FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO.: 333-126351
PROSPECTUS
AMEDIA NETWORKS, INC.
17,486,723 shares of Common Stock
This Prospectus relates to the sale by the selling stockholders of up to
17,486,723 shares of our common stock, par value $0.001 (the "Common Stock")
consisting of shares of our Common Stock issuable (i) upon the conversion of
outstanding shares of Series B Preferred Stock we previously issued in a private
placement that was concluded in April and May 2005, (ii) in respect of dividends
thereon accrued through the fifth anniversary of issuance, (iii) upon the
exercise of warrants that were issued in connection with the same private
placement (iv) such additional shares of common stock as may be issued pursuant
to the anti-dilution provisions of the Series B Preferred Stock or through the
projected date of this registration statement, as well as (v) up to an
additional 150,000 shares issuable upon exercise of warrants unrelated to the
Series B Preferred 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 Bulletin Board under the trading symbol
"AANI". The last reported sales price per share of our Common Stock as quoted by
the OTC Bulletin Board on August 31, 2005, was $0.78.
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 9.
Neither the Securities Exchange and 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 August 31, 2005
PRINCIPAL EXECUTIVE OFFICE:
Amedia Networks, Inc.
2 Corbett Way
Eatontown, New Jersey 07724
(732) 440-1992
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 6
USE OF PROCEEDS........................................................... 17
DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS .............. 17
SELLING STOCKHOLDERS...................................................... 21
PLAN OF DISTRIBUTION...................................................... 26
DESCRIPTION OF CAPITAL STOCK.............................................. 28
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES........................................................... 33
INTEREST OF NAMED EXPERT AND COUNSEL...................................... 33
LEGAL MATTERS............................................................. 33
EXPERTS................................................................... 33
WHERE YOU CAN FIND MORE INFORMATION....................................... 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 34
DOCUMENTS DELIVERED WITH THIS PROSPECTUS.................................. 35
We have not authorized anyone to provide you with information different from
that contained or incorporated by reference in this Prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of our
Common Stock only in jurisdictions where offers and sales are permitted. The
information contained in this Prospectus is accurate only as of the date of this
Prospectus, regardless of the time of delivery of this Prospectus or of any sale
of Common Stock.
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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.
Amedia Networks is a development stage company that designs, develops and
markets technology-based broadband access solutions for voice, video and data
services, focusing on fiber-based and Ethernet-based solutions. Our QoStream(TM)
product line is designed to deliver "triple play" (voice, video and data)
broadband communication. The core technologies underlying our initial products
were co-developed with Lucent Technologies, Inc. ("Lucent") at Lucent's Bell
Labs in New Jersey pursuant to our Development and Licensing Agreement with
Lucent dated as of January 6, 2004 (the "Development and Licensing Agreement").
We commercially introduced the QoStream product line in January 2005. These
products are designed for placement at various points in the network
infrastructure layout and are inter-operable with most installed FTTP
communications networks and equipment. We market our 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.
We have been engaged in the broadband access solutions business 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. In May
2004, we changed our name to "Amedia Networks, Inc."
We are a development stage company that has generated significant losses since
our inception in August 1994. We expect to continue operating at a loss through
at least 2005 as we expect to incur significant outlays and expenses in further
developing, upgrading and marketing or products. As of June 30, 2005, we had an
accumulated deficit of approximately $52.7 million. 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
challenges, expenses, delays and complications associated with a development
stage company. As a result of our condition, our independent registered public
accounting firm has included a "going concern" explanatory paragraph in their
audit reports on our audited 2004 and 2003 financial statements.
RECENT DEVELOPMENTS
In April and May 2005 we completed private placements to certain individual and
institutional investors of 77,650 shares of our newly designated Series B 8%
Convertible Preferred Stock, par value $0.001 per share (the "Series B Preferred
Stock"), for gross proceeds of $7.765 million. We intend to use the proceeds of
the financing for general corporate purposes, including working capital and the
funding of operating losses. Each share of the Series B Preferred Stock has a
stated value of $100 and is convertible into shares of our Common Stock at an
initial conversion rate of $1.01 per share (subject to adjustment if there are
certain capital adjustments or if we enter into certain specified types of
transactions, as further discussed in this Prospectus). The total number of
shares of Common Stock initially issuable upon
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conversion of the 77,650 shares of Series B Preferred Stock issued in the April
and May 2005 private placements is 7,688,122. Investors in this financing
received warrants to purchase 3,844,065 shares of shares of Common Stock at a
per share exercise price of $1.50 (subject to adjustment if there are certain
capital adjustments or if we enter into certain specified types of transactions,
as further discussed in this Prospectus). In connection with this transaction,
we also issued to a placement agent for the transaction warrants to purchase
1,153,220 shares of Common Stock, of which 768,814 shares are exercisable at an
exercise price of $1.01 and 384,406 shares are exercisable at an exercise price
of $1.50 per share. A more complete description of these transactions is
included elsewhere in this Prospectus under the caption "DESCRIPTION OF THE
AGREEMENTS WITH THE SELLING STOCKHOLDERS - SERIES B PREFERRED STOCK."
CORPORATE INFORMATION
Our principal offices are located at 2 Corbett Way, Eatontown New Jersey 07724
and our telephone number is (732) 440-1992. We maintain a website at
www.amedia.com. Information contained on our website is not part of this
Prospectus.
All references to "we," "our," or "us" in this filing refer to Amedia Networks,
Inc., a Delaware corporation, and our subsidiaries.
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 9 of
this Prospectus in deciding whether to purchase the Common Stock offered under
this Prospectus.
THE OFFERING
SECURITIES OFFERED BY THE 17,486,723 SHARES OF COMMON STOCK. (1)
SELLING STOCKHOLDERS
SHARES OUTSTANDING BEFORE THE 20,953,698 SHARES OF COMMON STOCK. (2)
OFFERING
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) 7,688,122 shares of our Common Stock issuable upon
conversion of 77,650 shares of our Series B 8% Convertible Preferred Stock, par
value $0.001 (the "Series B Preferred Stock") having a stated value of $100 per
share at a per share conversion price of $1.01, (b) up to 3,075,248 shares of
Common Stock issuable in respect of dividends on the Series B Preferred Stock
accrued and accruing through the fifth anniversary of issuance and (c) 3,844,065
shares of Common Stock issuable upon exercise of warrants issued in connection
with the Series B Preferred Stock (the "Series B Warrants") and (d) an
additional 1,460,745 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 first anniversary of the
effective date of this Registration Statement, we subsequently offer or issue
securities at a purchase price or conversion price lower than $1.01 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
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effective date of this Registration Statement, in each case as contemplated by
terms of agreements between us and such selling stockholders; (ii) (a) 1,153,222
shares of Common Stock issuable upon exercise of certain other warrants issued
to placement agents in connection with the issuance of the Series B Preferred
Stock, (b) an additional 115,323 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 by their unexercised warrants in the event that, on or prior to the
first anniversary of the effective date of this Registration Statement, we
subsequently offer or issue securities at a purchase price or conversion price
lower than $1.01 per share or warrants having an exercise price below the
exercise price of the warrants held by the selling stockholders as contemplated
by terms of these warrants; and (iii) 150,000 shares of Common Stock that
issuable upon exercise of warrants that are unrelated to the Series B Preferred
Stock that have piggy-back registration rights (the "Other Warrants") . For a
description of the agreements between us and the selling stockholders, see
"DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(2) Does not include (a) up to an aggregate of 6,502,642 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
and outstanding as of August 31, 2005, (b) any of the shares described in
clauses (i), (ii) or (iii) in footnote (1) above and (c) 8,581,506 shares of
Common Stock issuable upon exercise of certain other outstanding options and
warrants.
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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 SUBSTANTIAL AND CONTINUING LOSSES SINCE INCEPTION, COUPLED WITH SIGNIFICANT
ONGOING OPERATING EXPENSES, RAISE 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 expect to
continue to incur losses attributable to operations associated with our current
business and to lack revenues sufficient to offset these operating expenses. We
have raised capital to fund ongoing operations by private sales of our
securities, some of which sales have been highly dilutive and involve
considerable expense. In our present circumstances, there is substantial doubt
about our ability to continue as a going concern absent significant sales of our
existing products, substantial revenues or further substantial sales of our
securities.
We incurred a net loss of $4,320,828 for the six months ended June 30, 2005 and
a net income (loss) of $(8,322,211) and $3,466,602 for the fiscal years ended
2004 and 2003, respectively. Our 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 June 30, 2005, we had an accumulated deficit of $52,723,236.
As a result, we will need to generate significant revenue to achieve
profitability. 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.
We expect to spend significant additional amounts to enhance our products and
technologies, expand domestic and international sales and operations, fund
further product development and develop our broadband communications business.
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. 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. Even if we do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis.
Our independent registered public accounting firm's reports on our financial
statements for the years ended December 31, 2004 and 2003 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.
We anticipate incurring substantial sales and marketing, research and
development and general operating expenses in the course of fiscal 2005 and
thereafter that will require substantial amounts of additional
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capital on an ongoing basis. We will most likely have to obtain such capital
from sales of our equity, convertible equity and/or debt securities, unless we
generate significant revenues.
We believe that our existing cash resources will be sufficient to enable us to
maintain operations and meet our obligations as they come due until December
2005. However, such resources may not be sufficient to support new product
development or unforeseen contingencies. The extent and timing of our future
capital requirements will depend upon several factors, including the rate of
market acceptance of our initial products, the degree of competition that we
will face, and our level of expenditures, including those for product
development, inventory, 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.
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.
IF OUR INITIAL QOSTREAM FAMILY OF PRODUCTS IS NOT SUCCESSFUL IN THE MARKET, WE
MAY NOT BE ABLE TO GENERATE SUBSTANTIAL REVENUES OR ACHIEVE SUSTAINED
PROFITABILITY.
Our success is substantially dependent on the success of our QoStream products,
the first of which became commercially available in January 2005. As of June
2005, we have completed the commercial development of our QoStream product line
and have commenced limited commercial deployment. If the market accepts our
QoStream products, then we expect that these products will account for the vast
majority of our net revenue in the future. If our QoStream products are
unsatisfactory, or if we are unable to generate significant demand for these
products, or we fail to develop other significant products, our business may be
materially and adversely affected.
We have been engaged in the broadband access solutions business since only March
2004. 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 development-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 product base to encompass sophisticated business applications and other
in-house wiring options;
o unfavorable economic conditions in the technology industry;
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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.
IF OUR THIRD-PARTY COLLABORATORS DO NOT EFFECTIVELY MARKET AND SERVICE OUR
PRODUCTS, WE MAY NOT GENERATE SIGNIFICANT REVENUES OR PROFITS FROM SALES OF OUR
PRODUCTS.
We utilize third parties, such as system vendors, consultants, value added
resellers and system integrators, to sell and/or assist us in selling our
products. To date, we have signed agreements with several of these third-party
collaborators. We believe that the establishment of a network of third-parties
with extensive and specific knowledge of the various applications critical in
the industrial market is important for us to succeed in that market. For the
foreseeable future, we may sell fewer products if we cannot attract and retain
third-party collaborators to sell and service our products effectively and to
provide timely and cost-effective customer support. An increasing number of
companies compete for access to the types of partners we use. We cannot assure
you that our partners will successfully sell or assist us in selling our
products or provide us with adequate customer of support. If these relationships
are terminated or otherwise disrupted our operating performance and financial
results may be adversely affected.
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 and President, 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 (and President) and our Chief Financial
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.
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 utilized in
our QoStream products include World Wide Packets and Allied Telesyn. Other
competitors, including Alcatel, Salira, Optical Solutions, Motorola, UT Starcom
and Wave 7 Optics, are positioning solutions employing a different technological
approach. We will also face indirect competition from public and private
companies providing products that address the same fiber optic network problems
that our QoStream products 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
8
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 QoStream 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 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 successfully develop and market
such similar products, then our prospects and proposed business would be
materially adversely affected.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We have and intend to continue to sell our products internationally. Our
international operations and activities subject us to a number of risks,
including the risk of political and economic instability, difficulty in managing
foreign operations, potentially adverse taxes, higher expenses and difficulty in
collection of accounts receivable in some of these countries. We do not
currently cover known or anticipated operating exposures through foreign
currency exchange option or forward contracts.
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 in the United States, including potential
customers for products utilizing our
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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 from a significant downturn characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. The most recent
downturn was 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 most 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.
IF WE DO NOT DEVELOP OR ACQUIRE AND INTRODUCE NEW AND ENHANCED PRODUCTS ON A
TIMELY BASIS, OUR PRODUCTS MAY BE RENDERED OBSOLETE.
The markets for our broadband access communication products are characterized by
rapidly changing technology. The introduction of products by others based on new
or more advanced technologies could render our products obsolete and
unmarketable. Therefore, our ability to build on our existing technologies and
products to develop and introduce new and enhanced products in a cost effective
and timely manner will be a critical factor in our ability to grow and compete.
We cannot assure you that we will develop new or enhanced products successfully
and in a timely manner. Further, we cannot assure you that the market will
accept new or enhanced products. Our failure to develop new or enhanced
products, including our failure to develop or acquire the technology necessary
to do so, would have a material adverse effect on our business.
IF OUR COMPETITORS INTRODUCE BETTER OR CHEAPER PRODUCTS, OUR PRODUCTS MAY NOT BE
PROFITABLE TO SELL OR TO CONTINUE TO DEVELOP.
The business in which we engage is highly competitive. Advances in technology,
product improvements and new product introductions, as well as marketing and
distribution capabilities, and price competition
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influence success. Failure to keep pace with product and technological advances
could adversely affect our competitive position and prospects for growth. Our
products compete with those being offered by larger, traditional computer
industry participants who have substantially greater financial, technical,
marketing and manufacturing resources than us. We cannot assure you that we will
be able to compete successfully against these competitors or that competitive
pressures faced by us would not adversely affect our business or operating
results.
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 $23 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 PRODUCTS
OUR QOSTREAM PRODUCT LINE REMAINS SUBJECT TO SIGNIFICANT UNCERTAINTY AND MAY NOT
BE ACCEPTED IN THE MARKETPLACE.
Our QoStream 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 and since June 2005 there have been limited
commercial deployments. These products have not been commercially proven in
their current form.
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 QoStream product line and prospective products, intellectual property
and system designs. Our success is subject to the risks that:
o our products are found to be ineffective for the intended purposes;
o the 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
products.
Significant undetected errors or delays in new products or releases may affect
market acceptance of our products. There can be no assurance that, despite
extensive testing, errors will not be found in our initial QoStream 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 our 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.
WE WILL RELY ON THIRD PARTIES TO PROVIDE CERTAIN COMPONENTS FOR OUR PRODUCTS. IF
OUR VENDORS FAIL TO DELIVER THEIR PRODUCTS IN A RELIABLE, TIMELY AND
COST-EFFICIENT MANNER, OUR BUSINESS WILL SUFFER.
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We expect to depend on relationships with third parties such as contract
manufacturing companies, chip design companies and others who may be sole source
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. Our QoStream products may contain undetected flaws.
There can be no assurance that, despite testing by us and by potential
customers, flaws will not be found in our QoStream products, resulting in loss
of or delay in market acceptance. We may be unable, for technological or other
reasons, to develop and introduce our products in a timely manner in response to
changing customer requirements. Further, there can be no assurance that a
competitor will not introduce similar products. The introduction by a competitor
of either similar products or a superior alternative may diminish our
technological advantage, render our 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.
WE MAY NOT BE ABLE TO PROTECT INTELLECTUAL PROPERTY INHERENT IN OUR 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 developed in the course of the development
of the technologies underlying our QoStream products. Lucent owns the 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
12
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 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.
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 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.
RISKS CONCERNING THIS OFFERING AND CAPITAL STRUCTURE
THIS OFFERING MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON
STOCK.
This Prospectus relates to the sale or distribution of up to 17,486,723 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.
13
As of August 31, 2005, we had 75 million authorized shares of Common Stock, of
which 20,953,698 shares of our Common Stock were issued and outstanding as of
such date. Our board of directors has the authority, without further action or
vote of our stockholders, to issue all or a part of any authorized but unissued
shares of our Common Stock. Such stock issuances may be made at a price which
reflects a discount from the then-current trading price of our Common Stock. In
addition, in order to raise capital that we need at today's stock prices, we
would likely need to issue securities which are convertible into or exercisable
for a significant number of shares of our Common Stock. These issuances would
dilute your percentage ownership interest, which will have the effect of
reducing your influence on matters on which our stockholders vote, and might
dilute the book value of our Common Stock. You may incur additional dilution of
net tangible book value if holders of stock options or warrants, whether
currently outstanding or subsequently granted, exercise their options or
warrants to purchase shares of our Common Stock.
We currently have a concurrent offering of shares of our Common Stock that will
have a dilutive effect on any purchaser of shares under this Prospectus and the
Registration Statement of which it is a part. A registration statement on Form
SB-2 (SEC File Number 333-120771) covers sales by selling shareholders of shares
issued or issuable upon conversion of shares of our 7% Series A Convertible
Preferred Stock ("Series A Preferred Stock"), described more fully in the
section "Description of Capital Stock" below, as well as shares issuable upon
exercise of certain other warrants and options included therein. As of August
31, 2005, there were approximately 12.4 million shares of our Common Stock
reserved for issuance upon (i) the conversion of our outstanding Series A
Preferred Stock and in payment of dividends thereon, (ii) upon exercise of
warrants (the "Series A Warrants") issued in connection with our Series A
Preferred Stock or as additional shares issuable to the holders of our Series A
Preferred Stock or the Series A Warrants as liquidated damages as contemplated
by our agreements with these holders and (iii) upon exercise of warrants issued
to certain persons as compensation in connection with the placement of the
Series A Preferred Stock. Our Series A Preferred Stock is convertible into our
Common Stock at a conversion price of $0.75 per share, and the Series A Warrants
are exercisable at prices of $1.50 and $2.50 per share. Each of the Series A
Warrants contains limited cashless exercise provisions which, under certain
circumstances, would permit the holders to exercise the Series A Warrants
without paying the exercise price in cash. Additionally, that registration
statement includes an additional 428,812 shares issuable upon exercsie of
warrants that are unrelated to the Series A Preferred Stock. The shares included
in such registration statement that was previously filed are not covered by this
Prospectus or the Registration Statement of which it is a part.
In April and May 2005, we issued 77,650 shares of our Series B Preferred Stock.
As of August 31, 2005, there were approximately 17.3 million shares of our
Common Stock reserved for issuance upon the conversion of our Series B Preferred
Stock, in payment of dividends on our Series B Preferred Stock, upon exercise of
the Series B Warrants or as compensation warrants issued in connection
thereunder.
The shares of Common Stock issuable upon conversion of our Series B Preferred
Stock and our Series A Preferred Stock and exercise of the Series B Warrants and
Series A Warrants or the other warrants included in the concurrently effective
registration statement will be saleable without restriction immediately upon
issuance. The conversion or exercise of any Series B Preferred Stock or Series A
Preferred Stock or Series A Warrants or Series B 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
14
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 covering the resale of these shares. 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.
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 4,863,500 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.
Further, our board of directors and our shareholders have approved at our 2005
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 2006 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.
OUR STOCK PRICE IS VOLATILE.
The trading price for our Common Stock has been volatile. 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
15
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 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
16
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 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 for which the underlying shares of Common Stock
that are covered by this Prospectus are exercised for cash, we will receive
approximately $7.34 million in cash proceeds (before deducting fees and
commission). However, the holders of these warrants have cashless exercise
provisions that become effective under certain conditions and if these warrants
are exercised by the cashless exercise provision, we will not receive any cash
proceeds from the exercise of those warrants.
DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS
PRIVATE PLACEMENT OF THE SERIES B PREFERRED STOCK
Pursuant to the Securities Purchase Agreement dated as of April 26, 2005 (the
"Series B Securities Purchase Agreement") with each of the holders of the Series
B Preferred Stock, on April 26, 2005 and May 10, 2005 we raised aggregate gross
proceeds of $7.765 million from the private placement of 77,650 shares of our
Series B Preferred Stock. In connection with the issuance of the Series B
Preferred Stock, we issued to the holders of the Series B Preferred Stock
five-year warrants to purchase up to approximately 3.8 million shares of our
Common Stock at an exercise price of $1.50 per share (collectively the "Series B
Warrants").
The rights and preferences of the Series B 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 April 20, 2005. The following is
a summary of its principal rights and preferences. Each share of Series B
Preferred Stock has a stated value of $100 and is convertible into shares of
Common Stock at an initial conversion price of $1.01 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 8% per annum are
payable on a bi-annual basis, the first scheduled dividend payment date being
December 31, 2005, and on conversion and may be paid, at our option, either in
cash or in shares of Common Stock at a rate equal to 90% of the 5 day volume
weighted average price of the Company's Common Stock ending on the trading day
immediately preceding the dividend payment date. 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). If not converted earlier, the Series B
Preferred Stock will automatically convert on the fifth anniversary of issuance
into shares of Common Stock at the conversion price then in effect.
17
The Series B Warrants are exercisable at any time from earlier of (i) the date
which is six (6) months after the effective date of the Registration Statement
of which this Prospectus is a part or (ii) the first anniversary of their
issuance. The exercise prices for each of the Series B 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 Series B
Warrants on a "cashless" 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 Series B 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 Series B Preferred Stock and Series B Warrants specify that the
beneficial owner can convert Series B Preferred Stock or exercise Series B
Warrants in accordance with their respective terms by giving notice to us.
However, the holder may not convert Series B Preferred Stock or exercise Series
B Warrants 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 Series B Securities Purchase Agreement and a registration rights
agreement we entered into with the purchasers of the Series B Preferred Stock at
the same time (the "Series B Registration Rights Agreement"), we are obligated
initially to register under the Act the number of shares issuable on conversion
in full of the Series B Preferred Stock outstanding plus dividends thereon
accrued through the fifth anniversary of the issuance thereof and the number of
shares of Common Stock issuable upon exercise of the Series B Warrants, as well
as our good faith estimate of certain additional shares we might have to issue
to certain selling shareholders. Some of those 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 Series B
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 Series B Registration Rights
Agreement. Other shares we might be required to issue 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 first anniversary of
the effective date of the Registration Statement of which this Prospectus forms
a part, 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 an agreement with the placement agent for the Series B Preferred
Stock transaction, we are also registering 1,153,220 shares of Common Stock that
may become issuable upon exercise of warrants issued to the placement agent or
its designees, pursuant to which (i) 768,814 shares are issuable at a per share
exercise price of $1.01 and (ii) 384,406 shares are issuable at a per share
exercise price of $1.50. These warrants, each having an expiration date of
approximately five years from the closing, were issued as compensation in
connection with the placement of 77,650 shares of our Series B Preferred Stock.
These warrants are otherwise exercisable on substantially the same terms and
conditions as the Series B
18
Warrants. We are also registering an additional 115,323 shares of Common Stock
representing our current good faith estimate of additional shares that we might
be required to issue in respect of these warrants based on adjustments to the
number of shares covered thereby in the event that, on or prior to the first
anniversary of the effective date of the Registration Statement, we subsequently
offer or issue securities at a purchase price or conversion price lower than
$1.01 per share or warrants either (i) having an exercise price below the
exercise price of the Warrants or (ii) exercisable for more shares, on a
proportionate basis, than the number of shares of Common Stock issuable upon
exercise of such compensation warrants.
In the Series B 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 "Series B New Transaction") without the
prior consent of a majority in interest of the holders of the then outstanding
Series B Preferred Stock on any date which is earlier than first anniversary of
the effective date of the Registration Statement 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 Series B 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
Series B Warrants (such transaction being a "Series B Lower Price Transaction"),
then the terms of any unconverted share of Series B Preferred Stock shall be
modified to adjust the relevant conversion price in such Series B Preferred
Stock or the terms of any unexercised Series B Warrants shall be modified to
adjust the relevant 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 Series B 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 April 22, 2005, (b) pursuant to
any of our existing employee or non-employee directors stock option plans, and
(c) pursuant to certain transactions with any of our strategic partners (as
defined in the Series B Securities Purchase Agreement).
Under the Series B Registration Rights Agreement, we will be obligated to pay
liquidated damages to the holders of Series B Preferred Stock if the
Registration Statement is 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 "Series B Restricted Sale Date").
The amount that we must pay to the holders of the Series B Preferred Stock in
payment of the liquidated damages after a Series B Restricted Sale Date will be
1% of the sum of (X) the stated value of all Series B Preferred Stock not yet
converted and (Y) the stated value of such preferred stock converted within the
preceding 30 days but not yet sold for any 30-day period (and pro rata for any
such period which is less than 30 days). The Series B Preferred Stock holders
have the right to have these liquidated damages paid in shares of Common Stock
(valued at the conversion price).
19
Each of our officers and directors has signed an agreement with us limiting the
number of shares of Common Stock beneficially owned by him that he can sell
during certain periods of time (the "Principal's Agreement"). The obligation of
each officer and director under his Series B Principal's Agreement is separate
from the obligation of each other officer and director under his Series B
Principal's Agreement. Each Series B Principal's Agreement provides that,
without the prior consent of a majority in interest of the holders of the Series
B Preferred Stock 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 90 days after the
effective date of the Registration Statement (plus any days during which the
Registration Statement is suspended, if any). 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
We obtained the consent and waiver of a majority-in-interest of the Series A
Preferred Stock to the placement of the Series B Preferred Stock. The
procurement of such consent and waiver precluded the re-setting of the price per
share of certain warrants issued in connection with the placement of such Series
A Preferred Stock from the currently effective per share exercise price of
$2.50. For a discussion of the rights of the Series A Preferred Stock and the
associated warrants issued in connection therewith, please refer to the
discussion ion this Prospectus under the caption "DESCRIPTION OF CAPITAL STOCK--
SERIES A PREFERRED STOCK."
Reference is made to the Certificate of Designations of Series B Preferred
Stock, the form of Series B Warrant, the Series B Securities Purchase Agreement,
the Series B Registration Rights Agreement and the form of Series B Principal's
Agreement filed as exhibits to our Current Report on Form 8-K that was filed on
April 28, 2005 for more complete description of the complex provisions that are
summarized under this caption.
All of the securities issued in the private placement of the Series B Preferred
Stock 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
under Regulation D thereunder. The recipients of securities in each such
transaction represented to us that they were acquiring the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. In each case, we believe 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 our Common Stock. All recipients had adequate access to information about our
company. None of the transactions described above involved general solicitation
or advertising.
SELLING STOCKHOLDER WITH PIGGY BACK REGISTRATION RIGHTS
Finally, we are also registering 150,000 shares issuable upon exercise of
warrants with piggy-back registration rights. These warrants are held by the
Double U Master Fund, one of the purchasers of the Series B Preferred Stock, and
these warrants were issued to such holder on April 11, 2005 in connection with a
working capital loan made by such holder to the Company. The loan obligations
were repaid in April 2005 from the proceeds of the placement of the Series B
Preferred Stock. The warrant, which becomes first exercisable on the sixth month
following issuance, is exercisable through April 30, 2010, had an initial per
share exercise price of $2.50. By its terms, the exercise price of the warrant
is subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger or, under certain circumstances
(including obtaining appropriate consent of certain other parties), if prior to
the expiration of six months from the closing date of the loan, the Company
issues warrants having a lower exercise price to investors in a subsequent
financing transaction. The holder of this
20
warrant is entitled to exercise the warrant on a cashless basis at any time
following the first anniversary of its issuance if, at the time of exercise,
there is no effective registration statement covering the resale of the shares
of Common Stock issuable upon exercise of such warrant. 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 Series B 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 these warrants specify that the beneficial owner may not exercise
these warrants 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 exercise these warrants.
Upon the consummation of the placement of the Series B Preferred Stock, the per
share exercise price of the warrant was reduced to $1.50 in accordance with the
provisions of the agreements with such selling stockholder.
Reference is made to the loan documents, the promissory note issued thereunder,
the security agreement and the warrant, each of which is attached hereto as an
exhibit to our Current Report on Form 8-K that was filed on April 5, 2005 for
more complete description of the warrant.
The securities issued in the transaction 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 under Regulation D thereunder. The
recipients of securities in each such transaction represented to us that they
were acquiring the securities for investment only and not with a view to or for
sale in connection with any distribution thereof. In each case, we believe 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 our Common Stock. All recipients had adequate access to
information about our company. None of the transactions described above involved
general solicitation or advertising.
We are 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.
SELLING STOCKHOLDERS
The following table sets forth the shares that are to our knowledge beneficially
owned, as of August 31, 2005, 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. For a fuller description of
these transactions, see the discussion in this Prospectus under the caption
"DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
21
Beneficial ownership is determined in accordance with SEC rules and includes
voting or investment power with respect to the securities currently owned or for
which the selling stockholder has the right to acquire within 60 days.
Additionally, each of the selling stockholders is subject to certain limitations
on the conversion of its preferred stock and the exercise of its warrants. These
limitations provide that the conversion of the Series B 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 Series B Warrants is first
available six months after of the effective date of the registration statement
of which this Prospectus is a part. 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 preferred 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.
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
- ------------------- --------------- ---------------- ------ -------
DOUBLE U MASTER FUND, L.P. 3,253,960 3,253,960(1) -- *
RHP MASTER FUND, LTD. 2,898,509 2,069,308(2) 899,201 3.8
MELTON MANAGEMENT LTD. 4,455,215 1,392,646(3) 3,062,569 4.9
TRUK OPPORTUNITY FUND, LLC 972,574 972,574(4) -- *
ALPHA CAPITAL AG 872,724 827,724(5) -- *
WHALEHAVEN CAPITAL FUND LIMITED 920,527 620,793(6) 299,734 1.4
DKR SOUNDSHORE OASIS HOLDING 1,035,994 620,793(7) 415,201 1.9
FUND LTD.
BASSO MULTI-STRATEGY HOLDING 745,486 579,406(8) 166,080 *
FUND LTD.
LEVI SCHAPIRA 569,060 569,060(9) -- *
NOTZER CHESED 614,932 521,465(10) 93,467 *
BASSO PRIVATE OPPORTUNITY 496,768 455,248(11) 41,520 *
HOLDING FUND LTD.
22
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
- ------------------- --------------- ---------------- ------ -------
BRIDGES & PIPES LLC 829,063 413,862(12) 415,201 *
WAYNE SAKER 206,931 206,931(13) -- *
TRUK INTERNATIONAL FUND, LP 62,079 62,079(14) -- *
GRYPHON MASTER FUND, LP 2,090,000 2,090,000(15) -- *
GSSF MASTER FUND, LP 1,045,000 1,045,000(16) -- *
CORDILLERA FUND, LP 517,329 517,329(17) -- *
POND EQUITIES 1,076,313 1,076,313(18) -- *
JESSE B SHELMIRE 96,116 96,116(19) -- *
SCOTT R. GRIFFITH 96,114 96,114(20) -- *
* Less than 1%
(1) Represents (A) (i) 1,485,149 shares of Common Stock issuable upon conversion
of 15,000 shares of our Series B Preferred Stock, together with additional
shares of Common Stock issuable in respect of dividends thereon accrued through
the fifth anniversary of issuance ("Series B Dividend Shares") in the aggregate
amount of 594,059 shares; (ii) 742,574 shares issuable upon the exercise of
Series B Warrants issued in connection with the Series B Preferred Stock; and
(iii) 282,178 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 (x) based on adjustments to the
conversion price of unconverted preferred stock and/or to the number of shares
covered by unexercised warrants in the event that, on or prior to the first
anniversary of the effective date of this Registration Statement, we
subsequently offer or issue securities at a purchase price or conversion price
lower than the then effective conversion price or warrants having an exercise
price below the exercise price of the Series B Warrants and (y) as liquidated
damages through the projected effective date of this Registration Statement
("Series B Adjustment Shares") and (B) 150,000 shares issuable upon exercise of
other currently exercisable warrants. The selling stockholder advised us that it
purchased these securities solely for investment and not with a view to or for
resale or distribution of such securities and that the natural person having
voting or dispositive power over such securities is Isaac Winehouse. For more
information on our agreement with such selling stockholder, see "DESCRIPTION OF
THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(2) Represents (A) (i) 990,099 shares of Common Stock issuable upon conversion
of 10,000 shares of our Series B Preferred Stock together with 396,040 Series B
Dividend Shares; (ii) 495,050 shares issuable upon the exercise of Series B
Warrants; (iii) 188,119 Series B Adjustment Shares. 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. The selling stockholder is a party to an investment management
agreement with Rock Hill Investment Management, L.P., a limited partnership of
which the general partner is RHP General Partner, LLC. Pursuant to such
agreement, Rock Hill Investment Management directs the voting and disposition of
shares owned by the selling stockholder. Messrs. Wayne Bloch and Peter Lockhart
own all of the interests in RHP General Partner, LLC. The aforementioned
entities and individuals disclaim beneficial ownership of the interests owned by
the selling stockholder. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(3) Represents (A) (i) 666,337 shares of Common Stock issuable upon conversion
of 6,730 shares of our Series B Preferred Stock, together with 266,535 Series B
Dividend Shares; (ii) 333,168 shares issuable upon the exercise of Series B
Warrants; (iii) 126,604 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities is Yehuda Breitkopf. For more information on our agreement with
such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS." 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.
23
(4) Represents (i) 465,346 shares of Common Stock issuable upon conversion of
4,700 shares of our Series B Preferred Stock, together with 186,139 Series B
Dividend Shares, (ii) 232,673 shares issuable upon the exercise of Series B
Warrants; and (iii) 88,416 Series B Adjustment Shares. 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. Michel E. Fein and Stephen E. Saltzstein, as principals of Atoll
Asset Management, LLC, the Managing Member of the selling stockholder, exercise
investment and voting control over the securities owned by the selling
stockholder. Both Mr. Fein and Mr. Saltzstein disclaim beneficial ownership of
the securities owned by the selling stockholder. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH
THE SELLING STOCKHOLDERS."
(5) Represents (i) 396,040 shares of Common Stock issuable upon conversion of
4,000 shares of our Series B Preferred Stock, together with 158,416 Series B
Dividend Shares, (ii) 198,020 shares issuable upon the exercise of Series B
Warrants; and (iii) 75,248 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities are Konrad Ackerman and Kainer Posch. For more information on
our agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE SELLING STOCKHOLDERS."
(6) Represents (A) (i) 297,030 shares of Common Stock issuable upon conversion
of 3,000 shares of our Series B Preferred Stock, together with 118,812 Series B
Dividend Shares; (ii) 148,515 shares issuable upon the exercise of Series B
Warrants; (iii) 56,436 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities are Evan Schmenaver, Arthur Jones, and Jennifer Kelly. For more
information on our agreement with such selling stockholder, see "DESCRIPTION OF
THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(7) Represents (A) (i) 297,030 shares of Common Stock issuable upon conversion
of 3,000 shares of our Series B Preferred Stock, together with 118,812 Series B
Dividend Shares; (ii) 148,515 shares issuable upon the exercise of Series B
Warrants; (iii) 56,436 Series B Adjustment Shares. 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. The selling stockholder is a master fund in a master-feeder
structure. The selling stockholder's investment manager is DKR Oasis Management
Company LP (the "Investment Manager"). Pursuant to an investment management
agreement among the selling stockholder, the feeder funds and the Investment
Manager, the Investment Manager has the authority to do any and all acts on
behalf of the selling stockholder, including voting any shares held by the
selling stockholder. Mr. Seth Fischer is the managing partner of Oasis
Management Holdings L.L.C., one of the general partners of the Investment
Manager. Mr. Fischer has ultimate responsibility for trading with respect to the
selling stockholder. Mr. Fischer disclaims beneficial ownership of these shares.
For more information on our agreement with such selling stockholder, see
"DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(8) Represents (A) (i) 277,228 shares of Common Stock issuable upon conversion
of 2,800 shares of our Series B Preferred Stock, together with 110,891 Series B
Dividend Shares; (ii) 138,614 shares issuable upon the exercise of Series B
Warrants; (iii) 52,673 Series B Adjustment Shares. 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. Basso Capital Management, L.P. ("Basso") is the Investment Manager
to the selling stockholder. Howard I. Fischer is a managing member of Basso GP,
LLC, the General Partner of Basso, and as such has investment power and voting
control over these securities. Mr. Fischer disclaims beneficial ownership of
these securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(9) Represents (i) 272,277 shares of Common Stock issuable upon conversion of
2,750 shares of our Series B Preferred Stock, together with 108,911 Series B
Dividend Shares; (ii) 136,139 shares issuable upon the exercise of Series B
Warrants; (iii) 51,733 Series B Adjustment Shares. 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 SELLING STOCKHOLDERS."
(10) Represents (A) (i) 249,505 shares of Common Stock issuable upon conversion
of 2,520 shares of our Series B Preferred Stock, together with 99,802 Series B
Dividend Shares; (ii) 124,752 shares issuable upon the exercise of Series B
Warrants; (iii) 47,406 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities is Abraham Nussbaum. For more information on our agreement with
such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS."
(11) Represents (A) (i) 217,822 shares of Common Stock issuable upon conversion
of 2,200 shares of our
24
Series B Preferred Stock, together with 87,129 Series B Dividend Shares; (ii)
108,911 shares issuable upon the exercise of Series B Warrants; (iii) 41,386
Series B Adjustment Shares. 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. Basso Capital Management, L.P.
("Basso") is the Investment Manager to the selling stockholder. Howard I.
Fischer is a managing member of Basso GP, LLC, the General Partner of Basso, and
as such has investment power and voting control over these securities. Mr.
Fischer disclaims beneficial ownership of these securities. For more information
on our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE SELLING STOCKHOLDERS."
(12) Represents (A) (i) 198,020 shares of Common Stock issuable upon conversion
of 2,000 shares of our Series B Preferred Stock, together with 79,208 Series B
Dividend Shares; (ii) 99,010 shares issuable upon the exercise of Series B
Warrants; (iii) 37,624 Series B Adjustment Shares. 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 and that the natural persons having voting or dispositive power over
such securities are David Furtis and Michael Crow. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH
THE SELLING STOCKHOLDERS."
(13) Represents (i) 99,010 shares of Common Stock issuable upon conversion of
1,000 shares of our Series B Preferred Stock having, together with 39,604 Series
B Dividend Shares; (ii) 49,505 shares issuable upon the exercise of Series B
Warrants; and (iii) 18,812 Series B Adjustment Shares. 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 SELLING STOCKHOLDERS."
(14) Represents (i) 29,703 shares of Common Stock issuable upon conversion of
300 shares of our Series B Preferred Stock, together with 11,881 Series B
Dividend Shares; (ii) 14,851 shares issuable upon the exercise of Series B
Warrants; and (iii) 5,644 Series B Adjustment Shares. 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. Michel E. Fein and Stephen E. Saltzstein, as principals of Atoll
Asset Management, LLC, the Managing Member of the selling stockholder, exercise
investment and voting control over the securities owned by the selling
stockholder. Both Mr. Fein and Mr. Saltzstein disclaim beneficial ownership of
the securities owned by the selling stockholder. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH
THE SELLING STOCKHOLDERS."
(15) Represents (i) 1,000,000 shares of Common Stock issuable upon conversion of
10,100 shares of our Series B Preferred Stock, together with 400,000 Series B
Dividend Shares; (ii) 500,000 shares issuable upon the exercise of Series B
Warrants; and (iii) 190,000 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities is E.B. Lyon IV. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS."
(16) Represents (i) 500,000 shares of Common Stock issuable upon conversion of
5,050 shares of our Series B Preferred Stock, together with 200,000 Series B
Dividend Shares; (ii) 250,000 shares issuable upon the exercise of Series B
Warrants; and (iii) 95,000 Series B Adjustment Shares. 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 and that the natural person having voting or dispositive power over
such securities is Tom C. Davis. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS."
(17) Represents (i) 247,525 shares of Common Stock issuable upon conversion of
2,500 shares of our Series B Preferred Stock, together with 99,010 Series B
Dividend Shares; (ii) 123,764 shares issuable upon the exercise of Series B
Warrants; and (iii) 47,030 Series B Adjustment Shares. The selling stockholder
advised us that it purchased the preferred stock and warrants solely for
investment and not
25
with a view to or for resale or distribution of such securities and that the
natural persons having voting or dispositive power over such securities are
Stephen Caster and James Andrew. For more information on our agreement with such
selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS."
(18) Represents (i) 978,466 shares of Common Stock issuable upon exercise of
five-year warrants issued as compensation in connection with the placement of
our Series B Preferred Stock and (ii) 97,847 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 first anniversary of the effective date of
this Registration Statement, we subsequently offer or issue securities at a
purchase price or conversion price lower than $1.01 per share or warrants having
an exercise price below the exercise price of the Series B Warrants held by the
selling stockholder. The selling stockholder is a registered broker-dealer,
which served as the placement agent in the Series B Preferred Stock transaction
described in the section "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS." The natural person having voting or dispositive power over such
securities is Ezra Birnbaum.
(19) Represents (i) 87,378 shares of Common Stock issuable upon exercise of
five-year warrants issued to the selling stockholder as a designee of Stonegate
Securities, Inc., a registered broker-dealer which was the designee of the
selling stockholder referred to in footnote 17 above, and (ii) 8,738 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 first anniversary of
the effective date of this Registration Statement, we subsequently offer or
issue securities at a purchase price or conversion price lower than $1.01 per
share or warrants having an exercise price below the exercise price of the
Series B Warrants held by the selling stockholder. The selling stockholder is a
principal of Stonegate Securities, Inc.
(20) Represents (i) 87,376 shares of Common Stock issuable upon exercise of
five-year warrants issued to the selling stockholder as a designee of Stonegate
Securities, Inc., a registered broker-dealer which was the designee of the
selling stockholder referred to in footnote 17 above, and (ii) 8,738 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 first anniversary of
the effective date of this Registration Statement, we subsequently offer or
issue securities at a purchase price or conversion price lower than $1.01 per
share or warrants having an exercise price below the exercise price of the
Series B Warrants held by the selling stockholder. The selling stockholder is a
principal of Stonegate Securities, Inc.
PLAN OF DISTRIBUTION
As used in this Prospectus, stockholders selling our shares pursuant to this
Prospectus include donees, pledgees, assignees, successors in interest and other
tranferees 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.
26
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 Act, disclosing: 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 made in compliance with applicable laws and regulations;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the Act if
available, rather than under this Prospectus.
Any sales of the shares may be effected 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
27
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 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 Act.
The anti-manipulation provisions of Rules 101 through 104 of Regulation M under
the Securities Exchange Act of 1934, as amended the (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. We have advised each
selling stockholder that it may not use shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock or the Warrants and included in
this Registration Statement to cover short sales of Common Stock made prior to
the date on which the Registration Statement shall have been declared effective.
Under the securities laws of certain states, the shares may be sold in 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. The NASD
members who received their interests as compensation for the placement are
subject to NASD Marketplace Rule 2710(g)(1). The maximum amount of compensation
to be received by any NASD member or independent broker-dealer for the sale of
any securities registered under this prospectus will not be greater than 8% of
the gross proceeds from the sale of such securities.
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 $82,414 in the aggregate. We have agreed to indemnify certain
selling stockholders and certain other persons against certain liabilities,
including liabilities under the 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 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 CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 75,000,000 shares of Common Stock. As of August
31, 2005, there were 20,953,698 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 ("Preferred Stock"). As of August 31, 2005, there were 52,500
shares designated as Series A Preferred Stock and 85,000 shares designated
Series B Preferred Stock. As of August 31, 2005, there were outstanding
approximately 21,500 shares of Series A Preferred Stock and 77,650 shares of
Series B Preferred Stock.
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The Preferred Stock is 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, our 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 our stock and any other
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, of the shares of each series.
SERIES A PREFERRED STOCK
In July 2004, we designated 52,500 of our authorized preferred stock as Series A
7% Convertible Preferred Stock.
As of July 30, 2004, we entered into a Securities Purchase Agreement with
certain investors pursuant to which we placed 52,500 of the Series A Preferred
Stock on August 9, 2004. In connection with the issuance of the Series A
Preferred Stock, we also issued the warrants (the "Series A Warrants") to
purchase up to 7 million shares of our Common Stock, of which 3,500,000 shares
are issuable at a per share exercise price of $1.50 and 3,500,000 shares are
issuable at a per share exercise price of $2.50. The warrants are exercisable
through the fifth anniversary of the issuance thereof.We also issued to
placement agents warrants to purchase up to 1,400,000 shares of Common Stock
that may become issuable upon exercise of warrants, pursuant to which (i)
700,000 shares are issuable at a per share exercise price of $0.75, (ii) 350,000
shares are issuable at a per share exercise price of $1.50 and (iii) 350,000
shares are issuable at a per share exercise price of $2.50.
As part of our issuances of the Series A Preferred Stock and these warrants, we
filed with the SEC in November 2004 a registration statement on Form SB-2 for
the resale of the Common Stock underlying these securities as well as certain
other securities (SEC File Number 333-120771). That registration statement was
declared effective in February 2005. Details as to these transactions relating
to the Series B Preferred Stock are included in such registration statement.
KEY TERMS OF THE SERIES A PREFERRED STOCK AND SERIES A WARRANTS
Each share of Series A 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 of Common Stock, subject to adjustment in the event of certain capital
adjustments or similar transactions, such as a stock split or merger. All of the
warrants become exercisable on the sixth month following issuance. Holders of
the Series A Warrants are entitled to exercise their Series A Warrants on a
"cashless" 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 Series A Warrant is exercised. That closing price is multiplied by the full
number of shares for which the Series A 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.
DIVIDENDS
Dividends at the rate of 7% per annum are payable on a bi-annual basis and on
conversion and may be
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paid, at our option, in stock or cash. If we elect to pay dividends in stock,
the stock will be valued at the conversion price then in effect. Our right to
pay dividends in stock, however, is subject to the following conditions:
o the registration statement, of which this Prospectus forms a part, covering
the resale of such shares of Common Stock by the selling security holders
must be effective at the time of the issuance of such shares; and
o the issuance of such shares to the holder cannot result in such holder
being the beneficial owner of more than 4.99% of the then outstanding
shares of our Common Stock.
CONVERSION
Each holder can convert all or any part of its Series A Preferred Stock and each
warrant holder can exercise all or part of its Series A Warrant by giving notice
to the Company. Each conversion or warrant exercise is subject to the following
limitation: the holder may convert the outstanding Series A Preferred Stock or
exercise a Series A Warrant up to an amount which would result in the holder
being the beneficial owner of no more than 4.99% of our then outstanding shares
(after taking into account the conversion or warrant exercise). If the holder
then disposes of some or all of its holdings, it can again convert outstanding
Series A Preferred Stock or exercise its Series A Warrant.
Unless converted earlier, on the fifth anniversary of issuance the Series A
Preferred Stock convert into shares of our Common Stock at the conversion price
then in effect (subject to extension under certain circumstances).
REDEMPTION RIGHTS
Under certain circumstances each holder of shares of Series A Preferred Stock
has the right to give us a notice requiring us to redeem all or any portion of
that holder's shares. Such redemption will be at a
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redemption price equal to V/CP x M, where "V" means the outstanding stated value
plus the accrued and unpaid dividend on such share, "CP" means the conversion
price in effect on the date of the redemption notice, and "M" means the average
of the closing sale prices for any five (5) trading days (which need not be
consecutive) selected by the holder of the shares of Series A Preferred Stock
being redeemed.
SERIES B PREFERRED STOCK
In April 2005, we designated 85,000 of our authorized preferred stock as Series
B 8% Convertible Preferred Stock. In April and May 2005, we issued in the
aggregate 77,650 of the Series B Preferred Stock. As of August 31, 2005, there
were outstanding 77,650 shares of the Series B Preferred Stock.
On April and May 2005, we entered into the Series B Securities Purchase
Agreement with certain investors pursuant to which we placed 77,650 of the
Series B Preferred Stock. We also issued Series B Warrants to purchase up to
approximately 3.8 million shares of our Common Stock at a per share exercise
price of $1.50 . The Series B Warrants are exercisable commencing on the earlier
of (i) sixth month following the effective date of the Registration Statement of
which this prospectus is a part and (ii) the first anniversary of issuance and
continuing through the last day of the month in which fifth anniversary their
issuance occurs. Details as to these transactions are included in this
Prospectus under the caption "DESCRIPTION OF THE AGREEMENTS WITH THE SELLING
STOCKHOLDERS".
KEY TERMS OF THE SERIES B PREFERRED STOCK AND WARRANTS
Each share of Series B Preferred Stock has a stated value of $100 and is
convertible into shares of Common Stock at an initial conversion price of $1.01
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. All of the
warrants become exercisable on day which is the sixth month following issuance.
Holders of the Series B Warrants are entitled to exercise their Series B
Warrants on a "cashless" 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 Series B Warrant is exercised. That closing price is
multiplied by the full number of shares for which the Series B 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.
DIVIDENDS
Dividends at the rate of 8% per annum are payable on a bi-annual basis and on
conversion and may be paid, at our option, in stock or cash. If we elect to pay
dividends in stock, the stock will be valued at 90% of the market price of the
Common Stock on the dividend payment date. Our right to pay dividends in stock,
however, is subject to the condition the issuance of such shares to the holder
cannot result in such holder being the beneficial owner of more than 4.99% of
the then outstanding shares of our Common Stock.
CONVERSION
Each holder can convert all or any part of its Series B Preferred Stock and each
warrant holder can exercise all or any part of its Series B Warrant by giving
notice to the Company. Each conversion or warrant exercise is subject to the
following limitation: the holder may convert a the outstanding Series B
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Preferred Stock or exercise a Series B Warrant up to an amount which would
result in the holder being the beneficial owner of no more than 4.99% of our
then outstanding shares (after taking into account the conversion or warrant
exercise). If the holder then disposes of some or all of its holdings, it can
again convert outstanding Series B Preferred Stock or exercise its Series B
Warrant.
Unless converted earlier, on the fifth anniversary of issuance the Series B
Preferred Stock will convert into shares of our Common Stock at the conversion
price then in effect (subject to extension under certain circumstances).
ADJUSTMENT TO CONVERSION PRICE OR EXERCISE PRICE
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 without the prior consent of a majority in interest of the
holders of the Series B Preferred Stock on any date which is earlier than first
anniversary of 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 Series B Warrants, then the terms of any
unconverted share of Series B Preferred Stock or any unexercised Series B
Warrants shall be modified to adjust the relevant conversion price in such
Series B 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 certain specified issuances.
As of the date of this Prospectus, we have not made any offer or sale of
securities which triggered an adjustment of the respective conversion prices of
the Series B Preferred Stock or in the number of shares covered by, or the
exercise price of, the Series B Warrants.
REDEMPTION RIGHTS
Under certain circumstances each holder of shares of Series B Preferred Stock
has the right to give us a notice requiring us to redeem all or any portion of
that holders shares. Such redemption will be at a redemption price equal to V/CP
x M, where "V" means the principal of plus the accrued and unpaid dividend on
such share, "CP" means the conversion price in effect on the date of the
redemption notice, and "M" means the average of the closing sale prices for any
five (5) trading days (which need not be consecutive) selected by the holder of
the shares of Series B Preferred Stock being redeemed.
KEY TERMS OF THE OTHER WARRANTS
This Prospectus includes up to 150,000 shares of our Common Stock issuable upon
the exercise of the Other Warrants. The Other Warrants, which were issued in
April 2005, become first exercisable on the day which is the sixth month
following issuance, are exercisable through April 30, 2010, had an initial per
share exercise price of $2.50. By its terms, the exercise price of these
warrants is subject to adjustment in the event of certain capital adjustments or
similar transactions, such as a stock split or merger or, under certain
circumstances (including obtaining appropriate consent of certain other
parties), if prior to the expiration of six months from the closing date of the
loan, we issue warrants having a lower exercise price to investors in a
subsequent financing transaction. The holder of these warrants is entitled to
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exercise the warrant on a cashless basis at any time following the first
anniversary of its issuance if, at the time of exercise, there is no effective
registration statement covering the resale of the shares of Common Stock
issuable upon exercise of the Bridge Loan Warrant. Upon the consummation of the
Series B Preferred Stock financing, the per share exercise price of the warrant
was reset to $1.50.
The terms of these warrants specify that the beneficial owner may not exercise
these warrants 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 exercise these warrants.
DISCLOSURE OF SEC 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 unlawful.
Accordingly, indemnification may occur for liabilities arising under the Act.
Insofar as indemnification for liabilities arising under the 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 and is, therefore,
unenforceable.
INTEREST OF NAMED EXPERTS AND COUNSEL
In April 2004, Aboudi & Brounstein, Law Offices received 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 shares
issuable upon exercise of this warrant are not included in the registration
statement of which this prospectus is a part.
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 incorporated by reference in this Prospectus to our
Annual Report on Form 10-KSB for the years ended December 31, 2004 and 2003 have
been so incorporated in reliance on the report of Marcum & Kliegman LLP,
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting. These reports express an unqaulified
opinion and include 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 and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the SEC public reference room in Washington, D.C. You can
request copies of those documents, upon payment of a duplicating fee, by writing
to the SEC.
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We have filed with the SEC under the Act a Registration Statement on Form S-2,
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 SEC. You can obtain a copy of the registration
statement from the SEC at the address listed above or from the SEC's internet
site.
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate" into this Prospectus information that
we file with the SEC in other documents. This means that we can disclose
important information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this Prospectus. Information contained in this Prospectus automatically
updates and supersedes previously filed information. We are incorporating by
reference the documents listed below and all of our filings pursuant to the
Exchange Act after the date of filing the initial Registration Statement and
prior to effectiveness of the Registration Statement.
The following documents filed by with the SEC are incorporated herein by
reference:
o our Annual Report on Form 10-KSB for the year ended December 31, 2004, as
filed with the SEC on March 31, 2005;
o our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005,
as filed with the SEC on May 16, 2005;
o our Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005, as
filed with the SEC on August 15, 2005;
o our Current Report on Form 8-K, as filed with the SEC on April 11, 2005;
o our Current Report on Form 8-K, as filed with the SEC on April 22, 2005;
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o our Current Report on Form 8-K, as filed with the SEC on April 28, 2005;
o our Current Report on Form 8-K, as filed with the SEC on May 13, 2005 and
o our Current Report on Form 8-K, as filed with the SEC on June 13, 2005.
DOCUMENTS DELIVERED WITH THIS PROSPECTUS
This Prospectus is accompanied by a copy of our most Annual Report on Form
10-KSB (which is currently our Annual Report for the fiscal year ended December
31, 2004) and our most recent Quarterly Report on Form 10-QSB (which is
currently our Quarterly Report for the quarter ended June 30, 2005).
If you need an additional copy of these documents, or if you would like to
receive a copy of any of the other items referenced above, you may request
copies, at no cost, by writing or telephoning us at the address set forth below.
We will provide copies of the exhibits to these filings only if they are
specifically incorporated by reference in these filings.
Amedia Networks, Inc. 2 Corbett Way Eatontown, New Jersey 07724 (732) 440-1992
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