As filed with the Securities and Exchange Commission on October 24, 2006
Registration No. 333-120771
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMEDIA NETWORKS, INC.
(Name of small business issuer in its charter)
DELAWARE 3577
(State or jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
11-3223672
(I.R.S. Employer Identification No.)
2 CORBETT WAY
EATONTOWN, NEW JERSEY 07724
(732) 440-1992
(Address and telephone number of principal executive offices)
FRANK GALUPPO
AMEDIA NETWORKS, INC.
2 CORBETT WAY
EATONTOWN, NEW JERSEY 07724
(732) 440-1992
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent to the agent
for service, should be sent to:
JONATHAN FREEDMAN,ESQ. DAVID ABOUDI, ESQ.
ABOUDI & BROUNSTEIN ABOUDI & BROUNSTEIN
174 FIFTH AVENUE, SUITE 204 3 GAVISH STREET
NEW YORK, NY 10010 KFAR SABA, 44641, ISRAEL
212-202-0783 972-9-764-4833
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the
effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registration Fee was previously calculated and paid in connection with the
initial filing of this Registration Statement on November 24, 2004.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This Post Effective Amendment No. 1 to Registration Statement amends the
Registration Statement on Form SB-2 No. 333-120771 (the "Original Registration
Statement"), which was filed by Amedia Networks, Inc. (the "Company") on
November 24, 2004. The Original Registration Statement, as amended by this
Post-Effective Amendment No. 1, is referred to herein as the "Registration
Statement." The Original Registration Statement registered for resale 18,985,844
shares of common stock previously issued by the Registrant in connection with a
private placement of its securities, and the applicable filing fee was paid.
This Post-Effective Amendment No. 1 relates to 12,468,985 shares of common stock
included in the Original Registration Statement which have not been sold as of
the date hereof and is being filed to update information pertaining to these
securities.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED ______________, 2006
PROSPECTUS
AMEDIA NETWORKS, INC.
12,468,985 shares of Common Stock
This prospectus relates to the resale by the selling stockholders of
12,468,985 shares of our common stock, par value $0.001 (the "Common Stock").
The selling stockholders may sell the shares from time to time at the prevailing
market price or in negotiated transactions.
We will not receive any of the proceeds from the sale of the shares by
the selling stockholders.
Each of the selling stockholders may be deemed to be an "underwriter,"
as such term is defined in the Securities Act of 1933, as amended (the "Act").
Our common stock is quoted on the OTC Electronic Bulletin Board under
the trading symbol "AANI". The last reported sales price per share of our Common
Stock as reported by the OTC Bulletin Board on October 23, 2006, was $0.85.
AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission (the "SEC") nor any
state securities commission has approved or disapproved of these securities or
passed on the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this Prospectus is _________, 2006
PRINCIPAL EXECUTIVE OFFICE:
Amedia Network, Inc.
2 Corbett Way
Eatontown, New Jersey 07724
(732) 440-1992
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TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 5
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 20
Description of the Agreements with the Holders of the Convertible
Preferred Stock....................................................... 20
Dividend Policy.......................................................... 23
Price Range of Common Stock.............................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Financial Operation ............................................... 24
Business................................................................. 31
Description of Property.................................................. 54
Legal Proceedings........................................................ 54
Management............................................................... 55
Executive Compensation................................................... 57
Beneficial Ownership of Certain Shareholders, Directors and
Executive Officers.................................................... 59
Certain Relationships and Related Transactions........................... 61
Selling Stockholders..................................................... 61
Plan of Distribution..................................................... 73
Description of Securities................................................ 75
Disclosure of Commission Position of Indemnification for Securities
Act Liabilities....................................................... 78
Interest of Named Expert and Counsel..................................... 78
Legal Matters............................................................ 78
Experts.................................................................. 79
Where You can find more Information...................................... 79
Index to Financial Statements............................................ F-i
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF ANY
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
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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 engaged in the design, development and marketing of
next-generation technology-based broadband access solutions for voice, video and
data services. Our initial QoStream(TM) products are designed to deliver "triple
play" (voice, video and data) broadband communication. These products are
designed for placement at various points in the network infrastructure layout.
Our products offer large amounts of dedicated bandwidth in both the downstream
and upstream directions, permitting triple play services and are designed for
deployment in either indoor or outdoor environments. We are marketing our
initial products to communications carriers, municipal authorities and
communication equipment companies.
Our initial QoStream product line, comprised of premises gateways,
aggregation switches and a network management systems, was commercially
introduced in January 2005. Our initial QoStream products include technologies
licensed from Lucent Technologies, Inc. ("Lucent") as well as technologies
developed jointly with Lucent. Lucent has granted us a worldwide and perpetual
non-exclusive license to manufacture, develop and sell products designed to
deliver broadband access solutions that use Lucent's technologies and related
patents. Recently, we developed a stand-alone triple play home gateway product
that is designed to inter-operate with other standards-based devices deployed in
the central offices of carriers or in the field.
In April 2006, we entered into an agreement with Motorola Wireline
Networks, Inc., a subsidiary of Motorola Inc., pursuant to which, among other
things, we granted Motorola the exclusive right to distribute certain of our
products to certain specified major telecommunications carriers in the United
States and Canada.
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. We recognized revenues of $5,548 and $25,379 for the
year ended December 31, 2005 and the six months ended June 30, 2006,
respectively, representing unit sales of our QoStream(TM) product line. We
incurred net losses applicable to common stockholders of $12,941,282 and
$9,724,637 for the year ended December 31, 2005 and the six months ended June
30, 2006, respectively. 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. These
conditions raise substantial doubt as to our ability to continue as a going
concern. The financial statements do not include any adjustment that might
result from the outcome of such uncertainty.
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We need to raise working capital on an immediate basis in order to
meet our operating requirements, fulfill our business plans and repay short-term
loans that mature in February 2007 (which are discussed below). If we are unable
to raise funds in the amounts needed, we may need to cease operations. At the
present time, we have no commitments for any such financing, and there can be no
assurance that additional capital will be available to us on commercially
acceptable terms or at all. However, if the warrants included in the
registration statement of which this prospectus forms a part, which have per
share exercise prices of $1.50 and $2.50, are exercised by these holders for
cash in a net amount sufficient for our needs, we may be able to satisfy part or
all of our immediate working capital requirements. No assurance can be provided,
though, that any of these warrants will in fact be exercised.
On October 23, 2006, we obtained a short-term working capital loan in
the gross amount of $600,000 from two previous investors. The loan was made in
response to an offer we made to the purchasers of our convertible preferred
stock to reinstate certain anti-dilution price protection provisions contained
in the securities purchase agreements that they entered into with us when
purchasing such preferred stock. Under the terms of the offer, the price
protection, which by its terms has expired, would be reinstated from the date of
the advance to us through August 31, 2007. Under the offer, we are seeking to
raise up to $2 million from these investors. Additional loans, if any, will be
advanced to us in separate closings. All of these loans, irrespective of the
date of advance, are scheduled to mature on the date which is the earliest of
(i) February 20, 2007, which is 120 days from the initial closing, (ii) the date
on which we consummate a subsequent financing that generates, on a cumulative
basis with all other financings (except for the proceeds of these loans and
certain other limited exceptions specified in the promissory notes issued in
connection with such advances), gross proceeds to us of at least $2 million or
(iii) the date on which a holder of a note evidencing a loan accelerates payment
of such note while there is an Event of Default existing under that note. See
"BUSINESS - RECENT DEVELOPMENTS".
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 8 of this Prospectus in deciding whether to purchase the Common Stock
offered under this Prospectus.
THE OFFERING
Securities offered by the
selling stockholders 12,468,985 shares of Common Stock. (1)
Shares outstanding before the
Offering 27,946,979 shares of Common Stock. (2)
Use of Proceeds We will not receive any proceeds
from the Sale of the Common Stock
by the selling stockholders.
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(1) Includes up to (i) (a) 1,590,400 shares of our Common Stock issuable upon
conversion of 11,928 shares of our Series A 7% Convertible Preferred Stock,
par value $0.001 (the "Convertible Preferred Stock"), having a stated value
of $100 per share at a per share conversion price of $0.75, (b) up to
346,185 shares of Common Stock issuable in respect of dividends on the
Convertible Preferred Stock accruing from July 1, 2006 through the third
anniversary of issuance, (c) 856,556 shares of Common Stock issued upon
conversion of or as dividends with respect to the Convertible Preferred
Stock and currently held as of record by the selling stockholders (d)
7,000,000 shares of Common Stock issuable upon exercise of warrants issued
in connection with the Convertible Preferred Stock (the "Warrants") and (e)
an additional 1,547,032 shares of Common Stock, representing additional
shares issuable to such selling stockholders as liquidated damages through
the projected effective date of this Registration Statement, in each case
as contemplated by terms of agreements between us and such selling
stockholder; (ii) (a) 700,000 shares of Common Stock issuable upon exercise
of certain other warrants issued to placement agents in connection with the
issuance of the Convertible Preferred Stock and (iii) 164,406 shares of
Common Stock and an additional 264,406 shares of Common Stock issuable upon
exercise of certain other warrants and options. For a description of the
agreement between us and the holders of the Convertible Preferred Stock,
see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK."
(2) As of October 16, 2006. Does not include (a) up to an aggregate of 7,
218,225 shares of Common Stock issuable upon exercise of options granted
under our 2000 Equity Incentive Stock Option Plan and our 2002 Non-Employee
Director Stock Option Plan, (b) any of the shares described in footnote (1)
above and (c) 36,203,512 shares of Common Stock issuable upon conversion of
other outstanding convertible securities or upon exercise of 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
WE HAVE A HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE.
Since inception, we have incurred significant net losses. We incurred
net losses applicable to common stockholders of $9,724,637 and $7,497,198 for
the six months ended June 30, 2006 and 2005, respectively, and $12,941,282 and
$8,322,211 for the years ended December 31, 2005 and 2004, respectively. As of
June 30, 2006, we had an accumulated deficit of $67,891,957. We expect to
continue to incur net losses for the foreseeable future as we continue to
develop our products and semiconductor technology. We have been funding our
operations through the sale of our securities and expect to continue doing so
for the foreseeable future. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the factors
discussed elsewhere in this "Risk Factors" section. We cannot assure you that we
will achieve or sustain profitability or that our operating losses will not
increase in the future. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future. We expect to increase expense levels on research and development,
continuing product design and enhancements, manufacturing, marketing, sales and
administration as we begin to aggressively market our products. These
expenditures will necessarily precede the realization of substantial revenues
from the sale of our QoStream(TM) products or any future product.
WE WILL NEED TO RAISE ADDITIONAL FUNDS IN ORDER TO ACHIEVE OUR BUSINESS
OBJECTIVES.
We need to raise additional working capital on an immediate basis in
order to meet our operating requirements and satisfy our business plans as well
as repay short-term working capital loans that are scheduled to mature in
February 2007. We will most likely have to obtain such capital from additional
sales of our equity, convertible equity and/or debt securities. At the present
time, we have no commitments for any additional financing, and there can be no
assurance that additional capital will be available to us on commercially
acceptable terms or at all. We may have difficulty obtaining additional funds as
and when needed, and we may have to accept terms that would adversely affect our
stockholders. In connection with the convertible debenture financing that we
concluded in May 2006, we granted to the holders of these debentures a security
interest in all of our assets in order to secure our obligation to them. Under
the terms of the agreements with these holders, without their consent we may not
grant any additional security interest that is senior or equal in rank to the
security interest granted to them.
Additional equity financings are likely to be dilutive to holders of
our Common Stock and debt financing, if available, may involve significant
payment obligations and covenants that restrict how we operate our business or
contain rights, preferences and privileges senior to our Common Stock.
Even if we raise funds to address our immediate working capital
requirements, we also may be required to seek additional financing in the future
to respond to increased expenses or shortfalls in
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anticipated revenues, accelerate product development and deployment, respond to
competitive pressures, develop new or enhanced products, or take advantage of
unanticipated acquisition opportunities. We cannot be certain we will be able to
find such additional financing on commercially reasonable terms, or at all.
If we are unable to obtain additional financing when needed, we could
be required to modify our business plan in accordance with the extent of
available financing. We also may not be able to accelerate the development and
deployment of our products, respond to competitive pressures, develop new or
enhanced products or take advantage of unanticipated acquisition opportunities.
Finally, we may be required to sell out assets or shut down the company and
cease operations.
These conditions raise substantial doubt as to our ability to continue
as a going concern and may make it more difficult for us to raise additional
capital when needed. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability of reported assets or
liabilities should we be unable to continue as a going concern.
A DEFAULT BY US UNDER OUR 8% SENIOR SECURED CONVERTIBLE DEBENTURES ISSUED IN MAY
2006 WOULD ENABLE THE DEBENTURE HOLDERS TO TAKE CONTROL OF ALL OF OUR ASSETS.
In May 2006, we issued $10,000,000 in aggregate principal amount of
our 8% Senior Secured Convertible Debentures. The debentures are scheduled to
mature on April 30, 2008. To secure our obligations under the debentures, we
granted the holders a security interest in substantially all of our assets,
including, without limitation, our intellectual property. The security interest
terminates upon the earlier of (i) the date on which less than $2.5 million in
principal amount of the Convertible Debentures is outstanding or (ii) payment or
satisfaction of all of our obligations under the debentures. A default by us
under the debentures would enable the holders to foreclose on our assets. Any
foreclosure could force us to substantially curtail or cease our operations.
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. In
June 2005, we commenced limited commercial deployment of our QoStream product
line. 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;
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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;
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.
OUR RELATIONSHIP WITH MOTOROLA IS VERY IMPORTANT TO US BECAUSE WE HAVE GRANTED
TO MOTOROLA EXCLUSIVE DISTRIBUTION RIGHTS FOR OUR PG 1000 AND HG-V100 PRODUCTS
WITH RESPECT TO MOST OF THE LARGEST TELECOMMUNICATION CARRIERS IN THE UNITED
STATES AND CANADA.
On April 5, 2006, we entered into a three-year agreement with Motorola
to jointly develop a family of IP Home Gateway (IPTV Gateways) that will provide
expanded support for data, IPTV, High Definition TV, and Digital Video Recorders
using Motorola's existing Multi-Service Access Platform. Under this agreement we
have granted Motorola the exclusive right to resell our PG1000 and the HG-V100
products, and all derivative or substantially similar products (the "Exclusive
Products") to certain specified telecommunications carriers and their affiliates
(the "Exclusive Customers") for a period of 24 months from the effective date of
the agreement as part of Motorola's portfolio of broadband wireline solutions.
These exclusive customers serve a majority of all access lines in the United
States and Canada. The exclusivity may be terminated by us unless, among other
things, at least one of the Exclusive Customers shall have accepted one of the
Exclusive Products for lab testing within one year of the effective date of the
Strategic Alliance Agreement and signed contract to purchase Exclusive Products
(which is reasonably expected to result in revenue to us in a specified minimum
amount) within 18 months of the effective date of the agreement; provided,
however, that if these conditions are satisfied with respect to an Exclusive
Customer, then Motorola's exclusivity period for such Exclusive Customer will be
extended for an additional 24 months. The Strategic Alliance Agreement also
provides that we will not, during the term of the agreement and for a period of
two years thereafter, directly or indirectly sell to or solicit or accept any
order for any of its products from any customer to which Motorola has resold one
of our products during the term of the agreement, subject to certain exceptions.
If Motorola sources, manufactures or resells a gateway which has substantially
the same functionality as our PG1000, the exclusivity and the non-solicitation
provisions contained in the Strategic Alliance Agreement shall immediately
terminate.
Under the terms of the agreement, Motorola is responsible for
promoting and marketing our PG 1000 and HG-V100 products to the specified
telecommunications carriers. Motorola has the discretion to determine the
staffing and resources it allocates to resell our products to the carriers. In
addition, under the agreement, Motorola is entitled to terminate at its
convenience the development IPTV Gateway program before the completion of its
development. If Motorola elects to so terminate the development program, the
referred to exclusive distribution rights for our other products continue in
full force and effect, subject to the terms of the agreement. We currently
expect that sales through Motorola, if any, will account for a major portion of
our revenues for at least fiscal year 2007. We believe that the rapid
penetration of our products to telecommunications carriers to be important to
our success. If we are unable to effectively manage and maintain our
relationship with Motorola or for any reason Motorola cannot successfully market
our products, our business will be materially adversely affected. In addition,
our condition could be adversely affected by changes in the financial condition
of Motorola or by any changes to Motorola's business.
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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 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. 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 ANDRAPIDLY
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
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
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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 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,
12
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 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.
13
THERE MAY BE SIGNIFICANT LIMITATIONS TO THE UTILIZATION OF NET OPERATING LOSSES
TO OFFSET FUTURE TAXABLE INCOME.
As of December 31, 2005, we had net operating loss carry-forwards
(NOL) of approximately $32 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 carry-forward 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.
We 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.
14
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 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
15
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
12,468,985 shares of Common Stock by the selling security holders. We will not
receive any proceeds from these sales and have prepared this Prospectus
principally in order to meet our contractual obligations to some of the selling
security holders. The sale of this block of stock, or even the possibility of
its sale, may adversely affect the trading market for our Common Stock and
reduce the price available in that market.
FUTURE SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT
PREVAILING MARKET PRICES FOR OUR COMMON STOCK.
As of October 16, 2006, we had 100 million authorized shares of Common
Stock, of which 27,946,979 shares of our Common Stock were issued and
outstanding. As of October 16, 2006, approximately an additional 70.6 million
shares are reserved for issuance upon exercise or conversion of outstanding
options, warrants and convertible securities. Many of the those options,
warrants and convertible securities contain provisions that require the issuance
of increased numbers of shares of
16
common stock upon exercise or conversion in the event of stock splits,
redemptions, mergers or other transactions. The occurrence of any such event or
the exercise or conversion of any of the options, warrants or convertible
securities described above 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.
Our board of directors has the authority, without further action or
vote of our stockholders, to issue all or any part of the shares of our Common
Stock that are authorized for issuance and neither issued nor reserved for
issuance. Any such issuances would dilute the percentage ownership interests of
our current stockholders, which will have the effect of reducing their influence
on matters on which our stockholders vote, and might dilute the book value of
our Common Stock. Our stockholders 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 concurrent offerings 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 S-2 (SEC File Number 333-126351) (the "Series B Registration
Statement"), which is being concurrently filed with this Registration Statement,
covers sales by selling shareholders of shares issued or issuable upon
conversion of shares of our Series B 8% Convertible Preferred Stock ("Series B
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 October 16, 2006, there were approximately
12.9 million shares of our Common Stock reserved for issuance upon (i) the
conversion of our outstanding Series B Preferred Stock and in payment of
dividends thereon, (ii) upon exercise of warrants (the "Series B Warrants")
issued in connection with our Series B Preferred Stock or as additional shares
issuable to the holders of our Series B Preferred Stock or the Series B 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 B Preferred Stock. Our Series B
Preferred Stock is currently convertible into our Common Stock at a conversion
price of $0.75 per share, and the Series B Warrants are currently exercisable at
$1.50 per share. Each of the Series B Warrants contains limited cashless
exercise provisions which, under certain circumstances, would permit the holders
to exercise the Series B Warrants without paying the exercise price in cash.
Additionally, that registration statement includes an additional 150,000 shares
issuable upon exercise of warrants that are unrelated to the Series B Preferred
Stock. The shares included in the Series B Registration Statement are not
covered by this Prospectus or the Registration Statement of which it is a part.
On May 5, 2006, we completed a private placement of $10.0 million in aggregate
principal amount of our two year 8% Senior Secured Convertible Debentures. This
private placement resulted in the reduction to $0.75 per share of the conversion
price of the Series B Preferred Stock (from a conversion price of $1.01 per
share immediately prior to the reset) that had not been converted as of such
date. A significant part of the additional shares of Common Stock issuable as a
result of the reduction in the conversion price of the Series B Preferred Stock
are not included in the Series B Registration Statement. We intend to file in
the near future a new registration statement relating to the resale of
approximately 2.1 million additional shares of our Common Stock issuable as a
result of the reduction in the conversion price of the Series B Preferred Stock.
Also, under the terms of our agreements with the holders of our
Convertible Debentures, we are obligated to file a registration statement on
Form SB-2 covering the resale of the Common Stock issuable upon conversion of
the Convertible Debentures or exercise of the warrants issued to the purchasers
of the Convertible Debentures and certain other warrants to be included therein.
As of October 16, 2006, there were approximately 25 million shares of our Common
Stock reserved for issuance upon (i) the conversion of our Convertible
Debentures and in payment of interest thereon, (ii) upon exercise of warrants
issued in
17
connection with our Convertible Debentures or as additional shares issuable to
the holders of our Convertible Debentures or the 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 Convertible Debentures. Our Convertible Debentures are
convertible into shares of Common Stock at a conversion price of $0.75 per
share, and the warrants are exercisable at a conversion price of $1.50 per
share. Each of the warrants contains limited cashless exercise provisions which,
under certain circumstances, would permit the holders to exercise the warrants
without paying the exercise price in cash. The shares included in the
registration statement to be filed on behalf of the holders of the Convertible
Debentures are not covered by this Prospectus or the Registration Statement of
which it is a part.
The shares of Common Stock issuable upon conversion of our Series B
Preferred Stock and exercise of the Series B Warrants or the other warrants
included in the Series B Registration Statement are, and the shares of Common
Stock issuable upon conversion of our Convertible Debentures and exercise of the
warrants issued to the purchasers thereof or the other warrants included in the
registration statement to be filed on behalf of the holders of our Convertible
Debentures will be upon the effectiveness of that registration statement,
saleable without restriction immediately upon issuance. The conversion or
exercise of any Series B Preferred Stock or Convertible Debentures or any of the
foregoing 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.
On May 5, 2006, we completed a private placement of $10.0 million in
aggregate principal amount of our two year 8% Senior Secured Convertible
Debentures. This private placement resulted in the reduction to $0.75 per share
of the conversion price of the Series B Preferred Stock that had not been
converted as of such date. Most of the additional shares of Common Stock
issuable as a result of the reduction in the conversion price of such Series B
Preferred Stock are not included in this Registration Statement. The Original
Registration Statement that was filed in July 2005 included approximately 1.46
million shares that can be used to satisfy, in part, the share requirements upon
conversion of such Series B Preferred Stock. We intend to file in the near
future a new registration statement relating to the resale of approximately 2.1
million additional shares of our Common Stock issuable as a result of the
reduction in the conversion price of the Series B Preferred Stock and that are
not included in this Registration Statement.
Lastly, in August 2004, we secured from an institutional investor a $6
million equity line (the "Equity Line") on which we can draw from time to time
during a 24-month period following the effectiveness of a separate registration
statement, subject to certain conditions. The Equity Line allows us to sell up
to $6 million of Common Stock at 98% of the then current market price, but in no
event at less than $2.00 per share. We also issued to the equity line investor
five year warrants to purchase up to 333,333 shares of Common Stock at a per
share exercise price of $2.00. These warrants are subject to cashless exercise
following the first anniversary of issuance if at the time of exercise there is
no effective registration statement in effect covering the resale of these
shares. Under our agreements with the Equity Line investor we are obligated 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 that we intend to
file on behalf of the holders of our Convertible Debentures 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.
18
WE HAVE A LIMITED NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR
ISSUANCE AND IF OUR STOCKHOLDERS DO NOT APPROVE AN INCREASE IN THE AUTHORIZED
NUMBER OF SHARES OF OUR COMMON STOCK WE WILL BE UNABLE TO RAISE ADDITIONAL
CAPITAL.
As of October 16, 2006, we had 100 million authorized shares of Common
Stock, of which 27,946,979 shares of our Common Stock were issued and
outstanding and approximately an additional 70.6 million shares are reserved for
issuance upon exercise or conversion of outstanding options, warrants and
convertible securities. Thus, we have only approximately 1.5 million shares of
Common Stock available for issuance. If our stockholders do not approve of the
increase in the number of authorized shares of Common Stock if and when
requested to by our Board of Directors, our ability to raise additional capital
through the issuance of Common Stock or securities convertible into or
exercisable for our Common Stock will be severely limited.
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 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
19
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 reflective in any way of our actual future operations and/or
financial results, and any of such information and statements should not be
relied upon either in whole or in part in connection with any decision to invest
in the shares. There are a number of important factors that could cause actual
events or our actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth above under the caption "Risk Factors" included in this prospectus and
other factors expressed from time to time in our filings with the Securities and
Exchange Commission ("SEC"). We do not undertake to update any forward-looking
statements.
USE OF PROCEEDS
The selling stockholders will receive the net proceeds from sales of
the shares of the Common Stock included in this Prospectus. We will not receive
any proceeds from the sale of Common Stock by the selling stockholders.
Assuming all of the warrants and options for which the underlying
shares of Common Stock that are covered by this Prospectus are exercised for
cash, we will receive approximately $15.6 million in cash proceeds (before
deducting fees and commission). The holders of warrants having an aggregate
exercise price of approximately $15.4 million have cashless exercise provisions
that become effective under certain conditions and if these warrants are
exercised by the cashless exercise provision, then we will not receive any cash
proceeds from the exercise of those warrants. See, also "DESCRIPTION OF
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK
We are registering the shares offered hereby primarily in order to
satisfy our obligations to the holders of our Convertible Preferred Stock.
On August 9, 2004, under a Securities Purchase Agreement, dated as of
July 30, 2004 (the
20
"Securities Purchase Agreement"), with each of the holders of the Convertible
Preferred Stock we received gross proceeds of $5.25 million from the private
placement of 52,500 shares of our Convertible Preferred Stock. In connection
with the issuance of the Convertible Preferred Stock, we issued to the holders
of the Convertible Preferred Stock five-year warrants to purchase up to 3.5
million shares of our Common Stock at an exercise price of $1.50 per share and
up to 3.5 million shares of our Common Stock at an exercise price of $2.50 per
share (collectively the "Warrants"). As of October 16, 2006 there were 11,928
shares of Convertible Preferred Stock and Warrants to purchase 7 million shares
of Common Stock outstanding.
Concurrently with the placement of our Convertible Preferred Stock, we
secured from an institutional investor a $6 million equity line (the "Equity
Line"). In connection therewith, we undertook to file a separate registration
statement (the "Equity Line 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 covering the
resale of the shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock nor later than the 120th day after such date. That registration
statement became effective on February 11, 2005. The Equity Line investor
subsequently suspended our obligation to file the Equity Line Registration
Statement. In April 2006, we entered into an agreement with the Equity Line
investor pursuant to which we agreed to file the Equity Line Registration
Statement between 90 and 120 days after the effective date of any resale
registration statement that we file in connection with a private placement of
our long-term debt or equity securities resulting in aggregate proceeds to us of
at least $6.0 million. The shares issuable under the Equity Line are not covered
by this Prospectus.
The rights and preferences of the Convertible Preferred Stock are set
forth in a Certificate of Designations of Rights and Preferences that we filed
with the Secretary of State of the State of Delaware on July 30, 2004. The
following is a summary of its principal rights and preferences. Each share of
Convertible Preferred Stock has a stated value of $100 and is convertible into
shares of Common Stock at an initial conversion price of $0.75 per share,
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger. Dividends at the rate of 7% per
annum are payable on a semi-annual basis and on conversion and may be paid, at
our option, either in cash or in shares of Common Stock at a rate equal to the
conversion price then in effect. The option to pay dividends in shares of our
Common Stock, however, is subject to the condition that the issuance of such
shares of Common Stock to the holder cannot result in such holder and its
affiliates beneficially owning more than 4.99% of the shares of our Common Stock
outstanding immediately after such issuance (this limitation is further
discussed below in this section) and that at the time of payment there be in
effect an effective registration statement covering these shares. The
Convertible Preferred Stock is convertible at any time. If not converted
earlier, the Convertible Preferred Stock will automatically convert on the fifth
anniversary of issuance (subject to certain limitations which might defer the
automatic conversion of some shares of such preferred stock to a later date)
into shares of Common Stock at the conversion price then in effect.
The Warrants are exercisable at any time through August 31, 2009. The
exercise price of each Warrant is subject to adjustment if there are certain
capital adjustments or similar transactions, such as a stock split or merger.
Holders are entitled to exercise their Warrants on a "cashless" basis following
the first anniversary of issuance if the Registration Statement is not in effect
at the time of exercise. If the holder elects the cashless exercise option, it
will receive a lesser number of shares and we will not receive any cash proceeds
from that exercise. The lesser number of shares which the holder will receive is
determined by a formula that takes into account the closing bid price of our
Common Stock on the trading day immediately before the Warrant exercise. That
closing price is multiplied by the full number of shares for which the Warrant
is then being exercised. That result is reduced by the total exercise price the
holder would have paid for those shares if it had not elected a cashless
exercise. The number of shares actually issued under the cashless exercise
option is equal to the balance amount divided by the closing price referred to
above.
21
The terms of the Convertible Preferred Stock and Warrants specify that
the beneficial owner can convert such preferred stock or exercise such warrant
in accordance with their respective terms by giving notice to us. However, the
holder may not convert the Convertible Preferred Stock or exercise its Warrant
to the extent that such conversion or exercise would result in such owner and
its affiliates beneficially owning more than 4.99% of our stock then outstanding
(after taking into account the shares of our Common Stock issuable upon such
conversion or warrant exercise). If the holder then disposes of some or all of
its holdings, it can again convert its preferred stock or exercise its warrant,
subject to the same limitation.
Pursuant to the Securities Purchase Agreement and a Registration
Rights Agreement executed and delivered at the same time, we were obligated
initially to register under the Act the number of shares issuable on conversion
in full of the Convertible Preferred Stock outstanding plus dividends thereon
accrued through the third anniversary of the issuance thereof and the number of
shares of Common Stock issuable upon exercise of the Warrants, as well as our
good faith estimate of certain additional shares we might have to issue to
certain selling shareholders if, after the effective date, the shareholder's
right to sell under the registration statement is suspended for periods in
excess of those specified in the Registration Rights Agreement. We are also
obligated to keep the Registration Statement of which this Prospectus forms a
part effective until the earlier of the date on which the holders may sell
without restriction all shares registered on their behalf under this Prospectus
under Rule 144 promulgated under the Act, or the date on which such holders no
longer own any of those shares.
Pursuant to agreements with certain placement agents, we are also
registering 700,000 shares of Common Stock that may become issuable upon
exercise of warrants, pursuant to which (i) 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. These warrants were issued as compensation in
connection with the placement of our Convertible Preferred Stock. The holders
have cashless exercise rights identical to those of the investors warrants'
described above.
All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act or 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.
Finally, we are also registering 264,406 shares issuable upon exercise
of certain other warrants held by persons who are neither placement agents nor
holders of Convertible Preferred Stock as well as 164,406 shares held by one of
our non-employee directors.
In the Securities Purchase Agreement, we have agreed that if we enter
into any offer or sale of our Common Stock (or securities convertible into
Common Stock) with any third party (a "New Transaction") without the prior
consent of a majority in interest of the holders of the Convertible Preferred
Stock on any date which is earlier than 180 days after the effective date of the
Original 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 New Transaction is below the initial conversion price
and/or (ii) the lowest exercise price of any warrants issued thereunder is lower
22
than the initial exercise prices of the Warrants (such transaction being a
"Lower Price Transaction"), then the terms of any unconverted share of
Convertible Preferred Stock or any unexercised Warrants shall be modified to
adjust the relevant conversion price in such convertible preferred stock, the
warrant exercise price or the number of warrant shares to be equal to that
provided in the transaction as so consummated. This period ended on August 10,
2005. However, in connection with our efforts to raise working capital, in
October 2006 we offered to the purchasers of the Convertible Preferred Stock to
reinstate this protection in consideration of new loans (each a "Loan";
collectively the "Loans") that these persons would make to us. Under our offer
(hereinafter, the "Offer"), each investor who advances a Loan to us will have
the benefit of this protection with respect to three times the amount advanced
to us in connection with a Loan. Under the terms of the Offer, the price
protection provisions will be operative with respect to Convertible Preferred
Stock and the Warrants held by such investor on the day on which the Loan is
advanced to us from that closing date through August 31, 2007. The Offer was
also made to the purchasers of our Series B Preferred Stock. We raised on
October 23, 2006 (the "Initial Closing Date") $600,000 from two of these
investors. Our Offer is being made to obtain Loans for up to a maximum of $2
million in advances. Additional loans, if any, will be advanced to us in
separate closings subsequent to the Initial Closing Date. The extended
protection hereunder is available only to the investors who participate in our
Offer.
Under the Registration Rights Agreement, we will be obligated to pay
liquidated damages to the holders of the Convertible Preferred Stock if the
effectiveness of 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 ten days
after the preceding suspension period ended (the date any such suspension
commences, beyond such permitted restrictions, is referred to as a "Restricted
Sale Date"). The amount that we must pay to the holders of the Convertible
Preferred Stock in payment of the liquidated damages incurred during any 30-day
period after a Restricted Sale Date (and pro rata for any such period which is
less than 30 days) will be 1% of the sum of (X) the stated value of all
preferred stock not yet converted and (Y) the stated value of such preferred
stock converted within the preceding 30 days but not yet sold. Both the Company
and the Convertible Preferred Stock holders have the right to have these
liquidated damages paid in shares of Common Stock (valued at the conversion
price). The registration statement was originally declared effective on February
11, 2005. Accordingly, approximately $115,000 in penalties have accrued in
respect of the suspension of effectiveness of the registration statement in
November 2005 as of August 10, 2006 (the date on which the liquidated damages
cease accruing). In addition, prior to effectiveness of the Original
Registration Statement, approximately $199,500 in liquidated damages have
accrued in respect of the late filing/effectiveness of such registration
statement. At their option, the holders are entitled to have these liquidated
damages paid in registered shares at the effective conversion rate.
Reference is made to the Certificate of Designations of Convertible
Preferred Stock, the form of Warrant, the Securities Purchase Agreement, the
Registration Rights Agreement and the form of Principal's Agreement filed as
exhibits to our Current Report on Form 8-K that was filed on August 12, 2004 for
more complete description of the complex provisions that are summarized under
this caption.
DIVIDEND POLICY
We have not declared or paid dividends on our Common Stock since our
formation, and we do not anticipate paying dividends in the foreseeable future.
Declaration or payment of dividends, if any, in the future, will be at the
discretion of our Board of Directors and will depend on our then current
financial condition, results of operations, capital requirements and other
factors deemed relevant by the board of directors.
23
PRICE RANGE OF OUR COMMON STOCK
Our Common Stock is traded on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc., Automated Quotation System under the
symbol "AANI". Prior to May 28, 2004, our Common Stock was quoted under the
symbol "TTRE". Although trading in our Common Stock has occurred on a relatively
consistent basis, the volume of shares traded has been limited. There can be no
assurance the current market will be maintained or that a liquid market for our
Common Stock will be available in the future. Investors should not rely on
historical stock price performance as an indication of future price performance.
The following table shows the quarterly high and low bid prices for
our Common Stock over the last two completed fiscal years and over the first
three quarters of the current fiscal year, as reported on the OTC Bulletin
Board. The prices represent quotations by dealers without adjustments for retail
mark-ups, mark-downs or commission and may not represent actual transactions.
The closing price of our Common Stock on October 19, 2006 was $0.81 per share.
LOW HIGH
------ -----
Year Ending December 31, 2006
First Quarter $ 0.52 $1.01
Second Quarter $ 0.71 $1.25
Third Quarter $ 0.52 $0.77
Year Ended December 31, 2005
First Quarter $ 0.82 $1.36
Second Quarter $ 0.82 $1.26
Third Quarter $ 0.75 $1.09
Fourth Quarter $ 0.75 $1.00
Year Ended December 31, 2004
First Quarter $ 0.25 $1.00
Second Quarter $ 0.52 $1.05
Third Quarter $ 0.76 $1.15
Fourth Quarter $ 0.85 $2.00
As of October 16, 2006, there were approximately 172 holders of record
of our Common Stock. We believe that a significant number of shares of our
Common Stock are held in either nominee name or street name brokerage accounts
and, consequently, we are unable to determine the number of beneficial owners of
our stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
We are engaged in the design, development and marketing of
next-generation technology-based broadband access solutions for voice, video and
data services. Our initial products are designed to deliver "triple play"
(voice, video and data) broadband communication. These products are designed for
24
placement at various points in the network infrastructure layout. We are
marketing our initial products to communications carriers, municipal authorities
and communication equipment companies.
Our initial QoStream product line is comprised of premises gateways,
aggregation switches and a network management systems. Our initial QoStream
products include technologies licensed from Lucent Technologies, Inc. ("Lucent")
as well as technologies developed jointly with Lucent. Lucent has granted us a
worldwide and perpetual non-exclusive license to manufacture, develop and sell
products designed to deliver broadband access solutions that use Lucent's
technologies and related patents. Recently, we developed a stand-alone triple
play home gateway product that is designed to inter-operate with other
standards-based devices deployed in the central offices of carriers or in the
field.
We continue to upgrade and improve our Qostream product line to
encompass sophisticated network interfaces, expanded feature sets and increased
inter-operability with in-house wiring, including copper based facilities. For
example, in December 2005, we unveiled new features on our QoStream AS5000
Aggregator Switch and QoStream PG1000 Premises Gateway products that are
designed to enable a network operator to connect to a home or office and provide
sufficient bandwidth to enable voice, data, and video services over the existing
copper wires already in the ground. Additional feature upgrades that we are
working on include the ability for our gateways to distribute services within a
served premise over existing copper coaxial cables and possibly over telephone
wires.
INITIAL COMMERCIALIZATION OF QOSTREAM PRODUCT LINE
Our business involves the development of new broadband access products
with no significant market penetration. We cannot predict when or to what extent
our QoStream product line or future extended applications will begin to produce
significant revenues, or whether we will ever reach profitability.
In December 2005, Salsgiver Inc., an ISP, agreed to purchase our
PG1000 Premises Gateways and AS5000 Aggregation Switches to support their
service build-out in the Allegheny Valley Region of Western Pennsylvania. We
shipped our first units under this purchase order in March 2006. This was our
first significant sale in the U.S. market.
In April 2006, we entered into an agreement with Motorola Wireline
Networks, Inc. ("Motorola"), a subsidiary of Motorola, Inc., pursuant to which
Motorola will distribute under the Motorola brand a family of up to three IP
Home Gateway products to be jointly developed by us and Motorola. Additionally,
we have granted Motorola the exclusive right to distribute our PG 1000 and
HG-V100 products to certain specified major telecommunications carriers in the
United States and Canada.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND THE SIX AND THREE
MONTHS ENDED JUNE 30, 2005
SALES AND COSTS OF GOODS SOLD. Revenues for the six months and three
months ended June 30, 2006 were $25,379 and $0, respectively. Revenues for the
six and three months ended June 30, 2005 were $5,248and $2,598, respectively We
recorded unit sales from our QoStream product line for the first time during the
three month period ended March 31, 2005. Cost of goods sold were $19,747 and $0
during the six and three months ended June 30, 2006, respectively, and $5,846
and $2,705 during the corresponding periods in 2005.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
consist of expenses incurred primarily in product designing, developing and
testing. These expenses consist
25
primarily of salaries and related expenses for personnel, contract design and
testing services and supplies used and consulting and license fees paid to third
parties. Research and development expenses for the six and three months ended
June 30, 2006 were $2,419,017 and $1,151,903, respectively and $2,063,462 and
$1,001,085 for the comparable periods in 2005. The increase in research and
development expenses during the 2006 periods is primarily attributable to
additional stock based compensation recorded in respect of stock options granted
to employees and the implementation of SFAS 123R effective January 1, 2006 as
well as increased development costs of our products.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related expenses for personnel, consulting fees, and trade show
expenses incurred in product distribution. Sales and marketing expenses for the
six and three months ended June 30, 2006 were $839,495 and $412,016,
respectively, and $1,078,540 and $637,060 for the corresponding periods in 2005.
The decrease is primarily attributable to a shift in personnel costs from
marketing to research and development of our products.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expenses consist primarily of salaries and other related costs for personnel in
executive and other functions. Other significant costs include professional fees
for legal, accounting, investor relations and other services. General and
administrative expenses for the six and three months ended June 30, 2006 were
$1,955,973 and $710,015, respectively, and $935,575 and $496,506 for the
corresponding periods in 2005. The increase in general and administrative
expenses during the 2006 periods is attributable to stock based compensation
recorded for stock options granted to employees and the implementation of SFAS
123R effective January 1, 2006 and, an increase in personnel costs and outside
services.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004.
SALES AND COSTS OF GOODS SOLD. Revenues for the year ended December
31, 2005 were $5,548 and were derived from unit sales of the QoStream product
line and related hardware. We recorded revenues for the first time during the
quarter ended March 31, 2005. Cost of goods sold in the amount of $6,078 for the
year ended December 31, 2005 exceeded sales resulting in negative gross profit.
Certain of the units were sold to a customer at a discount to the anticipated
market price due to the necessity of further testing and evaluation. No revenues
or cost of goods were recorded for the year ended December 31, 2004.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist of expenses incurred primarily in product designing, developing and
testing. These expenses consist primarily of salaries and related expenses for
personnel, contract design and testing services and supplies used and consulting
and license fees paid to third parties.
For the years ended December 31, 2005 and 2004, our research and
development expenses were $3,975,852 and $3,222,695, respectively. The increase
in research and development expenses during 2005 as compared to 2004 is
primarily attributable to the increase in amounts incurred for personnel,
contracted labor and certain materials and supplies used in product development
and enhancement.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and related expenses for personnel, consulting fees, and trade show
expenses incurred in product distribution.
Sales and marketing expenses for the years ended December 31, 2005 and
2004 were $2,422,999 and $505,313, respectively. The increase in sales and
marketing expenses during 2005 as compared to 2004 is primarily attributable to
the hiring of additional marketing and sales personnel during 2005 and other
marketing costs, such as trade shows.
26
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative
expenses consist primarily of salaries and other related costs for personnel in
executive and other functions. Other significant components of general and
administrative costs include professional fees for legal, accounting and other
services. General and administrative expenses for the years ended December 31,
2005 and 2004 were $2,209,171 and $1,860,959, respectively. The increase in
general and administrative expenses during the 2005 period compared to the 2004
period is primarily attributable to the hiring of additional executive and staff
positions.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
we make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Management continually evaluates the
accounting policies and estimates it uses to prepare the consolidated financial
statements. We base our estimates on historical experience and assumptions
believed to be reasonable under current facts and circumstances. Actual amounts
and results could differ from these estimates made by management.
We do not participate in, nor have we created, any off-balance sheet
special purpose entities or other off-balance sheet financing. In addition, we
do not enter into any derivative financial instruments for speculative purposes
and uses derivative financial instruments primarily for managing its exposure to
changes in interest rates.
Stock-based Compensation
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment"
(FAS 123R) that amends FAS 123, and FAS No. 95, "Statement of Cash Flows" and
supersedes Accounting Principles Board (APB) Opinion No. 25, " Accounting for
Stock Issued to Employees," and related interpretations (APB 25). As of January
1, 2006, FAS 123R requires us to measure the cost of employee services received
in exchange for an award of equity instruments, such as stock options, based on
the grant-date fair value of the award and to recognize such cost over the
requisite period during which an employee provides service. The grant-date fair
value will be determined using option-pricing models adjusted for unique
characteristics of the equity instruments. FAS 123R also addresses the
accounting for transactions in which a company incurs liabilities in exchange
for goods or services that are based on the fair value of our equity instruments
or that may be settled through the issuance of such equity instruments. The
statement does not change the accounting for transactions in which we issue
equity instruments for services to non-employees. The pro forma disclosures
previously permitted under FAS 123 no longer will be an alternative to financial
statement recognition.
We adopted FAS 123R on January 1, 2006 and use the modified
prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of FAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
FAS 123R for all awards granted to employees prior to the effective date of FAS
123R that remain unvested on the effective date. As a result, our net loss for
the six months ended June 30, 2006 is $673,694 higher than if we had continued
to account for the share based payment under APB 25. In addition, there was
$990,558 of unvested employee options as of January 1, 2006 that was recorded as
deferred compensation and additional paid in capital.
Prior to January 1, 2006, we accounted for awards granted under those
plans following the recognition and measurement principles of APB 25.
27
Capitalized Software Development Costs
Capitalization of software development costs in accordance with SFAS
No. 86 begins upon the establishment of technological feasibility. Technological
feasibility for the Company's computer software is generally based upon
achievement of a detail program design free of high risk development issues and
the completion of research and development on the product hardware in which it
is to be used. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technology. Amortization of capitalized software development costs
commences when the related products become available for general release to
customers.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances were approximately $3 million at June 30, 2006 and
$333,787 at December 31, 2005. The increase in cash balances at June 30, 2006 is
primarily attributable to the placement of the May 2006 Debentures discussed
below. As of October 24, 2006, following the initial closing of the bridge loan,
cash balances were approximately $550,000.
Net cash used during the six months ended June 30, 2006 consisted of
operating activities of approximately $4.3 million, the purchase of property and
equipment and the costs associated with internally developed software of
approximately $600,000. Net cash used during the corresponding period in 2005
consisted of operating activities of approximately $4.1 million, the purchase of
property and equipment and the costs associated with internally developed
software of approximately $900,000.
Net cash provided by financing activities during the six months ended
June 30, 2006 was approximately $7.7 million compared to approximately $7.1
million in the corresponding period in 2005. Net cash provided by financing
activities during the 2006 period was the result of proceeds from the issuance
of (i) short-term notes in the aggregate principal amount of $2,581,500 offset
by financing costs of $166,620 and original issue discount of $131,500 and (ii)
the issuance of our two year 8% secured convertible debenture in May 2006 in
connection with the private placement discussed below. Net cash provided by
financing activities during the corresponding period in 2005 was the result of
the exercise of stock warrants and proceeds from the placement in April and May
2006 of our Series B Preferred Stock.
From our inception in August 1994, we have financed our operations
through the sale of our securities. Set forth below is a summary of our recent
financings.
In October 2006, we entered into a bridge loan agreement with one of
the purchasers of the Series B Preferred Stock pursuant to which we borrowed as
of October 23, 2006 (the "Initial Closing Date") the gross amount of $600,000
(prior to the payment of offering related fees and expenses). The funds were
raised in response to an offer we made to the holders of the purchasers of the
Convertible Preferred Stock and the purchasers of our Series B Preferred Stock
to reinstate for a specified period certain price protection provisions that
were contained in the purchase agreements relating to these securities. See
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK." Under the terms of our offer, we are seeking to raise up to $2 million
from these investors. Additional loans, if any, will be advanced to us in
separate closings. The loans will be evidenced by our promissory notes (each, a
"Note" and collectively, "Notes") in the principal amount equal to the amount
advanced by investor multiplied by the Applicable Percentage. The "Applicable
Percentage" is the percentage which is equal to (x) one hundred percent (100%),
plus (y) (1) the percent equal to twenty-four percent (24%), multiplied by (2)
the fraction, of which the numerator is the number of days from the closing date
of the Loan for the relevant investor until February 20, 2007 ("the Stated
Maturity Date"), which is 120 days from the Initial Closing Date, and the
denominator is 360. Each of the notes, whether issued on the Initial Closing
Date or a subsequent closing date, are scheduled to mature on the date (the
"Maturity Date") which is the earliest of (i) the Stated Maturity Date or (ii)
the date on which we consummate a subsequent financing that generates, on a
cumulative basis with all other financings (except for the proceeds of these
loans and other limited exceptions specified in the promissory notes evidencing
the
28
loans), gross proceeds to us of at least $2 million (the "Subsequent Capital
Financing") or (iii) the date on which an investor accelerates payment on the
note evidencing a loan while there is existing an Event of Default under that
note.
On May 5, 2006, we raised gross proceeds of $10 million from the
private placement to certain institutional and individual investors of our
two-year 8% Senior Secured Convertible Debentures (the "May 2006 Debentures").
At closing, we received net proceeds of approximately $5.2 million, after
payment of offering related fees and expenses and after the repayment of bridge
loans made between December 2005 and April 2006 in the aggregate amount of
$3,691,500 (inclusive of $30,000 in related fees). Certain of the investors in
these bridge loans elected to participate in the Convertible Debenture
transaction and, accordingly, approximately $850,000 in principal amount of
bridge loans was offset against these investors' purchases of the Convertible
Debentures. The investors in this private placement have a lien on all of our
assets, including our intellectual property.
On April 26, 2005, we completed a private placement to certain
individual and institutional investors of 60,000 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 $6 million. Thereafter, on May 9,
2005, we sold to institutional investors an additional 17,650 shares of Series B
Preferred Stock for aggregate gross proceeds of $1,765,000 (together with the
private placement completed in April 2005, the "2005 Private Placement"). We
received aggregate net proceeds of approximately $5,590,000 from the closings of
the 2005 Private Placement, following repayment of the outstanding principal and
accrued interest on the bridge loans and payment of offering related expenses.
We issued to the purchasers of the Series B Preferred Stock five-year warrants
to purchase, in the aggregate, up to 3,844,062 shares of Common Stock at a per
share exercise price of $1.50, subject to adjustment in certain circumstances.
On December 22, 2005, we entered into a bridge loan agreement with two
institutional investors pursuant to which we borrowed $1.0 million from these
investors. On January 20, 2006, we entered into a bridge loan agreement on
identical terms with three private investors pursuant to which we borrowed an
additional $500,000. In February and March 2006, we entered into bridge loan
agreements with one of the institutional investors who participated in the
December 2005 bridge loan pursuant to which we borrowed $1.5 million.
Additionally, in April 2006, we entered into a bridge loan agreement with two
institutional investors pursuant to which we borrowed $450,000. On May 5, 2006,
we repaid all of the amounts owed on these short-term loans from the proceeds of
the May 2006 Debentures.
On April 5, 2006, we entered into a Strategic Alliance Agreement with
Motorola pursuant to which we and Motorola will jointly develop a family of
three IP Home gateways that will provide expanded support for data, IPTV, High
Definition TV, and Digital Video Recorders using Motorola's existing
Multi-Service Access Platform for exclusive distribution by Motorola under the
Motorola brand. The Agreement with Motorola provides, among other things, that
Motorola will pay to us $1.9 million for engineering costs associated with the
development of these products, of which amount we have received as of October
10, 2006 approximately $900,000 with the remainder to be paid in installments
upon the achievement of certain agreed upon project milestones. Motorola is
entitled to terminate the development program at any time prior to the
completion of the development of the gateway products and, in the event that it
does so, we will be entitled to retain any of the engineering costs paid or due
and owing by Motorola as of the date of termination.
29
We need to raise additional funds on an immediate basis in order to
meet our operating requirements and to fulfill our business plan as well as
satisfy the working capital loans that are scheduled to mature in February 2007.
We may not be successful in our efforts to raise additional funds. Even if we
raise cash to meet our immediate working capital needs, our future cash needs
could be heavier than anticipated in which case we could be forced to raise
additional capital. Even after we begin to sell our products, we do not yet know
what payment terms will be required by our customers or if our products will be
successful. At the present time, we have no commitments for any additional
financing, and there can be no assurance that, if needed, additional capital
will be available to us on commercially acceptable terms or at all. If we are
unable to raise funds as needed, we may need to curtail expenses, further reduce
planned research and development and sales and marketing efforts, forego
business opportunities and cease operations. These conditions raise substantial
doubts as to our ability to continue as a going concern, which may make it more
difficult for us to raise additional capital when needed. However, if the
warrants issued to the purchasers of the Convertible Preferred Stock, which have
a per share exercise prices $1.50 and $2.50 and which are included in this
Registration Statement, are exercised by these holders for cash in a net amount
sufficient for our needs, we may be able to satisfy part or all of our immediate
working capital requirements. No assurance can be provided, though, that these
warrants will in fact be exercised in amounts sufficient for our needs. If these
warrants are not so exercised, we will need to raise additional funds through
public or private sales of equity securities or borrowings.
Additional equity financings are likely to be dilutive to holders of
our Common Stock and debt financing, if available, may involve significant
payment obligations and covenants that restrict how we operate our business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS Statement No. 155, "Accounting
for Certain Hybrid Financial Instruments"(SFAS 155), which amends SFAS Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) and SFAS Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" (SFAS 140). SFAS 155 amends
SFAS 133 to narrow the scope exception for interest-only and principal-only
strips on debt instruments to include only such strips representing rights to
receive a specified portion of the contractual interest or principle cash flows.
SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to
hold a passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative instruments. We are currently assessing
the impact that the adoption of SFAS 155 will have on our financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
does not expect SFAS 156 to have a material impact on the Company's financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on the
recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
will be effective for the Company beginning January 1, 2007. The Company is in
the process of determining the effect, if any, that the adoption of FIN 48 will
have on its financial statements.
30
DESCRIPTION OF BUSINESS
GENERAL
Amedia Networks, Inc. is a development stage company that designs,
develops and markets Ethernet-based solutions that can be deployed with optical
fibers or copper wires to offer voice, video and data broadband services. Our
products enable service providers to offer voice, video and high-speed Internet
access, or "triple-play" services, to their subscribers. In recent years, the
volume, variety and complexity of communications traffic have increased
significantly. An increasing proportion of today's communications traffic
consists of digital media, including voice, video and data content, placing new
demands on communications networks. A variety of service providers now seek to
offer subscribers a broadband connection through which they can deliver
triple-play services. Traditional telephone service providers, in particular,
have faced significant challenges in delivering triple-play services over their
traditional copper-based access networks.
Our initial QoStream(TM) product line solution comprised of premises
gateways, aggregation switches and a network management systems are designed to
implement Fiber to the Premises (FTTP), Fiber to the Node (FTTN) and other
broadband access solutions that many networking companies are currently
undertaking in order to offer triple play services to their subscribers. Our
initial QoStream FTTP products include technologies licensed from Lucent as well
as technologies developed jointly with Lucent. Under our Development and
Licensing Agreement with Lucent (the "Development and Licensing Agreement"),
Lucent provided a significant amount of the development required to
commercialize those initial products. Under the Development and Licensing
Agreement, Lucent granted us a worldwide and perpetual non-exclusive license to
manufacture, develop and sell products designed to deliver broadband access
solutions that use Lucent's technologies and related patents. Recently, we
developed a stand-alone triple play home gateway product that is designed to
inter-operate with other standards-based devices deployed in the central offices
of carriers or in the field.
We have been engaged in the broadband access solutions business only
since March 2004. From our inception in August 1994 through October 2002, we
were engaged solely in the business of designing and developing digital security
technologies that provide copyright protection for electronic content
distributed on optical media and the Internet (the "Copy Protection Business")
under the name of "TTR Technologies, Inc." We sold the Copy Protection Business
in May 2003. In May 2004, we changed our name to "Amedia Networks, Inc."
We currently market our broadband access products directly and
indirectly to telecommunications carriers, cable and video providers,
governments, public utilities, and municipalities around the globe. In April
2006, we entered into an agreement with Motorola Wireline Networks, Inc., a
subsidiary of Motorola Inc., pursuant to which, among other things, we granted
Motorola the exclusive right to distribute certain of our products to certain
specified major telecommunications carriers in the United States and Canada. See
"Recent Developments". Our products enable our customers to economically
provision bundles of voice, data, and video related services to their
subscribers by providing and managing the quantities and quality of necessary
associated bandwidth. They also accommodate the multiple network architecture
and deployment alternatives to which our customers may adhere.
31
INDUSTRY BACKGROUND
DEMAND FOR TRIPLE PLAY SERVICES
In recent years, the volume, variety and complexity of communications
traffic have increased significantly. In the past, the traffic of telephone
companies consisted primarily of traditional voice communications and simple
data traffic, such as facsimile and Internet email. An increasing proportion of
today's communications traffic consists of digital media, including voice, video
and data content. The continued growth of digital media traffic has placed new
demands on communications networks, including the need for higher bandwidth
capacity and increased quality of service.
A variety of service providers, including telephone, cable and,
increasingly, wireless operators, now seek to offer a broadband connection that
permits end users to receive diverse digital media applications simultaneously
within their homes, including voice, video and high-speed Internet access. This
bundle of services is commonly referred to as "triple-play" services, and the
ability of service providers to offer triple-play services to customers has
become an increasingly important competitive factor. Service providers can
achieve competitive and financial benefits by offering triple-play services,
including retaining existing customers, acquiring new customers and maximizing
revenue per customer.
In order to deliver triple-play services to subscribers, service
providers are required to make investments in their communications
infrastructure and must weigh the cost of these investments against the
potential loss of customers if they are unable to offer triple-play services, as
well as the potential new service revenues they may gain from their existing and
new customers. In addition, service providers need to carefully consider whether
any new infrastructure they implement is scalable, or capable of meeting future
bandwidth requirements for emerging applications, cost-effectively. As the
deployment costs of new and advanced broadband technologies decline, service
providers can invest in new infrastructure cost-effectively to offer triple-play
services to a broader customer base today and to provide more advanced digital
media applications to end users in the future.
Traditional telephone service providers, in particular, have faced
significant challenges in delivering triple-play services because the
copper-based networks infrastructure is inherently bandwidth constrained and
thus may not be fully capable of supporting next-generation digital media
applications. In addition, telephone service providers have lost revenue from
their traditional voice business as consumers are increasingly relying on mobile
phone and Voice over Internet Protocol (VoIP) services instead of fixed line
services. The continued loss of fixed line voice revenue is driving telephone
service providers to focus on making investments necessary to provide
triple-play services.
BANDWIDTH BOTTLENECK
The current communications infrastructure consists of a variety of
networks, including principally (i) core networks that include international
and, inter-city, (ii) metro networks that include major intra-city links and
(ii) access networks, also known as the "first mile."
The "first mile" is the neighborhood communications infrastructure
that connects subscribers to a telephone service provider's central office or a
remote node. The central office (as well as the node) is where concentrations of
communications equipment are located. Access nodes are sometimes used for more
economical operations when the distance between a central office and subscribers
exceed certain distances. Subscribers are located at the other end of the first
mile, where they use devices (including VoIP phones, personal computers with
Internet access, residential gateways and HDTVs) that connect to the access
network.
The first mile continues to be the key bandwidth bottleneck in today's
communications infrastructure. Currently, the bandwidth available to subscribers
in the first mile is significantly less than the bandwidth available in the core
networks. Core networks are capable of supporting gigabits-per-second(Gbps) of
bandwidth. However, in the first mile existing broadband access technologies
only
32
deliver speeds ranging from 128 kilobits-per-second (Kbps) to a few
megabits-per-second (Mbps). These speeds are insufficient for next-generation
digital media applications. Several individuals in a single home accessing a
variety of applications, including web surfing, video on demand, video
conferencing, interactive gaming and HDTV, may in the aggregate require
somewhere between 20Mbps to 100Mbps of bandwidth.
A variety of broadband access technologies using copper based wire
systems exist in the first mile today, most of which use the traditional
telephone infrastructure. The most common of these are digital subscriber line
(DSL) technologies, the most advanced of which are approaching the physical
limits of copper-based networks that extend over the typical range of distances
found in access networks.
To overcome the inherent limitations of existing copper-based networks
within the first mile, service providers are increasingly turning to optical
fiber to deliver triple-play services and enhanced performance. In some cases,
the fibers will be connected directly to the premises, while in other cases,
they will be connected to a node that in turn, will connect to the premises over
existing copper wires using more advanced DSL protocols such as very high rate
DSL or VDSL. Today's VDSL, called VDSL2, can transmit 24Mbps of bandwidth to
premises located 5,000 feet from a node and up to 100Mbps of bandwidth when the
node is 500 feet from the premises. A connection that is all optical, will
deliver 100Mbps of bandwidth or more for far greater distances.
Optical technology involves the transmission of data over fiber optic
cables via digital pulses of light. Communication by means of light waves guided
through glass fibers offers a number of advantages over conventional means of
transmitting information through metallic conductors. Glass fibers carry
significantly more information (bandwidth) over longer distances than metallic
conductors but, unlike metallic conductors, they are not subject to
electromagnetic or radio frequency interference.
Fiber optics are well-suited to accommodate the transmission signal
requirements of triple play services. These requirements refer to signal
attributes such as the amount of bandwidth that can be delivered to each network
endpoint, the level of delay in delivering that bandwidth (latency), the
variation in the occurrences of those delays (jitter), and the service
guarantees (Quality of Service) that apply differentially to each type of
service.
These and other characteristics of fiber optical strands render it an
excellent match for transporting large amounts of data, and they have long been
used in the core of a network. In this use, a single fiber cable would carry
signals from thousands and thousands of individuals, operating at data
transmission rates up to 40 gigabits per second (Gbps), and has generally been
used rather than other media based on copper cables or microwave radio
frequencies for both technological and economical reasons. There has also been
an increased use of fiber in metro networks, where transmission rates range from
155Mbps to 10Gbps. However, the use of fiber optics in the infrastructure closer
to a single subscriber at the first mile has not been economically viable until
recently.
As a result, most telephone carriers have deployed Digital Subscriber
Loop Access Multiplexers (DSLAM) in their access networks to address near-term
service requirements that often include both voice and data services. These
devices manage traffic emanating from a subscriber traditionally using a Digital
Subscriber Line (DSL) modem which has combined voice and data traffic together.
The DSLAM interfaces the voice traffic to the existing "voice" network, and the
data traffic to a separate "data" network. Since the data bandwidth available
from a DSL service is significantly affected by the lengths of the copper cables
over which it is transmitted, DSLAMs are often deployed at a node between the
central office and the subscriber. In this case, fiber is extended from the
Central Office deeper into the access network to the site or node where the
DSLAM is located.
33
Cable companies have implemented fiber in a similar manner. Generally,
they have deployed fiber in the core of their networks, but have not yet been
able to justify deploying fiber at the very edge of their networks closest to
their subscribers. Cable networks, which were deployed far more recently than
most telephone company networks, and which were designed to accommodate video
services that are far more demanding in the kinds of signal attributes they
require, were implemented with a different medium in the access plant: coaxial
cables. This copper medium is designed to accommodate significantly more
bandwidth over longer distances than the kind of copper wire used by telephone
companies, although their capabilities fall far short of fiber optical strands.
In addition to the medium of transport, networks are changing in terms
of architecture and protocols that are used. Traditionally, carriers that
provided voice and data services deployed them over separate networks, an
approach called "overlay networks." Data traffic could be separated from voice
traffic soon after it left a subscriber's interface with the network, and they
were each transported and managed very differently from each other. Different
provisioning software, maintenance procedures, and craft skills would be used
for each of these networks. However, in response to the increased consumer
demand for higher speed, less expensive, and more advanced services, some
carriers, in addition to adding greater capacities for faster access networking,
are starting to converge their separate voice and data services onto single
integrated networks. This convergence of voice and broadband services onto a
single network allows carriers to lower operating costs by eliminating much of
the duplication. These developments impact both operating expenses as well as
capital requirements. Today, many carriers are considering or beginning to
deploy Voice over Internet protocol VoIP systems, which transmits voice services
on networks designed for data.
EVOLUTION OF THE NETWORK INFRASTRUCTURE
The movement of all voice and data traffic throughout the
telecommunications network requires the use of software communications protocols
that govern how information is passed within the network infrastructure. These
protocols generally fall into two different categories. In one, the traffic
between two points is treated as a "whole" and allocated to a dedicated circuit.
In the other, the information is broken into packets and those packets travel
multiple paths to get to the same destination. Circuit switching, the most
common technique for transporting and switching ordinary telephone calls through
telecommunications networks, was used because of its reliability; packet data in
past decades was unable to offer the same assurances for delivering traffic when
it was needed. The appeal of packet data - its efficient use of a network's
capacity - was not able to compensate for its uncertain performance levels for
voice, video, and certain data applications, especially under oversubscribed
congestion situations. But that has been ameliorated in recent years with
advances in many of the packet-oriented protocols.
The first of these improved protocols adopted by telephone carriers
was called Asynchronous Transport Mode Protocol (ATM). ATM provided a means of
associating different levels of priorities to different kinds of cells
associated with different kinds of services. While this technology paved the way
for using cells to deliver services, it had associated costs - both the costs of
the additional equipment required as well as the costs associated with
transmitting the additional data (packet header overhead) that had to be added
to the original content data in order to implement ATM. Another packet oriented
protocol, Ethernet, had been widely used for data networks, but was considered
lacking in terms of its ability to assure that packets would be appropriately
prioritized and transmitted in a way required by a particular service. Recently,
however, Ethernet has evolved from its original design so that it could now also
provide a superior level of quality and performance assurance as ATM. Since
Ethernet was already widely used in business and (increasingly) home networks,
and would be less costly to implement, it has been embraced by many carriers as
a means to further reduce the costs associated with providing their services.
34
As voice traffic could be appropriately managed on packet networks,
the cost advantages of deploying VoIP services become very compelling when
compared to traditional circuit-based implementations and the need to maintain
overlay networks. Most cable companies have adopted VoIP for their voice
services. Telephone companies are migrating to VoIP as well, given its far lower
cost to maintain and operate, although their timing in adopting VoIP will be
determined by their strategy for dealing with their very large embedded base of
voice circuit infrastructure.
The emergence of systems to provision Ethernet networks with
sufficient bandwidth and high levels of quality and performance assurance also
enables an option to deliver video services in packets - or IPTV. This evolving
trend holds significant promise, particularly for telephone companies seeking to
deploy video services over their networks to compete with cable companies and/or
to capture more revenue. Most video subscribers today receive their video from a
coaxial cable that simultaneously carries all possible TV channels from which a
subscriber may select one for viewing (assuming they have subscribed to those
channels). When video streams are packetized, only those TV channels that are
being consumed are transported from the carrier. The practical implication of
this is that the total set of TV channels available for consumption are no
longer limited by the capacity of the cable passing each subscriber. For
services such as Video-on-Demand (VOD) and high definition (HDTV), this is a
very significant factor.
Recently, the economics associated with optical transport have
improved to a point sufficient to enable their increased use in access networks.
Telephony carriers are finding it increasingly advantageous to either transport
signals to a node in the access plant over fiber (to obtain the benefits
discussed above) and then use copper wires to finally reach the home or small
office, or to use fiber all the way to the premises. In the case of newly
constructed residential or business structures, most carriers find that they can
economically justify deploying fiber all the way to the premises. However, for
existing buildings, the expense for carriers becomes far more pronounced in the
final segment - the so-called "last mile" where digging up the flower beds and
cement pavements of existing homes can become very costly. But this is also
beginning to change. Fiber-based systems are continuing to decline in price, and
the advantages that they offer in both reduced operating expenses and new
revenue opportunities is significant. In 2006, most carriers that have not yet
done so will seriously consider or actually adopt one of these two different
last mile (sometimes called "deep fiber") strategies.
FTTP-BASED ACCESS NETWORKS
One deep fiber strategy is to implement a full fiber to the premises
(FTTP) system. Initial deployments of FTTP systems have occurred in rural
communities, which have typically been frustrated by being under-served by their
incumbent telephone and cable carriers. Several U.S. municipalities and public
utility authorities in states that do not prohibit such actions, have
established access services through which they sell voice, data, and / or video
based services to their community constitutes. This same trend has occurred in
communities in the Scandinavian region of Europe. In several Asian countries,
FTTP deployments have been more "main stream" owing to a more activist position
by their governments who see the resulting benefits as directly related to
economic policy.
Two general approaches are generally being used to provide FTTP
access-based solutions. The first approach uses a passive optical network or PON
architecture. In a PON system, digital signals are converted into light pulses
and sent down a fiber which is then split into as many as 32 fibers - each
carrying the same signals, and terminating at different premises. Traffic from
each premises can then be sent back up those fibers onto the common fiber and
back into the network. The second approach uses Ethernet, the most common
protocol for managing digital packets over a network, and employs a direct
oversight role as to who gets what information. In an Ethernet switched optical
networking, or ESON, traffic is sent via light pulses to an Ethernet switch that
can be located either in a communications office,
35
outside in an enclosure, or in a building where the subscribers reside or work.
At the Ethernet switch, subscriber-specific traffic travels down a dedicated
fiber as light pulses to a specific home, apartment, or office. The standard for
ESON-like networks was recently approved, although Ethernet itself has been a
standard for network transport for over two decades.
The initial deployments of PON were called APON, followed by BPON, and
more recently, EPON and GPON. These newer versions of PON provide increased
bandwidth and other improvements over the earlier varieties, although their
basic architecture remains the same. The original APON and BPON systems were
relatively more compelling than ESON since they adhered to an existing standard
and used less fiber and less of what were then relatively more expensive optical
components. This resulted in most of the earlier FTTP deployments being
BPON-based. Several of the largest United States carriers issued requirements
for their FTTP deployments that specified a PON architecture. However, optical
components have since become far less expensive - particularly the lasers and
receivers of the kind used in ESON networks. More important, optical fiber has
undergone orders of magnitude reductions in costs. (Actually, both PON systems
and ESON use about the same amount of cabling - but PON systems have fewer
fibers within each cable.) PON-based systems share all of the capacity of the
fiber with multiple users. A one gigabit per second link shared among 32
subscribers can yield as little as 31Mbps per subscriber. While GPON has
increased the overall bandwidth available to each subscriber, it remains a
shared medium which can constrain the total 1.2Gbps or 2.4Gbps of available
bandwidth to 38Mbps or 75Mbps for each of 32 users. While a deployment based on
fewer subscribers can drive-up the available bandwidth for each, the resulting
increased costs to provision that bandwidth to all subscribers will generally
preclude that option. As a reference point, ESONs can provide 100Mbps of
bandwidth per subscriber in either the upstream or downstream direction.
PON systems have greater restrictions with regards to reach. Current
PON systems typically advertise that they can economically extend up to 25 km
from the central office, although the actual experiences of carriers that have
implemented such systems suggest that the distance is far shorter. (This is
principally the result of economics: to achieve the longer reach, optics that
are far more costly must be used to compensate for all of the optical power lost
due to the greater distances covered and the multiple splits to distribute the
common signal out to multiple fibers.) With PON systems, carriers cannot
precisely isolate information related to users or faults. This means that when
there is a problem with the PON network, the operator may not be able to
identify the location and will need to send a technician out into the field
(called a "truck roll") to search for the problem. This can drive up maintenance
costs.
ESON systems can economically extend up to 90 km from the central
office, can completely isolate information streams, and remotely isolate and
locate faults. Its basic architecture never allows "contact" with the content
that was not intended for a given subscriber. In addition, ESON systems are
inherently less complex to install and manage. They contain none of the complex
engineering restrictions that PON systems have as to tolerable distances between
subscribers on a PON cluster, or the distances between nearest and furthest
subscribers from a Central Office of a telephone company.
In general, carriers will increasingly find the decision to deploy
ESON or PON to be less clear-cut than in past years, and will need to consider
several factors, the principal one being the density of their subscriber base.
FTTN-BASED ACCESS NETWORKS
The second "deep fiber" strategy is the deployment of fiber to a node
in the access network, and then use of the existing copper telephone cables to
complete the transmission link to the subscriber. The node can be as close to a
few hundred feet from the subscriber (generally called Fiber to the Curb, or
FTTC) to five or ten thousand feet or more. The difference between this network
design and the use of a
36
traditional remote DSLAM (see above) is the availability of new DSL technologies
that can provide sufficient bandwidth to offer high bandwidth data services as
well as IPTV service.
Most recent DSL services have been implemented using a technology
called Asymmetric Digital Subscriber Line (ADSL) providing a total bandwidth of
roughly 1.5Mbps to 7Mbps downstream, and between 16Kbps to 800Kbps upstream over
several thousand feet of copper cable. Recently, there has been considerable
improvement with respect to increasing that bandwidth, and new versions of DSL,
such as ADSL2+, can offer 2 Mb/s (long loops) to 24Mbps downstream (very short
loops) and 1Mbps upstream.
Currently, the most promising DSL technology is VDSL2 (Very High Speed
DSL) which can transmit at 100Mbps in both downstream and upstream directions
over 600 feet, and up to 24Mbps downstream over 5,000 feet. In addition, VDSL2
is ideally designed to accommodate Ethernet traffic. (ADSL has generally been
optimized for ATM traffic.) The term IP-DSLAM has recently been introduced to
describe a DSLAM that terminates Ethernet-based DSL traffic.
FTTN networks can be positioned as an interim deployment, ultimately
leading to FTTP as the fiber lengths grow and the node progresses closer and
closer to the subscriber - evolving into a FTTC implementation, and finally, to
a direct fiber connection to the subscriber. FTTN access networks are less
expensive to deploy than FTTP networks, and can offer a similar set of services
for many subscribers. However, it is generally agreed that FTTN networks will
not offer the same efficiencies with respect to operating expenses as FTTP
networks. In addition, FTTN networks may not provide sufficient bandwidth for
all services that could be offered to subscribers, and may not be able to reach
some subscribers with the same services that are offered to other subscribers
residing in closer proximity to the Node. Nevertheless, three of the four
largest domestic telephone carriers, AT&T Corporation (formerly SBC
Communications), BellSouth Corporation, and Qwest Communications have all
announced their intention to implement services based on variations of FTTN.
In addition to deploying FTTN systems based on the new DSL protocols
to support higher performance for Triple Play services, some carriers are
evaluating another approach called pair bonding.
Traditional voice service requires only two insulated copper wires
twisted around each other (a "twisted pair"), but most subscribers have access
to multiple pairs passing by their premises. These additional pairs can be used
for second or third telephone lines, fax lines, etc to which the consumer may
subscribe. Pair bonding is a technology that allows transmission of more data
over longer distances by dividing the DSL signal over multiple unused pairs with
a lower bit rate on any of them. While this technology has promise, there are
several barriers that prevent its more widespread implementation. First, pair
bonding assumes that those extra pairs are in place, available, and with similar
characteristics (gauge, length, unterminated stubs, condition, etc). Second,
telephone companies often have extremely deficient records of their copper
access plant, and so locating any candidate pairs for Pair Bonding is often
difficult. Thirdly, provisioning systems must be modified to permit more than
one pair to be associated with the same telephone number. Because of these
factors, several vendors that offer Pair Bonding solutions often position them
for business applications in areas where, due to zoning and other
considerations, the carriers will have likely deployed far more pairs than they
would have in more residential areas.
Generally, the provisioning of services over VDSL2-based FTTN networks
is far simpler than other FTTN options. VDSL2 has the ability to train itself on
the condition and characteristics of the loop such that it optimizes the
performance of transmission (bit rate, error performance, etc.) given any
impacts from impairments in the existing copper plant.
37
MARKET FACTORS
Given the current nature of the information networking market, we
believe that it is likely that almost all carriers will adopt at least one of
the two strategies for deeper fiber penetration. Specifically, service carriers
must be able to provide a competitive service package which in turn requires
that their access infrastructure can accommodate the associated higher bandwidth
and other signal attributes in the manner previously discussed. The urgency in
providing these services is the result of the intense competition between what
had historically been the relatively separate operational spheres of cable,
satellite, telephone, and wireless carriers. Over the last several years,
satellite companies providing digital video services were able to aggressively
compete against cable companies by offering a larger choice of TV channels and
often higher quality products. Cable companies responded by not only introducing
digital services themselves, but also by seeking new revenue sources by
providing cable modem data service, and then voice services. Telephone
companies, who have seen their access lines in service decline in recent years
due to the impact of cellular service replacing second or even primary access
lines, now experienced an additional source of market erosion from cable
companies offering voice, video and data services. Service bundling by cable
companies also provided a one-stop shopping appeal to consumers, introducing
additional revenue erosion to telephone companies.
Telephone companies have pursued several different approaches to
launch triple play services. Some have continued to provide voice and data over
their existing DSL networks, and have contracted with a satellite video provider
to resell their video - often on a co-branded basis. Others have deployed a FTTP
access network, and have allocated some of the downstream capacity for
delivering the same kind of RF video that a cable company would deliver -
broadcasting all TV channels to every subscriber. These are generally near-term
measures that will likely be replaced for reasons that will soon be discussed.
Meanwhile, cable companies, seeking additional revenue sources, have
begun focusing on small and medium size business customers - a market primarily
addressed by telephone companies and resellers. Their first initiative in the
business market was based on a cable modem service. However, given the nature of
business data and information technology requirements, cable companies have
begun to implement point-to-point Ethernet services for businesses - a service
that requires a network design very different from the existing cable networks.
As carriers weigh their options for network strategies in this more
competitive market, they must also accommodate several emerging trends related
to how subscribers view video. HDTV sets have recently achieved a cost level
that has ignited a surge of consumer demand. As such, there is an increased
demand for video in HD format to be viewed on newly purchased HDTV sets.
However, HD video consumes three to four times the bandwidth than Standard
Definition (SD) video. Consequently, for cable companies, there is less capacity
for more channels, and for telephone companies implementing Internet protocol TV
(IPTV) over certain FTTN network architectures, there may be inadequate
bandwidth on the copper loop.
The market demand for upstream bandwidth is also beginning to
increase, and will likely continue to do so. File sharing, exchange of large
sized digital photographs, and gaming applications are often touted as reasons.
However, the availability of consumer targeted HD video cameras, currently
selling for close to $1,000, hold the prospect of increasing that demand to a
far larger extent than previously thought. The level of detail, the enhanced
viewing experience, and the increased sense of presence enabled by the wider
aspect ratio of HDTV all have the potential to make video conferencing a far
more compelling option than did earlier more limited video conferencing
technologies.
38
OUR ULTRA-BROADBAND ACCESS SOLUTIONS AND PRODUCTS
The term "ultra-broadband" is used to characterize the amount of
bandwidth required to provide a full-featured triple play service bundle
consisting of voice, data, and video applications. Generally, this would be an
access network capable of delivering greater than 50Mbps downstream to, and at
least 25Mbps upstream from a subscriber at any given time, assuming that video
is delivered by means of IP-TV.
We have introduced two product families for providing ultra-broadband
access. The first of these consists of hardware and software products that are
designed to be deployed together to offer a comprehensive access solution for a
particular application. For example, customers seeking to provide a FTTN access
network could purchase our solution that consists of equipment that would reside
at a Central Office or node, equipment that would reside at each premises, as
well as a comprehensive access network management system. These products have
been designed to interoperate with each other so as to optimize their total
resources. This is our QoStream(TM) family of products which can be configured
for use to support the following applications:
ESON FIBER TO THE PREMISES (FTTP)
Our solution provides 100Mbps of bandwidth both downstream and
upstream (symmetrically) to support full triple play services over up to 40Km of
fiber from a central office with no intervening electronics ("actives.") With an
intervening node, it can support full triple play services over up to 90Km of
fiber from a central office. In this point-to-point switched Ethernet solution,
each subscriber accesses its own dedicated (unshared) fiber. Sophisticated
algorithms provide the quality of service (QoS) performance for each of the
triple play services, and allow service providers to market a wide set of
different service combinations based on performance and bandwidth.
VDSL2-BASED FIBER TO THE NODE (FTTN)
The Amedia AS5000 layer 2 Ethernet aggregation switch can serve up to
48 subscribers per chassis located over 5,000 feet away from a node over copper
twisted pairs through the use of VDSL2. At that distance, subscribers can
receive approximately 24Mbps of bandwidth. Multiple AS5000s can also be "daisy
chained" at that node to serve far more than 48 subscribers. The QoStream AS5000
aggregation switch can also simultaneously support connections via CAT5 cables,
as well as fiber-based connections using ESON. Thus, the same equipment can be
reused as subscribers require more bandwidth over longer distances than is
achievable with VDSL2 - just by replacing a line card and deploying the fiber
subscriber connection. The QoStream PG1000 Premises Gateway terminates the
copper twisted-pair VDSL2 link, and enables a wide array of triple play
services, wireless routing, and support for analog phones.
FIBER TO THE BUILDING (FTTB)
Approximately 25% of U.S. Households reside in Multiple Dwelling Units
(MDUs), most of which do not have fiber in the internal risers and lateral
conduits. Telephone companies seeking to provide triple play services with a
FTTP solution find that they often cannot gain access to buildings to install
fiber, or that those undertakings would be too costly or disruptive to tenants.
And while some FTTP systems can distribute video over coaxial cables that may be
in these buildings, telephone companies find they often cannot access or use
that infrastructure. However, by terminating a fiber from the central office
onto an AS5000 located in the building basement or rooftop, 100Mbps can be
economically made available for triple play services to each apartment, with
VDSL2 running over the internal copper wires to a VDSL2 Premises Gateway located
in each unit.
METRO ETHERNET SMALL BUSINESS NODES
Many of the larger telephone companies have deployed a separate
network for delivering
39
Ethernet services over fiber to businesses. These Metro Ethernet services
require high bandwidth rates as well as performance that can be guaranteed by
means of service level agreements with subscribers. Many smaller businesses
could be served from this same network, but are not currently connected by
fiber. An Aggregation Switch with VDSL2 line cards located at the central office
where the serving Ethernet Core Switch resides could serve those smaller
businesses with the performance and bandwidth necessary for a business service.
A variation on this application is the use of the Aggregation Switch to serve
shopping malls and small office buildings (Multiple Tenant Units or MTUs) by
locating that switch on-site and transmitting over the existing telephone cables
to the individual tenants. Services would be terminated on a VDSL2 Premises
Gateway configured for business needs in terms of the number and types of ports.
The following are our QoStream family of products that are used to
build our solutions for each of the above applications:
QOSTREAM(TM) PG1000: a Premises Gateway product that resides at the
subscriber premises and that performs data, telephony, gaming, video and local
Ethernet switching functions. The PG1000 is designed to connect to the line
cards of a QoStream AS5000 (below) via a fiber ESON interface, a copper twisted
pair VDSL2 interface, or CAT5 cables. Subscribers connect their devices
(standard analog telephones, IP telephones, HDTVs, SDTVs, computers, gaming
consoles, video cameras, etc.) to the Premises Gateway via simple telephone
(RJ-12) or data (RJ-45) cables, or via an optional wireless 802.11b/g (WiFi)
access point and router.
A Premises Gateway should not be confused with a modem. Gateways must
manage each service independently using different bandwidth parameters, offer
substantial remote monitoring, fully support IPTV, include advanced security
capabilities, and integrate several functions including routing, support of
VoIP, Network Interface, as well as those functions associated with a
traditional modem, and often in a single integrated unit. Gateways also directly
connect to primary home communication appliances, such as computers, telephones,
and TV set top boxes without requiring intervening boxes that modems require,
such as routers, splitters, hubs, and devices to introduce service guarantees
for required triple play quality of service.
QOSTREAM(TM) PG1000H: a Premises Gateway with the same capabilities as
the PG1000, but designed for outside deployment. It can operate within more
extreme temperature (-40(degree)C to +65(degree)C) and humidity ranges and other
outside plant conditions, has more secure and separate physical access for the
subscriber as well as for telephone company craft, and is equipped with alarms
that trigger various temperature or access conditions to a remote monitoring
station.
QOSTREAM(TM) AS5000: a distributed Ethernet aggregation switch
designed to route data to and from the premises gateways. Each chassis can
accommodate up to six line cards - each with eight ports, for a total of 48
ports. Multiple AS5000 chasses can be linked together. This switch is very
compact, and can be located inside a central office or data network center, an
MDU, or outside in a cabinet or on a telephone pole in a hardened configuration
without the need for expensive air conditioning to compensate for external or
temperature or internally generated heat. (Not only are operational costs
reduced due to less power consumption and no power backup for air-conditioning,
but the probability of system failure (due to failure in the air conditioning
unit) is significantly decreased.) The product is highly modular, and can
accommodate multiple types of connections to the subscriber, while also
providing connectivity and it connects those subscribers to a Core Ethernet
Switch via from one to five 1GbE fiber connections, depending on bandwidth needs
and degree of desired over subscription.
QOSTREAM(TM) DIRECTOR: a graphical and point-and-click network
management system that provides complete capability for remotely managing and
operating the QoStream product line from a remote Network Operations Center
(NOC). The QoStream Director employs the industry standard Simple
40
Network Management Protocol (SNMPv3) for communicating with the PG1000 and the
AS5000 network elements and uses standard Management Information Base (MIBs) as
well as enterprise-specific MIBs for managing the various capabilities of the
system. The QoStream Director provides a complete suite of management
capabilities that consists of Fault, Configuration, Accounting, Performance and
Security (FCAPS) management as well as topology and resource management. The
Director features a Graphical User Interface (GUI) with equipment front panel
views, topology views and alarm summaries. The GUI enables NOC personnel to
provision bandwidth and Virtual Local Area Network (VLAN) circuits for service
providers as well as individual customers with simple point-and-click
mechanisms. The QoStream Director is supported in both a small network platform
that can manage thousands of network elements, for larger as well as in a large
network deployments, in a distributed platform that can support tens of
thousands of network elements. The Director also features a northbound interface
that supports industry standards for interoperating with higher level network
management systems as well as service management systems for service
provisioning and billing functions.
Our other product family consists of stand-alone products that are
intended to interface with equipment from other vendors rather than other
QoStream devices. These products are administered from an external network
management system, are fully standards-compliant, and are designed to be more
self-contained. As of December 2005, we announced one product in this family:
the HG-V100 Home Gateway.
HG-V100: A Home Gateway designed to interface with a VDSL2 IPDSLAM. It
is similar to the PG1000, but managed via the TR-069 industry standard for DSL
device management. As is the case with the PG1000, the HG-V100 supports voice,
video, wired data and wireless data. Subscribers connect their devices (standard
analog telephones, VoIP telephones, HDTVs, SDTVs, computers, gaming consoles,
video cameras, etc.) to the HG-V100 via simple telephone (RJ-12) or data (RJ-45)
cables, or via an optional wireless 802.11b/g (WiFi) access point and router. We
believe that most of the world's traditional DSL Modems, of which there are
about 140 million (according to the market research firm Point Topic) will be
replaced with Home Gateways similar to the HG-V100 as subscribers transition to
or newly adopt Ultra-broadband services. Furthermore, the transition towards
VDSL2 as the interface of choice will continue, according to market research
firm Infonetics, growing to 41% of all deployments of DSL infrastructure by
2008.
HG-V100 (OUTDOOR): The HG-V100 is also available with the same
extended range capabilities as the Outdoor QoStream PG1000, and enables a
carrier to mount the unit on the exterior of a building in order to more easily
gain maintenance access to it.
DEMONSTRATIONS AND FIELD TESTING / COMMERCIAL AVAILABILITY
Our initial QoStream products were first introduced to the public in
their pre-release configurations in June 2004 at the industry's leading trade
show and exposition event. The QoStream PG1000, QoStream AS5000, and the
QoStream Director were configured so as to interconnect two virtual homes with
HDTV, live video, online interactive gaming, Voice over IP, and broadband data
via both wired and wireless means. The demonstration successfully showed the
capabilities of these systems, including the ability to manage the bandwidth
according to the parameters required for each of these applications. Hardened
versions of these products for outdoor deployments were demonstrated in October
2004 at another major industry event. On the anniversary of the first
demonstration, we introduced our initial VDSL capabilities at the same industry
show in June of 2005, and our VDSL2 products in October 2005. In the latter
event, we demonstrated three HDTVs, one SDTV, four analog phone lines, and a
broadband data service all being transported over 500 feet of copper twisted
pair via our PG1000 and AS5000 configured for a FTTB (MDU) application.
41
We began to implement plans for the outsourced manufacturing of our
products at the close of 2004 with contract manufacturers with operations in the
U.S., and had some limited production capabilities by the middle of the second
quarter of 2005 for selected products for international field trials. By the
beginning of the third quarter of 2005, we had sufficient production
capabilities to support additional customer laboratory and field trials in the
U.S.
With production of products underway, we were able to initiate 10
product pilots in 2005 with prospective customers operating in the United States
and internationally. Laboratory and field trials such as these are vital for the
commercialization process, not only as a prelude to revenue, but also as a means
of validating our solutions that can be referenced to other prospective
customers.
Commencing June 2005, we entered into our first sales agreement for
our QoStream product line with Tai Long Communications in China. Tai Long is
licensed by the Chinese Government to operate broadband customer premise
networks (CPN) and ISP networks. In addition, it is licensed as an Internet
content provider. Ongoing field trials of our equipment have thus far been
successful, and Tai Long is evaluating how to best market these services.
In October 2005, the Company received an order from CSM Telecom, a
Brazilian Telecommunications Service Provider, for QoStream PG1000 Premises
Gateways, QoStream AS5000 Aggregation Switches, and the QoStream Director
Network Management System, to be deployed in 100 buildings in Florianopolis,
Brazil.
Additionally in October 2005, Hans Communications, a Korean-based CATV
and High-Speed Internet Service Provider operating in Mongolia, and Sejong
Network Technologies, a Korean distributor and systems integrator of the
Company's products announced plans to initially install 100 QoStream PG1000
Premises Gateways in Mongolia.
In December 2005, Salsgiver Inc., an ISP, agreed to purchase our
PG1000 Premises Gateways and AS5000 Aggregation Switches to support their
service build-out in the Allegheny Valley Region of Western Pennsylvania. We
shipped our first units under this purchase order in March 2006. This was our
first sale in the U.S. market.
OUR STRATEGY
Our goal is to become a leading designer, developer and distributor of
ultra-broadband access equipment and solutions for the provisioning of triple
play services. Key elements of our strategy include the following initiatives:
INTER-OPERABILITY AND VALIDATION WITH KEY VENDOR PARTNERS: Our
products do not by themselves provide the complete capability for our customers
to implement a revenue generating service. For example, our QoStream AS5000
Aggregation Switch is designed to connect to a large Ethernet Core Switch, which
in turn connects to network elements that provide video content, access to the
internet, and access to the existing voice network. Our QoStream PG1000 Premises
Gateway connects to set top boxes (STBs), telephones, computers and other
devices in a home or business. In order to confirm that our products will
interoperate with these other products to enable our customer to deploy a
revenue generating service, we create small versions of these end-to-end
configurations and confirm that services will perform as intended. In some cases
where these other products are themselves undergoing considerable changes, we
initiate a more encompassing relationship with the leading vendors of these
products and directly engage their development teams. We also initiate such
relationships when a prospective customer has indicated intent to deploy a
particular vendor's products.
In November 2004, we entered into a formal agreement with Riverstone
Networks in which we
42
each committed to undertake interoperability tests to assure that each other's
products work together to provide integrated, end-to-end service capabilities.
We have also extensively tested our products with equipment from companies such
as Adtec Digital, TUT Systems, Verso Technologies, Amino Communications,
RCA/Thompson, Cisco Networks, Extreme Networks, Infogate, and Alcatel.
In April 2006, we entered into an agreement with Motorola Wireline
Networks, Inc. (a subsidiary of Motorola, Inc.) pursuant to which we granted
Motorola the exclusive right to distribute our PG 1000 and HG-V100 products to
certain specified major telecommunications carriers in the United States and
Canada. See "Recent Developments".
TIME TO MARKET: A founding principal of our company has been to
optimize operations for the rapid market evaluation of our products. For reasons
that can be discerned from the above characterization of the market there is a
strong advantage in being "first-to-market" with a commercial product. In
addition, given the highly dynamic nature of this market, it is essential that
development directions be acquired from "real-time" market interactions rather
than from more insular secondary market research. Accordingly, we have elected
to employ significant out-sourcing of non-core functions instead of relying on
organic development in order to expedite our ability to get products into the
market.
For most of 2004 and part of 2005, we relied extensively on our
initial contract developer, Lucent, to commercialize our prototypes. This
allowed us to build our own research and development capacity while
simultaneously having product in the market. We also contracted with Wipro
Limited in 2004 and 2005 to develop the network management system that we had
internally specified and architected. Currently, we continue to outsource
non-core development projects or purchase third party hardware or software in
order to optimize the use of our own resources and to speed time to market.
COST REDUCTION INITIATIVES: Our initiative for reducing our variable
costs associated with our products has several components. We have modified our
engagements with contract manufacturers in order to reduce unit costs while
preserving responsiveness and quality. Feedback from customers and prospective
customers has allowed us to revise the desired features set and options for our
products which can help us, in some cases, to eliminate non-required elements
that would otherwise contribute to costs.
In some cases, we have outsourced development projects to less costly
resources in China and India. These options are invoked in only those cases not
involving our core technologies and under the assurance that current or
prospective critical intellectual property of Amedia is protected.
VDSL2 INITIATIVES: In 2004, the direction of our company was primarily
focused on products that could enable carriers to deploy an Ethernet-based FTTP
network. Our belief was that alternatives with more limited bandwidth would not
adequately allow carriers to provision triple play services, which we viewed as
critical to their future. However, as the VDSL standard evolved towards VDSL2,
we reassessed our initial assumptions and recognized that a VDSL2-based Ethernet
network using copper twisted pair could be viable for many carriers.
Accordingly, we initiated a rapid development effort aimed at being
first-to-market with VDSL2-based products.
o In February 2005, we announced our initial VDSL-based
Fiber-to-the-Node / Curb solution that was also designed for use in
MDUs - the first of its kind in the market.
o In October 2005, we announced a VDSL2-based Home Gateway, the HG-V100,
that was the first of its kind to be available in the market.
o In October 2005, we also announced that the HG-V100 would be available
in a carrier-grade / hardened version that could be mounted outdoors
and reliably operate in
43
temperatures ranging from -40(degree)C to +60(degree)C. This was the
first such product announced and available to customers.
LEVERAGE LEADERSHIP ASSETS: The Amedia leadership team has a rich and
lengthy background in telecommunications. Each member of our management team has
a long record of interactions with senior executives of many of the major
telecommunications firms in the world. Our Board of Directors also has members
with considerable industry experience, including a former Chief Technology
Officer (CTO) of Bell Laboratories, and a former President of both Lucent's and
Nortel's North America Divisions. In addition, in November 2005, we created a
Corporate Advisory Board to advise the senior management team on strategic and
overall business development. The Advisory Board initially includes individuals
who have led major telecommunications companies as the CEO or as a key senior
executive, have authored ground-breaking papers and books related to the
evolving networking landscape, and have been at the forefront of the
implementation of pioneering technologies.
This level of experience enables us to more aggressively pursue
international opportunities, more effectively prepare for commercial
deployments, gain insights from senior level executives of major carriers, and
implement carrier-grade features at a level uncharacteristic of an enterprise
that has only been in operations for fewer than two years.
LEVERAGE COMPETITIVE ADVANTAGES RELATED TO SERVICE QUALITY: A key
factor in the success of any vendor in the ultra-broadband solutions market is
their products' ability to independently manage and maintain performance levels
of each of the services within a triple play offering. Many early VoIP services
were plagued by deteriorating data performance when a telephone was in use.
Carriers will not deploy products that result in their subscriber experiencing
pixilation or frozen frames on a newly-acquired HDTV every time a phone call is
made or a large download of data occurs - they will require more service
guarantees for all services. And while a high level of bandwidth and a
standards-based implementation are required, they are in and of themselves, not
sufficient to insure a satisfactory level of performance.
Our products have been designed with highly innovative approaches to
insure that the performance of each service can be uniquely managed based on
service priority and that optimal use of resources is obtained to eliminate
dropped packets for high priority services such as video and voice and to
minimize overall dropped packets and other factors impacting the quality of
those services. We believe our products have a leading position in the market in
this respect.
THE LUCENT LICENSE
In January 2004, we entered our Development and Licensing Agreement
with Lucent pursuant to which Lucent developed and is licensing to us the first
generation versions of our premises gateway and our aggregation switch. In the
course of the development of these components, we concluded that in order for us
to compete more effectively in the broadband access market, these components
required significant upgrade. Accordingly, since April 2004, we entered into
supplementary development agreements with Lucent to upgrade the feature sets on
these initial products. Under the Development and Licensing Agreement, we have a
worldwide, perpetual and non-exclusive license to use certain specified related
Lucent technologies and solutions to develop, market and sell broadband access
products. Our initial QoStream products contain Lucent technologies, as well as
technologies jointly developed by us and Lucent in the course of the development
projects. Subject to certain standard restrictions, we are entitled to
sublicense to third parties the rights to manufacture and sell these products.
Lucent is not restricted from using pre-existing Lucent technologies or
information that is incorporated in these products.
All technologies and information, including the object or source code,
that are developed as direct
44
result of the development efforts taken under the development projects with
Lucent are jointly owned by us and Lucent (each, a "Joint Invention"). Lucent,
however, is the sole owner of all pre-existing Lucent technologies incorporated
in the licensed products. Lucent has agreed not to use, through January 2014,
any new Joint Inventions for the purpose of developing and selling any products
that may directly compete with the QoStream PG1000 or the QoStream AS5000.
Under the Development and Licensing Agreement, Lucent is entitled to
1.5% of revenue sources from our Gateway and Switch products that include Lucent
owned technologies, provided that no royalties accrue or become payable until
July 10, 2008.
Subject to timely payment of all amounts due under the Development and
Licensing Agreement (including the royalties and revenue fees), the licenses
granted us under the Development and Licensing Agreement continue in perpetuity
notwithstanding any termination of that agreement.
MARKETING PLAN
Our business plan calls for the leadership team to engage in executive
level selling with the top-tier global customers; a small direct domestic sales
force to address other strategic accounts; and the use of distributors,
resellers, sales agents, and other third parties to represent our products with
most other prospective customers.
Market communications programs were implemented to support the
Company's brand and value including our participation in key domestic and global
trade shows and expositions, event sponsorships, print advertisements, outbound
e-mails programs, and web-based initiatives. Thought leadership programs
included the authoring of multiple articles by management in industry
publications, webinars, speaking engagements at several of leading conferences,
and engagements with industry analysts.
Co-marketing programs have been instituted with several other
equipment vendors with whom we interoperate. For example, Riverstone Networks
and TUT Systems have both represented our products with their customers, and we
have reciprocated.
In April 2006, we entered into an agreement with Motorola Wireline
Networks, Inc. (a subsidiary of Motorola, Inc.) pursuant to which Motorola will
distribute under the Motorola brand a family of up to three IP Home Gateway
products to be jointly developed by us and Motorola. Additionally, we have
granted Motorola the exclusive right to distribute our PG 1000 and HG-V100
products to certain specified major telecommunications carriers in the United
States and Canada. See "Recent Developments".
RESEARCH AND DEVELOPMENT
The market in which we compete is characterized by the rapid
introduction of new technology which in turn has precipitated rapidly changing
customer interests. As such, we have built a highly responsive technical and
research and development group which, as of February 13, 2006, numbers 23
employees. These teams performs hardware and software engineering, systems
architecture design, quality assurance, and systems testing.
As of February 2006, our QoStream products are commercially
deployable. Current development efforts are primarily focused toward feature
enhancements of our products.
However, our current and future research and development efforts are
subject to our raising funds needed to meet our liquidity needs and realize our
business plans.
45
COMPLIANCE WITH REGULATORY AND INDUSTRY STANDARDS
The market for Ultra-broadband access solutions and technologies is
characterized by a significant number of laws, regulations, and standards, both
domestic and international, some of which are evolving as new technologies are
deployed. As our intent is to insure that all of our products are standards
based, we seek to and for the most part do conform with all industry wide
standardization organizations, which include the DSL Forum, the Institute of
Electrical and Electronics Engineers (IEEE,) the American National Standards
Institute (ANSI), Telcordia, and the European Telecommunications Standards
Institute (ETSI). In addition, our products must meet product safety and
electromagnetic compatibility requirements specified by several regulatory
agencies, including the Federal Communications Commission (FCC), the
Underwriters Laboratories (UL)) safety standards, and the European Union
Directive (Community CE mark). Any additional compliance testing, as required by
new customers, will take place in a timely fashion.
MANUFACTURING
Like many other system vendors in our industry, our business plan
contemplates the outsourcing of our primary manufacturing operations. Our
contract manufacturers utilize processes and procedures that are generally ISO
9000 certified, and so are those of our component vendors. However, the
outsourcing of these operations means that some degree of risks related to
delivery schedules, yields, and other factors are external to our immediate
control.
In the fourth quarter of 2004, we entered into an agreement with a
leading contract manufactures with facilities in the United States. In addition,
we have been evaluating lower cost alternatives and have entered into contract
manufacturing agreements with a high quality / lower cost manufacturer with
production facilities in China. Going forward, our sourcing strategy will
include a combination of manufacturing in the US as well as China depending on
volume and manufacturing technology needs.
COMPETITION
The market for ultra-broadband systems is highly competitive and
relatively young, and as such, there is as of yet no clear dominant set of
players.
Our competitors fall into several categories. Among those that offer a
similar FTTP ESON-like solution are World Wide Packets, Telco Systems,
PacketFront, and Allied Telesyn. Other FTTP competitors who provide a PON
solutions include Alcatel, Wave7, Calix, Tellabs, AllOptic, and Motorola.
The competition associated with FTTN products includes companies that
offer an IP-DSLAM with VDSL2 such as Siemens and Alcatel, those with VDSL such
as ECI Telecom, and others who have not yet introduced a VDSL or VDSL2
capability such as Adtran, Huawei, and Zhone. This market continues to evolve,
and we anticipate that additional entrants - particularly those currently
offering DSLAM products- will emerge.
With respect to Home Gateways, we believe that 2Wire and Netopia are
the primary competitors that we face in the market today. And while modems or
home routers do not address the same market needs, and their vendors are not
currently viewed as competitors, we anticipate that several of them will emerge
in the future with a Home Gateway product.
While it is generally believed that wireless-based systems will not
provide the functions or performance required by customers for our QoStream(TM)
products, there is a possibility that in the future, companies offering products
based on technologies such as WiMAX (802.16) systems or one of several fixed
wireless approaches could emerge as competitors.
46
Many of our competitors have longer operating histories, greater name
recognition and significantly greater financial, technical, sales and marketing
resources than we have. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, these entities have large market capitalization or cash
reserves and are in a much better position to acquire other companies in order
to gain new technologies or products. Many of our competitors also have much
greater brand name recognition, more extensive customer bases, more developed
distribution channels and broader product offerings than we do. These companies
can use their broader customer bases and product offerings and adopt aggressive
pricing policies to gain market share.
We expect competitors to introduce new and improved products with
lower prices, and we will need to do the same to remain competitive. We may not
be able to compete successfully against either current or future competitors
with respect to new products.
GOVERNMENT REGULATIONS
The broadband communications industry in the United States is subject
to extensive regulation by federal and state agencies, including the Federal
Communications Commission (FCC), and various state and local public utility and
service commissions. Furthermore, several influential members of the United
States Congress have voiced their interest in revising the laws from which these
regulations are based in a comprehensive re-write of the associated
telecommunications law in the upcoming session of Congress. Meanwhile,
regulators struggle with issues related to fair competition, the rights of
public agencies to offer networking services, universal service, content, and a
host of other issues. Absent clear direction from the Congress, business
decisions on the part of carriers will continue to have higher risks associated
with them related to court challenges, re-regulation, and a lack of
harmonization among regulatory bodies. The overall impact of regulatory change
on our business is not readily discernable, although increased clarity that
removes some of the carriers' risks could be a net-positive.
PROPRIETARY RIGHTS
We own jointly with Lucent all Joint Inventions. We currently rely on
a combination of trade secret, patent, copyright and trademark laws, as well as
non-disclosure agreements and invention-assignment agreements, to protect our
products, the underlying technologies and other proprietary information.
However, such methods may not afford complete protection and there can be no
assurance that other competitors will not independently develop such processes,
concepts, ideas and documentations. We are the licensee of those technologies of
Lucent that are included in our QoStream Products. Lucent generally maintains,
at its expense, U.S. and foreign patent rights with respect to both the licensed
technology and its own technology and files and/or prosecutes the relevant
patent applications in the U.S. and foreign countries. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop our competitive position. We intend to file patent
applications, when appropriate, and to take other actions necessary to protect
our technology, improvements to our technology and any specific products we
develop.
Our policy is to require our employees, consultants, other advisors
and software design collaborators to execute confidentiality agreements upon the
commencement of employment, consulting or advisory relationships. These
agreements generally provide that all confidential information developed or made
known to the individual by us during the course of the individual's relationship
with us is to be kept confidential and not to be disclosed to third parties
except in specific circumstances. In the case of employees and consultants, the
agreements provide that all inventions conceived by the individual in the course
of their employment or consulting relationship shall be our exclusive property.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for trade secrets in the event of
unauthorized use or disclosure of such information.
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EMPLOYEES
As of October 16, 2006, we employed on a full time basis 40 employees.
Of these employees, 30 are engaged solely in research and development functions
and another four employees are engaged in sales, marketing, and four have
primarily administrative functions.
Subject to our raising additional working capital, we anticipate that
we will need to increase the number of our employees, primarily in the research
and development as well as in the sales, marketing and operations areas. Our
future performance will depend highly upon our ability to attract and retain
experienced personnel. The hiring of such personnel is competitive and there can
be no assurance that we will be able to attract and retain qualified personnel
for the development of our business.
In addition to full time employees, we also contract with several
individuals for both short term and longer term projects.
RECENT DEVELOPMENTS
MOTOROLA STRATEGIC ALLIANCE AGREEMENT
On April 5, 2006, we entered into a Strategic Alliance Agreement with
Motorola, a subsidiary of Motorola, Inc., pursuant to which we and Motorola will
jointly develop a family of three IP Home gateways (the "Gateway Products") that
will provide expanded support for data, IPTV, High Definition TV, and Digital
Video Recorders using Motorola's existing Multi-Service Access Platform for
exclusive distribution by Motorola under the Motorola brand. Under the Strategic
Alliance Agreement, we have also granted Motorola certain rights with respect to
the resale of our products as described below.
The Strategic Alliance Agreement provides that Motorola will pay to us
$1.9 million for engineering costs associated with the development of the
Gateway Products, of which as of October 16, 2006, approximately $900,000 has
been received and the remainder of which is payable in installments on the
achievement of certain agreed upon project milestones. Motorola is entitled to
terminate the development program at any time prior to the completion of the
development of the Gateway Products and, in the event that it does so, we will
be entitled to retain any of the engineering costs paid or due and owing by
Motorola as of the date of termination. Upon successful completion of all
necessary testing, the Gateway Products will be manufactured by us for exclusive
sale to Motorola.
Under the Strategic Alliance Agreement, we have granted Motorola the
exclusive right to resell the Company's PG1000 and the HG-V100 gateway products,
and all derivative or substantially similar products (the "Exclusive Products")
to certain specified leading telecommunications carriers and their affiliates
(the "Exclusive Customers") for a period of 24 months from the effective date of
the agreement as part of Motorola's portfolio of broadband wireline solutions.
The exclusivity may be terminated by us unless, among other things, at least one
of the Exclusive Customers shall have accepted one of the Exclusive Products for
lab testing within one year of the effective date of the Strategic Alliance
Agreement and signed a contract to purchase Exclusive Products (which is
reasonably expected to result in revenue to us in a specified minimum amount)
within 18 months of the effective date of the agreement; provided, however, that
if these conditions are satisfied with respect to an Exclusive Customer, then
Motorola's exclusivity period for such Exclusive Customer will be extended for
an additional 24 months. At all times we retain the right to sell the Exclusive
Products to customers other than the Exclusive Customers. In addition, we also
granted Motorola the non-exclusive right to resell all of our other existing
products worldwide.
48
The Strategic Alliance Agreement also provides that we will not,
during the term of the agreement and for a period of two years thereafter,
directly or indirectly sell to or solicit or accept any order for any of its
products from any customer to which Motorola has resold one of our products
during the term of the agreement. These provisions will not apply to customers
to whom we made sales of products in the twelve months preceding the effective
date of the Strategic Alliance Agreement or in the event of termination of the
agreement by us for cause or by Motorola for convenience. Notwithstanding the
foregoing, if Motorola sources, manufactures or resells a gateway which has
substantially the same functionality as our PG1000 or HG-V100 products, the
exclusivity and the non-solicitation provisions contained in the Strategic
Alliance Agreement shall immediately terminate. We have also agreed that the
prices for our products that we charges Motorola will be no higher than the
prices that we charge any other reseller, customer or entity.
The Strategic Alliance Agreement has an initial term of three years
which will automatically extend for successive additional one-year terms unless
either party gives notice of termination no less than 30 days prior to the
expiration date of the then-current term. The agreement may be terminated by
Motorola at any time on 30 days notice and by either party if the other ceases
to do business in the ordinary course or defaults on its material obligations,
representations or warranties under or otherwise materially breaches the
Agreement subject, except in the case of payment failures, to a 30-day cure
period.
8% SENIOR SECURED CONVERTIBLE DEBENTURES
In May 2006, we raised gross proceeds of $10 million from the private
placement to certain accredited institutional and individual investors (the
"Investors") of our two-year 8% Senior Secured Convertible Debentures (the
"Convertible Debentures"). The transaction was effected pursuant to a Securities
Purchase Agreement dated as of April 26, 2006 (the "Convertible Debenture
Purchase Agreement"), among the Company and the Investors. In connection with
the issuance of the Convertible Debentures, we issued to the Investors five-year
warrants (the "Convertible Debenture Warrants") to purchase up to 6,666,675
shares of Common Stock at a per share exercise price of $1.50. At closing, we
received net proceeds of approximately $5.2 million from the proceeds of the
Convertible Debentures, after the payment of offering related fees and expenses
and after the repayment in full of the bridge loans, made between December 2005
and April 2006 in the aggregate approximate amount of $3.7 million. Most of the
bridge investors participated in the private placement and the gross proceeds
raised include amounts we owed to these investors that were offset against their
respective purchases of the Convertible Debentures. Remaining proceeds received
from the private placement of the Convertible Debentures, will be used primarily
for general corporate purposes.
The Convertible Debentures, issued on May 5, 2006 (the "Closing
Date"), are scheduled to mature on April 30, 2008 and are convertible into
shares of Common Stock at an initial conversion price of $0.75 per share,
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger and as further described below.
Interest on the Convertible Debentures accrues at the rate of 8% per annum,
payable upon conversion or semi-annually (June 30 and December 31 of each year,
commencing December 31, 2006) or upon maturity, whichever occurs first, and will
continue to accrue until the Convertible Debentures are fully converted and/or
paid in full. Interest is payable, at our option, either (i) in cash or (2) in
shares of Common Stock at a rate equal to 90% of the volume weighted average
price of the Common Stock for the five trading days ending on the trading day
immediately preceding the relevant interest payment date; provided that interest
payments may be made in shares of Common Stock only if on the relevant interest
payment date the Convertible Debenture Registration Statement is then effective.
In addition, provided the Convertible Debenture Registration Statement is
effective, we may prepay the amounts outstanding on the Convertible Debentures
by giving advance notice and paying an amount equal to 120% of the sum of (x)
the principal being prepaid plus (y)
49
the accrued interest thereon. Holders will continue to have the right to convert
their Convertible Debentures prior to the actual prepayment.
Holders of the Convertible Debentures may require us to redeem any or
all of the outstanding Debentures upon the occurrence of any one or more of the
following events of default: (i) our failure to pay principal and interest when
due (subject to a 5 day grace period), (ii) our material breach of any of the
representations or warranties made in the Convertible Debenture Purchase
Agreement, (iii) our failure to have stock certificates delivered within a
specified time period after delivery of a conversion notice if such failure
continues for ten trading days after notice thereof, (iv) our failure to observe
any undertaking contained in the Convertible Debentures or the other transaction
documents in a material respect if such failure continues for 30 calendar days
after notice, (v) our insolvency or liquidation or a bankruptcy event, (vi) the
entry of a money judgment or similar process in excess of $750,000 if such
judgment remains unvacated for 60 days, or (vii) the suspension of the Common
Stock from trading on the OTC Bulletin Board if such suspension continues for
fifteen consecutive trading days. The redemption amount is equal to (i) (x) the
principal and accrued interest of the Convertible Debenture being redeemed,
divided by (y) the applicable conversion price, multiplied by (ii) the highest
closing sale price of the Common Stock from the date of the redemption notice
through the payment date.
The Convertible Debenture Warrants, issued as of the Closing Date,
become first exercisable on the earlier of (i) the sixth month following the
effective date of the Registration Statement or (ii) one year after issuance.
The Convertible Debenture Warrants are exercisable at a per share exercise price
of $1.50 through the last day of the month in which the fifth anniversary of the
effective date of the Convertible Debenture Registration Statement occurs.
Holders of the Convertible Debenture Warrants are entitled to exercise their
warrants on a cashless basis following the first anniversary of issuance if the
Convertible Debenture Registration Statement is not in effect at the time of
exercise.
The conversion price of the Convertible Debentures and the exercise
price of the Convertible Debenture Warrants are subject to adjustment. Under the
agreements with the holders of the Convertible Debentures, we agreed that if we
made certain sales of our Common Stock (or securities convertible into Common
Stock) to any third party during the period from the Closing Date through the
date which is the earlier of (i) the first anniversary of the effective date of
the Convertible Debenture Registration Statement (subject to extension if the
effectiveness of the Convertible Debenture Registration Statement is suspended
in the interim) or (ii) the date on which less than one-fourth of the aggregate
principal amount of the Convertible Debentures issued on the Closing Date remain
unconverted (the "Final Lockup Period"), adjustments would be made to the
conversion price of the then unconverted Convertible Debentures and to the
exercise price of the then unexercised Convertible Debenture Warrants. The above
adjustments do not apply to certain specified transactions, such as the exercise
of outstanding options, warrants, or convertible securities, the issuance of
securities pursuant to our employee option plans or a non-employee director
option plan, or the issuance of options to our directors, officers, and
employees, and advisors or consultants, and transactions with strategic
investors. The exercise price of the Convertible Debenture Warrants also is
subject to adjustment in the event of certain capital adjustments or similar
transactions, such as a stock split or merger. In addition, in certain cases,
the investors may be entitled to receive additional warrants to purchase
additional shares.
We also agreed that during such period, without the prior written
consent of the holders of at least 66.67% of the then outstanding Convertible
Debentures, we will not enter into any new transaction for the offer or sale of
our securities when such transaction provides for a variable conversion price or
a variable exercise price. We also agreed that until the effective date of the
Convertible Debenture Registration Statement we will not enter into any other
transaction for the offer or sale of any of our securities and, commencing on
the effective date and for six months thereafter, we will not enter into any
transaction granting the investors in that new transaction registration rights.
50
Holders of the Convertible Debentures are subject to certain
limitations on their rights to convert the Convertible Debentures. The principal
limitation is that the holder may not, with certain limited exceptions, convert
into a number of shares that would, together with other shares held by the
holder, exceed 4.99% of the then outstanding shares of Common Stock after such
conversion. The exercise of the Convertible Debenture Warrants is subject to a
similar limitation.
To secure our obligations under the agreements with the holders of the
Convertible Debentures, we granted a security interest in substantially all of
our assets, including without limitation, our intellectual property, in favor of
the investors under the terms and conditions of a Security Interest Agreement
dated as of April 26, 2006. The security interest terminates upon the earlier of
(i) the date on which less than one-fourth of the original principal amount of
the Convertible Debenture issued are outstanding or (ii) payment or satisfaction
of all of our obligations under the agreements with the holders of the
Convertible Debentures.
Pursuant to a Registration Rights Agreement, dated as of April 26,
2006, between us and the Investors, we agreed to file, within 75 days after the
Closing Date, a registration statement (the "Convertible Debenture Registration
Statement") covering the Common Stock underlying the Convertible Debentures and
the Convertible Debenture Warrants, as well as certain other securities agreed
to by the parties, and to use reasonable best efforts to cause the Convertible
Debenture Registration Statement to be declared effective within 120 days of the
Closing Date. We have not filed the Convertible Debenture Registration Statement
within the required time frame and the registration statement was not declared
effective by the 120th day after the Closing Date and, as a result, we are
obligated to pay liquidated damages to the holders of the Convertible
Debentures. As of October 16, 2006, we are obligated to pay approximately
$550,000 in liquidated damages, and such damages will continue to accrue at the
rate of approximately $200,000 per 30 day period thereafter until such time as
the Convertible Debenture Registration Statement is declared effective. Similar
payments will be required if the registration is subsequently suspended beyond
certain agreed upon periods.
Each of our directors and officers (and their family members,
companies or trusts beneficially owning any Common Stock) have agreed in writing
that such person or entity will not, without the prior written consent of the
holders of at least 66.67% of the then outstanding principal amount of the
Convertible Debentures, sell any shares of Common Stock he or such entity holds
during the period from the Closing Date through the date which is 180 days after
the effective date of the Convertible Debenture Registration Statement (which
period is extended if the registration statement is suspended in the interim).
During each 30 day period thereafter, without such consent, such person or
entity will not sell, on a cumulative basis, shares representing more than 10%
of its aggregate holdings. This limitation will expire when the outstanding
principal amount of the Convertible Debentures is less than 25% of the
Convertible Debentures originally issued on the Closing Date.
In connection with the placement of the Convertible Debentures, we
paid to a registered broker dealer who acted as placement agent (the "Placement
Agent") fee equal to (i) 10% of the aggregate purchase price, (ii) 10% of the
proceeds realized in the future from exercise of the Convertible Debenture
Warrants, and (iii) two warrants (the "Placement Agent's Warrants"). The
Placement Agent's Warrants consist of (x) warrants to purchase an aggregate of
1,333,333 shares of Common Stock having an initial exercise price equal to $0.75
per share, and (y) warrants to purchase an aggregate of 666,667 shares of common
stock having an initial exercise price equal to $1.50 per share. These warrants
become first exercisable on the earlier of (i) the sixth month following the
effective date of the Convertible Debenture Registration Statement or (ii) one
year after issuance and continue to be exercisable through the last day of the
month in which the fifth anniversary of the effective date of the Convertible
Debenture Registration Statement occurs. The shares of Common Stock underlying
the Placement Agent's Warrants will be included in the Convertible Debenture
Registration Statement. In addition, subject to certain specified
51
conditions, we granted to the Placement Agent a right of first refusal to manage
any private offering of our equity or debt securities for a period of one year
from the Closing Date where we retain or otherwise uses the services of an
investment bank or similar financial advisor. These first refusal rights are
contingent upon the Placement Agent participating in any such future offering on
the same terms and conditions as we shall receive from a third party. The right
of first refusal does not apply to transactions with strategic investors.
SHORT TERM WORKING CAPITAL LOANS
On October 23, 2006 (the "Initial Closing Date"), pursuant to the
terms of a Bridge Loan Agreement, dated as of October 10, 2006 (the "Loan
Agreement"), we obtained a short-term working capital loan (hereinafter, the
"Loan"; together with any subsequent Loan, the "Loans") in the gross amount of
$600,000. The Loan was made in response to an offer (the "Offer") that we made
to the purchasers of the Convertible Preferred Stock and the Series B Preferred
Stock to reinstate elements of the anti-dilution price protection that was
originally included in the agreements (such protection, respectively, the "Price
Protection Provisions") with the purchasers of these securities in consideration
of new Loans that these investors make to us. For a description of the Offer,
see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED
STOCK." By their terms, the relevant Price Protection Provisions expired in
August 2005 with respect to the Convertible Preferred Stock and in August 2006
with respect to the Series B Preferred Stock. Under our offer, each investor who
advances a Loan to us will have the benefit of the relevant Price Protection
Provisions with respect to three times the amount that is advanced to us by that
investor (hereinafter, the "Protected Amount") in connection with a Loan. Under
the terms of the Offer, the Price Protection Provisions will be operative with
respect to Convertible Preferred Stock and/or Series B Preferred Stock, as well
as the warrants issued in connection therewith (the "Series A Warrants" or the
"Series B Warrants", as the case may be), held by such investor on the day on
which the Loan is advanced to us from that closing date through August 31, 2007
(the "Current Protection Period"). Our Offer is being made to obtain Loans for
up to a maximum of $2 million in advances. Additional Loans, if any, will be
advanced to us in separate closings subsequent to the Initial Closing Date.
Pursuant to the Loan Agreement, the Loan from each investor will be
evidenced by our promissory note (each, a "Note" and collectively, "Notes") in
the principal amount equal to the amount advanced by such investor multiplied by
the Applicable Percentage. The "Applicable Percentage" is the percentage which
is equal to (x) one hundred percent (100%), plus (y) (1) the percent equal to
twenty-four percent (24%), multiplied by (2) the fraction, of which the
numerator is the number of days from the closing date of the Loan for the
relevant investor until February 20, 2007 (the "Stated Maturity Date"), which
is 120 days after the Initial Closing Date, and the denominator is 360. Each of
the Notes, whether issued on the Initial Closing Date or on a subsequent closing
date, is scheduled to mature on the date (the "Maturity Date") which is the
earliest of (i) the Stated Maturity Date, (ii) the date on which we consummate a
subsequent financing that generates, on a cumulative basis with all other
financings after the Initial Closing Date (except for the proceeds of the Loans
and certain limited exceptions specified in the Notes), gross proceeds to us of
at least $2 million (the "Subsequent Capital Financing") or (iii) the date on
which a holder of a Note accelerates payment of the Note while there is an Event
of Default existing under such Note. Prior to the Maturity Date, we may, at our
option, prepay the Notes in whole or in part. If not paid at maturity, interest
on the Notes will accrue at 14% per annum from the Maturity Date until the
actual date of payment. We currently anticipate that in order to complete a
Subsequent Capital Financing we will need to obtain the consent of the holders
of 66.67% of the aggregate principal amount of the Senior Secured 8% Convertible
Debentures that we issued in May 2006 (the "May 2006 Private Placement").
52
Under the terms of the Notes, the holder may declare a Note
immediately due and payable upon the occurrence of any of the following events
of default: (i) failure to pay principal or any other amount due under the Note
when due, (ii) material breach of any of the representations or warranties made
in the Loan Agreement, the Note or the other transaction documents, (iii)
failure to observe any undertaking contained in the Note or the other
transaction documents in a material respect if such failure continues for 30
calendar days after notice, (iv) our admission in writing as to our inability to
pay our debts generally as they mature, makes an assignment for the benefit of
creditors or commences proceedings for our dissolution, or apply for or consent
to the appointment of a trustee, liquidator or receiver for our or for a
substantial part of our property or business, (v) our insolvency or liquidation
or a bankruptcy event, (vi) the entry of money judgment or similar process in
excess of $750,000 if such judgment remains unvacated for 60 days, provided
that, except for an event of default relating to the payment of principal and
interest, the holders of 66.67% of the principal amount of the Loan can waive
the defaults.
In connection with the placement of the Notes, we paid or will pay to
a registered broker dealer which acted as placement agent (the "Placement
Agent") a cash fee equal to 10% of the aggregate amount advanced to us on
account of the Notes. The Placement Agent also acted as placement agent in the
May 2006 private placement of the Company's Senior Secured 8% Convertible
Debentures as well as the placement in April-May 2005 of the Series B Shares.
The Company will also be incurring additional related closing fees and expenses
which will be paid out of the gross proceeds of the Loans.
PREVIOUS BUSINESS ACTIVITIES
We were incorporated in Delaware in July 1994 under the name "TTR
Technologies, Inc." From our inception through February 2002, we were engaged in
the business of designing and developing digital security technologies that
provide copy protection for electronic content distributed on optical media and
over the Internet (the "Copy Protection Business"). On November 4, 2002, we
entered into an Asset Purchase Agreement (the "Purchase Agreement") with
Macrovision Corporation ("Macrovision"), then one of our largest stockholders,
and Macrovision Europe, Ltd., an affiliate of Macrovision (collectively, the
"Purchaser"), pursuant to which we agreed to sell to the Purchaser all of the
assets used in the Copy Protection Business. On May 28, 2003, we consummated the
sale of our Copy Protection Business for a cash payment of $5,050,000 and the
return for cancellation of 1,880,937 shares of our common stock, par value
$0.001 (the "Common Stock"), which Macrovision had purchased in January 2000 for
$4.0 million.
Following the sale of our Copy Protection Business, our then existing
management considered several possible alternatives regarding our strategic
direction, including the acquisition, development or investment in new lines of
business. We announced on January 14, 2004 that we had entered into the
Development and Licensing Agreement with Lucent, subject to the approval by our
stockholders of the transactions contemplated thereby (the "Transaction"). Our
stockholders approved the Transaction at a special meeting held on March 4,
2004.
AVAILABLE INFORMATION
Our Internet website is located at http://www.amedia.com. This
reference to our Internet website does not constitute incorporation by reference
in this report of the information contained on or hyperlinked from our Internet
website and such information should not be considered part of this report.
The public may read and copy any materials we file with the Securities
and Exchange Commission ("SEC") at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet website that contains reports, proxy and
53
information statements and other information regarding issuers that file
electronically with the SEC. The SEC's Internet website is located at
http://www.sec.gov.
DESCRIPTION OF PROPERTY
We do not own any real property. Our corporate offices are located at
2 Corbett Way, Eatontown, New Jersey 07724 and are currently comprised of
approximately 14,700 square feet. The term of the lease on our offices began in
May 2005 and was for originally approximately 9,300 square feet. In November
2005, we modified the lease and let an additional 1,900 square feet of office
premise. In December 2005, we further modified the lease to let an additional
3,500 feet. The lease is in effect through May 2010. From May through October
2005, our monthly lease payments were approximately $9,800. Beginning November
2005 and continuing through February 2006, total monthly payments under the
modified lease are approximately $12,600. From March 2006 lease payments are as
follows: for the first lease year, approximately $19,000 (after giving effect to
agreed upon rent credits for such year); for the second lease year, monthly
payments of approximately $24,500; for the third lease year, monthly payments of
approximately $25,000; for the fourth lease year, monthly payments of
approximately $25,500; and for the fifth lease year, monthly payments of
approximately $25,700.
We believe that our facilities are generally in good condition and
suitable to carry on our business. We also believe that, if required, suitable
alternative or additional space will be available to us on commercially
reasonable terms.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings which we
anticipate can result in a material adverse effect on our business or
operations.
54
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The names, ages and positions of our directors, executive officers and
key employees are as follows:
Name Age Position
- ----------------- --- -----------------------------------------------
Frank Galuppo 60 Chief Executive Officer, President and Director
James D. Gardner 54 Chief Financial Officer
John R. Colton 64 Chief Technology Officer
Juan Mendez 42 Chairman of the Board of Directors
Richard Rosenblum 47 Director
Gerald Butters 62 Director
Bob Martin 64 Director
The business experience, principal occupations and employment, as well
as the periods of service, of each of the Company's directors and executive
officers during at least the last five years are set forth below.
FRANK GALUPPO has been a director and our Chief Executive Officer
since March 2004 and President since December 2004. Mr. Galuppo possesses nearly
40 years of experience in the Telecommunications Industry, serving in a number
of senior management positions with Lucent Technologies and AT&T. From March
2003 until he began his employment with the Company, Mr. Galuppo had been
assisting several companies with business development support in the U.S.
Government market where he has extensive sales experience. Mr. Galuppo was
employed by Lucent since its formation in September 1996 until March 2003 in a
series of management level and operational positions. His most recent role at
Lucent was President of Lucent's Optical Networking Group, which he held since
September 2002 and had worldwide responsibility for the development and
marketing of Lucent's global optical portfolio which had annual sales of over $1
billion.
JAMES D. GARDNER has been our Chief Financial Officer since May 2005.
From January 2005 thru May 2005, Mr. Gardner served as Chief Operating Officer
of dotPhoto, a private company engaged in on-line photo processing and wireless
application development for cellular telephones. From January 2002 through April
2004, Mr. Gardner served as Chief Executive Officer for Comstar Interactive, a
private company engaged in the wireless credit card processing field. He has
also held the position of Chief Financial Officer at BellSouth Wireless Data
(renamed Cingular Interactive (May 1999 through November 2001), and as chief
financial officer of BellSouth Mobile Data (November 1995 through May 1999) and
chief financial officer of RAM/BSE Communications L.P. from 1991 though 1995,
with all companies involved in the provision of wireless packet data networks
and services, principally in the US and Europe. Mr. Gardner also held several
other senior executive positions at BellSouth and AT&T in the areas of Financial
Management, Domestic and International corporate finance, issuing debt and
equity and the related rating agency and investment banking interfaces,
shareholder relations and a number of other treasury, accounting and finance
positions.
JOHN R. COLTON has been with us since April 2004 and has been our
Chief Technology Officer and Senior Vice President, Product Realization since
June 2005. From November 2001 to March
55
2004 Mr. Colton was Vice President of Architecture, Systems Engineering, and
Product Management for Lambda Optical Systems, where he specified technology,
product and network architecture, and system applications for a next generation
optical networking product line incorporating optical switching, optical DWDM
transmission, optical add/drop multiplexing, and network management. From
October 2000 to October 2001, John founded and managed JRC Consulting, a company
providing consultation in the fields of optical communications, voice and data
switching, and FTTP, a position that led to officer and board positions with
several startups. Before his retirement after 36 years with Bell Labs, AT&T, and
Lucent, Mr. Colton served in senior positions in Lucent's Optical Networking
Group as well as in technical management and product management positions while
at Bell Laboratories and AT&T Network Systems. He holds an SMEE from the
Massachusetts Institute of Technology and a BSEE from the University of
Pennsylvania.
JUAN MENDEZ has been a director since July 2003. Mr. Mendez is
President, Chief Executive Officer and co-founder of Total Claims Management,
Inc., a privately held company based in Miami, Florida. Mr. Mendez has held that
position since March 1999. Prior to co-founding Total Claims Management, Inc.,
Mr. Mendez was a Public Insurance Adjuster from 1996 to 1999.
RICHARD ROSENBLUM has been a director since September 2003. Since July
2004, Mr. Rosenblum has been a principal of Harborview Advisors, LLC, a firm
that provides structuring and financing advice to publicly and privately held
firms. From August 2004 through November 2004, Mr. Rosenblum was a Managing
Director of Greenfield Capital Partners, LLC, a private investment banking firm.
From July 2001 until July 2004, Mr. Rosenblum was a Managing Director of
Investment Banking for vFinance Investments in New York, where he was
responsible for advising, structuring and financing publicly and privately held
companies. From July 2001 until July 2004, Mr. Rosenblum also served as Senior
Managing Partner of ACP Advisors in New York, where he was responsible for
advising and raising capital for emerging growth companies. From April 1999
until July 2001, Mr. Rosenblum was a Managing Director at Robb Peck McCooey
Financial Services, Inc. in New York. Mr. Rosenblum also serves on the board of
directors of Crystal International Travel Group, Inc. and as a director,
President, CEO and CFO of Mill Basin Technologies, Ltd.
GERALD BUTTERS has been a director since May 2004. Mr. Butters is a
communications industry veteran with more than 39 years experience in this
sector. His career encompasses senior executive positions at Nortel Networks,
AT&T, and Lucent Technologies. These include Chairman of the Board of AGCS (a
joint venture of GTE and AT&T), President of NTI (a Nortel Networks US
subsidiary). He was President of Global Public Networks at AT&T Network Systems
from October 1997 to November 1999, President of the Optical Networks Group at
Lucent Technologies from December 1999 to August 2000 and Senior Vice President
Marketing and Technology at Lucent Technologies. Mr. Butters retired from Lucent
Technologies in August 2000. Since August 2000 through the present time, Mr.
Butters has been a board director of Lambda Optical Systems a privately held
company since October 2003 and a technical advisor to several privately held
technology firms.
BOB MARTIN has been a director since May 2004. Mr. Martin retired as
the Chief Technology Officer of Lucent Technologies' Bell Laboratories in
September 2003, a position he held for seven years. In this role, he helped
guide Lucent's directions in next generation networks and in approaches the
company used for research and development. His background at Bell Laboratories
and Bellcore included a variety of positions related to large systems
development. He has been responsible for Unix, network management systems,
intelligent network systems, packet switching, and broadband access systems
developments. Mr. Martin received his Bachelor of Science in Electrical
Engineering from Brown University in 1964, and his Master of Science and Doctor
of Philosophy degrees in Electrical Engineering and Computer Science from
Massachusetts Institute of Technology in 1965 and 1967, respectively. In 1985,
he attended the MIT Alfred P. Sloan School Senior Executive Program. A Fellow of
the Institute of
56
Electrical and Electronics Engineers, Mr. Martin was a member and first chair of
its Software Industrial Advisory Board. He has served on the National Research
Council's Computer Science and Telecommunications Board and the FCC's
Technological Advisory Board. He is on technical advisory boards for venture
capitalist's and startups in telecommunications, optical devices & product
innovation.
Officers are elected by the Board of Directors and serve at the
discretion of the Board of Directors and hold office until a successor is
elected and qualified or until his/her earlier resignation or removal.
There are no family relationships between any of the above executive
officers or directors, and there is no arrangement or understanding between any
of the above executive officers or directors and any other person pursuant to
which the officer or director was elected to hold office.
All directors hold office until the next annual meeting of
stockholders and the election and qualification of a successor.
DIRECTOR RESIGNATIONS
Messrs. Ivan Berkowitz and Samuel Brill elected not to stand for
re-election as directors of the Company at the 2005 annual meeting of
stockholders on June 2005.
BOARD COMMITTEES
Our Board of Directors has an audit committee and a compensation
committee. The audit committee reviews the results and scope of the audit and
other services provided by our independent public accountant. The compensation
committee establishes the compensation policies applicable to our executive
officers and administers and grants stock options pursuant to our stock plans.
The current members of the audit committee are Juan Mendez and Richard
Rosenblum. The sole current member of the compensation committee is Richard
Rosenblum.
DIRECTOR COMPENSATION
CASH COMPENSATION: During 2005, each of our non-employee directors was
paid a cash fee of $500 per telephonic board meeting and $1,000 for each board
meeting attended in person. We also reimbursed directors for reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
and any meetings of its committees.
OPTION GRANTS: None of our non-employee directors was granted an
option in 2005.
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned by the
Company's Chief Executive Officer and the most highly compensated executive
officers and key employees of the Company whose total annual salaries and
bonuses exceeded $100,000 for the year ended December 31, 2005 (the "Named
Executive Officers"):
57
Annual Compensation Long-Term Compensation
-------------------------------------- --------------------------
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary($) Bonus($) Compensation($) Options (#) ($)
- --------------------- ---- --------- -------- --------------- ----------- ------------
Frank Galuppo 2005 204,692 -- -- -- --
President and Chief 2004 141,923 -- -- 1,315,250(2) --
Executive Officer (1) 2003 -- -- -- -- --
James D. Gardner 2005 104,326 -- -- 300,000(2) --
Chief Financial 2004 -- -- -- -- --
Officer (3) 2003 -- -- -- -- --
John R. Colton 2005 143,538 -- -- 125,000(2) --
Chief Technology 2004 69,842 -- -- 100,000(2) --
Officer (4) 2003 -- -- -- -- --
(1) Mr. Galuppo became Chief Executive Officer in March 2004. In December 2004,
he was elected President.
(2) Represents shares of Common Stock issuable upon exercise of employee stock
options issued under the Company's 2000 Equity Incentive Plan.
(3) Mr. Gardner was appointed Chief Financial Officer in June 2005.
(4) Mr. Colton Joined the Company in April 2004 and in June 2005 was appointed
Chief Technology Officer.
OPTION GRANTS IN 2005
The following table contains information concerning the grant of stock
options to the Named Executives Officers during the fiscal year ended December
31, 2005:
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (%) PRICE ($) DATE
- ---------------- ----------- --------------- ----------- ----------
Frank Galuppo -- -- -- --
James D. Gardner 300,000(1) 14.64% $1.05 5/23/2015
John R. Colton 125,000(1) 7.04% $0.92 6/09/2015
AGGREGATE OPTIONS EXERCISED IN 2005 AND 2005 YEAR END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning the number and value of unexercised options held
at December 31, 2005.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Value Options at Fiscal Year At Fiscal Year End ($)
Acquired on Realized End (#) Exercisable/
Name Exercise (#) ($) Exercisable/Unexercisable Unexercisable (1)
- ---------------- ------------ -------- ------------------------- ----------------------
Frank Galuppo -- -- 767,229 / 548,020 -- / --
James D. Gardner -- -- 50,000 / 250,000 -- / --
John R. Colton -- -- 74,306 / 150,694 11,000 / 11,000
(1) Based upon the difference between the exercise price of such options and
the closing price of the Common Stock ($0.77) on December 30, 2005, as
reported on the OTC Bulletin Board.
58
EMPLOYMENT AGREEMENTS
In March 2004, we entered into an employment agreement with Frank
Galuppo pursuant to which Mr. Galuppo serves as our Chief Executive Officer and
President. The agreement provides for a term of three years. Under his
employment agreement, Mr. Galuppo is currently paid an annual salary of
$210,000. Mr. Galuppo's salary is scheduled to increase to $235,000 at the
beginning of the third year of employment. The agreement further provides that
if Mr. Galuppo's employment is terminated other than for cause (as defined in
the employment agreement) or if Mr. Galuppo terminates his employment for good
reason (as defined in the employment agreement), he will be entitled to receive
the equivalent of six months' base salary and benefits. We also issued to Mr.
Galuppo an option under our 2000 Equity Incentive Plan to purchase up to
1,315,250 shares of Common Stock at a per share exercise price of $0.79, which
option is scheduled to vest over twelve succeeding quarters, beginning June 30,
2004. Mr. Galuppo has agreed to certain customary confidentiality and
non-compete provisions that prohibit him from competing with us for one year, or
soliciting our employees for one year, following the termination of his
employment.
In May 2005, we entered into an employment agreement with James D.
Gardner pursuant to which Mr. Gardner serves as our Chief Financial Officer. The
agreement has an initial term of one year. After the initial term of one year,
the agreement is automatically renewable for an additional one-year term unless
either party notifies the other in writing upon at least 45 days prior to the
scheduled termination of the initial term or any renewal term that it does not
intend to renew such agreement. Mr. Gardner is paid a monthly salary of $14,583
and was granted options under the Company's 2000 Equity Incentive Plan to
purchase 300,000 shares of Common Stock at a per share purchase price of $1.05.
The options vest over three years from the grant date and on a quarterly basis.
The agreement may be terminated by Mr. Gardner for any reason on 60 days written
notice to us or by us immediately for cause. In the event of a termination by us
for any reason other than cause, we are to pay Mr. Gardner (i) if such
termination occurs during the initial term of the agreement, an amount equal to
3 months' salary and (ii) if such termination occurs after the initial term, an
amount equal to 6 months' salary. Mr. Gardner has agreed to certain customary
confidentiality and non-compete provisions that prohibit him from competing with
us for one year, or soliciting our employees for one year, following the
termination of his employment.
In June 2005, we entered into an employment agreement with John R.
Colton pursuant to which Mr. Colton serves as our Chief Technology Officer and
pursuant to which he is paid a monthly salary of $12,500. Either we or Mr.
Colton may terminate the agreement at any time upon advance notice. In
connection with the entry into the employment agreement, Mr. Colton was granted
options under the Company's 2000 Equity Incentive Plan to purchase 125,000
shares of Common Stock at a per share purchase price of $0.92. The options vest
over three years from the grant date.
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of October 16,
2006, concerning the ownership of the Common Stock by (a) each person who, to
the best of the Company's knowledge, beneficially owned on that date more than
5% of the outstanding Common Stock, (b) each of the Company's directors and
Named Executive Officers (as defined above under "Executive Compensation") and
(c) all current directors and executive officers of the Company as a group.
59
Number of Shares Percent of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
- ------------------------------------------------- ---------------------- ----------------
Frank Galuppo, President, Chief Executive Officer 1,151,580(3) 3.73%
and Director
James D. Gardner, Chief Financial Officer 161,100(4) *
John R. Colton, Chief Technology Officer 185,104(5) *
Juan Mendez, Director 1,875,688(6) 6.43%
Richard Rosenblum, Director 297,323(7) 1.10%
Gerald Butters, Director 212,500(8) *
Bob Martin, Director 125,000(9) *
Puritan LLC 1,533,334(10) 5.82%
Melton Management Limited 2,187,619(11) 8.30%
All directors and executive officers as
a group(7 persons) 4,008,295 13.18%
* Indicates less than 1%.
(1) Unless otherwise indicated, the address of each person listed is c/o Amedia
Networks, Inc., 2 Corbett Way, Eatontown, New Jersey 07724.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and generally includes
voting or investment power with respect to securities. In accordance with
SEC rules, shares of Common Stock issuable upon the exercise of options or
warrants which are currently exercisable or which become exercisable within
60 days following the date of the information in this table are deemed to
be beneficially owned by, and outstanding with respect to, the holder of
such options or warrants. Except as indicated by footnote, and subject to
community property laws where applicable, to the knowledge of the Company,
each person listed is believed to have sole voting and investment power
with respect to all shares of Common Stock owned by such person.
(3) Represents (i) 35,270 shares of Common Stock and (ii) 1,116,310 shares of
Common Stock issuable upon the exercise of currently exercisable employee
stock options issued under the Company's 2000 Equity Incentive Plan. Does
not include options to purchase an additional 219,209 shares of Common
Stock scheduled to vest over the next 12 months.
(4) Represents (i) 36,100 shares of Common Stock and (ii) 125,000 shares of
Common Stock issuable upon the exercise of currently exercisable employee
stock options issued under the Company's 2000 Equity Incentive Plan. Does
not include options to purchase an additional 175,000 shares of Common
Stock scheduled to vest by May 2008.
(5) Represents (i) 27,274 shares of Common Stock and (ii) 157,830 shares of
Common Stock issuable upon the exercise of currently exercisable employee
stock options issued under the Company's 2000 Equity Incentive Plan. Does
not include options to purchase an additional 94,444 shares of Common Stock
scheduled to vest over the next two years.
(6) Represents (i) 1,260,626 shares of Common Stock and (ii) 615,062 shares of
Common Stock issuable upon exercise of currently exercisable options. The
foregoing is based, in part, on the Amendment No. 1 to Schedule 13D filed
by the stockholder on March 3, 2006.
(7) Represents (i) 16,667 shares of Common Stock, (ii) 164,406 shares of Common
Stock issuable upon exercise of currently exercisable non-plan options and
(iii) 116,250 shares of Common Stock issuable upon the exercise of
currently exercisable employee stock options issued under the Company's
2002 Non-Employee Directors Stock Option Plan.
60
(8) Represents (i) 56,250 shares of Common Stock and (ii) 156,250 shares of
Common Stock issuable upon the exercise of currently exercisable employee
stock options issued under the Company's 2002 Non-Employee Directors Stock
Option Plan.
(9) Represents shares of Common Stock issuable upon the exercise of currently
exercisable employee stock options issued under the Company's 2002
Non-Employee Directors Stock Option Plan.
(10) The stockholder is a limited liability company. The address of such person
is 314 McDonald Avenue, Brooklyn, New York 11218. The foregoing is based on
a Schedule 13G filed by the stockholder on November 19, 2004.
(11) The address of such person is P.O. Box 3161, Road Town, Tortola, British
Virgin Islands. The foregoing is based on a Schedule 13G filed by the
stockholder on October 8, 2003, as amended on February 10, 2006. Does not
include shares of Common Stock issuable upon conversion of Convertible
Preferred Stock or exercise of warrants referred to under "Selling
Stockholders."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 2004, the Company entered into a service agreement with
Elite Financial Communications Group, LLC ("Elite"), pursuant to which Elite
agreed to provide investor relation services to the Company for compensation of
$7,500 per month (plus expenses). By its terms, the agreement with Elite expired
in December 2005. One of the Company's former non-employee directors was a
partner and managing member of Elite. This director resigned from service on the
Board of Directors as of June 9, 2005.
In August 2004, we paid to Greenfield Capital Partners, LLC, and its
designees, a placement fee with respect to the placement of 2,500 shares of our
Convertible Preferred Stock. The placement fee was comprised of (i) a cash
payment of $25,000 and (ii) five-year warrants to purchase up to 66,667 shares
of our Common Stock, of which warrants to purchase 33,333 shares are exercisable
at a per share exercise price of $.75, warrants to purchase 16,667 shares are
exercisable at a per share exercise price of $1.50 and warrants to purchase
16,667 shares are exercisable at a per share exercise price of $2.50. The
warrants are otherwise exercisable on the same terms and conditions as those
relating to the Warrants issued to the purchases of the Convertible Preferred
Stock. One of our directors, Mr. Richard Rosenblum, was a Managing Director of
such entity at the time that the private placement was consummated. At that time
Greenfield designated Mr. Rosenblum to receive half of those warrants. Mr.
Rosenblum subsequently left Greenfield Capital Partners, LLC.
In January 2006 we entered into bridge loan agreements with three
private investors (collectively the "January 2006 Investors"), pursuant to which
these investors loaned to us, on a secured basis, the aggregate amount of
$500,000. The January 2006 Investors included Mr. Juan Mendez, Chairman of the
Company's board of directors, who loaned the Company $250,000. Pursuant to the
terms of the agreements with these investors, we issued to Mr. Mendez five year
warrants to purchase up to 125,000 share of our Common Stock at a per share
exercise price of $1.50, subject to adjustment.
SELLING STOCKHOLDERS
Up to 12,468,985 shares are being offered hereby under this
prospectus, all of which are being registered for sale for the account of the
selling stockholders.
61
THE AUGUST 2004 PRIVATE PLACEMENT
In August 2004, we sold 52,500 shares of Convertible Preferred Stock,
(with each share having a stated value of $100) and issued warrants for 7
million shares of our Common Stock, for aggregate gross consideration of
$5,250,000. Dividends on the Convertible Preferred Stock accrue at the rate of 7
% per annum and are payable on a semi-annual basis and on conversion and may be
paid, at our option, in shares of our Common Stock (subject to certain
conditions). As of October 16, 2006, there were 11,928 shares of Convertible
Preferred Stock and Warrants to purchase 7 million shares of Common Stock issued
and outstanding.
Except for selling stockholders with an asterisk (*) next to their
names and except for Mr. Richard Rosenblum, a director in our company who
acquired a portion of his beneficial interest in consideration of service on our
board of directors, the selling stockholders acquired their beneficial interests
in the shares being offered hereby in connection with the private placement
described in this Prospectus under the caption "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." Mr. Richard Rosenblum, a
director in our company, acquired only part of his beneficial interest in
connection with these transactions.
THE OTHER SELLING STOCKHOLDERS
The selling stockholders with an asterik (*) next to their name
acquired part or all of their beneficial interests unrelated to the private
placement discussed above. The details relating to the acquisition of the
beneficial interests of these selling stockholders is set forth in the footnote
relating to each such stockholder. For a discussion of the material terms of
these warrants, see "DESCRIPTION OF SECURITIES"
SELLING STOCKHOLDER TABLE
The following table sets forth the shares beneficially owned, as of
October 16, 2006, 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.
Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities. However,
except for the selling stockholders with an asterisk (*) next to their names and
except for a portion of the beneficial interest of Mr. Richard Rosenblum, a
director of our company, no selling stockholder may convert its preferred stock
or exercise its warrants if such conversion or exercise would cause such
holder's beneficial ownership of our Common Stock (excluding shares underlying
any of their unconverted debentures or unexercised warrants) to exceed 4.99% of
the outstanding shares of Common Stock immediately after the conversion or
exercise. (If the holder subsequently disposes of some or all of its holdings,
it can again convert its debenture or exercise its warrant, subject to the same
limitation). Also, the table below also includes the number of shares which
might be issuable on the occurrence of certain events, such as the accrual of
dividends, which have not yet occurred and may not occur. Therefore, although
they are included in the table below, the number of shares of Common Stock for
some listed persons may include shares that are not subject to purchase during
the 60-day period.
62
Common Stock to be
Beneficially Owned if
All shares offered
Number of Shares Offered Hereunder are sold
Shares Owned Pursuant to this ---------------------
Selling Stockholder Before Offering Prospectus shares+ Percent
- --------------------------------- --------------- ---------------- --------- ---------
Melton Management Ltd. 4,885,268 1,194,162 (1) 3,691,106 12.79%
Yokim Asset Management Corp. 1,562,157 746,102 (2) 816,055 2.98%
RHP Master Fund, Ltd. 2,784,230 488,400 (3) (37) 2,295,830 7.76%
L&B Trading Corp. 488,400 488,400 (4) (38) -- *
Stonestreet LP 488,400 488,400 (4) (39) -- *
Bridges & PIPES LLC 488,400 488,400 (4) (40) -- *
DKR Soundshore Oasis Holding
Fund Ltd. 488,400 488,400 (4) (41) -- *
Southridge Partners LP 407,001 407,001 (5) -- *
Emes Capital Partners LLC 446,300 446,300 (6) -- *
Platinum Partners Value Arbitrage
Fund 325,602 325,602 (7) -- *
Gross Foundation, Inc. 422,039 422,039 (8) -- *
Basso Multi-Strategy Holding
Fund Ltd. 339,974 195,360 (9) 138,614 *
Cisneros Capital Group 183,150 183,150 (10) -- *
Notzer Chesed 354,701 167,404 (11) (42) 187,297 *
Professional Traders Fund, LLC 162,801 162,801 (12) (43) -- *
Mordechai Vogel 452,029 230,696 (13) 221,333 *
Simon Vogel 558,324 298,564 (14) 221,333 *
Edelweiss Trading Ltd. 339,092 339,092 (15) (44) -- *
Quines Financial S.A. 339,092 339,092 (16) (45) -- *
Appel 26 Corp. 339,092 339,092 (16) (46) -- *
Abbey Berkowitz 307,895 307,895 (17) -- *
Greenwich Growth Fund Limited 162,801 162,801 (18) (47) -- *
Whalehaven Fund Limited 311,316 162,801 (19) (48) 148,515 *
First Mirage, Inc. 162,801 162,801 (12) (49) -- *
MEA Group LLC 162,801 162,801 (12) (50) -- *
SRG Capital LLC 162,801 162,801 (12) (51) -- *
Cong. Mishkan Sholom 162,801 162,801 (12) (52) -- *
63
Magdiel Rodriguez 149,845 149,845 (20) -- *
Alfredo Jacomino 149,845 149,845 (20) -- *
Tower Paper Co. Inc. Ret. Plan 375,269 153,936 (21) (53) 221,333 *
Mordechai Boaziz 169,548 169,548 (22) -- *
Saul Kessler 167,196 169,548 (23) -- *
Shaye Brauner 81,402 81,402 (24) -- *
AS Capital Partners 81,402 81,402 (24) (54) -- *
Richard A. Cohen 148,069 148,069 (25) -- *
Basso Private Opportunity Holding
Fund Ltd. 157,751 48,840 (26) 108,911 *
Crestview Capital LLC 367,254 192,500 (27) 174,754 *
Krystal Investitionen AG 131,999 131,999 (28) -- *
Crambeth Properties Ltd. 131,999 131,999 (28B) -- *
Ruth Karasik 59,584 59,584 (29) -- *
Naftali Vax 66,000 66,000 (30) -- *
Lucien Geldzahler 82,499 82,499 (31) -- *
Pentium Management Limited 631,506 631,506 (32) -- *
Martinez-Ayme Securities 35,160 35,160 (33) -- *
*Juan Mendez 1,163,626 164,406 (34) 999,220 5.6%
Richard Rosenblum 181,073 181,073 (35) -- *
*Aboudi & Brounstein 100,000 100,000 (36) -- *
David Stefansky 16,666 16,666 (55) -- *
+ Some or all of these shares may be included in other registration
statements which, when declared effective, would allow the selling
shareholders to sell such shares and/or reflect shares issuable on
conversion or exercise of other securities which have 4.99% conversion or
exercise limits similar to those provided in the Series B Preferred Stock
and the Series B Warrants.
* Less than 1%
(1) Represents (i) 681,733 shares of Common Stock issuable upon conversion of
5,113 shares of our Convertible Preferred Stock having a stated value of
$100 per share, based on a conversion price of $0.75, together with 148,394
shares of Common Stock issuable in respect of dividends thereon accruing
from July 1, 2006 through the third anniversary of issuance ("Reserved
Dividends Shares"), (ii) 47,720 shares
64
of Common Stock issued upon conversion of or as dividend with respect to
our Series A Preferred ("Issued Shares"); (iii) 212,569 shares issuable
upon the exercise of Warrants issued in connection with the Convertible
Preferred Stock ("Warrant Shares"); and (iv) an additional 103,746 shares
of Common Stock that we might be required to issue to such selling
stockholder as liquidated damages ("Reserved Damages 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 Breitkope. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The amount reflected
under the column titled "Number of Shares Owned Before the Offering"
includes (i) 2,187,619 shares of Common Stock referred to in the Amendment
No. 1 to Schedule 13G filed by the selling stockholder on February 10, 2006
and (ii) 1,433,214 shares of our Common Stock that are issuable upon
conversion of 6,730 shares of our Series B 8% Convertible Preferred Stock
("Series B Preferred Stock"), dividends payable thereunder and warrants
issued in connection with the purchase thereof. The shares underlying these
securities are not included in this Registration Statement. We are
contractually bound to file a registration statement in respect of these
shares.
(2) Represents (i) 233,333 shares of Common Stock issuable upon conversion of
1,750 shares of our Convertible Preferred Stock having a stated value of
$100 per share, based on a conversion price of $0.75, together with 50,790
Reserved Dividend Shares, (ii) 40,676 Issued Shares; (iii) 331,669 Warrant
Shares; and (iv) 89,634 Reserved Damages 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 Andre Zolty. For more information on our agreement
with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE
HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The amount reflected under the
column titled "Number of Shares Owned Before the Offering" is based upon
the information provided by the selling stockholder in the Amendment No. 3
to Schedule 13D filed by the selling stockholder with the SEC on February
9, 2005.
(3) Represents (i) 400,000 Warrant Shares; and (ii) 88,400 Reserved Damages
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 HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The figure under the
column "Number of Shares Owned Before Offering" includes shares of our
Common Stock that are issuable upon conversion of 10,000 shares of our
Series B Preferred Stock, dividends payable through the maturity date
thereof and exercise of warrants issued to the selling stockholder in
connection with the purchase of such Series B Preferred Stock. The shares
underlying these securities are not included in this Registration
Statement. We are contractually bound to file a registration statement in
respect of these shares.
(4) Represents (i) 400,000 Warrant Shares; and (ii) 88,400 Reserved Damages
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 HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(5) Represents (i) 333,332 Warrant Shares and (ii) 73,667 Reserved Damages
Shares. The selling stockholder advised us that it purchased the 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 Stephen Hicks. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE
65
PREFERRED STOCK." The selling stockholder has advised us that it is an
affiliated person of Greenfield Capital Partners LLC, a registered broker
dealer, which served as a placement agent in the transactions described
above. The selling stockholder has advised us that the securities to be
sold by it will be sold through unaffiliated broker dealers and not through
Greenfield Capital Partners LLC.
(6) Represents (i) 80,000 Issued Shares, (ii) 300,000 Warrant Shares and (ii)
66,300 Reserved Damages Shares. The selling stockholder advised us that it
purchased the 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 Frank Maglicto.
For more information on our agreement with such selling stockholder, see
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK."
(7) Represents (i) 266,666 Warrant Shares and (ii) 58,936 Reserved Damages
Shares. The selling stockholder advised us that it purchased the 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 Mark Nordlicht. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(8) Represents (i) 142,000 shares of Common Stock issuable upon conversion of
1,065 shares of our Convertible Preferred Stock having a stated value of
$100 per share, based on a conversion price of $0.75, together with 30,909
Reserved Dividend Shares, (ii) and 4,930 Issued Shares; (iii) 200,000
Warrant Shares; and (iv) 44,200 Reserved Damages 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 Chaim Gross. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(9) Represents (i) 160,000 Warrant Shares and (ii) 35,360 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK." 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. The figure under the
column "Number of Shares Owned Before Offering" includes shares of our
Common Stock that are issuable upon exercise of warrants issued to the
selling stockholder in connection with the purchase of Series B Preferred
Stock. The shares underlying these securities are not included in this
Registration Statement. We are contractually bound to file a registration
statement in respect of these shares.
(10) Represents (i) 150,000 Warrant Shares and (ii) 33,150 Reserved Damages
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 James Blanchard.
For more information on our agreement with such selling stockholder, see
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK."
(11) Represents (i) 133,334 Warrant Shares and (ii) 29,467 Reserved Damages
Shares and (iii) 4,603 Issued Shares. The selling stockholder advised us
that it purchased the preferred stock and warrants solely
66
for investment and not with a view to or for resale or distribution of such
securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK." The figure under the column "Number of Shares
Owned Before Offering" includes shares of our Common Stock that are
issuable upon exercise of warrants issued to the selling stockholder in
connection with the purchase of Series B Preferred Stock. The shares
underlying these securities are not included in this Registration
Statement. We are contractually bound to file a registration statement in
respect of these shares.
(12) Represents (i) 133,332 Warrant Shares and (ii) 29,469 Reserved Damages
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 HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(13) Represents (i) 133,334 Warrant Shares (ii) 67,895 Issued Shares and (iii)
29,467 Reserved Damages 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 HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The figure under the column "Number of Shares Owned
Before Offering" includes shares of our Common Stock that are issuable upon
conversion of our two year 8% Senior Secured Convertible Debenture that is
scheduled to mature on April 30, 2008 (the "Senior Secured Convertible
Debenture") in the principal amount of $100,000, interest through the
maturity date and warrants issued in connection with such debentures. The
shares underlying the Senior Secured Convertible Debentures and the
accompanying warrants are not included in this Registration Statement. We
are contractually bound to file a registration statement in respect of
these shares.
(14) Represents (i) 133,334 Warrant Shares, (ii) 135,762 Issued Shares and (iii)
29,467 Reserved Damages 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 HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The figure under the column "Number of Shares Owned
Before Offering" includes shares of our Common Stock that are issuable upon
conversion of our Senior Secured Convertible Debenture in the principal
amount of $100,000, interest through the maturity date and warrants issued
in connection with such debentures. The shares underlying the Senior
Secured Convertible Debentures and the accompanying warrants are not
included in this Registration Statement. We are contractually bound to file
a registration statement in respect of these shares.
(15) Represents (i) 133,334 shares of Common Stock issuable upon conversion of
1,000 shares of our Convertible Preferred Stock having a stated value of
$100 per share, based on a conversion price of $0.75, together with 29,023
Reserved Dividend Shares, (iii) 13,935 Issued Shares, (iii) 133,334 Warrant
Shares and (iv) 29,467 Reserved Damages 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 HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(16) Represents (i) 133,334 shares of Common Stock issuable upon conversion of
1,000 shares of our Convertible Preferred Stock having a stated value of
$100 per share, based on a conversion price of $0.75, together with 29,023
Reserved Dividend Shares, (iii) 13,935 Issued Shares, (iii) 133,334 Warrant
Shares and (iv) 29,467 Reserved Damages Shares. The selling stockholder
advised us that it purchased the
67
preferred stock and warrants solely for investment and not with a view to
or for resale or distribution of such securities. For more information on
our agreement with such selling stockholder, see "DESCRIPTION OF THE
AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(17) Represents (i)145,094 Issued shares of Common Stock and (ii) 29,467
Reserved Damages Shares and (iii) 133,334 Warrant 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 HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(18) Represents (i) 133,332 Warrant Shares and (ii) 29,469 Reserved Damages
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 James Blanchard.
For more information on our agreement with such selling stockholder, see
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK."
(19) Represents (i) 133,332 Warrant Shares and (ii) 29,469 Reserved Damages
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 James Blanchard.
For more information on our agreement with such selling stockholder, see
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The figure under the column "Number of Shares Owned
Before Offering" includes shares of our Common Stock that are issuable upon
exercise of warrants issued to the selling stockholder in connection with
the purchase of Series B Preferred Stock. The shares underlying these
securities are not included in this Registration Statement. We are
contractually bound to file a registration statement in respect of these
shares.
(20) Represents (i) 67,467 Issued Shares, (ii) 67,468 Warrant Shares and (iii)
14,910 Reserved Damages Shares. The selling stockholder advised us that it
purchased the warrants solely for investment and not with a view to or for
resale or distribution of such securities. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(21) Represents (i) 72,534 Issued Shares, (ii) 66,668 Warrant Shares and (iii)
14,734 Reserved Damages 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 HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The figure under the column "Number of Shares Owned
Before Offering" includes shares of our Common Stock that are issuable upon
conversion of our Senior Secured Convertible Debenture in the principal
amount of $100,000, interest through the maturity date and warrants issued
in connection with such debentures. The shares underlying the Senior
Secured Convertible Debentures and the accompanying warrants are not
included in this Registration Statement. We are contractually bound to file
a registration statement in respect of these shares.
(22) Represents (i) 66,667 shares of Common Stock issuable upon conversion of
500 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75, together with 14,511
Reserved Dividend Shares, (ii) 6,968 Issued Shares; (iii) 66,666 Warrant
Shares; and (iii) 14,736 Reserved Damages 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
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such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(23) Represents (i) 66,667 shares of Common Stock issuable upon conversion of
500 shares of our Convertible Preferred Stock having a stated value of $100
per share, based on a conversion price of $0.75, together with 14,511
Reserved Dividend Shares, (ii) 6,968 Issued Shares; (iii) 66,668 Warrant
Shares; and (iii) 14,734 Reserved Damages 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 HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(24) Represents (i) 66,668 Warrant Shares and (ii) 14,734 Reserved Damages
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 HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(25) Represents (i) 66,667 Issued Shares (ii) 66,668 Warrant Shares and (iii)
14,734 Reserved Damages 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 HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK."
(26) Represents (i) 40,000 Warrant Shares and (ii) 8,840 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK." Basso Capital Management, L.P. ("Basso
Capital") is the Investment Manager to the selling stockholder. Howard I.
Fischer is a managing member of Basso GP, LLC, the General Partner of Basso
Capital, and as such has investment power and voting control over these
securities. Mr. Fischer disclaims beneficial ownership of these securities.
The figure under the column "Number of Shares Owned Before Offering"
includes shares of our Common Stock that are issuable upon exercise of
warrants issued to the selling stockholder in connection with the purchase
of Series B Preferred Stock. The shares underlying these securities are not
included in this Registration Statement. We are contractually bound to file
a registration statement in respect of these shares.
(27) Represents (i) 175,000 Warrant Shares and (ii) 17,500 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK." Crestview Capital Partners ("CCP") is the
sole managing member of Crestview Capital Master, LLC ("CCM") and may be
deemed to have sole voting and investment power with respect to the
securities beneficially owned by CCM. CCP disclaims beneficial ownership of
these securities. The figure under the column "Number of Shares Owned
Before Offering" includes shares of our Common Stock that are issuable upon
exercise of warrants issued to the selling stockholder in connection with
the placement of the Series B Preferred Stock. The shares underlying these
securities are not included in this Registration Statement. We are
contractually bound to file a registration statement in respect of these
shares.
69
(28) Represents (i) 119,999 Warrant Shares and (ii) 12,000 Reserved Damages
Shares. The selling stockholder advised us that it purchased the 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 Steve Cohenim. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(28B)Represents (i) 119,999 Warrant Shares and (ii) 12,000 Reserved Damages
Shares. The selling stockholder advised us that it purchased the 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 MJ Anahory. For more information on our
agreement with such selling stockholder, see "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK."
(29) Represents (i) 54,167 Warrant Shares and (ii) 5,417 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(30) Represents (i) 60,000 Warrant Shares and (ii) 6,000 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(31) Represents (i) 74,999 Warrant Shares and (ii) 7,500 Reserved Damages
Shares. The selling stockholder advised us that it purchased the warrants
solely for investment and not with a view to or for resale or distribution
of such securities. For more information on our agreement with such selling
stockholder, see "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE
CONVERTIBLE PREFERRED STOCK."
(32) Represents 631,506 shares of Common Stock issuable upon exercise of
five-year warrants issued as compensation in connection with the placement
of our Convertible Preferred Stock. The natural person having voting or
dispositive power over such securities is Chaim Epstein.
(33) Represents 35,160 shares of Common Stock issuable upon exercise of
five-year warrants issued as compensation in connection with the placement
of 2,637 shares of our Convertible Preferred Stock. The selling stockholder
is a registered broker-dealer, which served as a placement agent in the
transactions described in the section "DESCRIPTION OF THE AGREEMENTS WITH
THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The natural persons having
voting or dispositive power over such securities are Reynaldo A. Martinez
and Alfredo F. Ayme.
(34) Represents 164,406 shares of Common Stock issued upon exercise of warrants
granted in consideration of service on our board of directors. See
"DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK." The amount reflected under the column titled "Number of
Shares Owned Before the Offering" is based on information provided by the
selling stockholder in the Schedule 13D filed by the selling stockholder
with the SEC on February 11, 2004 as well as an additional 150,000 shares
of Common Stock issuable upon exercise of warrants held by the selling
stockholder. The shares underlying the warrants are not included in this
Registration Statement. We are contractually bound to file a registration
statement in respect of the shares underlying these warrants.
(35) Represents (i) 164,406 shares of Common issuable upon exercise of five-year
warrants granted in consideration of service on our board of directors and
(ii) 16,667 shares of Common Stock issuable upon exercise of five-year
warrants issued to the selling stockholder as a designee of of one of the
placement agents, as compensation in connection with the placement of our
Convertible Preferred Stock described in
70
the transaction described in the section "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." This selling
stockholder has advised us that he was a Managing Director of Greenfield
Capital Partners LLC at the time such transaction was consummated, but has
subsequently left Greenfield Capital. Of the shares to be sold by the
selling stockholder, 164,406 shares were not derived from those
transactions. At the time such transaction was completed, Mr. Rosenblum was
affiliated with JH Darbie & Co., a registered broker dealer, and has
advised that at the time the warrants were acquired the selling stockholder
did not have any agreements, plans, understandings, directly or indirectly,
with any person, to distribute the securities.
(36) Represents 100,000 shares of Common Stock issuable upon exercise of
warrants granted in exchange for legal services rendered in 2004. This
selling stockholder provides legal services to us. The natural persons
having voting or dispositive power over such securities are David Aboudi
and Gerald Brounstein.
(37) 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.
(38) The natural person having voting or dispositive power over such securities
is Barry Braunstein.
(39) The natural persons having voting or dispositive power over such securities
are Michael Finkelstein and Elizabeth Leonard.
(40) The natural persons having voting or dispositive power over such securities
are David Fuchs and Michael Crow.
(41) 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.
(42) The natural persons having voting or dispositive power over such securities
are Abraham Nussbaum and Tanchum Adler.
(43) The natural persons having voting or dispositive power over such securities
are Marc Swickle and Howard Berger.
(44) The natural persons having voting or dispositive power over such securities
is James David Hassan.
(45) The natural person having voting or dispositive power over such securities
is Simcha Hecht.
(46) The natural persons having voting or dispositive power over such securities
are Barry Appel and Esther Appel.
(47) The natural persons having voting or dispositive power over such securities
are Evan Schemenauer,
71
Jonathan Walk and Don Dunstan.
(48) The natural persons having voting or dispositive power over such securities
are Evan Schemenauer, Arthur Jones and Jennifer Kelly.
(49) The natural persons having voting or dispositive power over such securities
are David Rapaport and Fred Brasch.
(50) The natural person having voting or dispositive power over such securities
is Eli Chabot.
(51) The selling stockholder acquired these securities as an investor in the
transactions described under the caption "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The selling
stockholder has advised us that it is an affiliated person of a registered
broker dealer and that at the time the securities were acquired the selling
stockholder did not have any agreements, plans, understandings, directly or
indirectly, with any person to distribute the securities. The selling
stockholder acquired the securities without regard to its status as an
affiliate of a broker-dealer. The natural person having voting or
dispositive power over such securities are Edwin Mecabe and Tai May Lee.
(52) The natural person having voting or dispositive power over such securities
is Menachem Lipsker.
(53) The natural persons having voting or dispositive power over such securities
are Mordechai Vogel and Simon Vogel.
(54) The selling stockholder acquired these securities as an investor in the
transactions described under the caption "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." The selling
stockholder has advised us that it is an affiliated person of a registered
broker dealer and that at the time the securities were acquired the selling
stockholder did not have any agreements, plans, understandings, directly or
indirectly, with any person to distribute the securities. The selling
stockholder acquired the securities without regard to its status as an
affiliate of a broker-dealer. The natural person having voting or
dispositive power over such securities is Michael Coughlan.
(55) Represents 16,666 shares of Common Stock issuable upon exercise of
five-year warrants issued to the selling stockholder as a designee of
Greenfield Capital Partners LLC, as compensation in connection with the
placement of 2,500 shares of our Convertible Preferred Stock described in
the transaction described in the section "DESCRIPTION OF THE AGREEMENTS
WITH THE HOLDERS OF THE CONVERTIBLE PREFERRED STOCK." This selling
stockholder has advised that he was a Managing Director of Greenfield
Capital Partners LLC at the time such transaction was consummated, but has
subsequently left Greenfield Capital. We are also registering an additional
1,666 shares of Common Stock issuable to such selling stockholder
representing our current good faith estimate of additional shares that we
might be required to issue to such selling stockholder based on adjustments
to the number of shares covered by its unexercised warrants in the event
that, on or prior to the one hundred eightieth day after the effective date
of this Registration Statement, we subsequently offer or issue securities
at a purchase price or conversion price lower than $0.75 per share or
warrants having an exercise price below the exercise price of the warrants
held by the selling stockholder. The selling stockholder is affiliated with
JH Darbie & Co., a registered broker dealer, and has advised us that at the
time the warrants were acquired the selling stockholder did not have any
agreements, plans, understandings, directly or indirectly, with any person,
to distribute the securities.
72
RELATIONSHIPS BETWEEN AMEDIA AND THE SELLING STOCKHOLDERS
Melton Management Ltd. holds approximately 7.82% of our issued and
outstanding shares of Common Stock as of October 16, 2006 (without giving effect
to the purchase of their beneficial interests in the transaction described in
the section "DESCRIPTION OF THE AGREEMENTS WITH THE HOLDERS OF THE CONVERTIBLE
PREFERRED STOCK" ). Each of Juan Mendez and Richard Rosenblum currently serves
as a non-employee director of our company. Aboudi & Brounstein has provided and
continues to provide legal services to our company. Except as otherwise
described above, none of the selling shareholders (i) are affiliates or
controlled by an affiliate of our company (ii) are now or were at any time in
the past an officer or director of ours or any of any of our predecessors or
affiliates. With the exception of each of Juan Mendez, Richard Rosenblum and
Aboudi & Brounstein, we have separate contractual obligations to file this
registration with each of the selling shareholders.
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices.
We have agreed, subject to certain limits, to bear all costs, expenses
and fees of registration of the shares of Common Stock offered by the selling
stockholders for resale. However, any brokerage commissions, discounts,
concessions or other fees, if any, payable to broker-dealers in connection with
any sale of the shares of Common Stock will be borne by the selling stockholders
selling those shares or by the purchasers of such shares.
Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
o The name of each such selling stockholder and of the participating
broker-dealer(s);
o The number of securities involved;
o The price at which such securities were sold;
o The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o That such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
o Other facts material to the transaction.
The selling stockholders may use any one or more of the following methods
when selling shares:
o directly as principals;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales that are in compliance with the applicable laws and
regulations of any state or
73
the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this Prospectus.
Any sales of the shares may be effected through the OTC Bulletin Board, in
private transactions or otherwise, and the shares may be sold at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. We
believe that the selling stockholders have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their shares other than ordinary course brokerage arrangements, nor
is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. If the selling stockholders effect
sales through underwriters, brokers, dealers or agents, such firms may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or the purchasers of the shares for whom they may act as
agent, principal or both in amounts to be negotiated. Those persons who act as
broker-dealers or underwriters in connection with the sale of the shares may be
selected by the selling stockholders and may have other business relationships
with, and perform services for, us. The selling stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
Any selling stockholder or broker-dealer who participates in the sale of
the shares may be deemed to be an "underwriter" within the meaning of Section
2(11) of the Securities Act. Any commissions received by any underwriter or
broker-dealer and any profit on any sale of the shares as principal may be
deemed to be underwriting discounts and commissions under the Securities Act.
The anti-manipulation provisions of Rules 101 through 104 of Regulation M
promulgated under the Exchange Act may apply to purchases and sales of shares of
common stock by the selling stockholders. In addition, there are restrictions on
market-making activities by persons engaged in the distribution of the common
stock. 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.
We were required to pay expenses incident to the registration, offering and
sale of the shares pursuant
74
to this offering. We have agreed to indemnify certain selling stockholders and
certain other persons against certain liabilities, including liabilities under
the Securities Act or to contribute to payments to which such selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest may be required to make in respect thereof. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons, we have been advised
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 100,000,000 shares of Common Stock.
As of October 16, 2006, there were 27,946,979 shares of Common Stock
outstanding. Holders of the Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of Common
Stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock,
par value $.001 per share. As of October 16, 2006, there were 57,928 shares of
preferred stock issued and outstanding, comprised of 11,928 shares of our Series
A Preferred Stock and 46,000 shares of our Series B Preferred Stock.
The shares of preferred stock are issuable in series, and in
connection with the issuance of any series of preferred stock and to the extent
now or hereafter permitted by law, the board of directors is authorized to fix
by resolution the designation of each series, the stated value of the shares of
each series, the dividend rate or rates of each series and the date or dates and
other provisions respecting the payment of dividends, the provisions, if any,
respecting the redemption of the shares of each series and, subject to
requirements of law, the voting rights, the terms, if any, upon which the shares
of each series shall be convertible into or exchangeable for any other shares of
stock of the Company and any other relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of the
shares of each series.
SERIES A PREFERRED STOCK
In July 2004, we designated 52,500 of our authorized preferred stock
as Series A 7% Convertible Preferred Stock.
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.
Dividends at the rate of 7% per annum are payable on a semi-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 the conversion
price then in effect. Our right to pay dividends in stock, however, is subject
to the following conditions:
75
o the registration statement 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.
Each holder can convert all or any part of its Series A Preferred
Stock by giving notice to the Company. Each conversion is subject to the
following limitation: the holder may convert the outstanding Series A Preferred
Stock 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, subject to the same limitations.
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).
We agreed with the holders of the Series A Preferred Stock 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 Convertible Preferred Stock on any date which is
earlier than 180 days after the effective date of the Registration Statement
(plus the number of days, if any, during which the Registration Statement is
suspended in the interim) in which the (i) lowest per share purchase price
contemplated thereunder or the lowest conversion price which would be applicable
under the terms of such New Transaction is below the initial conversion price
and/or (ii) the lowest exercise price of any warrants issued thereunder is lower
than the initial exercise prices of the Warrants, then the terms of any
unconverted share of Convertible Preferred Stock or any unexercised Warrants
shall be modified to adjust the relevant conversion price in such convertible
preferred stock, the warrant exercise price or the number of warrant shares to
be equal to that provided in the transaction as so consummated. This protection
ended in August 2005. However, in connection with our efforts to raise working
capital, in October 2006 we offered to the purchasers of the Series A Preferred
Stock to reinstate this protection in consideration of new loans that these
persons would make to us. Under our offer, each investor who advances a loan to
us will have the benefit of this protection with respect to three times the
amount advanced to us in connection with a loan. Under the terms of the Offer,
the price protection provisions will be operative with respect to Series A
Preferred Stock and the Warrants held by such investor on the day on which the
loan is advanced to us from that closing date through August 31, 2007. Our Offer
is being made to obtain Loans for up to a maximum of $2 million in advances.
Additional loans, if any, will be advanced to us in separate closings subsequent
to the Initial Closing Date.
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 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.
76
Each share of Series B Preferred Stock has a stated value of $100 and
was 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. On
May 5, 2006, we completed a private placement of the Convertible Debenture
transaction. This private placement resulted in the reduction to $0.75 per share
of the conversion price of the Series B Preferred Stock.
Dividends at the rate of 8% per annum are payable on a semi-annual
basis and on conversion and may be paid, at our option, in stock or cash. If we
intend to pay the dividends in cash on a scheduled dividend payment date, we
have to give advance notice to each holder of the Series B Preferred Stock. If
the dividends are being paid in stock, the stock will be valued at 90% of the
volume weighted average price of the Common Stock for the five trading days
prior to 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.
Each holder can convert all or any part of its Series B Preferred
Stock by giving notice to the Company. Each conversion is subject to the
following limitation: the holder may convert a the outstanding Series B
Preferred Stock 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, subject to the same limitations.
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).
We agreed with the holders of the Series B Preferred Stock that if we
would 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 prior to August 31, 2006 in which the 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 (a
"Series B Lower Price Transaction"), then the terms of any unconverted share of
Series B Preferred Stock and the exercise price of the Series B Warrants would
be modified to adjust the relevant conversion or exercise price to be equal to
the prices 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 stockholders' 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. The private placement that we completed in May 2006
qualified as a Series B Lower Price Transaction, thereby resulting in reduction
in the conversion price of 46,000 shares of Series B Preferred Stock that was
then outstanding.
We agreed with the holders of the Series B Preferred Stock 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 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
77
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. This protection ended in
August 2006. However, in connection with our efforts to raise working capital,
in October 2006 we offered to the purchasers of the Series B Preferred Stock to
reinstate this protection in consideration of new loans that these persons would
make to us. Under our offer, each investor who advances a loan to us will have
the benefit of this protection with respect to three times the amount advanced
to us by that investor in connection with a loan. Under the terms of the Offer,
the price protection provisions will be operative with respect to Series B
Preferred Stock and the Series B Warrants held by such investor on the day on
which the Loan is advanced to us from that closing date through August 31, 2007.
We raised on October 23, 2006 $600,000 from two of these investors. Our Offer is
being made to obtain Loans for up to a maximum of $2 million in advances.
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.
TRANSFER AGENT
Our transfer agent is American Stock Transfer and Trust Company, Inc.
Their address is 459 Maiden Lane, New York New York 10038 and their telephone
number is (212) 936-5100.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Pursuant to our certificate of incorporation and by-laws, our officers
and directors are indemnified by us to the fullest extent allowed under Delaware
law for claims brought against them in their capacities as officers and
directors. Indemnification is not allowed if the officer or director does not
act in good faith and in a manner reasonably believed to be in our best
interest, or if the officer or director had no reasonable cause to believe his
conduct was lawful. Accordingly, indemnification may occur for liabilities
arising under the Act. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted for our directors, officers and controlling
persons pursuant to the foregoing provisions or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
INTEREST OF NAMED EXPERTS AND COUNSEL
Aboudi & Brounstein, Law Offices received in April 2004 a three year
warrant to purchase up to 100,000 shares of our Common Stock at a per share
exercise price of $0.61, in connection with legal services rendered by them. The
legal services included the preparation of this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered under this Prospectus was
passed on for us by Lawrence Kallaur, Esq.
78
EXPERTS
The financial statements as of December 31, 2005 and 2004 included in
this Prospectus and elsewhere in the Registration Statement of which this
Prospectus forms a part, have been audited by Marcum & Kliegman LLP, independent
registered public accounting firm. Each of these reports express an unqaulified
opinion and includes an explanatory paragraph related to our ability to continue
as a going concern and have been included in reliance upon the reports of such
firms given upon their authority as experts in accounting 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's Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You can request copies of those documents, upon
payment of a duplicating fee, by writing to the SEC at that same address. 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.
We have filed with the SEC under the Securities Act a Registration
Statement on Form SB-2 (the "Registration Statement"), of which this prospectus
is a part, with respect to the shares offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules as permitted by the rules and regulations of
the SEC.
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.
Prospective Investors may rely on the information contained in this
Prospectus. Neither we nor the selling stockholders have authorized anyone to
provide prospectus investors with information different from that contained in
this Prospectus. The information in this Prospectus is correct only as of the
date of this Prospectus, regardless of the time delivery of this Prospectus or
any sale of these securities.
79
AMEDIA NET WORKS, INC.
up to 12,468,985 shares of Common Stock
PROSPECTUS
___________, 2006
80
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Balance Sheet as of
June 30, 2006 (unaudited) F-1
Condensed Consolidated Statements of Operations For the six and three
months ended June 30, 2006 and 2005 and from Inception
(July 14, 1994) to June 30, 2006 (unaudited) F-2
Condensed Consolidated Statements of Cash Flows For the six and three
months ended June 30, 2006 and 2005 and from Inception
(July 14, 1994) to June 30, 2006 (unaudited) F-3
Notes to the Condensed Consolidated Financial Statements (unaudited) F-5
F-i
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, 2006
ASSETS
Current assets
Cash and cash equivalents $ 3,079,772
Inventories 917,165
Prepaid expenses 66,415
------------
Total current assets 4,063,352
------------
Property and equipment, net of accumulated depreciation of $223,962 718,048
------------
Other assets
Capitalized software costs, net of accumulated amortization of $204,584 1,583,843
Deferred financing costs, net of accumulated amortization of $167,906 2,007,046
Security deposit 46,749
------------
Total other assets 3,637,638
------------
Total assets $ 8,419,038
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 994,374
Accrued expenses 297,358
Accrued penalties 894,667
Accrued interest expense 131,803
Advances under R&D arrangement, net of costs incurred 178,769
Current portion of capital leases 5,141
------------
Total current liabilities 2,502,112
Long-term liabilities
8% Convertible debentures, net of unamortized discount of $7,243,968 2,756,032
Capital leases, less current maturities 9,650
------------
Total liabilities 5,267,794
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized;
Series A convertible preferred stock,
52,500 shares authorized; 11,928 issued and outstanding
($1,192,800 liquidation preference) 12
Series B convertible preferred stock,
85,000 shares authorized; 46,000 issued and outstanding
($4,600,000 liquidation preference) 46
Common stock, $.001 par value;
100,000,000 shares authorized; 27,321,978
issued and outstanding 27,322
Additional paid-in capital 71,914,189
Deficit accumulated during the development stage (67,891,957)
Deferred compensation (898,368)
------------
Total stockholders' equity 3,151,244
------------
Total liabilities and stockholders' equity $ 8,419,038
============
See Notes to Condensed Consolidated Financial Statements.
F-1
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
From
Six Months Inception Three Months
Ended (July 14, Ended
June 30, 1994) to June 30,
------------------------- June 30, -------------------------
2006 2005 2006 2006 2005
----------- ----------- ------------ ----------- -----------
Sales $ 25,379 $ 5,248 $ 30,927 $ -- $ 2,598
----------- ----------- ------------ ----------- -----------
Cost of goods sold 19,747 5,846 25,825 -- 2,705
----------- ----------- ------------ ----------- -----------
Gross profit (loss) 5,632 (598) 5,102 -- (107)
----------- ----------- ------------ ----------- -----------
Expenses
Research and development (1) 2,419,017 2,063,462 15,777,934 1,151,903 1,001,085
Sales and marketing (1) 839,495 1,078,540 13,561,822 412,016 637,060
General and administrative (1) 1,955,973 935,575 24,647,056 710,015 496,506
Bad debt expense -- -- 161,000 -- --
----------- ----------- ------------ ----------- -----------
Total expenses 5,214,485 4,077,577 54,147,812 2,273,934 2,134,651
----------- ----------- ------------ ----------- -----------
Operating loss (5,208,853) (4,078,175) (54,142,710) (2,273,934) (2,134,758)
----------- ----------- ------------ ----------- -----------
Other (income) expense
Legal settlement -- -- 565,833 -- --
Late filing penalty on stock registration rights 641,738 -- 927,980 641,738 --
Realized gain of foreign currency translation -- -- (81,007) -- --
Loss on investment -- -- 17,000 -- --
Other income -- -- (75,000) -- --
Net losses of affiliate -- -- 1,196,656 -- --
Impairment loss on investment in affiliate -- -- 748,690 -- --
Revenue from copy protection business -- -- (125,724) -- --
Gain on sale of copy protection business -- -- (5,708,328) -- --
Gain on sale of investment in affiliate -- -- (40,000) -- --
Loss on disposition of fixed assets -- 1,692 30,873 -- --
Amortization of deferred financing costs 83,723 -- 4,600,498 83,723 --
Impaired offering costs -- -- 267,404 -- --
Interest income (26,983) (19,354) (1,011,718) (26,230) (14,921)
Interest expense 1,908,052 260,315 4,161,088 1,495,821 260,315
----------- ----------- ------------ ----------- -----------
Total other (income) expense 2,606,530 242,653 5,474,245 2,195,052 245,394
----------- ----------- ------------ ----------- -----------
Net loss $(7,815,383) $(4,320,828) $(59,616,955) $(4,468,986) $(2,380,152)
=========== =========== ============ =========== ===========
Deemed dividend on convertible preferred stock 1,591,525 2,943,272 7,162,382 1,591,525 2,943,272
Dividend on convertible preferred stock 317,729 233,098 1,112,620 140,817 161,910
----------- ----------- ------------ ----------- -----------
Net loss applicable to common stockholders $(9,724,637) $(7,497,198) $(67,891,957) $(6,201,328) $(5,485,334)
=========== =========== ============= =========== ===========
Per share data:
Basic and diluted $ (0.40) $ (0.39) $ (0.23) $ (0.26)
=========== =========== =========== ===========
Weighted average number
of common shares used in
basic and diluted loss per share 24,609,848 19,386,647 26,635,279 20,758,670
=========== =========== =========== ===========
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 129,170 $ 9,287 $ 603,982 $ 54,220 $ 4,644
Sales and marketing 85,246 -- 5,421,804 44,850 --
General and administrative 679,278 32,268 6,451,633 200,394 11,385
------------ ----------- ------------ ----------- -----------
$ 893,694 $ 41,555 $ 12,477,419 $ 299,464 $ 16,029
============ =========== ============ =========== ===========
See Notes to Condensed Consolidated Financial Statements.
F-2
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months From
Ended Inception
June 30, (July 14, 1994)
------------------------- to June 30,
2006 2005 2006
----------- ----------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(7,815,383) $(4,320,828) $(59,616,955)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 296,317 41,829 1,382,699
Forgiveness of note receivable, officer -- -- 100,000
Loss from disposition of fixed assets -- 1,692 197,065
Bad debt expense -- -- 161,000
Amortization of note discount and finance costs 1,391,558 104,985 6,188,690
Impaired offering costs 267,404
Foreign currency translation adjustment and realized gain -- -- (82,535)
Beneficial conversion feature of convertible debt 437,071 -- 1,009,576
Stock, warrants and options issued for services and legal settlement 893,694 41,555 12,650,380
Payment of common stock issued with guaranteed selling price -- -- (155,344)
Net losses of affiliate -- -- 1,196,656
Impairment loss on investment in affiliate -- -- 748,690
Gain on sale of Copy Protection Business -- -- (5,708,328)
Gain on sale of investment in affiliate -- -- (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable -- -- 554
Inventories 11,852 (206,812) (917,165)
Prepaid expenses and other current assets 12,779 (215,616) (96,072)
Other assets -- (26,099) (46,750)
Accounts payable (462,203) 350,743 447,181
Accrued expenses (1,208) 93,935 1,656,383
Accrued penalties 631,419 -- 631,419
Accrued severance pay -- -- (122,363)
Advances under R&D arrangement 178,769 -- 178,769
Accrued interest expense 131,803 -- 382,822
----------- ----------- ------------
Net cash used by operating activities (4,293,532) (4,134,616) (39,586,224)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets -- -- 68,594
Purchases of property and equipment (118,897) (460,684) (1,924,642)
Capitalized software costs (528,045) (436,010) (1,788,427)
Proceeds from sale of Copy Protection Business -- -- 5,050,000
Proceeds from sale of investment in affiliate -- -- 40,000
Investment in ComSign, Ltd. -- -- (2,000,000)
Increase in note receivable, officer -- -- (100,000)
Increase in note receivable -- -- (130,000)
Increase in organization costs -- -- (7,680)
----------- ----------- ------------
Net cash used in investing activities (646,942) (896,694) (792,155)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock -- 7,084,170 11,726,600
Proceeds from exercise of warrants and options 210,018 189,230 399,248
Proceeds from issuance of common stock -- -- 21,177,354
Stock offering costs -- -- (475,664)
Deferred financing costs (1,309,620) -- (2,114,462)
Proceeds from notes payable 2,450,000 3,450,000
Proceeds from short-term borrowings -- -- 1,356,155
Payments on capital lease obligations (2,439) -- (5,367)
Proceeds from long-term debt -- -- 2,751,825
Proceeds from convertible debentures 10,000,000 -- 12,000,000
Repayment of notes payable (3,661,500) -- (3,661,500)
Repayment of short-term borrowings -- -- (1,357,082)
Repayments of long-term debt -- -- (1,615,825)
Dividends paid to preferred stockholders -- (167,719) (167,719)
----------- ----------- ------------
Net cash provided by financing activities 7,686,459 7,105,681 43,463,563
----------- ----------- ------------
Effect of exchange rate changes on cash -- -- (5,412)
----------- ----------- ------------
F-3
INCREASE IN CASH AND CASH EQUIVALENTS 2,745,985 2,074,371 3,079,772
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 333,787 2,275,377 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,079,772 $ 4,349,748 $ 3,079,772
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 30,000 $ 5,178 $ 482,492
=========== =========== ============
Non-cash investing and financing activities:
Issuance of common stock warrants in connection
with bridge loans $ 338,955 $ -- $ 447,615
=========== =========== ============
Original issue discount on notes payable $ 131,500 $ -- $ 211,500
=========== =========== ============
Deemed dividend in connection with sale
of convertible preferred stock $ 1,591,525 $ 2,943,272 $ 7,162,382
=========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
F-4
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
Amedia Networks, Inc. (hereinafter, the "Company" or "Amedia"), is a development
stage company that designs, develops and markets technology-based broadband
access solutions for voice, video and data services. The Company's products are
designed to provide key functionality that enables service providers to deliver
"triple play" (voice, video and data) broadband communication to their
subscribers. These products are designed for placement at various points in the
network infrastructure layout and can be deployed with optical fibers as well as
with copper wires. The Company is marketing its initial products to
communications carriers, municipal authorities and communication equipment
companies.
The Company has been engaged in the broadband access communications business
since March 2004. From its inception in July 1994 through May 2003, Amedia was
primarily engaged in the business of designing and developing technologies that
provide copy protection for electronic content distributed on optical media and
the Internet under the name of "TTR Technologies, Inc." In May 2003, the Company
sold its copy protection business. In May 2004, the Company changed its name to
"Amedia Networks, Inc."
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The Company's condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
net losses of $67,891,957 since its inception, and as of June 30, 2006, has
working capital of $1,561,240 and stockholders' equity of $3,151,244. The
Company's ability to continue operating as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan or to secure funding sufficient to provide for the working
capital needs of its business. There is no assurance that the Company will
generate revenue or raise the funds in the amounts needed to realize its
business plan or maintain its operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. There can be no assurance that management will
be successful in implementing its business plan or that the successful
implementation of such business plan will actually improve the Company's
operating results.
As more fully described in Note 5 (Private Placement) and Note 6 (Notes
Payable), the Company funded its operations during the past six months from the
proceeds of the sale of its short-term notes issued from December 2005 through
April 2006 and from the proceeds of the Private Placement in May 2006.
NOTE 3 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements contained herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements, the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, these
financial statements do not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for
annual financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make the financial
position of the Company at June 30, 2006, and its results of operations and cash
flows for the six months ended June 30, 2006 not misleading. Operating results
for the six months ended June 30, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006. For further
information, refer to the condensed consolidated financial statements and
footnotes thereto included in the
F-5
Company's Form 10-KSB for the year ended December 31, 2005 as filed with the
Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, TTR LTD., which has been inactive since
December 2002. All significant inter-company accounts and transactions have been
eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts in the financial statements for the six and three months ended
June 30, 2005 have been reclassified for comparative purposes to conform to the
presentation in the financial statements for the six and three months ended June
30, 2006. These reclassifications had no effect on the previously reported net
loss.
REVENUE RECOGNITION
The Company receives revenue from the sale of its QoStream product line which is
comprised of hardware and software. Revenue is recognized on product sales when
there exists persuasive evidence of an arrangement pursuant to which units are
shipped, the fee is fixed and determinable and collection is probable. During
the six months ended June 30, 2006 the Company recorded $25,379 from sales of
units of its QoStream products and related hardware.
INVENTORY
Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of June 30, 2006 any items relieved from
inventory have been determined under the specific identification method. The
balance at June 30, 2006 of inventories amounted to $917,165, which included raw
materials of $168,658 and finished goods of $748,507.
CAPITALIZED SOFTWARE COSTS
During the six months ended June 30, 2006 the Company capitalized $528,045 of
internally developed software product costs. Capitalization of software
development costs begins upon the establishment of technological feasibility.
Technological feasibility is based on reaching a high level design stage with
regards to a certain product as defined in SFAS No. 86. Such software product
costs are to be amortized over the expected beneficial life once the general
release stage of the product is reached. During the six months ended June 30,
2006 the Company recorded amortization expense of $204,584.
RESEARCH AND DEVELOPMENT
Research and development costs incurred in connection with product development
and testing are expensed as incurred. Research and development costs for the six
months ended June 30, 2006 and 2005 were $2,419,017 and $2,063,462,
respectively.
STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment" (SFAS 123R) that amends SFAS 123, and SFAS No. 95, "Statement of Cash
Flows" and supersedes Accounting Principles Board (APB) Opinion No. 25, "
Accounting for Stock Issued to Employees," and related interpretations (APB 25).
As of January 1, 2006, SFAS 123R requires the Company to measure the cost of
employee services received in exchange for an award of equity instruments, such
as stock options, based on the grant-date fair value of the award and to
recognize such cost over the requisite period during which an employee provides
service. The grant-date fair value will be determined using option-pricing
models adjusted for unique characteristics of the equity instruments. SFAS 123R
also addresses the accounting for transactions in which a company incurs
liabilities in exchange for goods or services that are based on the fair value
of the Company's equity instruments or that may be settled through the issuance
of such equity instruments. The statement does not change the accounting for
transactions in which the Company issues equity instruments for
F-6
services to non-employees. The pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement recognition.
The Company adopted SFAS 123R on January 1, 2006 and uses the modified
prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of
SFAS 123R for all awards granted to employees prior to the effective date of FAS
123R that remain unvested on the effective date. As a result, the Company's net
loss for the six and three months ended June 30, 2006 is $673,694 and $374,230,
respectively, higher than if it had continued to account for the share based
payment under APB 25. In addition, there was $990,558 of unvested employee stock
options as of January 1, 2006 that was recorded as deferred compensation and
additional paid in capital.
Prior to January 1, 2006, the Company accounted for awards granted under those
plans following the recognition and measurement principles of APB 25.
Pro-forma net earnings for the six and three months ended June 30, 2005,
including effects of expensing stock options, follows.
Six Months Ended, Three Months Ended
June 30, June 30,
2005 2005
----------------- ------------------
Net loss applicable to common
stockholders, as reported $(7,497,198) $(5,485,334)
Net loss per share applicable to common
stockholders, basic and diluted as
reported $ (0.39) $ (0.26)
Stock option expense included in net
loss $ 41,555 $ 16,029
Total stock option expense $ 378,386 $ 143,351
PRO-FORMA EFFECTS
Pro-forma net loss applicable to common
stockholders, as reported $(7,834,029) $(5,612,656)
Pro-forma net loss per share,
basic and diluted $ (0.40) $ (0.27)
The fair value of employee stock options at the date of grant was estimated
using the Black-Scholes option pricing method during the six months ended June
30, 2005 with the following weighted-average assumptions:
Expected Life (Years) 3.43
Interest Rate 3.65%
Annual Rate of Dividends --%
Volatility 76%
The weighted average fair value of options at the date of grant using the fair
value-based method during the six months ended June 30, 2005 was estimated at
$0.56.
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the "Plan") and has reserved up to 450,000
shares of Common Stock for issuance thereunder. In December 1999, the Plan was
amended to increase the total number of shares available for grant to 1.5
million. As of December 31, 2005 a total of 714,566 options were outstanding
under the 1996 Plan. Future grants under the 1996 Plan were discontinued in July
2000.
F-7
In July 1998, the Board of Directors adopted the Non-Executive Directors Stock
Option Plan (the "Directors' Plan") and has reserved up to 25,000 shares of
common stock for issuance thereunder. In May 2001, the Plan was amended to
increase the total number of shares available for grant to 75,000. In August
2002, the Company adopted the 2002 Non-Employee Directors' Plan (the "2002
Directors' Plan") which provides for 275,000 shares available for grant. Both
plans provide for the grant of options to directors who are not otherwise
employed by the Company. In May 2004, the 2002 Directors Plan was subsequently
amended to increase the total number of shares available for grant to 1,000,000
and in July 2006 such plan was further amended to increase the total number of
shares available for grant thereunder to 2,000,000 shares. As of December 31,
2005, options to purchase a total of 225,000 shares of Common Stock were
outstanding under the Directors' Plan and the 2002 Directors' Plan.
In July 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Incentive Plan") and originally reserved a total of 1,500,000 shares of common
stock for issuance thereunder. Since its adoption, the 2000 Incentive Plan was
amended to increase the total number of shares of Common Stock available for
grant and, as of July 2006, the 2000 Incentive Plan was last amended to increase
to 10,000,000 the total number of shares of Common Stock available for issuance
thereunder. The 2000 Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards
and performance units. The 2000 Incentive Plan also permits cash payments under
certain conditions. As of December 31, 2005, there were options to purchase
5,569,858 shares of Common Stock issued and outstanding under the 2000 Incentive
Plan. The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and the terms of the awards and exercise prices. The options are
exercisable for a period not to exceed ten years from the date of grant. Vesting
periods range from immediately to four years.
OTHER OPTION GRANTS
In addition to the options granted under the Stock Option Plans, the Company has
issued options outside of the plans, pursuant to various agreements. Stock
option activity for the six months ended June 30, 2006 is summarized as follows:
A summary of Plan and options activity as of June 30, 2006. and changes during
the six months ended June 30, 2006 presented below:
Weighted Weighted
Average Average Aggregate
Options Exercise Remaining Intrinsic
Plan Nonplan Total Price Years Value
--------- -------- --------- -------- --------- ---------
Options outstanding, December 31, 2005 6,509,425 493,218 7,002,643 $1.60
Granted 1,470,400 0 1,470,400 $0.37
Exercised (160,044) (328,812) (488,856) $0.61
Forfeited (207,583) 0 (207,583) $0.27
--------- -------- ---------
Options outstanding, June 30, 2006 7,612,198 164,406 7,776,604 $1.53 7.52 $84,854
========= ======== ========= ===== ==== =======
Options exercisable, June 30, 2006 5,507,370 164,406 5,671,776 $1.75 6.96 $80,485
========= ======== ========= ===== ==== =======
A summary of Plan and options activity of nonvested options as of June 30, 2006.
and changes during the six months ended June 30, 2006 presented below:
Weighted
Average
Grant Date
2006 Fair Value
---------- -----------
Nonvested at January 1, 2,719,159 $0.54
Granted 1,470,400 $0.37
Vested (1,877,148) $0.47
Forfeited (207,583) $0.27
----------
Nonvested at June 30, 2,104,828 $0.49
========== =====
F-8
The total fair value of shares vested during the six months ended June 30, 2006
was $673,694.
The fair value of employee stock options at the date of grant was estimated
using the Black-Scholes option pricing method during the six months ended June
30, 2006 with the following weighted-average assumptions:
Expected Life (Years) 3.44
Interest Rate 4.67%
Annual Rate of Dividends --%
Volatility 57%
Weighted-average grant date fair value of options granted during the six months
ended June 30, 2006, under the Black-Scholes option pricing model, was $0.37 per
option. The total intrinsic value of options exercised during the six months
ended June 30, 2006 was $143,704.
DURING THE SIX MONTHS ENDED JUNE 30, 2006 THE COMPANY ISSUED THE FOLLOWING STOCK
OPTIONS:
On February 2, 2006, the Company granted to an employee stock options to
purchase up to an aggregate of 10,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options were scheduled to vest over a three-year
period from the date of grant and are exercisable at an exercise price of $.65
per share (based on the closing market price of the Common Stock on the date
preceding the date of grant). The fair value of the options amounted to $2,954
and is being amortized over the three-year vesting period. The Company recorded
stock-based compensation expense of $164 in the accompanying condensed
consolidated financial statements for the six months ended June 30, 2006 for
this transaction. As the employee subsequently forfeited these options, the
Company will not recognize any further expense for this transaction.
On February 3, 2006 the Company granted to two consultants non-qualified stock
options under the 2000 Equity Incentive Plan to purchase up to an aggregate of
60,000 shares of Common Stock at an exercise price of $0.65 per share, with such
option vesting over 3 years. The $0.65 exercise price equaled the closing market
price of the Common Stock on the date of grant. The fair value of the options
amounted to $17,274 and is being amortized over the 3-year vesting period. The
Company recorded stock-based compensation expense of $2,399 in the accompanying
condensed consolidated financial statements for the six months ended June 30,
2006 for this transaction.
In February 2006 the Company received cash proceeds of $162,000 from the
exercise by certain Company officers and directors of stock options to purchase
a total of 268,200 shares of the Company's Common Stock. In consideration of
those stock option exercises, the Company issued to the exercising officers and
directors stock options to purchase up to 95,088 shares of the Company's Common
Stock from the 2000 Equity Incentive Plan and stock options to purchase up to
441,312 shares of the Company's Common Stock under the 2002 Directors Plan, in
each case at per share exercise prices ranging from $0.69 to $0.70. The exercise
price of each of these options is equal to the closing price of the Common Stock
on the date of issuance. The fair value of the options amounted to $169,484 and
is vested immediately The Company recorded stock-based compensation expense of
$169,484 in the accompanying financial statements for the six months ended June
30, 2006 for this transaction.
On March 14, 2006, the Company issued to a total of 29 employees options to
purchase up to an aggregate of 486,500 shares of the Company's common stock, par
value $0.001 ("Common Stock") under the Company's 2000 Equity Incentive Plan.
The options vest over a three-year period from the date of grant and are
exercisable at an exercise price of $0.86 per share (based on the closing market
price of the Common Stock on the date of the grant). The fair value of the
options amounted to $190,895 and is being amortized over the 3-year vesting
period. The Company recorded stock-based compensation expense of $20,704 in the
accompanying financial statements for the six months ended June 30, 2006 for
this transaction.
On April 25, 2006 the Company granted to four non-employee directors, on the
one-year anniversary of service on the Company's board of directors,
non-qualified options under the 2002 Non Employee Directors Stock Option Plan
F-9
to purchase up to 327,500 shares of the Company's Common Stock at an exercise
price of $1.03 per share (based on the closing market price of the Common Stock
on the date of the grant). The options immediately vested on the grant date. The
fair value of the options on the date of grant equaled $149,075. The Company
recorded stock-based compensation expense of $149,075 in the accompanying
condensed consolidated financial statements for the six months ended June 30,
2006 for this transaction.
On May 1, 2006, the Company granted to a new employee stock options to purchase
up to an aggregate of 50,000 shares of Common Stock under the Company's 2000
Equity Incentive Plan. The options vest over a three-year period from the date
of grant and are exercisable at an exercise price of $1.07 per share (based on
the closing market price of the Common Stock on the date preceding the date of
grant). The fair value of the options amounted to $23,649 and is being amortized
over the three-year vesting period. The Company recorded stock-based
compensation expense of $1,314 in the accompanying condensed consolidated
financial statements for the six months ended June 30, 2006 for this
transaction.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. The Company is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
does not expect SFAS 156 to have a material impact on the Company's financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return. Additionally, FIN 48 provides guidance on the
recognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
will be effective for the Company beginning January 1, 2007. The Company is in
the process of determining the effect, if any, that the adoption of FIN 48 will
have on its financial statements.
NOTE 4 - LOSS PER SHARE
Basic loss per share, "EPS" is computed by dividing net loss applicable to
common shares by the weighted-average of common shares outstanding during the
period.
Diluted loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive. The shares
assumable upon exercise of stock options and warrants are excluded from the
calculation of net loss per share, as their inclusion would be anti-dilutive.
Common stock equivalents have been excluded from the weighted-average shares for
the three months ended June 30, 2006 and 2005 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 7,776,603 and 6,302,642
shares of Common Stock were outstanding at June 30, 2006 and 2005, respectively.
Potentially dilutive warrants to purchase 23,838,947 and 13,728,786 shares of
Common Stock were outstanding at June 30, 2006 and 2005, respectively. In
addition, there were 11,928 and 21,403 shares of the Company's Series A 7%
Convertible Preferred Stock, par value $0.001 per share ("Series A Preferred
Stock"), outstanding and potentially convertible into 1,590,400 and 2,853,733
shares of Common Stock at June 30, 2006 and 2005, respectively. In addition,
there were 46,000 and 77,650 shares of the Company's Series B 8% Convertible
F-10
Preferred Stock, par value $0.001 per share ("Series B Preferred Stock"), were
outstanding and potentially convertible into 6,133,333 and 7,688,119 shares of
Common Stock at June 30, 2006 and 2005, respectively. The May 2006 Private
Placement referred to in Note 5 (Private Placement) resulted in an adjustment to
the conversion rate into Common Stock of the outstanding Series B Preferred
Stock. In addition, there was $10,000,000 of 8% convertible debentures
outstanding which are potentially convertible into 13,333,333 shares of Common
Stock at June 30, 2006
NOTE 5 - PRIVATE PLACEMENT
On May 5, 2006, the Company raised gross proceeds of $10 million from the
private placement (the "May 2006 Private Placement") to accredited institutional
and individual investors (the "Investors") of its two-year 8% Senior Secured
Convertible Debentures (the "Debentures"). In connection with the issuance of
the Debentures, the Company issued to the investors warrants, exercisable
through the last day of the month in which the fifth anniversary of the
effective date of the Registration Statement (as defined below) occurs (the
"Investor Warrants"), to purchase up to 6,666,675 shares of the Company's Common
Stock at a per share exercise price of $1.50. At closing, the Company received
net proceeds of approximately $5.2 million from the proceeds of the Debentures,
after the payment of offering related fees and expenses and after the repayment
in full of the bridge loans made between December 2005 and April 2006 (the
"Bridge Loans") in the aggregate amount of $2,841,500. Certain of the investors
in the Bridge Loans elected to participate in the May 2006 Private Placement
and, accordingly, approximately $850,000 in principal amount of Bridge Loans was
offset against these investors' purchases of the Debentures.
The Debentures mature on April 30, 2008 and are convertible into shares of
Common Stock at the holder's option at any time at an initial conversion price
of $0.75 per share, subject to adjustment in the event of certain capital
adjustments or similar transactions, such as a stock split or merger and as
further described below. Interest on the Debentures accrues at the rate of 8%
per annum, payable upon conversion or semi-annually (June 30 and December 31 of
each year, with the first scheduled payment date being December 31, 2006) or
upon maturity, whichever occurs first, and will continue to accrue until the
Debentures are fully converted and/or paid in full. Interest is payable, at the
option of the Company, either (i) in cash, or (2) in shares of Common Stock at a
rate equal to 90% of the volume weighted average price of the Common Stock for
the five trading days ending on the trading day immediately preceding the
relevant interest payment date; provided that interest payments may be made in
shares of Common Stock only if on the relevant interest payment date the
Registration Statement (as defined below) is then effective. In addition,
provided the Registration Statement is effective, the Company may prepay the
amounts outstanding on the Debentures by giving advance notice and paying an
amount equal to 120% of the sum of (x) the principal being prepaid plus (y) the
accrued interest thereon. Holders will continue to have the right to convert
their Debentures prior to the actual prepayment. The Company recorded accrued
interest of $131,803 in the accompanying condensed consolidated financial
statements for the six and three months ended June 30, 2006 for this
transaction.
Under certain conditions, the Company is entitled to require the holders of the
Debentures to convert all or a part of the outstanding principal amount of the
Debentures. If the closing sale price of the Company's Common Stock as quoted on
the OTC Bulletin Board equals to or exceeds 200% of the conversion price then in
effect (i.e., $1.50 with respect to the initial conversion price of $0.75)
(which amount may be adjusted for certain capital events, such as stock splits)
on each of twenty consecutive trading days, then, subject to certain specified
conditions, within five trading days after the last day in such period, the
Company may, at its option (exercised by written notice to the holders of the
Convertible Debentures), require the holders thereof to convert all or any part
of their Debentures on or before a specified date, which date shall not be less
than 20 and not more than 60 trading days after the date of such notice.
To secure the Company's obligations under the Debentures, the Company has
granted a security interest in substantially all of its assets, including
without limitation, its intellectual property, in favor of the Investors. The
security interest terminates upon the earlier of (i) the date on which less than
one-fourth of the original principal amount of the Debentures originally issued
at closing are outstanding or (ii) payment or satisfaction of all of the
Company's obligations in respect of these advances.
F-11
The Company has undertaken to file, within 75 days after the closing, a
registration statement (the "Registration Statement") covering the Common Stock
underlying the Debentures and the Warrants, as well as certain other securities
agreed to by the parties. As of the date of the filing of this quarterly report
on Form 10-QSB, the Company has not filed such registration statement. Under the
agreements with the holders of the Debentures, the Company is obligated to pay
liquidated damages to the holders of the Debentures because the Registration
Statement was not filed within the time frame provided therein. Similar payments
will be required if the Registration Statement is not declared effective by the
Securities and Exchange Commission within 120 days of the closing or
subsequently suspended beyond certain agreed upon periods. Accordingly, the
Company recorded accrued estimated penalties of $486,666 at June 30, 2006
(estimated through September 30, 2006). Liquidated damages in respect of late
filing/effectiveness are first payable at the earlier of (i) the effective date
of the Registration Statement or (ii) 180 days after closing. The Debenture
holders have the right to have these liquidated damages paid in shares of Common
Stock (valued at the conversion price). In addition, if the effective date of
the Registration Statement is on or before 180 days after the closing date, the
Company is entitled to pay these liquidated damages in shares of Common Stock.
The Private Placement resulted in a beneficial conversion feature of $5,658,503
which the Company recorded as a discount to the face value of the Debentures.
The Company also recorded a $2,191,836 discount on the Debentures based upon the
relative fair values of the Debentures and the Investor Warrants. During the six
and three months ended June 30, 2006, $606,371 of these discounts was amortized
and is included in interest expense in the accompanying condensed consolidated
financial statements. The remaining unaccreted discount of $7,243,968 will be
amortized over the remaining term of the Debentures.
In connection with the placement of the Debentures, a placement agent has
received a fee of $1,000,000 and warrants, with a grant date value of
$1,090,452, to purchase up to 2,000,000 shares of the Company's Common Stock, of
which warrants for 1,333,333 shares have an initial exercise price equal to
$0.75 per share and warrants for 666,667 shares have an initial exercise price
equal to $1.50. These warrants become first exercisable on the earlier of (i)
the sixth month following the effective date of the Registration Statement or
(ii) one year after issuance and continue to be exercisable through the last day
of the month in which the fifth anniversary of the effective date of the
Registration Statement occurs. The resale of the Common Stock underlying the
Placement Agent's Warrants will also be included in the Registration Statement.
The Company paid an additional $84,500 in other costs associated with the
placement of the Debentures. Accordingly, a total of $2,174,952 was recorded as
deferred financing costs. During the six and three months ended June 30, 2006
$84,183 and $83,723 were amortized and are included in interest expense and
amortization of deferred financing costs respectively.
The placement of the Debentures resulted in the reduction to $0.75 from $1.01 of
the conversion rate into Common Stock of the outstanding shares of the Company's
Series B 8% Convertible Preferred Stock issued in April and May of 2005. The
reduction in the conversion price resulted in an additional beneficial
conversion feature of $1,591,525 which the Company recorded as a deemed dividend
in the accompanying condensed consolidated financial statements for the six and
three months ended June 30, 2006 for this transaction.
NOTE 6 - NOTES PAYABLE
(i) On January 20, 2006, the Company entered into short term loan agreements
with three private investors (collectively the "January 2006 Bridge Investors"),
pursuant to which these investors loaned the Company the aggregate amount of
$500,000. The January 2006 Investors included Mr. Juan Mendez, Chairman of the
Company's board of directors, who loaned the Company $250,000. Pursuant to the
January 2006 Loan Agreement, the Company issued to the January 2006 Investors
secured promissory notes (the "January 2006 Bridge Notes") in the aggregate
principal amount of $530,000, representing an original issue discount of 6%
with respect to the principal amount of $500,000 through the stated maturity
date of April 21, 2006. The Company received net proceeds of $495,000 from these
loans, after payment of offering related fees and expenses. The Company issued
to the January 2006 Investors warrants expiring December 31, 2010 (the "January
2006 Bridge Loan Warrants") to purchase in the aggregate up to 250,000 shares of
the Company's Common Stock, at a per share exercise price of $1.50, subject to
adjustment upon certain specified conditions. On April 19, 2006, the maturity
date of these loans was extended to May 21, 2006 and, in connection with such
extension, the Company issued to the January 2006 Bridge Investors warrants to
purchase an additional 50,000 shares of Common Stock on terms and conditions,
including without
F-12
limitation, exercise price and period, identical to the December 2005 Bridge
Warrants and agreed to pay to them in the aggregate $10,000.
On May 5, 2006, the Company paid to the January 2006 Bridge Investors a total of
$290,000 from the proceeds of the May 2006 Private Placement referred to in Note
5 (Private Placement) above in satisfaction of the January 2006 Bridge Notes.
Two of the January 2006 Bridge Investors participated in the May 2006 Private
Placement and, accordingly, $250,000 of the original principal amount of the
January 2006 Bridge Notes issued to these investors was offset against the
purchase price of the securities these investors purchased in the May 2006
Private Placement.
The Company recorded a $40,134 discount on the short term loan based upon the
relative fair values of the January 20, 2006 Bridge Notes and the January 20,
2006 Bridge warrants that is amortizing over the 91day term of the note.
Amortization of the discount on the January 20, 2006 short term loan for the six
months ended June 30, 2006 was $40,134 and is included as interest expense in
the accompanying condensed consolidated statement of operations. The Company is
amortizing the $30,000 original issue discount over the 91day term of the
January 20, 2006 short term loan. Amortization of the discount on the note
payable for the six months ended June 30, 2006 was $30,000 and is included as
interest expense in the accompanying condensed consolidated statements of
operations.
(ii) From February 27 through March 13, 2006, the Company entered into
additional short term loan agreements under which it borrowed the aggregate
amount of $1,500,000 (the "March 2006 Short-Term Loans") from one of the
institutional investors who advanced to the Company a short-term loan in
December 2005. The Company issued to the investor secured promissory notes in
the aggregate principal amount of $1,585,000, representing an original issue
discount of approximately 6% with respect to the principal amount loaned through
the stated maturity date of June 1, 2006. The Company received net proceeds of
$1,328,410 from the proceeds of these loans, after payment of offering related
fees and expenses. The Company issued to the investor five year warrants to
purchase in the aggregate up to 750,000 shares of the Company's Common Stock, at
a per share exercise price of $1.50, subject to adjustment upon certain
specified conditions. The March 2006 Short Term Loans were on terms and
conditions substantially similar to the December 2005 Bridge Loan. On May 5,
2006, the Company paid to this investor $1,585,000 from the proceeds of the May
2006 Private Placement referred to in Note 5 (Private Placement) in satisfaction
of the March 2006 Short-Term Loans.
The Company recorded a $205,182 discount on the notes payable based upon the
relative fair values of the note and the Common Stock purchase warrants that is
amortizing over the term of the note. Amortization of the discount on the note
payable for the six months ended June 30, 2006 was $205,182 and is included as
interest expense in the accompanying condensed consolidated statement of
operations. The Company amortized the $85,000 original issue discount over the
term of the Notes. Amortization of the discount on the notes payable for the six
months ended June 30, 2006 was $85,000 and is included as interest expense in
the accompanying condensed consolidated statements of operations. The Company
paid $171,590 of financing costs on the notes payable which are being amortized
over the term of the Notes which vary from 79 to 92 days. Amortization of the
issue costs on the note payable for the six months ended June 30, 2006 was
$171,590 and is included as interest expense in the accompanying condensed
consolidated statements of operations.
(iii) On April 7, 2006 the Company entered into a Bridge Loan Agreement ("April
2006 Bridge Loan Agreement") with two institutional investors (the "April 2006
Bridge Investors") pursuant to which the April 2006 Bridge Investors loaned to
the Company the aggregate amount of $450,000 (the "April 2006 Bridge Loan").
Pursuant to the April 2006 Bridge Loan Agreement, the Company issued to the
April 2006 Bridge Investor secured promissory notes in the aggregate principal
amount of $466,500 (the "April 2006 Bridge Note"), representing an original
issue discount of approximately 3.5% with respect to the principal amount of
$450,000 through the stated maturity date of June 1, 2006. The Company received
net proceeds of $401,500 from the proceeds of the loan, after the payment of
transaction related fees and expenses. In connection with the April 2006 Bridge
Loan, the Company issued to the April 2006 Bridge Investors five-year warrants
to purchase up to 225,000 shares of Common Stock at a per share exercise price
of $1.50, subject to adjustment under certain specified conditions.
On May 5, 2006, the Company paid to the April 2006 Bridge Investors a total of
$216,500 from the proceeds of the May 2006 Private Placement referred to in Note
5 (Private Placement)in satisfaction of the April 2006 Bridge Notes. As these
investors elected to participate in the May 2006 Private Placement, $250,000 of
the original principal
F-13
amount of the April 2006 Bridge Notes was offset against the purchase price of
the securities that these investors purchased in the May 2006 Private Placement.
The Company recorded a $93,639 discount on the notes payable based upon the
relative fair values of the note and the Common Stock purchase warrants that is
amortizing over the term of the note. Amortization of the discount on the note
payable for the six months ended June 30, 2006 was $93,639 and is included as
interest expense in the accompanying condensed consolidated statement of
operations. The Company amortized the $16,500 original issue discount over the
term of the Notes. Amortization of the discount on the notes payable for the six
months ended June 30, 2006 was $16,500 and is included as interest expense in
the accompanying condensed consolidated statements of operations. The Company
paid $48,500 of issue costs on the notes payable which are being amortized over
the term of the Notes. Amortization of the issue costs on the note payable for
the six months ended June 30, 2006 was $48,500 and is included as interest
expense in the accompanying condensed consolidated statements of operations.
(iv) On April 19, 2006 the Company issued warrants to purchase up to an
additional 150,000 shares of Common Stock, on terms and conditions identical to
the January 2006 Bridge Loan Warrants, as consideration for the extension from
April 21, 2006 to May 21, 2006 of the scheduled maturity date of the December
2005 and January 2006 Bridge Notes, with an aggregate principal amount of
$1,610, 000. In addition the Company agreed to pay these same investors $30,000.
In connection with the extension of the maturity date, the Company recorded a
$73,509 discount to the face values of the bridge notes which was amortized over
the extended term of the notes and is included in interest expense in the
accompanying condensed consolidated statement of operations for the six and
three months ended June 30, 2006.
NOTE 7 - STOCKHOLDERS' EQUITY
COMMON STOCK
During the six months ended June 30, 2006:
The Company issued 1,233,333 shares of Common Stock upon the conversion of 9,250
shares of Series A Preferred Stock representing $925,000 in stated value at a
per share conversion price of $0.75.
The Company issued 2,524,423 shares of Common Stock upon the conversion of
25,150 shares of Series B Preferred Stock representing $2,515,000 in stated
value at per share conversion prices of $1.01 and $0.75.
The Company issued 413,699 shares of Common Stock upon the exercise of stock
options resulting in proceeds of approximately $210,000.
The Company issued 167,319 shares of Common Stock upon the exercise of 431,506
stock warrants. The Company did not receive any proceeds from this cashless
exercise.
The Company issued 250,000 shares of Common Stock with a total fair market value
of $220,000 to a consultant.
The Company issued 76,676 shares of Common Stock valued at a total fair market
value of $61,953 to Series A Preferred Stockholders as payment for accrued stock
dividends. The shares were issued at prices between $0.71 and $1.13 per share
which depending on the fair market price when issued may have been a discount to
the fair market value on the date of issuance.
The Company issued 340,677 shares of Common Stock valued at a total fair market
value of $255,819 to Series B Preferred Stockholders as payment for accrued
stock dividends. The shares were issued at prices between $0.71 and $1.16 per
share which was a discount to the fair market value on the date of issuance.
The Company is obligated to pay liquidated damages to the holders of the Series
A Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued penalties of $294,534.
F-14
The Company is obligated to pay liquidated damages to the holders of the Series
B Preferred Stock as the registration statement relating to the resale of the
Common Stock underlying such preferred stock was not updated to maintain
effectiveness. The Company recorded accrued estimated penalties of $113,467
(estimated through September 30, 2006).
NOTE 8 - MOTOROLA STRATEGIC ALLIANCE AGREEMENT
On April 5, 2006, the Company entered into a Strategic Alliance Agreement (the
"Strategic Alliance Agreement") with Motorola Wireline Networks, Inc.
("Motorola"), a subsidiary of Motorola, Inc., pursuant to which the Company and
Motorola are jointly developing a family of three IP Home gateways (the "Gateway
Products") that will provide expanded support for data, IPTV, High Definition
TV, and Digital Video Recorders using Motorola's existing Multi-Service Access
Platform for exclusive distribution by Motorola under the Motorola brand. Under
the Strategic Alliance Agreement, the Company has also granted Motorola certain
rights with respect to the resale of the Company's products as described below.
The Strategic Alliance Agreement provides that Motorola will pay to the Company
$1.9 million for engineering costs associated with the development of the
Gateway Products, of which as of the date of the filing of this quarterly report
on Form 10-QSB approximately $600,000 has been received and the remainder of
which is payable in installments on the achievement of certain agreed upon
project milestones. Motorola is entitled to terminate the development program at
any time prior to the completion of the development of the Gateway Products and,
in the event that it does so, the Company will be entitled to retain any of the
engineering costs paid or due and owing by Motorola as of the date of
termination. Upon successful completion of all necessary testing, the Gateway
Products will be manufactured by the Company for exclusive sale to Motorola.
Under the Strategic Alliance Agreement, the Company has granted
Motorola the exclusive right to resell the Company's PG1000 and the HG-V100
gateway products, and all derivative or substantially similar products (the
"Exclusive Products") to certain specified leading telecommunications carriers
and their affiliates (the "Exclusive Customers") for a period of 24 months from
the effective date of the agreement as part of Motorola's portfolio of broadband
wireline solutions. The exclusivity may be terminated by the Company unless,
among other things, at least one of the Exclusive Customers shall have accepted
one of the Exclusive Products for lab testing within one year of the effective
date of the Strategic Alliance Agreement and signed a contract to purchase
Exclusive Products (which is reasonably expected to result in revenue to the
Company in a specified minimum amount) within 18 months of the effective date of
the agreement; provided, however, that if these conditions are satisfied with
respect to an Exclusive Customer, then Motorola's exclusivity period for such
Exclusive Customer, then Motorola's exclusivity period for such Exclusive
Customer will be extended for an additional 24 months. At all times the Company
retains the right to sell the Exclusive Products to customers other than the
Exclusive Customers. In addition, the Company also granted Motorola the
non-exclusive right to resell all of its other existing products worldwide.
The Company accounts for the strategic alliance with Motorola under SFAS No. 68
(Research and Development Arrangements). As such, amounts received from Motorola
are netted against costs incurred by the Company. During the six months ended
June 30, 2006 the Company spent $421,231 on development projects related to the
strategic alliance. This resulted in a net advance of $178,769 under the
research and development arrangement and is recorded as a liability on the
balance sheet at June 30, 2006 in the accompanying condensed consolidated
financial statements.
NOTE 9 - PRODUCT ENHANCEMENT
The Company and Lucent Technologies, Inc. ("Lucent") are parties to a
Development and Licensing Agreement effective as of January 2004. In April 2004
and in September 2004, the Company and Lucent entered into supplementary
development agreements to add to the Company's QoStream product line additional
product features and upgrades intended to enhance product competitiveness in
respect of which the Company agreed to pay to Lucent an additional $868,000 upon
receipt of deliverables. As of June 30, 2006, the Company has remitted the
entire $868,000 to Lucent for this development work.
F-15
During May 2005, the Company and Lucent entered into a supplementary development
agreement to add additional product features and developments to the Company's
QoStream product line for agreed upon consideration of approximately $1,100,000.
Under the agreement, payment is due upon delivery and acceptance of the
deliverables by the Company. Certain of the deliverables received by the Company
under such agreement have not been completed in accordance with design and
development criteria specified in the agreement and the Company has not accepted
delivery of these items. Accordingly, the Company has not recorded the expense
and the related amount payable to Lucent concerning the non-accepted
deliverables in the accompanying consolidated financial statements. As of June
30, 2006, $170,000 of internally developed software product costs was
capitalized in connection with this supplementary agreement. See Note 11
(Subsequent Event).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
INVESTOR RELATIONS AGREEMENT
On March 2, 2006 the Company entered into an agreement with a consultant to
provide investor relations services to increase awareness of the Company and its
products. In consideration of services provided, the Company paid to the
consultant approximately $432,000 and issued to the consultant's designee
250,000 restricted shares of the Company's Common Stock under the Company's 2000
Incentive Plan. The Company recorded stock based compensation expense of
$220,000 for the fair market value of the stock issued to the consultant in the
accompanying condensed consolidated statements of operations.
EQUITY LINE
In August 2004, the Company secured a $6 million equity line commitment from an
institutional investor on which it can draw from time to time during a 24 month
period following the effectiveness of a registration statement relating to the
resale of the shares of Common Stock underlying the securities issued pursuant
thereto, subject to certain conditions. The Company undertook to file a
registration statement in respect of such equity line no earlier than the 90th
day following the effective date of the registration statement for the Common
Stock underlying the Series B Preferred Stock (i.e., December 1, 2005), but no
later than the 120th day after such date (i.e. December 31, 2005) discussed in
Note 4 (Financing). The investor may terminate the equity line commitment if the
Company does not timely file the registration statement relating to the equity
line or if such registration statement is not declared effective within 180 days
following the filing thereof. No such registration statement has been filed as
of the filing of this Quarterly Report on Form 10-QSB.
The equity line allows the sale of up to $6 million of Common Stock at 98 % of
the then current market price, but in no event at less than $2.00. The Company
may not draw down more than $500,000 under the equity line during any 30-day
period. The investor is entitled to 5% of the cash proceeds from the sale of the
shares to it by the Company under the equity line. No assurance can be provided
that the equity line will in fact ever become available for use by the Company.
On April 12, 2006, the Company and the equity investor entered in to an
amendment of the $6 million equity line commitment the Company obtained in
August 2004. Under the amendment, the price at which Company has the right to
sell Common Stock to the investor under the equity line was reduced to 89% of
the then-current market price but in no event at less than $1.50 per share. In
addition, under the terms of the amendment the Company agreed to file such
registration statement between 90 and 120 days after the effective date of the
resale registration statement that the Company intends to file in connection
with the May 2006 Private Placement. The amendment also provides that the
exercise price of common stock purchase warrant issued to the equity line
investor in August 2004 will be reduced to $1.50, subject to further adjustment
as therein provided. The equity line investor also agreed to waive the
requirement under the equity line that the Company reserve at all times a
sufficient number of shares of its Common Stock to satisfy its obligations under
the equity line and the warrant, pending the amendment of the Company's
certificate of incorporation to increase the number of shares of Common Stock
authorized for issuance.
DISPUTED PAYABLE
Stifel Nicolaus & Company ("Stifel"), the successor-in-interest to Legg Mason
Walker Wood LLC, an investment banking firm, has made a demand on the Company
for payment of $700,000 as fees for financial advisory services
F-16
due in connection with the certain of the bridge loans referred to in Note 6.
Management believes that Stifel's position, which is based on Stifel's
interpretation of a placement agency agreement entered into by the Company and
the investment bank in September 2005 and terminated by the Company in December
2005, is without merit. It is the Company's intention to defend itself against
any claim for payment asserted by Stifel vigorously. The Company also reserves
the right to dispute the balance due on the initial retainer payable under the
agreement as well as related out-of-pocket expenses claimed by Stifel, which
together total approximately $96,000, which are recorded and included in
accounts payable as of June 30, 2006 in the accompanying condensed consolidated
financial statements.
NOTE 11 - SUBSEQUENT EVENTS
A. INCREASE IN AUTHORIZED COMMON STOCK
On July 19, 2006, the Company's stockholders approved an increase in the
authorized shares of Common Stock that the Company is authorized to issue from
time to time to 100,000,000 shares. Such amount has been reflected retroactively
in the accompanying condensed consolidated balance sheet at June 30, 2006.
B. PRODUCT ENHANCEMENT
On July 14, 2006, the Company and Lucent entered into the Amendment to Prior
Agreements, dated as of July 10, 2006 (the "Amendment"), pursuant to which they
have amended the terms of a number of prior agreements entered into by them,
including, without limitation, the (i) Development and Licensing Agreement of
January 6, 2004 and (ii) the Supplementary Development Agreement between the
Company and Lucent effective as of May 5, 2005 as well as various supplementary
agreements and amendments thereto entered into by them (collectively the
"Agreements"). Under the terms of the Amendment, in lieu of the current
royalties of 3.2% of certain revenues payable (under certain circumstances) to
Lucent under the Agreements, the Company will be required to pay to Lucent
royalties in the amount of 1.5% of specified revenue sources from the Company's
Gateway and Switch products that include Lucent owned technologies, provided,
that, no royalties accrue or become payable until July 10, 2008. In addition,
Lucent waived payments aggregating $835,000 that were outstanding under the
Agreements in respect of deliverables received by the Company from Lucent under
the Agreements upon the Company's remittal to Lucent of $200,000 in July of
2006. In addition, the parties agreed to terminate the license that the Company
was granted to Lucent owned patents under the Agreements; accordingly, the
Company is no longer obligated to make any payments to Lucent, if any, owing
under such patent license. The termination of the patent license does not affect
the Company's rights under the Agreements to develop and sell products based
upon or incorporating Lucent owned technologies.
C. INVESTOR RELATION AGREEMENTS
In August 2006, the Company entered into an agreement with a consultant to
provide investor relations services to increase awareness of the Company and its
products. In consideration of services provided, the Company paid to the
consultant approximately $260,000 and, in September 2006, issued to the
consultant 400,000 restricted shares of the Company's Common Stock under the
Company's 2000 Incentive Plan.
In June 2006, the Company entered into an agreement with a consultant to provide
investor relations services to the Company. Under the agreement the Company pays
to the consultant $7,500 per month and, in September 2006, has issued to such
consultant 150,000 restricted shares of the Company's Common Stock under the
Company's 2000 Incentive Plan.
D. SHORT TERM WORKING CAPITAL LOANS
On October 23, 2006 (the "Initial Closing Date"), pursuant to the
terms of a Bridge Loan Agreement, dated as of October 10, 2006 (the "Loan
Agreement"), the Company obtained a short-term working capital loan
(hereinafter, the "Loan"; together with any subsequent Loan, the "Loans") in the
gross amount of $600,000. The Loan was made in response to the Company's offer
(the "Offer") to the purchasers of its Series A 7% Convertible Preferred Stock
issued in August 2004 (hereinafter the "Series A Shares") and its Series B 8%
Convertible Preferred Stock issued in April-May 2005 (hereinafter the "Series B
Shares") to reinstate elements of the anti-dilution price
F-17
protection that was originally included in the agreements (such protection,
respectively, the "Price Protection Provisions") with the purchasers of these
securities in consideration of new Loans that these investors make to the
Company. By their terms, the relevant Price Protection Provisions expired in
August 2005 with respect to the Series A Shares and in August 2006 with respect
to the Series B Shares. Under the Company's offer, each investor who advances a
Loan to the Company (each, a "Qualified Investor") will have the benefit of the
relevant Price Protection Provisions with respect to three times the principal
amount that is advanced to the Company by that Qualified Investor (hereinafter,
the "Protected Amount") in connection with a Loan. Under the terms of the Offer,
the Price Protection Provisions will be operative with respect to Series A
Shares and/or Series B Shares, as well as the warrants issued in connection
therewith (the "Series A Warrants" or the "Series B Warrants", as the case may
be), held by such Qualified Investor on the day on which the Loan is advanced to
the Company from that closing date through August 31, 2007 (the "Current
Protection Period"). The Company's Offer is being made to obtain Loans for up to
a maximum of $2 million in advances by Qualified Investors. Additional Loans, if
any, will be advanced to the Company in separate closings subsequent to the
Initial Closing Date. Purchasers of the Series A Shares and/or Series B Shares
who do not make any Loans pursuant to the Offer will not have the benefit of the
Price Protection Provisions during this period.
Pursuant to the Loan Agreement, the Loan from each Qualified Investor
will be evidenced by the Company's promissory note (each, a "Note" and
collectively, "Notes") in the principal amount equal to the amount advanced by
such Qualified Investor multiplied by the Applicable Percentage. The "Applicable
Percentage" is the percentage which is equal to (x) one hundred percent (100%),
plus (y) (1) the percent equal to twenty-four percent (24%), multiplied by (2)
the fraction, of which the numerator is the number of days from the closing date
of the Loan for the relevant Qualified Investor until February 20, 2007 (the
"Stated Maturity Date"), which is 120 days after the Initial Closing Date, and
the denominator is 360. Each of the Notes, whether issued on the Initial Closing
Date or on a subsequent closing date, is scheduled to mature on the date (the
"Maturity Date") which is the earliest of (i) the Stated Maturity Date, which is
120 days after the Initial Closing Date, (ii) the date on which the Company
consummates a subsequent financing that generates, on a cumulative basis with
all other financings after the Initial Closing Date (except for the proceeds of
the Loan and certain exceptions specified in the Notes), gross proceeds to the
Company of at least $2 million (the "Subsequent Capital Financing") or (iii) the
date on which a holder of a Note accelerates payment of the Note while there is
an Event of Default existing under that Note. Prior to the Maturity Date, the
Company may, at its option, prepay the Notes in whole or in part. If not paid at
maturity, interest on the Notes will accrue at 14% per annum from the Maturity
Date until the actual date of payment.
Each of the respective Price Protection Provisions originally
contained in the securities purchase agreements previously entered into by the
Company and the purchasers of the Series A Shares and the Series B Shares,
respectively, provides that if the Company enters into a "Lower Price
Transaction" (as defined in the relevant such purchase agreement) during a
specific period specified in each such agreement, where the (i) lowest per share
purchase price contemplated thereunder or the lowest conversion price which
would be applicable under the terms of such transaction is below the then
current conversion price and/or (ii) the lowest exercise price of any warrants
issued thereunder is lower than the then current exercise prices of the warrants
issued in connection with such Series A Shares of Series B Shares, as the case
may be, then the terms of any unconverted share of the relevant Series A Shares
or Series B Shares shall be modified to adjust the relevant conversion price
and/or the terms of any unexercised warrants issued in connection therewith
shall be modified to adjust the relevant warrant exercise price, and/or the
number of warrant shares may be increased depending on the terms of the Lower
Price Transaction. The reinstatement of the Price Protective Provisions for the
Protected Amount pursuant to the Company's Offer relate solely with respect to
the occurrence of a Lower Price Transaction during the Current Protection Period
and not to any other protective provision that may be included in such
agreements.
In connection with the placement of the Notes, the Company paid or
will pay to a registered broker dealer which acted as placement agent (the
"Placement Agent") a cash fee equal to 10% of the aggregate amount advanced to
the Company on account of the Notes. The Company anticipates that there will be
additional closing related fees and expenses.
F-18
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet
At December 31, 2005 F-2
Consolidated Statements of Operations
for the Years Ended December 31, 2005 and 2004
and from Inception (July 14, 1994) to December 31, 2005 F-3
Consolidated Statements of Comprehensive Loss
for the Years Ended December 31, 2005 and 2004
and from Inception (July 14, 1994) to December 31, 2005 F-4
Consolidated Statements of Stockholders' (Deficiency) Equity
from Inception (July 14, 1994) to December 31, 2005 F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2005 and 2004 F-11
and from Inception (July 14, 1994) to December 31, 2005
Notes to the Consolidated Financial Statements F-13
F-i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of Amedia
Networks, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Amedia Networks,
Inc. and Subsidiary (a development stage company) (the "Company") as of December
31, 2005 and the related consolidated statements of operations, comprehensive
loss, stockholders' equity, and cash flows for the years ended December 31, 2005
and 2004 and for the period from January 1, 2003 to December 31, 2005 (for which
the statements of operations and cash flows are not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
The consolidated financial statements of the Company for the period from July
14, 1994 (Inception) to December 31, 2002 were audited by other auditors whose
report, dated March 20, 2003, expressed an unqualified opinion on those
statements and included an explanatory paragraph regarding the Company's ability
to continue as a going concern. The consolidated financial statements for the
period from July 14, 1994 (Inception) to December 31, 2002 reflect a net loss of
$40,370,429 of the total inception to date net loss of $42,586,299. The other
auditors' report has been furnished to us, and our opinion, insofar as it
related to the amounts included for such prior periods is based solely on the
report of such other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Amedia Networks, Inc. and
Subsidiary as of December 31, 2005, and the results of their operations and
their cash flows for the years ended December 31, 2005 and 2004 and for the
period from July 14, 1994 (Inception) to December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
consolidated financial statements, the Company has incurred significant
operating losses resulting in cash flow deficiencies from operations. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding this matter also is described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ MARCUM & KLIEGMAN LLP
New York, New York
February 27, 2006 (except for Note
13A(ii), as to which the date is March
13, 2006, Note 13A(iii), as to which the
date is April 7, 2006, Note 13C, as to
which the date is March 2, 2006, Note
13D, as to which the date is April 5,
2006, Note 13E, as to which the date is
April 12, 2006, and Note 13F, as to
which the date is April 7, 2006)
F-1
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
December 31, 2005
ASSETS
Current assets
Cash and cash equivalents $ 333,787
Inventories 929,017
Prepaid expenses 79,193
------------
Total current assets 1,341,997
------------
Property and equipment - net 690,884
------------
Other assets
Capitalized software costs 1,260,382
Deferred financing costs 112,323
Security deposit 46,750
------------
Total other assets 1,419,455
------------
Total assets $ 3,452,336
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 1,456,578
Accrued expenses 561,817
Notes payable, net of unamortized discounts of $172,945 907,055
Current portion of capital leases 4,965
------------
Total current liabilities 2,930,415
------------
Long-term liabilities
Capital leases, less current maturities 12,265
------------
Total liabilities 2,942,680
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized; Series A convertible
preferred stock, 52,500 shares authorized; 21,178
issued and outstanding
($2,117,800 liquidation preference) 21
Series B convertible preferred stock,
85,000 shares authorized; 71,150 issued and outstanding
($7,115,000 liquidation preference) 71
Common stock, $.001 par value;
75,000,000 shares authorized; 22,315,851
issued and outstanding 22,316
Additional paid-in capital 58,781,193
Deficit accumulated during the development stage (58,167,320)
Deferred compensation (126,625)
------------
Total stockholders' equity 509,656
------------
Total liabilities and stockholders' equity $ 3,452,336
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Twelve Months Inception
Ended (July 14,
December 31, 1994) to
-------------------------- December 31,
2005 2004 2005
------------ ----------- ------------
Sales $ 5,548 $ -- $ 5,548
------------ ----------- ------------
Cost of goods sold 6,078 -- 6,078
------------ ----------- ------------
Gross loss (530) -- (530)
------------ ----------- ------------
Expenses
Research and development (1) 3,975,852 3,222,695 13,358,917
Sales and marketing (1) 2,422,999 505,313 12,722,327
General and administrative (1) 2,209,171 1,860,959 22,691,083
Bad debt expense -- -- 161,000
------------ ----------- ------------
Total expenses 8,608,022 5,588,967 48,933,327
------------ ----------- ------------
Operating loss (8,608,552) (5,588,967) (48,933,857)
------------ ----------- ------------
Other expense (income)
Legal settlement -- -- 565,833
Late filing penalty on preferred stock registration 86,742 199,500 286,242
Realized gain of foreign currency translation -- (81,007) (81,007)
Loss on investment -- -- 17,000
Other income -- -- (75,000)
Net losses of affiliate -- -- 1,196,656
Impairment loss on investment in affiliate -- -- 748,690
Revenue from copy protection business -- -- (125,724)
Gain on sale of copy protection business -- -- (5,708,328)
Gain on sale of investment in affiliate -- -- (40,000)
Loss on disposition of fixed assets 1,692 -- 30,873
Amortization of deferred financing costs -- -- 4,516,775
Impaired offering costs 267,404 -- 267,404
Interest income (36,006) (24,988) (984,735)
Interest expense 286,889 -- 2,253,036
------------ ----------- ------------
Total other expense 606,721 93,505 2,867,715
------------ ----------- ------------
Net loss $ (9,215,273) $(5,682,472) $(51,801,572)
============ =========== ============
Deemed dividend on convertible preferred stock 3,076,104 2,494,753 5,570,857
Dividend on convertible preferred stock 649,905 144,986 794,891
------------ ----------- ------------
Net loss applicable to common stockholders $(12,941,282) $(8,322,211) $(58,167,320)
============ =========== ============
Per share data:
Basic and diluted $ (0.64) $ (0.51)
============ ===========
Weighted average number
of common shares used in
basic and diluted loss per share 20,378,250 16,440,630
============ ===========
(1) Includes non-cash, stock-based compensation expense as follows:
Research and development $ 18,573 $ -- $ 474,812
Sales and marketing -- -- 5,336,558
General and administrative 73,592 85,850 5,772,355
------------ ----------- ------------
$ 92,165 $ 85,850 $ 11,583,725
============ =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Year Inception
Ended (July 14,
December 31, 1994) to
------------------------- December 31,
2005 2004 2004
----------- ----------- ------------
Net loss $(9,215,273) $(5,682,472) $(51,801,572)
Other comprehensive loss
Foreign currency translation adjustments -- (81,007) --
----------- ----------- ------------
Comprehensive loss $(9,215,273) $(5,763,479) $(51,801,572)
=========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
----------------------------------
Series A Series B Common Stock
---------------- --------------- --------------------
Shares Amount Shares Amount Shares Amount
------- ------ ------ ------ ---------- -------
Balances at July 14, 1994 (date of inception) -- $ -- -- $-- -- $ --
Issuances of common stock, par value $.001
Services rendered 1,200,000 1,200
Cash 1,200,000 1,200
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1994 2,400,000 2,400
Common stock contributed (561,453) (561)
Issuances of common stock, par value $.001
Services rendered 361,453 361
Stock options and warrants granted
Foreign currency translation adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1995 2,200,000 2,200
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 850,000 850
Foreign currency translation adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1996 3,050,000 3,050
Common stock contributed (135,000) (135)
Issuances of common stock, par value $.001
Cash, net of offering costs of $832,551 908,000 908
Services rendered 74,000 74
Exercise of options 374,548 375
Common stock subscriptions Sale of
Underwriters warrants Stock options and
warrants granted Amortization of deferred
compensation Foreign currency translation
adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1997 4,271,548 4,272
Common stock subscriptions 16,000 16
Common Stock forfeited (1,000,000) (1,000)
Transfer of temporary equity to permanent
capital 15,000 15
Issuances of common stock, par value $.001
Cash 41,667 42
Services rendered 244,000 244
Stock options and warrants granted
(cancelled) Discount relating to shares
and warrants issued 156,111 156
Amortization of deferred compensation
Warrant exchange 432,000 432
Foreign currency translation adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1998 4,176,326 4,177
Issuances of common stock, par value $.001
Cash 314,774 315
Services rendered 1,227,000 1,227
Exercise of option 1,714,952 1,715
Stock options granted (cancelled)
Conversion of debt into common stock 3,220,508 3,221
Fair value of warrants associated with
financing agreement
Amortization of deferred compensation
Value assigned to beneficial conversion
feature of convertible notes
Foreign currency translation adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 1999 10,653,560 10,654
F-5
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 3,680,937 3,681
Services rendered 16,269 16
Exercise of options and warrants 3,005,574 3,006
Stock options granted Amortization of
deferred compensation Foreign currency
translation adjustment Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 2000 17,356,340 17,357
Issuances of common stock, par value $.001
Exercise of options and warrants 237,556 238
Stock options granted Amortization of
deferred compensation Foreign currency
translation adjustment Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 2001 17,593,896 17,594
Issuances of common stock, par value $.001
Exercise of options and warrants 667,671 668
Stock options granted Amortization of
deferred compensation Foreign currency
translation adjustment
Net loss
------- ---- ------ --- ---------- -------
Balances at December 31, 2002 18,261,567 18,262
Issuances of common stock, par value $.001
Exercise of options and warrants 60,000 60
Stock options granted (forfeited)
Amortization of deferred compensation
Macrovision sale (1,880,937) (1,881)
Foreign currency translation adjustment
Net income
------- ---- ------ --- ---------- -------
Balances at December 31, 2003 16,440,630 16,441
Issuances of preferred stock and warrants,
net of offering costs of $607,570 52,500 52
Issuance of warrants
Stock options and warrants granted
Amortization of deferred compensation
Realized gain of foreign currency translation
Net loss
Deemed dividend on convertible preferred
stock
Dividend on convertible preferred stock
------- ---- ------ --- ---------- -------
Balances at December 31, 2004 52,500 52 16,440,630 16,441
Issuances of Series B preferred stock and
warrants, 77,650 78
Series A preferred stock converted into
common (31,322) (31) 4,176,262 4,176
Series B preferred stock converted into
common (6,500) (7) 643,564 644
Warrants issued for Note Payable
Warrants issued for bridge loan
Stock options and warrants granted
Stock warrants exercised 251,827 252
Amortization of deferred compensation
Accrued penalty paid in common stock 15,200 15
Impaired offering costs
Net loss
Deemed dividend on convertible preferred
stock
Dividend on convertible preferred stock 788,368 788
------- ---- ------ --- ---------- -------
Balances at December 31, 2005 21,178 $ 21 71,150 $71 22,315,851 22,316
======= ==== ====== === ========== =======
F-6
Common Stock Foreign Accumulated
Subscribed Additional Currency During
------------------- Paid-in Translation Development
Shares Amount Capital Adjustment Stage
------- --------- ----------- ------------ ------------
Balances at July 14, 1994 (date of inception) -- $ -- $ -- $ -- $ --
Issuances of common stock, par value $.001
Services rendered
Cash 23,800
Net loss (42,085)
------- --------- ----------- -------- ------------
Balances at December 31, 1994 -- -- 23,800 (42,085)
Common stock contributed 561
Issuances of common stock, par value $.001
Services rendered 17,712
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652
Net loss (896,663)
------- --------- ----------- -------- ------------
Balances at December 31, 1995 -- -- 42,673 22,652 (938,748)
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 362,683
Foreign currency translation adjustment 35,044
Net loss (1,121,211)
------- --------- ----------- -------- ------------
Balances at December 31, 1996 -- -- 405,356 57,696 (2,059,959)
Common stock contributed 135
Issuances of common stock, par value $.001
Cash, net of offering costs of $832,551 5,000,440
Services rendered 832,551
Exercise of options 3,370
Common stock subscriptions 16,000 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted 1,875,343
Amortization of deferred compensation
Foreign currency translation adjustment (19,667)
Net loss (4,119,612)
------- --------- ----------- -------- ------------
Balances at December 31, 1997 16,000 100,000 8,117,275 38,029 (6,179,571)
Common stock subscriptions (16,000) (100,000) 99,984
Common Stock forfeited 1,000
Transfer of temporary equity to permanent
capital 77,141
Issuances of common stock, par value $.001
Cash 24,958
Services rendered 620,344
Stock options and warrants granted (cancelled) (255,992)
Discount relating to shares and warrants issued 486,307
Amortization of deferred compensation
Warrant exchange (432)
Foreign currency translation adjustment 41,386
Net loss (5,578,540)
------- --------- ----------- -------- ------------
Balances at December 31, 1998 -- -- 9,170,585 79,415 (11,758,111)
Issuances of common stock, par value $.001
Cash 225,140
Services rendered 1,669,548
Exercise of option 1,401,660
Stock options granted (cancelled) 4,449,015
Conversion of debt into common stock 3,376,748
Fair value of warrants associated with
financing agreement 3,845,400
Amortization of deferred compensation
Value assigned to beneficial conversion
feature of convertible notes 572,505
Foreign currency translation adjustment (22,444)
Net loss (13,072,237)
------- --------- ----------- -------- ------------
Balances at December 31, 1999 -- -- 24,710,602 56,971 (24,830,348)
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 13,266,319
Services rendered 114,609
Exercise of options and warrants 220,716
Stock options granted 2,028,720
Amortization of deferred compensation
Foreign currency translation adjustment (10,725)
Net loss (4,796,693)
------- --------- ----------- -------- ------------
Balances at December 31, 2000 -- -- 40,340,966 46,246 (29,627,041)
Issuances of common stock, par value $.001
Exercise of options and warrants 17,012
Stock options granted 168,604
F-7
Amortization of deferred compensation
Foreign currency translation adjustment (9,312)
Net loss (5,498,637)
------- --------- ----------- -------- ------------
Balances at December 31, 2001 -- -- 40,526,583 36,934 (35,125,678)
Issuances of common stock, par value $.001
Exercise of options and warrants 1,314
Stock options granted 5,696
Amortization of deferred compensation
Foreign currency translation adjustment 47,336
Net loss (5,244,751)
------- --------- ----------- -------- ------------
Balances at December 31, 2002 -- -- 40,533,593 84,270 (40,370,429)
Issuances of common stock, par value $.001
Exercise of options and warrants
Stock options granted (forfeited) (3,611)
Amortization of deferred compensation
Macrovision sale (656,506)
Foreign currency translation adjustment (3,263)
Net income 3,466,602
------- --------- ----------- -------- ------------
Balances at December 31, 2003 -- -- 39,873,476 81,007 (36,903,827)
Issuances of preferred stock and warrants,
net of offering costs of $607,570 4,642,378
Issuance of warrants 267,404
Stock options and warrants granted 179,379
Amortization of deferred compensation
Realized gain of foreign currency translation (81,007)
Net loss (5,682,472)
Deemed dividend on convertible preferred
stock 2,494,753 (2,494,753)
Dividend on convertible preferred stock (144,986)
------- --------- ----------- -------- ------------
Balances at December 31, 2004 -- -- 47,457,390 -- (45,226,038)
Issuances of Series B preferred stock and
warrants, 7,084,092
Series A preferred stock converted into
common (4,145)
Series B preferred stock converted into
common (637)
Warrants issued for Note Payable 108,660
Warrants issued for bridge loan 104,985
Stock options and warrants granted 125,261
Stock warrants exercised 188,978
Amortization of deferred compensation
Accrued penalty paid in common stock 14,121
Impaired offering costs 267,404
Net loss (9,215,273)
Deemed dividend on convertible preferred
stock 3,076,104 (3,076,104)
Dividend on convertible preferred stock 626,384 (649,905)
------- --------- ----------- -------- ------------
Balances at December 31, 2005 -- $ -- 58,781,193 $ -- $(58,167,320)
======= ========= =========== ======== ============
F-8
Deferred Deferred
Offering Costs compensation Total
-------------- ------------ ------------
Balances at July 14, 1994 (date of inception) $ -- $ -- $ --
Issuances of common stock, par value $.001
Services rendered 1,200
Cash 25,000
Net loss (42,085)
--------- ------------ ------------
Balances at December 31, 1994 -- -- (15,885)
Common stock contributed
Issuances of common stock, par value $.001
Services rendered 18,073
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652
Net loss (896,663)
--------- ------------ ------------
Balances at December 31, 1995 -- -- (871,223)
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 363,533
Foreign currency translation adjustment 35,044
Net loss (1,121,211)
--------- ------------ ------------
Balances at December 31, 1996 -- -- (1,593,857)
Common stock contributed --
Issuances of common stock, par value $.001
Cash, net of offering costs of $832,551 5,001,348
Services rendered (500,000) 332,625
Exercise of options 3,745
Common stock subscriptions 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted (1,875,343) --
Amortization of deferred compensation 972,567 972,567
Foreign currency translation adjustment (19,667)
Net loss (4,119,612)
--------- ------------ ------------
Balances at December 31, 1997 -- (1,402,776) 677,229
Common stock subscriptions --
Common Stock forfeited --
Transfer of temporary equity to permanent
capital 77,156
Issuances of common stock, par value $.001
Cash 25,000
Services rendered (620,588) --
Stock options and warrants granted
(cancelled) 255,992 --
Discount relating to shares and warrants
issued 486,463
Amortization of deferred compensation 1,173,139 1,173,139
Warrant exchange --
Foreign currency translation adjustment 41,386
Net loss (5,578,540)
--------- ------------ ------------
Balances at December 31, 1998 -- (594,233) (3,098,167)
Issuances of common stock, par value $.001
Cash 225,455
Services rendered (445,725) 1,225,050
Exercise of option 1,403,375
Stock options granted (cancelled) (613,435) 3,835,580
Conversion of debt into common stock 3,379,969
Fair value of warrants associated with
financing agreement 3,845,400
Amortization of deferred compensation 1,374,518 1,374,518
Value assigned to beneficial conversion
feature of convertible notes 572,505
Foreign currency translation adjustment (22,444)
Net loss (13,072,237)
--------- ------------ ------------
Balances at December 31, 1999 -- (278,875) (330,996)
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 13,270,000
Services rendered 114,625
Exercise of options and warrants 223,722
Stock options granted (2,028,720) --
Amortization of deferred compensation 1,527,024 1,527,024
Foreign currency translation adjustment (10,725)
Net loss (4,796,693)
--------- ------------ ------------
Balances at December 31, 2000 -- (780,571) 9,996,957
Issuances of common stock, par value $.001
Exercise of options and warrants 17,250
Stock options granted (168,604) --
Amortization of deferred compensation 909,959 909,959
Foreign currency translation adjustment (9,312)
Net loss (5,498,637)
--------- ------------ ------------
Balances at December 31, 2001 -- (39,216) 5,416,217
Issuances of common stock, par value $.001
Exercise of options and warrants 1,982
Stock options granted (5,696) --
Amortization of deferred compensation 35,251 35,251
Foreign currency translation adjustment 47,336
Net loss (5,244,751)
--------- ------------ ------------
Balances at December 31, 2002 -- (9,661) 256,035
F-9
Issuances of common stock, par value $.001
Exercise of options and warrants 60
Stock options granted (forfeited) 3,611 --
Amortization of deferred compensation 6,050 6,050
Macrovision sale (658,387)
Foreign currency translation adjustment (3,263)
Net income 3,466,602
--------- ------------ ------------
Balances at December 31, 2003 -- -- 3,067,097
Issuances of preferred stock and warrants,
net of offering costs of $607,570 4,642,430
Issuance of warrants (267,404) --
Stock options and warrants granted (179,379) --
Amortization of deferred compensation 85,850 85,850
Realized gain of foreign currency translation (81,007)
Net loss (5,682,472)
Deemed dividend on convertible preferred
stock --
Dividend on convertible preferred stock (144,986)
--------- ------------ ------------
Balances at December 31, 2004 (267,404) (93,529) 1,886,912
Issuances of Series B preferred stock and
warrants, 7,084,170
Series A preferred stock converted into
common Series B preferred stock converted
into common
Warrants issued for Note Payable 108,660
Warrants issued for bridge loan 104,985
Stock options and warrants granted (125,261) --
Stock warrants exercised 189,230
Amortization of deferred compensation 92,165 92,165
Accrued penalty paid in common stock 14,136
Impaired offering costs 267,404
Net loss (9,215,273)
Deemed dividend on convertible preferred
stock --
Dividend on convertible preferred stock (22,733)
--------- ------------ ------------
Balances at December 31, 2005 $ $ (126,625) $ 509,656
========= ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months From
Ended Inception
December 31, (July 14, 1994)
------------------------- to December 31,
2005 2004 2005
----------- ----------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(9,215,273) $(5,682,472) $(51,801,572)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 123,117 9,908 1,086,382
Forgiveness of note receivable, officer -- -- 100,000
Loss from disposition of fixed assets 1,692 -- 197,065
Bad debt expense -- -- 161,000
Amortization of note discount and finance costs 130,907 -- 4,797,132
Impaired offering costs 267,404 -- 267,404
Foreign currency translation adjustment and realized gain -- (81,007) (82,535)
Beneficial conversion feature of convertible debt -- -- 572,505
Stock, warrants and options issued for services and settlement 92,165 85,850 11,756,686
Payment of common stock issued with guaranteed selling price -- -- (155,344)
Net losses of affiliate -- -- 1,196,656
Impairment loss on investment in affiliate -- -- 748,690
Gain on sale of Copy Protection Business -- -- (5,708,328)
Gain on sale of investment in affiliate -- -- (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable -- -- 554
Inventories (929,017) -- (929,017)
Prepaid expenses 51,008 90,377 (108,851)
Other assets (46,750) -- (46,750)
Accounts payable 1,189,706 173,726 909,384
Accrued expenses 316,970 229,992 1,657,591
Accrued severance pay -- (64,734) (122,363)
Interest payable -- -- 251,019
----------- ----------- ------------
Net cash used by operating activities (8,018,071) (5,238,360) (35,292,692)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets -- -- 68,594
Purchases of property and equipment (643,360) (159,783) (1,805,745)
Intangible asset (1,260,382) -- (1,260,382)
Proceeds from sale of Copy Protection Business -- -- 5,050,000
Proceeds from sale of investment in affiliate -- -- 40,000
Investment in ComSign, Ltd. -- -- (2,000,000)
Increase in note receivable, officer -- -- (100,000)
Increase in note receivable -- -- (130,000)
Increase in organization costs -- -- (7,680)
----------- ----------- ------------
Net cash used by investing activities (1,903,742) (159,783) (145,213)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred stock 7,084,170 4,642,430 11,726,600
Proceeds from exercise of warrants 189,230 -- 189,230
Proceeds from issuance of common stock -- -- 21,177,354
Stock offering costs -- -- (475,664)
Deferred financing costs (122,530) -- (804,842)
Proceeds from note payable 1,000,000 -- 1,000,000
Proceeds from short-term borrowings -- -- 1,356,155
Payments on capital lease obligations (2,928) -- (2,928)
Proceeds from long-term debt -- -- 2,751,825
Proceeds from convertible debentures -- -- 2,000,000
Repayment of short-term borrowings -- -- (1,357,082)
Repayments of long-term debt -- -- (1,615,825)
Dividends paid to preferred stockholders (167,719) -- (167,719)
----------- ----------- ------------
Net cash provided by financing activities 7,980,223 4,642,430 35,777,104
----------- ----------- ------------
Effect of exchange rate changes on cash -- -- (5,412)
----------- ----------- ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,941,590) (755,713) 333,787
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,275,377 3,031,090 --
----------- ----------- ------------
F-11
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 333,787 $ 2,275,377 $ 333,787
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 5,514 $ -- $ 482,492
=========== =========== ============
Non-cash investing and financing activities:
Deemed dividend in connection with sale
of convertible preferred stock $ 3,076,104 $ 2,494,753 $ 5,570,857
=========== =========== ============
Accrual of dividend on convertible preferred stock $ -- $ 144,986 $ 144,986
=========== =========== ============
Deferred offering costs $ -- $ 267,404 $ 267,404
=========== =========== ============
Deferred compensation $ -- $ 179,379 $ 179,379
=========== =========== ============
Issuance of common stock warrants in connection
with note payable $ 108,660 $ -- $ 108,660
=========== =========== ============
Original issue discount on notes payable $ 80,000 $ -- $ 80,000
=========== =========== ============
Issuance of common stock warrants in connection
with bridge loan $ 104,985 $ -- $ 104,985
=========== =========== ============
Capital leases $ 20,158 $ -- $ 20,158
=========== =========== ============
Late filing penalty on preferred stock registration
paid in common stock $ 14,136 $ -- $ 14,136
=========== =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
AMEDIA NETWORKS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND DEVELOPMENT STAGE OPERATIONS
Amedia Networks, Inc. (hereinafter, the "Company" or "Amedia"), is a development
stage company that designs, develops and markets technology-based broadband
access solutions for voice, video and data services. The Company's products are
designed to provide key functionality that enables service providers to deliver
"triple play" (voice, video and data) broadband communication to their
subscribers. These products are designed for placement at various points in the
network infrastructure layout and can be deployed with optical fibers as well as
with copper wires. A significant portion of the core technologies underlying the
Company's initial products were co-developed with Lucent Technologies, Inc.
("Lucent") at Lucent's Bell Labs in New Jersey pursuant to a Development and
Licensing Agreement with Lucent dated as of January 6, 2004 (the "Development
and Licensing Agreement") entered into by the Company and Lucent. Under the
Development and Licensing Agreement, Lucent has granted to Amedia a worldwide
and perpetual non-exclusive license to manufacture, develop and sell products
designed to deliver broadband based access solutions utilizing the Lucent owned
technologies and related patents. The Company is marketing its initial products
to communications carriers, municipal authorities and communication equipment
companies.
The Company has been engaged in the broadband access communications business
since March 2004. From its inception in July 1994 through May 2003, Amedia was
primarily engaged in the business of designing and developing technologies that
provide copy protection for electronic content distributed on optical media and
the Internet under the name of "TTR Technologies, Inc." In May 2003, the Company
sold its copy protection business. In May 2004, the Company changed its name to
"Amedia Networks, Inc."
NOTE 2 - GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses for the past
several years, the majority of which are related to the development of the
Company's copy protection business which it sold in May 2003. These losses have
produced operating cash flow deficiencies, and negative working capital. As
indicated in the accompanying consolidated financial statements, as of December
31, 2005, the Company had a cash balance of $333,787 and incurred a net loss
applicable to common stockholders of $12,941,982 for the year ended December 31,
2005. The Company expects to incur additional losses for the foreseeable future
and will need to raise additional funds in order to realize its business plan.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
The Company's future operations are dependent upon management's ability to find
sources of additional equity capital. The Company needs to raise additional
funds on an immediate basis to continue to meet its liquidity needs, repay
short-term loans that mature on April 21, 2006, realize its current business
plan and maintain operations. Management of the Company is continuing its
efforts to secure funds through equity and/or debt instruments for its
operations. In December 2005, the Company engaged an investment bank to assist
the Company, on a best efforts basis, in raising funds. The period during which
the investment bank was entitled to provide such services to the Company on an
exclusive basis expired in March 2006. To date, the Company has not received a
financing proposal from any investor introduced to it by the investment bank.
The Company has received a non-binding financing proposal from a party not
introduced to it by the investment bank which is subject to, among other things,
the negotiation and execution of legally binding agreements. Presently, the
Company does not have any financing commitment from any person and there can be
no assurance that additional capital will be available to the Company on
commercially acceptable terms or at all. The inability to obtain such financing
will have a material adverse effect on the Company, its condition and prospects.
Furthermore, it is anticipated that any successful financing will have a
F-13
significant dilutive effect on existing stockholders. As more fully described in
Note 5 below, the Company funded its operations during fiscal year 2005 from the
private placement of its convertible preferred stock and short-term notes
resulting in approximate net proceeds to the Company of $7.09 million and
$887,000, respectively. In addition, from January 1 to April 7 2006, the Company
raised net proceeds of $2,234,880 from short term loans. See Note 13.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, TTR Ltd., which has been inactive since December
2002. All material inter-company accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
(the "U.S.") requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and revenue and
expenses during the period reported. These estimates include assessing the
collectability of accounts receivable, the use and recoverability of inventory,
the realization of deferred tax assets, tax contingencies and valuation
allowances, employee benefits, useful lives for depreciation and amortization
periods of tangible and intangible assets, and long-lived asset impairments,
among others. The markets for the Company's products are characterized by
intense competition, rapid technological development, evolving standards, short
product life cycles and price competition, all of which could impact the future
realizable value of the Company's assets. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they
are determined to be necessary. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the financial statements for the year ended December 31, 2004
have been reclassified for comparative purposes to conform to the presentation
in the financial statements for the year ended December 31, 2005. These
reclassifications had no effect on the previously reported net loss.
CASH EQUIVALENTS
This includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have maturities of three months or less
when purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments, consisting primarily
of cash equivalents, accounts payable and accrued expenses, are carried at, or
approximate, fair value because of their short-term nature or because they carry
market rates of interest.
STOCK BASED COMPENSATION
As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which amended SFAS No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," the Company has elected to
continue to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangements, as defined by Accounting Principles Board
Opinion("APB") No. 25, Accounting for Stock Issued to Employees," and related
interpretations including Financial Accounting Standards Board Interpretations
No. 44, "Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25.
Accordingly, the Company records deferred compensation for share options granted
to employees at the date of grant based on the difference between the exercise
price of the options and the market value of the underlying shares
F-14
at that date. Deferred compensation is amortized to compensation expense over
the vesting period of the underlying options. No compensation expense is
recorded for fixed stock options that are granted to employees and directors at
an exercise price equal to the fair market value of the common stock, par value
$0.001 (the "Common Stock") at the time of the grant. Stock options and warrants
granted to non-employees are recorded at their fair value.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for the years ended December 31, 2005 and
2004:
Year Ended Year Ended
December 31, December 31,
2005 2004
------------ ------------
Net loss applicable to common stockholders, as
reported $(12,941,282) $(8,322,211)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects 14,000 7,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (715,511) (868,925)
------------ -----------
Pro forma net loss $(13,642,793) $(9,184,136)
============ ===========
Net loss per share applicable to common
stockholders, basic and diluted, as reported $ (0.64) $ (0.51)
============ ===========
Pro forma net loss per share,
basic and diluted $ (0.67) $ (0.56)
============ ===========
F-15
The fair value of each option granted in 2005 and 2004 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2005 2004
---- ----
Risk free interest rates 3.76% 2.32%
Expected option lives 3.4 3.5
Expected volatilities 69% 133%
Expected dividend yields None None
FOREIGN CURRENCY TRANSLATIONS
The financial statements of TTR Ltd. have been translated into U.S. dollars in
accordance with Statement No. 52 of the Financial Accounting Standards Board
(FASB). Assets and liabilities have been translated at year-end exchange rates
and expenses have been translated at average rates prevailing during the year.
The translation adjustments have been recorded as a separate component in the
consolidated statement of stockholders' equity (deficiency). TTR Ltd. has been
inactive since December 2002 and the Company has not recorded any foreign
currency translation adjustments during 2005 or 2004. During 2004 the Company
realized a gain from foreign currency translation of $81,007.
NET LOSS PER SHARE
Basic loss per share, "EPS" is computed by dividing net loss applicable to
common shares by the weighted-average of common shares outstanding during the
period.
Diluted loss per share adjusts basic loss per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive. The shares
assumable upon exercise of stock options and warrants are excluded from the
calculation of net loss per share, as their inclusion would be anti-dilutive.
Common stock equivalents have been excluded from the weighted-average shares for
the years ended December 31, 2005 and 2004 as their inclusion would be
anti-dilutive. Potentially dilutive options to purchase 7,002,642 and 4,998,642
shares of Common Stock were outstanding at December 31, 2005 and 2004,
respectively. Potentially dilutive warrants to purchase 14,228,786 and
10,598,333 shares of Common Stock were outstanding at December 31, 2005 and
2004, respectively. In addition, there were 21,178 and 52,500 shares of the
Company's Series A 7% Convertible Preferred Stock, par value $0.001 per share
("Series A Preferred Stock"), outstanding and potentially convertible into
2,823,733 and 7,000,000 shares of Common Stock at December 31, 2005 and 2004,
respectively. In addition, 71,150 shares of the Company's Series B 8%
Convertible Preferred Stock, par value $0.001 per share, were outstanding and
potentially convertible into 7,044,554 shares of Common Stock at December 31,
2005.
In addition, see Note 13 for issuances of Common Stock subsequent to year end.
REVENUE RECOGNITION
Revenue is derived from sales of the Company's QoStream product line which is
comprised of hardware and software as well as related hardware. Revenue is
recognized when persuasive evidence of an arrangement exists, the product has
been delivered and title and risk of loss have transferred, the price is fixed
and determinable, and collection of the resulting receivable is reasonably
assured.
Utilizing these criteria, product revenue is generally recognized upon delivery
of the product at the end-customer's location when the risks and rewards of
ownership have passed to the customer. During the year ended December 31, 2005
the Company recorded $5,548 from sales of units of its QoStream products and
related hardware. The Company did not record any revenue during 2004.
F-16
INVENTORY
Inventory includes costs for materials and finished product which is stated at
the lower of cost or market. As of December 31, 2005 any items relieved from
inventory have been determined under the specific identification method. The
balance at December 31, 2005 of inventories amounted to $929,017, which included
raw materials of $172,238 and finished goods of $756,779.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method over
the estimated useful lives of the various asset classes. Leasehold improvements
are amortized using the straight line method over the lesser of the term of the
lease or the estimated useful lives of the assets. Equipment leases qualifying
as capital leases are also included in property and equipment.
Estimated useful lives range from three to seven years for property and other
equipment. Major renewals and improvements are capitalized and minor
replacements, maintenance, and repairs are charged to current operations as
incurred. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the consolidated balance sheets and
any gain or loss is reflected in the consolidated statements of operations.
INTERNAL USE SOFTWARE
Certain costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over three years. The
capitalized costs related to internal use software and are included in property
and equipment. Costs for general and administrative, overhead, maintenance and
training, as well as the cost of software that does not add functionality to the
existing system, are expensed as incurred.
CAPITALIZED SOFTWARE COSTS
During the year ended December 31, 2005 the Company capitalized $1,260,382 of
internally developed software product costs. Capitalization of software
development costs that are to be sold, leased or otherwise marketed begins upon
the establishment of technological feasibility. Technological feasibility is
based on reaching a high level design stage with regards to a certain product as
defined in SFAS No. 86. Such software product costs are to be amortized over the
expected beneficial life once the general release stage of the product is
reached, which as of December 31, 2005 had not been achieved.
IMPAIRMENT OF LONG LIVED ASSETS
The Company reviews the carrying value of its intangible assets when specific
events and circumstances would indicate that their carrying amounts may not be
recoverable. The Company considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of the intangible
assets can be recovered. If it is determined that the carrying value of the
intangible assets will not be recovered from the undiscounted future cash flows,
the carrying value of the assets would be considered impaired. An impairment
charge is measured as the excess of the carrying amount of an intangible asset
over its estimated fair value. The Company, based on its most recent evaluation,
determined that its intangible assets were not impaired during the year ended
December 31, 2005. There can be no assurance that future impairment tests of the
intangible assets will not result in a charge to operations.
RESEARCH AND DEVELOPMENT
Research and development costs incurred in connection with product development
and testing are expensed as incurred. Research and development costs for the
years ended December 31, 2005 and 2004 were $3,975,852 and $3,222,695,
respectively.
INCOME TAXES
The Company uses the asset and liability method to determine its income tax
expense. This method requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
F-17
operating loss carry-forwards. Deferred tax expense or benefit is recognized as
a result of the changes in the assets and liabilities during the year.
Valuation allowances are established when necessary, to reduce deferred tax
assets, if it is more likely than not that all or a portion of it will not be
realized.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash. The Company's cash is
maintained at one financial institution, and from time to time the account
balance at this financial institution may exceed the amount of insurance
provided on such accounts. Generally, these deposits may be redeemed upon demand
and therefore, bear minimal risk.
COMPREHENSIVE LOSS
In January 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting the components of comprehensive income
or loss. The foreign currency translation adjustment was the Company's only
component of comprehensive loss. The Company has not recorded any foreign
currency translation adjustments during 2005 or 2004. During 2004 the Company
realized a gain from foreign currency translation of $81,007.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based
Payment". This statement is a revision of SFAS Statement No. 123, "Accounting
for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS No.
123R addresses all forms of share based payment ("SBP") awards including shares
issued under employee stock purchase plans, stock options, restricted stock and
stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that
will be measured at fair value on the awards' grant date, based on the estimated
number of awards that are expected to vest and will be reflected as compensation
expense in the financial statements. This statement is effective for public
entities that file as small business issuers as of the beginning of the first
annual reporting period that begins after December 15, 2005. Upon the adoption
of this pronouncement on January 1, 2006 the Company expects to record
additional stock compensation expense. As of December 31, 2005, there is
approximately $1,117,183 of future employee stock based compensation costs that
will be expensed over a three year period from 2006 through 2008.
In October 2004, the FASB ratified Emerging Issues Task Force ("EITF") 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share." The EITF reached a consensus that contingently convertible instruments,
such as contingently convertible debt, contingently convertible preferred stock,
and other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus is effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have material effect on the Company's
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20 and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. This statement changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of this pronouncement is not expected to have a material
effect on the Company's financial statements.
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues", which addresses whether a modification to a conversion option that
changes its fair value affects the recognition of interest expense for the
associated debt instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishment, if
F-18
a debt modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt).
In September 2005, the FASB also ratified EITF Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,"
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
treated recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes), and, if so, whether that basis difference is
a temporary difference under SFAS No. 109, "Accounting for Income Taxes." This
Issue should be applied by retrospective application pursuant to SFAS No. 154 to
all instruments with a beneficial conversion feature accounted for under EITF
Issue 00-27 included in financial statements for reporting periods beginning
after December 15, 2005.
EITF Issues 05-7 and 05-8 did not have an effect on the Company's consolidated
financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. The Company is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.
NOTE 4- FINANCING
SERIES A PREFERRED STOCK
On August 9, 2004, the Company completed a private placement to certain private
and institutional investors of 52,500 shares of its Series A 7% Convertible
Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock") for
aggregate gross proceeds of $5.25 million. In connection with the issuance of
the Series A Preferred Stock, the Company issued five-year warrants (the
"Investor Warrants") to purchase up to 3.5 million shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") at a per share
exercise price of $1.50 and up to an additional 3.5 million shares of the
Company's Common Stock at a per share exercise price of $2.50. The Company
received net proceeds of approximately $4.6 million from the sale of the Series
A Preferred Stock, net of payment of offering related expenses. The private
placement resulted in a beneficial conversion feature of $2,494,753 for which
the Company recorded a deemed dividend in accordance with Emerging Issues Task
Force ("EITF") 98-5 and EITF 00-27 for the year ended December 31, 2004. This
beneficial conversion feature is calculated after the warrants have been valued
with proceeds allocated on a relative value basis.
Each share of Series A Preferred Stock has a stated value of $100 and is
convertible into Common Stock at an initial conversion rate equal to $0.75 per
share of Common Stock, subject to adjustment if there are certain capital
adjustments or similar transactions, such as a stock split or merger. Dividends
at the rate of 7% per annum are payable on a semi-annual basis and, under
certain conditions at the option of the Company, dividends may be paid in shares
of Common Stock at rate of $0.75 per share. The Company recorded an accrual for
the preferred stock dividend payable of approximately $145,000 as of December
31, 2004. If not converted earlier, on the fifth anniversary of issuance, the
Series A Preferred Stock will automatically convert into shares of the Company's
Common Stock at the per share of Common Stock conversion price then in effect.
The exercise prices of the Investor Warrants are also subject to adjustment if
there are certain capital adjustments or similar transactions, such as a stock
split or merger.
In connection with the placement of the Series A Preferred Stock, the Company
issued to placement agents five year warrants (the "Compensation Warrants") to
purchase up to 1.4 million shares of Common Stock. The breakdown of the
Compensation Warrants is as follows, 700,000 shares are issuable at a per share
exercise price of $0.75, 350,000 shares are issuable at a per share exercise
price of $1.50 and 350,000 shares are issuable at a per share exercise price of
$2.50. Other than as specified above, the Compensation Warrants have the same
substantive provisions as the Investor Warrants.
F-19
Pursuant to the terms of the agreements with the holders of the Series A
Preferred Stock, the Company filed on November 24, 2004 a registration statement
(the "Registration Statement") covering the Common Stock underlying the Series A
Preferred Stock, the Investor Warrants and the Placement Agent Warrants which
was declared effective on February 11, 2005. As a result of a delay in the
filing and the effectiveness of the Registration Statement beyond the dates
specified in the agreements with the holders of the Series A Preferred Stock,
under the agreements with the holders of the Series A Preferred Stock, the
Company is required to pay the holders of the Series A Preferred Stock a penalty
in the aggregate amount of approximately $199,500. For the year ended December
31, 2004 the Company recorded this amount as a late filing penalty. In addition,
as a post effective amendment to such Registration Statement was not filed by
the date specified in the agreements with the holders of the Series A Preferred
Stock, the Company accrued an additional late filing penalty of $84,006 as of
December 31, 2005.
SERIES B PREFERRED STOCK
On April 26, 2005 the Company completed a private placement to certain
individual and institutional investors of 60,000 shares of Series B 8%
Convertible Preferred Stock par value $0.001 per share (the "Series B Preferred
Stock") for gross proceeds of $6 million. Thereafter, on May 9, 2005, the
Company sold to institutional investors an additional 17,650 shares of Series B
Preferred Stock for aggregate gross proceeds of $1,765,000 (together with the
private placement in April 2005 the "2005 Private Placement"). 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 rate of $1.01 per share, subject
to adjustment in the event of certain lower priced issuances of Common Stock
equivalents and certain capital adjustments or similar transactions, such as a
stock split or merger. The rights and preferences of the Series B Preferred
Stock are set forth in a Certificate of Designations of Rights and Preferences
that Company filed with the Secretary of State of the State of Delaware on April
20, 2005. In connection with the issuance of the Series B Preferred Stock, the
Company issued to the investors five-year warrants (the "Investor Warrants") to
purchase, in the aggregate, up to approximately 3,844,062 shares of Common Stock
at a per share exercise price of $1.50, subject to adjustment in the event of
certain lower priced issuances of Common Stock equivalents and certain capital
adjustments or similar transactions, such as a stock split or merger. Holders of
the Investor Warrants are entitled to exercise those warrants on a cashless
basis following the first anniversary of issuance if a registration statement
covering the Common Stock issuable upon exercise of the Investor Warrants is not
in effect at the time of exercise.
The Company received aggregate net proceeds of approximately $5,590,000, after
payment of offering related expenses, repayment of the outstanding principal and
accrued interest on the Bridge Loan (See Note 5 - Notes Payable). The 2005
Private Placement resulted in a beneficial conversion feature of $3,076,104 for
which the Company recorded as a deemed dividend in accordance with Emerging
Issues Task Force ("EITF") 98-5 and EITF 00-27 for the year ended December 31,
2005. This beneficial conversion feature is calculated after the warrants have
been valued with proceeds allocated on a relative value basis.
Dividends on the Series B Preferred Stock accrue at the rate of 8% per annum and
are payable semi-annually on each of June 30 and December 31 and on conversion.
When due, dividends may be paid, at the option of the Company, either in cash or
in shares of Common Stock at a rate equal to 90% of the volume weighted average
market price of the Common Stock for the five trading days before payment. 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. The Company issued shares of Common Stock with
a fair market value of $444,539 for the preferred stock dividend and recorded a
charge to net loss applicable to common stockholders for the year ended December
31, 2005.
In connection with the placement of the Series B Preferred Stock, the Company
issued to a placement agent warrants (the "Placement Agent Warrants") to
purchase up to 1,153,220 shares of Common Stock, 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. The Placement Agent
Warrants have an expiration date of approximately five years from the closing
and are exercisable on substantially the same terms and conditions as the
Investor Warrants, including without limitation, expiration date, potential
adjustments and cashless exercise rights. In addition, at the closing the
Company also paid to the placement agent fees totaling 8% of the gross proceeds.
F-20
NOTE 5- NOTES PAYABLE
On April 5, 2005 the Company entered into a Bridge Loan Agreement ("April 2005
Bridge Loan Agreement") with an institutional investor (the "April 2005 Bridge
Lender") pursuant to which the April 2005 Bridge Lender advanced a loan to the
Company in the principal amount of $1,500,000 (the "Bridge Loan"). Interest on
the April 2005 Bridge Loan accrued at the rate of 7% per annum. Pursuant to the
April 2005 Loan Agreement, the Company issued to the April 2005 Bridge Lender a
convertible promissory note in the principal amount of $1,500,000. To secure the
Company's obligations under the April 2005 Bridge Loan, the Company granted to
such investor a security interest in substantially all of its assets, including
without limitation, its intellectual property. The Company received net proceeds
of $1,350,000 from the proceeds of the loan, after the payment of transaction
related fees and expenses. These fees and expenses were recorded as interest
expense during the year ended December 31, 2005. On April 26, 2005 the Company
repaid to the April 2005 Bridge Lender $1,505,178 from the proceeds of the 2005
Private Placement, representing the outstanding principal amount of the April
2005 Bridge Loan, fees, and expenses and interest accrued thereon and the lien
on the assets was released.
In connection with the April 2005 Bridge Loan, the Company also issued to the
April 2005 Bridge Lender a five-year warrant (the "Bridge Warrant") to purchase
up to 150,000 shares of Common Stock at a per share exercise price of $2.50.
Upon the closing of the 2005 Private Placement, the per share exercise price of
the Bridge Warrant was adjusted to $1.50, in accordance with the terms of the
April 2005 Loan Agreement. The Company recorded as interest expense $104,985 of
amortization of the note discount in the accompanying consolidated statements of
operations for the year ended December 31, 2005 for this transaction.
On December 22, 2005 the Company entered into a Bridge Loan Agreement ("December
2005 Bridge Loan Agreement") with two institutional investors (collectively the
"December 2005 Bridge Investors") pursuant to which the December 2005 Bridge
Investors advanced a loan to the Company in the aggregate principal amount of
$1,000,000 (the "December 2005 Bridge Loan"). Pursuant to the December 2005
Bridge Loan Agreement, the Company issued to the December 2005 Bridge Investors
secured promissory notes in the aggregate principal amount of $1,080,000
(collectively the "December 2005 Bridge Notes"), representing an original issue
discount of 8%. The Notes are scheduled to mature on the date (the "Maturity
Date") which is the earlier of (i) a subsequent financing that generates, on a
cumulative basis together with any other interim financings, gross proceeds to
the Company of at least $2 million or (ii) April 21, 2006. Prior to the Maturity
Date, the Company may, at its option, prepay the December 2005 Bridge Notes in
whole or in part. If not paid at maturity, interest on the December 2005 Bridge
Notes will accrue at 14% per annum from the Maturity Date until the actual date
of payment. To secure the Company's obligations under the December 2005 Bridge
Loan, the Company granted to these investors a security interest in
substantially all of its assets, including without limitation, its intellectual
property, under the terms and conditions of a Security Agreement (the "Security
Agreement") dated as of the date of the December 2005 Bridge Loan Agreement,
which security interest, by its terms, is released upon payment or other
satisfaction of the outstanding amounts. The Company received net proceeds of
$877,470 from the proceeds of the loan, after the payment of transaction related
fees and expenses. In connection with the December 2005 Bridge Loan, the Company
issued to these December 2005 Bridge Investors a five-year warrant (the
"December 2005 Bridge Warrants") to purchase up to 500,000 shares of Common
Stock at a per share exercise price of $1.50, 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 exercise period, the
Company issues warrants having a lower exercise price to investors in a
subsequent financing transaction. In accordance with Accounting Principles Board
Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants," the Company recorded a $108,660 discount on the note payable
based upon the relative fair values of the note and the Common Stock purchase
warrants that is amortizing over the 120 day term of the note. Amortization of
the discount on the note payable for the year ended December 31, 2005 was $9,051
and is included as interest expense in the accompanying consolidated statement
of operations. The Company is amortizing the $80,000 original issue discount
over the 120 day term of the Notes. Amortization of the discount on the note
payable for the year ended December 31, 2005 was $6,664 and is included as
interest expense in the accompanying consolidated statements of operations. On
April 19, 2006, the Company entered into an agreement to extend the maturity
date of the December 2005 Bridge Loan. See Note 13G (Subsequent Events) -
Extension of Bridge Loans (Unaudited).
The Company paid $122,530 of issue costs on the note payable which is being
amortized over the 120 day term of the Notes. Amortization of the issue costs on
the note payable for the year ended December 31, 2005 was $10,207 and is
included as interest expense in the accompanying consolidated statements of
operations.
F-21
The December 2005 Bridge Loan Agreement provides that, prior to the Maturity
Date, the Company can obtain up to an additional $500,000 in short term funding
(the "Additional Short-Term Loans") from these investors or other sources with
such additional amount being secured PARI-PASSU with the amounts advanced under
the December 2005 Bridge Notes, subject to certain specified conditions. In
January 2006, the Company obtained Additional Short-Term Loans in the aggregate
principal amount of $500,000 and, from February through April 2006, the Company
obtained additional bridge loans in the aggregate principal amount of
$1,950,000. See Note 13 (Subsequent Events).
NOTE 6 - PRODUCT ENHANCEMENT
The Company and Lucent Technologies, Inc. ("Lucent") are parties to a
Development and Licensing Agreement effective as of January 2004. In April 2004
and in September 2004, the Company and Lucent entered into supplementary
development agreements to add to the Company's QoSteam product line additional
product features and upgrades intended to enhance product competitiveness in
respect of which the Company agreed to pay to Lucent an additional $868,000 upon
receipt of deliverables. As of December 31, 2005, the Company has remitted the
entire $868,000 to Lucent for this development work.
During May 2005, the Company and Lucent entered into a supplementary development
agreement to add additional product features and developments to the Company's
Qostream product line for agreed upon consideration of approximately $1,100,000.
Under the agreement, payment is due upon delivery and acceptance of the
deliverables by the Company. Certain of the deliverables received by the Company
under such agreement have not been completed in accordance with design and
development criteria specified in the agreement and the Company has not accepted
delivery of these items. The Company is currently pursuing a number of options,
including completing in-house certain of these product features/enhancements,
out-sourcing the completion of certain of the other features and working with
Lucent to complete the design of such deliverables. Accordingly, the Company has
not recorded the expense and the related amount payable to Lucent concerning the
non-accepted deliverables in the accompanying consolidated financial statements.
During the year ended December 31, 2005, research and development costs incurred
in connection with this supplementary agreement were $277,000. As of December
31, 2005, $170,000 of internally developed software product costs was
capitalized in connection with this supplementary agreement.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
2005
------------
Computer and office equipment $ 704,771
Furniture and fixtures 15,769
Leasehold improvements 16,699
Software 86,062
---------
Subtotal 823,301
Less: Accumulated depreciation (132,417)
---------
Property and Equipment, net $ 690,884
=========
F-22
Depreciation expense was $123,117, $9,908 for the years ended December 31, 2005
and 2004, respectively, and $1,086,382 for the period from July 14, 1994
(inception) through December 31, 2005.
NOTE 8 - INCOME TAXES
The following table presents the principal reasons for the difference between
the expected and effective income tax rates for each of the years presented as
follows:
DECEMBER 31,
2005 2004
---- ----
U. S. federal expected income tax rate 35% 35%
State and local income taxes, net of federal benefit 6% 6%
Effect of permanent differences 4% 3%
--- ---
45% 44%
Less valuation allowance (45%) (44%)
--- ---
Effective income tax rate 0% 0%
=== ===
At December 31, 2005, the Company had available approximately $32 million of net
operating loss carryforwards for U.S. federal income tax purposes which expire
in the years 2014 through 2025, and approximately $6 million of foreign net
operating loss carryforwards from its wholly-owned subsidiary with no expiration
date. Due to the uncertainty of their realization, no income tax benefit has
been recorded by the Company for these net operating loss carryforwards as
valuation allowances have been established for any such benefits. The use of the
U.S. federal net operating loss carryforwards is subject to limitations under
Section 382 of the Internal Revenue Code pertaining to changes in stock
ownership.
Significant components of the Company's deferred tax assets for U.S. federal and
Israel income taxes are as follows:
December 31,
2005
-------------
Net operating loss carryforwards $ 13,543,200
Capital loss carryforward 686,000
Stock based compensation 309,214
Other 273,016
------------
Total deferred tax assets 14,811,430
Valuation allowance (14,811,430)
------------
Net deferred tax assets $ --
============
F-23
The valuation allowance increased $3,481,373 for the year ended December 31,
2005.
NOTE 9 - STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the "Plan") and has reserved up to 450,000
shares of Common Stock for issuance thereunder. In December 1999, the Plan was
amended to increase the total number of shares available for grant to 1.5
million. As of December 31, 2005 a total of 714,566 options were outstanding
under the 1996 Plan. Future grants under the 1996 Plan were discontinued in July
2000.
In July 1998, the Board of Directors adopted the Non-Executive Directors Stock
Option Plan (the "Directors' Plan") and has reserved up to 25,000 shares of
common stock for issuance thereunder. In May 2001, the Plan was amended to
increase the total number of shares available for grant to 75,000. In August
2002, the Company adopted the 2002 Non-Employee Directors' Plan (the "2002
Directors' Plan") which provides for 275,000 shares available for grant. Both
plans provide for the grant of options to directors who are not otherwise
employed by the Company. In May 2004, the 2002 Directors Plan was further
amended to increase the total number of shares available for grant to 1,000,000.
As of December 31, 2005, options to purchase a total of 225,000 shares of Common
Stock were outstanding under the Directors' Plan and the 2002 Directors' Plan.
In July 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Incentive Plan") and originally reserved a total of 1,500,000 shares of common
stock for issuance thereunder. In May 2001, the 2000 Incentive Plan was amended
to increase the total number of shares available for grant to 3,500,000 and in
May 2004 the 2000 Incentive Plan was further amended to increase the total
number of shares available for grant to 5,000,000, The plan was further amended
in April 2005 to increase the total number of shares available for issuance to
6,500,000. The 2000 Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards
and performance units. The 2000 Incentive Plan also permits cash payments under
certain conditions. As of December 31, 2005, there were options to purchase
5,569,858 shares of Common Stock issued and outstanding under the 2000 Incentive
Plan. The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and the terms of the awards and exercise prices. The options are
exercisable for a period not to exceed ten years from the date of grant. Vesting
periods range from immediately to four years.
OTHER OPTION GRANTS
In addition to the options granted under the Stock Option Plans, the Company has
issued options outside of the plans, pursuant to various agreements. Stock
option activity for 2005 and 2004 is summarized as follows:
F-24
Weighted
Options Average
------------------------------- Exercise
Plan Nonplan Total Price
--------- ------- --------- --------
Options outstanding,
December 31, 2003 2,000,175 0 2,000,175 $1.85
Granted 2,505,249 493,218 2,998,467 0.74
Exercised 0 0 0 0.00
Forfeited 0 0 0 0.00
--------- ------- ---------
Options outstanding
December 31, 2004 4,505,424 493,218 4,998,642 1.85
Granted 2,049,000 0 2,049,000 0.50
Exercised 0 0 0 0.00
Forfeited (45,000) 0 (45,000) 1.02
--------- ------- ---------
Options outstanding,
December 31, 2005 6,509,424 493,218 7,002,642 1.60
--------- ------- ---------
Shares of common stock
available for future
grant under the plans 1,705,142
---------
The following table summarizes significant ranges of outstanding and exercisable
stock options outstanding at December 31, 2005:
Stock Options Outstanding
------------------------------------ Stock Options Exercisable
Weighted Average -------------------------
---------------------- Weighted
Remaining Average
Ranges of Number Contractual Exercise Number Exercise
Prices Outstanding Life(years) Price Exercisable Price
- ----------- ----------- ----------- -------- ----------- --------
$0.16 50,000 6.77 0.16 50,000 0.16
$0.56-0.82 2,728,467 8.34 0.70 1,793,780 0.68
$0.85-1.25 2,274,000 9.29 0.99 489,528 1.00
$1.53-1.68 293,300 5.86 1.66 293,300 1.66
$2.56-3.56 324,941 4.29 3.25 324,941 3.25
$3.91-5.06 1,323,934 4.47 4.08 1,323,934 4.08
$6.84-7.00 8,000 2.40 6.93 8,000 6.93
--------- ---- ----- --------- -----
$0.16-$7.00 7,002,642 7.61 $1.60 4,283,483 $2.04
========= ==== ===== ========= =====
F-25
Weighted-average grant date fair value of options granted in 2005 and 2004,
under the Black-Scholes option pricing model, was $0.50 and $0.74 per option,
respectively.
During 2004 the Company issued the following stock options:
On January 21, 2004, the Company's Compensation Committee awarded to each of the
Company's then two independent directors 164,406 non-qualified options to
purchase the Company's Common Stock at a $0.56 strike price and immediate
vesting, exercisable for five years.
In March 2004, in conjunction with their employment agreements, three new
Company employees received options to purchase a total of up to 280,000 shares
of the Company's Common Stock under the Company's 2000 Equity Incentive Plan,
such options will vest on the first anniversary of their employment agreements,
at various exercise prices based on the closing market price of the Company's
Common Stock on their date of hire (the exercise prices range from $0.62 to
$0.80).
In April 2004, in conjunction with an employment agreement, a new Company
employee received options to purchase a total of up to 20,000 shares of the
Company's Common Stock under the Company's 2000 Equity Incentive Plan, of which
options for one-fourth (1/4) of the shares is to vest on the first anniversary
of employment and options for the remaining shares to vest in equal quarterly
installments thereafter at an exercise price of $0.65, which is based on the
closing market price of the Company's Common Stock on the date of hire.
On May 25, 2004 the Company's Compensation Committee granted from the 2000
Equity Incentive Plan 60,000 non-qualified options to purchase the Company's
Common Stock at a $0.71 strike price vesting over 2 years to a member of the
Company's newly formed Advisory Board. The $0.71 strike price equaled the
closing market price of the Company's Common Stock on the date of issuance. The
fair value of the options amounted to $34,087 and is amortized over the 2-year
vesting period. Amortization expense for the year ended December 31, 2004 was
$12,783.
On May 25, 2004 the Company's Compensation Committee granted from the 2002
Non-Employee Directors Stock Option Plan 225,000 non-qualified options to
purchase the Company's Common Stock at a $0.71 strike price vesting over 2 years
to three new directors of the Company's Board. The $0.71 strike price equaled
the closing market price of the Company's Common Stock on the date of issuance.
On July 1, 2004 in conjunction with a new employment agreement, an employee
received options to purchase a total of up to 100,000 shares of the Company's
Common Stock under the Company's 2000 Equity Incentive Plan, vesting over a
three year period. The options have an exercise price of $0.55, which was less
than the closing market price of the Company's Common Stock on the date of hire.
As such, the Company recorded deferred compensation of $42,000 which is
amortized over the 3-year vesting period. Amortization expense for the year
ended December 31, 2004 was $7,000.
In August and September 2004, in conjunction with their employment agreements,
three new Company employees received options to purchase a total of up to
220,000 shares of the Company's Common Stock under the Company's 2000 Equity
Incentive Plan. The options will vest over a two or three year period, at
exercise prices ranging from $0.91 to $1.05 based on the closing market price of
the Company's Common Stock on their respective dates of hire.
In October 2004, in conjunction with their employment agreements, three new
Company employees received options to purchase a total of up to 225,000 shares
of the Company's Common Stock under the ompany's 2000 Equity Incentive Plan. The
options will vest over a two or three year period, at exercise prices ranging
from $0.85 to $0.92 based on the closing market price of the Company's Common
Stock on their respective dates of hire.
On November 4, 2004 the Company's Compensation Committee granted from the 2000
Equity Incentive Plan 60,000 non-qualified options to purchase the Company's
Common Stock at a $0.99 strike price vesting over 2 years to a member of the
Company's Advisory Board. The $0.99 strike price equaled the closing market
price of the Company's Common Stock on the date of issuance. The fair value of
the options amounted to $42,543 and is amortized over the 2-year vesting period.
Amortization expense for the year ended December 31, 2004 was $5,318.
During 2005 the Company issued the following stock options:
F-26
From January 1 through March 31, 2005, in conjunction with their employment
agreements, seven new Company employees received options to purchase up to an
aggregate of 315,000 shares of the Company's common stock, par value $0.001
("Common Stock") under the Company's 2000 Equity Incentive Plan (the "2000
Equity Incentive Plan"). The options vest over a two or three-year period from
the date of grant and are exercisable at exercise prices ranging from $0.89 to
$1.24 per share (based on the closing market price of the Common Stock on the
day preceding the date of grant).
On February 14, 2005 the Company granted to a consultant a non-qualified option
under the 2000 Equity Incentive Plan to purchase up to 25,000 shares of Common
Stock at an exercise price of $0.89 per share. The option was fully vested upon
the date of grant. The $0.89 exercise price equaled the closing market price of
the Common Stock on the date of grant. The fair value of the option on the date
of grant equaled $10,161. The Company recorded stock-based compensation expense
of $10,161 in the accompanying consolidated financial statements for the year
ended December 31, 2005 for this transaction.
On February 16, 2005 the Company granted to two consultants non-qualified
options under the 2000 Equity Incentive Plan to purchase up to an aggregate of
50,000 shares of Common Stock at an exercise price of $0.94 per share, with such
option vesting over 3 years. The $0.94 exercise price equaled the closing market
price of the Common Stock on the date of grant. The fair value of the options
amounted to $27,440 and is being amortized over the 3-year vesting period. The
Company recorded stock-based compensation expense of $9,146 in the accompanying
consolidated financial statements for the year ended December 31, 2005 for this
transaction.
From April 1 through June 30, 2005, six new Company employees received options
to purchase up to an aggregate of 285,000 shares of Common Stock under the
Company's 2000 Equity Incentive Plan. The options vest over a two or three-year
period from the date of grant and are exercisable at exercise prices ranging
from $1.02 to $1.25 per share (based on the closing market price of the Common
Stock on the day preceding the date of grant).
On May 23, 2005, pursuant to an employment agreement (See Note 9 Employment
Agreement) the Company's new Chief Financial Officer received options to
purchase a total of up to 300,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options vest over a three-year period from the
date of grant and are exercisable at an exercise price of $1.05 per share (based
on the closing market price of the Company's Common Stock on the day preceding
the date of grant).
On May 25, 2005 the Company granted to a member of its advisory board, on the
one-year anniversary of service, a non-qualified option under the 2000 Equity
Incentive Plan to purchase up to 20,000 shares of Common Stock at an exercise
price of $0.98 per share. The option vests over a two-year period from the date
of grant. The $0.98 exercise price equaled the closing market price of the
Common Stock on the date of grant. The fair value of the option on the date of
grant equaled $10,620. The Company recorded stock-based compensation expense of
$3,982 in the accompanying consolidated financial statements for the year ended
December 31, 2005 for this transaction.
On June 9, 2005, the Company awarded six employees options to purchase up to an
aggregate of 319,000 shares of Common Stock under the Company's 2000 Equity
Incentive Plan. The options vest over a three-year period from the date of grant
and are exercisable at an exercise price of $.92 per share (based on the closing
market price of the Common Stock on the date preceding the date of grant).
During August and September 2005, four new Company employees received options to
purchase a total of up to 190,000 shares of Common Stock under the Company's
2000 Equity Incentive Plan. The options vest over a three-year period from the
date of grant and are exercisable at exercise prices ranging from $.78 to $.98
per share (based on the closing market price of the Common Stock on the day
preceding the date of grant).
During September 2005, the Company granted to two new members of its advisory
board non-qualified options under the 2000 Equity Incentive Plan to purchase up
to 120,000 shares of Common Stock at an exercise price of $0.95 per share. The
options vest over a two-year period from the date of grant. The $0.95 exercise
price equaled the closing market price of the Common Stock on the date of grant.
The fair value of the options on the date of grant equaled $55,440. The Company
recorded stock-based compensation expense of $8,258 in the accompanying
consolidated financial statements for the year ended December 31, 2005 for this
transaction.
F-27
During October, November and December 2005, eight new Company employees received
options to purchase a total of up to 365,000 shares of Common Stock under the
Company's 2000 Equity Incentive Plan. The options vest over a three-year period
from the date of grant and are exercisable at exercise prices ranging from $.82
to $.90 per share (based on the closing market price of the Common Stock on the
day preceding the date of grant).
During October 2005, the Company granted to a new member of its advisory board
non-qualified options under the 2000 Equity Incentive Plan to purchase up to
60,000 shares of Common Stock at an exercise price of $0.90 per share. The
options vest over a two-year period from the date of grant. The $0.90 exercise
price equaled the closing market price of the Common Stock on the date of grant.
The fair value of the options on the date of grant equaled $21,600. The Company
recorded stock-based compensation expense of $2,700 in the accompanying
consolidated statement of operations for the year ended December 31, 2005 for
this transaction.
WARRANTS
Warrant activity for 2004 and 2005 is summarized as follows:
Weighted
Average
Exercise
Warrants Price
---------- --------
Warrants outstanding, December 31, 2003 1,670,000 $8.08
Granted 8,833,333 $1.89
Exercised 0 $0.00
Forfeited (400,000) $7.50
----------
Warrants outstanding, December 31, 2004 10,103,333 $2.56
Granted 5,647,280 $1.59
Exercised (251,827) $0.75
Forfeited (1,270,000) $8.27
----------
Warrants outstanding, December 31, 2005 14,228,786 $1.79
----------
F-28
On May 11, 2004, the Company issued 100,000 four-year warrants to a service
provider. The warrants have an exercise price of $0.62 per share. The $0.62
strike price equaled the closing market price of the Company's Common Stock on
the date of issuance. The Company recorded stock-based compensation expense of
$60,749 in the accompanying financial statements for the year ended December 31,
2004 for this transaction.
The warrants forfeited in 2004 and 2005 expired in those years unexercised in
accordance with their terms.
STOCK ISSUANCES
During the year ended December 31, 2004, the Company completed the following
Preferred and Common Stock transactions:
The Company issued 52,500 shares of Series A 7% Convertible Preferred Stock.
The Company did not issue any shares of Common Stock during 2004.
During the year ended December 31, 2005, the Company completed the following
Preferred and Common Stock transactions:
The Company issued 77,650 shares of Series B 8% Convertible Preferred Stock from
this equity raise (See Note 4).
The Company issued 4,176,267 shares of Common Stock upon the conversion of
31,322 shares of Series A Preferred Stock representing $3,132,200 in stated
value at a per share conversion price of $0.75.
The Company issued 643,564 shares of Common Stock upon the conversion of 6,500
shares of Series B Preferred Stock representing $650,000 in stated value at a
per share conversion price of $1.01.
The Company issued 251,827 shares of Common Stock upon the exercise of stock
warrants resulting in proceeds of approximately $189,000.
The Company issued 215,916 shares of Common Stock with a total value of $182,633
to Series A Preferred Stockholders as stock dividends. The shares were issued at
$0.75 per share which was a discount to the fair market value on the date of
issuance.
The Company issued 572,451 shares of Common Stock with a total value of $444,539
to Series B Preferred Stockholders as stock dividends. The shares were issued at
various prices per share, each of which was a discount to the fair market value
on the date of issuance.
The Company issued 15,200 shares of Common Stock with a total value of $14,136
for late filing penalty on preferred stock registration. The shares were issued
at $0.75 per share which was a discount to the fair market value on the date of
issuance.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company and Mr. Frank Galuppo, the Company's Chief Executive Officer entered
into a three-year employment agreement, effective as of March 15, 2004, pursuant
to which Mr. Galuppo is currently paid an annual salary of $210,000. Prior to
March 15, 2005, Mr. Galuppo's annual salary was $180,000. Mr. Galuppo's salary
is scheduled to increase to $235,000 at the beginning of the third year of his
employment. The agreement further provides that if Mr. Galuppo's employment is
terminated other than for cause (as defined in the employment agreement) or if
Mr. Galuppo terminates his employment for good reason (as defined in the
employment agreement), he will be entitled to receive the equivalent of six
months' base salary and benefits. The Company also issued to Mr. Galuppo options
under the Company's 2000 Equity Incentive Plan to purchase up to 1,315,250
shares of the Company's common stock, par value $0.001 (the "Common Stock") at a
per share exercise price of $0.74, which are scheduled to vest over 12
succeeding quarters, beginning June 30, 2004.
F-29
On May 25, 2005, the Company entered into an employment agreement with James D.
Gardner pursuant to which Mr. Gardner serves as the Company's Chief Financial
Officer. The agreement has an initial term of one year. After the initial term
of one year, the agreement is automatically renewable for an additional one-year
term unless either party notifies the other in writing upon at least 45 days
prior to the scheduled termination of the initial term or any renewal term that
it does not intend to renew such agreement. Mr. Gardner is paid a monthly salary
of $14,583 and was granted options under the Company's 2000 Equity Incentive
Plan to purchase 300,000 shares of Common Stock at a per share purchase price of
$1.05. The options vest over three years from the grant date and on a quarterly
basis. The agreement may be terminated by Mr. Gardner for any reason on 60 days
written notice to the Company or by the Company immediately for cause. In the
event of a termination by the Company for any reason other than cause, the
Company shall pay Mr. Gardner (i) if such termination occurs during the initial
term of the agreement, an amount equal to 3 months' salary and (ii) if such
termination occurs after the initial term, an amount equal to 6 months' salary.
The Company's aggregate annual commitments under the existing employment
agreements are approximately $403,743 and $233,745 during 2006 and 2007,
respectively. In addition, each of the employment agreements provides for
payments through the term of the employment agreement under certain
circumstances.
LEASE COMMITMENTS
On February 9, 2005, the Company entered into a lease for office facilities at 2
Corbett Way, Eatontown, New Jersey, 07724, to which it relocated in May 2005.
The new facilities are comprised of approximately 7,500 square feet. The lease
term began in May 2005 and is for a term of approximately five years. Monthly
payments under the lease vary as follows: for the first lease year, monthly
payments of approximately $10,000 (after giving effect to agreed upon rent
credits for such year); for the second lease year, monthly payments of
approximately $14,000; for the third lease year, monthly payments of
approximately $14,500; for the fourth lease year, monthly payments of
approximately $14,700; and for the fifth lease year, monthly payments of
approximately $14,900. In connection with the lease the Company paid a security
deposit of approximately $26,000 and, in connection with the lease modification
discussed below, the Company paid in July 2005 an additional security deposit of
approximately $6,650.
On June 1, 2005 the Company entered into a modification of the lease pursuant to
which the Company leases an additional 1,900 square feet. The modified lease
began as of November 1, 2005. Beginning November 2005, total monthly payments
under the modified lease are as follows: for the first lease year, monthly
payments of approximately $12,000 (after giving effect to agreed upon rent
credits for such year); for the second lease year, monthly payments of
approximately $17,500; for the third lease year, monthly payments of
approximately $18,000; for the fourth lease year, monthly payments of
approximately $18,500; and for the fifth lease year, monthly payments of
approximately $18,700.
On December 22, 2005 the Company entered into a second modification of the lease
pursuant to which the Company leases an additional 3500 sq. ft. The Company paid
a $14,000 security deposit, representing two months rent, upon entering into the
second modification. Under the second lease modification, the Company's monthly
rental expense will increase by $7,000 beginning on March 1, 2006.
As a result of the lease payments above the Company recorded $37,527 of deferred
rent included in accrued expenses on the balance sheet in the accompanying
consolidated financial statements as of December 31, 2005.
During the year ended December 31, 2005 the Company incurred rent expense of
$162,247 for its previous and current facilities. The Company had no rent
expense for the year ended December 31, 2004.
EQUITY LINE
In August 2004, the Company secured a $6 million equity line commitment from an
institutional investor on which it can draw from time to time during a 24 month
period following the effectiveness of a registration statement relating thereto,
subject to certain conditions. The Company undertook to file a registration
statement in respect of such equity line no earlier than the 90th day following
the effective date of the registration statement for the Common Stock underlying
the Series B Preferred Stock (i.e., December 1, 2005), but no later than the
120th day
F-30
after such date (i.e. December 31, 2005) discussed in Note 4 (Financing). The
investor may terminate the equity line commitment if the Company does not timely
file the registration statement relating to the equity line or if such
registration statement is not declared effective within 180 days following the
filing thereof. No such registration statement has been filed as of the filing
of this Annual Report on Form 10-KSB.
The equity line allows the sale of up to $6 million of Common Stock at 98 % of
the then current market price, but in no event at less than $2.00. The Company
may not draw down more than $500,000 under the equity line during any 30-day
period. The investor is entitled to 5% of the cash proceeds from the sale of the
shares to it by the Company under the equity line. No assurance can be provided
that the equity line will in fact ever become available for use by the Company.
The Company subsequently amended this equity line (see Note 13e).
In August 2004, the Company issued to the equity line investor five year
warrants to purchase up to 333,333 shares of Common Stock at a per share
exercise price of $2.00. These warrants are subject to cashless exercise
following the first anniversary of issuance if at the time of exercise there is
no effective registration statement in effect. The Company recorded deferred
offering costs of $267,404 for the value of these warrants. During 2005 the
Company recorded $267,404 as impaired offering costs in the accompanying
Consolidated Statements of Operations.
DISPUTED PAYABLE
Stifel Nicolaus & Company ("Stifel"), the successor-in-interest to Legg Mason
Walker Wood LLC, an investment banking firm, has made a demand on the Company
for payment of $700,000 as fees for financial advisory services due in
connection with the Bridge Loan referred to in Note 5. Management believes that
Stifel's position, which is based on Stifel's interpretation of a placement
agency agreement entered into by the Company and the investment bank in
September 2005 and terminated by the Company in December 2005, is without merit.
It is the Company's intention to defend itself against any claim for payment
asserted by Stifel vigorously. The Company also reserves the right to dispute
the balance due on the initial retainer payable under the agreement as well as
related out-of-pocket expenses claimed by Stifel, which together total
approximately $96,000, which are recorded and included in accounts payable as of
December 31, 2005 in the accompanying consolidated financial statements.
NOTE 12 - RELATED PARTY TRANSACTIONS
In December 2004, the Company entered into a service agreement with Elite
Financial Communications Group, LLC ("Elite"), pursuant to which Elite agreed to
provide investor relation services to the Company for compensation of $7,500 per
month (plus expenses). By its terms, the agreement with Elite expired in
December 2005. One of the Company's non-employee directors was a partner and
managing member of Elite. This director resigned from service on the Company's
board of directors as of June 9, 2005.
In August 2004, the Company paid Greenfield Capital Partners, LLC,
("Greenfield") and its designees, a placement fee with respect to the placement
of 2,500 shares of its Series A Preferred Stock. See Note 4 (Financing). The
placement fee was comprised of (i) a cash payment of $25,000 and (ii) five-year
warrants to purchase up to 66,667 shares of the Company's Common Stock, of which
options for 33,333 shares are exercisable at a per share exercise price of $.75;
options for 16,667 shares are exercisable at a per share exercise price of
$1.50; and options for the 16,667 shares are exercisable at a per share exercise
price of $2.50. One of the Company's non-employee directors was a Managing
Director of Greenfield at the time that the private placement was consummated
and Greenfield designated that director to receive half of those warrants. The
director subsequently left Greenfield.
In January 2006 the Company entered into additional Short Term Loans with three
private investors (collectively the "January 2006 Investors"), pursuant to which
these investors loaned to the Company the aggregate amount of $500,000. The
January 2006 Investors included Mr. Juan Mendez, Chairman of the Company's board
of directors, who loaned the Company $250,000 (see Note 13a).
F-31
NOTE 13 - SUBSEQUENT EVENTS
A. BRIDGE LOANS
(i) On January 20, 2006, the Company entered into additional Short Term Loans
with three private investors (collectively the "January 2006 Investors"),
pursuant to which these investors loaned to the Company the aggregate principal
amount of $500,000. The January 2006 Investors included Mr. Juan Mendez,
Chairman of the Company's board of directors, who loaned the Company $250,000.
Pursuant to the January 2006 Loan Agreement, the Company issued to the January
2006 Investors secured promissory notes (the "January 2006 Notes") in the
aggregate principal amount of $530,000, representing an original issue discount
of 6% with respect to the principal amount of $500,000 through the stated
maturity date of April 21, 2006. The January 2006 Notes are scheduled to mature
on the Maturity Date of the Short-Term Loan incurred in December 2005 (see Note
5). To secure the Company's obligations under the January 2006 Loan Agreement,
the Security Agreement between the Company and the Secured Parties named therein
which was entered into in connection with the December 2005 Short-Term Loan was
amended to reflect the new loan by the January 2006 Investors. The Company also
issued to the January 2006 Investors warrants expiring December 31, 2010 (the
"January 2006 Bridge Loan Warrants") to purchase in the aggregate up to 250,000
shares of the Company's Common Stock, at a per share exercise price of $1.50,
subject to adjustment upon certain specified conditions. The Company received
net proceeds of $495,000 from the proceeds of the loan, after the payment of
transaction related fees and expenses. The additional loans were on terms and
conditions substantially similar to the Short Term Loan that were incurred in
December 2005. On April 19, 2006, the Company entered into an agreement to
extend the maturity date of the January 2006 Bridge Notes. See Note 13G
(Subsequent Events - Extension of Bridge Loans (Unaudited).
(ii) From February 27 through March 13, 2006, the Company entered into
additional short term loan agreements under which it borrowed the aggregate
principal amount of $1,500,000 (the "March 2006 Short-Term Loans") from one of
the institutional investors who participated in the Bridge Loan Agreement that
closed in December 2005 (see Note 5). These loans are scheduled to mature on the
date which is the earlier of (i) a subsequent financing that generates, on a
cumulative basis together with any other interim financings, gross proceeds to
the Company of at least $3.5 million or (ii) June 1, 2006. The Company issued to
the investor secured promissory notes in the aggregate principal amount of
$1,585,000, representing an original issue discount of approximately 6% with
respect to the principal amount loaned through the stated maturity date of June
1, 2006. To secure the Company's obligations in connection with the March 2006
Short-Term Loans, the Security Agreement between the Company and the Secured
Parties named therein which was entered into in connection with the Short-Term
Loan that was incurred in December 2005 was amended to reflect the new loans. In
addition, the Company issued to the investor five year bridge loan warrants to
purchase in the aggregate up to 750,000 shares of the Company's Common Stock, at
a per share exercise price of $1.50, subject to adjustment upon certain
specified conditions. The additional loan was on terms and conditions
substantially similar to the Short Term Loan that were incurred in December
2005.
(iii) On April 7, 2006 the Company entered into a Bridge Loan Agreement ("April
2006 Bridge Loan Agreement") with two institutional investors (the "April 2006
Bridge Investors") pursuant to which the April 2006 Bridge Investors loaned to
the Company the aggregate principal amount of $450,000 (the "April 2006 Bridge
Loan"). Pursuant to the April 2006 Bridge Loan Agreement, the Company issued to
the April 2006 Bridge Investor secured promissory notes in the aggregate
principal amount of $466,500 (the "April 2006 Bridge Note"), representing an
original issue discount of 3.667%. The Note is scheduled to mature on the date
(the "Maturity Date") which is the earlier of (i) a subsequent financing that
generates, on a cumulative basis together with any other interim financings,
gross proceeds to the Company of at least $3.5 million or (ii) June 1, 2006.
Prior to the Maturity Date, the Company may, at its option, prepay the April
2006 Bridge Note in whole or in part. If not paid at maturity, interest on the
April 2006 Bridge Notes will accrue at 14% per annum from the Maturity Date
until the actual date of payment. To secure the Company's obligations under the
April 2006 Bridge Loan, the security interest agreement dated as of March 13,
2006 between the Company and the secured parties named therein was amended and
restated to include the April 2006 Bridge Loan. The Company received net
proceeds of $401,500 from the proceeds of the loan, after the payment of
transaction related fees and expenses. In connection with the April 2006 Bridge
Loan, the Company issued to the April 2006 Bridge Investors five-year warrants
(the "April 2006 Bridge Warrants") to purchase up to 225,000 shares of Common
Stock at a per share exercise price of $1.50, 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 exercise period, the
Company issues warrants having a lower exercise price to investors in a
subsequent financing transaction.
F-32
B. OPTION EXERCISES AND ISSUANCES
In February 2006 the Company received cash proceeds of $162,000 from the
exercise by certain
C. INVESTOR RELATIONS AGREEMENT
On March 2, 2006 the Company entered into an agreement with a consultant to
provide investor relations services to increase awareness of the Company and its
products. In consideration of services provided, the Company paid to the
consultant $432,000 and issued to the consultant's designee 250,000 restricted
shares of the Company's Common Stock under the Company's 2000 Incentive Plan.
D. MOTOROLA STRATEGIC ALLIANCE AGREEMENT
On April 5, 2006, the Company entered into a Strategic Alliance Agreement (the
"Strategic Alliance Agreement") with Motorola Wireline Networks, Inc.
("Motorola"), a subsidiary of Motorola, Inc., pursuant to which the Company and
Motorola will jointly develop a family of three IP Home gateways (the "Gateway
Products") that will provide expanded support for data, IPTV, High Definition
TV, and Digital Video Recorders using Motorola's existing Multi-Service Access
Platform for exclusive distribution by Motorola under the Motorola brand. Under
the Strategic Alliance Agreement, the Company has also granted Motorola certain
rights with respect to the resale of the Company's products as described below.
The Strategic Alliance Agreement provides that Motorola will pay to the Company
$1.9 million for engineering costs associated with the development of the
Gateway Products, approximately 32% of which is payable within 30 days of the
effective date of the agreement and the remainder of which is payable in
installments on the achievement of certain agreed upon project milestones.
Motorola is entitled to terminate the development program at any time prior to
the completion of the development of the Gateway Products and, in the event that
it does so, the Company will be entitled to retain any of the engineering costs
paid or due and owing by Motorola as of the date of termination. Upon successful
completion of all necessary testing, the Gateway Products will be manufactured
by the Company for exclusive sale to Motorola.
Under the Strategic Alliance Agreement, the Company has granted Motorola the
exclusive right to resell the Company's PG1000 and the HG-V100 gateway products,
and all derivative or substantially similar products (the "Exclusive Products")
to certain specified leading telecommunications carriers and their affiliates
(the "Exclusive Customers") for a period of 24 months from the effective date of
the agreement as part of Motorola's portfolio of broadband wireline solutions.
The exclusivity may be terminated by the Company unless, among other things, at
least one of the Exclusive Customers shall have accepted one of the Exclusive
Products for lab testing within one year of the effective date of the Strategic
Alliance Agreement and signed a contract to purchase Exclusive Products (which
is reasonably expected to result in revenue to the Company in a specified
minimum amount) within 18 months of the effective date of the agreement;
provided, however, that if these conditions are satisfied with respect to an
Exclusive Customer, then Motorola's exclusivity period for such Exclusive
Customer will be extended for an additional 24 months. At all times the Company
retains the right to sell the Exclusive Products to customers other than the
Exclusive Customers. In addition, the Company also granted Motorola the
non-exclusive right to resell all of the Company's other existing products
worldwide.
The Strategic Alliance Agreement also provides that the Company will not, during
the term of the agreement and for a period of two years thereafter, directly or
indirectly sell to or solicit or accept any order for any of its products from
any customer to which Motorola has resold a Company product during the term of
the agreement. These provisions will not apply to customers to whom the Company
made sales of products in the twelve months preceding the effective date of the
Strategic Alliance Agreement or in the event of termination of the agreement by
the Company for cause or by Motorola for convenience. Notwithstanding the
foregoing, if Motorola sources, manufactures or resells a gateway which has
substantially the same functionality as the Company's PG1000 or HG-V100
products, the exclusivity and the non-solicitation provisions contained in the
Strategic Alliance Agreement shall immediately terminate. The Company has also
agreed that the prices for its products that it charges Motorola will be no
higher than the prices that the Company charges any other reseller, customer or
entity.
The Strategic Alliance Agreement has an initial term of three years which will
automatically extend for successive additional one-year terms unless either
party gives notice of termination no less than 30 days prior to the expiration
date of the then-current term. The agreement may be terminated by Motorola at
any time on 30 days notice and by
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either party if the other ceases to do business in the ordinary course or
defaults on its material obligations, representations or warranties under or
otherwise materially breaches the Agreement subject, except in the case of
payment failures, to a 30-day cure period.
E. AMENDMENT TO EQUITY LINE AGREEMENT
On April 12, 2006, the Company and the equity investor entered in to an
amendment of the $6 million equity line commitment the Company obtained in
August 2004. Under the amendment, the price at which Company has the right to
sell Common Stock to the investor under the equity line was reduced to 89% of
the then-current market price but in no event at less than $1.50 per share. In
addition, under the terms of the amendment the Company agreed to file such
registration statement between 90 and 120 days after the effective date of any
resale registration statement that the Company files subsequent to the date of
the amendment in connection with a private placement of the Company's long-term
debt or equity securities resulting in aggregate proceeds to the Company of at
least $6.0 million. The amendment also provides that the exercise price of
common stock purchase warrant issued to the equity line investor in August 2004
will be reduced to $1.50, subject to further adjustment as therein provided. The
equity line investor also agreed to waive the requirement under the equity line
that the Company reserve at all times a sufficient number of shares of its
Common Stock to satisfy its obligations under the equity line and the warrant,
pending the amendment of the Company's certificate of incorporation to increase
the number of shares of Common Stock authorized for issuance.
F. ISSUANCES OF COMMON STOCK
From January 1, 2006 through April 7, 2006, the Company has issued 1,085,151
shares of the Company's Common Stock upon the conversion of $802,500 in stated
value of shares of the Company's Series A Preferred Stock and accrued dividends
thereon. The stated value and accrued dividends were converted at a rate equal
to $0.75 per share of Common Stock. As of April 7, 2006, $1,315,300 in stated
value of Series A Preferred Stock remain outstanding.
From January 1, 2006 through April 7, 2006, the Company has issued 2,444,258
shares of the Company's Common Stock upon the conversion of $2,415,000 in stated
value of shares of the Company's Series B Preferred Stock and accrued dividends
thereon. The state value was converted at a rate equal to $1.01 per share of
Common Stock and dividends were paid at a rate equal to 90% of the volume
weighted average market price of the Common Stock for the five trading days
preceding payment. As of April 7, 2006, $4,700,000 in stated value of Series B
Preferred Stock remain outstanding.
G. EXTENSION OF BRIDGE LOANS (UNAUDITED)
On April 19, 2006, the Company, the December 2005 Bridge Loan Investors and the
January 2006 Investors entered in to an agreement to extend the maturity date of
the December 2005 Bridge Notes and the January 2006 Notes until May 21, 2006 (or
the earlier date on which the Company completes a financing that generates, on a
cumulative basis together with any other interim financings, gross proceeds to
the Company of at least $2.0 million). In consideration of this extension, the
Company issued to the December 2005 Bridge Loan Investors January and the
January 2006 Investors warrants to purchase, in the aggregate, up to 150,000
shares of Common Stock at $1.50 per share and otherwise having terms and
conditions identical to the December 2005 Bridge Warrants and the January 2006
Bridge Loan Warrants.
F-34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was lawful.
In the case of an action by or in the right of the corporation, Section 145
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or complete action in
any of the capacities set forth above against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in and not opposed to the best interests of the
corporation, except that indemnification is not permitted in respect of any
claim, issue or matter as to which such person is adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all of the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such court deems proper.
Section 145 further provides: that a Delaware corporation is required to
indemnify a director, officer, employee or agent against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with any
action, suit or proceeding or in defense of any claim, issue or matter therein
as to which such person has been successful on the merits or otherwise; that
indemnification provided for by Section 145 not be deemed exclusive of any other
rights to which the indemnified party may be entitled; that indemnification
provided for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs,
executors and administrators; and empowers the corporation to purchase and
maintain insurance on behalf of a director or officer against any such liability
asserted against him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
liability under Section 145. A Delaware corporation may provide indemnification
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct. Such
determination is to be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even through less than a quorum or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion or (iii) by the stockholders.
Section 6 of the Registrant's certificate of incorporation provides that:
"To the fullest extent that the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended, permits elimination or
limitation of the liability of directors, a director of the corporation shall
not be personally liable to the corporation or any of its shareholders for any
breach of duty in his capacity as a director. Any repeal or modification of the
foregoing sentence by the shareholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing at the
time of such repeal or modification."
II-1
Section 102(b)(7) of the Delaware Corporation Law provides that the Certificate
of Incorporation of a Delaware corporation may contain a provision eliminating
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) the payment of unlawful dividends or the
making of unlawful stock purchases or redemptions or(iv) any transaction from
which the director derived a personal benefit.
Section 7 of the Registrant's certificate of incorporation contains the
following provisions with respect to the elimination or limitation of liability
of the Registrant's directors:
"The directors and officers of the corporation shall be entitled to such rights
of indemnification and advancement of expenses, including attorneys' fees, in
the defense of any action or threatened action in which a director or officer is
or may be a party as the Board of Directors may by resolution prescribe."
The Registrant's by-laws provide that it will indemnify its directors, executive
officers, other officers, employees and agents to the fullest extent permitted
by law
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than broker
commissions, payable by the Issuer in connection with the sale of the shares
offered hereby. All amounts shown are estimates (except for the SEC filing
fees).
SEC filing fee(1) $ 0
Legal fees and expenses $10,000
Blue sky filing fees and expenses
(including counsel fees) $ 0
Accounting fees and expenses $ 5,000
Printing and engraving expenses $ 500
Miscellaneous expenses $
Total $15,500
(1) A registration fee of $4,168 was previously paid in connection with the
initial filing of the Original Registration Statement on November 24, 2004.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following paragraphs set forth certain information with respect to all
securities sold by us within the past three years without registration under the
Securities Act.
1. In August 2002, we issued to each of four newly elected independent directors
out of our 2002 Non-Employee Directors Stock Option Plan options to purchase up
to 55,000 shares of our Common Stock, at a per share exercise price of $0.25.
These options expired unexercised by January 2004 upon these directors'
resignation from our Board of Directors.
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2. In January 2004, we issued to each of two independent directors 164,406 five
year non-plan options to purchase up to 164,406 shares of our Common Stock at a
per share exercise price of $0.56.
3. In January 2004, we issued to our then interim Chief Executive Officer and a
director, in connection with his resignation from all positions held with our
company, five year non-plan options to purchase up 164,406 shares of our Common
Stock at a per share exercise price of $0.56.
4. In March 2004, we issued to our Chief Executive Officer and a director, in
connection with his employment, out of our 2000 Equity Incentive Plan options to
purchase up to 1,315,520 shares of our Common Stock at a per share exercise
price of $0.74. The option is to vest over three years, beginning June 30, 2004.
5. In March 2004, we issued to each of two new employees, out of our 2000 Equity
Incentive Plan, options to purchase up to 100,000 shares of the Company's Common
Stock at a per share exercise price of $0.80. The options are scheduled to vest
in March 2005.
6. In May 2004, in consideration of services provided, we issued to a service
provider non-plan four year warrants to purchase up to 100,000 shares of Common
Stock at a per share exercise price of $0.62.
7. In May 2004, we issued to three newly elected non-employee directors out of
our 2002 Non-Employee Directors' Stock Option Plan options to purchase up to a
total of 225,000 shares of Common Stock at a per share exercise price of $0.71.
The options are to vest over two years in equal quarterly installments at the
end of each quarter, beginning September 30, 2004.
8. In May 2004, we issued to a member of our newly established advisory board
out of our 2000 Equity Incentive Plan options to purchase up to a 60,000 shares
of Common Stock at a per share exercise price of $0.71. The options are to vest
over two years in equal quarterly installments at the end of each quarter,
beginning September 30, 2004.
9. In April 2004, in connection with the commencement of employment we issued to
a non-management employee out of the 2000 Equity Incentive Plan options to
purchase up to 20,000 shares of Common Stock at a per share exercise price of
$0.65. Options for 25% of the shares are to vest on the first anniversary of
employment and the options for the remaining shares in equal quarterly
installments thereafter.
10. In August 2004, we entered into agreements with 36 investors pursuant to
which we issued to them 52,500 shares of our Series A 7% Convertible Preferred
Stock, par value $0.001 per share (the "Series A"). In connection with the
issuance of the Series A shares, we issued to the purchasers of the Series A
shares five-year warrants to purchase up to 3.5 million shares of Common Stock
at a per share exercise price of $1.50 and up to 3.5 million shares of Common
Stock at a per share exercise price of $2.50.
11. In connection with the placement of the Series A shares, we issued to three
placement agents five-year warrants to purchase, in the aggregate, up to 1.4
million shares of Common Stock at exercise prices ranging from $0.75 to $2.50
per share.
12. In April 2005, we entered into agreements with investors pursuant to which
we issued to them 60,000 shares of our Series B 8% Convertible Preferred Stock,
par value $0.001 per share (the "Series B"). In connection with the issuance of
the Series B shares, we issued to the purchasers of the Series B shares
five-year warrants to purchase up to 2.9 million shares of Common Stock at a per
share exercise price of $1.50.
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13. In connection with the placement of the Series B shares in April 2005, we
issued to a placement agent five-year warrants to purchase, in the aggregate, up
to 891,000 shares of Common Stock at exercise prices ranging from $1.01 to $1.50
per share.
14. In May 2005, we entered into agreements with investors pursuant to which we
issued to them 17,650 Series B shares. In connection with the issuance of the
Series B shares, we issued to the purchasers of the Series B shares five-year
warrants to purchase up to 873,760 shares of Common Stock at a per share
exercise price of $1.50.
15. In connection with the placement of the Series B shares in May 2005, we
issued to a placement agent five-year warrants to purchase, in the aggregate, up
to 262,000 shares of Common Stock at exercise prices ranging from $1.01 to $1.50
per share.
16. In December 2005, we issued to two institutional investors five-year
warrants to purchase in the aggregate up to 500,000 shares of our Common Stock
at an exercise price of $1.50 per share. The warrants were issued pursuant to a
bridge loan agreement between us and the investors, under which the investors
loaned us the aggregate amount of $1,000,000 (before the payment of offering
related fees and expenses).
17. In January 2006, we issued to three institutional investors five-year
warrants to purchase in the aggregate up to 250,000 shares of our Common Stock
at an exercise price of $1.50 per share. The warrants were issued pursuant to a
bridge loan agreement between us and the investors, under which the investors
loaned us the aggregate amount of $500,000 (before the payment of offering
related fees and expenses).
18. In March 2006, we issued to an institutional investor five-year warrants to
purchase in the aggregate up to 750,000 shares of our Common Stock at an
exercise price of $1.50 per share. The warrants were issued pursuant to a bridge
loan agreement between us and the investors, under which the investors loaned us
the aggregate amount of $1,500,000 (before the payment of offering related fees
and expenses).
19. In March 2006, pursuant to a consulting agreement entered into between us
and a third party consultant we issued to a designee of such consultant 250,000
restricted shares of our Common Stock under our 2000 Equity Incentive Plan in
consideration of services rendered under such agreement.
20. In April 2006, we issued to two institutional investors five-year warrants
to purchase in the aggregate up to 225,000 shares of our Common Stock at an
exercise price of $1.50 per share. The warrants were issued pursuant to a bridge
loan agreement between us and the investors, under which the investors loaned us
the aggregate amount of $450,000 (before the payment of offering related fees
and expenses).
21. In April 2006, in connection with the extension of the maturity date of the
bridge loan agreements referred to in Notes 16 and 17 above, we issued to the
institutional investors party to those agreements warrants to purchase in the
aggregate 150,000 shares of Common Stock on terms and conditions, including
without limitation, exercise price and period, identical to the warrants
referred to in Notes 16 and 17.
22. In May 2006, we raised gross proceeds of $10 million from the private
placement (the "May 2006 Private Placement") to accredited institutional and
individual investors of our two-year 8% Senior Secured Convertible Debentures.
In connection with the issuance of the debentures, we issued to the investors
five-year warrants to purchase up to 6,666,667 shares of our Common Stock at a
per share exercise price of $1.50.
23. In connection with the placement of the convertible debentures in May 2006,
we issued to a
II-4
placement agent five-year warrants to purchase, in the aggregate, up to
2,000,000 shares of Common Stock at exercise prices ranging from $0.75 to $1.50
per share.
24. Pursuant to consulting agreements entered into between us and third party
consultants, in September 2006, we issued to a total of two such consultants an
aggregate of 550,000 restricted shares of our Common Stock under our 2000 Equity
Incentive Plan in consideration of services rendered under such agreements.
All of the securities issued in the transactions described above were issued
without registration under the Securities Act in reliance upon the exemption
provided in Section 4(2) of the Securities Act or Regulation S under such
Securities Act. Except with respect to securities sold under Regulation S, the
recipients of securities in each such transaction acquired the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to the share certificates
issued in all of the above transactions. The Company believes the recipients
were all "accredited investors" within the meaning of Rule 501(a) of Regulation
D under the Securities Act, or had such knowledge and experience in financial
and business matters as to be able to evaluate the merits and risks of an
investment in its common stock. All recipients had adequate access to
information about the Company. None of the transactions described above involved
general solicitation or advertising.
ITEM 27. EXHIBITS
3.1 Certificate of Incorporation of the Company dated July 14, 1994. (1)
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company dated August 17, 1994. (2)
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company dated January 30, 1999. (3)
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company dated December 21, 1999. (3)
3.5 Certificate of Amendment to the Certificate of Incorporation of the
Company dated July 15, 2000. (4)
3.6 By-Laws of the Company, as amended. (2)
4.1 Specimen Common Stock Certificate. (1)
4.2 Form of Warrant issued by the Company to certain investors. (3)
4.3 Form of Agent Warrant issued by the Company to certain agents. (3)
4.4 Certificate of Designations of Rights and Preferences of the Series A
Convertible Preferred Stock of the Company. (10)
4.5 Form of Common Stock Purchase Warrant issued by the Company to certain
investors. (10)
4.6 Form of Common Stock Purchase Warrant issued by the Company to certain
placement agents. (10)
II-5
4.7 Form of Common Stock Purchase Warrant issued by the Company to the
investor identified therein. (10)
4.8 Certificate of Designations of Rights and Preferences of the Series B
Convertible Preferred Stock of the Company. (11)
4.9 Form of Common Stock Purchase Warrant issued by the Company to certain
investors as of April 26, 2005. (11)
4.10 Form of Secured Promissory Note issued on December 22, 2005. (13)
4.11 Form of Five-Year Warrant issued on December 22, 2005. (13)
4.12 Form of 8% Senior Secured Convertible Debenture issued on May 5, 2006.
(15)
4.13 Form of Five-Year Warrant issued on May 5, 2006. (15)
5.1 Opinion of Lawrence Kallaur. (13)
10.1 1996 Incentive and Non-Qualified Stock Option Plan, as amended. (2)
10.2 The Company's 2000 Equity Incentive Plan. (5)
10.3 The Company's Non-Executive Directors Stock Option Plan. (5)
10.4 The Company's 2002 Non-Employee Directors Stock Option Plan. (6)
10.5 Asset Purchase Agreement dated as of November 4, 2002 among the Company,
Macrovision Corporation and Macrovision Europe Ltd. (7)
10.6 Termination and Settlement Agreement dated as of January 28, 2004 between
the Company and Judah Marvin Feigenbaum. (8)
10.7 Stock Option Agreement dated as of January 28, 2004 between the Company
and Judah Marvin Feigenbaum. (8)
10.8 Development and Licensing Agreement dated as of January 6, 2004 between
the Company and Lucent Technologies Inc. (9)
10.9 Amendment to the Development and Licensing Agreement between the Company
and Lucent Technologies, Inc. (9)
10.10 Employment Agreement dated as of March 3, 2004 between the Company and
Frank Galuppo. (8)+
10.11 Form of Securities Purchase Agreement dated as of July 30, 2004 among the
Company and purchasers of the Convertible Preferred Stock. (10)
10.12 Form of Registration Rights Agreement dated as of July 30, 2004 among the
Company and certain investors identified therein. (10)
II-6
10.13 Private Equity Credit Agreement dated as of August 9, 2004 by and between
the Company and the investor identified therein. (10)
10.14 Registration Rights Agreement dated as of August 9, 2004 by and between
the Company and the investor identified therein. (10)
10.15 Lease dated as of February 9, 2005 between 2 Corbett Way, LLC and the
Company. (11)
10.16 Form of Securities Purchase Agreement dated as of April 22, 2005 among the
Company and certain investors identified therein. (11)
10.17 Form of Registration Rights Agreement dated as of April 22, 2005 among the
Company and certain investors identified therein. (11)
10.18 Employment Agreement dated May 12, 2005 between the Company and James D.
Gardner. (12)+
10.19 Form of Bridge Loan Agreement dated as of December 15, 2005. (14)
10.20 Security Interest Agreement dated as of December 15, 2005 among the
Company and the investors named therein and Krieger and Prager, as agent
for the secured parties. (14)
10.21 Form of Securities Purchase Agreement dated as of April 26, 2006 between
the Company and the investors named therein. (15)
10.22 Form of Security Interest Agreement dated as of April 26, 2006 among the
Company, the Secured Parties named therein, and Krieger & Prager, LLP, as
agent for the Secured Parties. (15)
10.23 Form of Registration Rights Agreement dated as of April 26, 2006 between
the Company and the investors named therein. (15)
10.24 Strategic Alliance Agreement, effective as of April 3, 2006 between the
Company and Motorola Wireline Networks Inc. (16) (confidential treatment
requested with respect to certain portions thereof; such portions have
been redacted).
10.25 Offer Letter issued by the Company on October 16, 2006 to the investors
specified therein.(17)
10.26 Form of Bridge Loan Agreement dated as of October 10, 2006.(17)
14.1 Code of Business Conduct. (8)
15. Subsidiary of Amedia: TTR Technologies, Ltd., an Israeli corporation,
wholly-owned.
23.1 Consent of Lawrence Kallaur, Esq. *
23.2 Consent of Marcum & Kliegman, LLP *
+ Management Agreement
* Filed Herewith
II-7
(1) Filed as an exhibit to the Registrant's Registration Statement on Form SB-2
(File No. 333-11829) filed on September 12, 1996 and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB filed
for the year ended December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(File No. 333-32662) filed on March 16, 2000 and incorporated herein by
reference.
(4) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Annual Report on Form 10-K filed for
the year ended December 31, 2001 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Revised Definitive Proxy Statement for
the 2002 Annual meeting of Stockholders, and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Proxy Statement and incorporated
herein by reference.
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for
the year ended December 31, 2003 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Definitive Proxy Statement filed on
February 10, 2004 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
August 12, 2004 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2005 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
April 28, 2005 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-2
(File No. 333-126351) filed on July 1, 2005 and incorporated herein by
reference.
(14) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
December 22, 2005 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on May
11, 2006 and incorporated herein by reference.
(16) Filed as an exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2006 and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
October 24, 2006 and incorporated herein by reference.
II-8
ITEM 28. UNDERTAKINGS.
Amedia Networks, Inc. hereby undertakes the following:
(a)(1) To file, during any period in which it offers or sells securities,
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement.
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Post Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned in Eatontown, New Jersey, on the 24th day of October, 2006.
AMEDIA NETWORKS, INC.
DATE: OCTOBER 24, 2006 BY /S/ FRANK GALUPPO
----------------------------------
FRANK GALUPPO,
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: OCTOBER 24, 2006 BY /S/ JAMES D. GARDNER
----------------------------------
JAMES D. GARDNER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ FRANK GALUPPO PRESIDENT, CHIEF OCTOBER 24, 2006
- ------------------------------------- EXECUTIVE OFFICER,
FRANK GALUPPO DIRECTOR
/S/ JUAN MENDEZ CHAIRMAN OCTOBER 24, 2006
- -------------------------------------
JUAN MENDEZ
/S/ RICHARD ROSENBLUM DIRECTOR OCTOBER 24, 2006
- -------------------------------------
RICHARD ROSENBLUM
/S/ GERALD BUTTERS DIRECTOR OCTOBER 24, 2006
- -------------------------------------
GERALD BUTTERS
/S/ BOB MARTIN DIRECTOR OCTOBER 24, 2006
- -------------------------------------
BOB MARTIN
II-10