, and the Warrants are exercisable at prices of $1.50
and $2.50 per share. The Warrants contain provisions which, under certain
circumstances, would permit the holders to exercise the Warrants without paying
the exercise price in cash. We are also registering 1,968,813 shares of our
Common Stock issuable upon exercise of certain other warrants and options. The
shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock and exercise of the Warrants or the other warrants will be saleable
14
without restriction immediately upon issuance pursuant to the plan of
distribution in this Prospectus. The conversion or exercise of any Convertible
Preferred Stock or Warrants would dilute the interest in our Company represented
by each share of Common Stock and may adversely affect the prevailing market
price of our Common Stock.
Further, in August 2004, we secured from an institutional investor a $6
million equity line (the "Equity Line") on which we can draw from time to time
during a 24 month period following the effectiveness of a separate registration
statement, subject to certain conditions. The Equity Line allows us to sell up
to $6 million of Common Stock at 98% of the then current market price, but in no
event at less than $2.00 per share. We also issued to the equity line investor
five year warrants to purchase up to 333,333 shares of Common Stock at a per
share exercise price of $2.00. These warrants are subject to cashless exercise
following the first anniversary of issuance if at the time of exercise there is
no effective registration statement in effect. We intend to file a separate
registration statement covering the Common Stock issuable pursuant to the Equity
Line by a date that is not earlier than the 90th day following the effective
date of the Registration Statement of which this Prospectus is a part (nor later
than the 120th day after such date). The shares of Common Stock issuable upon
our drawing down on the Equity Line and exercise of the warrant will be saleable
without restriction immediately upon issuance. The issuance of Common Stock upon
our drawing down on the Equity Line or exercise of the warrant would further
dilute the interest in our company represented by each share of Common Stock and
may adversely affect the prevailing market price of our Common Stock.
Finally, in addition to the shares described above, there are an
additional 5,985,424 shares of Common Stock authorized and available for
issuance by us. We may need to raise additional capital through the sale of
shares of Common Stock or other securities exercisable for or convertible into
Common Stock. The occurrence of any such sale would dilute the interest in the
Company represented by each share of Common Stock and may adversely affect the
prevailing market price of our Common Stock.
OUR BOARD OF DIRECTORS' RIGHT TO AUTHORIZE THE ISSUANCE OF ADDITIONAL
SHARES OF PREFERRED STOCK COULD ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR
COMMON STOCK.
Our board of directors currently has the right to designate and
authorize the issuance up to 4,947,500 shares of our preferred stock, in one or
more series, with such voting, dividend and other rights as our directors may
determine. The board of directors can designate new series of preferred stock
without the approval of the holders of our Common Stock. The rights of holders
of our Common Stock may be adversely affected by the rights of any holders of
shares of preferred stock that may be issued in the future, including without
limitation dilution of the equity ownership percentage of our holders of Common
Stock and their voting power if we issue preferred stock with voting rights.
Additionally, the issuance of preferred stock could make it more difficult for a
third party to acquire a majority of our outstanding voting stock.
15
OUR STOCK PRICE IS VOLATILE.
The trading price for our Common Stock has been volatile, ranging from a
sales price of $0.13 in April 2003 to a sales price of over $1.80 per share in
November 2004. The price has changed dramatically over short periods, including
changes of over 50% percent in a single day. An investment in our Common Stock
is subject to such volatility and, consequently, is subject to significant risk.
ADDITIONAL BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE
"PENNY STOCK" RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON
STOCK.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current
prices and volume information with respect to transactions in such securities
are provided by the exchange or system). If our Common Stock continues to be
offered at a market price less than $5.00 per share, and does not qualify for
any exemption from the penny stock regulations, our Common Stock will continue
to be subject to these additional regulations relating to low-priced stocks.
The penny stock rules require a broker-dealer, prior to a transaction in
a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These requirements have historically resulted in reducing the level of trading
activity in securities that become subject to the penny stock rules.
The additional burdens imposed upon broker-dealers by these penny stock
requirements may discourage broker-dealers from effecting transactions in the
Common Stock, which could severely limit the market liquidity of our Common
Stock and our shareholders' ability to sell our Common Stock in the secondary
market.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain financial information and statements
regarding our operations and financial prospects of a forward-looking nature.
Any statements contained in this prospectus, which are not statements of
historical fact, may be deemed to be forward-looking statements. Without
limiting the generality of the foregoing, words such as, "may", "will",
"intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or
"continue" or the negative variations of those words or comparable terminology
are intended to identify forward-looking statements. We make forward-looking
16
statements in this prospectus, regarding, among other items:
o statements regarding our overall strategy relating to the
design, development, implementation and marketing of our
proposed products;
o statements regarding the plans and objectives of our management
for future operations and the size and nature of the costs we
expect to incur and the people and services we may employ;
o statements regarding the future of broadband access solutions
and opportunities therein, our competition or regulations that
may affect us;
o statements regarding our ability to compete with third parties;
o any statements using the words "anticipate," "believe,"
"estimate," "expect," "intend," "may," "will," "should,"
"expect," "plan," "predict," "potential," "continue" and similar
words; and
o any statements other than historical fact.
There can be no assurance of any kind that such forward-looking
information and statements will be reflective in any way of our actual future
operations and/or financial results, and any of such information and statements
should not be relied upon either in whole or in part in connection with any
decision to invest in the shares. There are a number of important factors that
could cause actual events or our actual results to differ materially from those
indicated by such forward-looking statements. These factors include, without
limitation, those set forth above under the caption "Risk Factors" included in
this prospectus and other factors expressed from time to time in our filings
with the Securities and Exchange Commission ("SEC"). We do not undertake to
update any forward-looking statements.
USE OF PROCEEDS
The selling stockholders will receive the net proceeds from sales of the
shares of the Common Stock included in this Prospectus. We will not receive any
proceeds from the sale of Common Stock by the selling stockholders.
Assuming all of the warrants and options for which the underlying shares
of Common Stock that are covered by this Prospectus are exercised for cash, we
will receive approximately $16.1 million in cash proceeds (before deducting fees
and commission). The holders of warrants having an aggregate exercise price of
approximately $15.9 million have cashless exercise provisions that become
effective under certain conditions and if these warrants are exercised by the
cashless exercise provision, then we will not receive any cash proceeds from the
exercise of those warrants. See, also "DESCRIPTION OF AGREEMENTS WITH THE
HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
17
DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK
We are registering the shares offered hereby primarily in order to
satisfy our obligations to the holders of our Convertible Preferred Stock.
Under a Securities Purchase Agreement, dated as of August 9, 2004 (the
"Securities Purchase Agreement"), with each of the holders of the Convertible
Preferred Stock we received gross proceeds of $5.25 million from the private
placement of 52,500 shares of our Convertible Preferred Stock. In connection
with the issuance of the Convertible Preferred Stock, we issued to the holders
of the Convertible Preferred Stock five-year warrants to purchase up to 3.5
million shares of our Common Stock at an exercise price of $1.50 per share and
up to 3.5 million shares of our Common Stock at an exercise price of $2.50 per
share (collectively the "Warrants").
Concurrent with the placement of our Convertible Preferred Stock, we
have secured from an institutional investor a $6 million equity line (the
"Equity Line"). In connection therewith, we have undertaken to file a separate
registration statement covering the Common Stock issuable pursuant to the Equity
Line by a date that is not earlier than the 90th day following the effective
date of the Registration Statement of which this Prospectus is a part (nor later
than the 120th day after such date). The shares issuable under the Equity Line
are not covered by this Prospectus or the Registration Statement of which it is
a part.
The rights and preferences of the Convertible Preferred Stock are set
forth in a Certificate of Designations of Rights and Preferences that we filed
with the Secretary of State of the State of Delaware on July 30, 2004. The
following is a summary of its principal rights and preferences. Each share of
Convertible Preferred Stock has a stated value of $100 and is convertible into
shares of Common Stock at an initial conversion price of $0.75 per share,
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger. Dividends at the rate of 7% per
annum are payable on a bi-annual basis and on conversion and may be paid, at our
option, either in cash or in shares of Common Stock at a rate equal to the
conversion price then in effect. The option to pay dividends in shares of our
Common Stock, however, is subject to the condition that the issuance of such
shares of Common Stock to the holder cannot result in such holder and its
affiliates beneficially owning more than 4.99% of the shares of our Common Stock
outstanding immediately after such issuance (this limitation is further
discussed below in this section). The Convertible Preferred Stock may first be
converted on the effective date of the Registration Statement. If not converted
earlier, the Convertible Preferred Stock will automatically convert on the fifth
anniversary of issuance (subject to certain limitations which might defer the
automatic conversion of some shares of such preferred stock to a later date)
into shares of Common Stock at the conversion price then in effect.
The Warrants are exercisable at any time from February 9, 2005 through
August 31, 2009. The exercise prices for each of the Warrants are subject to
adjustment if there are certain capital adjustments or similar transactions,
such as a stock split or merger. Holders are entitled to exercise their Warrants
on a "cashless"
18
basis following the first anniversary of issuance if the Registration Statement
is not in effect at the time of exercise. If the holder elects the cashless
exercise option, it will receive a lesser number of shares and we will not
receive any cash proceeds from that exercise. The lesser number of shares which
the holder will receive is determined by a formula that takes into account the
closing bid price of our Common Stock on the trading day immediately before the
Warrant exercise. That closing price is multiplied by the full number of shares
for which the Warrant is then being exercised. That result is reduced by the
total exercise price the holder would have paid for those shares if it had not
elected a cashless exercise. The number of shares actually issued under the
cashless exercise option is equal to the balance amount divided by the closing
price referred to above.
The terms of the Convertible Preferred Stock and Warrants specify that
the beneficial owner can convert such debenture or exercise such warrant in
accordance with their respective terms by giving notice to us. However, the
holder may not convert the Convertible Preferred Stock or exercise its Warrant
to the extent that such conversion or exercise would result in such owner and
its affiliates beneficially owning more than 4.99% of our stock then outstanding
(after taking into account the shares of our Common Stock issuable upon such
conversion or warrant exercise). If the holder then disposes of some or all of
its holdings, it can again convert its preferred stock or exercise its warrant.
Pursuant to the Securities Purchase Agreement and a Registration Rights
Agreement executed and delivered at the same time, we are obligated initially to
register under the Act the number of shares issuable on conversion in full of
the Convertible Preferred Stock outstanding plus dividends thereon accrued
through the third anniversary of the issuance thereof and the number of shares
of Common Stock issuable upon exercise of the Warrants, as well as our good
faith estimate of certain additional shares we might have to issue to certain
selling shareholders. Some of hose additional shares would be issuable if we
file the registration statement of which this Prospectus is a part or if its
effective date are later than the dates specified in the Registration Rights
Agreement, or if, after the effective date, the shareholder's right to sell
under the registration statement is suspended for periods in excess of those
specified in the Registration Rights Agreement. Other shares we might be
required to such selling stockholder would be based on adjustments to the
conversion price of the unconverted preferred stock and/or to the number of
shares covered by its unexercised warrants in the event that, on or prior to the
one hundred eightieth day after the effective date of this Registration
Statement, we subsequently offer or issue securities at a purchase price or
conversion price lower than the conversion price then in effect or issue
warrants having an exercise price below the exercise price of the warrants held
by the selling stockholder. We are also obligated to keep the Registration
Statement of which this Prospectus forms a part effective until the earlier of
the date on which the holders may sell without restriction all shares registered
on their behalf under this Prospectus under Rule 144 promulgated under the Act,
or the date on which such holders no longer own any of those shares.
Pursuant to agreements with certain placement agents, we are also
registering 1,400,000 shares of Common Stock that may become issuable upon
exercise of warrants with per share exercise prices ranging between $0.75 and
$2.50. These warrants were issued as a placement fee in connection with the
placement of 52,500
19
shares of our Convertible Preferred Stock. We are also registering an additional
140,000 shares of Common Stock representing our current good faith estimate of
additional shares that we might be required to issue to these placement agents
based on adjustments to the number of shares covered thereby in the event that,
on or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the Warrants held by such selling
stockholders.
Finally, we are also registering 428,812 shares issuable upon exercise
of certain other warrants held by persons who are neither placement agents nor
holders of Convertible Preferred Stock.
In the Securities Purchase Agreement, we have agreed that if we enter
into any offer or sale of our Common Stock (or securities convertible into
Common Stock) with any third party (a "New Transaction") without the prior
consent of a majority in interest of the holders of the Convertible Preferred
Stock on any date which is earlier than 180 days after the effective date of the
Registration Statement (plus the number of days, if any, during which the
Registration Statement is suspended in the interim) in which the (i) lowest per
share purchase price contemplated thereunder or the lowest conversion price
which would be applicable under the terms of such New Transaction is below the
initial conversion price and/or (ii) the lowest exercise price of any warrants
issued thereunder is lower than the initial exercise prices of the Warrants
(such transaction being a "Lower Price Transaction"), then the terms of any
unconverted share of Convertible Preferred Stock or any unexercised Warrants
shall be modified to adjust the relevant conversion price in such convertible
preferred stock, the warrant exercise price or the number of warrant shares to
be equal to that provided in the transaction as so consummated. In addition, if
during such period we enter into any offer or sale of our Common Stock (or
securities convertible into Common Stock), whether or not a Lower Price
Transaction, we are required to incorporate in the selling shareholders'
agreements or instruments the terms, if any, from the instruments relating to
such transaction which are more beneficial to the investors.
The foregoing restrictions will not apply to the issuance of securities
(a) in connection with the exercise of conversion or other rights under
documents executed and transactions consummated prior to August 9, 2004, (b)
pursuant to any of our existing employee or non-employee directors stock option
plans, (c) the Equity Line referred to above in this section and (d) pursuant to
certain transactions with any of our strategic partners (as defined in the
Securities Purchase Agreement).
We have included in this registration statement our current good faith
estimate of additional shares that we might be required to issue to such selling
stockholder based on adjustments to the conversion price of the unconverted
preferred stock and/or to the number of shares covered by its unexercised
warrants in the event that, on or prior to the one hundred eightieth day after
the effective date of this Registration Statement, we subsequently offer or
issue securities at a purchase price or conversion price lower than $0.75 per
share or warrants having an exercise price below the exercise price of the
warrants held by the selling stockholder. Other additional shares, if any, which
might be issued to a holder on account of any of such
20
adjustments referred to in the preceding paragraphs are not covered by the
Registration Statement and this Prospectus. However, if in fact we are required
to issue any of these securities as a result of any action taken by us then we
may be required to file a new registration statement in respect of the resale of
the Common Stock underlying these securities.
Under the Registration Rights Agreement, we will be obligated to pay
liquidated damages to the holders of the Convertible Debentures in respect of
the filing of this Registration Statement after the required filing date of
October 8, 2004, if the Registration Statement is not declared effective by
December 7, 2004 or if the effectiveness of the Registration Statement is
subsequently suspended for more than certain permitted periods. The permitted
suspension periods are any one or more periods during any consecutive 12-month
period aggregating not more than 50 days, but each period shall neither be for
more than 20 days nor begin less than 10 days after the preceding suspension
period ended (the date any such suspension commences, beyond such permitted
restrictions, is referred to as a "Restricted Sale Date"). The amount that we
must pay to the holders of the Convertible Preferred Stock in payment of the
liquidated damages incurred as a result of any delay in the filing of this
registration, any delay in the effective date or after a Restricted Sale Date
will be 1% of the stated value of all the Convertible Preferred Stock during any
30-day period (and pro rata for any such period which is less than 30 days).
After the effective date, however, the stated value of the Convertible Preferred
Stock used in determining the liquidated damages will be adjusted to equal the
sum of (X) the stated value of all preferred stock not yet converted and (Y) the
stated value of such preferred stock converted within the preceding 30 days but
not yet sold. The Convertible Preferred Stock holders have the right to have
these liquidated damages paid in shares of Common Stock (valued at the
conversion price). In addition, the Company is entitled to pay these liquidated
damages in shares of Common Stock if the Registration Statement becomes
effective on or before February 5, 2005. Notwithstanding the foregoing, if the
Registration Statement is declared effective on or before January 6, 2005, then
the Company will not be required to pay any liquidated damages in respect of the
delay in the filing of such registration statement or effectiveness thereof.
In connection with the placement of the Convertible Preferred Stock, we
issued to three placement agents five-year warrants (the "Placement Agent
Warrants") to purchase, in the aggregate, up to 1.4 million shares of Common
Stock, representing 10% of the shares of Common Stock issuable upon conversion
of the Convertible Preferred Stock and exercise of the Warrants as of the date
of issuance thereof. The Placement Agent Warrants are exercisable at prices
ranging from $0.75 to $2.50 per share and are otherwise exercisable on
substantially the same terms and conditions as the Warrants. The shares of
Common Stock underlying the Placement Agent Warrants are included in the
Registration Statement.
Each of our officers and directors has signed an agreement with us
limiting the number of shares of Common Stock that he can sell during certain
periods of time (the "Principal's Agreement"). The obligation of each officer
and director under his Principal's Agreement is separate from the obligation of
each other officer and director under his Principal's Agreement. Each
Principal's Agreement provides that, without the prior consent of a majority in
interest of the holders of the Convertible
21
Debentures in each instance, the officer or director will not sell or otherwise
transfer or offer to sell or otherwise transfer any shares of Common Stock
directly or indirectly held by him at any time prior to 180 days after the
effective date of the Registration Statement of which this Prospectus forms a
part (plus any days during which the Registration Statement is suspended, if
any), but in any event, no later than March 31, 2005. An exception to this
limitation is a private transaction in which the transferee agrees to be bound
by the Principal's Agreement; in that case the transferee would be bound by the
terms of this agreement
Reference is made to the Certificate of Designations of Convertible
Preferred Stock, the form of Warrant, the Securities Purchase Agreement, the
Registration Rights Agreement and the form of Principal's Agreement filed as
exhibits to our Current Report on Form 8-K that was filed on August 12, 2004 for
more complete description of the complex provisions that are summarized under
this caption.
DIVIDEND POLICY
We have not declared or paid dividends on our Common Stock since our
formation, and we do not anticipate paying dividends in the foreseeable future.
Declaration or payment of dividends, if any, in the future, will be at the
discretion of our Board of Directors and will depend on our then current
financial condition, results of operations, capital requirements and other
factors deemed relevant by the board of directors.
PRICE RANGE OF OUR COMMON STOCK
Our Common Stock is traded on the OTC Electronic Bulletin Board of the
National Association of Securities Dealers, Inc., Automated Quotation System
under the symbol "AANI". Prior to May 28, 2004, our Common Stock was quoted
under the symbol "TTRE". Although trading in our Common Stock has occurred on a
relatively consistent basis, the volume of shares traded has been sporadic.
There can be no assurance that an established trading market will develop, that
the current market will be maintained or that a liquid market for our Common
Stock will be available in the future. Investors should not rely on historical
stock price performance as an indication of future price performance.
The following table shows the quarterly high and low bid prices for our
Common Stock over the last two completed fiscal years and over the first and
second quarter of the current fiscal year, as reported on the OTC Bulletin
Board. The prices represent quotations by dealers without adjustments for retail
mark-ups, mark-downs or commission and may not represent actual transactions.
The closing price of our Common Stock on November 18, 2004 was $1.33 per share.
22
LOW HIGH
---- ----
January 1, 2004 through
September 30, 2004
First Quarter $ 0.25 $1.00
Second Quarter $ 0.52 $1.05
Third Quarter $ 0.76 $1.15
Year Ended December 31, 2003
First Quarter $ 0.15 $0.49
Second Quarter $ 0.30 $0.50
Third Quarter $ 0.16 $0.46
Fourth Quarter $ 0.13 $0.33
Year Ended December 31, 2002
First Quarter $ 0.81 $1.84
Second Quarter $ 0.22 $1.32
Third Quarter $ 0.10 $0.57
Fourth Quarter $ 0.13 $0.29
As of November 18, 2004, there were approximately 139 holders of record
of our Common Stock. We believe that a significant number of shares of our
Common Stock are held in either nominee name or street name brokerage accounts
and, consequently, we are unable to determine the number of beneficial owners of
our stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
We are engaged in the design, development and marketing of
next-generation technology-based broadband access solutions for voice, video and
data services, focusing on fiber-based and Ethernet-based solutions, including
Fiber-to-the-Premises (FTTP). We are currently working to complete certain
contemplated products designed to deliver "triple play" (voice, video and data)
broadband communication over an all fiber network/communication system. These
products, comprise our initial products, are designed for placement at various
points in the network infrastructure layout. We will be marketing our initial
FTTP products to communications carriers, municipal authorities and
communication equipment companies. We will not be marketing any products
directly to subscribers.
We are a development stage company that has generated significant
operating losses since our inception in August 1994, all of which primarily
relate to Copy Protection Business in which we were previously engaged. We have
been engaged in the broadband access communication business since only March
2004. From our inception in August 1994 through October 2002, we were engaged in
the Copy Protection Business under the name "TTR Technologies, Inc." Our
financial statements for the year ended December 31, 2003, primarily reflect the
financial results of operations associated with the Copy Protection Business. As
a development stage company, we have a limited operating history upon which an
evaluation of our prospects can be made. Our prospects must therefore be
evaluated in light of the problems, expenses, delays and complications
associated with a development stage company.
PLAN OF OPERATIONS
Our immediate objective is to complete our contemplated initial products
23
for FTTP deployment. Our customer premise unit, designed to deliver broadband
services directly to the subscriber, is currently available for commercial
release. We anticipate that by December 31, 2004, our aggregator switch, the
component that routes data to and from the subscriber/end user, will be
available for testing by prospective customers. These products are being
designed to be inter-operable with most installed FTTP communications networks
and equipment.
Subject to raising additional funds, over the next 12 months we
anticipate that we will be expanding products applications to encompass
sophisticated business applications and other in-house wiring, including copper
networks. Accordingly, we anticipate that we will be significantly increasing
our investment in research and development efforts and marketing.
FINANCIAL OPERATIONS OVERVIEW
REVENUES. We have not generated any revenues. Our business involves the
development of new and as yet unreleased broadband access products with no
market penetration. We do not expect to generate any significant revenues in the
near term and we plan to operate at a loss through at least 2005. We cannot
predict when or to what extent our initial evolving product line or future
extended applications will begin to produce revenues, or whether we will ever
reach profitability.
We believe that we will eventually be able to generate revenues from the
sale or license of our prospective broadband access products. We presently have
no revenue generating agreements respecting any of our proposed products. Our
ability to successfully conclude any revenue generating commercial agreements is
premised, in part, on the inter-operability of our products existing network
communications structure by leading telecommunications carriers, service
providers, governments and municipalities.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
consist of expenses incurred primarily in product designing, developing and
testing. These expenses consist primarily of salaries and related expenses for
personnel, contract design and testing services, supplies used and consulting
and license fees paid to third parties. For the nine months ended September 30,
2004, our research and development expenses were $2,650,069. This amount
includes approximately $2.5 million remitted to Lucent in respect of product
development work.
Currently, we have four employees engaged in undertaking product
testing. Subject to raising additional capital, we anticipate that our research
and development expenses will increase significantly over the next twelve months
as we begin to expand our product offerings and applications beyond fiber based
systems to encompass advanced business applications and configurations for other
wiring options, including copper based networks. Consequently, we anticipate
that we will be adding additional research and development personnel over the
next 12 months.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
consist primarily of salaries and other related costs for personnel in executive
and other functions. Other significant costs include professional fees for
legal, accounting and other services. We expect that our general and
administrative expenses will increase as we increase our efforts to complete the
design and development of our
24
proposed products and our commercialization efforts. For the nine months ended
September 30, 2004, our general and administrative expense were $1,275,728.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements and accompanying notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires we make estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Management continually
evaluates the accounting policies and estimates it uses to prepare the condensed
consolidated financial statements. We base our estimates on historical
experience and assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from these estimates made
by management.
We do not participate in, nor have we created, any off-balance sheet
special purpose entities or other off-balance sheet financing. In addition, we
do not enter into any derivative financial instruments for speculative purposes
and uses derivative financial instruments primarily for managing its exposure to
changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in August 1994, we have financed our operations
through the sale of our securities. The proceeds from the sale of our Copy
Protection Business in May 2003 were also used to finance our operations.
In August 2004, we completed a private placement to certain private and
institutional investors of shares of our Convertible Preferred Stock for
aggregate gross proceeds of $5.25 million. We received net proceeds of
approximately $4.6 million, following the repayment of offering related
expenses.
In August 2004, we also secured a $6 million equity line commitment on
which we can draw from time to time during a 24 month period following the
effectiveness of a separate registration statement relating thereto, subject to
certain conditions. We undertook to file a registration statement in respect of
such equity line no earlier than the 90th day following the effective date of
this Registration Statement (but no later than the 120th day after such date).
The Equity Line allows the sale of up to $6 million of Common Stock at 98 % of
the then current market price, but in no event at less than $2.00. The Company
may not draw down more than $500,000 during any 30-day period. The investor is
entitled to 5% of the cash proceeds from the sale of the shares to it by the
Company under the Equity Line.
As of September 30, 2004, cash and cash equivalents were approximately
$3.5 million. We believe that our existing cash resources will be sufficient to
maintain operations through the first quarter of 2005. Our existing resources
may not be sufficient to support the commercial introduction, production and
marketing of our contemplated initial products. Unless we raise additional
funds, we may need to curtail expenditures which may result in a delay in our
initial product testing or marketing efforts, all of which can have a material
adverse effect on our business and prospects. However, if the Warrants issued to
the purchasers of the Convertible Preferred Stock, which warrants are first
exercisable only as of February 9, 2005, are exercised by these holders for cash
in a net amount sufficient for our needs, we will be able to maintain operations
beyond the end of the first quarter of 2005. No assurance can be provided,
though, that these warrants will in fact be exercised in amounts sufficient for
our needs. If these warrants are not so exercised, we will need to raise
additional funds through public or private sales
25
of equity securities or borrowings. At the present time, we have no commitments
for any such financing, and there can be no assurance that additional capital
will be available to us on commercially acceptable terms or at all. Furthermore,
it is anticipated that any successful financing will have a significant dilutive
effect on existing stockholders. The inability to obtain such financing will
have a material adverse effect on our condition and prospects.
The notes to the consolidated financial statements accompanying this
Prospectus, include an explanatory paragraph relating to the uncertainty of our
ability to continue as a going concern, which may make it more difficult for us
to raise additional capital.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003 and revised in December 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), an interpretation of Accounting Research
Bulletin No. 51. FIN 46 expands upon and strengthens existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. A variable
interest entity is any legal structure used for business purposes that either
does not have equity investors with voting rights or has equity investors that
do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 addresses certain financial instruments that, under previous guidance,
could be accounted for as equity, but now must be classified as liabilities in
statements of financial position. These financial instruments include: 1)
mandatorily redeemable financial instruments, 2) obligations to repurchase the
issuer's equity shares by transferring assets, and 3) obligations to issue a
variable number of shares. SFAS No. 150 generally is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a significant impact on our financial
statements.
BUSINESS
GENERAL
We are a development stage company that designs, develops and intends to
market technology-based broadband access solutions for voice, video and data
services, focusing on fiber-based and Ethernet-based solutions, including
26
Fiber-to-the-Premises (FTTP). The core technologies underlying our contemplated
initial FTTP products discussed below have been co-developed with Lucent at
Lucent's Bell Labs in New Jersey. The Development and Licensing Agreement with
Lucent provides us with a worldwide, perpetual and non-exclusive license to
manufacture, develop and sell products designed to deliver FTTP based broadband
access solutions.
We have been engaged in the broadband access solutions business only
since March 2004. From our inception in August 1994 through October 2002, we
were engaged solely in the business of designing and developing digital security
technologies that provide copy protection for electronic content distributed on
optical media and the Internet (the "Copy Protection Business") under the name
of "TTR Technologies, Inc." We consummated the sale of the Copy Protection
Business in May 2003. In May 2004, we changed our name to "Amedia Networks,
Inc."
We intend to sell or license our contemplated FTTP products to
telecommunications carriers, cable and video providers, governments, public
utilities, and municipalities around the globe. We do not intend to market any
products directly to subscribers.
INDUSTRY BACKGROUND
Two decades ago, communications technology generally consisted of simple
analog signals representing voice, video, and data transmitted over networks of
copper telephone lines for voice and very limited data, or coaxial cables for
limited video. Communications technology has significantly changed in the past
two decades and currently includes both complex analog and digital voice, video
and data signals transmitted over varying networks of media that now include
fiber optic strands and wireless transmission over radio frequencies. Some media
such as fiber optical strands can handle all types of signals and all managed in
a converged, consolidated system. This evolution has been driven by the
interplay between technological innovations and the substantial increases in the
number of users and new data-intensive computing and communications
applications, such as web-based commerce, streaming audio and video and
telecommuting, as well as mobility applications. These applications and the
associated devices are continuing to require higher and more cost-efficient data
transfer rates throughout the network infrastructures that serve them.
Traditionally, technology advances have been first implemented in what
is called "the core" of a network, that is, where signal traffic from individual
users is grouped together in increasingly larger and larger bundles of traffic,
and transported from one centralized aggregation point to another. For example,
fiber optics was first used in inter-continental transport where a single cable
would carry signals from thousands and thousands of individuals. Typically, the
use of newer transport technologies have reached the access network (or the
"edge" of the network - where the subscribers are located) only at a later point
in time after the costs associated with using the new technologies (at the
subscriber level) had been substantially reduced.
Over the last several years, the cost of deploying different access
technologies has generally declined to the point where telephone companies and
cable companies could and have increased the amount of bandwidth that they
provide to their
27
subscribers. For example, most subscribers previously had access to 28.8
Kilobytes per second (Kbps) or up to 56 Kbps over their analog phone lines for
very limited data services. Now, they can access networks at rates greater than
1.5 Megabytes per second (Mbps), enabling voice, data, music, Internet based
multiplayer gaming and some video transfers over the Internet
Traditionally, carriers providing telephone and data services deployed
them over separate networks, an approach called "overlay networks." Data traffic
would be separated from voice traffic soon after it left a subscriber's
interface with the network, and they were each transported and managed very
differently from each other. Different provisioning software, maintenance
procedures, and craft skills would be used for each of these networks. However,
in response to the increased consumer demand for faster, less expensive, and
more advanced services, some carriers, in addition to adding greater capacities
for faster access networking, are starting to converge their separate voice and
data services onto single integrated networks. This convergence of voice and
broadband services allows carriers to lower operating costs by eliminating much
of the duplication. These developments impact both operating expenses as well as
capital requirements. Today, many carriers are considering or beginning to
deploy Voice over Internet protocol (VoIP) systems, which are voice services on
networks designed for data.
The regulatory environment is also a factor that has impacted network
convergence. Concerns over regulatory ambiguity generated hesitation among
traditional telephone carriers for deployment of packet-based voice and
broadband services. Generally, carriers were required to open up their
infrastructure for use by non-infrastructure carriers at wholesale prices. Those
non-infrastructure carriers would in turn offer services over that
infrastructure to subscribers that would compete with the incumbent carrier,
thereby realizing the regulators' intent of increased retail competition.
However, a result of this approach was that infrastructure-based carriers were
hesitant in deploying newer technologies. Meanwhile, cable companies, who were
not under these same requirements, continued to successfully rollout a
competitive service bundle of voice, video and high-speed Internet services.
Recently, regulators have begun to address this and related issues, and have
removed some of the dis-incentives to incumbent carriers to deploy the
capabilities to offer converged services. For example, the FCC has excluded
infrastructure carriers from this requirement when they deployed certain
fiber-based facilities for new housing in new neighborhoods. On October 14,
2004, the FCC went a step further by eliminating the sharing requirement when an
infrastructure carrier deployed fiber to a node within 500 feet of a home and
connected the home to that node with copper.
EVOLUTION OF THE NETWORK INFRASTRUCTURE
Traditionally, access networks consisted of copper cabling along which
voice, data and video communications were transmitted in the form of electronic
signals. While copper cabling is generally a reliable transmission medium, its
ability to transmit large volumes of data at high speeds is limited, and it is
prone to electromagnetic interference, or EMI, from nearby electronic equipment
and other sources. EMI interferes with the transmission of a signal and degrades
signal quality. Copper is also more costly to maintain given its more reactive
nature with respect to moisture and other environmental factors.
28
To overcome the limitations of the copper cable infrastructure and meet
increasing demand for high capacity and high-speed voice and data transmission,
communication service providers have increasingly adopted optical technology in
their networks. Optical technology involves the transmission of data over fiber
optic cables via digital pulses of light. Communication by means of light waves
guided through glass fibers offers a number of advantages over conventional
means of transmitting information through metallic conductors. Glass fibers
carry significantly more information (bandwidth) over longer distances than
metallic conductors but, unlike metallic conductors, are not subject to
electromagnetic or radio frequency interference.
Given its superior bandwidth capability, ease of maintenance, improved
data integrity and network reliability, fiber optic cable has become the
communication medium of choice for the core network, and over time, into the
wide-area networks and most metro networks. Today, high-speed connections
operate at data transmission rates from 155 Mbps to 2.5 gigabits per second
(Gbps) in metro service areas and up to 40 Gbps in long haul networks.
Regardless of the selected communications medium or data transmission
rate, the movement of all voice and data traffic throughout the
telecommunications network requires the use of software intensive communications
protocols that govern how information is passed within the network
infrastructure. These protocols generally fall into two different categories. In
one case, the traffic between two points is treated as a "whole" and allocated
to a dedicated circuit. The other approach breaks up the information into
packets, and allow those packets to traverse multiple paths to get to the same
destination.
Circuit switching, the most common technique for transporting and
switching ordinary telephone calls throughout the telecommunications network,
was used because of its reliability; packet data in past decades was rarely able
to offer the same assurances for delivering traffic when it was needed. The
appeal of packet data - its efficient use of bandwidth- was not able to
compensate for its uncertain performance levels for voice, video, and certain
data applications. But that has changed in recent years with advances in many of
the packet-oriented protocols. Accordingly, in recent years access solutions
have become increasingly "packetized".
In addition to the increased use of packet-based networks, the economics
of fiber-based solutions have improved enough so as to enable their increased
use in access networks. Over the last several years, the use of optical
transport has been increasingly approaching subscribers. Both cable and
telephony carriers have found it advantageous to transport signals to a node in
the access plant over fiber (to obtain the benefits discussed above) and then
using copper to finally reach the home or small office. These
"Fiber-to-the-Node" or FTTN deployments are becoming increasingly common. The
expense, for carriers was in that final segment - the so-called "last mile"
where digging up the flower beds and cement pavements of existing homes can
become very costly. But this is beginning to change. Given the option of
providing services to a new residential or business area with copper or
fiber-based technology, fiber is generally chosen. This is a direct result of
the declining cost of fiber-based systems, and the advantages they offer in both
reduced operating expenses and new revenue opportunities.
29
INFRASTRUCTURE OF FTTP BASED ACCESS NETWORKS
Initial deployments of FTTP systems, based on the latest technology and
innovation, has occurred in rural communities, which have typically been
frustrated by being under-served by their incumbent telephone and cable
carriers. Several municipalities and public utility authorities in states that
do not prohibit such actions, have established access services through which
they sell voice, data, and / or video based services to their community
constitutes. (This same trend has occurred in several communities in the
Scandinavian region of Europe.) Incumbents, concerned about the regulatory
issues discussed above, had been more reticent to deploy such systems, although
this may now change in some cases. In several Asian countries, FTTP deployments
have been more "main stream" owing to a more activist position by their
governments who see the resulting benefits as directly related to economic
policy.
Two primary approaches are generally being used to provide FTTP
access-based solutions. The first approach uses a passive optical network or PON
architecture. In a PON system, digital signals are converted into light pulses
and sent down a fiber which is then split into as many as 32 fibers - each
terminating at a different premises. Traffic from each premise can then be sent
back up those fibers onto the common fiber and back into the network. The second
approach uses Ethernet, the most common protocol for managing digital packets
over a network, and employs a direct oversight role as to who gets what
information. In an Ethernet switched optical network, or ESON, traffic is sent
via light pulses to an Ethernet switch that can be located either in a
communications office, or outside in an enclosure. At the Ethernet switch,
traffic for a specific subscriber travels down a dedicated fiber as light pulses
to a specific home or office. The standard for ESON-like networks was recently
approved, although Ethernet itself has been a standard for network transport for
over two decades.
PON systems were originally compelling since they adhered to an existing
standard and used less fiber and less of what were then relatively more
expensive optical components. This resulted in most of the earlier deployments
being PON-based. Several of the largest United States carriers issued
requirements for their FTTP deployments that specified a PON architecture.
However, fiber and optical components have since become far less expensive -
particularly the lasers and receivers of the kind used in ESON networks. Also,
optical fiber has undergone reduced costs. (Actually, both PON and ESON use
about the same amount of cabling - but PON systems have fewer fibers within each
cable.) In addition, PON systems share all of the capacity of the fiber with
multiple users. For example, a 1-Gbit per second link shared among 32
subscribers yields approximately 31 Mbits/sec per subscriber. Currently, the
only way to increase the available bandwidth is to reduce the number of homes
served. Reducing the number of subscribers to 16, for example, will double the
bandwidth to 62 Mbits/sec while increasing the cost. ESONs can provide 100 or
1,000 Mbits/sec of bandwidth per subscriber in either the upstream or downstream
direction. A single ESON system can serve up to 48 homes on each fiber run and
isolate information streams and faults to each subscriber. Up to 50,000 homes
can be served from a single core switch in the central office. These factors are
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repositioning how PON and ESON systems are viewed and causing some network
providers to reconsider their earlier decisions favoring PON architectures.
In addition, PON systems have limited reach and typically can only
extend about 25 km from the central office. They cannot isolate information,
users, or FTTP Solution faults. This means that when there is a problem with the
PON network, the operator may not be able to identify the location and will need
to send a technician out into the field (called a "truck roll") to search for
the problem. This can drive up maintenance costs. PON systems pass all of the
traffic from a node past every building. A determined "hacker" has physical
access to the facility carrying all of that traffic and could more easily (than
ESON systems) acquire content for which he or she was not authorized to access.
ESON provides a higher level of security, a high level of scalability and
symmetrical bandwidth upstream and downstream.
ESON systems, on the other hand, can extend up to 90 km from the central
office, can completely isolate information streams, and remotely isolate and
locate faults. Its basic architecture never allows "contact" with the content
that was not intended for a given subscriber.
OUR BROADBAND ACCESS SOLUTIONS
The FTTP based products that we are developing comprise an ESON based
solution that is designed to provide state-of-the-art Ethernet and Internet
protocol technologies to the broadband access market. Our contemplated products
are standards-based and carrier-grade and satisfy the demand for emerging
broadband packet-based services in a cost effective and efficient manner. Our
products are designed to enable secure, scalable and cost-effective delivery of
"triple play" services (voice, video and data) over a seamless Ethernet network.
Our initial FTTP products will be marketed under the name
"QoStream(TM)". Our current FTTP based QoStream products are comprised of the
following:
o QOSTREAM(TM) PG1000: a premises gateway product that resides
with the subscriber and is designed to perform data, telephony,
video and local Ethernet switching functions (the "QoStream
PG1000"). Our premises gateway can be situated indoors and
outdoors (in a hardened configuration), and is the device that
subscribers connect to for their voice, data, and video
services. Those connections are via simple telephone (RJ-12) or
data (RJ-45) cables, or can be via a wireless 802.11g (WiFi)
means. This product "talks" to the network, and can be set-up to
deliver the right kind of bandwidth to each device that a
subscriber connects to it.
o QOSTREAM AS5000 AGGREGATOR SWITCH: a distributed Ethernet switch
designed to route data to and from the premises gateways at
distances of up to 40km away (the "QoStream AG5000"). This
switch is very compact, and can be located outside in a cabinet
or on a telephone pole (in a "hardened" configuration which does
not require any environmental conditioning) or can reside inside
a communications building.
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o QOSTREAM(TM) DIRECTOR: a network management system designed to
provide product and network management functions for these
products (the "QoStream Director"). It supports fault isolation,
configuration, inventory and accounting management. The QoStream
Director will be made available for use in conjunction with the
above products.
Our QoStream product line includes certain features that we believe
provide competitive advantages. These include:
o INTEROPERABILITY WITH EXISTING NETWORKS: We have rigorously
maintained full compliance with industry standards to achieve
the highest performance levels for our products, as opposed to
developing a simpler or proprietary solution. This assures that
our products will have maximum levels of inter-operability with
network products that may already be in our prospective
customer's asset base.
o OUTDOOR / HARDENED CONFIGURATION: Our QoStream PG1000 and
QoStream AS5000 are both available in a hardened configuration
for the outside deployment that many carriers require.
Facilitating out-of-premises placement requires that the
products be designed from start of their development cycle to
function in an outside environment without adding significant
initial or operating costs. For example, because of innovative
design, our hardened aggregator switch can be placed into an
outside cabinet or on a utility pole without the need for very
expensive air conditioning to compensate for external or
circuit-based heat build-up. Not only are operational costs
reduced due to less power consumption for air conditioning, but
the probability of system failure due to failure in the air
conditioning unit is significantly decreased. We are not aware
of any currently available FTTP customer premises units or
aggregator switches that posses a hardened configuration that
could withstand varying climactic conditions without the
addition of expensive environmental conditioning.
o CENTRALIZED REMOTE CONTROL FEATURES: The combination of using an
ESON architecture along with the features provided by the
QoStream Director means that much of the provisioning,
operational, administrative, and maintenance activities can be
performed remotely from a centralized network operating center
(NOC) rather than on-site. Alarming features are also
centralized. For example, any unauthorized access would alert a
NOC operator.
o REACH: Our systems have the longest spanning reach of any
currently deployed FTTP system, ranging over 90km from the
subscriber's premises to the carrier's central office or head
end with the use of our aggregation switch in an intervening
node, or 40km when not implementing any intervening nodes. We
believe that the added reach provides a wide range of
flexibility to carriers in how they want to configure their
access network to meet their specific requirements.
o INSTALLATION AND DEPLOYMENT: We believe that the overall
operations associated with the installation and deployment of
our products are straight-forward and non-complex. A qualified
technician can employ pluggable optical components to meet the
configuration needs at a
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particular site without the need to coordinate with others at
sites remote from the install site to turn-up a particular
location.
Demonstrations and Field Testing/ Commercial Availability
The QoStream products were first introduced to the public in their
pre-release format in June 2004 at a major industry trade event. The QoStream
PG1000, QoStream AS5000, and the QoStream Director were configured so as to
interconnect two virtual homes with High Definition TV, live video, online
interactive gaming, Voice over IP, and broadband data via wired and wireless
means. The demonstration successfully showed the capabilities of these systems,
including the ability to manage the bandwidth according to the parameters
required for each of these applications. Following the event, further
development ensued to prepare the products for commercial delivery.
The QoStream PG1000 is currently available for commercial shipment. We
anticipate that by December 31, 2004, the QoStream AS5000 will be available to
prospective customers for acceptance testing. The QoStream Director is in the
development stage with a third party development contractor and we currently
expect that it will be available for customer testing and commercial delivery in
the first quarter of 2005.
OUR STRATEGY
Our goal is to become a leading designer, developer and distributor of
next-generation broadband access equipment and technologies for the provision of
"triple play" (voice, video and data) services. Our immediate goal is to
complete the design, development, testing and commence the marketing of our
QoStream products for FTTP deployment. Subject to raising additional funds and
market demands, we intend to expand business applications, configure the
QoStream products for diverse in-house wiring options, including copper wiring
for localities where subscribers are served via copper interfaces.
To achieve these objectives, the key elements of our strategy include
the following:
o COMPLETE THE DEVELOPMENT AND COMMENCE MARKETING THE INITIAL
QOSTREAM PRODUCTS. We continue to seek out relationships with
commercial carriers for the test deployments and eventual
commercial deployments of the QoStream PG1000 and the QoStream
AS5000. In November 2004, we entered into a non-exclusive
co-marketing agreement with Riverstone Networks, Inc.
("Riverstone"), a company that markets Ethernet switches for
metro applications. Under the agreement, we and Riverstone
intend to perform an extensive set of interoperability tests to
assure that our contemplated initial FTTP products interconnect
with Riverstone's core switches. Where feasible, we and
Riverstone have agreed to a comprehensive solution that enables
carriers to deliver a vast range of IP voice, video and data
services. We have also entered into a reseller agreement in
November 2004 with LightRiver Technologies, Inc. ("LightRiver"),
a full service telecommunications solutions provider of high
performance products and services. Under the agreement with
LightRiver, LightRiver has agreed to include in its product
portfolio our QoStream products as these products become
available.
33
o AGGRESSIVELY MARKET THE QOSTREAM PG1000 AND QOSTREAM AS5000. In
response to the development of perceived market demands, subject
to raising additional capital we intend to focus on adding
enhancements to the QoStream PG1000 and the AS5000 products to
render them more competitive. Specifically, we intend to deploy
resources to look at evolutions of the Aggregator Switch's
switching and software features and bring MPLS edge switching
capabilities closer to the consumer for providing higher levels
of Quality of Service and network redundancy capabilities. We
have also determined, based on the interactions with potential
customers, that there is a need to interoperate with several
existing core switch products in the products that are already
deployed in the customer networks. Hence, for the near future,
our development will be targeted towards ensuring the highest
level of interoperability between these third party core
switches and our QoStream PG1000 and AS5000 products.
o ESTABLISH AND EXPAND STRATEGIC AND PARTNERING RELATIONSHIPS. Our
success and eventual profitability is premised in large measure
on our ability to establish relationships with broadband
communications equipment companies. In addition to our
relationship with Lucent in the development of our initial FTTP
products, we continue to seek out cooperative arrangements with
prospective technology partners. For example, in November 2004,
we announced a non-exclusive marketing and inter-operability
alliance agreement with Riverstone, a manufacturer of core
switches that could route bandwidth to and from our AS5000
Aggregator Switch. Additionally, in November 2004, we entered
into our first reseller agreement under which LightRiver, an
advanced telecommunications equipment provider, will be
including in its product portfolio our QoStream products as such
products become available in its product portfolio. However, in
order to eventually reach profitability, we will need to
establish relationships and other arrangement with third party
production companies for volume production of components for our
products. We are currently in discussion with several
prospective production facilities.
o RESPOND TO FTTP BIDS BY MUNICIPAL AUTHORITIES AND OTHERS. In the
United States, there are currently several municipal authorities
that have deployed limited FTTP communications architectures.
Many of them are issuing requests for proposals (RFP) to deploy
FFTP systems (on a test or commercial basis). Toward the end of
establishing awareness of our company and the QoStream products,
we continuously seek to respond to RFPs from these municipal
authorities. The RFPs generally specify product requirements and
interoperability capabilities as well as contain specific
delivery schedules. Subject to our raising additional capital,
we intend to participate, on a selective basis, in these RFPs.
o INTRODUCE NEW PRODUCT APPLICATIONS. Subject to raising
additional funds and market conditions, we intend to expand the
range of the QoStream products to include new products and / or
additional models
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of existing products Areas that we are evaluating include,
hybrid copper / fiber interfaces, enhanced wireless
functionality, business-specific configurations, and enhanced
gigabit Ethernet user interfaces.
o ESTABLISH RESELLER RELATIONSHIPS WITH COMMUNICATION CARRIERS. We
intend to sell our contemplated broadband access products to
communications carriers. We will not be selling these products
directly to the subscriber. Accordingly, it is important for us
to establish revenue-generating arrangements with communication
carriers. Initially, we are focusing on the smaller and more
innovative carriers. Subject to raising additional funds and
market opportunities, we may approach "mainstream" carriers with
our product offerings.
o PROTECT PATENT POSITIONS. The technologies contained in the
initial QoStream products contain Lucent owned technologies as
well as technologies jointly owned by us and Lucent. We believe
that our future success will depend, in part, on the continued
protection of the proprietary technology contained in these and
future products.
No assurance can be provided that we will be successful in completing
the design and development of our contemplated products (including all of the
integral components/technologies to be created by third parties) or, that even
if successfully completed, that we will be able to successfully deploy on a
commercial basis these products. We are subject to significant business risks
and will need to raise additional capital in order to realize our business plan
and effectuate the above strategy.
AGREEMENTS WITH LUCENT
In January 2004, we and Lucent entered into the Development and
Licensing Agreement pursuant to which Lucent developed and is licensing to us
the first generation versions of our premises gateway and our aggregator switch.
In the course of the development of these components, we concluded that in order
for us to compete more effectively in the broadband access market, these
components needed to be upgraded. Accordingly, in April 2004, we and Lucent
entered into a supplementary development agreement to (among other things), (i)
add the environmental hardening feature and install the wireless control feature
to QoStream AS5000, (ii) install the wireless port enabling feature for the
QoStream PG1000 to enable it to communicate with voice, video and data devices
through a wireless connection and (iii) develop an interim network director for
these products (pending the development of the QoStream Director), for agreed
upon consideration of $500,000. Thereafter, we and Lucent entered into an
additional supplemental development agreement as of September 30, 2004 to (i)
provide for the environmental hardening feature for the QoStream PG1000, (ii)
install additional software features in the QoStream AS5000 to guarantee quality
of service, remote management, SNMP network management interface and (iii)
outside enclosures and fiber management design for each of the QoStream PG1000
and QoStream AS5000, for agreed upon consideration of $368,000. To date, we have
remitted to Lucent approximately $ 2.5 million for development work performed
under the Development and Licensing Agreement and the subsequent supplemental
development agreement in April 2004. To date, we have remitted to Lucent
approximately $10,000 in respect of development work under the
35
supplemental development agreement as of September 2004 and anticipate
completing the remaining payment of $358,000 thereunder upon the anticipated
delivery in December 2004 of the QoStream AS5000.
The original Development and Licensing Agreement contemplated that
Lucent develop and deliver to us by November 2004 a specified Ethernet MPLS core
switch, which is to serve as an interface with the core network. Following the
execution of the Development and Licensing Agreement, in July 2004 we and Lucent
entered into an amendment to the Development and Licensing Agreement pursuant to
which Lucent is to deliver to the Company an improved design model for the Core
Switch by December 20, 2004. Subject to delivery, we and Lucent agreed that
payments aggregating $1.1 million originally scheduled to be made in two
payments of $500,000 and 600,000, respectively, in December 2004 and March 2005,
would be re-scheduled to be made in monthly installments of $110,000, beginning
in December 2004. If Lucent does not meet the delivery date by December 20,
2004, we are entitled to delay the rescheduled payments by one year; if delivery
is not made by March 20, 2005, we are not required to make any of these
payments.
We do not currently anticipate that we will be receiving the enhanced
core switch contemplated under such amendment. However, we have determined,
based on the interactions with potential customers, that our QoStream PG1000 and
QoStream AS500 need to interoperate with several existing core switch products
already deployed in existing customer networks. Given the installed base of
existing core switch products, the larger market opportunity in terms of volume
for customer premises units and aggregator switches, together with the projected
lower volume for core switch units, we believe that we can maximize shareholder
value by focusing our limited resources on increasing the attractiveness of our
QoStream PG1000 and QoStream AS5000 products, as well as expanding product
applications afforded by these products. Consequently, we anticipate that for
the near future our development efforts will be targeted towards ensuring the
highest level of quality and interoperability between these third party core
switches and our developing QoStream product line. In this regard, under our
co-marketing agreement with Riverstone, we intend to perform an extensive set of
interoperability tests to assure that our QoStream PG1000 and QoStream AS5000
seamlessly and effectively interconnect with Riverstone's core switches.
Riverstone markets a wide variety of Ethernet switches for metro applications.
THE LICENSE
Under the Development and Licensing Agreement, we have a worldwide,
perpetual and non-exclusive license to use certain specified FTTP related Lucent
technologies and solutions to develop, market and sell FTTP broadband access
products. Our initial QoStream products contain Lucent owned technologies, as
well as technologies jointly developed by us and Lucent in the course of the
development projects. Subject to certain standard restrictions, we are entitled
to sublicense to third parties rights to manufacture and sell these products.
Lucent is not restricted from using pre-existing Lucent technologies or
information that is incorporated in these products.
All technologies and information, including the object or source code,
that are
36
developed as direct result of the development efforts taken under the
development projects with Lucent are jointly owned by us and Lucent (each, a
"Joint Invention"). Lucent, however, is the sole owner of all pre-existing
Lucent technologies incorporated in the Licensed Products. Lucent has agreed not
to use, through January 2014, any new Joint Inventions for the purpose of
developing and selling any products that may directly compete with the QoStream
PG1000 or the QoStream AS5000.
Under the Development and Licensing Agreement, Lucent is entitled to
royalties of 3.2% of revenues, if any, received by us from the sale or license
of products that utilize their technologies. If Lucent expends substantial sales
efforts with respect to any customer (the extent and amount of such sales
efforts being subject to mutual agreement), then it is entitled to 7% of
revenues received from such customer.
Subject to timely payment of all amounts due under the Development and
Licensing Agreement (including the royalties and revenue fees), the licenses
granted under the Development and Licensing Agreement continue in perpetuity.
If, however, we are in material breach, Lucent is entitled to terminate the
Development Licensing Agreement, provided, that if the payments required under
the Development Licensing Agreement and the supplemental agreements have been
timely made , the licenses granted to us under such agreement continue in full
force and effect.
MARKETING PLAN
Our efforts to date have been devoted primarily to the design,
development and testing of our contemplated QoStream products. We have begun to
ship selective products for customer evaluation in November 2004, and expect
that will be able to provide selective products for general deployment in
December 2004.
Our current business plan contemplates that the initial targets will be
municipalities and independent service providers around the globe. We will
generally present the PG1000 and the AS5000 as an integrated solution, although
each component of our emerging product line can be marketed as a stand-alone
product. For example, the QoStream PG1000 can, in some cases, be deployed with
aggregator switches from other vendors; the QoStream AS5000 can also be used as
a general-purpose aggregation switch; each is compatible with several
carrier-class Gigabit Ethernet switches.
In November 2004, we entered into our first reseller agreement with
LightRiver Technologies, a provider of advanced telecommunications equipment,
pursuant to which LightRiver will be including in its product portfolio our
initial QoStream products as these products become available. LightRiver's
customers include telephone companies, municipalities, utilities, government
agencies and cable TV providers. We also entered into a co-marketing agreement,
in November 2004 with Riverstone Network, Inc., a leading provider of Ethernet
switches, pursuant to which we and Riverstone will be conducting extensive tests
to assure the interoperability of our QoStream initial products with
Riverstone's core switches. The agreements with Riverstone and LightRiver do not
guarantee our company any revenues, but are part of our overall strategy for
increasing the awareness and availability of our contemplated products.
Under the Development and Licensing Agreement, Lucent has agreed to make
available to us through January 2006 qualified personnel for up to an average of
80 hours a month to provide specified technical and marketing assistance,
including interfacing with prospective customers of our proposed products and
with prospective third party manufacturers and assisting with installation and
testing of these. Lucent has also agreed to our use of the Lucent logo in
connection with the sale and marketing of our contemplated products.
We presently have no agreement with any carrier or other party
respecting any revenue generating arrangement relating to our products and no
assurance can be provided that we will in fact be able to enter into any such
arrangement on terms that are commercially acceptable to us or on any terms. Our
success is subject to many risks.
37
We have recently begun to develop an in-house marketing capability;
however that capability is very limited, and not sufficient to carry out our
business plan without additional capital resources. We anticipate that we will
need to raise additional funds in order to realize our current business plans
and to maintain operations as presently conducted through 2005. We currently
have no commitments relating to such financing and no assurance can be provided
that we will be successful in obtaining financing on commercially acceptable
terms or at all. Subject to raising capital, we expect to outsource assembly and
testing of our prospective products to independent, third-party contractors.
Our current business plan anticipates that we will be outsourcing our
assembly and, on some occasions, complete turnkey production of our products to
independent contract manufacturers. Outsourcing in selected areas, we believe,
allows us to react more quickly to market demand, avoid the significant capital
investment required to establish automated manufacturing and assembly facilities
and concentrate resources on product design and development. We currently
perform in-house limited testing of prototypes for inter-operability testing and
in some cases, units for customer evaluation, as well as inspection and final
testing. Our manufacturing processes and procedures are generally ISO 9000
certified and so are those of our vendors.
RESEARCH AND DEVELOPMENT
We currently conduct in-house certain product testing acitivities.
Subject to raising additional funds, we anticipate that we will be relocating
in-house certain product design activities that we currently out-source to third
parties. For the nine months ended September 30, 2004, we expended $2,650,069 in
connection with the development of our QoStream products.
During fiscal years 2003 and 2002 we expended $0 and $701,629,
respectively, on research and development. The amounts expended in 2002 related
to our previous Copy Protection Business. No amounts were expended in 2003 as we
had contracted in November 2002 to sell our Copy Protection Business, which sale
was consummated in May 2003.
FUTURE PRODUCT APPLICATIONS
The broadband access solutions industry in general is characterized by
rapid product changes resulting from new technological developments, performance
improvements and lower production costs. As a result, there is a lack of market
consensus about preferred solutions, and the market has undertaken active
experimentation and re-evaluation. Accordingly, we anticipate that our research
and development efforts will initially be focused on quickly responding to a
critical mass of customer interests in certain immediate areas. For example,
several carriers are beginning to favor copper interfaces and digital subscriber
line approaches for interfacing with the QoStream PG1000 with an evolution to a
full fiber interface in the future. Depending on the cost and resources required
to develop this capability in our products, we may dedicate research and
development resources to this effort.
38
Subject to raising additional funds, we anticipate that another component of our
research and development resources will be devoted to understanding the
requirements of some of the more innovative carriers, and what we believe will
be the overall market's medium to longer term requirements. To date, however,
due to insufficient funding, our research and development efforts in this area
have been limited.
Our initial research and development efforts have been directed to
commercializing the original designs of the QoStream products, including
enhancing the operational capabilities, designing certain market requirements
from specific segments that had not been part of the original design, and
modifying the products for manufacturing and deployment on a larger scale.
Our business plan relied on the out-sourcing of development of our
QoStream products in as rapid a time as possible in order to be in the market at
an optimal point in time. While we will still outsource some aspects of our
research and development on an ongoing basis, as this initial phase of our
research and development is concluding for our current QoStream product line, we
anticipate that, subject to raising additional financing, we will relocate
in-house a larger share of the research and development efforts. We expect that
these in-house resources will be primarily responsible for developing features
and functions that will form the basis of most of our evolving and future
product line.
COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The market for broadband access solutions and technologies is
characterized by a significant number of laws, regulations and standards, both
domestic and international, some of which are evolving as new technologies are
deployed.
Under the Development and Licensing Agreement, Lucent is required to
obtain certain specified regulatory certifications and satisfy certain customer
driven requirements (collectively, the "Certifications"). It is anticipated that
the aggregate costs of these Certifications will be approximately $700,000 and
is to be equally shared by Lucent and us.
No assurance can be given that the Certifications will in fact be
obtained. Failure to obtain the Certifications as contemplated under the
Development and Licensing Agreement may have a material adverse effect on our
prospects and its proposed business.
COMPETITION
The market for fiber optic subsystems and modules is highly competitive
and we expect competition to intensify in the future. As this market is
relatively young, there is as of yet no clear dominant set of players.
Competition falls into several categories. Among those that offer a similar
ESON-like solution are World Wide Packets and Allied Telesyn. Other competitors
are positioning PON solutions and include Alcatel, Salira, Optical Solutions,
Motorola and Huawei and Wave7 Optics . We also face indirect competition from
public and private companies providing products that address the same fiber
optic network problems that our QoStream
39
product line are designed to address. The development of copper based
alternative solutions to fiber optic transmission by competitors, particularly
systems companies that also manufacture modules, could significantly limit our
prospects and harm our competitive position. There is also a possibility that
certain wireless technologies could provide some measure of competition (using
802.16 or other standards.)
Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. Many of our competitors also have much
greater brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.
We expect competitors to introduce new and improved products with lower
prices, and we will need to do the same to remain competitive. We may not be
able to compete successfully against either current or future competitors with
respect to new products.
GOVERNMENT REGULATIONS
The broadband communications industry in the United States is subject to
extensive regulation by federal and state agencies, including the Federal
Communications Commission (FCC), and various state and local public utility and
service commissions. Furthermore, several influential members of the United
States Congress have voiced their interest in revising the laws from which these
regulations are based in a comprehensive re-write of the associated
telecommunications law in the upcoming session of Congress. Meanwhile,
regulators struggle with issues related to fair competition, the rights of
public agencies to offer networking services, universal service, content, and a
host of other issues. Absent clear direction from the Congress, business
decisions on the part of carriers will continue to have higher risks associated
with them related to court challenges, re-regulation, and a lack of
harmonization among regulatory bodies. The overall impact of regulatory change
on our business is not readily discernable, although increased clarity that
removes some of the carriers' risks could be a net-positive.
PROPRIETARY RIGHTS
We and Lucent jointly own all Joint Inventions. Lucent has exclusive
rights to the Lucent technologies incorporated in the QoStream Products. We
currently rely on a combination of trade secret, patent, copyright and trademark
law, as well as non-disclosure agreements and invention-assignment agreements,
to protect the our products, the underlying technologies and other proprietary
information. However, such methods may not afford complete protection and there
can be no assurance that other competitors will not independently develop such
processes, concepts, ideas and documentation. We are the licensee of those
technologies of Lucent that are included in our QoStream Products. Lucent
generally maintains, at its expense, U.S. and
40
foreign patent rights with respect to both the licensed technology and its own
technology and files and/or prosecutes the relevant patent applications in the
U.S. and foreign countries. We also rely upon trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop our
competitive position. We intend to file patent applications, when appropriate,
and to take other actions necessary to protect our technology, improvements to
our technology and any specific products we develop.
Our policy is to require our employees, consultants, other advisors and
software design collaborators to execute confidentiality agreements upon the
commencement of employment, consulting or advisory relationships. These
agreements generally provide that all confidential information developed or made
known to the individual by us during the course of the individual's relationship
with us is to be kept confidential and not to be disclosed to third parties
except in specific circumstances. In the case of employees and consultants, the
agreements provide that all inventions conceived by the individual in the course
of their employment or consulting relationship shall be our exclusive property.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for trade secrets in the event of
unauthorized use or disclosure of such information.
EMPLOYEES
We employ thirteen full-time employees, including our Chief Executive
Officer. Of these employees, five are engaged solely in research and development
functions and another eight employees engaged in sales, marketing and
administrative functions.
Subject to raising additional capital, we anticipate that we may need to
increase the number of our employees, primarily in the research and development
area. Our future performance will depend highly upon our ability to attract and
retain experienced personnel. The hiring of such personnel is competitive and
there can be no assurance that we will be able to attract and retain qualified
personnel for the development of our business. See "Risk Factors".
OUR CORPORATE HISTORY
PREVIOUS BUSINESS
We were incorporated in Delaware in July 1994 under the name "TTR
Technologies, Inc." From our inception through February 2002, we were engaged in
the business of designing and developing digital security technologies that
provide copy protection for electronic content distributed on optical media and
over the Internet (the "Copy Protection Business"). On November 4, 2002, we
entered into an Asset Purchase Agreement (the "Purchase Agreement") with
Macrovision Corporation ("Macrovision"), then one of our largest stockholders,
and Macrovision Europe, Ltd., an affiliate of Macrovision (collectively, the
"Purchaser"), pursuant to which we greed to sell to the Purchaser all of the
assets used in the Copy Protection Business. On May 28, 2003, we consummated the
sale of our Copy Protection Business for a cash payment of $5,050,000 and the
return for cancellation of
41
1,880,937 shares of our common stock, par value $0.001 (the "Common Stock"),
which Macrovision had purchased in January 2000 for $4.0 million. We recorded a
gain on sale of $5.7 million in our statement of operations for the year ended
December 31, 2003 consisting of $5,050,000 in cash and $658,328 representing the
value of the Common Stock returned for cancellation to us based on the closing
price of the Common Stock on May 28, 2003. Under the Purchase Agreement, certain
indemnification obligations relating to our title to the assets sold, compliance
with laws and certain matters relating to taxes continue through November 2004.
As a result of the sale of our Copy Protection Business, we ceased all
activities in the only business that we had ever actively engaged in. Following
the sale of our Copy Protection Business, our only significant asset became cash
and cash equivalents and a net operating loss carry forward (NOL) that may be
available to offset future taxable income.
Following the sale of our Copy Protection Business, our then existing
management considered several possible alternatives regarding our strategic
direction, including the acquisition, development or investment in new lines of
business. We announced on January 14, 2004 that we had entered into the
Development and Licensing Agreement with Lucent, subject to the approval by our
stockholders of the transactions contemplated thereby (the "Transaction"). Our
stockholders approved the Transaction at a special meeting held on March 4,
2004.
MANAGEMENT RESTRUCTURE
Following stockholder approval of the Transaction, we commenced
operations to provide and market products in the field of advanced
telecommunication. Mr. Frank Galuppo, our Chief Executive Officer, was appointed
to lead our company immediately following stockholder approval of the
Transaction. Mr. Galuppo has nearly 40 years experience in the telecommunication
and related fields. Mr. Galuppo has also been appointed to our Board of
Directors.
Our former Chief Executive Officer, Mr. Daniel C. Stein, who was hired
in May 2002 and oversaw the sale of our Copy Protection Business, resigned in
October 2003 from his position as Chief Executive Officer and also from our
board of directors. Between July and September 2003, a majority of our Board of
Director were replaced through resignations and new appointments. Upon Mr.
Stein's resignation, Mr. Judah Marvin Feigenbaum, a new director appointed to
our Board of Directors in August 2003, was appointed interim Chief Executive
Officer. On January 28, 2004, Mr. Feigenbaum resigned from the all positions
held with Amedia. Subsequent to Mr. Feigenbaum's resignation and prior to Mr.
Galuppo's appointment, Mr. Sam Brill, our former Chief Operating Officer and
currently an employee and a member of our Board of Directors, supervised the
day-to-day management of our business.
RECENT DEVELOPMENTS
Our Board of Directors and our shareholders have approved at our 2004
annual stockholders' meeting a proposal granting to our Board of Directors the
authority to
42
effect a reverse stock split of our issued and outstanding Common Stock in the
range of 1:3 to 1:6, at the Board of Directors' discretion solely for the
purpose of qualifying for quotation of the Nasdaq National Market, the SmallCap
Market or the American Stock Exchange and only following satisfaction of all
listing requirements but for the minimum per share price, at any time or before
the date of our 2005 annual meeting of the shareholders. The Board of Directors
also has the authority not to effect the reverse split in such timeframe.
Although there can be no assurance of the future effect on our stock
price, the reverse stock split would likely increase the per share price of our
common stock. Initially, the increase in the per share stock price would likely
correspond to the reduction in the number of shares of our Common Stock that are
outstanding. The Board of Directors approved this resolution for the following
reasons. First, the reverse stock split will assist our efforts to have our
Common Stock re-listed on either the Nasdaq Small Cap Market or the Nasdaq
National Market by increasing the per share price of our stock to meet the
market's minimum listing price. Second, the Board of Directors believes that an
increased per share stock price may have the effect of making our Common Stock
more attractive to individuals as well as institutional investors in the future.
The Board of Directors believes that having our Common Stock listed on a
national securities exchange, the Nasdaq Small Cap Market or the Nasdaq National
Market is in the best interests of the long-term success of our company.
However, the Board of Directors believes that overall market conditions, the
momentum in the price of our stock and other factors may impact the desired
timing of effectuating the reverse stock split.
If the reverse stock split were to be implemented, there would be a
reduction in the number of shares of our Common Stock issued and outstanding and
an associated increase in the number of authorized shares which would be
unissued and available for future issuance after the reverse stock split. Such
shares could be used for any proper corporate purpose including, among others,
future financing transactions. Such issuances, if they occur, could result in
dilution to our stockholders by increasing the number of shares of outstanding
stock.
DESCRIPTION OF PROPERTY
We do not own any real property. Our corporate offices are located at
101 Crawfords Corner Road, Homdel, New Jersey 07733 and are comprised of
approximately 3,500 square feet. Our offices are in the Lucent complex. We do
not pay to Lucent or any other person rent in respect of this facility; we pay
for all officer services and utility bills. We believe that this facility is
sufficient to meet our current requirements. We anticipate that we will be
relocating our corporate offices to other premises within the general vicinity
in the near term. We are currently exploring available options and we believe
that we will be able to locate suitable replacement facilities.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings which we anticipate
can result in a material adverse effect on our business or operations.
43
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The names, ages and positions of our directors, executive officers and
key employees are as follows:
Name Age Position
Frank Galuppo 58 Chief Executive Officer, Director
Sam Brill 31 Vice President, Internal Operations
and Director
Juan Mendez 40 Director
Richard Rosenblum 45 Director
Gerald Butters 60 Director
Bob Martin 61 Director
Ivan Berkowitz 58 Director
The business experience, principal occupations and employment, as well
as the periods of service, of each of the Company's directors and executive
officers during at least the last five years are set forth below.
FRANK GALUPPO has been a director and Chief Executive Officer since
March 15, 2004. Mr. Galuppo possesses nearly 40 years of experience in the
Telecommunications Industry, serving in a number of senior management positions
with Lucent Technologies and AT&T. From March 2003 until he began his employment
with the Company, Mr. Galuppo had been assisting several companies with business
development support in the U.S. Government market where he has extensive sales
experience. Mr. Galuppo was employed by Lucent since its formation in September
1996 until March 2003 in a series of management level and operational positions.
His most recent role at Lucent was President of Lucent's Optical Networking
Group, which he held since September 2002 and had worldwide responsibility for
the development and marketing of Lucent's global optical portfolio which had
annual sales of over $1 billion.
SAM BRILL has been a director since February 2002 and the Chief
Operating Officer from April 15, 2002 through April 5, 2004, the date of his
resignation from such position. Mr. Brill currently serves as the Company's Vice
President, Internal Operations. From November 2001 to immediately prior to his
appointment as Chief Operating Officer, he served as the Company's
Vice-President, Corporate Strategy. Since April 2004, Mr. Brill has been a
portfolio manager with Weismann Associates, a family asset management firm
located in New York City. Prior to joining Amedia, Mr. Brill spent four years as
a senior financial analyst with JDS Capital Management, a New York based hedge
fund. Prior to joining JDS, Mr. Brill founded The Waiters Exchange, a successful
private service company in the catering industry.
44
JUAN MENDEZ has been a director since July 28, 2003. Mr. Mendez is
President, Chief Executive Officer and co-founder of Total Claims Management,
Inc., a privately held company based in Miami, Florida. Mr. Mendez has held that
position since March 1999. Prior to co-founding Total Claims Management, Inc.,
Mr. Mendez was a Public Insurance Adjuster from 1996 to 1999.
RICHARD ROSENBLUM has been a director since September 3, 2003. Since
July 2004, Mr. Rosenblum has been a principal of Harborview Advisors, LLC, a
hedge fund advisory firm. Mr. Rosenblum has been an active and productive force
in the small and mid cap markets for over 15 years, advising, strategizing and
raising over $250 million for both private and public companies during that time
span. He also serves as a Managing Director of Greenfield Capital Partners,
LLC., a member of the NASD and a registered broker dealer. He previously was a
Senior Vice President of Investment Banking for vFinance, Inc., a middle market
investment banking and brokerage organization. Mr. Rosenblum has continued to
provide advice, expertise and access to critical growth capital for emerging
growth companies. He graduated from State University of New York at Buffalo in
1981, Summa Cum Laude, with a degree in Finance and Accounting.
GERALD BUTTERS has been a director since May 25, 2004. Mr. Butters is a
communications industry veteran with more than 39 years experience in this
sector. His career encompasses senior executive positions at Nortel Networks,
AT&T, and Lucent Technologies. These include Chairman of the Board of AGCS (a
joint venture of GTE and AT&T), President of NTI (a Nortel Networks US
subsidiary). He was President of Global Public Networks at AT&T Network Systems
from October 1997 to November 1999, President of the Optical Networks Group at
Lucent Technologies from December 1999 to August 2000 and Senior Vice President
Marketing and Technology at Lucent Technologies. Mr. Butters retired from Lucent
Technologies in August 2000. Since August 2000 through the present time, Mr.
Butters has been a board director of Lambda Optical Systems a privately held
company since October 2003 and a technical advisor to several privately held
technology firms.
BOB MARTIN has been a director since May 25, 2004. Mr. Martin retired as
the Chief Technology Officer of Lucent Technologies' Bell Laboratories in
September 2003, a position he held for seven years. In this role, he helped
guide Lucent's directions in next generation networks and in approaches the
company used for research and development. His background at Bell Laboratories
and Bellcore included a variety of positions related to large systems
development. He has been responsible for Unix, network management systems,
intelligent network systems, packet switching, and broadband access systems
developments. Mr. Martin received his Bachelor of Science in Electrical
Engineering from Brown University in 1964, and his Master of Science and Doctor
of Philosophy degrees in Electrical Engineering and Computer Science from
Massachusetts Institute of Technology in 1965 and 1967, respectively. In 1985,
he attended the MIT Alfred P. Sloan School Senior Executive Program. A Fellow of
the Institute of Electrical and Electronics Engineers, Mr. Martin was a member
and first chair of its Software Industrial Advisory Board. He has served on the
National Research Council's Computer Science and Telecommunications Board and
the FCC's Technological Advisory Board. He is on technical advisory boards for
venture capitalist's and startups in telecommunications, optical devices &
product innovation.
45
IVAN BERKOWITZ, Ph.D. has been a director since May 25, 2004. Mr.
Berkowitz has over 30 years of professional experience in the financial and real
estate industries, Dr. Berkowitz has acted as an international corporate advisor
on matters that pertain to corporate structure and governance, transfer pricing,
EEC anti-trust law, mergers and international syndication. He holds a Ph.D. in
International Law from Cambridge University, an M.B.A. in Finance from Baruch
College and a B.A. in Economics from Brooklyn College. Currently, Dr. Berkowitz
serves as Vice Chairman of the Board of Directors for New Visual Corp. (OTC:
NVEI). Since August 2003, Dr. Berkowitz has also been Chairman of the Board of
Directors for Great Court Capital. Prior to its sale in 2003, Dr. Berkowitz was
a senior managing partner of Avatar Associates, a New York-headquartered
institutional asset management firm managing $1.7 billion in assets. Since 1993,
Dr. Berkowitz has served as Managing General Partner of Steib & Company, a
privately-held New York-based investment company. Additionally, from 1997
through 2002, Dr. Berkowitz served as President of Great Court Holdings, also a
privately-held New York-based investment company. Between 1995 and 1997, Dr.
Berkowitz led Polyvision Corporation (recently acquired by Steelcase) as its
Chief Executive Officer.
Officers are elected by the Board of Directors and serve at the
discretion of the Board of Directors and hold office until a successor is
elected and qualified or until his/her earlier resignation or removal.
There are no family relationships between any of the above executive
officers or directors, and there is no arrangement or understanding between any
of the above executive officers or directors and any other person pursuant to
which the officer or director was elected to hold office.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of a successor.
DIRECTOR RESIGNATIONS
Michael Paolucci, a non-employee director, resigned from the Board of
Directors in July 2003 and was replaced by Juan Mendez. Joel Schoenfeld and
Richard Gottehrer, non-employee directors, resigned from the Board of Directors
in August 2003 and were replaced by Judah Feigenbaum. Neil Subin, a non-employee
director, resigned from the Board of Directors in September 2003 and was
replaced by Richard Rosenblum. Mr. Danny Stein, the Company's former Chief
Executive Officer and a director, resigned from the Board of Directors and from
all other position held with the Company in October 2003. Mr. Judah Feigenbaum,
the Company's former interim Chief Executive Officer and a director, resigned
from the Board of Directors and from all other position held with the Company in
January 2004.
BOARD COMMITTEES
Our Board of Directors has an audit committee and a compensation
committee. The audit committee reviews the results and scope of the audit and
other services provided by our independent public accountant. The compensation
committee establishes the compensation policies applicable to our executive
46
officers and administers and grants stock options pursuant to our stock plans.
The current members of the audit committee are Juan Mendez and Richard
Rosenblum. The current member of the compensation committee are Richard
Rosenblum.
DIRECTOR COMPENSATION
CASH COMPENSATION: Each of the non-employee directors was paid a monthly
cash payment of $2,000 in 2003 for serving on the Board of Directors. The
Company also reimbursed directors for reasonable out-of-pocket expenses incurred
in attending meetings of the Board of Directors and any meetings of its
committees.
OPTION GRANTS: In February 2004, the Board of Directors granted to each
of Messrs. Mendez and Rosenblum options to purchase up to 164,406 shares of the
Company's Common Stock at a per share exercise price of $0.56. The options were
vested upon grant. Each of Messrs. Butters, Martin and Berkowitz were granted
options from the 2002 Non-Employee Directors Stock Option Plan to purchase up to
75,000 shares of Common Stock at a per share exercise price equal to $0.71.
INFORMATION RELATING TO KEY EMPLOYEES
Below is certain information relating to current key employees:
Raj Varajaradan has been employed as our Vice President, Product and
Project Business Operations since March 8, 2004. At Amedia, Mr. Varadarajan
oversees all outsourcing and manufacturing operations, customer deployment and
service, project management, and other key product planning and operational
functions. Prior to joining our company, Mr. Varajardan was affiliated with
Lucent from September 1979 to February 2003. At Lucent headed various
development functions for long-haul DWDM optical transport systems and digital
cross-connect systems in Lucent. While at NCR, he led the development of Network
Management System applications for data networking systems. Earlier in AT&T, he
led product development for a series of consumer and business communication
terminals - including the VideoPhone 2500 and Dimension PBX Systems.
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned by the Company's
Chief Executive Officer and the most highly compensated executive officers and
key employees of the Company whose total annual salaries and bonuses exceeded
$100,000 for the year ended December 31, 2003 (the "Named Executive Officers"):
47
Annual Compensation Long-Term Compensation
------------------------------------------- ------------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation($) Options (#)(1) Compensation ($)
- ------------------ ---- --------- -------- ------------------ -------------- ----------------
Sam Brill 2003 170,000 68,000 -- -- --
Vice President, Internal 2002 157,226 -- -- -- --
Operations and former 2001 14,423 -- -- 250,000 --
Chief Operating
Officer (2)
Daniel C. Stein 2003 184,615 108,000 -- -- 145,000(4)
Former CEO and 2002 159,414 -- -- 550,000 (5) 34,224(6)
President (3) 2001 -- -- -- -- --
Judah Marvin Feigenbaum 2003 11,000 -- -- -- --
Former interim CEO (7) 2002 -- -- -- -- --
2003 -- -- -- -- --
(1) Represents shares of Common Stock issuable upon exercise of employee stock
options issued in the year indicated under the Company's 2000 Equity Incentive
Plan.
(2) Mr. Brill resigned from the position of Chief Operating Officer as of April
11, 2004, whereupon he assumed the non-executive position of Vice-President,
Internal Operations.
(3) Mr. Stein resigned from the Company's employment and directorship as of
October 10, 2003.
(4) Comprised of (i) $78,000 paid to Mr. Stein in connection with his
resignation from the Company in October 2003 and (ii) the balance of
approximately $67,000 in principal amount of a three year loan in the principal
amount of $100,000 made by the Company to Mr. Stein in May 2002 in connection
with his employment, with interest accruing at the rate of 4% per annum. The
Company agreed that, at the end of each calendar year beginning December 31,
2002, it would forgive one-third of the loan (and the related accrued interest
thereon) as additional compensation, except under certain conditions. The
balance of loan was forgiven upon Mr. Stein's resignation in October 2002 in
accordance with its terms.
(5) Upon Mr. Stein's resignation in October 2003, these options were forfeited
by him.
(6) Represents principal amount of the three-year loan in the principal amount
of $100,000 made by the Company to Mr. Stein in May 2002 in connection with his
employment and discussed in footnote 6 above.
(7) Mr. Feigenbaum was appointed acting Chief Executive Officer as of October
10, 2003 upon Mr. Stein's resignation. Mr. Feigenbaum resigned from the
Company's employment and directorship as of January 29, 2004.
OPTION GRANTS IN 2003
There were no option grants during the year ended December 31, 2003 to
any of the Named Executive Officers.
AGGREGATE OPTIONS EXERCISED IN 2003 AND 2003 YEAR END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Value Options at Fiscal Year At Fiscal Year End ($)
Acquired on Realized End (#) Exercisable/
Name Exercise (#) ($) Exercisable/Unexercisable Unexercisable (1)
- ---- ------------- --- ------------------------- -----------------
Sam Brill -- -- 250,000/0 0/0
48
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
On May 2, 2002, the Company entered into a three-year employment
agreement with Daniel C. Stein as Chief Executive Officer. The agreement
provided for an annual base salary of $240,000 with increases of 10% per annum
provided that the previous year's gross revenues are greater than the base
salary. The agreement further provided that if Mr. Stein were to be terminated
other than for cause (as defined in the employment agreement) or if Mr. Stein
were to terminate his employment for good reason (as defined in the employment
agreement), he would be entitled to receive the equivalent of base salary and
benefits through the remaining term of his agreement.
In October 2003, Mr. Stein resigned from the position of Chief Executive
Officer and from all other positions held with the Company. In connection with
his resignation, the Company paid to Mr. Stein a one-time gross payment of
$78,000 under the terms of his Termination and Settlement Agreement with the
Company. Additionally, in consideration of Mr. Stein's waiver of certain claims
under his employment agreement, the outstanding balance of approximately $67,000
of the advance of $100,000 made to Mr. Stein upon the commencement of his
employment in May 2002 was extinguished. The initial one-third of such advance
(approximately $33,000) was, consistent with the terms of Mr. Stein's employment
agreement, extinguished at year-end 2002. In addition, the 550,000 stock options
held by Mr. Stein were extinguished and are no longer exercisable.
In connection with Sam Brill's promotion in April 2002 to Chief
Operating Officer (from Vice President, Corporate Strategy), on May 27, 2002 the
Company and Mr. Brill entered into an amended and restated three-year employment
agreement, which provides for an annual base salary of $170,000. If Mr. Brill is
terminated other than for cause (as defined in the employment agreement) or if
Mr. Brill terminates his employment for good reason (as defined in the
employment agreement), he will be entitled to receive the equivalent of base
salary and benefits through the remaining term of his agreement. Additionally,
upon (and subject to) the consummation of the sale of the Copy Protection
Business, then all outstanding stock options will vest and become exercisable.
On April 5, 2004, Mr. Brill resigned from the position of Chief
Operating Officer and assumed the non-executive position of Vice President,
Internal Operations. See "Certain Relationships and Related Transactions."
Each of the executives with an agreement has agreed to certain customary
confidentiality and non-compete provisions that prohibit him from competing with
the Company for one year, or soliciting our employees for one year, following
the termination of his employment.
Information as to the executive compensation of our Chief Executive
Officer, Mr. Galuppo, is included under "Certain Relationships and Related
Transactions".
49
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth information as of November 18, 2004,
concerning all persons known by us to own beneficially more than 5% of our
Common Stock and concerning shares beneficially owned by each director and named
executive officer and by all directors and executive officers as a group. Unless
expressly indicated otherwise, each shareholder exercises sole voting and
investment power with respect to the shares beneficially owned.
Number of Shares Percent of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
Frank Galuppo, Chief Executive Officer
and Director (3) 328,812 (4) 1.96%
Sam Brill, Vice President, Internal Operations
and Director 250,000 (5) 1.5%
Juan Mendez, Director 1,163,626 (6) 6.6%
Richard Rosenblum, Director 164,406 (7) 1.0%
Gerald Butters 9,375 (8) *
Bob Martin 9,375 (8) *
Ivan Berkowitz 9,375 (8) *
Yokim Asset Management Corp. 1,635,468 (9) 9.9%
Ronald Durando 1,620,000 (10) 9.9%
Puritan LLC 1,533,334 (11) 9.3%
Melton Management Limited 1,405,275 (12) 8.5%
Judah Marvin Feigenbaum, former interim Chief
Executive Officer and former director 164,406 (13) 1.0%
All directors and executive officers as
a group(7 persons) 1,934,969 11.14%
* Indicates less than 1%.
(1) Unless otherwise indicated, the address of each person listed is c/o Amedia
Networks, Inc., Inc., 101 Crawfords Corner Road, Holmdel, New Jersey 07733.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares of Common Stock issuable upon the exercise of options or warrants which
are currently exercisable or which become exercisable within 60 days of the
Record Date are
50
deemed to be beneficially owned by, and outstanding with respect to, the holder
of such options or warrants. Except as indicated by footnote, and subject to
community property laws where applicable, to the knowledge of the Company, each
person listed is believed to have sole voting and investment power with respect
to all shares of Common Stock owned by such person.
(3) Mr. Galuppo was appointed Chief Executive Officer and became a director as
of March 15, 2004.
(4) Represents shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under the Company's 2000 Equity
Incentive Plan. Does not include options for an additional 986,438 shares of
Common Stock scheduled to vest over the next two years.
(5) Represents shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under the Company's 2000 Equity
Incentive Plan.
(6) Includes (i) 999,220 shares of Common Stock and (ii) 164,406 shares of
Common Stock issuable upon exercise of currently exercisable non-plan options.
The foregoing is based on the Schedule 13D filed by the stockholder on February
11, 2004.
(7) Represents shares of Common Stock issuable upon exercise of currently
exercisable non-plan options.
(8) Represents shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under our 2002 Non-Employee Directors
Stock Option Plan. Does not include options for an additional 65,625 shares of
Common Stock scheduled to vest over the next two years.
(9) The address of such person is Akara Building, 24 De Castro Street, Wickhams
Cay I, Road Town, Tortola, British Virgin Islands. The foregoing is based on a
Schedule 13D (Amended) filed by the stockholder on June 30, 2003. Does not
include shares of Common Stock issuable upon conversion of Convertible Preferred
Stock or exercise of warrants referred to under "Selling Stockholders."
(10) The address of such person is 43 Alexander Avenue, Nutley, New Jersey
07110. The foregoing is based on a Schedule 13G filed by the stockholder on
January 26, 2004.
(11) The stockholder is a limited liability company. The address of such person
is 314 McDonald Avenue, Brooklyn, New York 11218. The foregoing is based on a
Schedule 13G filed by the stockholder on November 19, 2004.
(12) The address of such person is P.O. Box 3161, Road Town, Tortola, British
Virgin Islands. The foregoing is based on a Schedule 13G filed by the
stockholder on October 8, 2003. Does not include shares of Common Stock issuable
upon conversion of Convertible Preferred Stock or exercise of warrants referred
to under "Selling Stockholders."
(13) Represents shares of Common Stock issuable upon exercise of currently
exercisable non-plan options. Mr. Feigenbaum resigned from all position held
with the Company in January 2004.
51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the private placement in August 2004 of our
Convertible Preferred Stock, we paid to Greenfield Capital Partners, LLC, a
placement fee with respect to the placement of 2,500 shares of our Convertible
Preferred Stock. The placement fee is comprised of (i) a cash payment of $25,000
and (ii) five-year warrants to purchase up to 66,334 shares of our Common Stock,
of which options for 33,333 shares are exercisable at a per share exercise price
of $.75, 16,667 shares at a per share exercise price of $1.50 and options for
the 16,667 shares at a per share exercise price of $2.50; the warrants are
otherwise exercisable on the same terms and conditions as those relating to the
Warrants issued to the purchases of the Convertible Preferred Stock. One of our
directors, Mr. Richard Rosenblum, is a Managing Director of such entity.
In connection with his resignation as our Chief Operating Officer on
April 5, 2004 and in consideration of the release of certain rights, we paid to
Mr. Sam Brill, our Vice President, Internal Operations and a director, the gross
amount of $75,000, less payroll deductions. We and Mr. Brill also entered into
an employment agreement, commencing as of April 5, 2003 pursuant to which Mr.
Brill is employed as the Company's Vice-President, Internal Operations, at a
monthly rate of $7,500. The agreement is a month to month basis and is
terminable by either party upon two weeks' written notice to the other.
In May 2004, in connection with their election to our Board of
Directors, we granted to each of Messrs. Butters, Martin and Berkowitz from our
2002 Non-Employee Stock Option Plan shares to purchase up to 75,000 shares of
our Common stock at a per share exercise price of $0.71. The options are
scheduled to vest over two years.
We and Mr. Frank Galuppo, our Chief Executive officer and a director,
entered into three year employment agreement, effective as of March 15, 2004,
pursuant to which Mr. Galuppo is paid an annual salary at the rate of $180,000.
Mr. Galuppo's salary is scheduled to increase to $210,000 for the second year of
employment and to $235,000 for the third year of employment. The agreement
further provided that if Mr. Galuppo's employment is terminated other than for
cause (as defined in the employment agreement) or if Mr. Galuppo terminates his
employment for good reason (as defined in the employment agreement), he will be
entitled to receive the equivalent of three months' base salary and benefits, if
such termination takes place during the first 12 months of the effective date of
the agreement. If such termination takes place after the first year of
employment, then Mr. Galuppo will be entitled to receive the equivalent of six
months' base salary and benefits. We also issued to Mr. Galuppo option under our
2000 Equity Incentive Plan to purchase up to 1,315,250 shares of our Common
Stock at a per share exercise price of $0.74, which option is scheduled to vest
over 12 succeeding quarters, beginning June 30, 2004.
In connection with his employment by us in November 2001, Mr. Brill was
granted 250,000 options under the 2000 Equity Incentive Plan, originally
scheduled to vest periodically through May 2005. Upon the closing of the sale of
our Copy
52
Protection Business in May 2003, the options vested and became exercisable in
their entirety.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of
November 18, 2004, by the selling stockholders prior to the offering
contemplated by this Prospectus, the number of shares each selling stockholder
is offering by this Prospectus and the number of shares which each would own
beneficially if all such offered shares are sold. The selling stockholders
acquired their beneficial interests in the shares being offered hereby in
private placements in which each such selling stockholder advised us that it
purchased the relevant securities solely for investment and not with a view to
or for resale or distribution of such securities.
Except for selling stockholders with an asterisk (*) next to their
names, the selling stockholders acquired their beneficial interests in the
shares being offered hereby in private placements described in this Prospectus
under the caption "DESCRIPTION OF THE AGREEMENTS WITH THE CONVERTIBLE PREFERRED
STOCK HOLDERS."
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities. However,
except for the selling stockholders with a pound sign (#) next to their names,
each of the selling stockholders is subject to certain limitations on the
conversion of its convertible debentures and the exercise of its warrants. These
limitations provide that the conversion of the Convertible Preferred Stock is
first available on the earlier of 65 days after such preferred stock was
originally issued or the effective date of the registration statement of which
this Prospectus is a part. The exercise right of the Warrants is first available
after six months after such warrant was originally issued. The other significant
limitation is that such selling stockholder may not convert its preferred stock
or exercise its warrants, if such conversion or exercise would cause such
holder's beneficial ownership of our Common Stock (excluding shares underlying
any of their unconverted debentures or unexercised warrants) to exceed 4.99% of
the outstanding shares of Common Stock immediately after the conversion or
exercise. (If the holder subsequently disposes of some or all of its holdings,
it can again convert its debenture or exercise its warrant, subject to the same
limitation). Also, the table below also includes the number of shares which
might be issuable on the occurrence of certain events, such as the accrual of
dividends, which have not yet occurred and may not occur. Therefore, although
they are included in the table below, the number of shares of Common Stock for
some listed persons may include shares that are not subject to purchase during
the 60-day period.
53
Common Stock to be
Beneficially Owned if
All shares offered
Number of Shares Offered Hereunder are sold
Shares Owned Pursuant to this ---------------------
Selling Stockholder Before Offering Prospectus shares Percent
- ------------------- --------------- ---------------- ------ -------
Melton Management Ltd. 2,087,008 1,657,294 (1) 2,087,008 12.19 %
Yokim Asset Management Corp. 2,102,135 1,134,469 (2) 2,102,135 12.43 %
RHP Master Fund, Ltd. 972,400 972,400 (3) 0 0
L&B Trading Corp. 972,400 972,400 (3) 0 0
Stonestreet LP 972,400 972,400 (3) 0 0
Bridges & PIPES LLC 972,400 972,400 (3) 0 0
DKR Soundshore Oasis Holding
Fund Ltd. 972,400 972,400 (3) 0 0
Southridge Partners LP 810,334 810,334 (4) 0 0
Emes Capital Partners LLC 729,300 729,300 (5) 0 0
Platinum Partners Value Arbitrage
Fund 648,269 648,269 (6) 0 0
Gross Foundation, Inc. 486,200 486,200 (7) 0 0
Basso Multi-Strategy Holding
Fund Ltd. 388,960 388,960 (8) 0 0
Cisneros Capital Group 364,650 364,650 (9) 0 0
Notzer Chesed 324,134 324,134 (10) 0 0
Abbey Berkowitz 324,134 324,134 (10) 0 0
Professional Traders Fund,
LLC 324,134 324,134 (10) 0 0
Edelweiss Trading Ltd. 324,134 324,134 (10) 0 0
Mordechai Vogel 324,134 324,134 (10) 0 0
Simon Vogel 324,134 324,134 (10) 0 0
Quines Financial S.A. 324,134 324,134 (10) 0 0
Greenwich Growth Fund Limited 324,134 324,134 (10) 0 0
Whalehaven Fund Limited 324,134 324,134 (10) 0 0
First Mirage, Inc. 324,134 324,134 (10) 0 0
MEA Group LLC 324,134 324,134 (10) 0 0
Appel 26 Corp. 324,134 324,134 (10) 0 0
SRG Capital LLC 324,134 324,134 (10) 0 0
Cong. Mishkan Sholom 324,134 324,134 (10) 0 0
Magdiel Rodriguez 164,013 164,013 (11) 0 0
Alfredo Jacomino 164,013 164,013 (11) 0 0
Tower Paper Co. Inc. Ret.
Plan 162,069 162,069 (12) 0 0
Mordechai Boaziz 162,069 162,069 (12) 0 0
Saul Kessler 162,069 162,069 (12) 0 0
Shaye Brauner 162,069 162,069 (12) 0 0
54
AS Capital Partners 162,069 162,069 (12) 0 0
Richard A. Cohen 162,069 162,069 (12) 0 0
Basso Equity Opportunity Holding
Fund Ltd. 97,240 97,240 (13) 0 0
*Pentium Management Limited 1,389,315 1,389,315 (14) 0 0
*Greenfield Capital
Partners LLC 73,334 73,334 (15) 0 0
*Martinez-Ayme Securities 77,352 77,352 (16) 0 0
* # Juan Mendez 1,163,626 164,406 (17) 999,220 7.08 %
* # Richard Rosenblum 164,406 164,406 (18) 0 0
* # Aboudi & Brounstein 100,000 100,000 (19) 0 0
(1) Represents (i) 681,733 shares of Common Stock issuable upon conversion of
5,113 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75, together with 143,164 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 681,734 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 150,663 shares of Common Stock issuable to such
selling stockholder representing our current good faith estimate of additional
shares that we might be required to issue to such selling stockholder (A) based
on adjustments to the conversion price of the unconverted preferred stock and/or
to the number of shares covered by its unexercised warrants in the event that,
on or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The amount
reflected under the column titled "Number of Shares Owned Before the Offering"
includes 1,405,275 shares referred to on a Schedule 13G filed by such selling
stockholder on October 8, 2003.
(2) Represents (i) 466,667 shares of Common Stock issuable upon conversion of
3,500 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 98,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 466,668 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 103,134 shares of Common Stock issuable to such
selling stockholder representing our current good faith estimate of additional
shares that we might be required to issue to such selling stockholder (A) based
on adjustments to the conversion price of the unconverted preferred stock and/or
to the number of shares covered by its
55
unexercised warrants in the event that, on or prior to the one hundred eightieth
day after the effective date of this Registration Statement, we subsequently
offer or issue securities at a purchase price or conversion price lower than
$0.75 per share or warrants having an exercise price below the exercise price of
the warrants held by the selling stockholder and (B) as liquidated damages
through the projected effective date of this Registration Statement. The selling
stockholder advised us that it purchased the preferred stock and warrants solely
for investment and not with a view to or for resale or distribution of such
securities. For more information on our agreement with such selling stockholder,
see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK." The amount reflected under the column titled "Number of Shares Owned
Before the Offering" includes 1,635,468 shares referred to on a Schedule 13D
(amended) filed by such selling stockholder on June 30, 2003.
(3) Represents (i) 400,000 shares of Common Stock issuable upon conversion of
3,000 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 84,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 400,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 88,400 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(4) Represents (i) 333,333 shares of Common Stock issuable upon conversion of
2,500 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 70,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 333,334 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 73,667 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
56
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The selling
Stockholder has advised us that it is an affiliated person of Greenfield Capital
Partners LLC, a registered broker dealer, which served as a placement agent in
the transactions described above. The selling stockholder has advised us that
the securities to be sold by it will be sold through unaffiliated broker dealers
and not through Greenfield Capital Partners LLC.
(5) Represents (i) 300,000 shares of Common Stock issuable upon conversion of
2,250 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 63,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 300,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 66,300 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(6) Represents (i) 266,667 shares of Common Stock issuable upon conversion of
2,000 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 56,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 266,668 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 58,934 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(7) Represents (i) 200,000 shares of Common Stock issuable upon conversion of
1,500 shares of our Convertible Preferred Stock having a stated value of $100
57
per share, based on a conversion price of $0.75 , together with 42,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 200,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 44,200 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(8) Represents (i) 160,000 shares of Common Stock issuable upon conversion of
1,200 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 33,600 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 160,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 35,360 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(9) Represents (i) 150,000 shares of Common Stock issuable upon conversion of
1,125 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 31,500 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 150,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 33,150 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its
58
unexercised warrants in the event that, on or prior to the one hundred eightieth
day after the effective date of this Registration Statement, we subsequently
offer or issue securities at a purchase price or conversion price lower than
$0.75 per share or warrants having an exercise price below the exercise price of
the warrants held by the selling stockholder and (B) as liquidated damages
through the projected effective date of this Registration Statement. The selling
stockholder advised us that it purchased the preferred stock and warrants solely
for investment and not with a view to or for resale or distribution of such
securities. For more information on our agreement with such selling stockholder,
see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK."
(10) Represents (i) 133,333 shares of Common Stock issuable upon conversion of
1,000 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75 , together with 28,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 133,334 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 29,467 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(11) Represents (i) 67,467 shares of Common Stock issuable upon conversion of
506 shares of our Convertible Preferred Stock having a stated value of $100 per
share, based on a conversion price of $0.75 , together with 14,168 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 67,468 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 14,910 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with
59
such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF
THE CONVERTIBLE PREFERRED STOCK."
(12) Represents (i) 66,667 shares of Common Stock issuable upon conversion of
500 shares of our Convertible Preferred Stock having a stated value of $100 per
share, based on a conversion price of $0.75 , together with 14,000 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 66,668 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 14,734 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(13) Represents (i) 40,000 shares of Common Stock issuable upon conversion of
300 shares of our Convertible Preferred Stock having a stated value of $100 per
share, based on a conversion price of $0.75 , together with 8,400 shares of
Common Stock issuable in respect of dividends thereon accrued through the third
anniversary of issuance, and (ii) 40,000 shares issuable upon the exercise of
Warrants issued in connection with the Convertible Preferred Stock. We are also
registering an additional 8,840 shares of Common Stock issuable to such selling
stockholder representing our current good faith estimate of additional shares
that we might be required to issue to such selling stockholder (A) based on
adjustments to the conversion price of the unconverted preferred stock and/or to
the number of shares covered by its unexercised warrants in the event that, on
or prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder and (B) as liquidated damages through the projected effective date
of this Registration Statement. The selling stockholder advised us that it
purchased the preferred stock and warrants solely for investment and not with a
view to or for resale or distribution of such securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(14) Represents 1,263,014 shares of Common Stock issuable upon exercise of
five-year warrants issued as a placement fee in connection with the placement of
47,363 shares of our Convertible Preferred Stock. We are also registering an
additional 126,301 shares of Common Stock issuable to such selling stockholder
representing our current good faith estimate of additional shares that we might
be required to issue
60
to such selling stockholder based on adjustments to the number of shares covered
by its unexercised warrants in the event that, on or prior to the one hundred
eightieth day after the effective date of this Registration Statement, we
subsequently offer or issue securities at a purchase price or conversion price
lower than $0.75 per share or warrants having an exercise price below the
exercise price of the warrants held by the selling stockholder.
(15) Represents 66,667 shares of Common Stock issuable upon exercise of
five-year warrants issued as a placement fee in connection with the placement of
2,500 shares of our Convertible Preferred Stock. We are also registering an
additional 6,667 shares of Common Stock issuable to such selling stockholder
representing our current good faith estimate of additional shares that we might
be required to issue to such selling stockholder based on adjustments to the
number of shares covered by its unexercised warrants in the event that, on or
prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder. The selling stockholder is a registered broker-dealer, which served
as a placement agent in the transactions described in the section "DESCRIPTION
OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." Richard
Rosenblum, one of our directors and a selling stockholder, has advised us that
he is an affiliated person of this selling stockholder. We have been advised by
this selling stockholder that the securities to be sold by it under the
Registration Statement will be sold through unaffiliated broker dealers and not
through Greenfield Capital Partners, LLC.
(16) Represents 70,320 shares of Common Stock issuable upon exercise of
five-year warrants issued as a placement fee in connection with the placement of
2,500 shares of our Convertible Preferred Stock. We are also registering an
additional 7,032 shares of Common Stock issuable to such selling stockholder
representing our current good faith estimate of additional shares that we might
be required to issue to such selling stockholder based on adjustments to the
number of shares covered by its unexercised warrants in the event that, on or
prior to the one hundred eightieth day after the effective date of this
Registration Statement, we subsequently offer or issue securities at a purchase
price or conversion price lower than $0.75 per share or warrants having an
exercise price below the exercise price of the warrants held by the selling
stockholder.
(17) Represents shares of Common Stock issuable upon exercise of five-year
warrants. The selling stockholder is director of our company and has agreed to a
lock-up agreement restricting the number of shares which he can sell for a
specified period following the effective date of this Prospectus. See
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK." The amount reflected under the column titled "Number of Shares Owned
Before the Offering" is based on a Schedule 13D filed by such selling
stockholder on February 11, 2004.
(18) Represents shares of Common issuable upon exercise of five-year warrants.
The selling stockholder is director of our company and has agreed to a lock-up
agreement restricting the number of shares which he can sell for a specified
period following the effective date of this Prospectus. The Selling Stockholder
has advised us that he is an affiliated person of Greenfield Capital Partners
LLC, which served as a placement agent in the transactions described in the
section "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The shares to be sold by the selling stockholder, however,
were not derived from those transactions. The selling stockholder has advised us
that he exercises no voting or investment control in respect of any securities
owned by Greenfield Capital Partners LLC and that Greenfield Capital Partners
LLC exercises no voting or investment control in respect of any securities owned
by this Selling Stockholder. We have been advised by this selling stock holder
that the securities to be sold by him will be sold through unaffiliated broker
dealers and not through Greenfield Capital Partners, LLC.
(19) Represents shares of Common Stock issuable upon exercise of warrants. This
selling stockholder provides legal services to us.
61
PLAN OF DISTRIBUTION
As used in this Prospectus, stockholders selling our shares pursuant to
this Prospectus include donees and pledgees selling shares received after the
date of this prospectus from a selling stockholder named in this prospectus.
We have agreed, subject to certain limits, to bear all costs, expenses
and fees of registration of the shares of Common Stock offered by the selling
stockholders for resale. However, any brokerage commissions, discounts,
concessions or other fees, if any, payable to broker-dealers in connection with
any sale of the shares of Common Stock will be borne by the selling stockholders
selling those shares or by the purchasers of such shares.
Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
o The name of each such selling stockholder and of the
participating broker-dealer(s);
o The number of securities involved;
o The price at which such securities were sold;
o The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
o Other facts material to the transaction.
The selling stockholders may use any one or more of the following
methods when selling shares:
o directly as principals;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
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;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
62
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 of 1933, as amended (the "Securities Act"), if available, rather
than under this Prospectus.
Any sales of the shares may be effected through the OTC Bulletin Board,
in private transactions or otherwise, and the shares may be sold at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
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 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. We
believe that the selling stockholders have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their shares other than ordinary course brokerage arrangements, nor
is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. If the selling stockholders effect
sales through underwriters, brokers, dealers or agents, such firms may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or the purchasers of the shares for whom they may act as
agent, principal or both in amounts to be negotiated. Those persons who act as
broker-dealers or underwriters in connection with the sale of the shares may be
selected by the selling stockholders and may have other business relationships
with, and perform services for, us. The selling stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
Any selling stockholder or broker-dealer who participates in the sale of
the shares may be deemed to be an "underwriter" within the meaning of Section
2(11) of the Securities Act. Any commissions received by any underwriter or
broker-dealer and any profit on any sale of the shares as principal may be
deemed to be underwriting discounts and commissions under the Securities Act.
The anti-manipulation provisions of Rules 101 through 104 under the
Exchange Act may apply to purchases and sales of shares of common stock by the
selling stockholders. In addition, there are restrictions on market-making
activities by persons engaged in the distribution of the common stock.
Under the securities laws of certain states, the shares may be sold in
63
such states only through registered or licensed brokers or dealers. In addition,
in certain states the shares may not be able to be sold unless the Common Stock
has been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We are required to pay expenses incident to the registration, offering
and sale of the shares pursuant to this offering. We estimate that our expenses
will be approximately $70,000 in the aggregate. We have agreed to indemnify
certain selling stockholders and certain other persons against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments to which such selling stockholders or their respective pledgees,
donees, transferees or other successors in interest may be required to make in
respect thereof. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons,
we have been advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK
We are authorized to issue up to 50,000,000 shares of Common Stock. As
of November 18, 2004, there were 16,440,630 shares of Common Stock outstanding.
Holders of the common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore. Upon the liquidation,
dissolution, or winding up of our company, the holders of Common Stock are
entitled to share ratably in all of our assets which are legally available for
distribution after payment of all debts and other liabilities and liquidation
preference of any outstanding common stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are validly issued, fully paid and nonassessable.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock,
par value $.001 per share. As of November 18, 2004, there were 52,500 shares of
Convertible Preferred Stock issued and outstanding.
The preferred stock are issuable in series, and in connection with the
issuance of any series of preferred stock and to the extent now or hereafter
permitted by law, the board of directors is authorized to fix by resolution the
designation of each series, the stated value of the shares of each series, the
dividend rate or rates of each series and the date or dates and other provisions
respecting the payment of dividends, the provisions, if any, respecting the
redemption of the shares of each series and, subject to requirements of law, the
voting rights, the terms, if any, upon which the shares of each series shall be
convertible into or exchangeable for any other shares of stock of the Company
and any other relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, of the shares of each
series.
64
CONVERTIBLE PREFERRED STOCK
In July 2004, we designated 52,500 of our authorized preferred stock as
Series A 7% Convertible Preferred Stock. Each share of Convertible Preferred
Stock has a stated value of $100 and, commencing on the effective date of the
Registration Statement of which this Prospectus forms a part, is convertible
into shares of Common Stock at an initial conversion price of $0.75 per share of
Common Stock, subject to adjustment in the event of certain capital adjustments
or similar transactions, such as a stock split or merger. Dividends at the rate
of 7% per annum are payable on a bi-annual basis and on conversion and may be
paid, at the option of the Company, either in cash or in shares of Common Stock
at a rate of $0.75 per share. If not converted earlier, the Convertible
Preferred Stock will automatically convert on the fifth anniversary of issuance
(subject to certain limitations which might defer the automatic conversion of
some shares to a later date) into shares of Common Stock at the conversion price
then in effect.
TRANSFER AGENT
Our transfer agent is American Stock Transfer and Trust Company, Inc.
Their address is 459 Maiden Lane, New York New York 10038 and their telephone
number is (212) 936-5100.
AUDITOR CHANGE
Effective July 11, 2003, we engaged Marcum & Kliegman LLP ("Marcum") as
our principal independent accountant.
During the two most recent fiscal years ending December 31, 2002 and
through July 11, 2003, we have not consulted with Marcum regarding either:
(i) the application of accounting principles to any specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements, and neither a written report was
provided to us nor oral advice was provided that Marcum concluded was an
important factor considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue; or
(ii) any matter that was either subject of disagreement or event, as
defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction
to Item 304 of Regulation S-B, or a reportable event, as that term is explained
in Item 304(a)(1)(iv)(A) of Regulation S-B.
On July 11, 2003, Brightman Almagor & Co, a member of Deloitte Touche
Tohmatsu ("Brightman"), resigned as our independent public accountants.
For the years ended December 31, 2001 and 2002 and up until the date of
resignation, we had no disagreements with Brightman on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Brightman,
would have caused it to make reference to the subject matter of the disagreement
in connection
65
with any report or opinion it might have issued.
Brightman's opinion in its report on our financial statements for the
years ended December 31, 2002 and 2001 expressed substantial doubt with respect
to our ability to continue as a going concern. Brightman's report on our
financial statements for the years ended December 31, 2002 and 2001 did not
contain any other adverse opinion, disclaimer of opinion, or modification or
qualification of opinion.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Pursuant to our certificate of incorporation and by-laws, our officers
and directors are indemnified by us to the fullest extent allowed under Delaware
law for claims brought against them in their capacities as officers and
directors. Indemnification is not allowed if the officer or director does not
act in good faith and in a manner reasonably believed to be in our best
interest, or if the officer or director had no reasonable cause to believe his
conduct was lawful. Accordingly, indemnification may occur for liabilities
arising under the Act. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted for our directors, officers and controlling
persons pursuant to the foregoing provisions or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
INTEREST OF NAMED EXPERTS AND COUNSEL
Aboudi & Brounstein, Law Offices received in April 2004 a three year
warrant to purchase up to 100,000 shares of our Common Stock at a per share
exercise price of $0.61, in connection with legal services rendered by them. The
legal services included the preparation of this Prospectus.
LEGAL MATTERS
The validity of the common stock offered under this prospectus will be
passed on for us by Lawrence Kallaur, Esq.
EXPERTS
The financial statements as of December 31, 2003 and 2002 included in
this Prospectus and elsewhere in the Registration Statement of which this
Prospectus forms a part, have been audited, respectively, by Marcum & Kliegman
LLP, independent registered public accounting firm, and Brightman Almagor Co.,
certified public accountants based in Israel and a member of Deloitte Touche
Thomas, an independent registered public accounting firm. Each of these reports
express an unqaulified opinion and includes an explanatory paragraph related to
our ability to continue as a going concern and have been included in reliance
upon the reports of such firms given upon their authority as experts in
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("Commission").
You may read and copy any reports, statements or other information on file at
the Commission's public reference room in Washington, D.C. You can request
copies of those documents, upon payment of a duplicating fee, by writing to the
Commission.
We have filed with the SEC under the Securities Act a Registration
Statement on Form SB-2 (the "Registration Statement"), of which this prospectus
is a part, with respect to the shares offered hereby. This prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules as permitted by the rules and regulations of
the Securities and Exchange Commission.
66
Statements made in this prospectus as to the contents of any contract, agreement
or other document referred to herein are not necessarily complete. With respect
to each contract, agreement or other document filed as an exhibit to the
Registration Statement or in a filing incorporated by reference herein or
otherwise, reference is made to the exhibit for a more complete description of
the matters involved, and each statement shall be deemed qualified in its
entirety by this reference.
We are subject to the informational requirements of the Exchange Act and
file periodic reports, proxy statements and other information with the SEC.
Reports and other information filed by us may be inspected and copied at the
public reference facilities maintained by the SEC at:
Judiciary Plaza 450 Fifth Street, N. W.
Room 1024
Washington, D.C. 20549
Copies of such material may be obtained by mail from the Public
Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the SEC maintains a Web site at
HTTP://WWW.SEC.GOV containing reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC,
including us. The SEC's telephone number is 1-800-SEC-0330.
67
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(A Development Stage Company)
unaudited
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 Q-2
Condensed Consolidated Statements of Operations
For the nine and three months ended September 30, 2004 and 2003 Q-3
Condensed Consolidated Statements of Comprehensive Loss
For the nine and three months ended September 30, 2004 and 2003 Q-4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003 Q-5
Notes to the Condensed Consolidated Financial Statements Q-6
Q-1
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(FORMERLY TTR TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,513,021 $ 3,031,090
Prepaid expenses and other current assets 130,831 220,578
--------------- ---------------
Total current assets 3,643,852 3,251,668
Property and equipment - net 55,764 2,300
--------------- ---------------
Total assets $ 3,699,616 $ 3,253,968
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 59,481 $ 93,145
Accrued expenses 69,283 28,992
Dividends payable 52,356 -
Accrued severance pay - 64,734
--------------- ---------------
Total current liabilities 181,120 186,871
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 and 0 shares authorized, issued and
outstanding ($5,250,000 liquidating preference) 52 -
Common stock, $.001 par value;
50,000,000 shares authorized; 16,440,630
issued and outstanding 16,441 16,441
Additional paid-in capital 46,648,492 39,873,476
Other accumulated comprehensive income 81,007 81,007
Deficit accumulated during the development stage (43,163,431) (36,903,827)
Deferred compensation (64,065) -
--------------- ---------------
Total stockholders' equity 3,518,496 3,067,097
--------------- ---------------
Total liabilities and stockholders' equity $ 3,699,616 $ 3,253,968
=============== ===============
See Notes to Condensed Consolidated Financial Statements.
Q-2
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(FORMERLY TTR TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
From
Inception
Nine Months (July 14, Three Months
Ended 1994) to Ended
September 30, September 30, September 30,
2004 2003 2004 2004 2003
---- ---- ---- ---- ----
Revenue $ - $ - $ 125,724 $ - $ -
------------ ------------ ------------- -------------- -----------
Expenses
Research and development (1) 2,650,069 - 8,354,200 1,088,658 -
Sales and marketing (1) 232,852 - 4,690,309 124,235 -
General and administrative (1) 1,275,728 1,733,135 14,283,768 480,172 431,207
Stock-based compensation 72,771 6,050 11,478,481 7,761 1,424
Bad debt expense - - 161,000 - -
------------ ------------ ------------- -------------- -----------
Total expenses 4,231,420 1,739,185 38,967,758 1,700,826 432,631
------------ ------------ ------------- -------------- -----------
Operating loss (4,231,420) (1,739,185) (38,842,034) (1,700,826) (432,631)
------------ ------------ ------------- -------------- -----------
Other (income) expense
Legal settlement - 333,333 565,833 - 333,333
Loss on investment - - 17,000 - -
Other income - - (75,000) - -
Net losses of affiliate - - 1,196,656 - -
Impairment loss on investment in affiliate - - 748,690 - -
Gain on sale of Copy Protection Business - (5,708,328) (5,708,328) - -
Gain on sale of investment in affiliate - (40,000) (40,000) - -
Loss on disposition of fixed assets - 28,963 29,181 - 15,348
Amortization of deferred financing costs - - 4,516,775 - -
Interest income (19,974) (13,301) (943,715) (11,208) (11,002)
Interest expense - 66 1,966,147 - -
------------ ------------ ------------- -------------- -----------
Total other (income) expenses (19,974) (5,399,267) 2,273,239 (11,208) 337,679
------------ ------------ ------------- -------------- -----------
Net (loss) income (4,211,446) 3,660,082 (41,115,273) (1,689,618) (770,310)
Deemed dividend on convertible preferred stock 1,995,802 - 1,995,802 1,995,802 -
Dividend on convertible preferred stock 52,356 - 52,356 52,356 -
------------ ------------ ------------- -------------- -----------
Net (loss) income applicable to common
stockholders $(6,259,604) $ 3,660,082 $(43,163,431) $ (3,737,776) $ (770,310)
============ ============ ============= ============== ===========
Per share data:
Basic and diluted $ (0.38) $ 0.21 $ (0.23) $ (0.05)
============ ============ ============== ===========
Weighted average number
of common shares used in
basic and diluted loss per share 16,440,630 17,437,511 16,440,630 16,440,630
============ ============ ============== ===========
(1) Excludes non-cash, stock-based
compensation expense as follows:
Research and development $ - $ - $ 456,239 $ - $ -
Sales and marketing - - 5,336,558 - -
General and administrative 72,771 6,050 5,685,684 7,761 1,424
------------ ------------ ------------- -------------- -----------
$ 72,771 $ 6,050 $ 11,478,481 $ 7,761 $ 1,424
============ ============ ============= ============== ===========
See Notes to Condensed Consolidated Financial Statements.
Q-3
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(FORMERLY TTR TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
From
Inception
Nine Months (July 14, Three Months
Ended 1994) to Ended
September 30, September 30, September 30,
2004 2003 2004 2004 2003
---- ---- ---- ---- ----
Net (loss) income $ (4,211,446) $ 3,660,082 $ (41,115,273) $ (1,689,618) $ (770,310)
Other comprehensive (loss) income
Foreign currency translation adjustments - (1,999) 81,007 - -
--------------- --------------- --------------- --------------- ---------------
Comprehensive (loss) income $ (4,211,446) $ 3,658,083 $ (41,034,266) $ (1,689,618) $ (770,310)
=============== =============== =============== =============== ===============
See Notes to Condensed Consolidated Financial Statements.
Q-4
AMEDIA NETWORKS, INC. AND ITS SUBSIDIARY
(FORMERLY TTR TECHNOLOGIES, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
From
Nine Months Inception
Ended (July 14, 1994)
September 30, to September 30,
2004 2003 2004
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (4,211,446) $ 3,660,082 $ (41,115,273)
Adjustments to reconcile net (loss) income
to net cash used by operating activities:
Depreciation and amortization 3,497 4,092 956,854
Forgiveness of note receivable, officer - 66,667 100,000
Loss from write-down of fixed assets - 32,963 195,373
Bad debt expense - - 161,000
Amortization of note discount and finance costs - - 4,666,225
Translation adjustment - - (1,528)
Beneficial conversion feature of convertible debt - - 572,505
Stock, warrants and options issued for services and legal settlement 72,771 6,050 11,651,442
Payment of common stock issued with guaranteed selling price - - (155,344)
Net losses of affiliate - - 1,196,656
Impairment loss on investment in affiliate - - 748,690
Gain on sale of Copy Protection Business - (5,708,328) (5,708,328)
Gain on sale of investment in affiliate - (40,000) (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable - - 554
Prepaid expenses and other current assets 89,747 (117,043) (160,489)
Other assets - (188) -
Accounts payable (33,666) (27,419) (487,714)
Accrued expenses 40,291 267,000 1,150,920
Accrued severance pay (64,734) 79,360 (122,363)
Interest payable - - 251,019
-------------- ---------------- -----------------
Net cash used in operating activities (4,103,540) (1,776,764) (26,139,801)
-------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - - 68,594
Purchases of property and equipment (56,960) (16,067) (1,059,562)
Proceeds from sale of Copy Protection Business - 5,050,000 5,050,000
Proceeds from sale of investment in affiliate - 40,000 40,000
Investment in ComSign, Ltd. - - (2,000,000)
Increase in note receivable, officer - - (100,000)
Increase in note receivable - - (130,000)
Increase in organization costs - - (7,680)
-------------- ---------------- -----------------
Net cash (used in) provided by investing activities (56,960) 5,073,933 1,861,352
-------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock
net of stock offering costs of $607,569 4,642,431 - 4,642,431
Proceeds from issuance of common stock - - 21,177,354
Stock offering costs - - (475,664)
Deferred financing costs - - (682,312)
Proceeds from short-term borrowings - - 1,356,155
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures - - 2,000,000
Repayment of short-term borrowings - - (1,357,082)
Repayments of long-term debt - - (1,615,825)
-------------- ---------------- -----------------
Net cash provided by financing activities 4,642,431 - 27,796,882
-------------- ---------------- -----------------
Effect of exchange rate changes on cash - 11,722 (5,412)
-------------- ---------------- -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 481,931 3,308,891 3,513,021
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,031,090 653,885 -
-------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,513,021 $ 3,962,776 $ 3,513,021
============== ================ =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ - $ 66 $ 476,978
============== ================ =================
Non-cash investing and financing activities:
Deemed dividend in connection with sale of
convertible preferred stock $ 1,995,802 $ - $ 1,995,802
============== ================ =================
Accrual of dividend on Convertible Preferred Stock $ 52,356 $ - $ 52,356
============== ================ =================
See Notes to Condensed Consolidated Financial Statements.
Q-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Amedia
Networks, Inc. (formerly known as "TTR Technologies, Inc.") and its subsidiary
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary to make the information not misleading have been included. Operating
results for the nine and three months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2003 included
in this Prospectus.
On May 27, 2004, the Company changed its name from TTR Technologies, Inc. to
Amedia Networks, Inc.
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
indicated in the accompanying financial statements, as of September 30, 2004,
the Company had a cash balance of approximately $3,500,000.
On August 9, 2004, the Company completed a private placement of certain of its
securities for aggregate gross proceeds of $5.25 million. Following the payment
of offering related expenses, the Company received net proceeds of approximately
$4.6 million. The Company believes that the proceeds of the private placement of
these securities will enable it to complete the development of its initial
products, expand the range of these product applications and otherwise maintain
its operations as presently conducted through the first quarter of 2005.
Thereafter, the Company will need to raise additional cash in order to fully
execute its business plans and commercialize its proposed products. At the
present time, the Company has no commitments for any such financing, and there
can be no assurance that additional capital will be available to the Company on
commercially acceptable terms. Furthermore, it is anticipated that any
successful financing will have a significant dilutive effect on existing
stockholders. The inability to obtain such financing will have a material
adverse effect on the Company, its condition and prospects.
Q-6
Concurrent with the August 2004 private placement, the Company also secured a $6
million equity line providing for the sale of up to that amount of Common Stock
during a 24-month period that commences after the effectiveness of the
registration statement relating to such equity line. However, use of the equity
line is subject to certain substantial restrictions further discussed in Note 3
below.
These financial statements do not include any adjustments relating to the
recovery of the recorded assets or the classification of the liabilities that
might be necessary should the Company be unable to continue as a going concern.
NOTE 3- EQUITY RAISE
PRIVATE PLACEMENT. On August 9, 2004, the Company completed a private placement
to certain private and institutional investors of 52,500 shares of its Series A
7% Convertible Preferred Stock, par value $0.001 per share (the "Series A
Preferred") for aggregate gross proceeds of $5.25 million. In connection with
the issuance of the Series A Preferred, the Company issued five-year warrants
(the "Investor Warrants") to purchase up to 3.5 million shares of the Company's
Common Stock at a per share exercise price of $1.50 and up to an additional 3.5
million shares of the Company's Common Stock at a per share exercise price of
$2.50. The private placement resulted in a beneficial conversion feature of
$2,494,753 for which the Company recorded a deemed dividend of $1,995,802 for
the nine months ended September 30, 2004. The remaining unaccreted deemed
dividend of $498,951 will be recorded during the fourth quarter of 2004 when the
Series A Preferred becomes convertible.
On July 30, 2004, the Company filed in Delaware a Certificate of Designations of
Rights and Preferences for 52,500 Series A 7% Convertible Preferred shares. Each
Series A Preferred share has a stated value of $100 and, commencing on the
earlier of (i) the 65th day following issuance or (ii) the effective date of the
registration statement referred to below, is convertible into Common Stock at an
initial conversion rate equal to $0.75 per share of Common Stock, subject to
adjustment if there are certain capital adjustments or similar transactions,
such as a stock split or merger. Dividends at the rate of 7% per annum are
payable on a semi-annual basis and, at the option of the Company, dividends may
be paid in shares of Common Stock at rate of $0.75 per share. The Company
recorded an accrual for the preferred stock dividend payable of $52,356 and a
corresponding charge to net loss applicable to common stockholders for the nine
months ended September 30, 2004. If not converted earlier, on the fifth
anniversary of issuance, the Series A Preferred will automatically convert into
shares of the Company's Common Stock at the per share of Common Stock conversion
price then in effect.
The exercise prices of the Investor Warrants are also subject to adjustment if
there are certain capital adjustments or similar transactions, such as a stock
split or merger. Holders of the Investor Warrants are entitled to exercise these
warrants on a cashless basis following the first anniversary of issuance if at
the time of exercise there is no effective registration statement in effect.
Q-7
The Company received net proceeds of approximately $4.6 million from the sale of
the Series A Preferred, net of payment of offering related expenses.
In connection with the placement of the Series A Preferred shares, the Company
issued to placement agents five year warrants (the "Placement Agent Warrants")
to purchase up to 1.4 million shares of Common Stock, representing 10% of the
shares of Common Stock issuable upon conversion of the Series A Preferred shares
and exercise of the Investor Warrants as of the date of issuance. The Placement
Agent Warrants contain per share exercise prices ranging between $0.75 and $2.50
and otherwise have the same substantive provisions as the Investor Warrants.
Pursuant to the terms of the agreements with the holders of the Series A
Preferred shares, the Company undertook to file within 60 days of closing a
registration statement (the "Series A Registration Statement") covering the
Common Stock underlying the Series A Preferred shares, the Investor Warrants and
the Placement Agent Warrants. The Company intends to file the Series A
Registration Statement as soon as practically possible following the filing of
this quarterly report on Form 10-QSB. Under the agreements with the holders of
the Series A Preferred shares, the Company will be obligated to pay liquidated
damages to the holders of the Series A Preferred Shares if the Series A
Registration Statement is not declared effective by December 7, 2004 or if, the
effectiveness of the Series A Registration Statement is subsequently suspended
for more than certain permitted periods (as defined in such agreements). The
amount that the Company must pay to the holders of the Series A Preferred shares
incurred as a result of any delay in the filing of such registration statement,
any delay in the effective date or after a permitted suspension period will be
1% of the stated value of all of the Series A Preferred shares during any 30-day
period (and pro rata for any such period which is less than 30 days). The Series
A Preferred holders have the right to have these liquidated damages paid in
shares of Common Stock (valued at the conversion price) or, if the Registration
Statement becomes effective on or before February 5, 2005, the Company is
entitled to pay these liquidated damages in shares of Common Stock.
Notwithstanding the foregoing, if the Series A Registration Statement is
declared effective on or before January 6, 2005, the Company will not be
required to pay any liquidated damages in respect of the delay in the filing of
such registration statement or effectiveness thereof.
EQUITY LINE. In August 2004, the Company secured from an institutional investor
a $6 million equity line (the "Equity Line") on which the Company can draw from
time to time during a 24 month period following the effectiveness of the Series
A Registration Statement, subject to certain conditions. The Company intends to
file a registration statement respecting the resale of the Common Stock issuable
pursuant to the Equity Line (the "Equity Line Registration Statement") no
earlier than the 90th day following the effective date of the Series A
Registration Statement (but not later than the 120th day after such date). The
Equity Line commitment is, at the option of the Equity Line investor,
terminable, if the Company does not timely file the Equity Line Registration
Statement or if such Registration Statement is not declared effective within 180
days following the filing thereof.
Q-8
The Equity Line allows the sale of up to $6 million of Common Stock at 98 % of
the then current market price, but in no event at less than $2.00. The Company
may not draw down more than $500,000 during any 30-day period. The investor is
entitled to 5% of the cash proceeds from the sale of the shares to it by the
Company under the Equity Line.
The Company issued to the equity line investor five year warrants to purchase up
to 333,333 shares of Common Stock at a per share exercise price of $2.00. These
warrants are subject to cashless exercise following the first anniversary of
issuance if at the time of exercise there is no effective registration statement
in effect.
No assurance can be provided that the Equity Line commitment will in fact become
available for use by the Company.
NOTE 4 - AGREEMENTS WITH LUCENT TECHNOLOGIES, INC.
The Company and Lucent Technologies, Inc. ("Lucent") entered into a development
and licensing agreement, effective as of January 6, 2004 (the "Development and
Licensing Agreement"), pursuant to which Lucent agreed to develop for and
license to the Company next-generation management and routing technologies and
equipment (collectively the "Equipment") designed to provide
Fiber-to-the-Premises (FTTP) capabilities for voice, video, data, and
voice-over-Internet protocol (VoIP). Under the Development and Licensing
Agreement, the Company paid to Lucent $1.9 million for the development of first
generation premises gateway (a customer premises unit for provisioning broadband
access directly to the subscriber) and aggregator switch (the unit that routes
data to and from the subscriber's premises).
Subsequent thereto, the Company and Lucent in April 2004 entered into a
supplementary development agreement primarily to (i) design an outdoor hardened
configuration of the aggregator switch to enable the product to be placed in the
outside environment where required, (ii) add a wireless port on the premises
gateway to enable it to communicate with voice, video and data devices through a
wireless connection, and (iii) provide an interim network management system
required by the market to control all three network elements from a remote
network operations center. In consideration of Lucent's undertaking to assist in
the development of these upgrades, the Company paid to Lucent an additional
$500,000. As of September 30, 2004, the Company and Lucent entered into an
additional supplementary development agreement to jointly design an outdoor
hardened configuration of the premises gateway and additional software features
for the aggregator switch including remote software management for additional
consideration of approximately $368,000. The Company expects to remit payment
upon completion of these enhancements. The enhanced premises gateway and
aggregator switches will comprise the Company's initial products.
In July 2004, the Company and Lucent entered into an amendment (the "Amendment")
to their Development and Licensing Agreement pursuant to which Lucent is to
deliver to the Company an improved design model for the CS 1200 Core Switch (the
"CS") by December 20, 2004. Subject to delivery, the Company and Lucent agreed
that payments aggregating $1.1 million originally scheduled to be made in two
payments of $500,000 and 600,000, respectively, in December 2004 and March 2005,
would be re-scheduled to be made in monthly installments of $110,000, beginning
in December 2004. If Lucent does not meet the delivery date by December 20,
2004, the Company is entitled to delay the rescheduled payments by one year; if
delivery is not made by March 20, 2005, the Company is not required to make any
of these payments.
Q-9
RESEARCH AND DEVELOPMENT
Research and development costs are incurred in connection with product testing
and development and are expensed as incurred. Research and development costs for
the nine and three months ended September 30, 2004 were $2,650,069 and
$1,088,658, respectively, and $0 for the nine and three months ended September
30, 2003.
NOTE 5 - EMPLOYMENT AGREEMENTS
The Company and Mr. Frank Galuppo, the Company's Chief Executive Officer entered
into a three-year employment agreement, effective as of March 15, 2004, pursuant
to which Mr. Galuppo is paid an annual salary of $180,000. Mr. Galuppo's salary
is scheduled to increase to $210,000 in year two and to $235,000 in year three.
The agreement further provides that if Mr. Galuppo's employment is terminated
other than for cause (as defined in the employment agreement) or if Mr. Galuppo
terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to receive the equivalent of three months' base
salary and benefits, if such termination takes place during the first 12 months
from the effective date of the agreement. If such termination takes place after
the first year of employment, then Mr. Galuppo will be entitled to receive the
equivalent of six months' base salary and benefits. The Company also issued to
Mr. Galuppo options under the Company's 2000 Equity Incentive Plan to purchase
up to 1,315,250 shares of the Company's common stock, par value $0.001 (the
"Common Stock") at a per share exercise price of $0.74, which are scheduled to
vest over 12 succeeding quarters, beginning June 30, 2004.
In April 2004, the Company and its then former Chief Operating Officer, Mr. Sam
Brill, entered into an agreement amending and restating Mr. Brill's employment
agreement (as so amended, the "Amended Agreement") pursuant to which Mr. Brill
resigned as the Company's Chief Operating Officer and assumed the position of
Vice President, Internal Operations. In connection with his resignation as the
Company's Chief Operating Officer and in consideration of the release of certain
rights under the original employment agreement, the Company paid to Mr. Brill
the amount of $75,000, less payroll deductions. Under the Amended Agreement,
commencing as of April 5, 2004 and continuing through October 5, 2004, Mr. Brill
was compensated at $7,500 per month. The agreement is extended for successive
one-month periods unless either the Company or Mr. Brill notifies the other
prior to the expiration of the agreement of its election to not so extend.
Currently, the agreement continues on a month-to-month basis as neither party
has elected to terminate it.
Q-10
NOTE 6 - TERMINATION AND SETTLEMENT AGREEMENT
On January 28, 2004, the Company and Mr. Judah Marvin Feigenbaum, former interim
Chief Executive Officer and a director ("JMF"), entered into an agreement (the
"Separation Agreement") whereby JMF resigned from all positions held with
Company. Under the terms of the Separation Agreement, in consideration of
releases to the Company, the Company paid to JMF approximately $60,000 for
services provided during 2003, less payroll deductions. The Company also issued
to JMF a five-year option to purchase up to 164,406 shares of the Company's
Common Stock at a per share exercise price of $0.56 (a premium to the grant
date's closing market price of the Common Stock), subject to cashless exercise
provisions. Following the approval by the Company's stockholders of the
Development and Licensing Agreement, the Company remitted to JMF an additional
$60,000 payment. The Company also agreed, under certain conditions, to issue
options to purchase up to an additional 328,812 shares of the Company's Common
Stock at a per share exercise price not less than the market price at the time
of issuance. JMF has agreed to certain restrictions on the sale or other
transfer of shares of Common Stock issuable upon exercise of these options.
NOTE 7 - STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting
Standard Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation". Pursuant to these accounting
standards, the Company records deferred compensation for share options granted
to employees at the date of grant based on the difference between the exercise
price of the options and the market value of the underlying shares at that date.
Deferred compensation is amortized to compensation expense over the vesting
period of the underlying options. No compensation expense is recorded for fixed
stock options that are granted to employees and directors at an exercise price
equal to the fair market value of the common stock at the time of the grant.
Stock options and warrants granted to non-employees are recorded at their fair
value, as determined in accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123") and Emerging Issues Task Force Consensus No.
96-18, and recognized over the related service period.
The Company has adopted the disclosure provisions required by SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure" which amends
SFAS No. 123. Had compensation cost for all of the Company's stock-based
compensation grants been determined in a manner consistent with the fair value
approach described in SFAS No. 123 and amended by SFAS No. 148, the Company's
net (loss) income and net (loss) income per share as reported would have been
increased (decreased) to the pro forma amounts indicated below:
Q-11
Nine Months Ended Three Months Ended
September 30, September 30,
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
Net (loss) income applicable to common
stockholders as reported $ (6,259,604) $ 3,660,082 $ (3,737,776) $ (770,310)
Add: Stock-based employee compensation
expense included in reported
net (loss) income, net of related tax effects 12,022 6,050 7,761 1,424
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (650,276) (247,728) (185,554) (81,983)
----------------- ----------------- ----------------- -----------------
Pro forma $ (6,897,858) $ 3,418,404 $ (3,915,569) $ (850,869)
================= ================= ================= =================
Net (loss) income per share applicable to
common stockholders, basic and diluted
as reported $ (0.38) $ 0.21 $ (0.23) $ (0.05)
================= ================= ================= =================
Pro forma $ (0.42) $ 0.20 $ (0.24) $ (0.05)
================= ================= ================= =================
Common stock equivalents have been excluded from the weighted-average shares for
the nine and three months ended September 30, 2004 and 2003, as inclusion is
anti-dilutive. Potentially dilutive options of 4,713,642 and 2,210,175 are
outstanding at September 30, 2004 and 2003, respectively. Potentially dilutive
warrants of 10,665,000 are outstanding at September 30, 2004. In addition, the
Company has outstanding 52,500 shares of Series A Convertible Preferred Stock
which are potentially convertible into 7,000,000 shares of common stock.
On January 21, 2004, the Company's Compensation Committee awarded to each of the
Company's then two independent directors 164,406 non-qualified options to
purchase the Company's Common Stock at a $0.56 strike price and immediate
vesting with a 5 year life.
In March 2004, in conjunction with their employment agreements, three new
Company employees received options to purchase a total of up to 280,000 shares
of the Company's Common Stock under the Company's 2000 Equity Incentive Plan,
such options will vest on the first anniversary of their employment agreements,
at various exercise prices based on the closing market price of the Company's
stock on their date of hire (the exercise prices range from $0.62 to $0.80).
In April 2004, in conjunction with her employment agreement, a new Company
employee received options to purchase a total of up to 20,000 shares of the
Company's Common Stock under the Company's 2000 Equity Incentive Plan, of which
options for one-fourth (1/4) of the shares is to vest on the first anniversary
of employment and options for the remaining shares to vest in equal quarterly
installments thereafter at an exercise price of $0.65, which is based on the
closing market price of the Company's stock on her date of hire.
On May 11, 2004, the Company issued 100,000 four-year warrants to a service
provider.
Q-12
The warrants have an exercise price of $0.62 per share. The $0.62 strike price
equaled the closing market price of the Company's stock on the date of issuance.
The Company recorded stock-based compensation expense of $60,749 in the
accompanying financial statements for the nine and three months ended September
30, 2004 for this transaction.
On May 25, 2004 the Company's Compensation Committee granted from the 2000
Equity Incentive Plan 60,000 non-qualified options to purchase the Company's
Common Stock at a $0.71 strike price vesting over 2 years to a member of the
Company's newly formed Advisory Board. The $0.71 strike price equaled the
closing market price of the Company's stock on the date of issuance. The fair
value of the options amounted to $34,087 and is being amortized over the 2-year
vesting period. Amortization expense for the nine and three months ended
September 30, 2004 was $8,522 and $4,261, respectively.
On May 25, 2004 the Company's Compensation Committee granted from the 2002
Non-Employee Directors Stock Option Plan 225,000 non-qualified options to
purchase the Company's Common Stock at a $0.71 strike price vesting over 2 years
to three new directors of the Company's Board. The $0.71 strike price equaled
the closing market price of the Company's stock on the date of issuance.
On July 1, 2004 in conjunction with a new employment agreement, an employee
received options to purchase a total of up to 100,000 shares of the Company's
Common Stock under the Company's 2000 Equity Incentive Plan, vesting over a
three year period. The options have an exercise price of $0.55, which was less
than the closing market price of the Company's Common Stock on the date of hire.
As such, the Company recorded deferred compensation of $42,000.
In August and September 2004, in conjunction with their employment agreements,
three new Company employees received options to purchase a total of up to
220,000 shares of the Company's Common Stock under the Company's 2000 Equity
Incentive Plan. The options will vest over a two or three year period, at
exercise prices ranging from $0.91 to $1.05 based on the closing market price of
the Company's Common Stock on their respective dates of hire.
Q-13
AMEDIA NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Marcum & Kliegman, Independent Registered Public Accountants F-1
Report of Brightman Almagor & Co, a member of Deloitte Touche Tohmatsu,
Independent Auditors F-2
Consolidated Financial Statements
Balance Sheets as of December 31, 2003 and 2002 F-3
Statements of Operations for the years ended December 31, 2003,
2002 and 2001 and the period from July 14, 1994 (inception)
to December 31, 2003 F-4
Statements of Comprehensive Loss for the years ended December 31, 2003,
2002 and 2001 and the period from July 14, 1994 (inception) to
December 31, 2003 F-5
Statements of Stockholders' Equity (Deficiency) for the period from
July 14, 1994 (inception) to December 31, 2003 F-6
Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001 and the period from July 14, 1994 (inception) to
December 31, 2003 F-7
Notes to the Consolidated Financial Statements F-8
(1)
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT
------------------------------------------------------
To the Audit Committee of the Board of Directors of TTR Technologies, Inc. and
its Subsidiary:
We have audited the accompanying consolidated balance sheet of TTR Technologies,
Inc. and Subsidiary (a development stage company) as of December 31, 2003, and
the related consolidated statements of operations, comprehensive loss,
stockholders' equity (deficiency), and cash flows for the year then ended and
for the period from July 14, 1994 (Inception) to December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
The consolidated financial statements of the Company for the period from July
14, 1994 (Inception) to December 31, 2002 were audited by other auditors whose
report, dated March 20, 2003, expressed an unqualified opinion on those
statements and included and explanatory paragraph regarding the Company's
ability to continue as a going concern. The consolidated financial statements
for the period from July 14, 1994 (Inception) to December 31, 2002 reflect a net
loss of $40,370,429 of the total inception to date net loss of $36,903,827. The
other auditors' report has been furnished to us, and our opinion, insofar as it
related to the amounts included for such prior periods, is based solely on the
report of such other auditors.
We conducted our audit 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of TTR Technologies, Inc. and its
Subsidiary as of December 31, 2003, and the results of their operations and
their cash flows for the year then ended and for the period from July 14, 1994
(Inception) to December 31, 2003 in conformity with U.S. generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 12 to
the financial statements, the Company has significant cash commitments relating
to an agreement entered into and consummated on March 4, 2004. This condition
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding this matter also is described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Marcum & Kliegman, LLP
New York, NY
February 25, 2004
(except for Note 12d, which is dated March 3, 2004, Note 1 and Note 12a, which
are dated March 4, 2004 and Note 12e and 12f, which are dated March 8, 2004)
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
TTR Technologies, Inc.
We have audited the accompanying consolidated balance sheet of TTR Technologies,
Inc. (a development-stage company) and its subsidiary (the "Company") at
December 31, 2002, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for the years
ended December 31, 2002 and for the period from July 14, 1994 (date of
inception) to December 31, 2002 and 2001, and for the period from July 14, 1994
(date of inception) to December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiary at December 31, 2002, and the consolidated results of their
operations, comprehensive loss, stockholders' equity (deficit) and their cash
flows for the years ended December 31, 2002 amd 2001, and for the period from
July 14, 1994 (date of inception) to December 31, 2002, in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte Touche Tohmatsu
Tel-Aviv, Israel
March 20, 2003
F-2
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 3,031,090 $ 653,885
Note receivable, officer - 33,333
Prepaid expenses and other current assets 220,578 64,999
--------------- ---------------
Total current assets 3,251,668 752,217
Property and equipment - net 2,300 23,093
Note receivable, officer - 33,334
Other asset - 6,300
--------------- ---------------
Total assets $ 3,253,968 $ 814,944
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 93,145 $ 497,898
Accrued expenses 28,992 61,011
Accrued severance pay 64,734 -
--------------- ---------------
Total current liabilities 186,871 558,909
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized; none issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized; 16,440,630 and 18,261,567
issued and outstanding, respectively 16,441 18,262
Additional paid-in capital 39,873,476 40,533,593
Other accumulated comprehensive income 81,007 84,270
Deficit accumulated during the development stage (36,903,827) (40,370,429)
Less: deferred compensation - (9,661)
--------------- ---------------
Total stockholders' equity 3,067,097 256,035
--------------- ---------------
Total liabilities and stockholders' equity $ 3,253,968 $ 814,944
=============== ===============
See Notes to Consolidated Financial Statements.
F-3
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Year (July 14,
Ended 1994) to
December 31, December 31,
2003 2002 2001 2003
---- ---- ---- ----
Revenue $ - $ - $ - $ 125,724
-------------- --------------- --------------- ---------------
Expenses
Research and development (1) - 701,629 949,766 5,704,131
Sales and marketing (1) - 159,486 399,523 4,457,457
General and administrative (1) 1,936,600 3,050,620 2,894,616 13,008,040
Stock-based compensation 6,050 35,251 909,819 11,405,710
Bad debt expense - 161,000 - 161,000
-------------- --------------- --------------- ---------------
Total expenses 1,942,650 4,107,986 5,153,724 34,736,338
-------------- --------------- --------------- ---------------
Operating loss (1,942,650) (4,107,986) (5,153,724) (34,610,614)
-------------- --------------- --------------- ---------------
Other (income) expense
Legal settlement 333,333 - - 565,833
Loss on investment - - - 17,000
Other income - - - (75,000)
Net losses of affiliate - 369,409 618,090 1,196,656
Impairment loss on investment in
affiliate - 748,690 - 748,690
Gain on sale of copy protection
business (5,708,328) - - (5,708,328)
Gain on sale of investment in affiliate (40,000) - - (40,000)
Loss on disposition of fixed assets 29,181 - - 29,181
Amortization of deferred financing
costs - - - 4,516,775
Interest income (23,506) (37,808) (276,179) (923,741)
Interest expense 68 56,474 3,002 1,966,147
-------------- --------------- --------------- ---------------
Total other (income) expenses (5,409,252) 1,136,765 344,913 2,293,213
-------------- --------------- --------------- ---------------
Net income (loss) $ 3,466,602 $ (5,244,751) $ (5,498,637) $ (36,903,827)
============== =============== =============== ===============
Per share data:
Basic and diluted $ 0.20 $ (0.29) $ (0.31)
============== =============== ===============
Weighted average number
of common shares used in
basic and diluted loss per share 17,186,233 17,827,893 17,560,013
============== =============== ===============
(1) Excludes non-cash, stock-based compensation expense as follows:
Research and development $ - $ - $ - $ 456,239
Sales and marketing - 30,587 261,463 5,336,558
General and administrative 6,050 4,664 648,356 5,612,913
-------------- --------------- --------------- ---------------
$ 6,050 $ 35,251 $ 909,819 $ 11,405,710
============== =============== =============== ===============
See Notes to Consolidated Financial Statements.
F-4
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Inception
Year (July 14,
Ended 1994) to
December 31, December 31,
2003 2002 2001 2003
---- ---- ---- ----
Net income (loss) $ 3,466,602 $ (5,244,751) $ (5,498,637) $ (36,903,827)
Other comprehensive income (loss)
Foreign currency translation
adjustments (3,263) 47,336 (9,312) 81,007
-------------- --------------- --------------- ---------------
Comprehensive income (loss) $ 3,463,339 $ (5,197,415) $ (5,507,949) $ (36,822,820)
============== =============== =============== ===============
See Notes to Consolidated Financial Statements.
F-5
TTR TECHNOLOGIES, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock Additional
Common Stock Subscribed Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balances at July 14, 1994 (date of
inception) - $ - - $ - $ -
Issuances of common stock, par value $.001
Services rendered 1,200,000 1,200
Cash 1,200,000 1,200 23,800
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 1994 2,400,000 2,400 - - 23,800
Common stock contributed (561,453) (561) 561
Issuances of common stock, par value $.001
Services rendered 361,453 361 17,712
Stock options and warrants granted 600
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 1995 2,200,000 2,200 - - 42,673
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 850,000 850 362,683
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 1996 3,050,000 3,050 - - 405,356
Common stock contributed (135,000) (135) 135
Issuances of common stock, par value $.001
Cash, net of offering costs of $832,551 908,000 908 5,000,440
Services rendered 74,000 74 832,551
Exercise of options 374,548 375 3,370
Common stock subscriptions 16,000 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted 1,875,343
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 1997 4,271,548 4,272 16,000 100,000 8,117,275
Common stock subscriptions 16,000 16 (16,000) (100,000) 99,984
Common Stock forfeited (1,000,000) (1,000) 1,000
Transfer of temporary equity to permanent
capital 15,000 15 77,141
Issuances of common stock, par value $.001
Cash 41,667 42 24,958
Services rendered 244,000 244 620,344
Stock options and warrants granted
(cancelled) (255,992)
Discount relating to shares and warrants
issued 156,111 156 486,307
Amortization of deferred compensation
Warrant exchange 432,000 432 (432)
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
- -
Balances at December 31, 1998 4,176,326 4,177 9,170,585
Issuances of common stock, par value $.001
Cash 314,774 315 225,140
Services rendered 1,227,000 1,227 1,669,548
Exercise of option 1,714,952 1,715 1,401,660
Stock options granted (cancelled) 4,449,015
Conversion of debt into common stock 3,220,508 3,221 3,376,748
Fair value of warrants associated with
financing agreement 3,845,400
Amortization of deferred compensation
Value assigned to beneficial conversion
feature of convertible notes 572,505
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 1999 10,653,560 10,654 - - 24,710,602
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 3,680,937 3,681 13,266,319
Services rendered 16,269 16 114,609
Exercise of options and warrants 3,005,574 3,006 220,716
Stock options granted 2,028,720
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 2000 17,356,340 17,357 - - 40,340,966
Issuances of common stock, par value $.001
Exercise of options and warrants 237,556 238 17,012
Stock options granted 168,604
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 2001 17,593,896 17,594 - - 40,526,583
Issuances of common stock, par value $.001
Exercise of options and warrants 667,671 668 1,314
Stock options granted 5,696
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 2002 18,261,567 $ 18,262 - $ - $ 40,533,593
Issuances of common stock, par value $.001
Exercise of options and warrants 60,000 60
Stock options granted (forfeited) (3,611)
Amortization of deferred compensation
Macrovision sale (1,880,937) (1,881) (656,506)
Foreign currency translation adjustment
Net income
-------------- --------------- --------------- --------------- ----------------
Balances at December 31, 2003 16,440,630 $ 16,441 - $ - $ 39,873,476
============== =============== =============== =============== ================
(CONTINUED)
Deficit
Foreign Accumulated
Currency During
Translation Development Deferred
Adjustment Stage Compensation Total
---------- ----- ------------ -----
Balances at July 14, 1994 (date of
inception) $ - $ - $ - $ -
Issuances of common stock, par value $.001
Services rendered 1,200
Cash 25,000
Net loss (42,085) (42,085)
---------------- ------------ ---------- ------------
Balances at December 31, 1994 - (42,085) - (15,885)
Common stock contributed
Issuances of common stock, par value $.001
Services rendered 18,073
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652 22,652
Net loss (896,663) (896,663)
---------------- ------------ ---------- ------------
Balances at December 31, 1995 22,652 (938,748) - (871,223)
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 363,533
Foreign currency translation adjustment 35,044 35,044
Net loss (1,121,211) (1,121,211)
---------------- ------------ ---------- ------------
Balances at December 31, 1996 57,696 (2,059,959) - (1,593,857)
Common stock contributed -
Issuances of common stock, par value $.001
Cash, net of offering costs of $832,551 5,001,348
Services rendered (500,000) 332,625
Exercise of options 3,745
Common stock subscriptions 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted (1,875,343) -
Amortization of deferred compensation 972,567 972,567
Foreign currency translation adjustment (19,667) (19,667)
Net loss (4,119,612) (4,119,612)
---------------- ------------ ---------- ------------
Balances at December 31, 1997 38,029 (6,179,571) (1,402,776) 677,229
Common stock subscriptions -
Common Stock forfeited -
Transfer of temporary equity to permanent
capital 77,156
Issuances of common stock, par value $.001
Cash 25,000
Services rendered (620,588) -
Stock options and warrants granted
(cancelled) 255,992 -
Discount relating to shares and warrants
issued 486,463
Amortization of deferred compensation 1,173,139 1,173,139
Warrant exchange -
Foreign currency translation adjustment 41,386 41,386
Net loss (5,578,540) (5,578,540)
---------------- ------------ ---------- ------------
Balances at December 31, 1998 79,415 (11,758,111) (594,233) (3,098,167)
Issuances of common stock, par value $.001
Cash 225,455
Services rendered (445,725) 1,225,050
Exercise of option 1,403,375
Stock options granted (cancelled) (613,435) 3,835,580
Conversion of debt into common stock 3,379,969
Fair value of warrants associated with
financing agreement 3,845,400
Amortization of deferred compensation 1,374,518 1,374,518
Value assigned to beneficial conversion
feature of convertible notes 572,505
Foreign currency translation adjustment (22,444) (22,444)
Net loss (13,072,237) (13,072,237)
---------------- ------------ ---------- ------------
Balances at December 31, 1999 56,971 (24,830,348) (278,875) (330,996)
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 13,270,000
Services rendered 114,625
Exercise of options and warrants 223,722
Stock options granted (2,028,720) -
Amortization of deferred compensation 1,527,024 1,527,024
Foreign currency translation adjustment (10,725) (10,725)
Net loss (4,796,693) (4,796,693)
---------------- ------------ ---------- ------------
Balances at December 31, 2000 46,246 (29,627,041) (780,571) 9,996,957
Issuances of common stock, par value $.001
Exercise of options and warrants 17,250
Stock options granted (168,604) -
Amortization of deferred compensation 909,959 909,959
Foreign currency translation adjustment (9,312) (9,312)
Net loss (5,498,637) (5,498,637)
---------------- ------------ ---------- ------------
Balances at December 31, 2001 36,934 (35,125,678) (39,216) 5,416,217
Issuances of common stock, par value $.001
Exercise of options and warrants 1,982
Stock options granted (5,696) -
Amortization of deferred compensation 35,251 35,251
Foreign currency translation adjustment 47,336 47,336
Net loss (5,244,751) (5,244,751)
---------------- ------------ ---------- ------------
Balances at December 31, 2002 84,270 $ (40,370,429)$ (9,661)$ 256,035
Issuances of common stock, par value $.001
Exercise of options and warrants 60
Stock options granted (forfeited) 3,611 -
Amortization of deferred compensation 6,050 6,050
Macrovision sale (658,387)
Foreign currency translation adjustment (3,263) (3,263)
Net income 3,466,602 3,466,602
---------------- ------------ ---------- ------------
Balances at December 31, 2003 $ 81,007 $(36,903,827) $ - $ 3,067,097
================ ============ ========== ============
F-6
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Year Inception
Ended (July 14, 1994)
December 31, to December 31,
2003 2002 2001 2003
---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,466,602 $ (5,244,751) $ (5,498,637) $ (36,903,827)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 4,333 83,716 85,597 953,357
Forgiveness of note receivable, officer 66,667 33,333 - 100,000
Loss from write-down of fixed assets 33,181 162,192 - 195,373
Bad debt expense - 161,000 - 161,000
Amortization of note discount and finance costs - - - 4,666,225
Translation adjustment - - - (1,528)
Beneficial conversion feature of convertible debt - - - 572,505
Stock, warrants and options issued for services and
legal settlement 6,050 35,251 909,819 11,578,671
Payment of common stock issued with guaranteed
selling price - - - (155,344)
Net losses of affiliate - 369,409 618,090 1,196,656
Impairment loss on investment in affiliate - 748,690 - 748,690
Gain on sale of Copy Protection Business (5,708,328) - - (5,708,328)
Gain on sale of investment in affiliate (40,000) - - (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable - 950 929 554
Prepaid expenses and other current assets (155,513) 55,256 (57,063) (250,236)
Other assets 6,300 (2,750) (3,550)
Accounts payable (404,754) (3,129) 105,120 (454,048)
Accrued expenses (37,380) (80,778) 596,054 1,110,629
Accrued severance pay 64,734 (400,704) 122,141 (57,629)
Interest payable - - - 251,019
--------------- --------------- ---------------- ----------------
Net cash used by operating activities (2,698,108) (4,082,315) (3,121,500) (22,036,261)
--------------- --------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - 31,022 2,837 68,594
Purchases of property and equipment (16,067) (111,665) (86,931) (1,002,602)
Proceeds from sale of Copy Protection Business 5,050,000 - - 5,050,000
Proceeds from sale of investment in affiliate 40,000 - - 40,000
Investment in ComSign, Ltd. - - - (2,000,000)
Increase in note receivable, officer - (100,000) - (100,000)
Increase in note receivable - - (130,000) (130,000)
Increase in organization costs - - - (7,680)
--------------- --------------- ---------------- ----------------
Net cash provided by (used in) investing activities 5,073,933 (180,643) (214,094) 1,918,312
--------------- --------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - 1,982 17,250 21,177,354
Stock offering costs - - - (475,664)
Deferred financing costs - - - (682,312)
Proceeds from short-term borrowings - - - 1,356,155
Proceeds from long-term debt - - - 2,751,825
Proceeds from convertible debentures - - - 2,000,000
Repayment of short-term borrowings - - - (1,357,082)
Repayments of long-term debt - - - (1,615,825)
--------------- --------------- ---------------- ----------------
Net cash provided by financing activities - 1,982 17,250 23,154,451
--------------- --------------- ---------------- ----------------
Effect of exchange rate changes on cash 1,380 (408) (1,073) (5,412)
--------------- --------------- ---------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,377,205 (4,261,384) (3,319,417) 3,031,090
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 653,885 4,915,269 8,234,686 -
--------------- --------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,031,090 $ 653,885 $ 4,915,269 $ 3,031,090
=============== =============== ================ ================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 68 $ 882 $ 3,002 $ 476,978
=============== =============== ================ ================
Noncash investing transaction
Common stock returned to the Company from the
sale of Copy Protection Business $ 658,328 $ - $ - $ 658,328
=============== =============== ================ ================
Exchange of fixed assets for rent $ 4,000 $ - $ - $ 4,000
=============== =============== ================ ================
See Notes to Consolidated Financial Statements.
F-7
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
TTR Technologies, Inc ("TTR" or the "Company") was previously engaged in the
business of designing and developing digital security technologies that provide
copy protection for electronic content distributed on optical media and the
internet (the "Copy Protection Business"). Effective May 28, 2003, the Company
consummated the sale of its Copy Protection Business pursuant to an Asset
Purchase Agreement dated as of November 4, 2002, (the "Purchase Agreement") with
Macrovision Corporation ("Macrovision"), then one of the Company's largest
stockholders and Macrovision Europe, Ltd., an affiliate of Macrovision
(collectively, the "Purchaser"). See Note 3.
Following the sale of the Company's Copy Protection Business, then existing
management, considered several possible alternatives regarding the Company's
strategic direction, including, the acquisition, development or investment in
new lines of business. Subsequent to year end the Company entered into a
Development and Licensing Agreement with Lucent Technologies. See Note 12
"Subsequent Events."
GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going-concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
shown in the accompanying financial statements, the Company had net income of
$3,466,602 during the year ended December 31, 2003 primarily from the proceeds
of the sale of the Copy Protection Business, resulting in a cash balance of
$3,031,090 as of December 31, 2003. Upon the consummation of the Lucent
transaction on March 4, 2004, the Company had a cash balance of approximately
$1.5 million. As of March 4, 2004, the Company had remitted to Lucent $1.2
million and is obligated to remit to Lucent an additional $1.8 million through
February 15, 2005 and $350,000 required for specified regulatory specifications,
not including normal operating expenses.
The Company will need to raise capital or generating revenue in order to meet
its obligations under the transaction with Lucent, enter into its new business
and maintain its operations. The Company has no commitments in respect of the
raising of such capital nor does it have any revenue generating agreements.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. These financial
statements do not include any adjustments relating to the recovery of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, TTR Ltd. TTR Ltd. has been inactive since December
2002. All significant inter-company accounts and transactions have been
eliminated in consolidation.
F-8
USE OF ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported revenues and expenses. Actual results could vary
from the estimates that were used.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid debt investments that are
readily convertible into cash with maturities when purchased of three months or
less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments, consisting primarily
of cash equivalents, current receivables, accounts payable and accrued expenses,
are carried at, or approximate, fair value because of their short-term nature or
because they carry market rates of interest.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, the Company
records deferred compensation for share options granted to employees at the date
of grant based on the difference between the exercise price of the options and
the market value of the underlying shares at that date. Deferred compensation is
amortized to compensation expense over the vesting period of the underlying
options. No compensation expense is recorded for fixed stock options that are
granted to employees and directors at an exercise price equal to the fair market
value of the common stock at the time of the grant.
Stock options and warrants granted to non-employees are recorded at their fair
value, as determined in accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123") and Consensus No. 96-18, and recognized over the
related service period. The
Company has adopted the disclosure provisions
required by SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and
Disclosure" which amends SFAS No. 123. Accordingly, see below for disclosures
required in accordance with SFAS No. 148.
Year ended
December 31,
2003 2002 2001
---- ---- ----
Net income (loss)
As reported $3,466,602 $(5,244,751) $(5,498,637)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 6,050 35,251 264,136
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (610,045) (494,124) (1,393,060)
--------- --------- ---------
Pro forma $2,862,607 $(5,703,624) $(6,627,561)
========= ========= =========
Net income (loss) per share, basic and diluted
As reported $ 0.20 $(0.29) $(0.31)
==== ==== ====
Pro forma $ 0.17 $(0.32) $(0.38)
==== ==== ====
F-9
The fair value of each option granted in 2003, 2002 and 2001 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002 2001
---- ---- ----
Risk free interest rates N/A 3.45% 3.97%
Expected option lives N/A 3.14 3.26
Expected volatilities N/A 145.00% 106.00%
Expected dividend yields None None None
FOREIGN CURRENCY TRANSLATIONS
The financial statements of TTR Ltd. have been translated into U.S. dollars in
accordance with Statement No. 52 of the Financial Accounting Standards Board
(FASB). Assets and liabilities have been translated at year-end (period-end)
exchange rates and expenses have been translated at average rates prevailing
during the year. The translation adjustments have been recorded as a separate
component in the consolidated statement of stockholders' equity (deficiency).
NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per share, "EPS" is computed by dividing net income (loss)
applicable to common shares by the weighted-average of common shares outstanding
during the period.
Diluted earnings (loss) per share adjusts basic earnings (loss) per share for
the effects of convertible securities, stock options and other potentially
dilutive instruments, only in the periods in which such effect is dilutive. The
shares issuable upon exercise of stock options and warrants are excluded from
the calculation of net loss per share, as their effect would be antidilutive.
Common stock equivalents have been excluded from the weighted-average shares for
the year ended 2003 and 2002, as inclusion is anti-dilutive. Potentially
dilutive options and warrants of 3,670,175 and 4,886,875 are outstanding at
December 31, 2003 and 2002, respectively.
DEPRECIATION AND AMORTIZATION
Furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. For leasehold improvements, amortization is provided
over the shorter of the estimated useful lives of the assets or the lease term.
During the year ended 2003, the majority of the Company's property and equipment
was either sold or written-off.
RESEARCH AND DEVELOPMENT COSTS
There were no research and development expenditures in the year ended 2003.
INCOME TAXES
The Company uses the liability method to determine its income tax expense. This
method requires the establishment of a deferred tax asset or liability for the
recognition of future deductible or taxable amounts and operating loss
carry-forwards. Deferred tax expense or benefit is recognized as a result of the
changes in the assets and liabilities during the year.
F-10
Valuation allowances are established when necessary, to reduce deferred tax
assets, if it is more likely than not that all or a portion of it will not be
realized.
CONCENTRATIONS
Cash and cash equivalents are, for the most part, maintained with major
financial institutions. Deposits held with these banks exceed the amount of
insurance provided on such deposits. Generally, these deposits may be redeemed
upon demand and therefore, bear minimal risk.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the excess, if any, of the carrying value over the fair value of
the long-lived assets.
COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting the components of comprehensive income
or loss. The foreign currency translation adjustment is the Company's only
component of comprehensive loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003 and revised in December 2003, Financial Accounting Standards
Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"), an interpretation of Accounting Research Bulletin
No. 51. FIN 46 expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is any
legal structure used for business purposes that either does not have equity
investors with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. The adoption of FIN 46 did not have a significant
impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatorily
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 generally is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 did not have a significant impact on the Company's
financial statements.
NOTE 3 - CLOSING OF SALE TO MACROVISION CORPORATION
On May 28, 2003, the Company consummated the sale of its music copy protection
and digital rights management assets to Macrovision for a cash sales price of
$5,050,000 and return for cancellation 1,880,937 shares of the Company's Common
Stock that Macrovision
F-11
purchased in January 2000 for $4.0 million. The Company recorded a gain on sale
of $5.7 million in its statement of operations during the quarter ended June 30,
2003 consisting of $5,050,000 in cash and $658,387 representing the value of the
common stock returned for cancellation to the Company based on the closing price
of the stock on May 28, 2003.
Under this Agreement, the Company undertook to indemnify Macrovision for certain
losses as set forth in the Agreement. The Company's indemnification obligations
continue through November 2004 and are limited by an overall cap of $5.25
million, except with respect to matters relating to any bulk sales laws,
fraudulent conveyance laws, or certain pre-sale contractual liabilities.
NOTE 4 - NOTES RECEIVABLE
In July 2001, in connection with a consulting agreement, the Company advanced a
loan to a consultant in the amount of $130,000, evidenced by a promissory note.
The note bears interest at the rate of 8% per annum, and was due on June 27,
2002. As collateral for the loan, the consultant pledged 150,000 Company shares
of Common Stock issuable to him upon the exercise of 150,000 unexercised
options. Pursuant to consulting agreements, the consultant was granted 50,000
and 100,000 immediately vested options exercisable at $.35 and $6.00 per share,
respectively. On or about June 20, 2003, the Company initiated litigation in the
Supreme Court of the State of New York, County of Westchester, against Ripp
Entertainment Group, Inc. ("Ripp"), seeking the sum of $130,000 on a defaulted
promissory note. Ripp removed the case to Federal Court and filed an answer with
two counterclaims against the Company, seeking (a) compensatory damages in
excess of $1,000,000 and punitive damages in the amount of $3,000,000 for
allegedly fraudulently inducing Ripp to enter into a certain Consulting
Agreement with the Company, and (b) damages in excess of $210,000 for the
Company's alleged failure to pay Ripp for services rendered under the Consulting
Agreement. A settlement has been reached pursuant to which both the Company's
claims and Ripp's counterclaims were dismissed with prejudice.
In May 2002, in accordance with the terms of an employment agreement with its
then Chief Executive Officer, the Company loaned the officer $100,000 for a
three-year term with interest at the rate of four percent per annum. At the end
of each calendar year beginning December 31, 2002, the Company agreed to forgive
one-third of the loan and the related accrued interest thereon as additional
compensation, except under certain conditions where the officer resigns or his
employment is terminated by the Company for cause. In October 2003, the officer
executed a Termination and Settlement Agreement with the Company pursuant to
which he resigned from all positions with the Company. In consideration of his
waiver of certain claims under his employment agreement, the outstanding balance
of approximately $67,000 of the advance of $100,000 was extinguished and accrued
interest was forgiven.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2003 2002
---- ----
Computer equipment $2,808 $30,097
Office equipment -- 16,258
Vehicles -- 27,579
------ -------
2,808 73,934
Less: Accumulated depreciation (508) (50,841)
------ -------
Property and Equipment, net $2,300 $23,093
====== =======
F-12
Depreciation expense was $4,333, $83,716 and $85,597 for the years ended
December 31, 2003, 2002 and 2001 respectively. During the year ended 2003, the
majority of the Company's property and equipment was either sold or written-off,
resulting in a loss of $33,181.
NOTE 6 - INVESTMENT IN COMSIGN, LTD.
During the year ended December 31, 2002, the Company wrote-off the remaining
goodwill and the balance of its investment in ComSign, Ltd.. During the year
ended December 31, 2003, the Company sold its equity interest in ComSign, Ltd.
for $40,000 to Comda, Ltd. the other stockholder in ComSign, Ltd. Since the
Company had previously written off this entire investment, the $40,000 has been
recorded as a gain on sale of its investment in ComSign, Ltd. during the year
ended December 31, 2003. Accordingly, the Company is no longer providing
summarized financial data for ComSign, Ltd.
NOTE 7 - INCOME TAXES
At December 31, 2003, the Company had available approximately $20 million of net
operating loss carryforwards for U.S. federal income tax purposes which expire
in the years 2014 through 2023, and approximately $6 million of foreign net
operating loss carryforwards with no expiration date. Due to the uncertainty of
their realization, no income tax benefit has been recorded by the Company for
these net operating loss carryforwards as valuation allowances have been
established for any such benefits. The use of the U.S. federal net operating
loss carryforwards is subject to limitations under Section 382 of the Internal
Revenue Code pertaining to changes in stock ownership.
Significant components of the Company's deferred tax assets for U.S. federal and
Israel income taxes are as follows:
December 31,
------------
2003 2002
---- ----
Net operating loss carryforwards $8,878,622 $9,528,747
Stock based compensation 352,050 833,763
Other 240,296 240,058
--------- ---------
Total deferred tax assets 9,470,968 10,602,568
Valuation allowance (9,470,968) (10,602,568)
---------- ---------
Net deferred tax assets $ -- $ --
========= ==========
The valuation allowance decreased $1,131,600 and increased $1,506,583 for the
years ended December 31, 2003 and 2002 respectively.
NOTE 8 - STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the "Plan") and has reserved up to 450,000
shares of Common Stock for issuance thereunder. In December 1999, the Plan was
amended to increase the total number of shares available for grant to 1.5
million. As of December 31, 2003 a total of 714,566 options were outstanding
under the 1996 Plan and future grants have been discontinued.
In July 1998, the Board of Directors adopted the Non-Executive Directors Stock
Option Plan ("the Directors' Plan") and has reserved up to 25,000 shares of
common stock for issuance thereunder. In May 2001, the Plan was amended to
increase the total number of shares available for grant to 75,000. In August
2002, the Company adopted the 2002 Non-Employee
F-13
Directors' Plan (the "2002 Directors' Plan") which provides for 275,000 shares
available for grant. Both plans provide for the grant of options to directors
who are not otherwise employed by the Company. As of December 31, 2003,
outstanding options under the Directors' Plan and the 2002 Directors' Plan
totaled 0.
In July 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Incentive Plan") and has reserved a total of 1.5 million shares of common stock
for issuance thereunder. In May 2001, the Plan was amended to increase the total
number of shares available for grant to 3,500,000. The 2000 Incentive Plan
provides for the grant of incentive stock options, nonqualified stock options,
stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash
obligations, other stock-based awards and performance units. The 2000 Incentive
Plan also permits cash payments under certain conditions. As of December 31,
2003, there were 1,285,609 options outstanding under the 2000 Incentive Plan.
The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and the terms of the awards and exercise prices. The options are
exercisable for a period not to exceed ten years from the date of grant. Vesting
periods range from immediately to five years.
OTHER OPTION GRANTS
In addition to the options granted under the Stock Option Plans, the Company has
issued options outside of the plans, pursuant to various agreements. Stock
option activity for 2001, 2002 and 2003 is summarized as follows:
Weighted
Average
Options Exercise
Plan Non plan Total Price
---- -------- -----
Options outstanding, January 1, 2001 2,785,625 50,000 2,835,625 $3.18
Granted 575,000 0 575,000 3.53
Exercised (80,000) (50,000) (130,000) 0.01
Forfeited (4,000) 0 (4,000) 6.03
------- -------
Options outstanding, December 31, 2001 3,276,625 0 3,276,625 3.36
Granted 905,000 0 905,000 0.85
Exercised (332,150) 0 (332,150) 0.01
Forfeited (742,600) 0 (742,600) 3.30
--------- ---------
Options outstanding, December 31, 2002 3,106,875 0 3,106,875 2.81
Granted 0 0 0 0.00
Exercised (60,000) 0 (60,000) 0.01
Forfeited (1,046,700) 0 (1,046,700) 1.64
----------- -----------
Options outstanding and exercisable,
December 31, 2003 2,000,175 0 2,000,175 $3.50
---------- -- ---------
Shares of common stock available for
future grant under the plan 2,564,391
---------
F-14
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Exercisable
Weighted Average Weighted
Remaining Average
Number Contractual Exercise Number Exercise
Ranges of Price Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ----- ----------- -----
$0.16 50,000 8.77 0.16 50,000 0.16
$1.53-1.68 293,300 7.87 1.66 293,300 1.66
$2.56-3.56 324,941 6.29 3.25 324,941 3.25
$3.91-5.06 1,323,934 6.47 4.08 1,323,934 4.08
$6.84-7.00 8,000 4.41 6.93 8,000 6.93
------ ----- ----- ------ ----
$0.16-$7.00 2,000,175 6.69 $3.50 2,000,175 $3.50
---------- ----- ------ ---------- -----
Weighted-average grant date fair value of options granted in 2003, 2002 and
2001, under the Black-Scholes option pricing model, was none, $0.69 and $2.18
per option, respectively.
WARRANTS
Warrant activity for 2001, 2002 and 2003 is summarized as follows:
Weighted
Average
Exercise
Warrants Price
-------- -----
Warrants outstanding, January 1, 2001 2,224,458 $ 7.65
Granted 0 $ -
Exercised 0 $ -
Forfeited 0 $ -
----------------- --------------
Warrants outstanding, December 31, 2001 2,224,458 $ 7.65
Granted 0 $ -
Exercised 0 $ -
Forfeited -444,458 $ 6.83
----------------- --------------
Warrants outstanding, December 31, 2002 1,780,000 $ 7.85
Granted 0 $ -
Exercised 0 $ -
Forfeited -110,000 $ 4.30
----------------- --------------
Warrants outstanding and exercisable,
December 31, 2003 1,670,000 $ 8.08
----------------- --------------
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There are an additional 495,000 warrants with an exercise price of $22.21 that
are issuable upon the exercise of certain warrants with an exercise price of
$8.84.
STOCK ISSUANCES
During the year ended December 31, 2001, the Company completed the following
common stock transactions:
The Company issued 237,556 shares of Common Stock from the exercise of various
outstanding stock options and warrants
During the year ended December 31, 2002, the Company completed the following
common stock transactions:
The Company issued 667,671 shares of Common Stock from the exercise and exchange
of various outstanding stock options and warrants.
During the year ended December 31, 2003, the Company completed the following
common stock transactions:
The Company issued 60,000 shares of Common Stock from the exercise of various
outstanding stock options.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is or has been involved in the following legal proceedings:
On or about June 20, 2003, the Company initiated litigation in the Supreme Court
of the State of New York, County of Westchester, against Ripp Entertainment
Group, Inc. ("Ripp"), seeking the sum of $130,000 on a defaulted promissory
note. Ripp removed the case to Federal Court and filed an answer with two
counterclaims against the Company, seeking (a) compensatory damages in excess of
$1,000,000 and punitive damages in the amount of $3,000,000 for allegedly
fraudulently inducing Ripp to enter into a certain Consulting Agreement with the
Company, and (b) damages in excess of $210,000 for the Company's alleged failure
to pay Ripp for services rendered under the Consulting Agreement. In November
2003, a settlement was reached pursuant to which both the Company's claims and
Ripp's counterclaims were dismissed with prejudice. In addition, Ripp
surrendered to the Company the 150,000 stock options which it had obtained in
conjunction with the Consulting Agreements dated June 27, 2001 and September 25,
2000.
On August 14, 2002, nine purported stockholders of the Company filed a complaint
against the Company, eight of its current or former officers and several third
parties in the United States District Court for the Southern District of New
York. The action, which is known as EILENBERG ET AL. V. KRONITZ ET AL. (02 Civ.
6502), alleges, among other things, that the Company issued a series of false
and misleading statements, including press releases, that misled the plaintiffs
into purchasing the Company's common stock. The complaint seeks relief under
federal securities laws and common law, and demands compensatory damages of $7
million or more, and punitive damages of $50 million or more. The Company
believes it has meritorious defenses to this lawsuit. The Company and most of
its current or former officers have filed a motion based upon the federal
securities laws to dismiss the complaint for failure to state a claim and to
plead with particularity under Rule 9(b) of the Federal Rules of Civil
Procedure. After hearing arguments on November 26, 2002, the Court granted
defendants' motion to dismiss the complaint based on Rule 9(b). Plaintiffs filed
an amended complaint, and the Court held a settlement conference on June 24,
2003. Following this settlement conference, the Court adjourned the time for the
Company and all defendants to respond to the amended complaint without date in
order to facilitate settlement negotiations.
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Counsel for the EILENBERG plaintiffs filed a second action against the Company
and several of its current or former officers in the same court on August 21,
2002, this time on behalf of three additional purported stockholders as
plaintiffs. This action, which is known as STURM ET AL. V. TOKAYER ET AL. (602
Civ. 6672), alleged, among other things, that the Company had violated the
federal securities laws by distributing false and misleading materials in
connection with the annual shareholder meeting scheduled for August 26, 2002,
and that several officers and directors had breached duties to the Company and
committed acts of waste and mismanagement by paying excessive salaries to
themselves and others. Plaintiffs promptly moved for a temporary restraining
order to enjoin the annual shareholder meeting from being conducted on August
26, 2002. The Court denied this motion. The Company believes it has meritorious
defenses to this lawsuit. The Company and the other defendants thereafter moved
to dismiss the complaint for failure to state a claim for relief. In response,
the plaintiffs filed an amended complaint, which deleted the prior claims
concerning violations of the federal securities laws, but continued to assert
derivative claims for waste and mismanagement. The Court denied defendants'
motion to dismiss the latter claims but directed that plaintiffs submit a more
detailed verification to the amended complaint and correct an allegation
concerning one of the defendants. Plaintiffs have served their Second Verified
and Amended Complaint. Subsequent to the filing of this Second Amended and
Verified Complaint, and following a June 24, 2003 conference with the Court, the
Court adjourned the time for the Company and all defendants to respond to the
amended complaint without date in order to facilitate settlement discussions.
The Company has notified the insurer that issued a directors and officers'
liability policy to the Company covering the period in which the filing of the
Eilenberg and Sturm actions occurred. The Company is seeking, among other
things, to recover its costs of defense to the extent provided in the policy.
On November 17, 2003, The Company and the plaintiffs in each of the Eilenberg
Action and the Sturm Action entered into a settlement agreement (the "Settlement
Agreement") pursuant to which (i) the Company paid the plaintiffs in the
aggregate approximately $333,000 to the plaintiffs in the Eilenberg Action, the
parties exchanged mutual releases and (iii) the insurer made certain payment to
the plaintiffs. Under the Settlement Agreement, the Company and each of the
other named defendants in each of the Sturm Action and the Eilenberg Action
denied any violation of federal or state laws. By consent of the parties, on
December 1, 2003, United States District Court for the Southern District of New
York entered an order dismissing the each of the Eilenberg Action and the Sturm
Action with prejudice and without costs.
The Company's former attorneys commenced an action in state court in New York in
January 2003 seeking unpaid legal fees in the approximate amount of $324,000.
The Company's answer denies the complaint's material allegations and alleges as
defenses that it was over-billed in unreasonable amounts and otherwise damaged
by the law firm's failure to advise properly in the Sturm Action. While
conducting discovery, the parties engaged in settlement negotiations. On October
29, 2003, the parties executed a Settlement Agreement agreeing to resolve all
outstanding claims with regard to the dispute. Under the terms of the Settlement
Agreement, the Company's former attorneys dismissed all outstanding claims in
the action with prejudice and the Company agreed paid to Company's former
attorneys $133,899 with respect to its invoices in the Sturm Action, $73,748
with respect to its invoices in the Eilenberg Action, and $42,353 with respect
to general Company matters. The parties also exchanged mutual general releases.
EMPLOYMENT AND TERMINATION AGREEMENTS
In October 2003, Daniel C. Stein, TTR's former Chief Executive Officer ("Mr.
Stein"), was paid a one-time gross payment of $78,000 under the terms of his
Termination and Settlement Agreement with the Company. Additionally, in
consideration of Mr. Stein's waiver of certain
F-17
claims under his employment agreement, the outstanding balance of approximately
$67,000 of the advance of $100,000 made to Mr. Stein upon the commencement of
his employment in May 2002 was extinguished. The initial one-third of such
advance (approximately $33,000) was, consistent with the terms of Mr. Stein's
employment agreement, extinguished at year-end 2002. In addition, the 550,000
stock options held by Mr. Stein were extinguished and are no longer exercisable.
In connection with his resignation, Mr. Stein also received certain limited
benefits, including limited indemnification and general releases.
The Company's aggregate annual commitments under the existing employment
agreements are approximately $322,000 and $268,500 during 2004 and 2005. In
addition, each of the employment agreements provides for payments through the
term of the employment agreement under certain circumstances.
LEASE COMMITMENTS
As of December 31, 2003, the Company had no lease obligations.
NOTE 10 - GEOGRAPHIC DATA
U.S. % of Total Israel % of
Total
For the year ended
December 31, 2003
Revenue $ -- 0.00% $ -- 0.00%
Operating gain (loss) $(2,233,797) -64.44% $ 5,700,399 164.44%
Identifiable assets $ 3,253,968 100.00% $ -- 0.00%
For the year ended
December 31, 2002
Revenue $ -- 0.00% $ -- 0.00%
Operating loss $(2,969,015) 72.27% $(1,138,971) 27.73%
Identifiable assets $ 765,530 93.94% $ 49,414 6.06%
For the year ended
December 31, 2001
Revenue $ -- 0.00% $ -- 0.00%
Operating loss $(2,589,846) 50.25% $(2,563,878) 49.75%
Identifiable assets $ 5,163,161 78.82% $ 1,387,786 21.18%
NOTE 11 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
-------- -------- -------- -------- -------
2003
Revenues $ -- $ -- $ -- $ -- $ --
Net income (loss) $(560,386) $4,990,778 $(770,310) $(193,480) $3,466,602
Net income (loss) per share -
basic and diluted $(.03) $.28 $(.05) $.00 $.20
2002
Revenues $ -- $ -- $ -- $ -- $ --
Net loss $(950,152) $(1,887,785) $(1,166,735) $(1,240,079) $(5,244,751)
Net loss per share -
basic and diluted $(.05) $(.11) $(.07) $(.06) $(.29)
F-18
2001
Revenues $ -- $ -- $ -- $ -- $ --
Net loss $(1,291,867) $(1,276,115) $(1,355,739) $(1,574,916) $(5,498,637)
Net loss per share -
basic and diluted $(.07) $(.07) $(.08) $(.09) $(.31)
NOTE 12 - SUBSEQUENT EVENTS
a) The Company announced on January 14, 2004 that it and Lucent
Technologies, Inc. ("Lucent") entered into the Development and Licensing
Agreement, effective as of January 6, 2004, as subsequently amended as
of January 16, 2004 (the "Development and Licensing Agreement"),
pursuant to which Lucent has agreed to develop for and license to the
Company next-generation management and routing technologies and
equipment designed to provide Fiber-to-the-Premises (FTTP) capabilities
for voice, video, data, and voice-over-Internet protocol (VoIP)
services. The Development and Licensing Agreement contemplates that
Lucent deliver to the Company design models of specified equipment
designed to enable the provision of very rapid broadband access to a
range of communication services directly to the consumer's facility
(collectively, the "Equipment"). On February 10, 2004, the Company filed
with the Securities and Exchange Commission ("SEC") a definitive proxy
statement (the "Proxy Statement") soliciting stockholder approval to
enter into the transactions contemplated by the Development and
Licensing Agreement (collectively, the "Transaction"). A special meeting
of the stockholders was scheduled for and held on March 4, 2004, at
which the Company's stockholders approved the Transaction. Following
stockholder approval of the Transaction, the Company has commenced
operations to provide and market products in the field of advanced
telecommunication equipment. As of March 4, 2004, the Company had
remitted to Lucent $1 million and is obligated to remit to Lucent
another $2 million through February 15, 2005 and $350,000 required for
specified regulatory specifications, not including normal operating
expenses.
b) On January 21, 2004, the Company's Compensation Committee awarded
164,406 non-qualified, options to purchase the company's common stock at
a $0.56 strike price and immediate vesting with a 5 year life, to
independent director Richard Rosenblum and another 164,406
non-qualified, options to purchase the company's common stock at a $0.56
strike price and immediate vesting with a 5 year life, to independent
director Juan Mendez.
c) On January 28, 2004, TTR and Mr. Judah Marvin Feigenbaum, former acting
Chief Executive Officer and a director ("JMF"), entered into an
agreement (the "Separation Agreement") whereby JMF resigned from all
positions held with Company. Under the terms of the Separation
Agreement, in consideration of releases to the Company, the Company paid
to JMF approximately $60,000 for services provided during 2003, less
payroll deductions and withholdings. The Company also issued to JMF a
five-year option to purchase up to 164,406 shares of the Company's
common stock, par value $0.001 (the "Common Stock") at a per share
exercise price of $0.56 (a premium to the grant date's closing market
price of the Common Stock), subject to cashless exercise provisions.
Following the approval by the Company's stockholders of the Development
and Licensing Agreement, the Company remitted to JMF a $60,000 payment.
The Company also agreed, under certain conditions, to issue options to
purchase up to an additional 328,812 shares of the Company's Common
Stock at a per share exercise price not less than the market price at
the time of issuance. JMF has agreed to certain restrictions on the sale
or other transfer of shares of Common Stock issuable upon exercise of
these options.
d) On March 3, 2004, the Company entered into a three-year employment
agreement with Frank Galuppo as Chief Executive Officer and Director.
The agreement provides for an annual base salary of $180,000 for the
first 12 months, then increases to $210,000 per annum for the next 12
months and increases to $235,000 per annum for the last 12 months. If
Mr. Galuppo is terminated other than for cause (as defined in the
employment agreement) or if Mr. Galuppo
F-19
terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to receive the equivalent of three month salary
and benefits, if such event takes place within the first 12 months of
employment; he will be entitled to receive the equivalent of six month salary
and benefits if such event takes place after the first 12 months of employment.
Additionally, in connection with his employment, the Mr. Galuppo was issued,
under the Company's 2000 Equity Incentive Plan, options to purchase up to
1,315,250 shares of the Company's Common Stock, such option to vest over the
next three (3) years in equal quarterly installments beginning June 30, 2004, in
each case at a per share exercise price of $0.79.
(e) On March 8, 2004, Raj Varadarajan, the Company's Vice President of Product
Realization, was issued in conjunction with his employment agreement, options to
purchase up to 100,000 shares of the Company's Common Stock under the Company's
2000 Equity Incentive Plan, such option will vest on March 8, 2005, at a per
share exercise price of $0.80.
(f) On March 8, 2004, William Zakowski, the Company's Vice President of Business
Development, was issued in conjunction with his employment agreement, options to
purchase up to 100,000 shares of the Company's Common Stock under the Company's
2000 Equity Incentive Plan, such option will vest on March 8, 2005, at a per
share exercise price of $0.80.
F-20
Prospective Investors may rely on the information contained in this
Prospectus. Neither we nor the selling stockholders have authorized anyone to
provide prospectus investors with information different from that contained in
this Prospectus. The information in this Prospectus is correct only as of the
date of this Prospectus, regardless of the time delivery of this Prospectus or
any sale of these securities.
AMEDIA NETWORKS, INC.
up to 18,985,844 shares of Common Stock
PROSPECTUS
___________, 2004
68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was lawful.
In the case of an action by or in the right of the corporation, Section
145 empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or complete action in
any of the capacities set forth above against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in and not opposed to the best interests of the
corporation, except that indemnification is not permitted in respect of any
claim, issue or matter as to which such person is adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all of the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such court deems proper.
Section 145 further provides: that a Delaware corporation is required to
indemnify a director, officer, employee or agent against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with any
action, suit or proceeding or in defense of any claim, issue or matter therein
as to which such person has been successful on the merits or otherwise; that
indemnification provided for by Section 145 not be deemed exclusive of any other
rights to which the indemnified party may be entitled; that indemnification
provided for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs,
executors and administrators; and
II-1
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer against any such liability asserted against him in any such
capacity or arising out of his status as such whether or not the corporation
would have the power to indemnify him against liability under Section 145. A
Delaware corporation may provide indemnification only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct. Such determination is to be made (i) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even through less than a quorum or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion or (iii) by the stockholders.
Section 6 of the Registrant's certificate of incorporation provides
that:
"To the fullest extent that the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended,
permits elimination or limitation of the liability of directors, a
director of the corporation shall not be personally liable to the
corporation or any of its shareholders for any breach of duty in his
capacity as a director. Any repeal or modification of the foregoing
sentence by the shareholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing
at the time of such repeal or modification."
Section 102(b)(7) of the Delaware Corporation Law provides that the
Certificate of Incorporation of a Delaware corporation may contain a provision
eliminating the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director for (i) any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) the payment of
unlawful dividends or the making of unlawful stock purchases or redemptions
or(iv) any transaction from which the director derived a personal benefit.
Section 7 of the Registrant's certificate of incorporation contains the
following provisions with respect to the elimination or limitation of liability
of the Registrant's directors:
"The directors and officers of the corporation shall be entitled
to such rights of indemnification and advancement of expenses, including
attorneys' fees, in the defense of any action or threatened action in
which a director or officer is or may be a party as the Board of
Directors may by resolution prescribe."
The Registrant's by-laws provide that it will indemnify its directors,
executive officers, other officers, employees and agents to the fullest extent
permitted by law
II-2
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than broker
commissions, payable by the Issuer in connection with the sale of the shares
offered hereby. All amounts shown are estimates (except for the SEC filing
fees).
SEC filing fee $ 4,200
Legal fees and expenses $35,000
Blue sky filing fees and expenses
(including counsel fees) $ 5,000
Accounting fees and expenses $15,000
Printing and engraving expenses $ 5,000
Miscellaneous expenses $ 6,000
Total $70,200
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following paragraphs set forth certain information with respect to
all securities sold by us within the past three years without registration under
the Securities Act.
1. In November 2002, we issued to our former Chief Operating Officer and
current Vice President and Director out of our 2000 Equity Incentive Plan
options to purchase up to 250,000 shares of our Common Stock at a per share
exercise price of $1.66. The options were scheduled to vest over five years in
equal annul installments of 50,000. Following the sale of our Copy Protection
Business in May 2003, the options vested in full.
2. In January 2002, we issued to our former Chief Technology Officer out of
our 2000 Equity Incentive Plan options to purchase up to 40,000 shares of our
Common Stock at a per share exercise price of $1.68. In November 2002, we issued
to such person out of our 2000 Equity Incentive Plan additional options to
purchase up to 50,000 shares of our Common Stock at a per share exercise price
of $0.16.
3. In May 2002, we issued to our then newly hired Chief Executive Officer,
in connection with his employment, out of our 2000 Equity Incentive Plan options
to purchase up to 550,000 shares of Common Stock, such option to vest over three
years, with the option for one-third of the shares of Common Stock vesting in
May 2003 and the option for the remaining shares vesting over the next
succeeding eight calendar quarters, in each case at a per share exercise price
of $1.06. The options were terminated upon such officer's resignation in October
2003 from all positions held in our company from our board of directors.
4. In November 2002, we issued nine accredited investors a total of 300,000
shares of Common Stock in exchange for (and cancellation of) warrants to
purchase up to 350,000 shares of Common Stock at per share exercise prices
ranging between $6.50 and $8.50, which warrants were issued in June 2000 (the
"Previous Warrants").
II-3
The terms of the Previous Warrants would have entitled the holder of the
Previous Warrants, upon the closing of the sale of the Copy Protection Business,
pursuant to the cash-less exercise provisions contained therein, to acquire
additional shares of Common Stock equal to approximately one third of the
Company's issued and outstanding Common Stock.
5. In August 2002, we issued to each of four newly elected independent
directors out of our 2002 Non-Employee Directors Stock Option Plan options to
purchase up to 55,000 shares of our Common Stock, at a per share exercise price
of $0.25. These options expired unexercised by January 2004 upon these
directors' resignation from our Board of Directors.
6. In January 2004, we issued to each of two independent directors 164,406
five year non-plan options to purchase up to 164,406 shares of our Common Stock
at a per share exercise price of $0.56.
7. In January 2004, we issued to our then interim Chief Executive Officer
and a director, in connection with his resignation from all positions held with
our company, five year non-plan options to purchase up 164,406 shares of our
Common Stock at a per share exercise price of $0.56.
8. In March 2004, we issued to our Chief Executive Officer and a director,
in connection with his employment, out of our 2000 Equity Incentive Plan options
to purchase up to 1,315,520 shares of our Common Stock at a per share exercise
price of $0.74. The option is to vest over three years, beginning June 30, 2004.
9. In March 2004, we issued to each of two new employees, out of our 2000
Equity Incentive Plan, options to purchase up to 100,000 shares of the Company's
Common Stock at a per share exercise price of $0.80. The options are scheduled
to vest in March 2005.
10. In May 2004, in consideration of services provided, we issued to a
service provider non-plan four year warrants to purchase up to 100,000 shares of
Common Stock at a per share exercise price of $0.62.
11. In May 2004, we issued to three newly elected non-employee directors out
of our 2002 Non-Employee Directors' Stock Option Plan options to purchase up to
a total of 225,000 shares of Common Stock at a per share exercise price of
$0.71. The options are to vest over two years in equal quarterly installments at
the end of each quarter, beginning September 30, 2004.
12. In May 2004, we issued to a member of our newly established advisory
board out of our 2000 Equity Incentive Plan options to purchase up to a 60,000
shares of Common Stock at a per share exercise price of $0.71. The options are
to vest over two years in equal quarterly installments at the end of each
quarter, beginning September 30, 2004.
13. In April 2004, in connection with the commencement of employment we
issued to a non-management employee out of the 2000 Equity Incentive Plan
options to purchase up to 20,000 shares of Common Stock at a per share
II-4
exercise price of $0.65. Options for 25% of the shares are to vest on the first
anniversary of employment and the options for the remaining shares in equal
quarterly installments thereafter.
14. In August 2004, we entered into agreements with 36 investors pursuant to
which we issued to them 52,500 shares of our Series A 7% Convertible Preferred
Stock, par value $0.001 per share (the "Series A"). In connection with the
issuance of the Series A shares, we issued to the purchasers of the Series A
shares five-year warrants (the "Investor Warrants") to purchase up to 3.5
million shares of Common Stock at a per share exercise price of $1.50 and up to
3.5 million shares of Common Stock at a per share exercise price of $2.50.
15. In connection with the placement of the Series A shares, we issued to
three placement agents five-year warrants (the "Placement Agent Warrants") to
purchase, in the aggregate, up to 1.4 million shares of Common Stock. The
Placement Agent Warrants are exercisable at prices ranging from $0.75 to $2.50
per share.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or Regulation S under
such Securities Act. Except with respect to securities sold under Regulation S,
the recipients of securities in each such transaction acquired the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
ITEM 27. EXHIBITS
3.1 Certificate of Incorporation of the Company dated July 14, 1994 (1)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company dated August 17, 1994(2)
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company, dated January 30, 1999(3)
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company, dated December 21, 1999(3)
3.5 Certificate of Amendment to the Certificate of Incorporation of the
Company, dated July 15, 2000. (4)
3.6 By-Laws of the Company, as amended(2)
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4.1 Specimen Common Stock Certificate(1)
4.2 Form of Warrant between the Company and certain private investors(3)
4.3 Form of Agent Warrant between the Company and certain entities(3)
4.4 Certificate of Designations of Rights and Preferences of the Series A
Convertible Preferred Stock of the Company. (10)
4.5 Form of Common Stock Purchase Warrant issued by the Company to certain
investors. (10)
4.6 Form of Common Stock Purchase Warrant issued by the Company to certain
placement agents. (10)
4.7 Form of Common Stock Purchase Warrant issued by the Company to the
investor identified therein. (10)
5.1 Opinion of Lawrence Kallaur. *
10.1 1996 Incentive and Non-Qualified Stock Option Plan, as amended (2)
10.2 The Company's 2000 Equity Incentive Plan (5)
10.3 The Company's Non-Executive Directors Stock Option Plan(5)
10.4 The Company's 2002 Non-Employee Directors Stock Option Plan (6)
10.5 Asset Purchase Agreement among the Company, Macrovision Corporation and
Macrovision Europe Ltd., dated as of November 4, 2002. (7)
10.6 Termination and Settlement Agreement dated as of January 28, 2004
between the Company and Judah Marvin Feigenbaum (8)
10.7 Stock Option Agreement dated as of January 28, 2004 between the Company
and Judah Marvin Feigenbaum (8)
10.8 Development and Licensing Agreement dated as of January 6, 2004 between
the Company and Lucent Technologies Inc. (9)
10.9 Amendment to the Development and Licensing Agreement between the Company
and Lucent Technologies, Inc. (9)
10.10 Employment Agreement between the Company and Frank Galuppo dated as of
March 3, 2004 +
10.11 Form of Securities Purchase Agreement dated as of July 30, 2004, among
the Company and purchasers of the Convertible Preferred Stock. (10)
10.12 Form of Registration Rights Agreement dated as of July 30, 2004, among
the Company and certain investors. (10)
10.13 Private Equity Credit Agreement dated as of August 9, 2004 by and
between the Company and the investor identified therein. (10)
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10.13 Registration Rights Agreement dated as of August 9, 2004 by and between
the Compnay and the investor identified therein.(10)
14.1 Code of Business Conduct ( 8)
15. Subsidiary of Amedia: TTR Technologies, Ltd., an Israeli corporation,
wholly-owned.
23.1 Consent of Lawrence Kallaur, Esq. (included in Exhibit 5.1)
23.2 Consent of Marcum & Kliegman, LLP *
23.3 Consent of Brightman Almagor & Co., a member of Deloitte Touche
Tohmatsu *
+ Management Agreement
* Filed Herewith
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form SB-2,
No. 333-11829, and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-KSB filed
for the year ended December 31, 1998 and incorporated herein by reference.
(3) Filed as an Exhibit to Registrant's Registration Statement on Form S-1, No.
33-32662 and incorporated herein by reference.
(4) Filed as an Exhibit to Registrant's Report on Form 10-K filed for the year
ended December 31, 2000 and incorporated herein by reference.
(5) Filed as an Exhibit to Registrant's Report on Form 10-K filed for the year
ended December 31, 2001 and incorporated herein by reference.
(6) Filed as an Exhibit to Registrant's Revised Definitive Proxy Statement on
Form DEFRA 14-A for the 2002 Annual meeting of Stockholders, and incorporated
herein by reference.
(7) Filed as an Exhibit to the Registrant's Proxy Statement on Form 14-A, and
incorporated herein by reference.
(8) Filed as an Exhibit to Registrant's Report on Form 10-KSB for the year ended
December 31, 2003.
(9) Filed as an Exhibit to Registrant's Definitive Proxy Statement on Form DEF
14-A filed on February 10, 2004 for a special meeting of Stockholders, and
incorporated herein by reference.
(10) Filed as an Exhibit to Registrant Current Report on Form 8-K filed on
August 12, 2004.
ITEM 28. UNDERTAKINGS.
Amedia Networks, Inc. hereby undertakes the following:
(a)(1) To file, during any period in which it offers or sells
securities, post-effective amendment to this registration statement to:
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(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned in Holmdel, New Jersey,
on the 24th day of November, 2004.
AMEDIA NETWORKS, INC.
BY: /S/ FRANK GALUPPO
-------------------------------------------------
CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER AND OFFICER DULY
AUTHORIZED TO SIGN ON BEHALF OF REGISTRANT)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Frank Galuppo as his true and
lawful attorneys-in-fact and agent, with full powers of substitution and
resubstitution, for him and in his name, place and stead, to sign in any and all
capacities any and all amendments (including post-effective amendments) to this
Registration Statement on Form SB-2 and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLES DATE
--------- ------ ----
/S/ FRANK GALUPPO CHIEF EXECUTIVE OFFICER NOVEMBER 24, 2004
- ---------------------------- (AND PRINCIPAL FINANCIAL
FRANK GALUPPO AND ACCOUNTING OFFICER)
AND DIRECTOR
/S/ JUAN MENDEZ CHAIRMAN OF THE BOARD NOVEMBER 24, 2004
- ----------------------------
JUAN MENDEZ
/S/ SAM BRILL DIRECTOR, VICE PRESIDENT, NOVEMBER 24, 2004
- ---------------------------- INTERNAL OPERATIONS
SAM BRILL
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/S/ RICHARD ROSENBLUM DIRECTOR NOVEMBER 24, 2004
- ----------------------------
RICHARD ROSENBLUM
/S/ GERALD BUTTERS DIRECTOR NOVEMBER 24, 2004
- ----------------------------
GERALD BUTTERS
/S/ ROBERT MARTIN DIRECTOR NOVEMBER 24, 2004
- ----------------------------
ROBER MARTIN
/S/ IVAN BERKOWITZ DIRECTOR NOVEMBER 24, 2004
- ----------------------------
IVAN BERKOWITZ
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