As filed with the Securities and Exchange Commission on December 20, 2004
Registration No. 333-118044
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DELAWARE NUWAVE TECHNOLOGIES, INC. 22-3387630
(State or Other Jurisdiction of Incorporation (Name of Registrant in Our (I.R.S. Employer Identification No.)
or Organization) Charter)
3663
1416 MORRIS AVENUE, SUITE 207 (Primary Standard Industrial 1416 MORRIS AVENUE, SUITE 207
UNION, NEW JERSEY 07083 Classification Code Number) UNION, NEW JERSEY 07083
(Address and telephone number of Principal (908) 851-2470
Executive Offices and Principal Place of (Name, address and telephone number of agent
Business) for service)
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2)
----------------------------------------------------------------------------------------------------------------------
Common stock 130,690,033 $0.085 $11,108,653 $1,407.47
----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of the date the fee was paid and first submitted to the
Commission.
(2) Fee previously paid.
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to completion, dated December 20, 2004
NUWAVE TECHNOLOGIES, INC.
130,690,033 SHARES OF COMMON STOCKS
This prospectus relates to the sale of up to 130,690,033 shares of
NuWave's common stock by certain persons who are or will become stockholders of
NuWave. Please refer to "Selling Stockholders" beginning on page 12. NuWave is
not selling any shares of common stock in this offering and therefore will not
receive any proceeds from this offering. We will, however, receive proceeds from
the sale of common stock under the Standby Equity Distribution Agreement. All
costs associated with this registration will be borne by us
The shares of common stock are being offered for sale on a "best
efforts" basis by the selling stockholders at prices established on the
Over-the-Counter Bulletin Board during the term of this offering. There are no
minimum purchase requirements. These prices will fluctuate based on the demand
for the shares of common stock.
Our common stock is quoted on the Over-the-Counter Bulletin Board
maintained by the NASD under the symbol "NUWV." On November 22, 2004, the last
reported sale price of our common stock was $0.065 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___________ ___, 2004.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................2
THE OFFERING......................................................................................4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION........................................................5
RISK FACTORS......................................................................................7
FORWARD-LOOKING STATEMENTS.......................................................................11
SELLING STOCKHOLDERS.............................................................................12
USE OF PROCEEDS..................................................................................15
DILUTION.........................................................................................16
STANDBY EQUITY DISTRIBUTION AGREEMENT............................................................18
PLAN OF DISTRIBUTION.............................................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................................22
DESCRIPTION OF BUSINESS..........................................................................33
MANAGEMENT.......................................................................................36
DESCRIPTION OF PROPERTY..........................................................................39
LEGAL PROCEEDINGS................................................................................41
PRINCIPAL STOCKHOLDERS...........................................................................42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................43
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS....44
DESCRIPTION OF SECURITIES........................................................................45
EXPERTS..........................................................................................46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.......................................................................................46
LEGAL MATTERS....................................................................................47
HOW TO GET MORE INFORMATION......................................................................47
FINANCIAL STATEMENTS............................................................................F-1
We intend to distribute to our stockholders annual reports containing
audited financial statements. Our audited consolidated financial statements for
the year December 31, 2003, were contained in our Annual Report on Form 10-KSB.
i
PROSPECTUS SUMMARY
OVERVIEW
Since its formation in 1995, NuWave has been a technology company,
focused upon the development and marketing of technology and technology products
related to enhancing image and video output. Over the last three years, NuWave's
annual sales have declined from $505,000 in 2001, to $286,000 in 2002 to $20,000
in 2003 and no sales in the nine month period ended September 30, 2004, as it
has had difficulty securing buyers for its technology products in a very
competitive market environment. NuWave has incurred net losses of $4,273,000,
$2,674,000, $790,000 and $949,000 in 2001, 2002 and 2003, and for the nine
months ended September 30, 2004, respectively.
During 2003, in conjunction with a restructuring with the primary
lender, all of NuWave's officers and employees resigned or were terminated. On
September 10, 2003, NuWave entered into an agreement with a lender, Cornell
Capital Partners, L.P., to settle a default on indebtedness owed to Cornell
Capital Partners, L.P. This indebtedness, consisting of notes payable of
$484,000 and accrued interest of approximately $93,000, was settled in full for
the net sum of $460,000 on September 10, 2004.
During 2003, NuWave made changes to its product lines and business
strategy. NuWave has had difficulty in selling its technology related to image
and video enhancement. This technology is designed to enrich picture and video
output with clearer, more defined detail in texture, color, contrast and tone.
NuWave competes in a very competitive and quickly evolving market. NuWave's
products have not been price competitive in the market, and this had made it
difficult to obtain placements within end use electronics markets. NuWave
previously marketed three product lines; however, based on a reevaluation of
these lines it is no longer marketing the retail and security/surveillance
products and has significantly reduced its marketing efforts of the digital
filtering technology.
NuWave intends to broaden its base of products and investments in order
to diversify the product portfolio into a broad spectrum of industries and to
improve profitability. In 2003 and in the first quarter of 2004, NuWave formed
new subsidiaries for the purpose of acquiring and holding real estate and other
assets. On December 22, 2003, NuWave, through a wholly owned subsidiary,
acquired vacant land that it intends to develop into a community for residents
over the age of 55. On April 30, 2004, NuWave, through a wholly owned
subsidiary, purchased a parcel of residential real estate for $122,000,
utilizing approximately $113,000 in cash and the application of deposits of
approximately $9,000. NuWave intends to redevelop and then later sell this
property.
GOING CONCERN
NuWave did not have any revenues in the nine months ended September 30,
2004. NuWave incurred a net loss of approximately $949,000 during the nine
months ended September 30, 2004, resulting in a stockholders deficiency of
approximately $1,999,000. These matters raise substantial doubt about NuWave's
ability to continue as a going concern. The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. These consolidated 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 NuWave be unable to continue as a
going concern.
Management has taken a number of actions to lower costs and to improve
NuWave's liquidity. NuWave has substantially reduced its cash flow requirements
through significant reductions in payroll and various other operating expenses.
NuWave intends to remain in the technology business.
In August 2004, NuWave raised $1,783,549 through the issuance of a
convertible debenture related to NuWave's largest real estate holding. In
November 2004, NuWave repaid $298,000 of the $1,783,549 proceeds received from
this convertible debenture. In September 2004, NuWave repaid in full for the net
sum of $460,000 to Cornell Capital Partners, L.P. its indebtedness of notes
payable - related party, consisting of principal of $484,000 and interest of
$93,000 through the repayment date. In addition, management's plans include the
raising of cash through the issuance of debt or equity although there are no
assurances that NuWave will be successful. NuWave continues to require funding
by and the financial support of Cornell Capital Partners, L.P. Management
intends to monitor spending toward development of the land holdings carefully
until such time as all required new funding is secured.
2
ABOUT US
Our principal office is located at 1416 Morris Avenue, Suite 207,
Union, New Jersey 07083. Our telephone number is (908) 851-2470.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are stockholders of NuWave.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners, L.P. shares
of common stock for a total purchase price of up to $30 million. Note that at an
assumed price of $0.065 per share we would receive gross proceeds of $3,978,500
or $26,021,500 less than is available under the Standby Equity Distribution
Agreement. In order to have access to the full amount available under the
Standby Equity Distribution Agreement, our stock price would have to rise
substantially to approximately $0.45 per share or we would need to register and
issue an additional approximately 400 million shares of common stock.
Cornell Capital Partners, L.P. may purchase the shares of common stock
for a 1% discount to the lowest volume weighted average price of our common
stock for the 5 days immediately following the notice date. Cornell Capital
Partners, L.P. intends to sell any shares purchased under the Standby Equity
Distribution Agreement at the then prevailing market price. Among other things,
this prospectus relates to the shares of common stock to be issued under the
Standby Equity Distribution Agreement.
COMMON STOCK OFFERED 130,690,033 shares by selling
stockholders. This would equal
98.4% of our outstanding common
stock on the date hereof, if all
of these shares were to be
issued.
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING BEFORE THE OFFERING 2,062,013 shares
USE OF PROCEEDS We will not receive any proceeds
of the shares offered by the
selling stockholders. Any
proceeds we receive from the
sale of common stock under the
Standby Equity Distribution
Agreement will be used for real
estate development activities
and general working capital
purposes. See "Use of Proceeds."
RISK FACTORS The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution. See "Risk Factors" and
"Dilution."
OVER-THE-COUNTER BULLETIN BOARD SYMBOL NUWV
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
($ in thousands, except share and per share data)
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2004 2003
----------- ----------- ----------- -----------
STATEMENTS OF OPERATION DATA: (unaudited)
Net sales $ 20 $ 286 $ -- $ 19
Cost of sales 5 390 -- 5
----------- ----------- ----------- -----------
Gross profit (loss) 15 (104) -- 14
Operating expenses:
General and administrative 958 2,071 572 631
Research and development 134 681 -- 127
----------- ----------- ----------- -----------
Total operating expenses 1,092 2,752 572 758
Loss from operations (1,077) (2,856) (572) (744)
Gain on forgiveness of debt 347 -- -- 265
Interest income -- 5 -- --
Interest expense (55) (5) (377) (21)
----------- ----------- ----------- -----------
Loss before (provision for) benefit from
income taxes (785) (2,856) (949) (500)
(Provision for) benefit from income
taxes (5) 182 -- --
----------- ----------- ----------- -----------
Net loss $ (790) $ (2,674) $ (949) $ (500)
Deemed dividend - redemption premium on
convertible preferred stock (19) -- -- --
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (809) $ (2,674) $ (949) $ (500)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 1,455,365 285,315 1,961,240 1,267,079
=========== =========== =========== ===========
Basic and diluted net loss per common
share $ (0.56) $ (9.37) $ (0.48) $ (0.39)
=========== =========== =========== ===========
Comprehensive loss:
Net loss $ (809) $ (2,674) $ (949) $ (500)
Other comprehensive loss net of income
taxes:
Unrealized losses on marketable
securities -- -- (45) --
----------- ----------- ----------- -----------
Comprehensive loss $ (809) $ (2,674) $ (994) $ (500)
=========== =========== =========== ===========
5
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
($ in thousands)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
----------- -----------
(unaudited)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 822 $ 119
Marketable securities - available-for-sale 85 --
Inventory 1 1
----------- -----------
Total current assets 908 120
Property and equipment, net 22 4
Land held for development and sale 3,328 2,970
Deferred tax asset -- 225
----------- -----------
Total assets $ 4,258 $ 3,319
=========== ===========
Accounts payable, accrued interest and
accrued liabilities $ 101 $ 170
Current portion of note payable-related
party 198 --
----------- -----------
Total current liabilities 299 170
----------- -----------
Notes payable - related party -- 484
Note payable - related party 1,202 1,400
Convertible debentures - related party,
net of unamortized discounts of $697
and $866, respectively 2,603 2,634
Convertible debentures, net of unamortized
discounts of $574 and $109,
respectively 1,945 336
Accrued interest - non-current (including
related party of $182) 208 --
----------- -----------
Total non-current liabilities 5,958 4,854
----------- -----------
Total liabilities 6,257 5,024
Series A Convertible Preferred Stock -- --
Preferred Stock -- --
Common stock 2 2
Additional paid-in capital 26,916 26,216
Accumulated other comprehensive loss (45) --
Accumulated deficit (28,872) (27,923)
----------- -----------
Total stockholders' deficiency (1,999) (1,705)
----------- -----------
Total liabilities and stockholders'
deficiency $ 4,258 $ 3,319
=========== ===========
6
RISK FACTORS
NuWave is subject to various risks that may materially harm our business,
financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY INCURRED LOSSES AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically incurred losses. NuWave has experienced losses from
operations as a result of its investment necessary to achieve its operating
plan, which is long-range in nature. In the nine months ended September 30,
2004, we had a net loss applicable to common stockholders of $949,000. In the
years ended December 31, 2003 and 2002, we had net losses applicable to common
shareholders of $809,000 and $2,674,000, respectively. Future losses are likely
to occur. Accordingly, we may experience significant liquidity and cash flow
problems because historically our operations have not been profitable. No
assurances can be given that we will be successful in reaching or maintaining
profitable operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
We have relied on significant external financing to fund our operations
and expect to rely on external financing for the foreseeable future. Such
financing has historically come from a combination of borrowings and sale of
common stock from third parties. We cannot assure you that financing, whether
from external sources or related parties, will be available if needed or on
favorable terms. We have sufficient funds to continue operations for one year
but will require additional capital to complete our real estate development
projects. Our inability to obtain adequate financing will result in the need to
curtail business operations. Any of these events would be materially harmful to
our business and may result in a lower stock price. We will need to raise
additional capital to fund our anticipated future expansion. Among other things,
external financing may be required to cover our operating costs.
THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND CONVERTIBLE DEBENTURES CONTAIN
CERTAIN COVENANTS PROHIBITING US FROM RAISING CAPITAL AT LESS THAN THE MARKET
PRICE OR PLEDGING ASSETS TO OTHER LENDERS
The Standby Equity Distribution Agreement and Convertible Debentures
contain covenants that restrict the following activities:
o Raising capital from the sale of stock or other securities
convertible into stock at a price less than the market price of
NuWave's common stock on the date of issuance; or
o Granting a security interest in NuWave's assets, which security
interest may be needed in order to obtain borrowings or capital from
a lender.
The existence of these covenants may severely limit NuWave's ability to
borrow money or raise capital from the sale of stock or convertible securities
because any potential lender will likely require collateral in the form of a
security interest on NuWave's assets to secure a loan and purchasers of our
stock or convertible securities may want to pay a discount to the market price
of our stock.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMS, WHICH MEANS THAT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING
Our independent registered public accounting firms have added an
explanatory paragraph to their audit opinions issued in connection with the
financial statements for the years ended December 31, 2003 and 2002, which
states that NuWave's ability to continue as a going concern depends upon its
ability to secure financing and attain profitable operations. Our ability to
obtain additional funding will determine our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
7
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there can
be no assurance that an active trading market for our common stock will develop.
An absence of an active trading market could adversely affect our shareholders'
ability to sell our common stock in short time periods, or possibly at all. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations that could adversely affect the market
price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker-dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
RISKS RELATED TO THIS OFFERING
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 2,062,013 shares of common stock outstanding as of November 29, 2004,
1,805,148 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 256,865 shares of common stock held by
existing stockholders are "restricted securities" and may be resold in the
public market only if registered or pursuant to an exemption from registration.
Some of these shares may be resold under Rule 144.
EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT
The sale of shares pursuant to the Standby Equity Distribution Agreement
will have a dilutive impact on our stockholders. As a result, our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price is, the more shares of
common stock we will have to issue under the Standby Equity Distribution
Agreement to draw down the full amount. If our stock price is lower, then our
existing stockholders would experience greater dilution.
8
THE INVESTOR UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT AND CONVERTIBLE
DEBENTURES WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON
STOCK
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 1% discount to the volume weighted average price
for the 5 days immediately following the notice date of an advance. These
discounted sales could cause the price of our common stock to decline.
In addition, Cornell Capital Partners, L.P. holds debentures convertible
into NuWave's Common Stock at a price equal to the lower of either (a) 120% of
the closing bid price on the closing date or (b) an amount equal to eighty
percent (80%) of the average weighted average price of the common stock for the
5 trading days immediately preceding the conversion date. There is essentially
no limit on the number of shares that Cornell Capital Partners, L.P. may acquire
upon conversion of these debentures because Cornell Capital Partners, L.P. will
be entitled to a greater number of shares as the stock price falls.
THE NUMBER OF SHARES TO BE ISSUED UPON CONVERSION OF THE DEBENTURES IS
ESSENTIALLY LIMITLESS BECAUSE WE ARE REQUIRED TO ISSUE MORE SHARES AS OUR STOCK
PRICE DECLINES
Cornell Capital Partners, L.P. holds debentures convertible into NuWave's
Common Stock at a price equal to the lower of either (a) 120% of the closing bid
price on the closing date or (b) an amount equal to eighty percent (80%) of the
average weighted average price of the Common Stock for the 5 trading days
immediately preceding the conversion date. This means that the conversion price
of the debentures will decline as the price of our common stock declines.
Accordingly, NuWave would be obligated to issue a greater number of shares of
Common Stock as the stock price declines. For example, NuWave would be obligated
to issue the number of shares of Common Stock set forth below for the indicated
stock prices.
Stock Price No. of Shares
----------- -------------
$0.065 461,538,000
$0.0325 923,077,000
$0.01625 1,846,154,000
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means that up to
130,690,033 shares of common stock, the number of shares being registered in
this offering, may be sold. Such sales may cause our stock price to decline.
THE SALE OF OUR STOCK UNDER OUR STANDBY EQUITY DISTRIBUTION AGREEMENT COULD
ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE
DECLINE OF OUR STOCK PRICE
The significant downward pressure on the price of our common stock caused
by the sale of material amounts of common stock under the Standby Equity
Distribution Agreement could encourage short sales by third parties. In a short
sale, a prospective seller borrows stock from a shareholder or broker and sells
the borrowed stock. The prospective seller hopes that the stock price will
decline, at which time the seller can purchase shares at a lower price to repay
the lender. The seller profits when the stock price declines because it is
purchasing shares at a price lower than the sale price of the borrowed stock.
Such sales could place further downward pressure on the price of our common
stock by increasing the number of shares being sold.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, our common stock has traded on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to larger more widely
9
known companies in our industry. Thinly traded common stock can be more volatile
than common stock trading in an active public market. We cannot predict the
extent to which an active public market for the common stock will develop or be
sustained after this offering.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE STANDBY EQUITY
DISTRIBUTION AGREEMENT WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided from the Standby Equity Distribution
Agreement, in large part. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part, because the
amount of financing available will fluctuate with the price and volume of our
common stock. As the price and volume decline, then the amount of financing
available under the Standby Equity Distribution Agreement will decline.
There are additional restrictions on our ability to request advances under
the Standby Equity Distribution Agreement. For example, our ability to request
an advance is conditioned upon us registering the shares of common stock with
the SEC. Further, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners, L.P.
owning more than 9.9% of our outstanding common stock. Even if we request
advances the amount of each advance is limited to a maximum draw down of
$1,000,000 every 7 trading days.
10
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Business," as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
11
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling shareholder's relationship to NuWave
and how each selling shareholder acquired or will acquire the shares to be sold
in this offering is detailed in the information immediately following this
table.
PERCENTAGE
OF
OUTSTANDING
SHARES TO
SHARES TO BE BE
PERCENTAGE OF ACQUIRED ACQUIRED PERCENTAGE
OUTSTANDING UNDER THE UNDER THE OF SHARES
SHARES SHARES STANDBY STANDBY BENEFICIALLY
BENEFICIALLY BENEFICIALLY EQUITY EQUITY SHARES TO BE OWNED
OWNED BEFORE OWNED BEFORE DISTRIBUTION DISTRIBUTION SOLD IN THE AFTER
SELLING STOCKHOLDER OFFERING OFFERING (1) AGREEMENT AGREEMENT OFFERING OFFERING(1)
------------------------- ------------- -------------- ------------- ------------- ------------ ------------
Cornell Capital Partners,
L.P. 226,615(2) 9.9% 61,208,092 97.0% 120,122,191 0.0%
Gerald Holland 226,615(2) 9.9% -- -- 3,209,764 0.0%
David Kesselbrenner 226,615(2) 9.9% -- -- 445,800 0.0%
Sarah Kesselbrenner 226,615(2) 9.9% -- -- 445,800 0.0%
Joseph Kesselbrenner 226,615(2) 9.9% -- -- 534,961 0.0%
Louis Kesselbrenner 226,615(2) 9.9% -- -- 445,800 0.0%
Joanna Saporito 226,615(2) 9.9% -- -- 1,783,202 0.0%
Michael Kesselbrenner 226,615(2) 9.9% -- -- 1,783,202 0.0%
Mary-Ellen Viola 226,615(2) 9.9% -- -- 1,783.202 0.0%
NextGen Associates 25,000 1.2% -- -- 25,000 0.0%
Newbridge Securities
Corporation 111,111 5.1% -- -- 111,111 0.0%
----------- ----------- -----
TOTAL 61,208,092 130,690,033 0.0%
=========== =========== =====
-------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 2,062,013 shares of common
stock outstanding as of November 29, 2004, together with securities
exercisable or convertible into shares of common stock within 60 days of
November 29, 2004. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of
common stock that are currently exercisable or exercisable within 60 days
of November 29, 2004 are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) These represent the approximate number of shares underlying convertible
debentures at an assumed price of $0.052 per share (i.e., 80% of a recent
price $0.065 per share), subject to a limitation of 9.9% contained in the
convertible debentures. Because the conversion price will fluctuate based
on the market price of our stock, the actual number of shares to be issued
upon conversion of the debentures may be higher or lower. NuWave is
registering the number of shares indicated in the column entitled "Shares
to be Sold in the Offering," which number reflects NuWave's good faith
estimate of the number of shares that will need to be issued upon
conversion of the debentures. The number of shares in such column is
higher than the number of shares beneficially owned by each selling
stockholder because the number of shares in such column is not subject to
the 9.9% limitation. Each selling stockholder is permitted to convert up
to the 9.9% limit and sell the underlying stock on more than one occasion.
As such, each selling stockholder could convert and sell in the aggregate
more shares than is indicated in the beneficial ownership column.
12
The following information contains a description of the selling
shareholders' relationship to NuWave and how the selling shareholders acquired
the shares to be sold in this offering. No selling shareholder has held a
position or office, or had any other material relationship, with NuWave, except
as follows:
SHARES ACQUIRED IN FINANCING TRANSACTION WITH NUWAVE
o CORNELL CAPITAL PARTNERS, L.P. Cornell Capital Partners, L.P. is the
investor under the Standby Equity Distribution Agreement and the
holder of convertible debentures. All investment decisions of
Cornell Capital Partners, L.P. are made by its general partner,
Yorkville Advisors, LLC. Mark Angelo, the managing member of
Yorkville Advisors, LLC, makes the investment decisions on behalf of
Yorkville Advisors LLC. Cornell Capital Partners, L.P. acquired all
shares being registered in this offering in financing transactions
with NuWave. Those transactions are explained below:
STANDBY EQUITY DISTRIBUTION AGREEMENT. In May 2004, NuWave entered
into a Standby Equity Distribution Agreement with Cornell Capital
Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners, L.P. shares of common stock for a total purchase
price of up to $30 million. For each share of common stock purchased
under the Standby Equity Distribution Agreement, Cornell Capital
Partners, L.P. will pay NuWave 99% of the volume weighted average
price on the Over-the-Counter Bulletin Board or other principal
market on which our common stock is traded for the 5 days
immediately following the notice date. Further, Cornell Capital
Partners, L.P. will retain a fee of 10% of each advance under the
Standby Equity Distribution Agreement. We are registering 61,208,092
shares in this offering that may be issued under the Standby Equity
Distribution Agreement.
CONVERTIBLE DEBENTURES. During October 2003, NuWave raised $200,000
through the issuance of a convertible debenture to Cornell Capital
Partners, L.P. On September 10, 2004, this $200,000 convertible
debenture was redeemed in full. On December 22, 2003, NuWave issued
a convertible debenture for $3,300,000 to Cornell Capital Partners,
L.P. in connection with the acquisition of land held for development
and sale which is secured through a first mortgage lien on the land.
This debenture bears interest at a rate of 5% per annum, with
interest due at maturity or upon conversion. This debenture matures
in December 2008. At the option of NuWave, upon the maturity date,
this convertible debenture and accrued interest may be converted
into NuWave's Common Stock. At the option of the holder, at any time
prior to maturity, any portion of this convertible debenture and
accrued interest may be converted into Common Stock. The value of
principal and accrued interest is convertible at the per share price
equal to the lesser of (a) 120% of the closing bid price, or (b) 80%
of the lowest daily volume weighted average price for the five days
immediately preceding the conversion date. In addition, NuWave may
redeem a portion or all of this debenture at 120% of the dollar
value of the amount redeemed plus accrued interest. Under the
conversion limitation for the debenture, NuWave may issue shares
under conversion only so long as, at conversion, the holder has no
more than 9.9% of NuWave's outstanding shares. NuWave is registering
in this offering 58,914,099 shares of common stock underlying this
convertible debenture.
o INDIVIDUAL SELLING STOCKHOLDERS. The individual selling stockholders
are all holders of convertible debentures. These debentures, with
the exception of the debenture held by Mary-Ellen Viola, are
convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the lowest volume
weighted average price of the common stock as of the closing date or
(ii) 80% of the lowest volume weighted average price of the common
stock for the 5 trading days immediately preceding the conversion
date. Prior to maturity, NuWave has the option to redeem at 110% of
the amount redeemed, plus accrued interest. At maturity, NuWave has
the option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures and
accrued interest into shares of common stock at a conversion price
equal to the lower of (i) 120% of the lowest volume weighted average
price of the common stock as of the closing date or (ii) 80% of the
lowest volume weighted average price of the common stock for the 5
trading days immediately preceding the conversion date. The
convertible debentures are secured by all of NuWave's assets. NuWave
is registering in this offering 8,648,529 shares of common stock
underlying the convertible debentures.
With respect to the debenture held Mary-Ellen Viola, the debenture
is convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the lowest
closing bid price of the common stock as of the closing date, or
(ii) 80% of the lowest closing bid price of the common stock for the
13
5 trading days immediately preceding the conversion date. Prior to
maturity, NuWave has the option to redeem at 120% of the amount
redeemed, plus accrued interest. At maturity, NuWave has the option
to either pay the holder the outstanding principal balance and
accrued interest or to convert the debentures and accrued interest
into shares of common stock at a conversion price equal to the lower
of (i) 120% of the lowest closing bid price of the common stock as
of the closing date or (ii) 80% of the lowest closing bid price of
the common stock for the 5 trading days immediately preceding the
conversion date. NuWave is registering in this offering 1,783.202
shares of common stock underlying this convertible debenture.
o NEXTGEN ASSOCIATES. NextGen Associates received the shares for
services provided to NuWave. Stanley J. Chayka, President and Chief
Executive Officer, makes the investment decisions on behalf of
NextGen Associates. NuWave is registering 25,000 of these shares in
this offering.
o NEWBRIDGE SECURITIES CORPORATION. Newbridge Securities Corporation
is a registered broker-dealer that we engaged to advise us in
connection with the Standby Equity Distribution Agreement. Guy Amico
makes the investment decisions on behalf of Newbridge Securities
Corporation. We paid Newbridge Securities Corporation a fee of
111,111 shares of common stock. NuWave is registering 111,111 of
these shares in this offering.
THERE ARE CERTAIN RISKS RELATED TO SALES BY CORNELL CAPITAL PARTNERS, L.P.
There are certain risks related to sales by Cornell Capital Partners,
L.P., including:
o The shares will be issued based on a discount to the market rate. As
a result, the lower the stock price around the time Cornell Capital
Partners, L.P. is issued shares, the greater chance that Cornell
Capital Partners, L.P. gets more shares. This could result in
substantial dilution to the interests of other holders of common
stock.
o To the extent Cornell Capital Partners, L.P. sells its common stock,
the common stock price may decrease due to the additional shares in
the market. This could allow Cornell Capital Partners, L.P. to sell
greater amounts of common stock, the sales of which would further
depress the stock price.
o The significant downward pressure on the price of the common stock
as Cornell Capital Partners, L.P. sells material amounts of common
stocks could encourage short sales by others to the extent permitted
by applicable law. This could place further downward pressure on the
price of the common stock.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we may receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the Standby Equity Distribution Agreement.
The purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 99% of the volume weighted average price of our
common stock on the Over-the-Counter Bulletin Board for the 5 days immediately
following the notice date.
For illustrative purposes, NuWave has set forth below its intended use of
proceeds for the range of net proceeds indicated below to be received under the
Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $100,000 and commitment fees of 10% of the gross proceeds raised
under the Standby Equity Distribution Agreement.
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
-------------------------- ---------------- ----------------- ------------------ ----------------- ------------------
Gross Proceeds $2,500,000 $5,000,000 $10,000,000 $20,000,000 $30,000,000
Net Proceeds $2,150,000 $4,400,000 $8,900,000 $17,900,000 $26,900,000
Real Estate Development $1,150,000 $3,200,000 $7,400,000 $16,150,000 $24,900,000
General Working Capital
(including the repayment of
outstanding or future debt) $1,000,000 $1,200,000 $1,500,000 $1,750,000 $2,000,000
----------- ----------- ----------- ------------ ------------
Total $2,150,000 $4,400,000 $8,900,000 $17,900,000 $26,900,000
=========== =========== =========== ============ ============
15
DILUTION
The net tangible book value of NuWave as of September 30, 2004 was
($1,999,000) or ($0.9694) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of NuWave (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to NuWave, our net tangible
book value will be unaffected by this offering. Our net tangible book value per
share, however, will be impacted by the common stock to be issued under the
Standby Equity Distribution Agreement. The amount of dilution will depend on the
offering price and number of shares to be issued under the Standby Equity
Distribution Agreement. The following example shows the dilution to new
investors at an offering price of $0.065 per share.
If we assume that NuWave had issued 61,208,092 shares of common stock
under the Standby Equity Distribution Agreement at an assumed offering price of
$0.065 per share (i.e., the number of shares being registered in this offering),
less commitment fees of $397,853 and $100,000 of other offering expenses, our
net tangible book value as of September 30, 2004 would have been $1,481,673 or
$0.02340 per share. Note that at an assumed price of $0.065 per share NuWave
would receive gross proceeds of approximately $3,978,500 or $26,021,500 less
than is available under the Standby Equity Distribution Agreement. This
represents an immediate increase in net tangible book value to existing
stockholders of $0.9928 per share and an immediate dilution to Cornell Capital
Partners, L.P. of $0.0416 per share. The following table illustrates the per
share dilution:
Assumed public offering price per share $ 0.0650
Net tangible book value per share before this offering (0.9694)
Increase attributable to new investors 0.9928
Net tangible book value per share after this offering $ 0.02340
---------
Dilution per share to Cornell Capital Partners, L.P. $ 0.0416
=========
The offering price of our common stock is based on the then-existing
market price. In order to give Cornell Capital Partners, L.P. an idea of the
dilution per share they may experience, we have prepared the following table
showing the dilution per share at various assumed offering prices:
DILUTION PER SHARE TO
ASSUMED NO. OF SHARES TO BE CORNELL CAPITAL
OFFERING PRICE ISSUED(1) PARTNERS, L.P.
-------------- ------------------- ---------------------
$0.0650 61,208,092 $0.0416
$0.0490 61,208,092 $0.0395
$0.0330 61,208,092 $0.0374
$0.0160 61,208,092 $0.0353
------------
(1) This represents the number of shares of common stock that will be
registered hereunder in connection with the Standby Equity Distribution
Agreement.
16
Nuwave's convertible debenture holders will experience dilution upon
the conversion of the Convertible Debentures. The following table is intended to
give the holders of the Convertible Debentures an idea of the dilution per share
they may experience in connection with the outstanding Convertible Debentures.
DILUTION PER SHARE TO
ASSUMED NO. OF SHARES TO BE CONVERTIBLE DEBENTURE
CONVERSION PRICE (1) ISSUED(2) HOLDERS
-------------------- ------------------- ---------------------
$0.052 69,345,830 $0.0295
$0.039 69,345,830 $0.0291
$0.026 69,345,830 $0.0287
$0.013 69,345,830 $0.0284
----------
(1) The Assumed Offering Price is calculated by multiplying the discount
contained in the Convertible Debentures by an assumed market price of $0.065,
$0.049, $0.0325 and $0.01625 per share. The discount is 20% for all of the
Convertible Debentures.
(2) This represents the number of shares of common stock that will be registered
hereunder in connection with the Convertible Debentures.
17
STANDBY EQUITY DISTRIBUTION AGREEMENT
SUMMARY. In May 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners, L.P. shares of common stock for a total purchase price of up
to $30.0 million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners, L.P. will pay 99% of
the lowest volume weighted average price on the Over-the-Counter Bulletin Board
or other principal market on which our common stock is traded for the 5 days
immediately following the notice date. The volume weighted average price is
calculated automatically by Bloomberg, LLC, a reporting service, and is
calculated by multiplying the number of NuWave's shares sold on a given day by
the actual sales prices, adding up the totals and then dividing by the number of
shares sold. Cornell Capital Partners, L.P. is a private limited partnership
whose business operations are conducted through its general partner, Yorkville
Advisors, LLC. Further, Cornell Capital Partners, L.P. will retain a fee of 10%
of each advance under the Standby Equity Distribution Agreement. In addition, we
engaged Newbridge Securities Corporation, a registered broker-dealer, to advise
us in connection with the Standby Equity Distribution Agreement. For its
services, Newbridge Securities Corporation received a fee of 111,111 shares of
our common stock. NuWave is registering 61,208,092 shares of common stock for
the Standby Equity Distribution Agreement pursuant to this registration
statement. The costs associated with this registration will be borne by us.
There are no other significant closing conditions to draws under the Standby
Equity Distribution Agreement.
STANDBY EQUITY DISTRIBUTION AGREEMENT EXPLAINED. Pursuant to the
Standby Equity Distribution Agreement, we may periodically sell shares of common
stock to Cornell Capital Partners, L.P. to raise capital to fund our working
capital and real estate development needs. The periodic sale of shares is known
as an advance. We may request an advance every 7 trading days. A closing will be
held 1 trading day after the end of each pricing period at which time we will
deliver shares of common stock and Cornell Capital Partners, L.P. will pay the
advance amount.
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners, L.P. has advanced $30.0 million or 24 months after the
effective date of the accompanying registration statement, whichever occurs
first.
The amount of each advance is limited to a maximum draw down of
$1,000,000 every 7 trading days up to a maximum of $4,000,000 in any 30-day
period. The amount available under the Standby Equity Distribution Agreement is
not dependent on the price or volume of our common stock. Our ability to request
advances are conditioned upon us registering the shares of common stock with the
SEC. In addition, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners, L.P.
owning more than 9.9% of our outstanding common stock. We do not have any
agreements with Cornell Capital Partners, L.P. regarding the distribution of
such stock, although Cornell Capital Partners, L.P. has indicated that it
intends to promptly sell any stock received under the Standby Equity
Distribution Agreement.
There are certain conditions to NuWave's right to request an advance.
These conditions include:
o Maintaining NuWave's authorization for quotation on the
Over-the-Counter Bulletin Board,
o Having an effective registration statement related to the stock to
be issued,
o The absence of a stop order or other action adversely affecting the
registration statement,
o No events shall have occurred that would require NuWave to file a
post-effective amendment to the effective registration statement,
and
o The advance will not cause Cornell Capital Partners, L.P. to
beneficially own more than 9.9% of NuWave's outstanding common
stock.
Cornell Capital Partners, L.P. is permitted to terminate the Standby
Equity Distribution Agreement if (i) there is a stop order or suspension of the
effectiveness of this registration statement for 50 trading days or (ii) NuWave
fails to materially comply with certain covenants, which include the following:
o Maintaining a quotation of the common stock on the Over-the-Counter
Bulletin Board,
18
o Maintaining NuWave's status as a public company under Section 12(g)
of the Securities Act of 1934,
o Delivering instructions to the transfer agent to issue shares in
connection with an advance notice,
o Failing to notify Cornell Capital Partners, L.P. of events impacting
the registration of the stock to be issued, including the issuance
of a stop order,
o Issuing stock or convertible securities at a price less than the
market price of NuWave's common stock on the date of issuance, or
o Merging or consolidating NuWave with another company where the
acquiring entity does not assume NuWave's obligations under the
Standby Equity Distribution Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Assuming we issued the
number of shares of common stock being registered in the accompanying
registration statement at a recent price of $0.065 per share, we would issue
61,208,092 shares of common stock to Cornell Capital Partners, L.P. for gross
proceeds of $3,978,500 or $26,021,500 less than is available under the Standby
Equity Distribution Agreement. These shares would represent 97.0% of our
outstanding common stock upon issuance.
Proceeds used under the Standby Equity Distribution Agreement will be
used in the manner set forth in the "Use of Proceeds" section of this
prospectus. We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to draw.
We expect to incur expenses of approximately $100,000 in connection
with this registration, consisting primarily of professional fees. In addition,
we issued 111,111 shares of common stock to Newbridge Securities Corporation, a
registered broker-dealer, as a placement agent fee.
19
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
-- 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;
-- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
-- an exchange distribution in accordance with the rules of the
applicable exchange;
-- privately-negotiated transactions;
-- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
-- through the writing of options on the shares;
-- a combination of any such methods of sale; and
-- any other method permitted pursuant to applicable law.
The selling stockholders shall have the sole and absolute discretion not
to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders or their respective pledges, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. Cornell
Capital Partners, L.P. and any brokers, dealers or agents, upon effecting the
sale of any of the shares offered in this prospectus, are deemed "underwriters"
as that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act,
including any untrue statement of a material fact contained in this prospectus
or an omission to state any material fact necessary to make the statements in
this prospectus not misleading.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
If a selling stockholder notifies us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholder and the broker-dealer.
INDEMNIFICATION. We have agreed to indemnify the selling stockholder, or
their transferees or assignees, against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the selling stockholder or their respective pledgees, transferees or
20
other successors in interest, may be required to make in respect of such
liabilities. The selling stockholders have agreed to indemnify us against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
NuWave pursuant to the foregoing, or otherwise, NuWave has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
STATUTORY UNDERWRITER. Cornell Capital Partners, L.P. is an "underwriter"
within the meaning of the Securities Act of 1933 in connection with the sale of
common stock under the Standby Equity Distribution Agreement. For so long as
Cornell Capital Partners, L.P. is an "underwriter," Cornell Capital Partners,
L.P. may not sell shares by relying on Rule 144. Cornell Capital Partners, L.P.
will pay us 99% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal trading market on
which our common stock is traded for the 5 days immediately following the
advance date. In addition, Cornell Capital Partners, L.P. will retain 10% of the
proceeds received by us under the Standby Equity Distribution Agreement. The 1%
discount and the 10% retention are underwriting discounts. In addition, we
engaged Newbridge Securities Corporation, a registered broker-dealer, to advise
us in connection with the Standby Equity Distribution Agreement. For its
services, Newbridge Securities Corporation received 111,111 shares of our common
stock.
Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware
limited partnership. Cornell Capital Partners, L.P. is a domestic hedge fund in
the business of investing in and financing public companies. Cornell Capital
Partners, L.P. does not intend to make a market in our stock or to otherwise
engage in stabilizing or other transactions intended to help support the stock
price. Prospective investors should take these factors into consideration before
purchasing our common stock.
BLUE SKY LAWS. Under the securities laws of certain states, the shares of
common stock may be sold in such states only through registered or licensed
brokers or dealers. The selling stockholders are advised to ensure that any
underwriters, brokers, dealers or agents effecting transactions on behalf of the
selling stockholders are registered to sell securities in all fifty states. In
addition, in certain states the shares of common stock may not be sold unless
the shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
COSTS OF REGISTRATION. We will pay all of the expenses incident to the
registration, offering and sale of the shares of common stock to the public
hereunder other than commissions, fees and discounts of underwriters, brokers,
dealers and agents. We have agreed to indemnify Cornell Capital Partners, L.P.
and its controlling persons against certain liabilities, including liabilities
under the Securities Act. We estimate that the expenses of the offering to be
borne by us will be approximately $100,000. The offering expenses consist of: a
SEC registration fee of $1,407, printing expenses of $1,500, accounting fees of
$65,000, legal fees of $25,000 and miscellaneous expenses of $7,093. We will not
receive any proceeds from the sale of any of the shares of common stock by the
selling stockholders. We will, however, receive proceeds from the sale of common
stock under the Standby Equity Distribution Agreement.
REGULATION M. The selling stockholders should be aware that the
anti-manipulation provisions of Regulation M under the Exchange Act will apply
to purchases and sales of shares of common stock by the selling stockholders,
and that there are restrictions on market-making activities by persons engaged
in the distribution of the shares. Under Registration M, the selling
stockholders or their agents may not bid for, purchase, or attempt to induce any
person to bid for or purchase, shares of our common stock while such selling
stockholders are distributing shares covered by this prospectus. The selling
stockholders are not permitted to cover short sales by purchasing shares while
the distribution is taking place. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of NuWave and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this prospectus that are not
statements of historical or current fact constitute "forward-looking
statements."
GENERAL
Our mission is to profitably exploit our proprietary imaging technology
and to identify and develop other business opportunities that will diversify
NuWave's operations. We have diversified NuWave's operations by acquiring land
for development and sale. We also have been focusing on technology related to
image and video enhancement designed to enrich picture and video output with
clearer, more defined detail in texture, color, contrast and tone, at low cost.
We have developed and are currently marketing the NuWave Video Processor
Technology.
NOTE - NUWAVE WILL DISCUSS ITS TECHNOLOGY BUSINESS UNDER RESULTS OF OPERATIONS
AND WILL DISCUSS ITS NEW REAL ESTATE DEVELOPMENT BUSINESS UNDER PLAN OF
OPERATION. SEE BELOW.
OVERALL FINANCIAL PERFORMANCE FOR NINE MONTHS ENDED SEPTEMBER 30, 2004
Nine Months Ended September 30, 2004 Compared to the Nine Months Ended
September 30, 2003. For the nine months ended September 30, 2004, the Company
reported a net loss of $949,000 as compared to a net loss of $500,000 for the
nine months ended September 30, 2003. This represented a $449,000 increase in
the Company's net loss. This increase in the net loss was primarily attributable
to an increase in interest expense.
General and administrative expenses for the overall Company for the
nine months ended September 30, 2004 were $572,000, as compared to $631,000 for
the nine months ended September 30, 2003, a decrease of $59,000 or 9%. This
decrease was the result of reductions in salaries of $148,000 resulting from the
resignation of all management and employees with only a new CEO in September
2003 and one other administrative employee hired on November 1, 2003. There were
also decreases in insurance of $195,000 and depreciation expense of $39,000.
There were increases in accounting fees of $116,000, financial consulting
$76,000, and legal fees of $65,000. These professional fees increased on account
of the Company having to rely on consultants to perform functions such as
accounting and reporting, that previously were performed by employees, as well
as to support the Company's efforts to prepare for its registration filing and
other financing programs. Real estate taxes increased by $46,000 on account of
the Company's December 2003 investment in a real estate parcel for development.
The Company allocated approximately $224,000 of these general and administrative
expenses to the video and image technology segment and approximately $348,000 to
the real estate segment, for the nine months ended September 30, 2004.
RESULTS OF OPERATIONS - TECHNOLOGY BUSINESS
Nine Months Ended September 30, 2004 Compared to the Nine Months Ended
September 30, 2003. The Company continues to have difficulty selling its video
and image technology products. The market for the Company's technology products
continues to be adversely affected by strong competition and price compression
in the imaging and video electronics markets. There were no revenues for the
nine month period ended September 30, 2004, as compared to revenues of $19,000
for the nine month period ended September 30, 2003. These 2003 revenues related
to the Company's sale of its inventory of its retail line of products to its
former exclusive licensee.
Research and development expenses for the nine months ended September
30, 2004 were $0, as compared to expenses of $127,000 for the nine months ended
September 30, 2003. These expenses have decreased because the Company has
terminated all research and development employees and research consulting
agreements during 2003. The decrease in research and development expenses were
primarily in engineering salaries of $79,000, research and development fees of
$9,000 and $9,000 in laboratory supplies and laboratory operating expenses.
General and administrative expenses for the technology business for the
nine months ended September 30, 2004 were $224,000, as compared to $631,000 for
the nine months ended September 30, 2003, a decrease of $407,000 or 65%. This
decrease was the result of a reduction in the allocation of the overall NuWave
general and administrative expenses to the technology activities. Interest
expense for non real estate operations increased $141,000 on account of notes
22
payable and convertible debenture obligations entered into during 2003 and the
first nine months of the year 2004 to provide liquidity for the Company's
operations. The notes payable, along with accrued interest at the default
penalty rate of 24% per annum were repaid in September 2004. The convertible
debenture obligations applied to the technology operations bear a weighted
average annual interest rate of approximately 20%.
Year Ended December 31, 2003 Compared to December 31, 2002. Revenues
for the year ended December 31, 2003 were $20,000 as compared to $286,000 for
the prior year. Revenues for 2003 were negatively impacted by increased
competition and price compression in the image and video sectors of the
electronics markets. Revenues for 2002 were a direct result of the introduction
of our first retail product, the VGE 101 and an agreement with Gemini
Industries, Inc. ("Gemini") to become the exclusive licensee of NuWave's VGE
retail products. The Gemini program was not successful, and NuWave is no longer
marketing the VGE retail products.
In December 2001, we entered into a strategic alliance with Gemini, a
manufacturer and distributor of consumer electronics accessories. Gemini was
granted a five-year exclusive license to market and distribute NuWave's video
game enhancer ("VGE") in North America. Initial shipments of the VGE and
Application Specific Integrating Chips ("ASIC") chips to Gemini took place
during the first quarter of 2002. Minimum ongoing purchase requirements under
the contract were to begin in July 2002. After having received a six-month
extension, Gemini still had not met their minimum contractual purchase
requirements and management determined it was in NuWave's best interest to
terminate the agreement.
The sales for the year ended December 31, 2002 were primarily sales of
NuWave's remaining domestic VGE inventory to Gemini, as NuWave's efforts were
concentrated on sales of the NuWave Video Processor ("NVP") 1104. Cost of sales
for 2003 was $5,000 versus $390,000 for 2002. The decrease in cost of sales was
a result of a decrease in sales. Cost of sales in 2002 was primarily the result
of a write-off of NuWave's December 31, 2002 remaining physical inventory in the
amount of $230,000 consisting of the discontinued domestic and European VGE
product and the related NVP 1104 ASIC chips. Research and development costs for
the year ended December 31, 2003 were $134,000; a reduction of $547,000 from the
prior year. This reduction primarily resulted from a reduction in all research
and development due to liquidity constraints and the head count reductions in
order to trim costs. The decreases in research and development were in
engineering salaries and outside consulting fees that decreased $504,000 from
2002; and, a $54,000 reduction in lab supplies and lab operating expenses.
General and administrative expenses related to the technology business for the
year ended December 31, 2003 were $943,000 a decrease of $1,128,000 from the
prior year. This decrease was the result of a significant reduction in most all
expenses resulting from the resignation of all management and employees with
only a new CEO in September 2003 and one other administrative employee hired on
November 1, 2003. The decrease also resulted from continued Company wide cost
cutting efforts. There were major decreases in marketing and sales expenses of
$117,000, salaries of $278,000, professional fees $171,000, investor relations
of $77,000, financial consulting of $128,000, closing of overseas operations of
$110,000, insurance of $133,000, and domestic rent of $46,000. Interest expense
for non real estate operations increased $44,000 on account of additional notes
payable to finance liquidity and paying interest rates on these notes at the
default penalty rate of 24% per year. Gain on forgiveness of debt increased
$347,000 due to settlement of various liabilities for approximately 10% of the
amounts owed.
NuWave recorded a consolidated net loss of $790,000 for the year ended
December 31, 2003. After subtracting the loss associated with the real estate
operations (which are discussed in the plan of operation, below) NuWave incurred
a net loss for technology operations of $764,000. This compares favorably to the
$2,674,000 loss incurred in the year ended December 31, 2002. This decrease in
loss of $1,910,000 is primarily attributable to NuWave-wide cost cutting, which
occurred during 2003, as discussed above. These decreases in operating expenses
were offset by the decrease in NuWave's benefit from income tax of $187,000.
PLAN OF OPERATION - REAL ESTATE ACTIVITIES
Nine Months Ended September 30, 2004 Compared to the Nine Months Ended
September 30, 2004. The Company's first real estate investment, of land held for
development and sale, acquired through its wholly owned subsidiary, was made on
December 22, 2003. On April 30, 2004, the Company, through a separate wholly
owned subsidiary, purchased a parcel of residential real estate for $122,000,
utilizing approximately $113,000 in cash and the application of deposits of
approximately $9,000.
NuWave intends to develop the land held for development and sale. To
date, there are no revenues from the sale of developed properties. Revenues from
development activities are not projected to be realized until mid to late 2005.
During the nine months ended September 30, 2004, the Company incurred
general and administrative expenses of approximately $348,000, which consisted
of real estate taxes and maintenance expenses of approximately $49,000 and an
allocation of other general and administrative expenses of approximately
23
$299,000. Interest expense for the nine months ended September 30, 2004 was
$215,000. In addition, during the nine months ended September 30, 2004, costs
for legal expenses regarding the development plan of $27,000 and interest of
$209,000 has been capitalized to the cost of the land held for development and
sale. Accordingly, the Company recorded a net loss on the real estate segment of
approximately $572,000.
NuWave follows SFAS No. 34, "Capitalization of Interest Costs", which
provides for the capitalization of interest as part of the historical cost of
acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred.
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of a
20% fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004, as described
below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its interest
in the property ("Investor's Option"). The Investor may sell this property back
to the Company through exercise rights under a convertible debenture agreement,
discussed below. The Investors Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any time
prior to August 1, 2007, the Investor wishes to sell its interest to a third
party, it must first notify the Company. Upon such notice, the Company may,
within 30 days, repurchase all of the remaining property interest for a price
equal to a pro-rata portion of the original price paid by the Investor at the
effective date ($1,783,549). If the Company fails to exercise this offer within
the 30 day period, then the Investor shall be allowed 90 days in which to sell
all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated as
a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
24
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of the
Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004, NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
NuWave's tentative plans for the land held for development and sale
acquired in 2003 call for the development of approximately 100 residential
dwelling units. NuWave has engaged an architectural consultant during 2004 for
the purpose of preparing drawings that support the approval and permitting
process. Once the approvals and permits are in place, NuWave will contract with
a developer to build out the property. Land development and construction costs
are roughly estimated to be $8,000,000 to $10,000,000. NuWave will have to raise
additional funds to finance construction. Such financing may come from the sale
of securities or through bank or other debt financing.
Regarding the residential property acquired in April 2004, NuWave
intends to redevelop and then sell this property.
Year Ended December 31, 2003 Compared to December 31, 2002. During
2003, NuWave diversified its business by investing in real estate and real
estate development. NuWave's first real estate investment was made on December
22, 2003. At that time, NuWave acquired a parcel of undeveloped acreage for
$4,950,000. NuWave obtained an appraisal which valued the acreage at $4,950,000.
There are no revenues from real estate activities. Revenues in real
estate are not projected to be realized until mid to late 2005. NuWave's real
estate related operating costs include primarily real estate taxes. NuWave
recorded a net loss on real estate operations of approximately $26,000 during
the year ended December 31, 2003.
NuWave's tentative plans call for the development of approximately 100
residential dwelling units. NuWave intends to engage an architect during mid to
late 2004 for the purpose of drawing up specifications and establishing budgets
for costs for the project. Once the architectural plans are in place, NuWave
will interview and contract with a developer to build out the property.
Land development and construction costs are roughly estimated to be
$8,000,000 to $10,000,000. NuWave will have to raise additional funds to finance
construction, from the sale of securities or through bank or other debt
financing.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash balances on hand of $822,000 and $119,000 as of
September 30, 2004 and December 31, 2003, respectively. During August 2004,
NuWave received proceeds of approximately $1,783,000 from the issuance of a
convertible debenture related to its transfer of a 20% fee simple interest in
NuWave's land held for development and sale. During November 2004, the
convertible debenture was terminated and rescinded in its entirety and replaced
with an Amended and Restated Agreement of Sale dated November 2004. Under this
Amended and Restated agreement of sale, for a selling price of approximately
$1,427,000, the Company has sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures. The Company has
applied the $1,427,000 sale amount against the proceeds from the convertible
debenture and has incurred interest expense of $38,000 for the three month
period ended September 30, 2004, $30,000 of which has been paid to the buyer
through September 30, 2004. The Company has incurred additional interest expense
of $20,000 through the date of termination. On November 29, 2004 NuWave paid
approximately $326,000 to the buyer, representing approximately $28,000 in
accrued interest and $298,000 in refunded proceeds.
A portion of the proceeds from the Company's receipt of the
convertible debenture was applied to repay obligations consisting of notes
payable to Cornell Capital Partners, L.P. of approximately $460,000; convertible
debentures payable to Cornell Capital Partners, L.P. of $200,000 and convertible
debentures of four other debenture holders of an aggregate approximating
$79,000. These funds will provide the Company with current working capital. The
Company's future cash funding sources continue to be uncertain. The Company's
primary cash needs are to fund ongoing operations and real estate development
activities. The Company will defer any land development and construction
expenditures until after it has arranged adequate funding. In order to obtain
funding during the next twelve months, the Company intends to seek financing
through a combination of sources. These sources might include funding through
the sale of securities or loans.
In seeking sources of liquidity, NuWave intends to continue to rely on
the sale of securities or loans for near term working capital needs. NuWave
expects to satisfy most of its funding needs in 2005 pursuant to the Standby
Equity Distribution Agreement that is being registered in this offering. In
addition, NuWave will seek outside mortgage financing for certain of the
properties that it might acquire in the future, as well as to finance
development and construction of the dwelling units on the undeveloped acreage.
The cost cutting has reduced cash requirements at NuWave. In their reports on
the audit of NuWave's financial statements for the years ended December 31,
2003, and 2002 our independent registered public accounting firms included an
explanatory paragraph in their reports because of the uncertainty that we could
continue in business as a going concern. In the event we are unable to raise the
anticipated operating capital needs through the sale of securities or some other
form of financing or receive cash from sales of our products, there would be
substantial doubt about our ability to continue as a going concern.
During the nine month period ended September 30, 2004, the Company had
a net increase in cash and cash equivalents of $703,000. The Company's sources
and uses of funds were as follows:
CASH USED IN OPERATING ACTIVITIES. Net cash used in operating
activities was $410,000. This was primarily driven by a consolidated net loss of
$949,000, offset by the receipt of proceeds of $225,000 from the sale of certain
of the Company's state net operating losses.
CASH USED IN INVESTING ACTIVITIES. The Company purchased $21,000 of new
computer and office equipment. The Company acquired a parcel of land for
$122,000. The Company purchased marketable securities - available-for-sale, for
approximately $130,000. Also, the Company incurred $27,000 for legal costs
toward development of the land held for development and sale.
CASH PROVIDED BY FINANCING ACTIVITIES. The Company raised $2,143,000 in
funds through the issuance of convertible debentures. This was offset by the
repayment in September 2004 of notes and convertible debentures to Cornell
Capital Partners, L.P. of $460,000 and $200,000, respectively; and repayments of
other convertible debentures of approximately $70,000.
At September 30, 2004, the Company had positive net working capital of
approximately $609,000. The Company intends to monitor spending carefully until
such time that new funding is arranged.
In October 2004, NuWave raised $100,000 through the issuance of a
convertible debenture.
During November 2004, NuWave redeemed a convertible debentures with a
face amount of $250,000 and accrued interest through redemption of approximately
$12,000. The unamortized discount of approximately $63,000 at redemption has
been recorded as interest expense.
26
In May 2004, NuWave entered into a five year sublease agreement for the
rental of 3,580 square feet of corporate office tower space in Jersey City, New
Jersey. This rental agreement is effective July 1, 2004 and requires NuWave to
pay rent of approximately $7,000 and approximately $3,000 in shared building
operating expenses, each month. NuWave subleases one half of this space to a
subtenant, for approximately $5,000 per month.
In October 2004, NuWave received $100,000 upon the issuance of a
convertible debenture. In November 2004, NuWave redeemed a $250,000 convertible
debenture and related accrued interest and redemption premium, utilizing cash of
approximately $287,000.
CRITICAL ACCOUNTING POLICIES
NuWave's consolidated financial statements and related public financial
information are based on the application of accounting principles generally
accepted in the United States ("GAAP"). GAAP requires the use of estimates,
assumptions, judgments and subjective interpretations of accounting principles
that have an impact on the assets, liabilities, revenue and expense amounts
reported. These estimates can also affect supplemental information contained in
our external disclosures including information regarding contingencies, risk and
financial condition. We believe our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may
differ materially from these estimates under different assumptions or
conditions. We continue to monitor significant estimates made during the
preparation of our consolidated financial statements.
Our significant accounting policies are summarized in Note 3 of our
consolidated financial statements at December 31, 2003. While all these
significant accounting policies impact its financial condition and results of
operations, NuWave views certain of these policies as critical. Policies
determined to be critical are those policies that have the most significant
impact on NuWave's consolidated financial statements and require management to
use a greater degree of judgment and estimates. Actual results may differ from
those estimates. Our management believes that given current facts and
circumstances, it is unlikely that applying any other reasonable judgments or
estimate methodologies would cause a material effect on our consolidated results
of operations, financial position or liquidity for the periods presented in this
report.
NuWave's critical accounting policy relates to its acquisition of a
parcel of land, outlined as follows. On December 22, 2003, Lehigh Acquisition
Corp. ("Lehigh") (NuWave's wholly owned subsidiary) acquired a parcel of land in
New Jersey for $4,950,000 that it intends to develop and then sell. This land
was acquired from Stone Street Asset Management LLC ("Stone Street"), a company
under common control with Cornell Capital Partners, L.P. In connection with this
purchase of land, NuWave incurred debt obligations consisting of a $3,300,000
convertible debenture to Cornell Capital Partners, L.P., $250,000 of convertible
debentures to unrelated parties and a $1,400,000 secured note payable to Stone
Street. As a result of Stone Street's relationship with Cornell Capital
Partners, L.P., and Cornell Capital Partners, L.P.'s relationship with NuWave,
NuWave has recorded the land at the historical cost basis as recorded by Stone
Street of approximately $2,915,000 in accordance with accounting rules regarding
transfer of non-monetary assets. The difference of $2,035,000 between the fair
value of the land as determined by an independent appraiser and the carryover
cost basis of land from Stone Street has been recorded as an adjustment to
additional paid-in capital.
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of a
20% fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004, as described
below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its interest
in the property ("Investor's Option"). The Investor may sell this property back
to the Company through exercise rights under a convertible debenture agreement,
discussed below. The Investors Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
27
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any time
prior to August 1, 2007, the Investor wishes to sell its interest to a third
party, it must first notify the Company. Upon such notice, the Company may,
within 30 days, repurchase all of the remaining property interest for a price
equal to a pro-rata portion of the original price paid by the Investor at the
effective date ($1,783,549). If the Company fails to exercise this offer within
the 30 day period, then the Investor shall be allowed 90 days in which to sell
all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated as
a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of the
Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004 NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
28
EFFECTS OF ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and equity. It
requires classification of a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and,
otherwise, is effective at the beginning of the first interim period beginning
after June 15, 2003. NuWave adopted SFAS No. 150 in the third quarter of 2003.
The adoption did not have an impact on the consolidated financial statements.
In January 2003, as revised in December 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period ending after December 15, 2004.
The adoption of FIN 46 for provisions effective during 2003 and 2004 did not
have a material impact on the consolidated financial statements.
RECENT SALES OF UNREGISTERED SECURITIES
Standby Equity Distribution Agreement
In May 2004, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners, L.P. shares of common stock for a total purchase price of up to $30
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners, L.P. will pay NuWave 99% of
the volume weighted average price on the Over-the-Counter Bulletin Board or
other principal market on which our common stock is traded for the 5 days
immediately following the notice date. Further, Cornell Capital Partners, L.P.
will retain a fee of 10% of each advance under the Standby Equity Distribution
Agreement. In connection with the Standby Equity Distribution Agreement, we paid
Newbridge Securities Corporation a fee of 111,111 shares of common stock.
Convertible Debenture
During August 2004, the Company raised approximately $1,783,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bore interest at 10% per annum,
with interest payable monthly and was secured through an interest in the land
held for development and sale. This debenture matured in August 2007. At the
option of the holder or the Company, at any time, this convertible debenture
could be converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion date.
In connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each have the option to effectively
void all or a portion of the transfer. In the event that neither option is
exercised within three years, the 20% fee simple interest will revert to the
Company upon settlement of the convertible debenture. Upon issuance NuWave has
recorded a debt discount of $446,000, for the August 2004 debenture. This debt
discount was recorded to reflect the value of the beneficial conversion feature
related to the convertible debentures. Accordingly, NuWave has recorded the
value of the beneficial conversion feature as a reduction to the carrying amount
of the convertible debt and as an addition to additional paid-in capital. This
debt discount was being amortized over the term of the related debentures, which
was 36 months, and the amortization of such discount was recorded as interest
expense on the accompanying condensed consolidated statement of operations for
the nine months ended September 30, 2004.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004 NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
29
Convertible Debentures
During October 2004, NuWave issued $100,000 in a convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization will be recorded as interest expense in the
consolidated statement of operations. At the option of NuWave, upon the maturity
date, this convertible debenture may be converted into NuWave's Common Stock. At
the option of the holder, at any time prior to maturity, any portion of this
convertible debenture may be converted into Common Stock. The value of principal
and accrued interest is convertible at the per share price equal to the lesser
of (a) 120% of the closing bid price, or (b) 80% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, NuWave
may redeem, with 15 days advance notice, a portion or all of this outstanding
debenture at 110% of the dollar value of the amount redeemed plus accrued
interest.
In June 2004, NuWave issued $250,000 in a convertible debenture. This
debenture bears interest at a rate of 10% per annum, with interest due at
maturity or upon conversion and matures in June 2006. NuWave has recorded a debt
discount of $83,000 at issuance of this convertible debenture to reflect the
value of the beneficial conversion feature related to the convertible debenture.
At the option of NuWave, upon the maturity date, this convertible debenture may
be converted into NuWave's Common Stock. At the option of the holder, at any
time prior to maturity, any portion of this convertible debenture may be
converted into Common Stock. The value of principal and accrued interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price on April 26, 2004, or (b) 75% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, NuWave
may redeem, with 15 days advance notice, a portion or all of these outstanding
debentures at 125% of the dollar value of the amount redeemed plus accrued
interest.
During January 2004, NuWave issued $110,000 in convertible debentures.
These debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature in January 2006. NuWave has
recorded a debt discount of $27,000 at issuance of these convertible debentures
to reflect the value of the beneficial conversion feature related to the
convertible debentures. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debentures, which is 24
months, and such amortization was recorded as interest expense on the
accompanying condensed consolidated statement of operations. At the option of
NuWave, upon the maturity date, these convertible debentures may be converted
into NuWave's Common Stock. At the option of the holder, at any time prior to
maturity, any portion of these convertible debentures may be converted into
Common Stock. The value of principal and accrued interest is convertible at the
per share price equal to the lesser of (a) 120% of the closing bid price, or (b)
80% of the lowest daily volume weighted average price for the five days
immediately preceding the conversion date. In addition, NuWave may redeem, with
15 days advance notice, a portion or all of these outstanding debentures at 110%
of the dollar value of the amount redeemed plus accrued interest.
During October 2003, NuWave raised $200,000 through the issuance of a
convertible debenture to Cornell Capital Partners, L.P. In addition, during
December 2003, NuWave raised $195,000 through the issuance of convertible
debentures to various unrelated parties. In September 2004, NuWave redeemed a
$200,000 convertible debenture with Cornell Capital Partners, L.P. and $70,000
of the convertible debentures issued in December 2003 and January 2004. On
December 22, 2003, NuWave issued a convertible debenture for $3,300,000 to
Cornell Capital Partners, L.P. and $250,000 to unrelated parties in connection
with the acquisition of land held for development and sale which is secured
through a first mortgage lien on the land. All of these debentures bear interest
at a rate of 5% per annum, with interest due at maturity or upon conversion.
These debentures mature at various dates ranging from October 2005 through
December 2008. At the option of NuWave, upon the maturity date, these
convertible debentures and accrued interest may be converted into NuWave's
Common Stock. At the option of the holder, at any time prior to maturity, any
portion of these convertible debentures may be converted into Common Stock. The
value of principal and accrued interest is convertible at the per share price
equal to the lesser of (a) 120% of the closing bid price, or (b) 80% of the
lowest daily volume weighted average price for the five days immediately
preceding the conversion date. In addition, NuWave may redeem a portion or all
of these outstanding debentures at 110% (120% for Cornell Capital Partners,
L.P.) of the dollar value of the amount redeemed plus accrued interest. Under
the conversion limitation for the debentures, NuWave may issue shares under
conversion only so long as, at conversion, the holder has no more than 9.9% of
NuWave's outstanding shares.
30
Note Payable - Related Party
On December 22, 2003, Lehigh issued a note for $1,400,000 to Stone
Street in conjunction with its purchase of land in New Jersey. The note provides
for the payment of sixty equal monthly installments of principal and interest of
$27,741 beginning on January 1, 2005, matures on January 10, 2010 and is secured
through a second mortgage on the land. The note bears interest at a rate of 5%
per annum.
Warrants
On September 24, 2003, NuWave issued 200,000 warrants to purchase
NuWave's common stock at $1.00 per share. These warrants were issued to two
former officers for prior services provided to NuWave. The warrants are
exercisable over a five-year period which expires in September 2008.
Equity Line of Credit
On April 15, 2002, NuWave entered into a $3,000,000 Equity Line of
Credit Agreement with Cornell Capital Partners, L.P. Provided NuWave was in
compliance with the terms of the Agreement, NuWave could, at its option,
periodically require the Purchaser to purchase up to $100,000 in any seven day
period of NuWave's common stock (the "put" shares) up to a maximum of $3,000,000
over the next two years, commencing on May 31, 2002 (the effective date of a
Securities Act of 1933 registration statement on Form SB-2 for the registration
of 100,000 shares of common stock to be sold under the Agreement, plus 4,762
shares of common stock mentioned below). Additional registration statements
added 280,000 shares on November 1, 2002 and 1,200,000 on January 10, 2003,
bringing the total registered shares to 1,580,000 under the Agreement. NuWave
issued to the Purchaser 4,362 shares of common stock as a commitment fee for
entering into the Agreement. In addition, NuWave issued to the placement agent
400 shares of NuWave's common stock. For each share of common stock purchased
under the Equity Line of Credit, the Purchaser paid 97% of the then Market Price
(as defined in the Agreement), and was paid a fee of 4% of each advance. This
Agreement expired on April 15, 2004.
The Agreement was non-exclusive; thereby permitting NuWave to offer and
sell its securities to third parties while the Equity Line of Credit was in
effect. NuWave had the option to terminate the Equity Line of Credit Agreement
at any time, provided there is no pending advance thereunder. During July 2003,
NuWave reached the limit of 1,580,000 registered shares that were issuable under
the Agreement.
NuWave received loans aggregating $357,000 and $525,000 during the
years ended December 31, 2003 and 2002, respectively, from Cornell Capital
Partners, L.P. NuWave repaid certain of these loans in the amounts of $273,000
and $325,000, in each of the years December 31, 2003 and 2002, respectively
through the issuance of 1,151,490 and 187,374 shares of NuWave's common stock.
The common shares issued to repay these notes were issued at a 3% discount.
These loans were non-interest bearing during their terms, which ranged from 90
days to 180 days.
The balance of these loans as of September 2003, totaling $284,000,
were not repaid within their term and were in default. During September 2003,
NuWave entered into an Agreement with Cornell Capital Partners, L.P. to settle
the default on these loans. In connection therewith, Cornell Capital Partners,
L.P. agreed not to foreclose on its outstanding indebtedness of $284,000 owed by
NuWave. In addition, on September 29, 2003, Cornell Capital Partners, L.P.
entered into a new loan agreement with NuWave for $200,000 to be deposited in
escrow to be used to satisfy certain outstanding obligations of NuWave,
including trade payables, unpaid wages, and settlement of employment agreements.
The loan was non-interest bearing for its original term of 180 days.
On March 27, 2004, the $200,000 loan matured and was not repaid
according to its terms. On April 5, 2004, Cornell Capital Partners, L.P. agreed
to extend the due dates of the $284,000 of loans and the $200,000 loan to April
15, 2005. On May 11, 2004, Cornell Capital Partners, L.P. agreed to further
extend the due dates of these $484,000 in loans to August 1, 2005. On July 20,
2004, Cornell Capital Partners, L.P. agreed to further extend the due dates of
these $484,000 in loans to December 5, 2005. While in default and through the
extended maturity date, the $284,000 of loans and the $200,000 loan accrue
interest from the default dates at a rate of 24% per annum. On September 10,
2004, NuWave paid off in full its obligations for principal and accrued interest
related to its $484,000 in loans to Cornell Capital Partners, L.P.
Convertible Preferred Stock
During May 2003, NuWave entered into a Securities Purchase Agreement
with several independent buyers whereby NuWave issued and sold to the buyers
67,000 shares of Series A Preferred Stock at $1 per share. The buyers were
31
entitled, at their option, to convert the Series A Preferred Stock into shares
of NuWave's Common Stock at any time commencing after May 1, 2004 at an adjusted
conversion price of $0.05 per share. Any unconverted shares as of May 1, 2005
would automatically convert into shares of NuWave's Common Stock at an adjusted
conversion price of $0.05 per share. NuWave had the right to redeem the
outstanding Preferred Stock upon 30 days written notice at a redemption price of
150% of the subscription amount plus interest on the purchase price of 24%. If
NuWave chooses to redeem some, but not all, of the Series A Preferred Stock,
NuWave could redeem a pro rata amount from each holder of the Series A Preferred
Stock. The preferred stock was redeemed by NuWave in October 2003 for a total
redemption price of $86,400. The $19,400 excess of the amount of the redemption
over the amount of the original issue has been recorded as a deemed dividend -
redemption premium on the convertible preferred stock.
Shares issued for services
On June 30, 2003, NuWave issued 25,000 shares of common stock valued at
approximately $5,000 in exchange for services provided to NuWave.
Effective June 1, 2004, NuWave issued 75,000 shares of common stock to
George Kanakis, its President, under the terms of his employment contract. Mr.
Kanakis is also entitled to options to purchase 100,000 shares of common stock
at some future date. NuWave has not yet adopted a stock option plan, and as
such, no options have been granted to Mr. Kanakis.
Increase in Authorized Shares, Reduction in Par Value and Reverse Stock
Split
On December 20, 2002, the stockholders approved an increase in the
number of authorized shares from 40,000,000 to 140,000,000 and a reduction of
the par value per share from $0.01 to $0.001. The change in par value has been
reflected in the consolidated financial statements during 2002. On July 21,
2003, NuWave's Board of Directors declared effective a reverse split of NuWave's
common shares in the ratio of 1 to 50 as voted on and approved by the
stockholders at NuWave's Annual Stockholders' meeting held on December 20, 2002,
and effective on July 21, 2003. All share and per share amounts have been
retroactively restated for the stock split.
Issuance of Common Stock
Between June 7, 2002 and June 30, 2002 NuWave entered into agreements
with various investors whereby a total of 22,203 shares of Common Stock and
warrants exercisable at $50 per share for 1,000 shares of common stock were
issued for an aggregate purchase price of $330,350. In connection with the
issuance of these shares, NuWave incurred costs of $35,664 in placement agent
fees and expenses.
On February 27, 2002, NuWave entered into an agreement with an investor
whereby NuWave issued 4,285 shares of common stock for an aggregate purchase
price of $150,000 and warrants to purchase up to 1,000 shares of Common Stock at
an exercise price of $50.00 per share with an exercise period of five years
expiring February 27, 2007. Under the terms of the agreement a consultant was
paid a finder's fee of $1,500 representing one percent of the purchase price.
On February 5, 2002, NuWave entered into a private placement agreement
with investors whereby NuWave issued 12,000 shares of NuWave's common stock for
an aggregate purchase price of $330,000. In connection with this agreement,
NuWave issued to the Placement Agent a Placement Agent Warrant, exercisable to
purchase up to 600 shares of common stock, representing five percent of the
total of the stock issued in the Offering. The warrants shall be exercisable for
a period of five years, expiring on February 8, 2007, at an exercise price of
$27.50 per share. The Placement Agent also received a cash placement fee of
eight percent of the purchase price and a non-accountable allowance equal to two
percent of the purchase price, totaling $33,000.
All of the above offerings and sales were deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors, business associates of NuWave or executive officers of NuWave, and
transfer was restricted by NuWave in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
32
DESCRIPTION OF BUSINESS
GENERAL
NuWave Technologies was incorporated in Delaware on July 17, 1995.
Since its formation in 1995, NuWave has been a technology company,
focused upon the development and marketing of technology and technology products
related to enhancing image and video output. NuWave continues in its efforts to
identify customers and markets where it will be able to market its proprietary
technology.
Over the last three years, NuWave's annual sales have declined from
$505,000 in 2001, to $286,000 in 2002 and to $20,000 in 2003, as it has had
difficulty in securing buyers for its technology products in a very competitive
market environment. NuWave has incurred annual net losses of $4,273,000,
$2,674,000 and $790,000 for each of the years 2001, 2002 and 2003, respectively.
During 2003, in conjunction with a restructuring with the primary
lender, NuWave terminated all of its officers and employees. On September 10,
2003, NuWave entered into an Agreement with a lender, Cornell Capital Partners,
L.P., to settle a default on its indebtedness owed to Cornell Capital Partners,
L.P. Pursuant to the Agreement, Cornell Capital Partners, L.P. and NuWave agreed
to the following:
o Cornell Capital Partners, L.P. agreed not to foreclose on its
outstanding indebtedness owed by NuWave. Cornell Capital Partners,
L.P. agreed to enter into a new loan agreement with NuWave for
$200,000 to be deposited in escrow to be used to satisfy certain
outstanding obligations of NuWave, including trade payables, unpaid
wages, and settlement of employment agreements.
o In this agreement, Cornell Capital Partners, L.P. will consider
providing additional capital to NuWave and assisting in identifying
new businesses. Cornell Capital Partners, L.P. has agreed to
maintain NuWave's public filings and status. NuWave's Chief
Executive Officer ("CEO") and Chairman of the Board of Directors,
and Chief Financial Officer ("CFO"), agreed to resign their
positions with NuWave. The CEO and CFO received a settlement
consisting of cash and warrants to purchase shares of NuWave's
common stock at an exercise price of $1.00 per share. NuWave's Board
of Directors appointed a nominee to its Board of Directors, selected
by Cornell Capital Partners, L.P. Upon such appointment, NuWave's
Board members resigned. The Agreement was consummated on September
29, 2003, effective with the closing and the resignations of the
Board members. As a result of reaching settlements to satisfy
certain outstanding obligations of NuWave, including trade payables,
unpaid wages, and settlement of employment agreements, NuWave
realized a gain on forgiveness of debt of approximately $347,000,
during the year ended December 31, 2003.
During 2003, NuWave made changes to its product lines and business
strategy. NuWave has had difficulty in selling its technology related to image
and video enhancement. This technology is designed to enrich picture and video
output with clearer, more defined detail in texture, color, contrast and tone.
NuWave competes in a very competitive and quickly evolving market. NuWave's
products have not been price competitive in the market, and this had made it
difficult to obtain placements within end use electronics markets. NuWave
previously marketed three product lines; however, based on a reevaluation of
these lines it is no longer marketing the retail and security/surveillance
products and have significantly reduced our marketing efforts of the digital
filtering technology and will continue to market the NuWave Video Processor
(NVP).
The NVP technology is proprietary video-enhancement technology designed
to significantly enhance video output devices with clearer, sharper details and
more vibrant colors when viewed on the display screen. NuWave has engaged an
exclusive independent sales agent to provide marketing, product development,
promotion, sales and distribution of the NuWave Technology. This exclusive
independent agent is marketing NuWave's products and technology to electronics
and other companies on a world wide basis.
NuWave intends to broaden its base of products and investments in order
to diversify the product portfolio into a broad spectrum of industries and to
improve profitability. In 2003 and during the first quarter of 2004, NuWave
formed new subsidiaries for the purpose of acquiring and holding real estate and
other assets. As of September 30, 2004, NuWave holds two real estate properties.
33
On December 22, 2003, NuWave, through a wholly owned subsidiary,
acquired vacant land that it intends to develop into a community for residents
over the age of 55. On April 30, 2004, NuWave, through a wholly owned
subsidiary, purchased a parcel of residential real estate for $122,000,
utilizing approximately $113,000 in cash and the application of deposits of
approximately $9,000. NuWave intends to redevelop and then later sell this
property.
OTHER POTENTIAL PRODUCTS
NuWave continues to search for companies and investments, as well as
products that use NuWave's technology. Each opportunity will be evaluated for
both its fit for NuWave and the time frame upon which it will bring a
satisfactory return on NuWave's investment. As of the date hereof, NuWave has
not identified nor purchased any new investment products or companies.
RESEARCH AND DEVELOPMENT
Currently, research and development efforts are limited to refining
technology for specific markets and customers from whom there may be near term
sales. During 2003, NuWave made its research and development testing facilities
and testing equipment available to its independent commissioned agent who will
work with potential customers and markets to develop sales opportunities for
NuWave. The agent may use the research and development facility as needed to
support near term needs of potential market opportunities.
During fiscal 2003 and 2002, $134,000 and $681,000, respectively, was
spent on research and development activities.
MARKETING AND SALES
In its technology business, NuWave is currently exploring how best to
market its NuWave Video Processor technology. NuWave's contract with a sales and
marketing agent expired on October 31, 2004. NuWave currently is evaluating
whether to renew its agreement with that agent or whether to engage a new agent
to assist NuWave in marketing its technology.
MANUFACTURING
NuWave does not contemplate that it will directly manufacture any of
its products. It has contracted with third parties to manufacture its NVP
Application Specific Integrating Chips ("ASIC") and its product line up. It also
may license to third parties the rights to manufacture the products, through
direct licensing, Original Equipment Manufacturer ("OEM") arrangements or
otherwise.
NuWave intends to produce the NVP ASIC chips only as ordered under firm
commitments by customers.
PATENTS; PROPRIETARY INFORMATION
NuWave is presently re-evaluating is technology line-up and product
strategy. In the past, NuWave has filed U.S. patents and/or copyright
applications for certain of its proposed products and technology. NuWave has
also filed applications in key industrial countries worldwide. NuWave intends to
protect patents and technologies in key strategic technology product areas.
These areas are currently being studied, and have not yet been clearly
identified.
In April 1996, NuWave filed two U.S. patent applications on behalf of
Rave Engineering Corporation ("Rave") for its Randall connector system. One
patent was received in November 1997 and the second one in January 1998. Under
the terms of the settlement agreement with Rave, NuWave retains the exclusive
license rights to these patents.
In April 1998, NuWave filed three U.S. patent applications for certain
of its independently developed products: one for the NuWave Video Processor and
two for the Softsets, these patents were granted in November 2000, February 2001
and May 2001, respectively. In August 1999, NuWave filed a patent application
for its digital software technology as used in PicturePrep product line, this
patent was granted in October 2001. There is no assurance that any patent will
afford us with commercially significant protection of our technology or that we
will have adequate resources to enforce our patents.
NuWave historically sold its technology and products in foreign
markets. As such, it has filed for foreign patent protection in the countries
forming the European Common Union, Japan and Korea. The patent laws of other
34
countries may differ significantly from those of the United States as to the
patentability of NuWave's products and technology. Moreover, the degree of
protection afforded by foreign patents may be different from that in the United
States. Patent applications in the United States are maintained in secrecy until
the patents are issued, if a non-publication request is timely made and the
applications are not foreign filed, and are otherwise published 18 months after
filing. Publication of discoveries in scientific or patent literature tends to
lag behind actual discoveries by several months. As a result, NuWave cannot be
certain that it will be the first creator of inventions covered by any patent
applications it makes or the first to file patent applications on such
inventions.
Management believes that the products NuWave intends to market and sell
do not infringe the patents or other proprietary rights of third parties.
Further, it is not aware of any patents held by competitors that will prevent,
limit or otherwise interfere with NuWave's ability to make and sell its
products. However, it is possible that competitors may have applied for, or may
in the future apply for and obtain, patents which have an adverse impact on
NuWave's ability to make and sell its products. There is no assurance that
competitors will not infringe NuWave's patents. Defense and prosecution of
patent suits, even if successful, are both costly and time consuming. An adverse
outcome in the defense of a patent suit could subject NuWave to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require it to cease selling its products.
NuWave also relies on unpatented proprietary technology. There is no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to NuWave's unpatented technology. To
protect its trade secrets and other proprietary information, NuWave requires
employees, advisors and collaborators to enter into confidentiality agreements.
NuWave could be adversely affected in the event that these agreements fail to
provide meaningful protection for its trade secrets, know-how or other
proprietary information.
COMPETITION
The markets that NuWave intends to enter are characterized by intense
competition, and, particularly with respect to the market for video editing,
video production and video processing products, significant price erosion over
the life of a product. NuWave's products will directly compete with those of
numerous well-established companies, such as Sony Electronics, Inc., Panasonic
Division of Matsushita Electric Industrial Co., Motorola, Inc., Mitsubishi
International Corp. and Royal Philips Electronics, NV, which design, manufacture
and/or market video technology and other products. All of these companies have
substantially greater financial, technical, personnel and other resources than
NuWave and have established reputations for success in the development,
licensing, sale and service of their products and technology. Certain of these
competitors dominate their industries and have the necessary financial resources
to enable them to withstand substantial price competition or downturns in the
market for video products.
EMPLOYEES
NuWave currently has two full-time employees, of whom one is an
executive and depending on its level of business activity, expects to hire
additional employees in the next 12 months, as needed, to support marketing and
sales, development and construction. NuWave also retains a number of consultants
on an as-needed basis.
35
MANAGEMENT
NuWave's present directors and executive officers are as follows:
NAME AGE POSITION
---------------------- ---- --------
George D. Kanakis 32 President, Chief Executive Officer,
Chief Financial Officer and Director
Robert B. Legnosky (1) 31 Director
Gary H. Giannantonio 32 Director
(1) Robert B. Legnosky resigned from the Board of Directors effective
August 26, 2004.
The following is a brief description of the background of the directors
and executive officers of NuWave.
George D. Kanakis has been a Director and President and Chief Executive
Officer of NuWave since September 10, 2003. From March 2002 through August 2003,
he had been a Vice President, Corporate Finance for Cornell Capital Partners,
L.P., where he structured equity and debt financings, as well as provided
consulting to clients on mergers and acquisitions. From 1993 to 2001 Mr. Kanakis
managed the Futures and Options Group at Barclays Capital, where he serviced
primarily institutional clients, around the world. Mr. Kanakis holds an MBA in
Finance and Investments from the Zicklin School of Business at Baruch College
where he graduated in December 2001 and a degree in Economics from Rutgers
University where he graduated in May 1995.
Robert B. Legnosky has been a Director since September 10, 2003. Since
October 30, 2002, Mr. Legnosky has been serving as the President and Chief
Executive Officer of Celerity Systems, Inc. From 1998 through October 2002, Mr.
Legnosky has served as a Senior Technical Consultant with AXA
Financial/Equitable Life where he provided technical support and direction on
cash analysis and monitored unprocessed cash reports to ensure service
standards. From 1997 to 1998, Mr. Legnosky served as a Sales Associate with
Cybermax Computer Inc. where he advised consumers on personal computers,
provided technical support to clients, and drafted proposals. From 1997 to 1998,
Mr. Legnosky also served as a Group Life Claims Manager with Prudential
Insurance Company where he evaluated life insurance claims. Mr. Legnosky
graduated from Rutgers University with a Bachelor of Science and Bachelor of
Arts degree in 1996.
Gary H. Giannantonio became a Director on May 17, 2004. He is an
associate at the law firm of Kalebic, McDonnell & Miller, P.C. in Hackensack,
New Jersey. Mr. Giannantonio's primary experience involves residential and
commercial real estate transactions. He also has experience handling general
civil litigation, collections, landlord/tenant, matrimonial, and bankruptcy
matters. Mr. Giannantonio is also an Assistant Municipal Prosecutor in Palisades
Park, New Jersey. He received his Juris Doctor degree from New York Law School
in 1998 and a Bachelor of Arts Degree in Political Science from Boston
University in 1994. He is licensed to practice in New Jersey State Courts as
well as the United States District Court for the District of New Jersey.
COMMITTEES
NuWave's Board of Directors serves as the audit committee. The Board of
Directors does not have a "financial expert" due to the lack of capital needed
to attract a qualified expert.
CODE OF ETHICS
On March 30, 2004, the Board of Directors of NuWave adopted a written
Code of Ethics designed to deter wrongdoing and promote honest and ethical
conduct, full, fair and accurate disclosure, compliance with laws, prompt
internal reporting and accountability to adherence to the Code of Ethics.
36
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation
for services in all capacities for the fiscal years ended December 31, 2003,
2002 and 2001 paid to George D. Kanakis and Gerald Zarin ("Named Executive
Officer"). No other executive officer received compensation exceeding $100,000
during the years ended December 31, 2003, 2002 and 2001. Mr. Kanakis became our
Chief Executive Officer on September 10, 2003. The employment of Mr. Zarin
terminated on September 29, 2003. The following table sets forth the annual
compensation paid by NuWave for services performed on NuWave's behalf for the
years ended December 31, 2001, 2002 and 2003.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
UNDERLYING
NAME AND OTHER ANNUAL OPTIONS (NUMBER ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OF SHARES) (1) COMPENSATION
------------------ ---- ------ ----- ------------ -------------- ------------
George D. Kanakis, President
and Chief Executive Officer 2003 $ 12,500 -- -- -- --
Gerald Zarin
Former President and Chief
Executive Officer 2003 $ 117,000 -- -- -- --
2002 $ 155,000 $ 30,000 -- -- --
2001 $ 144,000 -- -- 200,000 --
Note: Effective June 1, 2004, George D. Kanakis' annual salary was $125,000.
Note: Gerald Zarin's employment terminated on September 29, 2003. In conjunction
therewith, he received 100,000 warrants to purchase NuWave's stock at $1.00 per
share. Mr. Zarin surrendered all options upon his resignation during 2003.
STOCK OPTIONS
For the Year Ended December 31, 2003, there were no options granted.
On January 12, 2003, the former executive Officers of NuWave and all
employees voluntarily and irrevocably surrendered all options granted to them
through that date. As such, no options remain outstanding as of this date. All
stock option plans have been terminated.
DIRECTORS' COMPENSATION
Directors who are not employees of NuWave are entitled to a fee of
$2,500 per quarter for serving on the Board of Directors. Each director is also
reimbursed for expenses incurred in connection with attendance at meetings of
the Board of Directors.
EMPLOYMENT AGREEMENT
Effective June 1, 2004, NuWave entered into a five year employment
contract with George Kanakis. Pursuant to the contract, Mr. Kanakis is employed
as President and Chief Executive Officer at an annual salary of $125,000 per
year, subject to increases at the Board of Directors' discretion. Mr. Kanakis is
also entitled to a bonus equal to 12.5% of the net income attributable to each
NuWave subsidiary, plus a discretionary bonus as determined by the Board of
Directors. Mr. Kanakis is also entitled to 75,000 shares of common stock and
options to purchase 100,000 shares of common stock at some future date. NuWave
has not yet adopted a stock option plan. Accordingly, no options have been
issued to Mr. Kanakis.
37
Until September 29, 2003, NuWave had employment agreements with its
former President and CEO, Mr. Gerald Zarin and its Chief Financial Officer, Mr.
Jeremiah F. O'Brien. These agreements terminated upon the September 29, 2003
resignations of these two former officers.
38
DESCRIPTION OF PROPERTY
NuWave maintains it headquarters in Union, New Jersey, a shared space
for which NuWave pays $500 per month, on a month-to-month basis. In addition,
NuWave maintains approximately 1,000 square feet of lab and storage space in
Fairfield, New Jersey. NuWave pays $1,200 per month, on a month-to-month basis.
Effective July 2004, NuWave entered into a five year lease agreement for
approximately 3,500 square feet of office tower space in Jersey City, New
Jersey. NuWave incurs a net cost of approximately $5,000 per month for this
space, when combining the rent and other costs such as utilities, taxes and
maintenance. This net cost reflects the benefit of NuWave subleasing
approximately 50% of the space to a subtenant.
Effective in 2003, NuWave began seeking investments in real estate
properties. Currently, there are no limitations on the types of assets NuWave
may invest. This policy may be changed without the consent of shareholders. It
is NuWave's policy to invest in properties primarily for possible capital gain.
NuWave may invest in most any property, including, for example,
undeveloped acreage, shopping centers, single family residential and office
buildings. NuWave intends to finance the acquisition of these properties through
a combination of debt and equity financing. NuWave intends to hold and manage
properties for only the duration which will facilitate the sale for the possible
capital gain.
NuWave has no current intention to invest in real estate mortgages.
NuWave may invest in the common stock of companies that are in the real estate
business. Primary real estate activities in which NuWave may invest in the
future include investing in: undeveloped and developed properties.
In April 2004, NuWave, through a wholly owned subsidiary, purchased
residential property consisting of land and a residential building in Jersey
City, New Jersey for a total purchase price of $122,000. The purchase was paid
with $113,000 in cash and $9,000 in the application of a deposit. NuWave intends
to redevelop and then later sell this property.
On December 22, 2003, NuWave acquired a parcel of undeveloped acreage
in Cranford, New Jersey. This land was purchased for $4,950,000 from Stone
Street Asset Management, LLC, a company under common control with Cornell
Capital Partners, L.P. NuWave obtained an appraisal by an independent Certified
General Real Estate Appraiser, who valued the acreage at $4,950,000. In exchange
for the undeveloped acreage, NuWave issued $3,550,000 in convertible debentures
and $1,400,000 in a note payable. $3,300,000 of the convertible debentures are
collateralized with a first mortgage lien on the land, which debentures are held
by Cornell Capital Partners, L.P. The $1,400,000 note payable is secured with a
second mortgage on the land and is held by Stone Street Asset Management, LLC.
Stone Street and Cornell Capital Partners, L.P. are related parties in that they
have common ownership. The $4,950,000 purchase price of the undeveloped acreage
is at a price that is approximately $2,035,000 greater than the cost basis in
the hands of Stone Street immediately prior to the sale. Stone Street purchased
the property from an independent 3rd party in August 2003. As a result of Stone
Street's relationship with Cornell Capital Partners, L.P., and Cornell Capital
Partners, L.P.'s ability to influence the management of NuWave, NuWave has
recorded the land on its book at the cost basis of the seller. NuWave has a
deeded interest in the property. Of the obligations due under the convertible
debentures $250,000 are due in December 2005 and $3,300,000 are due in December
2008. The holders of the convertible debentures may convert a portion into
NuWave's common stock at any time. The $1,400,000 note is payable over 60
months, starting January 1, 2005. All of these obligations accrue interest at a
5% annual interest rate.
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of a
20% fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004, as described
below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
39
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its interest
in the property ("Investor's Option"). The Investor may sell this property back
to the Company through exercise rights under a convertible debenture agreement,
discussed below. The Investors Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any time
prior to August 1, 2007, the Investor wishes to sell its interest to a third
party, it must first notify the Company. Upon such notice, the Company may,
within 30 days, repurchase all of the remaining property interest for a price
equal to a pro-rata portion of the original price paid by the Investor at the
effective date ($1,783,549). If the Company fails to exercise this offer within
the 30 day period, then the Investor shall be allowed 90 days in which to sell
all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated as
a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of the
Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
40
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004 NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
NuWave intends to develop the property into a 55 and over, residential
community. NuWave intends to develop residential dwelling units and limited
retail space on the site. The residential dwelling units will be sold to
individual buyers. Currently the acreage is not developed. NuWave believes that
there is a demand for these 55 and over units. Reasons include: an aging
population with disposable income, the continued positive economic outlook for
the Northeast economy and the positive local economics in the Cranford, New
Jersey area. NuWave expects that planning for the project will be completed in
2004 and that construction and development will begin in 2005. NuWave is
currently developing costs estimates for the development of the property.
NuWave maintains adequate liability insurance on the undeveloped
acreage.
LEGAL PROCEEDINGS
We are not aware of any pending legal actions against us.
41
PRINCIPAL STOCKHOLDERS
Voting Securities And Principal Holders Thereof
The following table sets forth, as of November 29, 2004, information
with respect to the beneficial ownership of our common stock by (i) persons
known by us to beneficially own more than five percent of the outstanding
shares, (ii) each director, (iii) each executive officer and (iv) all directors
and executive officers as a group.
COMMON STOCK
BENEFICIALLY OWNED
-----------------------------------
NAME/ADDRESS NUMBER PERCENT(1)
------------------------------- ------------ ------------
George Kanakis 75,000(2) 3.6%
Robert Legnosky (4) -- --
Gary H. Giannantonio -- --
All Officers and Directors 75,000 3.6%
Cornell Capital Partners, L.P. 226,615(3) 9.9%
101 Hudson Street
Jersey City, NJ 07302
-----------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 2,062,013 shares of
common stock outstanding as of November 29, 2004. Beneficial ownership
is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to
securities. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of November 29,
2004 are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The common
stock is the only outstanding class of equity securities of NuWave.
(2) Includes 75,000 shares of common stock.
(3) Cornell Capital Partners, L.P. holds $3,300,000 of convertible
debentures in NuWave. NuWave may exercise conversion of the debenture
into common stock, so long as after the conversion, NuWave holds not
more than 9.9% of NuWave's outstanding common stock.
(4) Robert B. Legnosky has resigned from the Board of Directors, effective
August 26, 2004.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lehigh acquired a parcel of land in New Jersey for $4,950,000 that it
intends to develop and then sell. Lehigh based its purchase price on an
independent commercial appraisal. This land was acquired from Stone Street Asset
Management LLC ("Stone Street"), a Company under common ownership and control as
Cornell Capital Partners, L.P. In connection with this purchase of land, NuWave
incurred debt obligations consisting of a $3,300,000 convertible debenture to
Cornell Capital Partners, L.P., $250,000 of convertible debentures to unrelated
parties and a $1,400,000 note payable to Stone Street (see Note 7 to the
December 31, 2003 NuWave Consolidated Financial Statements, page number F-34).
As a result of Stone Street's relationship with Cornell Capital Partners, L.P.,
NuWave has recorded land at the cost basis recorded by Stone Street of
approximately $2,915,000.
Effective July 2004, NuWave entered into a five year lease agreement
for approximately 3,500 square feet of office tower space in Jersey City, New
Jersey. NuWave incurs a net cost of approximately $5,000 per month for this
space, when combining the rent and other costs such as utilities, taxes and
maintenance. This net cost reflects the benefit of NuWave subleasing
approximately 50% of the space to a subtenant. NuWave's obligations under this
lease are guaranteed by Yorkville Advisors Management, LLC ("Yorkville").
Yorkville is related to Cornell Capital Partners, L.P. a related party to
NuWave.
43
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
NuWave's Common Stock, par value $0.001 per share ("Common Stock") is
traded on the OTC bulletin board (OTCBB) Market under the symbol NUWV. The OTCBB
is a regulated quotation service that displays real-time quotes, last-sale
prices and volume information in over-the-counter (OTC) equity securities. Prior
to August 13, 2002, the stock had been traded on the NASDAQ SmallCap Market. The
following table sets forth the range of high and low closing sale prices for the
Common Stock as reported on the NASDAQ SmallCap Stock Market during each of the
quarters presented until August 12, 2002 and the OTCBB subsequent to August 12,
2002. The quotations set forth below are inter-dealer quotations, without retail
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions. On July 21, 2003, NuWave affected a 1:50 reverse stock split, as
previously approved by stockholders. All closing sales prices below have been
restated retroactively for the effect of the reverse stock split.
BID PRICE PER SHARE
-------------------
HIGH LOW
------ ------
Three Months Ended March 31, 2002 $52.50 $29.50
Three Months Ended June 30, 2002 $36.50 $15.00
Three Months Ended September 30, 2002 $20.50 $3.50
Three Months Ended December 31, 2002 $7.00 $0.50
Three Months Ended March 31, 2003 $8.00 $0.18
Three Months Ended June 30, 2003 $0.45 $0.10
Three Months Ended September 30, 2003 $0.60 $0.10
Three Months Ended December 31, 2003 $0.31 $0.10
Three Months Ended March 31, 2004 $0.18 $0.10
Three Months Ended June 30, 2004 $0.17 $0.04
Three Months Ended September 30, 2004 $0.085 $0.065
As of November 29, 2004, there were approximately 195 holders of record
of NuWave's Common Stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
During October 2003, NuWave redeemed its convertible preferred stock.
In accordance with the redemption, NuWave paid a one time deemed dividend -
redemption premium in total of $19,400. These convertible preferred shares have
now all been redeemed are there remain no shares outstanding.
NuWave has never declared or paid any cash dividends on its common
shares. NuWave currently intends to retain any future earnings to finance the
growth and development of its business and future operations, and therefore does
not anticipate paying any further cash dividends in the foreseeable future.
44
DESCRIPTION OF SECURITIES
Capital Stock
The authorized capital stock of NuWave consists of 140,000,000 shares
of common stock, par value $0.001 per share. As of November 29, 2004, we had
2,062,013 shares of our common stock outstanding. The following description is a
summary of the capital stock of NuWave and contains the material terms of the
capital stock. Additional information can be found in NuWave's Articles of
Incorporation and Bylaws.
Common Stock. Each share of common stock entitles the holder to one
vote on each matter submitted to a vote of our stockholders, including the
election of directors. There is no cumulative voting. Subject to preferences
that may be applicable to any outstanding preferred stock, stockholders are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors. Stockholders have no preemptive, conversion
or other subscription rights. There are no redemption or sinking fund provisions
related to the common stock. In the event of liquidation, dissolution or winding
up of NuWave, stockholders are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding.
WARRANTS
NuWave has outstanding warrants, as of November 29, 2004 to purchase a
total of 217,600 shares of common stock. Warrants for 200,000 of these are at an
exercise price of $1.00 per share. The remaining 17,600 warrants to purchase
common stock are at a weighted average exercise price of $63.15 per share.
Limitation Of Liability: Indemnification
Our Bylaws include an indemnification provision under which we have
agreed to indemnify directors and officers of NuWave to fullest extent possible
from and against any and all claims of any type arising from or related to
future acts or omissions as a director or officer of NuWave.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
NuWave pursuant to the foregoing, or otherwise, NuWave has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Anti-Takeover Effects Of Provisions Of The Articles Of Incorporation
AUTHORIZED AND UNISSUED STOCK. The authorized but unissued shares of
our common and preferred stock are available for future issuance without our
shareholders' approval. These additional shares may be utilized for a variety of
corporate purposes including but not limited to future public or direct
offerings to raise additional capital, corporate acquisitions and employee
incentive plans. The issuance of such shares may also be used to deter a
potential takeover of NuWave that may otherwise be beneficial to shareholders by
diluting the shares held by a potential suitor or issuing shares to a
shareholder that will vote in accordance with the desires of NuWave's Board of
Directors. A takeover may be beneficial to shareholders because, among other
reasons, a potential suitor may offer shareholders a premium for their shares of
stock compared to the then-existing market price.
45
EXPERTS
The consolidated financial statements for the year ended December 31,
2003 included in the Prospectus have been audited by Marcum & Kliegman LLP,
independent registered public accounting firm to the extent and for the period
set forth in their report (which contains an explanatory paragraph regarding
NuWave's ability to continue as a going concern) appearing elsewhere herein and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
The financial statements for the year ended December 31, 2002 included
in the Prospectus have been audited by Eisner LLP, independent registered public
accounting firm to the extent and for the periods set forth in their report
(which contains an explanatory paragraph regarding NuWave's ability to continue
as a going concern) appearing elsewhere herein and are included in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 2, 2004, NuWave Technologies, Inc. engaged Weiser LLP as its
principal accountant to audit NuWave Technologies's financial statements. NuWave
did not consult Weiser LLP on any matters described in paragraph (a)(2)(i) or
(ii) of Item 304 of Regulation S-B during the Registrant's two most recent
fiscal years or any subsequent interim period prior to engaging Weiser LLP.
Effective on June 30, 2004, NuWave Technologies, Inc. dismissed Marcum
& Kliegman LLP as its independent registered public accounting firm.
Marcum & Kliegman LLP's report on NuWave's financial statements for the
past fiscal year did not contain an adverse opinion or a disclaimer of opinion
and was not qualified as to uncertainty, audit scope, or accounting principles;
however, the report was modified to include an explanatory paragraph wherein
Marcum & Kliegman LLP expressed substantial doubt about NuWave's ability to
continue as a going concern.
Marcum & Kliegman LLP's dismissal was recommended and approved by
NuWave's Board of Directors.
During NuWave's most recent fiscal year, as well as the subsequent
interim period through June 30, 2004, there were no disagreements on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. Marcum & Kliegman LLP did not
advise NuWave Technologies, Inc. of any of the matters identified in paragraph
(a)(1)(B), (a) (1) (C), (D) or (E) of Item 304 of Regulation S-B.
On October 30, 2003, NuWave Technologies, Inc. dismissed Eisner LLP as
its independent registered public accountant.
Eisner's report on NuWave's financial statements for the years ended
December 31, 2001 and 2002, respectively, did not contain an adverse opinion or
a disclaimer of opinion. However, the report did reflect a going concern
uncertainty.
Eisner's dismissal was recommended and approved by NuWave's Board of
Directors.
Since January 1, 2001, as well as any subsequent interim period prior
to dismissal, there were no disagreements on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
Since January 1, 2001, as well as any subsequent interim period prior
to dismissal, Eisner did not advise NuWave Technologies, Inc. of any of the
matters identified in paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.
46
On October 30, 2003, NuWave Technologies, Inc. engaged Marcum &
Kleigman, LLP as its principal accountant to audit NuWave Technologies's
financial statements. NuWave did not consult Marcum & Kleigman, LLP on any
matters described in paragraph (a)(2)(i) or (ii) of Item 304 of Regulation S-B
since January 1, 2003 or any subsequent interim period prior to engaging Marcum
& Kliegman, LLP.
LEGAL MATTERS
Troy J. Rillo, Esquire will pass upon the validity of the shares of common stock
offered hereby for us. In addition to his law practice, Mr. Rillo is employed by
Yorkville Advisors Management, LLC, which is the investment manager of Cornell
Capital Partners, LP.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
securities offered by this prospectus. This prospectus, which forms a part of
the registration statement, does not contain all the information set forth in
the registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
47
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM SB-2
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2004 AND 2003
Balance Sheet as of September 30, 2004 (unaudited) and December 31, 2003 F-2
Statements of Operations and Comprehensive Income (Loss) for the three
and nine month periods ended September 30, 2004 (unaudited) and 2003
(unaudited) F-3
Statements of Cash Flows for the nine month periods ended
September 30, 2004 (unaudited) and 2003 (unaudited) F-4
Notes to Financial Statements F-6
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2003 AND 2002
Report of Independent Registered Public Accounting Firm -
Marcum & Kliegman LLP F-19
Report of Independent Registered Public Accounting Firm - Eisner LLP F-20
Balance Sheet as of December 31, 2003 F-21
Statements of Operations for the years ended December 31, 2003 and 2002 F-22
Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 2003 and 2002 F-23
Statements of Cash Flows for the years ended December 31, 2003 and 2002 F-24
Notes to Financial Statements F-26
F-1
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS
September 30, December 31,
2004 2003
-----------------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 822 $ 119
Marketable securities - available-for-sale 85 --
Inventory 1 1
-------------------------
Total current assets 908 120
Property and equipment, net 22 4
Land held for development and sale 3,328 2,970
Deferred tax asset -- 225
-------------------------
Total assets $ 4,258 $ 3,319
=========================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable, accrued interest and accrued liabilities $ 101 $ 170
Current portion of note payable - related party 198 --
-------------------------
Total current liabilities 299 170
-------------------------
Non-current liabilities:
Notes payable - related party -- 484
Note payable - related party, net of current portion 1,202 1,400
Convertible debentures - related party,
net of unamortized discounts of $697 and $866, respectively 2,603 2,634
Convertible debentures,
net of unamortized discounts of $574 and $109, respectively 1,945 336
Accrued interest - non-current 208 --
-------------------------
Total non-current liabilities 5,958 4,854
-------------------------
Total liabilities 6,257 5,024
-------------------------
Stockholders' deficiency:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; none issued -- --
Preferred stock, $.01 par value; authorized 1,600,000
shares; none issued - (preferences and
rights to be designated by the Board of Directors) -- --
Common stock, $.001 par value; authorized 140,000,000 shares;
2,062,013 shares issued and outstanding at September 30, 2004 2 2
and 1,875,902 shares issued and outstanding at December 31, 2003
Additional paid-in capital 26,916 26,216
Accumulated other comprehensive loss (45) --
Accumulated deficit (28,872) (27,923)
-------------------------
Total stockholders' deficiency (1,999) (1,705)
-------------------------
Total liabilties and stockholders' deficiency $ 4,258 $ 3,319
=========================
See accompanying notes to these condensed consolidated financial statements.
F-2
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ -- $ 4 $ -- $ 19
Cost of sales -- 2 -- 5
----------- ----------- ----------- -----------
Gross profit -- 2 -- 14
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 280 59 572 631
Research and development -- 1 -- 127
----------- ----------- ----------- -----------
Total operating expenses 280 60 572 758
----------- ----------- ----------- -----------
Loss from operations (280) (58) (572) (744)
Other income (expense):
Gain on forgiveness of debt -- 265 -- 265
Interest expense (202) (14) (377) (21)
----------- ----------- ----------- -----------
Net income (loss) $ (482) $ 193 $ (949) $ (500)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,062,013 1,866,788 1,961,240 1,267,079
=========== =========== =========== ===========
Basic and diluted net income (loss)
per common share $ (0.23) $ 0.10 $ (0.48) $ (0.39)
=========== =========== =========== ===========
Comprehensive loss:
Net income (loss) $ (482) $ 193 $ (949) $ (500)
Other comprehensive (loss) net of income taxes:
Unrealized losses on marketable securities (45) -- (45) --
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (527) $ 193 $ (994) $ (500)
=========== =========== =========== ===========
See accompanying notes to these condensed consolidated financial statements.
F-3
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
Nine Months Ended September 30,
-------------------------------
2004 2003
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (949) $ (500)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3 42
Provision for bad debt expense -- 11
Gain on forgiveness of debt -- (265)
Amortization of debt discount 170 --
Issuance of stock options and warrants for 18 27
consulting services
Decrease in operating assets:
Inventory -- 24
Prepaid expenses and other current assets -- 159
Other assets -- 20
Deferred tax asset 225 --
Increase (decrease) in operating liabilities:
Accounts payable, accrued liabilities and accrued interest 123 (237)
----------- -----------
Total adjustments 539 (219)
----------- -----------
Net cash used in
operating activities (410) (719)
----------- -----------
Cash flows from investing activities:
Purchase of marketable securities (130) --
Purchase of property and equipment (21) --
Land acquisition and land development costs (149) --
----------- -----------
Net cash used in investing activities (300) --
----------- -----------
(continued)
See accompanying notes to these condensed consolidated financial statements.
F-4
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands except share data)
Nine Months Ended September 30,
-------------------------------
2004 2003
----------- -----------
(unaudited) (unaudited)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related party -- 557
Proceeds from issuance of convertible debentures 2,143 --
Proceeds from equity offerings -- 122
Repayment of note payable to officer/stockholder -- (115)
Repayment of notes payable - related party (460) --
Repayment of convertible debentures (270) --
Costs incurred for equity offerings and warrants -- (15)
----------- -----------
Net cash provided by financing activities 1,413 549
----------- -----------
Net increase (decrease) in cash and cash equivalents 703 (170)
Cash and cash equivalents - beginning of the period 119 174
----------- -----------
Cash and cash equivalents - end of the period $ 822 $ 4
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 3 $ 12
=========== ===========
Supplemental disclosures of non-cash investing and financing activities:
Recording of debt discount $ 556 $ --
=========== ===========
Issuance of 1,151,489 shares of
common stock in settlement of notes payable $ -- $ 273
=========== ===========
Recording of interest payable and amortization of
debt discount that is capitalized as an addition to
the cost of the land held for development and sale $ 209 $ --
=========== ===========
Gain on related party forgiveness of debt credited to
additional paid-in capital $ 126 $ --
=========== ===========
See accompanying notes to these condensed consolidated financial statements.
F-5
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. NUWAVE Technologies, Inc. (the
"Company" or "NUWAVE"), believes that the quarterly information presented
includes all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States of America. The accompanying condensed
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission ("SEC") on April 15, 2004.
2. GOING CONCERN AND MANAGEMENT'S PLANS
Over the last three years, the Company's annual sales have declined
from approximately $505,000 in 2001 to approximately $286,000 in 2002 to
approximately $20,000 in 2003 and no sales in the three and nine month periods
ended September 30, 2004, as the Company has had difficulty securing buyers for
its technology products in a very competitive environment. The Company has
incurred annual net losses of approximately $4,273,000, $2,674,000, $790,000 in
2001, 2002 and 2003, respectively. As shown in the accompanying condensed
consolidated financial statements, the Company incurred a net loss of
approximately $482,000 and $949,000 during the three and nine months ended
September 30, 2004, respectively, resulting in a stockholders' deficiency of
approximately $1,999,000 at September 30, 2004. For the nine months ended
September 30, 2004, the Company has net cash used in operations of approximately
$410,000, resulting primarily from a net loss of approximately $949,000, offset
by amortization of debt discount of $170,000 and the receipt of the proceeds
from the sale of certain state net tax operating losses of $225,000. This
represents a decrease of $309,000 over the Company's net use of cash of $719,000
for the corresponding nine month period ended September 30, 2003. Net cash
provided by financing activities increased by approximately $864,000 to
$1,413,000, primarily through the issuance of convertible debentures of
$2,143,000. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. These condensed consolidated 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.
F-6
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN AND MANAGEMENT'S PLANS - CONTINUED
Management has taken a number of actions to lower costs and to improve
the Company's liquidity. The Company has substantially reduced its cash flow
requirements through significant reductions in payroll and various other
operating expenses. The Company has raised approximately $1,783,000 through the
issuance of a convertible debenture related to the Company's land held for
development and sale. In November 2004, this convertible debenture was
terminated and rescinded and a significant portion of the proceeds retained by
the Company and were applied toward the sale of an interest in the Company's
land held for development and sale (see Note 12). The current net proceeds of
approximately $1,783,000 from this convertible debenture has provided cash flow
for operating expenses and for repayment of certain obligations. The Company
applied approximately $460,000 of these funds to pay off in full certain
obligations to Cornell Capital Partners, L.P. ("Cornell") totaling $484,000. In
addition, the Company paid off convertible debenture obligations to Cornell and
others with a face value of $200,000 and $70,000, respectively. The Company
intends to remain in the technology business. The Company has found it difficult
to generate revenues through its technology business.
In addition, Management's plans include the raising of cash through the
issuance of debt or equity although there are no assurances that the Company
will be successful. The Company continues to require funding by and the
financial support of Cornell. In May 2004, the Company entered into a Standby
Equity Distribution Agreement ("SEDA") with Cornell (see Note 9).
On August 9, 2004, the Company filed a Form SB-2 Registration
Statement, with the Securities and Exchange Commission. The Company is seeking
to register 130,690,033 shares of its common stock.
Management does not intend to expend any additional funds toward the
development of the land held for development and sale until such time as new
funding is secured.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NuWave
and its wholly-owned subsidiaries Lehigh Acquisition Corp ("Lehigh"), WH
Acquisition Corp, Harwood Acquisition Corp and JK Acquisition Corp
(collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-7
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
On June 1, 2004, the Company granted 75,000 shares of stock to its
President and CEO under his employment agreement and recorded an earnings charge
of $7,500 (see Note 8). In addition, for the three months and nine months ended
September 30, 2004 and 2003, there was no other stock based employee
compensation expense as determined under the fair value based method.
Accordingly, for these periods, there are no differences between basic and
diluted net income (loss) per share as reported and pro forma net income (loss).
REVENUE RECOGNITION
In regard to the technology operations, income is recorded when orders
are shipped and the Company has no further involvement with the product. In
regard to real estate operations, income from sales of real estate is recorded
when title is conveyed to the buyer, adequate cash payment has been received and
there is no continued involvement.
EARNINGS (LOSS) PER SHARE
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", which provides for the calculation of
"basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share
includes no dilution and is computed by dividing earnings (loss) available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur through the effect of common shares issuable upon the exercise of
stock options and warrants and convertible securities. For the periods ended
September 30, 2004 and 2003, potential common shares amount to 80,198,409 and
220,230 shares, respectively. For the three and nine months ended September 30,
2004 and the nine months ended September 30, 2003, such potential common shares
have not been included in the computation of diluted loss per share since the
effect would be antidilutive. For the three months ended September 30, 2003, the
potential common shares were warrants that were out of the money.
MARKETABLE SECURITIES
The Company evaluates its investment policies and the appropriate
classification of securities at the time of purchase consistent with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," at each balance sheet date and
determined that all of its investment securities are to be classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Deficiency under
the caption "Accumulated Other Comprehensive Loss." Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in general and administrative expenses. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest and dividend income.
F-8
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INTEREST CAPITALIZATION
The Company follows SFAS No. 34, "Capitalization of Interest Costs",
which provides for the capitalization of interest as part of the historical cost
of acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 ("FIN 46-R"). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to periods ending after December 15, 2004. The
adoption of FIN 46 is not expected to have a material impact on the consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and, otherwise, is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS No. 150 in the third
quarter of 2003. The adoption has not had, and is not expected to have, a
material impact on the Company's consolidated financial position or results of
operations.
F-9
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LAND HELD FOR DEVELOPMENT AND SALE
During April 2004, WH Acquisition Corp. purchased real estate property
consisting of land and a residential building in Jersey City, New Jersey for a
total purchase price of $122,000. The purchase was paid with $113,000 in cash
and $9,000 in the application of a deposit. The Company intends to redevelop and
then later sell this property. On December 22, 2003, Lehigh acquired a parcel of
land in New Jersey that it intends to develop and then sell. During the three
and nine month periods ended September 30, 2004, the Company capitalized
approximately $68,000 and $209,000 of interest relating to the financing costs
incurred for the portion of Lehigh land that was capitalized in December 2003
and $12,000 and $27,000 in legal fees, respectively.
During August 2004, the Company received proceeds of approximately
$1,783,000 through the issuance of a convertible debenture that is secured
through an interest in the Company's land held for development and sale (see
Note 12).
5. NOTES PAYABLE - RELATED PARTY
On September 10, 2004, the Company repaid in full the $484,000
balance of the notes payable - related party, and related accrued interest of
approximately $93,000, for the net sum of $460,000. Such forgiveness,
aggregating approximately $117,000 has been recorded as an addition to
additional paid-in capital. Funds for this repayment were provided through the
proceeds received from the convertible debenture related to the land held for
development and sale (see Note 4).
6. CONVERTIBLE DEBENTURES
During August 2004, the Company raised approximately $1,783,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bears interest at 10% per annum,
with interest payable monthly and is secured through an interest in the land
held for development and sale. This debenture was to mature in August 2007 (see
Note 12).
On September 14, 2004, the Company redeemed convertible debentures with
a face amount of $70,000 for approximately $80,000, including the 10% redemption
fee and accrued interest through the date of redemption. The unamortized
discount aggregating approximately $11,000 at September 14, 2004 has been
recorded as interest expense. On September 10, 2004, the Company redeemed a
convertible debenture - related party with a balance of $200,000 and accrued
interest of approximately $9,000 at redemption for the net sum of $200,000. The
lender waived receipt of the accrued interest. Such forgiveness, aggregating
approximately $9,000 has been recorded as an addition to additional paid-in
capital. The unamortized discount of approximately $28,000 at September 10, 2004
has been recorded as interest expense.
During June 2004, the Company raised $250,000 through the issuance of a
convertible debenture to an unrelated party. This debenture bears interest at
10% per annum, with interest due at maturity or upon conversion. This debenture
matures in June 2006. During January 2004, the Company raised $110,000 through
the issuance of convertible debentures to two unrelated parties. These
debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature in January 2006.
F-10
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. CONVERTIBLE DEBENTURES - CONTINUED
For the convertible debenture issued in August 2004, at the option of
the holder or the Company, at any time, this convertible debenture could have
been converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion date.
In connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each had the option to effectively
void all or a portion of the transfer. In the event that neither option was
exercised within three years, the 20% fee simple interest would revert to the
Company upon settlement of the convertible debenture. This convertible debenture
was terminated and rescinded during November 2004 (see Note 12).
Upon the issuance of the convertible debenture issued in August 2004,
the Company has recorded a debt discount of $446,000. This debt discount was
recorded to reflect the value of the beneficial conversion feature related to
the convertible debenture. Accordingly, the Company has recorded the value of
the beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount was being amortized over the term of the related debenture, which was
36 months, and amortization of such discount was recorded as interest expense on
the accompanying condensed consolidated statement of operations (see Note 12).
For the convertible debenture issued in June 2004, at the option of the
Company, upon the maturity date, this convertible debenture may be converted
into the Company's Common Stock. At the option of the holder, at any time prior
to maturity, any portion of this convertible debenture may be converted into the
Company's Common Stock. The value of principal and accrued interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price at April 26, 2004, or (b) 75% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, the
Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 125% of the dollar value of the amount redeemed plus
accrued interest.
For the convertible debentures issued in January 2004, at the option of
the Company, upon the maturity date, these convertible debentures may be
converted into the Company's Common Stock. At the option of the holder, at any
time prior to maturity, any portion of these convertible debentures may be
converted into the Company's common stock. The value of principal and accrued
interest is convertible at the per share price equal to the lesser of (a) 120%
of the closing bid price, or (b) 80% of the lowest daily volume weighted average
price for the five days immediately preceding the conversion date. In addition,
the Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 110% of the dollar value of the amount redeemed plus
accrued interest.
F-11
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. CONVERTIBLE DEBENTURES - CONTINUED
Upon the issuance of the convertible debentures issued in June 2004 and
January 2004, the Company has recorded debt discounts of $83,000 and $27,000,
respectively. These debt discounts are recorded to reflect the value of the
beneficial conversion feature related to the convertible debentures.
Accordingly, the Company has recorded the value of the beneficial conversion
features as a reduction to the carrying amount of the convertible debt and as an
addition to additional paid-in capital. This debt discount is being amortized
over the term of the related debentures, which is 24 months, and amortization of
such discounts were recorded as interest expense on the accompanying condensed
consolidated statement of operations.
7. OTHER NON-CURRENT LIABILITIES
The Company accrues interest payable on all of its debt obligations.
For the convertible debenture issued in August 2004, the interest is payable
monthly. For the convertible debentures - related party and the other
convertible debentures, the interest is payable at maturity or redemption, if
earlier, and such interest will be converted to common stock upon the conversion
of the convertible debentures. For the August 2004 convertible debenture
obligation, the corresponding accrued interest payable is classified as a
current liability. The remaining obligations and the corresponding accrued
interest obligations thereon are classified as non-current obligations on the
condensed consolidated balance sheet at September 30, 2004.
Under the terms of the note payable - related party, the Company
accrues interest from the date of issue, December 22, 2003, through December 31,
2004. Pursuant to the terms of the note, effective on January 1, 2005, the
accrued interest will be added to the principal balance of the obligation. The
Company will then begin making 60 equal payments of $27,740, including interest
at 5% per annum, which will fully repay the outstanding obligations under the
note by January 2010. The accrued interest on this note payable, aggregating
approximately $54,000 at September 30, 2004, is reflected in accrued interest -
non-current in the condensed consolidated balance sheet as of September 30,
2004.
F-12
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYMENT AGREEMENT
Effective June 1, 2004, NuWave entered into a five year employment
contract with its President and Chief Executive Officer, George Kanakis, at an
annual salary of $125,000 per year, subject to increases at the Board of
Directors' discretion. Mr. Kanakis is also entitled to a bonus equal to 12.5% of
the net income attributable to each NuWave subsidiary, plus a discretionary
bonus as determined by the Board of Directors. In addition, Mr. Kanakis was
issued 75,000 shares of common stock. Under the contract, at some future date,
Mr. Kanakis will be entitled to receive options to purchase 100,000 shares of
common stock. The Company has not yet adopted a stock option plan and as such,
no options have yet been issued to Mr. Kanakis. The Company recorded an earnings
charge of $7,500 in connection with the issuance of the 75,000 shares of common
stock.
9. STANDBY EQUITY DISTRIBUTION AGREEMENT
In May 2004, NuWave entered into a Standby Equity Distribution
Agreement with Cornell. Pursuant to the Standby Equity Distribution Agreement,
the Company may, at its discretion, periodically sell to Cornell registered
shares of common stock for a total purchase price of up to $30 million. For each
share of common stock purchased under the Standby Equity Distribution Agreement,
Cornell will pay NuWave 99% of the volume weighted average price on the
Over-the-Counter Bulletin Board or other principal market on which its common
stock is traded for the 5 days immediately following the notice date. Further,
Cornell will retain a fee of 10% of each advance under the Standby Equity
Distribution Agreement. Pursuant to the terms of this Standby Equity
Distribution Agreement, the Company is restricted from raising capital from the
sale of securities at a price less than the market price of the Company's stock
on the date of issuance or granting additional security interests in the
Company's assets. The Company intends to register 67,000,000 shares of common
stock in conjunction with this Standby Equity Distribution Agreement. On May 25,
2004, the Company issued 111,111 shares to the placement agent engaged in
association with this agreement, and recorded an earnings charge of $10,000.
The amount of each advance is limited to a maximum draw down of
$1,000,000 every 7 trading days up to a maximum of $4,000,000 in any 30-day
period. The amount available under the Standby Equity Distribution Agreement is
not dependent on the price or volume of the Company's common stock. The
Company's ability to request advances is conditioned upon the Company
registering the shares of common stock with the SEC. In addition, the Company
may not request advances if the shares to be issued in connection with such
advances would result in Cornell Capital Partners, L.P. owning more than 9.9% of
the Company's outstanding common stock.
F-13
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT DATA
Commencing with the acquisition of land in December 2003, the Company
operates in two industry segments - video and image technology and real estate
development and sale. The Company evaluates segment performance based on loss
from operations.
Summarized financial information for the three and nine months ended
September 30, 2004 concerning the Company's reportable segments is shown in the
following table:
THREE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
REAL ESTATE
VIDEO & IMAGE DEVELOPMENT
TECHNOLOGY AND SALE TOTAL
----------- ----------- ---------
Net revenues from customers $ -- $ -- $ --
=========== =========== =========
Loss from operations $ (79) $ (201) $ (280)
=========== =========== =========
Interest expense $ 86 $ 116 $ 202
=========== =========== =========
Total identifiable assets $ 5 $ 4,253 $ 4,258
=========== =========== =========
Capital expenditures, including
capitalized interest $ -- $ 86 $ 86
=========== =========== =========
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
REAL ESTATE
VIDEO & IMAGE DEVELOPMENT
TECHNOLOGY AND SALE TOTAL
----------- ----------- ---------
Net revenues from customers $ -- $ -- $ --
=========== =========== =========
Loss from operations $ (224) $ (348) $ (572)
=========== =========== =========
Interest expense $ 162 $ 215 $ 377
=========== =========== =========
Total identifiable assets $ 5 $ 4,253 $ 4,258
=========== =========== =========
Capital expenditures, including
capitalized interest $ -- $ 379 $ 379
=========== =========== =========
F-14
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. LEASE COMMITMENT
In May 2004, the Company entered into a five year sublease agreement
for the rental of 3,580 square feet of corporate office tower space in Jersey
City, New Jersey. This rental agreement is effective July 1, 2004 and requires
the Company to pay rent of approximately $7,000 and approximately $3,000 in
shared building operating expenses, each month. The Company subleases one half
of this space to a subtenant, for approximately $5,000 per month. The Company's
obligations under this lease are guaranteed by Yorkville Advisors Management,
LLC ("Yorkville"). Yorkville is related to Cornell a related party to the
Company.
The approximate future minimum lease payments under the Company's
non-cancellable operating lease in effect at September 30, 2004, offset by
projected proceeds to be received for subtenant rentals, are as follows:
Projected
Minimum Lease Proceeds To Be Minimum Lease
Payments Under Received Under Payments, Net of
Year Operating Lease Sub-tenant Rentals Sub-tenant Rentals
---- --------------- ------------------ ------------------
2004 $ 20,000 $ 10,000 $ 10,000
2005 78,000 39,000 39,000
2006 78,000 39,000 39,000
2007 78,000 39,000 39,000
2008 78,000 39,000 39,000
2009 40,000 20,000 20,000
-------- -------- --------
Total $372,000 $186,000 $186,000
======== ======== ========
F-15
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS
REDEMPTION OF CONVERTIBLE DEBENTURE
During November 2004, NuWave redeemed a Convertible debentures with a
face amount of $250,000 for approximately $287,000, including a redemption
premium of $25,000 and accrued interest through redemption of approximately
$12,000. The unamortized discount of approximately $63,000 at redemption has
been recorded as interest expense.
ISSUANCE OF CONVERTIBLE DEBENTURE
During October 2004, NuWave issued $100,000 in a convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization will be recorded as interest expense on the
condensed consolidated statement of operations. At the option of NuWave, upon
the maturity date, this convertible debenture may be converted into NuWave's
Common Stock. At the option of the holder, at any time prior to maturity, any
portion of this convertible debenture may be converted into Common Stock. The
value of principal and accrued interest is convertible at the per share price
equal to the lesser of (a) 120% of the closing bid price, or (b) 80% of the
lowest closing bid price for the five days immediately preceding the conversion
date. In addition, NuWave may redeem, with 15 days advance notice, a portion or
all of this outstanding debenture at 110% of the dollar value of the amount
redeemed plus accrued interest.
TERMINATION AND RESCISSION OF JULY 2004 AGREEMENT OF SALE AND AUGUST
2004 CONVERTIBLE DEBENTURE AND RECOGNITION OF THE SALE OF AN INTEREST IN LAND
HELD FOR DEVELOPMENT AND SALE
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of a
20% fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
F-16
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS - CONTINUED
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its interest
in the property ("Investor's Option"). The Investor may sell this property back
to the Company through exercise rights under a convertible debenture agreement,
discussed below. The Investor's Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any time
prior to August 1, 2007, the Investor wishes to sell its interest to a third
party, it must first notify the Company. Upon such notice, the Company may,
within 30 days, repurchase all of the remaining property interest for a price
equal to a pro-rata portion of the original price paid by the Investor at the
effective date ($1,783,549). If the Company fails to exercise this offer within
the 30 day period, then the Investor shall be allowed 90 days in which to sell
all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated as
a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
F-17
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS - CONTINUED
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of the
Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004, the Company paid approximately $326,000 to
the buyer, representing approximately $28,000 in accrued interest and $298,000
in refunded proceeds.
F-18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
NuWave Technologies, Inc.
Union, New Jersey
We have audited the accompanying consolidated balance sheet of NuWave
Technologies Inc. and Subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NuWave
Technologies, Inc. and Subsidiary as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company incurred a loss during the year
of approximately $790,000 and had stockholders' and working capital deficiencies
of approximately $1,705,000 and $50,000, respectively, which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also 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
-------------------------
Marcum & Kliegman LLP
April 9, 2004
New York, New York
F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
NUWAVE Technologies, Inc.
Fairfield, New Jersey
We have audited the statements of operations, stockholders' equity (capital
deficit), and cash flows of NUWAVE Technologies, Inc. for the year ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of NUWAVE
Technologies, Inc. for the year ended December 31, 2002, in conformity with
accounting priciples generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced recurring net losses, its
operating activities have resulted in cash outflows, and at December 31, 2002 it
has both a negative working capital position and a capital deficit. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Eisner LLP
---------------------
Eisner LLP
Florham Park, New Jersey
March 28, 2003
F-20
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
(In thousands, except share and per share data)
ASSETS
December 31,
2003
------------
Current assets:
Cash and cash equivalents $ 119
Inventory 1
--------
Total current assets 120
Property and equipment, net 4
Land held for development and sale 2,970
Deferred tax asset 225
--------
Total assets $ 3,319
========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 170
--------
Total current liabilities 170
Long-term liabilities:
Notes payable - related party 484
Secured note payable - related party 1,400
Convertible debentures - related party,
net of unamortized discount of $866 2,634
Convertible debentures, net of unamortized discount of $109 336
--------
Total long-term liabilities 4,854
--------
Total liabilities 5,024
--------
Stockholders' deficiency:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; none issued --
Preferred stock, $.01 par value; authorized 1,600,000
shares; none issued - (preferences and
rights to be designated by the Board of Directors) --
Common stock, $.001 par value; authorized 140,000,000 shares;
1,875,902 shares issued and outstanding 2
Additional paid-in capital 26,216
Accumulated deficit (27,923)
--------
Total stockholders' deficiency (1,705)
--------
Total liabilties and stockholders' deficiency $ 3,319
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
For the Years ended December 31,
----------------------------
2003 2002
----------- -----------
Net sales $ 20 $ 286
Cost of sales 5 390
----------- -----------
Gross profit (loss) 15 (104)
----------- -----------
Operating expenses:
General and administrative 958 2,071
Research and development 134 681
----------- -----------
Total operating expenses 1,092 2,752
----------- -----------
Loss from operations (1,077) (2,856)
----------- -----------
Other income (expense):
Gain on forgiveness of debt 347 --
Interest income -- 5
Interest expense (55) (5)
----------- -----------
Other income, net 292 --
----------- -----------
Loss before (provision for) benefit from income taxes (785) (2,856)
(Provision for) benefit from income taxes (5) 182
----------- -----------
Net loss (790) (2,674)
Deemed dividend - Redemption premium on
convertible preferred stock (19) --
----------- -----------
Net loss applicable to common stockholders $ (809) $ (2,674)
=========== ===========
Basic and diluted net loss per common share:
Weighted average number of
common shares outstanding 1,455,365 285,315
=========== ===========
Basic and diluted net loss per common share $ (0.56) $ (9.37)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE TOTAL
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCKHOLDERS'
--------------------- ---------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
--------- --------- --------- --------- --------- --------- ---------
Balance, January 1, 2002 228,053 $ 2 -- $ -- $ 25,725 $ (24,440) $ 1,287
Common shares and 2,600
warrants to purchase common
shares issued in a private
placement 38,309 -- -- -- 731 -- 731
Options and warrants to purchase
common stock issued
for services -- -- -- -- 200 -- 200
Common shares issued under the
equity line of credit 240,412 3 -- -- 267 -- 270
Common shares issued for
services 960 -- -- -- -- -- --
Change in common stock par value -- (4) -- -- 4 -- --
Net loss -- -- -- -- -- (2,674) (2,674)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2002 507,734 1 -- -- 26,927 (27,114) (186)
Common shares issued under the
equity line of credit for
repayment of notes payable,
net of costs 1,151,490 1 -- -- 272 -- 273
Proceeds from issuance of
common stock under Equity
Line of Credit 191,678 -- -- -- 39 -- 39
Common shares issued for
services 25,000 -- -- -- 5 -- 5
Proceeds from issuance of
convertible preferred stock -- -- 67,000 1 66 -- 67
Warrants issued for services -- -- -- -- 22 -- 22
Redemption of convertible
preferred stock -- -- (67,000) (1) (66) (19) (86)
Recording of convertible debt -- -- -- -- 986 -- 986
discount
Adjustment to record acquired land
at the seller's historical cost -- -- -- -- (2,035) -- (2,035)
basis (Note 5)
Net loss -- -- -- -- -- (790) (790)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2003 1,875,902 $ 2 -- $ -- $ 26,216 $ (27,923) $ (1,705)
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years ended
December 31,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (790) $ (2,674)
--------- ---------
Adjustments to reconcile net loss to net cash used
in operating activities:
Bad debt expense 11 --
Deferred income taxes 5 --
Depreciation 42 32
Loss on disposal of equipment -- 7
Amortization of debt discount 11 --
Issuance of stock and warrants for services 27 200
Gain on forgiveness of debt (347) --
Decrease in operating assets:
Decrease in accounts receivable -- 127
Decrease in inventory 24 388
Decrease in prepaid expenses and other
current assets 159 20
Decrease in other assets 20 10
Decrease in deferred tax asset -- 50
Decrease in operating liabilities:
Decrease in accounts payable and accrued liabilities (20) (309)
--------- ---------
Total adjustments (68) 525
--------- ---------
Net cash used in operating activities (858) (2,149)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment -- (7)
Land development costs (55) --
Proceeds from sale of equipment 1 3
--------- ---------
Net cash used in investing activities $ (54) $ (4)
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(In thousands except share data)
For the Years ended
December 31,
--------------------------
2003 2002
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related party 557 --
Proceeds from issuance of notes payable -- 640
Proceeds from issuance of convertible debentures 395 --
Repayment of note payable to officer/stockholder (115) --
Proceeds from issuance of common stock
under Equity Line of Credit 39 850
Proceeds from issuance of convertible preferred stock 67 --
Costs incurred for equity offerings and warrants -- (174)
Redemption of convertible preferred stock (inclusive of
redemption premium of $19) (86) --
----------- -----------
Net cash provided by financing activities 857 1,316
----------- -----------
Net decrease in cash and cash equivalents (55) (837)
Cash and cash equivalents - beginning of the year 174 1,011
----------- -----------
Cash and cash equivalents - end of the year $ 119 $ 174
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 25 $ 5
=========== ===========
Supplemental disclosures of non-cash investing and
financing activities:
Recording of debt discount $ 986 $ --
=========== ===========
Issuance of 1,151,490 and 187,374 shares of
common stock in settlement of notes payable $ 273 $ 325
=========== ===========
On December 22, 2003, the Company acquired
a parcel of land through the
assumption of debt as follows:
Land held for development and sale $ 2,915
Note payable - Related party - Stone Street
Asset Management , LLC (1,400)
Convertible debenture - Related party - Cornell
Capital Partners, LP (3,300)
Convertible debentures (250)
-----------
Additional paid-in capital - adjustment
to record acquired land at the seller's
historical cost basis $ (2,035)
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
NUWAVE Technologies, Inc. ("NUWAVE") was incorporated in Delaware on
July 17, 1995. On October 20, 2003, NuWave formed Lehigh Acquisition Corp
("Lehigh"). Since its inception, NUWAVE has operated as a technology company,
focusing on technology related to enhancing image and video output. NUWAVE
continues to market its proprietary video-enhancement technology. During
November, 2003, through Lehigh, NUWAVE entered the land development business. On
December 22, 2003, Lehigh purchased a parcel of land from a related entity and
intends to develop and sell residential units.
2. GOING CONCERN AND MANAGEMENT'S PLAN
The Company incurred a net loss of approximately $790,000 and
$2,674,000 during the years ended December 31, 2003 and 2002, respectively, and
at December 31, 2003 has stockholders' and working capital deficiencies of
approximately $1,705,000 and $50,000, respectively and at December 31, 2002 had
stockholders' and working capital deficiencies of approximately $27,000 and
$283,000, respectively, that raise substantial doubt about the Company's ability
to continue as a going concern.
Management has taken a number of actions to lower costs and to improve
the Company's liquidity. The Company has substantially reduced its cash flow
requirements through significant reductions in payroll and various other
operating expenses. In addition, the Company intends to remain in the technology
business, and has engaged the services of an outside consultant to represent it
in its sales and marketing efforts in order to attempt to generate increased
sales of its technology products.
The Company has obtained an extension of the due dates until April,
2005, for the payment of certain note payable obligations to Cornell Capital
Partners, LP ("Cornell") that matured during 2003 and March of 2004 (see Note
7). In addition, management's plans include the raising of cash through the
issuance of debt or equity although there are no assurances that the Company
will be successful. The Company continues to require funding by and the
financial support of Cornell. Management does not intend to expend any
additional funds toward the development of the land held for development and
sale (see Note 5) until such time as new funding is secured.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. These consolidated
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.
Accordingly, there is substantial doubt about the Company's ability to continue
as a going concern. There can be no assurance that the Company will be
successful in these endeavors and therefore may have to consider other
alternatives.
F-26
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NuWave
and Lehigh, NUWAVE'S wholly-owned subsidiary (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORY
Inventory consists of purchased components and supplies, and is stated
at the lower of cost determined on the first-in, first-out method or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation of property and equipment is determined using the
straight-line method over their estimated useful lives, generally five to seven
years. Upon retirement or other disposition of these assets, the cost and
related accumulated depreciation of these assets are removed from the accounts
and the resulting gains or losses are reflected in the consolidated results of
operations. Expenditures for maintenance and repairs are charged to operations.
LAND HELD FOR DEVELOPMENT AND SALE
Land held for development and sale is stated at the seller's historical
cost basis (see Note 5), plus the costs of improvements.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment and land held for development and sale,
when there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors.
F-27
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
Revenue from sales is recognized when products are shipped to
customers.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
During the years ended December 31, 2003 and 2002, the Company incurred
approximately $134,000 and $681,000, respectively, in research and development
costs.
ADVERTISING COSTS
Advertising costs are expensed as incurred, which consist primarily of
promotional items, print and digital media. There were no material advertising
costs incurred during the year ended December 31, 2003. During the year ended
December 31, 2002, the Company incurred approximately $5,000 in advertising
costs.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities, using the effective tax rates in effect in the years in
which the differences are expected to reverse. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
STOCK-BASED COMPENSATION
On December 31, 2003, the Company terminated its two stock-based
employee compensation plans (see Note 8). As permitted under Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amended SFAS No. 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 ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB No. 25. No stock-based employee
compensation cost is reflected in net loss, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
The following table summarizes the effect on net loss as if the Company
has applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation. Since certain option grants awarded during 2001 vest over
several years, the pro forma results noted below are not likely to be
representative of the effects on future years of the application of the
fair-value-based method.
F-28
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION, CONTINUED
FOR THE YEARS ENDED
------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Net loss applicable to common stockholders,
as reported $ (809,000) $(2,674,000)
Less: Total stock based employee compensation
expense determined under the fair value based
method for all awards -- (28,000)
----------- -----------
Pro forma net loss $ (809,000) $(2,702,000)
=========== ===========
Basic and diluted net loss per share, as reported $ (.56) $ (9.37)
=========== -----------
Pro forma basic and diluted net loss per share $ (.56) $ (9.47)
=========== ===========
For the purpose of the above pro forma information, the fair value of
these options was estimated at the date of grant using the Black-Scholes option
pricing model. Options were last issued by the Company in 2001. The
weighted-average fair value of the options granted during 2001 was $39.00. The
following weighted-average assumptions were used in computing the fair value of
option grants for 2001: weighted-average risk-free interest rates ranged from
5.09% to 5.39%; zero dividend yield; volatility of the Company's Common Stock of
110%; and an expected life of the options of ten years.
LOSS PER SHARE
The Company follows SFAS No. 128, "Earnings Per Share", which provides
for the calculation of "basic" and "diluted" earnings (loss) per share. Basic
loss per share includes no dilution and is computed by dividing loss available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur through the effect of common shares issuable upon the
exercise of stock options and warrants and convertible securities. For the years
ended December 31, 2003 and 2002, potential common shares amount to 35,441,444
and 140,467 shares, respectively, and have not been included in the computation
of diluted loss per share since the effect would be antidilutive. Conversion of
all convertible debentures was based upon a conversion price of $0.112 per share
at December 31, 2003.
CONCENTRATION OF CREDIT RISK - CASH
The Company maintains its cash and cash equivalents with various
financial institutions, which exceed federally insured limits throughout the
year. At December 31, 2003, the Company had cash on deposit of approximately
$35,000 in excess of federally insured limits.
F-29
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The consolidated financial statements include various estimated fair
value information at December 31, 2003 and 2002, as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". Such information, which
pertains to the Company's financial instruments, is based on the requirements
set forth in that Statement and does not purport to represent the aggregate net
fair value to the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash: The carrying amount approximates fair value because of
the short-term maturity of those instruments.
Accounts payable and accrued liabilities: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Notes payable and convertible debentures: The carrying amounts
of notes payable and convertible debentures approximate fair value due to the
length of the maturities, and/or due to the interest rates not being
significantly different from the current market rates available to the Company.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
adopted SFAS No. 150 in the third quarter of 2003. The adoption did not have an
impact on the consolidated financial statements.
In January 2003, as revised in December 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period ending after December 15, 2004.
The adoption of FIN 46 for provisions effective during 2003 did not have a
material impact on the consolidated financial statements.
F-30
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
USEFUL LIVES IN DECEMBER 31,
YEARS 2003
--------------- ------------
Furniture and fixtures 7 $ 5,000
Computer equipment 5 221,000
Equipment 5 100,000
----------
$ 326,000
Less: accumulated depreciation 322,000
----------
$ 4,000
==========
Depreciation expense on property and equipment for the years ended
December 31, 2003 and 2002 amounted to approximately $42,000 and $32,000,
respectively.
5. LAND HELD FOR DEVELOPMENT AND SALE
On December 22, 2003, Lehigh acquired a parcel of land in New Jersey
for $4,950,000 that it intends to develop and then sell. This land was acquired
from Stone Street Asset Management LLC ("Stone Street"), a company under common
control with Cornell. In connection with this purchase of land, the Company
incurred debt obligations consisting of a $3,300,000 of convertible debenture to
Cornell, $250,000 of convertible debentures to unrelated parties and a
$1,400,000 secured note payable to Stone Street (see Note 7). As a result of
Stone Street's relationship with Cornell, and Cornell's relationship with the
Company (see Note 7), the Company has recorded the land at the historical cost
basis as recorded by Stone Street of approximately $2,915,000 in accordance with
accounting rules regarding transfer of non-monetary assets. The difference of
$2,035,000 between the fair value of the land as determined by an independent
appraiser and the carryover cost basis of land from Stone Street has been
recorded as an adjustment to additional paid-in capital.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31,
2003
------------
Accounting and legal fees $ 51,000
Interest - related parties 31,000
Interest 1,000
Consulting fees 37,000
Automobile lease termination fee 22,000
Miscellaneous 28,000
----------
$ 170,000
==========
F-31
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE AND CONVERTIBLE DEBENTURES
NOTE PAYABLE OFFICER/STOCKHOLDER
On December 10, 2002, the Company entered into a 60 day Revolving Line
of Credit and Secured Promissory Note with the Company's former CEO and
stockholder. Under the terms of the agreement, the former CEO agreed to lend the
Company, as needed for working capital requirements, up to $230,000. At December
31, 2002 there was an outstanding balance of $115,000, which was repaid on
January 2, 2003. Interest expense and a commitment fee related to this note
included in the consolidated statement of operations for the year ended December
31, 2002 amounted to $1,000 and $8,000, respectively.
NOTES PAYABLE
Effective upon September 29, 2003, Cornell became a related party (see
below).
In connection with the Equity Line of Credit with Cornell (see Note 8),
the Company received loans ("Equity Line Loans") aggregating $357,000 and
$525,000 during the years ended December 31, 2003 and 2002, respectively. Under
the Equity Line of Credit, through the issuance of its common stock, the Company
repaid certain of these Equity Line Loans in the amounts of $273,000 and
$325,000, in each of the years December 31, 2003 and 2002, respectively through
the issuance of 1,151,490 and 187,374 shares of the Company's common stock. The
common shares issued to repay these notes were issued at a 3% discount. These
Equity Line Loans were non-interest bearing during their terms, which ranged
from 90 days to 180 days.
The balance of these Equity Line Loans as of September 2003, totaling
$284,000, were not repaid within their term and were in default. During
September 2003, the Company entered into an Agreement with Cornell to settle the
default on these loans. The following items took place pursuant to the
Agreement:
o Cornell agreed not to foreclose on its outstanding indebtedness
of $284,000 owed by the Company. In addition, on September 29,
2003, Cornell entered into a new loan agreement with the Company
for $200,000 to be deposited in escrow to be used to satisfy
certain outstanding obligations of the Company, including trade
payables, unpaid wages, and settlement of employment agreements.
The loan was non-interest bearing for its original term of 180
days.
o Cornell would provide additional capital to the Company and
assist in identifying new businesses. Cornell agreed to maintain
the Company's public filings and status. The Company's Chief
Executive Officer ("CEO") and Chairman of the Board of Directors,
and Chief Financial Officer ("CFO"), agreed to resign their
positions with the Company, and as such, their employment
agreements terminated at the same time. The CEO and CFO received
a settlement consisting of cash and warrants to purchase shares
of the Company's common stock at an exercise price of $1.00 per
share (see Note 8). The Company's Board of Directors appointed a
nominee to its Board of Directors, selected by Cornell. Upon such
appointment, the Company's existing Board members resigned.
F-32
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE AND CONVERTIBLE DEBENTURES, CONTINUED
NOTES PAYABLE - RELATED PARTY, CONTINUED
o The Agreement was consummated on September 29, 2003 and effective
with the closing and the resignations of the Board members. As a
result of reaching settlements to satisfy certain outstanding
obligations of the Company, including trade payables, unpaid
wages, and settlement of employment agreements, the Company
realized a gain on forgiveness of debt of approximately $347,000
during the year ended December 31, 2003.
On March 27, 2004, the $200,000 loan matured and was not repaid
according to its terms. On April 5, 2004, Cornell agreed to extend the due dates
of the $284,000 of Equity Line Loans and the $200,000 loan to April 15, 2005.
While in default and through the extended maturity date, the $284,000
of Equity Line Loans and the $200,000 loan accrue interest from the default
dates at a rate of 24% per annum. Interest expense on these loans from Cornell
for the years ended December 31, 2003 and 2002 was approximately $46,000 and
$5,000, respectively.
At December 31, 2003, accrued interest on these loans due to Cornell
included in accounts payable and accrued liabilities on the accompanying
consolidated balance sheet was approximately $23,000.
CONVERTIBLE DEBENTURES
During October 2003, the Company raised $200,000 through the issuance
of a convertible debenture to Cornell. In addition, during December 2003, the
Company raised $195,000 through the issuance of convertible debentures to
various unrelated parties. On December 22, 2003, the Company issued a
convertible debenture for $3,300,000 to Cornell and $250,000 to unrelated
parties in connection with the acquisition of land held for development and sale
(see Note 5) which is secured through a first mortgage lien on the land. All of
these debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature at various dates ranging
from October 2005 through December 2008.
At the option of the Company, upon the maturity date, these convertible
debentures may be converted into the Company's Common Stock. At the option of
the holder, at any time prior to maturity, any portion of these convertible
debentures may be converted into Common Stock. The value of principal and
accrued interest is convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price, or (b) 80% of the lowest daily volume
weighted average price for the five days immediately preceding the conversion
date. In addition, the Company may redeem, with 30 days advance notice, a
portion or all of these outstanding debentures at 120% of the dollar value of
the amount redeemed plus accrued interest. Under the conversion limitation for
the debentures held by Cornell, the Company may issue shares under conversion
only so long as, at conversion, the Cornell holds no more than 9.9% of the
Company's outstanding shares.
F-33
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE AND CONVERTIBLE DEBENTURES, CONTINUED
CONVERTIBLE DEBENTURES, CONTINUED
The Company has recorded debt discounts of $986,000 ($875,000 of which
related to convertible debentures issued to Cornell) at issuance of these
convertible debentures to reflect the value of the beneficial conversion feature
related to the convertible debentures. Accordingly, the Company has recorded the
value of the beneficial conversion features as a reduction to the carrying
amount of the convertible debt and as an addition to additional paid-in capital.
The Company is amortizing the debt discount over the term of the
related debentures which range from 24 months to 60 months. Amortization of debt
discounts for the year ended December 31, 2003 amounted to approximately $11,000
(approximately $9,000 of which relates to convertible debentures issued to
Cornell) and was recorded as interest expense on the accompanying consolidated
statement of operations.
SECURED NOTE PAYABLE - RELATED PARTY
On December 22, 2003, Lehigh issued a secured note for $1,400,000 to
Stone Street in conjunction with its purchase of land in New Jersey (see Note
5). The note provides for the payment of sixty equal monthly installments of
principal and interest of $27,741 beginning on January 1, 2005, matures on
January 10, 2010 and is secured through a second mortgage on the land. The note
bears interest at a rate of 5% per annum.
Aggregate annual maturities of Notes Payable and Convertible Debentures
at December 31, 2003 are as follows:
Year Ending December 31, Amount
------------------------ -----------
2004 $ --
2005 1,122,000
2006 273,000
2007 287,000
2008 3,802,000
Thereafter 345,000
----------
Total notes payable and convertible
debentures 5,829,000
Less: unamortized debt discount 975,000
Total notes payable and convertible
debentures, net $4,854,000
==========
F-34
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIENCY
CONVERTIBLE PREFERRED STOCK
During May 2003, the Company entered into a Securities Purchase
Agreement with several independent buyers whereby the Company issued and sold to
the buyers 67,000 shares of Series A Preferred Stock at $1 per share. The buyers
were entitled, at their option, to convert the Series A Preferred Stock into
shares of the Company's Common Stock at any time commencing after May 1, 2004 at
an adjusted conversion price of $0.05 per share. Any unconverted shares as of
May 1, 2005 would automatically convert into shares of the Company's Common
Stock at an adjusted conversion price of $0.05 per share. The Company had the
right to redeem the outstanding Preferred Stock upon 30 days written notice at a
redemption price of 150% of the subscription amount plus interest on the
purchase price of 24%. If the Company chose to redeem some, but not all, of the
Series A Preferred Stock, the Company could redeem a pro rata amount from each
holder of the Series A Preferred Stock. The preferred stock was redeemed by the
Company in October 2003 for a total redemption price of $86,400. The $19,400
excess of the amount of the redemption over the amount of the original issue has
been recorded as a deemed dividend - redemption premium on convertible preferred
stock.
COMMON STOCK AND WARRANTS
On December 20, 2002, the stockholders approved an increase in the
number of authorized shares from 40,000,000 to 140,000,000 and a reduction of
the par value per share from $0.01 to $0.001. The change in par value has been
reflected in the consolidated financial statements during 2002. On July 21,
2003, the Company's Board of Directors declared effective a reverse split of the
Company's common shares in the ratio of 1 to 50 as voted on and approved by the
stockholders at the Company's Annual Stockholders' meeting held on December 20,
2002, and effective on July 21, 2003. All share and per share amounts have been
retroactively restated for the stock split.
On February 5, 2002, the Company entered into a private placement
agreement with investors whereby the Company issued 12,000 shares of the
Company's common stock for an aggregate purchase price of $330,000. In
connection with this agreement, the Company issued to the Placement Agent a
Placement Agent Warrant, exercisable to purchase up to 600 shares of common
stock, representing five percent of the total of the stock issued in the
Offering. The warrants shall be exercisable for a period of five years, expiring
on February 8, 2007, at an exercise price of $27.50 per share. The Placement
Agent also received a cash placement fee of eight percent of the purchase price
and a non-accountable allowance equal to two percent of the purchase price,
totaling $33,000.
On February 27, 2002, the Company entered into an agreement with an
investor whereby the Company issued 4,285 shares of common stock for an
aggregate purchase price of $150,000 and warrants to purchase up to 1,000 shares
of Common Stock at an exercise price of $50.00 per share with an exercise period
of five years expiring February 27, 2007. Under the terms of the agreement a
consultant was paid a finder's fee of $1,500 representing one percent of the
purchase price.
F-35
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIENCY, CONTINUED
COMMON STOCK AND WARRANTS, CONTINUED
On April 15, 2002, the Company entered into a $3,000,000 Equity Line of
Credit Agreement (the "Agreement") with Cornell (the "Purchaser"). Provided the
Company was in compliance with the terms of the Agreement, the Company could, at
its option, periodically require the Purchaser to purchase up to $100,000 in any
seven day period of the Company's common stock (the "put" shares) up to a
maximum of $3,000,000 over the next two years, commencing on May 31, 2002 (the
effective date of a Securities Act of 1933 registration statement on Form SB-2
for the registration of 100,000 shares of common stock to be sold under the
Agreement, plus 4,762 shares of common stock mentioned below). Additional
registration statements added 280,000 shares on November 1, 2002 and 1,200,000
on January 10, 2003, bringing the total registered shares to 1,580,000 under the
Agreement. The Company issued to the Purchaser 4,362 shares of common stock as a
commitment fee for entering into the Agreement. In addition, the Company issued
to the placement agent 400 shares of the Company's common stock. For each share
of common stock purchased under the Equity Line of Credit, the Purchaser paid
97% of the then Market Price (as defined in the Agreement), and was paid a fee
of 4% of each advance. The Company has issued 1,343,168 and 235,650 common
shares (of which 1,151,490 and 187,374 represented shares utilized for the
repayment of notes payable to Cornell - see Note 7) under the Agreement for the
years ended December 31, 2003 and 2002, respectively.
The Agreement was non-exclusive; thereby permitting the Company to
offer and sell its securities to third parties while the Equity Line of Credit
was in effect. The Company had the option to terminate the Equity Line of Credit
Agreement at any time, provided there is no pending advance thereunder. During
July 2003, the Company reached the limit of 1,580,000 registered shares that
were issuable under the Agreement.
Between June 7, 2002 and June 30, 2002 the Company entered into
agreements with various investors whereby a total of 22,203 shares of Common
Stock and warrants exercisable at $50 per share for 1,000 shares of common stock
were issued for an aggregate purchase price of $330,350. In connection with the
issuance of these shares, the Company incurred costs of $35,664 in placement
agent fees and expenses.
On June 30, 2003, the Company issued 25,000 shares of common stock
valued at approximately $5,000 in exchange for services provided to the Company.
On September 24, 2003, the Company issued 200,000 warrants to purchase
the Company's common stock at $1.00 per share. These warrants were issued to two
former officers for prior services provided to the Company. The warrants are
exercisable over a five-year period which expires in September 2008. The fair
value of the warrants was estimated at $0.09 per warrant on the date of issuance
using the Black-Scholes pricing model. Compensation costs related to these
warrants for the year ended December 31, 2003 included in the consolidated
statement of operations amounted to $18,000.
F-36
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIENCY, CONTINUED
COMMON STOCK AND WARRANTS, CONTINUED
During the years ended December 31, 2003 and 2002, a total of 94,879
and 50,600 warrants expired, respectively.
At December 31, 2003 there were 218,230 warrants outstanding as
follows:
NUMBER OF WEIGHTED
COMMON SHARES AVERAGE
UNDERLYING EXERCISE PRICE EXERCISE EXPIRATION
WARRANTS RANGE PER SHARE PRICE DATES
------------- --------------- -------- ----------------
3,130 $53.50 - $70.00 $66.78 November 2004 to
December 2004
12,000 $37.50 - $100.00 $68.79 February 2005 to
November 2005
3,100 $5.00 - $50.00 $38.39 January 2007 to
October 2007
200,000 $1.00 $1.00 September 2008
--------
218,230
=======
STOCK OPTIONS
On January 12, 2003 the Company's employees and directors rescinded
their interest in 23,780 of the Company's options that had been granted to them.
During 2003, all other outstanding options expired.
The Company accounted for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25") and related interpretations. Under APB No. 25, generally, no
compensation expense is recognized in the financial statements in connection
with the awarding of stock option grants to employees provided that, as of the
grant date, all terms associated with the award are fixed and the quoted market
price of the Company's stock, as of the grant date, is not more than the amount
an employee must pay to acquire the stock as defined; however, to the extent
that stock options are granted to non employees, for goods or services, the fair
value of these options is included in operating results as an expense.
F-37
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIENCY, CONTINUED
STOCK OPTIONS, CONTINUED
A summary of the Company's stock option activity under its plans, and
related information, is as follows. All amounts have been restated to reflect
the impact of the reverse stock split:
WEIGHTED
NUMBER OF AVERAGE NUMBER OF
COMMON EXERCISE PRICE EXERCISE SHARES
SHARES RANGE PER SHARE PRICE EXERCISABLE
---------- ---------------- -------- -----------
Outstanding at January 1, 2002 32,560 $30.50 - $344.00 $126.00 29,843
======
Cancelled 5,203 $36.50 - $344.00 $190.00
-------
Outstanding at December 31, 2002 27,357 $30.50 - $337.50 $114.50 26,991
======
Forfeited 27,357 $30.50 - $337.50 $114.50
-------
Outstanding at December 31, 2003 -- --
======= ======
PERFORMANCE INCENTIVE STOCK OPTION PLAN
On January 31, 1996, the Company adopted its 1996 Performance Incentive Stock
Option Plan (the "Plan"). Under the Plan, incentive and nonqualified stock
options, stock appreciation rights and restricted stock could be granted to key
employees and consultants (the "Participants") by certain disinterested
directors of the Board of Directors. Any incentive option granted under the Plan
would have an exercise price of not less than 100% of the fair market value of
the shares on the date on which such option is granted. With respect to an
incentive option granted to a Participant who owns more than 10% of the total
combined voting stock of the Company or of any parent or subsidiary of the
Company, the exercise price for such option would be at least 110% of the fair
market value of the shares subject to the option on the date on which the option
is granted. A nonqualified option granted under the Plan (i.e., an option to
purchase the common stock that does not meet the Internal Revenue Code's
requirements for incentive options) would have an exercise price of at least the
par value of the common stock. Stock appreciation rights could be granted in
conjunction with the grant of an incentive or nonqualified option under the Plan
or independently of any such stock option. The directors determined the vesting
of the options under the Plan at the date of grant. A maximum of 24,100 options
could be awarded under the Plan (as amended May 26, 1998). No options were
issued during the years ended December 31, 2003 and 2002 under the Performance
Incentive Stock Option Plan. This plan was terminated by the Company on December
31, 2003.
F-38
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' DEFICIENCY, CONTINUED
STOCK OPTIONS, CONTINUED
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On November 25, 1996, the Company established a Non-Employee Director
Stock Option Plan (the "Director's Plan"). The Director's Plan provided that
each member of the Board of Directors (an "Eligible Director") who otherwise (1)
was not currently an employee of the Company, or (2) was not a former employee
still receiving compensation for prior services (other than benefits under a
tax-qualified pension plan) would be eligible for the grant of stock options
under the Director's Plan. Each Eligible Director at the time of his election to
the Board of Directors, would be granted an option to purchase 60 shares of the
Company's common stock at an exercise price equal to closing price of such
common stock at close of business at the date of such grant, such option to vest
immediately and to expire five years from the date of such grant.
Beginning with the annual meeting of the stockholders of the Company
held on May 29, 1997 and provided that a sufficient number of shares remained
available under the Director's Plan, each year immediately following the date of
the annual meeting of the Company there automatically would be granted to each
Eligible Director who was then serving on the Board an option to purchase 100
shares of the Company's common stock. The first 20 options vested immediately,
the remainder vested equally over the next four years from the date of grant and
were exercisable at the closing price of such shares of common stock at the date
of grant. Such options expired five years from the date of vesting. No options
were issued during the years ended December 31, 2003 and 2002 under the
Director's Plan. This plan was terminated by the Company on December 31, 2003.
The maximum number of shares of Common Stock with respect to which
options could be granted under the Director's Plan (as amended May 26, 1998) was
4,700 shares.
This plan was terminated by the Company on December 31, 2003.
9. EMPLOYEE BENEFIT PLAN
The Company maintained a noncontributory Employee Savings Plan,
operated in accordance with the provisions of Section 401(k) of the Internal
Revenue Code that was terminated during the year ended December 31, 2003.
Pursuant to the terms of the plan, participants could defer a portion of their
income through contributions to the plan. During the years ended December 31,
2003 and 2002, the Company did not make any discretionary additional
contributions to the plan. The termination of the Plan had no effect on the
consolidated financial statements.
F-39
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The (provision for) benefit from income taxes for the years ended
December 31, 2003 and 2002 consists entirely of state taxes and is comprised of
the following:
2003 2002
---- ----
State:
Current $ 0 $ 232,000
Deferred $ (5,000) (50,000)
-------- ---------
$ (5,000) $ 182,000
======== =========
The difference between the statutory federal income tax rate and the
effective rate for the Company's income tax benefit for each of the years ended
December 31, 2003 and 2002, respectively, is summarized as follows:
2003 2002
------ ------
Tax at federal statutory rate 34.0% 34.0%
State income tax benefit (expense) net of federal
tax effect (0.2)% 4.2%
Increase in valuation allowance aaallowance (37.0)% (33.9)%
Miscellaneous 2.6% 2.1%
------ ------
Effective income tax rate 0.6% 6.4%
====== ======
The tax effect of temporary differences consists of the following:
DECEMBER,
31, 2003
------------
Deferred tax assets:
Net operating loss carryforward $ 10,231,000
Land held for development and sale 813,000
Research and development credits 198,000
Property and equipment 21,000
------------
11,263,000
Valuation allowance (11,038,000)
------------
$ 225,000
============
F-40
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES, CONTINUED
In accordance with New Jersey statutes, the Company entered into an
agreement to sell certain New Jersey net operating losses ("NOL") and research
and development credits. Accordingly, a state income tax benefit and deferred
tax asset was recorded at December 31, 2002 and for the year then ended. The
deferred tax asset at December 31, 2003 of $225,000 related to the sale of a
portion of the New Jersey NOL recorded in 2002 that was received by the Company
in January 2004. The Company has not recorded an additional state deferred tax
asset at December 31, 2003 related to the sale of the remaining New Jersey NOL
(see below).
An increase in valuation allowance of approximately $1,477,000 and
$968,000, respectively, for the years ended December 31, 2003 and 2002 was
recorded because it was more likely than not that the deferred tax assets would
not be realized.
As of December 31, 2003, the Company has unused net operating loss
carryforwards of $27,640,000 and $10,305,000, respectively, available for
federal and state income tax purposes. The unused net operating loss
carryforwards expire in various years from 2010 to 2023. The Company may be
subject to limitations on the use of its NOL's as provided under Section 382 of
the Internal Revenue Code. In addition, the Company has research and development
tax credit carryforwards for federal and state purposes of approximately
$144,000 and $54,000, respectively that expire in various years from 2010 to
2023.
11. SEGMENT DATA
The Company presents segment information in accordance with the
provisions of SFAS No. 131,"Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No.131 establishes standards for the
way public enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders.
Commencing with the acquisition of land (see Note 5) in December 2003,
the Company operates in two industry segments - video and image technology and
real estate development and sale. The Company evaluates segment performance
based on loss from operations.
F-41
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT DATA, CONTINUED
Summarized financial information concerning the Company's reportable
segments is shown in the following table for the year ended December 31, 2003:
(IN THOUSANDS)
REAL ESTATE
VIDEO & IMAGE DEVELOPMENT
TECHNOLOGY AND SALE TOTAL
---------- ---------- -------
Net revenues from customers $ 20 $ -- $ 20
========== ========== =======
Loss from operations $ (1,062) $ (15) $(1,077)
========== ========== =======
Total identifiable assets $ 349 $ 2,970 $ 3,319
========== ========== =======
Gain on forgiveness of debt $ 347 $ -- $ 347
========== ========== =======
Interest expense $ 53 $ 2 $ 55
========== ========== =======
Depreciation $ 42 $ -- $ 42
========== ========== =======
Capital expenditures $ -- $ 2,970 $ 2,970
========== ========== =======
12. MAJOR CUSTOMERS
For the year ended December 31, 2003, two customers accounted for sales
of $12,720 (65%) and $4,375 (22%), respectively. For the year ended December 31,
2002, one customer accounted for sales of approximately $268,000 (94%).
13. SALES AND MARKETING AGREEMENT
In October 2003, the Company entered into a non-exclusive contract with
a sales and marketing agent, who is the Company's former chief technology
officer. The agent will market, promote, sell and distribute the Company's
technology, in exchange for a commission equal to 90% of the net profits derived
from such efforts.
14. SUBSEQUENT EVENTS
During January and February 2004, the Company formed NuWave Acquisition
Corp, Harwood Acquisition Corp, WH Acquisition Corp. and JK Acquisition Corp.
Each of these subsidiaries was formed with the intent to acquire and hold
investments in real estate and other types of assets.
F-42
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS ABOUT NUWAVE
TECHNOLOGIES, INC. EXCEPT THE
INFORMATION OR REPRESENTATIONS CONTAINED
IN THIS PROSPECTUS. YOU SHOULD NOT RELY
ON ANY ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an ----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
O except the common stock ---------------------
offered by this prospectus;
O in any jurisdiction in which
the offer or solicitation is
not authorized; 130,690,033 Shares of Common Stock
O in any jurisdiction where the NuWave Technologies, Inc.
dealer or other salesperson is
not qualified to make the ___________ __, 2004
offer or solicitation;
O to any person to whom it is
unlawful to make the offer or
solicitation; or
O to any person who is not a
United States resident or who
is outside the jurisdiction of
the United States.
The delivery of this prospectus or any
accompanying sale does not imply that:
O there have been no changes in
the affairs of NuWave
Technologies, Inc. after the
date of this prospectus; or
O the information contained in
this prospectus is correct
after the date of this
prospectus.
-----------------------
Until __________, 2004, all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a prospectus. This is in
addition to the obligation of dealers to
deliver a prospectus when acting as
underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
NuWave's bylaws provide that we have the power to indemnify any officer
or director against damages if such person acted in good faith and in a manner
the person reasonably believed to be in the best interests of our Company. No
indemnification may be made (i) if a person is adjudged liable unless a Court
determines that such person is entitled to such indemnification, (ii) with
respect to amounts paid in settlement without court approval or (iii) expenses
incurred in defending any action without court approval.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. All expenses will be paid by NuWave.
Securities and Exchange Commission Registration Fee $ 1,407
Printing and Engraving Expenses 1,500
Accounting Fees and Expenses 65,000
Legal Fees and Expenses 25,000
Miscellaneous 7,093
-----------
TOTAL $ 100,000
===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Standby Equity Distribution Agreement
In May 2004, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners, L.P. shares of common stock for a total purchase price of up to $30
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners, L.P. will pay NuWave 99% of
the volume weighted average price on the Over-the-Counter Bulletin Board or
other principal market on which our common stock is traded for the 5 days
immediately following the notice date. Further, Cornell Capital Partners, L.P.
will retain a fee of 10% of each advance under the Standby Equity Distribution
Agreement. In connection with the Standby Equity Distribution Agreement, we paid
Newbridge Securities Corporation a fee of 111,111 shares of common stock.
Convertible Debenture
During August 2004, the Company raised approximately $1,783,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bore interest at 10% per annum,
with interest payable monthly and was secured through an interest in the land
held for development and sale. This debenture matured in August 2007. At the
option of the holder or the Company, at any time, this convertible debenture
could be converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion date.
In connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each have the option to effectively
void all or a portion of the transfer. In the event that neither option is
exercised within three years, the 20% fee simple interest will revert to the
Company upon settlement of the convertible debenture. Upon issuance NuWave has
recorded a debt discount of $446,000, for the August 2004 debenture. This debt
discount was recorded to reflect the value of the beneficial conversion feature
related to the convertible debentures. Accordingly, NuWave has recorded the
value of the beneficial conversion feature as a reduction to the carrying amount
of the convertible debt and as an addition to additional paid-in capital. This
debt discount was being amortized over the term of the related debentures, which
was 36 months, and the amortization of such discount was recorded as interest
expense on the accompanying condensed consolidated statement of operations.
II-1
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant in
common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000 sale
amount against the proceeds from the convertible debenture and has incurred
interest expense of $38,000 for the three month period ended September 30, 2004,
$30,000 of which has been paid to the buyer through September 30, 2004. The
Company has incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004 NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
Convertible Debentures
During October 2004, NuWave issued $100,000 in a convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization will be recorded as interest expense on the
consolidated statement of operations. At the option of NuWave, upon the maturity
date, this convertible debenture may be converted into NuWave's Common Stock. At
the option of the holder, at any time prior to maturity, any portion of this
convertible debenture may be converted into Common Stock. The value of principal
and accrued interest is convertible at the per share price equal to the lesser
of (a) 120% of the closing bid price, or (b) 80% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, NuWave
may redeem, with 15 days advance notice, a portion or all of this outstanding
debenture at 110% of the dollar value of the amount redeemed plus accrued
interest.
In June 2004, NuWave issued $250,000 in a convertible debenture. This
debenture bears interest at a rate of 10% per annum, with interest due at
maturity or upon conversion and matures in June 2006. NuWave has recorded a debt
discount of $83,000 at issuance of these convertible debentures to reflect the
value of the beneficial conversion feature related to the convertible debenture.
At the option of NuWave, upon the maturity date, this convertible debentures may
be converted into NuWave's Common Stock. At the option of the holder, at any
time prior to maturity, any portion of this convertible debenture may be
converted into Common Stock. The value of principal and accrued interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price on April 26, 2004, or (b) 75% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, NuWave
may redeem, with 15 days advance notice, a portion or all of these outstanding
debentures at 125% of the dollar value of the amount redeemed plus accrued
interest. This convertible debenture was redeemed by NuWave in November 2004.
During January 2004, NuWave issued $110,000 in convertible debentures.
These debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature in January 2006. NuWave has
recorded a debt discount of $27,000 at issuance of these convertible debentures
to reflect the value of the beneficial conversion feature related to the
convertible debentures. Accordingly, NuWave has recorded the value of the
beneficial conversion features as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debentures, which is 24
months, and such amortization was recorded as interest expense on the
accompanying condensed consolidated statement of operations. At the option of
NuWave, upon the maturity date, these convertible debentures may be converted
into NuWave's Common Stock. At the option of the holder, at any time prior to
maturity, any portion of these convertible debentures may be converted into
Common Stock. The value of principal and accrued interest is convertible at the
per share price equal to the lesser of (a) 120% of the closing bid price, or (b)
80% of the lowest daily volume weighted average price for the five days
immediately preceding the conversion date. In addition, NuWave may redeem, with
15 days advance notice, a portion or all of these outstanding debentures at 110%
of the dollar value of the amount redeemed plus accrued interest.
During October 2003, NuWave raised $200,000 through the issuance of a
convertible debenture to Cornell Capital Partners, L.P. In addition, during
December 2003, NuWave raised $195,000 through the issuance of convertible
debentures to various unrelated parties. In September 2004, NuWave redeemed the
$200,000 convertible debenture with Cornell Capital Partners, L.P. and $70,000
of the convertible debentures issued in December 2003. On December 22, 2003,
NuWave issued a convertible debenture for $3,300,000 to Cornell Capital
Partners, L.P. and $250,000 to unrelated parties in connection with the
acquisition of land held for development and sale which is secured through a
first mortgage lien on the land. All of these debentures bear interest at a rate
of 5% per annum, with interest due at maturity or upon conversion. These
debentures mature at various dates ranging from October 2005 through December
2008. At the option of NuWave, upon the maturity date, these convertible
II-2
debentures and accrued interest may be converted into NuWave's Common Stock. At
the option of the holder, at any time prior to maturity, any portion of these
convertible debentures may be converted into Common Stock. The value of
principal and accrued interest is convertible at the per share price equal to
the lesser of (a) 120% of the closing bid price, or (b) 80% of the lowest daily
volume weighted average price for the five days immediately preceding the
conversion date. In addition, NuWave may redeem a portion or all of these
outstanding debentures at 110% (120% for Cornell Capital Partners, L.P.) of the
dollar value of the amount redeemed plus accrued interest. Under the conversion
limitation for the debentures, NuWave may issue shares under conversion only so
long as, at conversion, the holder has no more than 9.9% of NuWave's outstanding
shares.
Note Payable - Related Party
On December 22, 2003, Lehigh issued a secured note for $1,400,000 to
Stone Street Asset Management LLC in conjunction with its purchase of land in
New Jersey. The note provides for the payment of sixty equal monthly
installments of principal and interest of $27,741 beginning on January 1, 2005,
matures on January 10, 2010 and is secured through a second mortgage on the
land. The note bears interest at a rate of 5% per annum.
Warrants
On September 24, 2003, NuWave issued 200,000 warrants to purchase
NuWave's common stock at $1.00 per share. These warrants were issued to two
former officers for prior services provided to NuWave. The warrants are
exercisable over a five-year period which expires in September 2008.
Equity Line of Credit
On April 15, 2002, NuWave entered into a $3,000,000 Equity Line of
Credit Agreement with Cornell Capital Partners, L.P. Provided NuWave was in
compliance with the terms of the Agreement, NuWave could, at its option,
periodically require the Purchaser to purchase up to $100,000 in any seven day
period of NuWave's common stock (the "put" shares) up to a maximum of $3,000,000
over the next two years, commencing on May 31, 2002 (the effective date of a
Securities Act of 1933 registration statement on Form SB-2 for the registration
of 100,000 shares of common stock to be sold under the Agreement, plus 4,762
shares of common stock mentioned below). Additional registration statements
added 280,000 shares on November 1, 2002 and 1,200,000 on January 10, 2003,
bringing the total registered shares to 1,580,000 under the Agreement. NuWave
issued to the Purchaser 4,362 shares of common stock as a commitment fee for
entering into the Agreement. In addition, NuWave issued to the placement agent
400 shares of NuWave's common stock. For each share of common stock purchased
under the Equity Line of Credit, the Purchaser paid 97% of the then Market Price
(as defined in the Agreement), and was paid a fee of 4% of each advance. This
Agreement expired on April 15, 2004.
The Agreement was non-exclusive; thereby permitting NuWave to offer and
sell its securities to third parties while the Equity Line of Credit was in
effect. NuWave had the option to terminate the Equity Line of Credit Agreement
at any time, provided there is no pending advance thereunder. During July 2003,
NuWave reached the limit of 1,580,000 registered shares that were issuable under
the Agreement.
NuWave received loans from Cornell Capital Partners, L.P. aggregating
$357,000 and $525,000 during the years ended December 31, 2003 and 2002,
respectively. NuWave repaid certain of these loans in the amounts of $273,000
and $325,000, in each of the years December 31, 2003 and 2002, respectively
through the issuance of 1,151,490 and 187,374 shares of NuWave's common stock.
The common shares issued to repay these notes were issued at a 3% discount.
These loans were non-interest bearing during their terms, which ranged from 90
days to 180 days.
The balance of these loans as of September 2003, totaling $284,000,
were not repaid within their term and were in default. During September 2003,
NuWave entered into an Agreement with Cornell Capital Partners, L.P. to settle
the default on these loans. In connection therewith, Cornell Capital Partners,
L.P. agreed not to foreclose on its outstanding indebtedness of $284,000 owed by
NuWave. In addition, on September 29, 2003, Cornell Capital Partners, L.P.
entered into a new loan agreement with NuWave for $200,000 to be deposited in
escrow to be used to satisfy certain outstanding obligations of NuWave,
including trade payables, unpaid wages, and settlement of employment agreements.
The loan was non-interest bearing for its original term of 180 days. Also see
Note 7 to the consolidated financial statements at December 31, 2003.
On March 27, 2004, the $200,000 loan matured and was not repaid
according to its terms. On April 5, 2004, Cornell Capital Partners, L.P. agreed
to extend the due dates of the $284,000 of loans and the $200,000 loan to April
15, 2005. On May 11, 2004, Cornell Capital Partners, L.P. agreed to further
extend the due dates of these $484,000 in loans to August 1, 2005. On July 20,
II-3
2004, Cornell Capital Partners, L.P. agreed to further extend the due dates of
these $484,000 in loans to December 5, 2005. While in default and through the
extended maturity date, the $284,000 of loans and the $200,000 loan accrue
interest from the default dates at a rate of 24% per annum. On September 10,
2004, NuWave paid off in full its obligations for principal and accrued interest
related to its $484,000 in loans.
Convertible Preferred Stock
During May 2003, NuWave entered into a Securities Purchase Agreement
with several independent buyers whereby NuWave issued and sold to the buyers
67,000 shares of Series A Preferred Stock at $1 per share. The buyers were
entitled, at their option, to convert the Series A Preferred Stock into shares
of NuWave's Common Stock at any time commencing after May 1, 2004 at an adjusted
conversion price of $0.05 per share. Any unconverted shares as of May 1, 2005
would automatically convert into shares of NuWave's Common Stock at an adjusted
conversion price of $0.05 per share. NuWave had the right to redeem the
outstanding Preferred Stock upon 30 days written notice at a redemption price of
150% of the subscription amount plus interest on the purchase price of 24%. If
NuWave chose to redeem some, but not all, of the Series A Preferred Stock,
NuWave could redeem a pro rata amount from each holder of the Series A Preferred
Stock. The preferred stock was redeemed by NuWave in October 2003 for a total
redemption price of $86,400. The $19,400 excess of the amount of the redemption
over the amount of the original issue has been recorded as a deemed dividend -
redemption premium on the convertible preferred stock.
Shares issued for services
On June 30, 2003, NuWave issued 25,000 shares of common stock valued at
approximately $5,000 in exchange for services provided to NuWave.
Effective June 1, 2004, NuWave issued 75,000 shares of common stock to
George Kanakis, its President, under the terms of his employment contract. Under
his employment agreement, Mr. Kanakis is also entitled to options to purchase
100,000 shares of common stock at some future date. NuWave has not yet adopted a
stock option plan. Accordingly, these options have not yet been issued to Mr.
Kanakis.
Increase in Authorized Shares, Reduction in Par Value and Reverse Stock
Split
On December 20, 2002, the stockholders approved an increase in the
number of authorized shares from 40,000,000 to 140,000,000 and a reduction of
the par value per share from $0.01 to $0.001. The change in par value has been
reflected in the financial statements during 2002. On July 21, 2003, NuWave's
Board of Directors declared effective a reverse split of NuWave's common shares
in the ratio of 1 to 50 as voted on and approved by the stockholders at NuWave's
Annual Stockholders' meeting held on December 20, 2002, and effective on July
21, 2003. All share and per share amounts have been retroactively restated for
the stock split.
Issuance of Common Stock
Between June 7, 2002 and June 30, 2002 NuWave entered into agreements
with various investors whereby a total of 22,203 shares of Common Stock and
warrants exercisable at $50 per share for 1,000 shares of common stock were
issued for an aggregate purchase price of $330,350. In connection with the
issuance of these shares, NuWave incurred costs of $35,664 in placement agent
fees and expenses.
On February 27, 2002, NuWave entered into an agreement with an investor
whereby NuWave issued 4,285 shares of common stock for an aggregate purchase
price of $150,000 and warrants to purchase up to 1,000 shares of Common Stock at
an exercise price of $50.00 per share with an exercise period of five years
expiring February 27, 2007. Under the terms of the agreement a consultant was
paid a finder's fee of $1,500 representing one percent of the purchase price.
On February 5, 2002, NuWave entered into a private placement agreement
with investors whereby NuWave issued 12,000 shares of NuWave's common stock for
an aggregate purchase price of $330,000. In connection with this agreement,
NuWave issued to the Placement Agent a Placement Agent Warrant, exercisable to
purchase up to 600 shares of common stock, representing five percent of the
total of the stock issued in the Offering. The warrants shall be exercisable for
a period of five years, expiring on February 8, 2007, at an exercise price of
$27.50 per share. The Placement Agent also received a cash placement fee of
eight percent of the purchase price and a non-accountable allowance equal to two
percent of the purchase price, totaling $33,000.
All of the above offerings and sales were deemed to be exempt under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
II-4
and sales were made to a limited number of persons, all of whom were accredited
investors, business associates of NuWave or executive officers of NuWave, and
transfer was restricted by NuWave in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our Securities
and Exchange Commission filings.
II-5
ITEM 27. EXHIBITS
(a) The following exhibits are filed as part of this registration
statement:
EXHIBIT NO. DESCRIPTION LOCATION
---------- ----------------------------------------------------- ----------------------------------------------
3.1 Articles of Incorporation of NuWave (Delaware) Incorporated by reference to Exhibit 3.1(a) to
Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
3.2 Certificate of Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1(b) to
of NuWave (Delaware) Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
3.3 Certificate of Authority (New Jersey) Incorporated by reference to Exhibit 3.1(c) to
Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
3.4 Amended Certificate of Authority (New Jersey) Incorporated by reference to Exhibit 3.1(d) to
Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
3.5 Certificate of Amendment to Articles of Incorporation Incorporated by reference to Exhibit 3.1(e) to
of NuWave (Delaware) Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
3.6 By-Laws of NuWave Incorporated by reference to Exhibit 3.2 to
Registration Statement on Form SB-2 filed with
the Securities and Exchange Commission on
April 2, 1996
4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to Registration Statement on
Form SB-2 filed with the Securities and
Exchange Commission on July 3, 1996
4.2 Form of Public Warrant Agreement between NuWave, Incorporated by reference to Exhibit 4.2 to
American Stock Transfer & Trust Company and Rickel & Amendment No. 1 to Registration Statement on
Associates, Inc. Form SB-2 filed with the Securities and
Exchange Commission on May 22, 1996
4.3 Form of Public Warrant Certificate (See Exhibit 4.3 to Amendment No. 2 to
Registration Statement on Form SB-2 filed with
the Commission on July 3, 1996
4.4 Form of Underwriter's Warrant Agreement (including Incorporated by reference to Exhibit 4.4 to
Warrant Certificate) between NuWave and Rickel & Amendment No. 1 to Registration Statement on
Associates Form SB-2 filed with the Securities and
Exchange Commission on May 22, 1996
5.1 Opinion re: Legality Incorporated by reference to Form SB-2 filed
with the Securities and Exchange Commission on
August 9, 2004
10.1 Form of Stock Purchase Agreement, dated as of June Incorporated by reference to Exhibit 10.45 to
2002, between NuWave Technologies, Inc. and certain Registration Statement on Form SB-2, filed
investors with the Securities and Exchange Commission on
July 11, 2002
10.2 Form of Selling Stockholders Agreement, dated as of Incorporated by reference to Exhibit 10.46 to
July 2002 among NuWave and the Purchasers. Registration Statement on Form SB-2, filed
with the Securities and Exchange Commission on
July 11, 2002
II-6
EXHIBIT NO. DESCRIPTION LOCATION
---------- ----------------------------------------------------- ----------------------------------------------
10.3 Revolving Line of Credit Secured Demand Promissory Incorporated by reference to Exhibit 10.47 to
Note, dated December 10, 2002, to Gerald Zarin by Registration Statement on SB-2 filed with the
NuWave Technologies, Inc. Securities and Exchange Commission on December
27, 2002
10.4 Agreement with Cornell Capital Partners LP, dated Incorporated by reference to Exhibit 10.1 to
September 10, 2003 Form 8-K, filed with the Securities and
Exchange Commission on September 10, 2003
10.5 Convertible Debenture dated December 22, 2003, between Incorporated by reference to Form 10-KSB filed
Cornell Capital Partners, L.P. and NuWave with the Securities and Exchange Commission on
April 15, 2004
10.6 Secured Note Payable Agreement dated December 22, Incorporated by reference to Form 10-KSB filed
2003, between Stone Street Asset Management, LLC and with the Securities and Exchange Commission on
NuWave April 15, 2004
10.7 Form of convertible debenture, dated as of December Incorporated by reference to Form 10-KSB filed
2003, between NuWave and certain investors with the Securities and Exchange Commission on
April 15, 2004
10.8 Independent Sales Agent Agreement between Nextgen Incorporated by reference to Form 10-KSB filed
Associates, Inc. and NuWave dated October 31, 2003 with the Securities and Exchange Commission on
April 15, 2004
10.9 Standby Equity Distribution Agreement dated as of May Incorporated by reference to Form SB-2 filed
2003 between NuWave and Cornell Capital Partners, L.P. with the Securities and Exchange Commission on
August 9, 2004
10.10 Placement Agent Agreement dated as of May 2003 between Incorporated by reference to Form SB-2 filed
NuWave, Newbridge and Cornell Capital Partners, L.P. with the Securities and Exchange Commission on
August 9, 2004
10.11 Registration Rights Agreement dated as of May 2003 Incorporated by reference to Form SB-2 filed
between NuWave and Cornell Capital Partners, L.P. with the Securities and Exchange Commission on
August 9, 2004
10.12 Employment Agreement dated June 1, 2004 between NuWave Incorporated by reference to Form SB-2 filed
and George Kanakis with the Securities and Exchange Commission on
August 9, 2004
10.13 Agreement of sale between 24 West 96th Street Realty Incorporated by reference to Form 10-QSB filed
Corp. and Lehigh Acquisition Corp dated July 1, 2004 with the Securities and Exchange Commission on
November 22, 2004
10.14 Convertible Debenture agreement between 24 West 96th Incorporated by reference to Form 10-QSB filed
Street Realty Corp. and NuWave dated August 20, 2004 with the Securities and Exchange Commission on
November 22, 2004
10.15 Amended and restated Agreement of sale between 24 West Incorporated by reference to Form 10-QSB filed
96th Street Realty Corp. and Lehigh Acquisition Corp with the Securities and Exchange Commission on
dated November 10, 2004 November 22, 2004
14.1 Code of Ethics Incorporated by reference to Form 10-KSB filed
with the Securities and Exchange Commission on
April 15, 2004
23.1 Consent of Marcum & Kliegman LLP Provided herewith
23.2 Consent of Eisner LLP Provided herewith
23.3 Consent of Legal Counsel Incorporated by reference to Exhibit 5.1 filed
herewith
II-7
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections
10(a)(3) of the Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) Include any additional or changed material
information on the plan of distribution;
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
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.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, as of December 20,
2004.
NUWAVE TECHNOLOGIES, INC.
By: /s/ George Kanakis
-------------------------------------
Name: George Kanakis
Title: President, Chief Executive Officer
(Principal Executive Officer),
Chief Financial Officer (Principal
Accounting Officer) and Director
Pursuant to 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 stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ George Kanakis President, Chief Executive December 20, 2004
------------------------ Officer (Principal Executive
George Kanakis Officer), Chief Financial Officer
(Principal Accounting Officer)
and Director
/s/ Gary H. Giannantonio Director December 20, 2004
------------------------
Gary H. Giannantonio
II-9