Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration Statement 71 393K
2: EX-3.4 Amended and Restated By-Laws 17 72K
3: EX-4.34 Common Stock Purchase Warrant - Brockington 14 61K
4: EX-4.35 Common Stock Purchase Warrant - Sld 14 61K
5: EX-4.36 Form of Warrant 12 45K
6: EX-4.37 Common Stock Purchase Warrant - Trask 13 50K
7: EX-5.1 Opinion of Kronish Lieb Weiner & Hellman LLP 2 12K
8: EX-10.10 Placement Agency Agreement 24 122K
9: EX-10.11 Engagement Agreement 8 35K
10: EX-10.12 Consulting Agreement 3 14K
11: EX-10.13 Subscription Agreement 11 67K
12: EX-10.14 Registration Rights Agreement 10 46K
13: EX-10.15 Employment Agreement - Liddle 10 40K
14: EX-10.16 Employment Agreement 14 41K
15: EX-10.17 Separation Agreement 9 39K
16: EX-23.1 Consent of Mahoney Cohen & Company 1 7K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 2004
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOME DIRECTOR, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 3669 52-2143430
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
2525 COLLIER CANYON ROAD
LIVERMORE, CALIFORNIA 94551
(925) 373-0438
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
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MICHAEL LIDDLE
CHIEF EXECUTIVE OFFICER
HOME DIRECTOR, INC.
2525 COLLIER CANYON ROAD
LIVERMORE, CALIFORNIA 94551
(925) 373-0438
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
RUSSELL S. BERMAN, ESQ.
KRONISH LIEB WEINER & HELLMAN LLP
1114 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 479-6000
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Approximate Date of Commencement of Proposed Sale to the Public: From
time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box |_|.
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Common Stock 10,588,633 shares(2) $2.21 $23,400,878.93 $2,964.89
========================= ====================== ====================== ====================== ======================
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933. For purposes of
this table, we have used the average of the closing bid and asked prices of the
registrant's Common Stock on March 4, 2004, as reported by the OTC Bulletin
Board.
(2) Of these shares, 3,488,354 are currently outstanding shares to be
offered for resale by selling stockholders and 7,100,279 are currently unissued
shares to be offered for resale by selling stockholders following issuance upon
exercise of outstanding warrants.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
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THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING STOCKHOLDERS
ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, MARCH 8, 2004
[HOME DIRECTOR LOGO]
HOME DIRECTOR, INC.
10,588,633 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 10,588,633 shares of our
Common Stock by some of our stockholders. For a list of the selling
stockholders, please see "Selling Stockholders." We are 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 up to
7,100,279 of such shares to warrant holders upon the exercise of outstanding
warrants held by the selling stockholders in the event that such warrants are
exercised. We will bear all costs associated with this registration.
On March 4, 2004, the average of the closing bid and asked prices of
our Common Stock was $2.21 per share. Our Common Stock is quoted on the OTC
Bulletin Board under the symbol "HMDR."
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under applicable state law or that an
exemption from registration is available.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISKS. PLEASE
REFER TO THE "RISK FACTORS" BEGINNING ON PAGE 4.
No underwriter or person has been engaged by us to facilitate the sale
of the shares of Common Stock in this offering. This offering will continue for
up to 24 months after the accompanying registration statement is declared
effective by the Securities and Exchange Commission or for so long thereafter as
sales of shares offered by the selling stockholders would otherwise be subject
to volume limitations imposed under the Securities Act.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ___________ __, 2004.
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................4
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS....................9
USE OF PROCEEDS...............................................................9
MARKET PRICE OF COMMON STOCK.................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................10
BUSINESS.....................................................................16
MANAGEMENT...................................................................21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................26
PRINCIPAL STOCKHOLDERS.......................................................27
SELLING STOCKHOLDERS.........................................................30
PLAN OF DISTRIBUTION.........................................................38
DESCRIPTION OF SECURITIES....................................................39
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES........40
LEGAL MATTERS................................................................41
EXPERTS .....................................................................41
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................................41
WHERE YOU CAN FIND MORE INFORMATION..........................................41
FINANCIAL STATEMENTS........................................................F-1
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and
may not contain all of the information that is important to an investor. We
encourage you to read this entire prospectus, including our consolidated
financial statements and the notes to our consolidated financial statements,
completely and carefully before deciding whether to invest in our Common Stock.
You should also review the other available information referred to in the
section entitled "Where You Can Find More Information" on page 41.
Summary of our Business
We design, manufacture, sell and install home networking solutions that
can interconnect security systems, audio systems, video services, televisions,
utilities, personal computers and the Internet. Our products are sold primarily
to the home building industry for installation in new homes. We market our
products to home builders with the objective that a Home Director home
networking solution can be incorporated in the construction of the new homes
they sell to consumers and included in the consumer's purchase price and initial
mortgage financing package. Home builders frequently use our systems and
solutions as a standard feature in their new home developments.
Our business is channeled through several marketing programs.
Since January 2001, we have generated sales of our networking systems
and related products and services through direct involvement as integrators and
installers of our systems, acting primarily as subcontractors for builders in
their new home developments. In the local areas where we perform these services,
we act as a single source supplier, participating directly in sales to consumers
and offering assistance ranging from pre-sale design to post-installation
support and including pre-packaged and custom options. We currently carry on
these systems installation activities in California, Florida, Colorado and
Texas.
Through a strategic relationship with Sears, Roebuck & Co., we are now
actively engaged with Sears in an important marketing initiative called the
Sears Connected Home program. This marketing initiative began as a pilot program
in Florida in 2002, and we are now supporting Sears in the implementation of the
program on a national basis. The Sears Connected Home program is intended to
capitalize on Sears' established reputation and contacts in the home building
industry by offering builders a reputable single source for technology-based
lifestyles options in their new home projects. Through the program, Sears offers
builders a variety of home networking options, arranges for installation of
network solutions through pre-certified local and regional integrators and
provides quality assurances that differentiate its program from the limited
local service typically available to developers. Home Director is the preferred
product supplier for the Sears program and acts as an integrator for the
program, primarily in areas where Sears has not yet certified other local
service providers.
We also continue to sell our hardware and software networking products
throughout the United States and Canada to distributors primarily for resale to
regional integrators and installers who carry out their own installation
activities, frequently with our technical and training assistance.
Recent Operating History and Management Changes
Our operating results for 2003 were disappointing and led to
significant management changes at the end of 2003 and early in 2004. At the end
of December 2003, our Chairman and Chief Executive Officer resigned and was
replaced by Michael Liddle. Early in March 2004, our President and Chief
Operating Officer resigned in a negotiated arrangement approved by our Board of
Directors. His responsibities have been assumed by other senior level managers
pending designation of a full-time replacement. Mr. Liddle has begun to
implement a new strategic vision for the Company, based on improved and expanded
hardware and software product offerings. Among recent management actions taken
was the retention of Jerry Steckling in the new positions of Vice President,
Advanced Technology and Chief Technology Officer. Mr. Steckling's background in
engineering and high-end audio technology are expected to provide leadership and
depth to our research and development activities.
Private Placement
In December 2003 and January 2004 we raised gross proceeds of
$3,226,315 in a private sale of units consisting of 3,470,679 shares of Common
Stock and warrants to purchase 3,470,679 shares of Common Stock. In addition, we
issued warrants to purchase 1,388,272 shares of Common Stock to the placement
agent in this transaction. All of the shares of Common Stock included in the
units sold in this transaction (including the shares underlying the warrants)
may be offered for resale pursuant to this prospectus.
HDT Merger
Until December 19, 2002, we were known as Netword, Inc. On that date,
we acquired all of the stock of Home Director Technologies, Inc. (formerly Home
Director, Inc. and referred to in this prospectus as "HDT") in a merger of
Netword's special purpose subsidiary into HDT. Immediately before the merger, we
completed a one-for-40 reverse split of our outstanding Common Stock.
As a result of the merger, HDT became our wholly-owned subsidiary, we
changed our name from Netword, Inc. to Home Director, Inc., and the business of
HDT became our only business. When we refer to "Netword" in this prospectus, we
are referring to the Company as it existed before the merger, and when we refer
to "the merger," we are referring to the merger in which we acquired HDT.
We were incorporated in Delaware on February 18, 1999. We have
approximately 90 full time employees. Our executive offices are located at 2525
Collier Canyon Road, Livermore, California 94551. Our telephone number is (925)
373-0438, and our web site address is www.homedirector.com.
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THE OFFERING
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Registrant.................................. Home Director, Inc.
OTC Bulletin Board Market Symbol............ HMDR
Securities Offered by Selling Stockholders.. 10,588,633 shares of Common Stock, consisting of 3,488,354
outstanding shares owned by selling stockholders and up to 7,100,279
shares issuable to selling stockholders upon exercise of outstanding
warrants.
Offering Price.............................. Determined at the time of sale by selling stockholders.
Shares of Common Stock outstanding before the
offering.................................... 7,222,146 shares
Shares of Common Stock outstanding after the
offering, assuming no exercise of warrants.. 7,222,146 shares
Shares of Common Stock outstanding after the
offering, assuming issuance of 7,100,279
shares of Common Stock underlying warrants 14,322,425 shares
Risk Factors................................ An investment in the Company involves significant risks and
uncertainties. See "Risk Factors," beginning on page 4.
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RISK FACTORS
An investment in our Common Stock involves a high degree of risk. You
should carefully consider the risks described below before deciding to purchase
shares of our Common Stock. The risks described below are not the only ones that
we face. Additional risks that generally apply to publicly traded companies,
that are not yet identified or that we currently think are immaterial, may also
adversely affect us.
If any of the events, contingencies, circumstances or conditions
described in the risks below actually occurs, our business, financial condition
or results of operations could be seriously harmed. The trading price of our
Common Stock could, in turn, decline and you could lose all or part of your
investment.
THE REPORT OF OUR INDEPENDENT AUDITORS ON OUR FINANCIAL STATEMENTS CONTAINS AN
EXPLANATORY PARAGRAPH ON OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent auditors contains an explanatory
paragraph raising substantial doubt about our ability to continue as a going
concern because of our operating losses, our default under our line of credit
and our dependence upon financing our operations through a series of private
offerings of debt and equity securities. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER BE PROFITABLE.
We experienced a net loss of approximately $30.4 million for 2001, a
loss of approximately $6.5 million (before a gain of approximately $4.5 million
as a result of the extinguishment of certain liabilities) for 2002, and a net
loss of approximately $5 million for 2003. We have incurred significant
quarterly and annual operating losses in every fiscal period since our
inception, and we may continue to incur quarterly and annual operating losses in
the future. There is no assurance that we will ever be profitable. Our ability
to achieve profitability will depend upon a number of factors, including, but
not limited to, whether we:
o have financing available for working capital, product development and
sales and marketing efforts;
o develop new products for existing and new markets;
o maintain sales prices, achieve higher sales volume and achieve
contract manufacturing efficiencies in order to maintain or improve
our gross margins;
o control our operating expenses;
o expand the distribution network for our products; and
o withstand competition in our marketplace.
OUR ACTIVITIES REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE OBTAINABLE.
As of December 31, 2003 we had a cash and cash equivalents balance of
approximately $66,000 and working capital of approximately $220,000. We have
historically needed to raise capital to fund our operating losses, and, although
we raised approximately $2.6 million in net proceeds through a private sale of
Common Stock and warrants in December 2003 and January 2004, our continuing
losses require us to obtain additional working capital which we are seeking
through bank loans and possible additional equity offerings. We may also need
to raise additional capital to fund expansion of our business by way of one or
more strategic acquisitions. There can be no assurance that we will be able to
obtain any such capital on acceptable terms, if at all. If we are unable to
obtain necessary working capital, we may be compelled to cease operations.
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WE HAVE BEEN UNABLE TO MEET CERTAIN FINANCIAL COVENANTS UNDER OUR LOAN AGREEMENT
AND ARE THEREFORE CURRENTLY UNABLE TO BORROW ADDITIONAL SUMS AND MAY BE REQUIRED
TO REPAY THE AMOUNTS ALREADY OUTSTANDING.
In July 2003 we entered into a loan agreement for a $1.0 million bank
line of credit for working capital purposes with advances secured by our assets.
We subsequently borrowed $300,000 under the line of credit, but, since September
2003, we have been in default because we have been unable to comply with certain
financial covenants under the loan agreement and have been denied further
borrowings. We can provide no assurance that the bank will continue to defer
exercise of its right to accelerate repayment of the loan or that it will lend
us additional amounts in the foreseeable future. We are seeking credit from
other financial institutions for purposes of repaying the loan and obtaining
additional working capital, but there is no assurance that we will be able to
obtain an alternative source of financing.
THE PUBLIC OFFERING BY SELLING STOCKHOLDERS OF A LARGE QUANTITY OF OUR SHARES AS
CONTEMPLATED BY THIS PROSPECTUS MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR
COMMON STOCK AND OUR ABILITY TO RAISE CAPITAL IN NEW STOCK OFFERINGS.
As of March 4, 2004 there were 7,222,146 shares of our Common Stock
outstanding, of which 3,751,467 shares were freely tradable (including shares
tradable pursuant to Rule 144 under the Securities Act). The shares of Common
Stock that may be freely offered for resale pursuant to this prospectus,
including the shares issuable upon exercise of warrants, represent approximately
140% of our outstanding Common Stock and includes virtually all of the shares
that were previously restricted from public sale. Efforts to sell all or a
significant portion of these shares during a limited period pursuant to this
prospectus could have a depressing effect on the market price of our Common
Stock and could make it more difficult for us to raise capital through sales of
our equity securities.
LIQUIDITY ON THE OTC BULLETIN BOARD IS LIMITED, AND WE MAY BE UNABLE TO OBTAIN
LISTING OF OUR COMMON STOCK ON A MORE LIQUID MARKET.
Our Common Stock is quoted on the OTC Bulletin Board, which provides
significantly less liquidity than a securities exchange (such as the American or
New York Stock Exchange) or an automated quotation system (such as the Nasdaq
National or SmallCap Market). There is uncertainty that we will ever be accepted
for a listing on an automated quotation system or securities exchange.
OUR COMMON STOCK HAS BEEN THINLY TRADED, AND THE PUBLIC MARKET MAY PROVIDE
LITTLE OR NO LIQUIDITY FOR HOLDERS OF OUR COMMON STOCK.
Purchasers of shares of our Common Stock may find it difficult to
resell their shares at prices quoted in the market or at all. There is currently
a limited volume of trading in our Common Stock, and on many days there has been
no trading activity at all. Due to the historically low trading price of our
Common Stock, many brokerage firms may be unwilling to effect transactions in
our Common Stock, particularly because low-priced securities are subject to an
SEC rule that imposes additional sales practice requirements on broker-dealers
who sell low-priced securities (generally those below $5.00 per share). We
cannot predict when or whether investor interest in our Common Stock might lead
to an increase in its market price or the development of a more active trading
market or how liquid that market might become.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR PURCHASERS OF OUR COMMON STOCK.
The relative illiquidity of trading in our Common Stock makes it
particularly susceptible to price volatility which could cause purchasers of our
Common Stock to incur substantial losses. Among factors that could cause
significant fluctuation in the market price of our Common Stock are the
following:
o an increase in the volume of public resales of our Common Stock
pursuant to this prospectus;
o changes in market valuations of similar companies;
o announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
o regulatory developments;
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o additions or departures of key personnel; and
o deviations in our results of operations from the estimates of
securities analysts.
WE DEPEND HEAVILY ON OUR SENIOR MANAGEMENT WHO MAY BE DIFFICULT TO REPLACE.
We believe that our future success depends to a significant degree on
the skills, experience and efforts of Michael Liddle, our Chief Executive
Officer, who joined us on January 1, 2004, and Jerry Steckling, our Vice
President, Advanced Technology and Chief Technology Officer, who joined us on
January 7, 2004. While they have incentives to remain with the Company, there is
no assurance that they will do so.
IMPROVEMENT IN OUR BUSINESS DEPENDS ON OUR ABILITY TO INCREASE CONSUMER DEMAND
FOR OUR PRODUCTS AND SERVICES AND HOME BUILDER PARTICIPATION IN OUR MARKETING
PROGRAMS.
Unless and until otherwise motivated by consumer demand, additional
home builders may be unwilling to introduce or bear the costs of offering our
systems to new home purchasers. Adverse events or economic or other conditions
affecting markets for new homes, potential delays in product development,
product and service flaws, changes in technology and the availability of
competitive products are among a number of factors that could limit home builder
and consumer demand for our products and services.
IF OUR NAME DOES NOT ACHIEVE AND MAINTAIN BROAD MARKET RECOGNITION, WE MAY FAIL
TO MAINTAIN OR INCREASE OUR MARKET SHARE.
We believe that brand recognition is important to our marketing efforts
and we have spent substantial amounts to promote our name. These efforts and
expenditures may not have achieved their objective or, even if our brand becomes
more generally known, may not result in a recovery of advertising and
promotional expenses or in any significant market penetration or increase in
revenues.
A THIRD PARTY HAS ASSERTED THAT OUR USE OF THE HOME DIRECTOR NAME IN CONNECTION
WITH THE MARKETING OF CERTAIN OF OUR PRODUCTS VIOLATES CERTAIN TRADEMARK AND
CONTRACTUAL RESTRICTIONS. IF THIS CLAIM WERE TO BE RESOLVED ADVERSELY, WE COULD
BE COMPELLED TO PAY ROYALTIES OR DAMAGES AND/OR LIMIT OR DISCONTINUE USE OF THE
NAME AS A TRADEMARK.
In June 2003, we received written notice from a third party alleging
that we had breached the terms of an agreement by using the "Home Director" mark
without displaying a distinctive corporate identifier in connection with some of
our products. We have taken what we believe is appropriate remedial action and
do not believe that there is any remaining basis for a claim by the third party,
nor has the third party taken further action to pursue its claim. Nevertheless,
it is possible that the third party will initiate legal action seeking damages
and/or injunctive relief against us. If any such litigation should be resolved
adversely, we could be compelled to pay damages and/or royalties to the third
party for our use of the Home Director name and/or to limit or discontinue its
use as a trademark. Any significant limitations on our use of the Home Director
name could adversely impact our marketing program and our efforts to establish
brand recognition.
WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF HOME BUILDERS IN
LIMITED GEOGRAPHICAL AREAS FOR A MATERIAL PORTION OF OUR REVENUES.
Our home networking systems installation business accounted for
approximately 73% of our total revenues in 2003, and one home builder accounted
for approximately 49% of this revenue. Our penetration of the new home market
represents a small percentage of all new homes constructed by the home builders
that we have relationships with. Loss or reduction of demand or increased
pricing pressure from any of these builders could adversely affect our revenues
and our ability to achieve profitability.
THE SEARS CONNECTED HOME PROGRAM, WHICH IS AN IMPORTANT ELEMENT OF OUR BUSINESS
PLAN, COULD BE DISCONTINUED BY SEARS AT ANY TIME.
A significant portion of our current marketing and sales efforts and
expectations is focused on the relatively new Sears Connected Home program. The
program is directly tied to our relationship with Sears, which is
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promoting the program through its extensive marketing and distribution
facilities and resources. Failure or discontinuance of the program would have an
adverse impact on our marketing and sales activities and could compel us to seek
other financial and distribution resources to support these activities. There is
no assurance that we could obtain any such alternative resources.
OUR BUSINESS IS TIED TO THE NEW HOUSING MARKET, WHICH IS INHERENTLY CYCLICAL,
SEASONAL AND SUBJECT TO CONTINUING UNCERTAINTIES.
Our business is directly related to the level of housing starts,
especially in those areas where we operate our systems installation business.
The housing industry is cyclical, and our revenues from new residential
installations will be affected by factors that affect the housing industry, both
generally and in the limited areas where we operate. The home building market is
also seasonal in many areas of the United States. As a result of all or any of
these factors, our revenues and operating results may fluctuate from period to
period.
REGULATORY CONSTRAINTS ON THE HOME CONSTRUCTION INDUSTRY MAY NEGATIVELY AFFECT
OUR BUSINESS.
The home construction industry is subject to various local, state and
federal laws and regulations. Sales of our products may be adversely affected by
periodic delays in homebuilding projects for a variety of regulatory reasons,
including factors relating to local and regional environmental and
infrastructure conditions and tax and assessment issues which may delay or halt
construction or increase the costs of home development and decrease potential
sales of our products.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL AND OTHER CHANGES.
The market for home technology products is highly competitive and
subject to rapid technological and other changes. Price competition has
adversely affected our revenues and margins in the recent past. Many of our
current and potential competitors have significantly greater financial,
technical, marketing and other resources and significantly greater name and
brand recognition than we have. Many of them also have well-established
relationships with current and potential distributors of our products. All or
any of these factors may limit or prevent any further development of our
business and our ability to achieve profitability. We believe that in order to
remain competitive, we will need to respond to frequent and rapid changes in
technology and industry standards affecting the market for our products. For a
variety of reasons, including lack of financial, technological and proprietary
resources, we may fail to recognize or be unable to respond to these changes in
a timely or cost-effective manner. We may also encounter capabilities or
technologies developed by others that render our products obsolete or not
competitive.
OUR NETWORKING HARDWARE AND SOFTWARE PRODUCTS MAY, FROM TIME TO TIME, SUFFER
FROM DESIGN OR MANUFACTURING DEFECTS WHICH COULD ADVERSELY AFFECT OUR REPUTATION
AND BUSINESS.
Our networking software products are complex. Errors by us or our
suppliers could result in software, design or manufacturing defects that could
be difficult to detect and correct. Any such defects could adversely impact
market interest in or demand for our products and our reputation, credibility
and relationships with home builders, current and prospective distributors and
consumers. Despite our efforts and testing, our products (including new products
and enhancements) may be susceptible to flaws or performance degradation, which
could result in:
o loss of or delay in revenue;
o loss of market share;
o failure to achieve market acceptance;
o adverse publicity;
o diversion of development resources;
o claims against us by customers; or
o injury to our reputation.
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WE MAY BE EXPOSED TO SIGNIFICANT COSTS OF DEFENSE AND DAMAGES IN LITIGATION
STEMMING FROM PRODUCT LIABILITY AND RELATED CLAIMS.
In spite of our best efforts, we may become subject to claims that give
rise to litigation resulting from the installation of our products and those of
other manufacturers in a consumer's premises. While we carry insurance that we
believe is adequate to cover our potential exposure in these matters, the
possibility exists that we may become subject to claims in amounts or for
reasons that are outside the scope of our insurance coverage. Litigation
involving personal injury or loss of life could lead to awards of enormous sums,
which could exceed our insurance coverage and force us to liquidate or seek
bankruptcy protection.
OUR TECHNOLOGY, WHETHER OR NOT PATENTED, MAY BE VULNERABLE TO MISAPPROPRIATION
BY OUR COMPETITORS AND THE EFFECTS OF COMPETITIVE, NON-INFRINGING TECHNOLOGY.
We own or have rights to use proprietary technology that we believe
affords us a current competitive advantage. This technology is not, however,
fully protected from infringement by competitors or from their introduction of
non-infringing technologies. Our patent rights and the additional steps we have
taken to protect our intellectual property may not be adequate to deter
misappropriation, and our proprietary position remains subject to the risk that
our competitors will independently develop non-infringing technologies that are
substantially equivalent or superior to our technologies.
WE MAY BE SUBJECT TO THE COSTS AND RISKS OF CLAIMS FOR PATENT AND/OR TRADEMARK
INFRINGEMENT ASSERTED AGAINST US BY OTHERS.
We remain subject to the risk that third parties will assert
infringement claims against us that will result in costly litigation, require us
to redesign infringing products or obtain a license to use the intellectual
property of third parties. Such licenses may not be available on reasonable
terms or at all. Any intellectual property claims resolved against us (including
the trademark-related claim against us for use of the Home Director name) could
adversely affect our ability to continue in business.
OUR ABILITY TO OPERATE AND COMPETE EFFECTIVELY REQUIRES THAT WE HIRE AND RETAIN
SKILLED TECHNICAL PERSONNEL, WHO, FROM TIME TO TIME, HAVE BEEN IN SHORT SUPPLY
AND MAY BE UNAVAILABLE TO US WHEN WE NEED THEM.
Our business requires us to be able to continuously attract, train,
motivate and retain highly skilled employees, particularly engineers and other
senior technical personnel. Our failure to attract and retain the highly trained
technical personnel who are integral to our sales, development and service teams
may limit the rate at which we can generate sales and develop new products or
product enhancements. Our inability to attract and retain the individuals we
need could adversely impact our business and our ability to achieve
profitability.
OUR INSTALLATION BUSINESS REQUIRES US TO HIRE, TRAIN AND RETAIN INCREASING
NUMBERS OF SKILLED TRADESMAN, BUT WE MAY PERIODICALLY BE UNABLE TO DO SO IN THE
LABOR MARKETS IN WHICH WE OPERATE.
We must continue to attract, train, motivate and retain highly skilled
tradesmen at competitive wage rates, to install and service our systems.
Qualified skilled tradesmen are scarce and in great demand throughout the
construction industry and particularly in the geographic areas where our systems
installation activities are currently conducted. Our inability to attract and
retain necessary skilled personnel, when we need them and at rates we can
afford, could adversely impact our business and our ability to achieve
profitability.
WE HAVE PREVIOUSLY ISSUED A SUBSTANTIAL NUMBER OF OPTIONS AND WARRANTS WHICH
REMAIN OUTSTANDING. THE EXISTENCE OF SUCH OPTIONS AND WARRANTS MAY HAVE A
DEPRESSING EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK AND IMPAIR OUR ABILITY
TO RAISE ADDITIONAL CAPITAL, WHILE ANY EXERCISE OF SUCH OPTIONS AND WARRANTS
WILL DILUTE THE INTERESTS OF THE HOLDERS OF OUTSTANDING COMMON STOCK.
There are outstanding options and warrants (including those held by the
selling stockholders) to purchase approximately 7,965,096 shares of Common Stock
at exercise prices ranging from $0.36 to $453.56 per share, as compared to a
total of only 7,222,146 shares of Common Stock currently outstanding. Such
options and warrants will likely be exercised, if at all, only at times when the
exercise or strike price thereunder is lower than the market
8
price of our Common Stock. While some of these options and warrants are largely
valueless and unlikely to be exercised prior to their expiration, there remains
a significant overhang of options and warrants exercisable at more modest prices
(approximately 7,215,992 shares of Common Stock at exercise prices ranging from
$0.36 to $10.89 per share). The existence of these options and warrants may have
a depressing effect on the market price of our Common Stock and may impair our
ability to raise additional capital through sales of our Common Stock or
adversely affect the terms of any such sales. The exercise of such options and
warrants (including by cashless exercise, where permitted) may result in
dilution of the relative interests of holders of our Common Stock in our
stockholders equity and earnings, if any.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of management and information currently available to management. The use of
words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should," "likely" or similar expressions, indicates a
forward-looking statement.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. Future results may differ
materially from those expressed in the forward-looking statements. Many of the
factors that will determine these results are beyond the ability of Home
Director to control or predict. Stockholders are cautioned not to put undue
reliance on any forward-looking statements, which speak only to the date made.
For those statements, Home Director claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
For a discussion of some of the factors that may cause actual results
to differ materially from those suggested by the forward-looking statements,
please read carefully the information under "Risk Factors" beginning on page 4.
The identification in this document of factors that may affect future
performance and the accuracy of forward-looking statements is meant to be
illustrative and by no means exhaustive. All forward-looking statements should
be evaluated with the understanding of their inherent uncertainty.
You may rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. Neither the delivery of this prospectus nor the sale of
Common Stock means that information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these securities in any circumstances under
which the offer or solicitation is unlawful.
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of shares of
Common Stock by selling stockholders in this offering. The Company may receive
up to approximately $7,639,494 from the sale of Common Stock to selling
stockholders for resale in this offering pursuant to the exercise of outstanding
warrants (assuming that warrants having an exercise price exceeding the closing
bid price for our Common Stock on March 4, 2004 will not be exercised and that
there will be no "cashless" exercise of warrants). We intend to use any proceeds
from the exercise of warrants for working capital purposes.
9
MARKET PRICE OF COMMON STOCK
MARKET INFORMATION
Our Common Stock is quoted on the OTC Bulletin Board under the symbol
HMDR. Prior to the merger, Netword's Common Stock was quoted on the OTC Bulletin
Board under the symbol "NTWD".
The following approximate high and low bid information for the Common
Stock is as reported by the OTC Bulletin Board. The prices stated represent
inter-dealer quotations, which do not include retail mark-ups, mark-downs or
commissions. Such prices do not necessarily represent actual transactions. The
high price during the fourth quarter of 2002 (and all periods thereafter)
reflects a one-for-40 reverse split of our Common Stock on December 19, 2002.
As of March 3, 2004, there were approximately 825 holders of record of
our Common Stock.
PRICE
-----
HIGH LOW
---- ---
2002
First quarter........................ $0.14 $0.07
Second quarter....................... 0.12 0.06
Third quarter........................ 0.09 0.04
Fourth quarter....................... 8.00 0.04
2003
First quarter........................ 8.00 2.85
Second quarter....................... 3.00 1.50
Third quarter........................ 2.10 0.75
Fourth quarter ..................... 1.50 0.85
DIVIDENDS
We have not paid any cash dividends on our Common Stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. In
addition, our loan agreement prohibits the payment of cash dividends. The
holders of our Common Stock are entitled to dividends when and if declared by
our board of directors from legally available funds.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As a result of the merger, on December 19, 2002, HDT became our
wholly-owned subsidiary, we changed our name from Netword, Inc. to Home
Director, Inc., and the business of HDT became our only business. Since the
former stockholders of HDT acquired a majority of our voting interests in the
merger, the transaction was treated as a reverse acquisition, with HDT treated
as the acquirer for accounting purposes. Accordingly, the pre-merger financial
statements of HDT are our historical financial statements. At the time of the
merger, Netword had no continuing operations and its historical results would
not be meaningful if combined with the historical results of HDT.
Our revenues consist primarily of revenues from the sale of home
networking products and services. Home networking hardware is sold primarily to
distributors for use by integrators who install the hardware in homes
10
throughout the United States and Canada. The Company also provides installation
services, primarily to the new home construction market, in California, Florida,
Colorado and, since early 2004, Texas.
Research and development expenses consist primarily of salaries and
related personnel expenses, subcontracted research expenses, and technology
license expenses. As of December 31, 2003, all research and development costs
had been expensed as incurred. We believe that continued investment in research
and development is critical to attaining our strategic objectives, and we expect
such expenses to increase during 2004.
General and administrative expenses consist primarily of expenses for
executive, finance and administrative personnel, professional fees, and other
general corporate expenses. As we add personnel and incur additional costs
related to the growth of our business, general and administrative expenses will
also increase.
RECENT DEVELOPMENTS
In December 2003 and January 2004, we raised gross proceeds of
$3,226,315 in a private sale of units consisting of 3,470,679 shares of Common
Stock and warrants to purchase 3,470,679 shares of Common Stock. In addition, we
issued warrants to purchase 1,388,270 shares of Common Stock to the placement
agent in this transaction. Net proceeds of the sale were approximately
$2,600,000.
In July 2003 we entered into a Loan and Security Agreement with Venture
Banking Group, a division of Cupertino National Bank, providing for a revolving
line of credit to the Company of up to $1,000,000. We subsequently borrowed
$300,000 under the line of credit, but, since September 2003, we have been
unable to comply with certain financial covenants under the loan agreement and
have received default notices from the lender which has denied us further
advances. On March 3, 2003, we signed a term sheet with a potential replacement
lender for a proposed new line of credit of up to $750,000 at an interest rate
of 10% per annum. However, we can provide no assurance that a definitive
agreement will be entered into on the terms set forth in the term sheet or at
all. See "Liquidity and Capital Resources."
On April 17, 2003, we entered into an agreement with Sears, Roebuck &
Co., pursuant to which we are currently expanding a strategic marketing
relationship with Sears called the Sears Connected Home program. This program
began as a pilot program in Florida in 2002 and, under the terms of the
agreement with Sears, is being implemented by Sears, with our support, on a
national basis. For a description of the agreement with Sears and the Sears
Connected Home program, see "Business."
During 2003, we signed new contracts to provide networking solutions
and services to Shea Homes, Bright Development, SummerHill Homes, Richmond
American Homes-Los Angeles Division, Greystone Homes, Cobblestone Homes,
Jonathan Homes and Beazer Homes. During the fourth quarter of 2003, we opened an
office in Colorado Springs, Colorado where our first customer was Classic Homes.
While we expect revenues to stem from these new agreements and the
commencement of operations in Colorado, we can provide no assurance that any of
the relationships contemplated by these agreements or the new office will
continue or will result in any increase in our total revenue.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We believe the following critical accounting policies, which have been discussed
by senior management and our audit committee, have significant effect in the
preparation of our consolidated financial statements.
Revenue Recognition. We generally recognize product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is reasonably assured. The Company
accrues for sales returns, rebate programs and warranty costs based on its
experience. We also recognize revenue using the percentage of completion method
on installation projects, primarily by comparing contractual billing milestones
with total contract value. Accounting for revenue from services, payment of
upfront fees, and achievement of contract-specific milestones involves
management making assessments of business conditions and estimates regarding
timing and cost of work associated with the revenue. Over time, these estimates
may be adjusted based on then-current circumstances, such as changes in contract
amounts, resulting in adjustment to
11
revenues. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are identified.
Allowance for Doubtful Accounts. Accounts receivable are unsecured and
we maintain allowances for doubtful accounts for estimated losses from
customers' inability to make payments. We assess each account that is more than
90 days delinquent or others when information known to us indicates amounts may
be uncollectable; in order to estimate the appropriate level of the allowance,
we consider such factors as historical bad debts, current customer credit
worthiness, changes in customer payment patterns and any correspondence with the
customer. In 2003, we experienced losses, or recorded provisions for potential
losses, totaling $373,000, or 4% of revenues. If the financial condition of our
customers were to deteriorate and impair their ability to make payments,
additional allowances might be required in future periods.
Inventory. We present inventory value at the lower of cost or market
and net of valuation allowances for excess and obsolete units. Establishing this
reserve requires estimates of sales volumes and pricing. In 2003, we recorded
expenses for disposal of or provision for obsolete inventory, totaling $956,000,
or 10% of revenues. The obsolete inventory was acquired primarily in 2000 and
2001, and we anticipate that the level of these expenses and write-downs will be
lower in future periods. To the extent that we are not able to correctly
anticipate these trends, additional reserves may be required in future periods.
Intangible Assets - Goodwill. Intangible assets include costs in excess
of net assets acquired ("goodwill") and other purchased intangibles. The
carrying amount of goodwill is reviewed annually. If this review indicates that
goodwill will not be recoverable, the carrying amount of the goodwill will be
reduced to its estimated fair value. This requires us to estimate such factors
as future sales volumes and costs of business produced by these intangibles. To
the extent that we are not able to correctly anticipate these trends, additional
adjustments to estimated fair value of goodwill may be required in future
periods.
Valuation of Warrants and Other Equity Instruments. We have entered,
and may continue to enter, into transactions whereby we grant warrants to
purchase stock to non-employees. These transactions sometimes require us to
determine the fair value of non-exchange traded instruments. The development of
these fair values requires significant judgment and estimates by management. We
disclose the principal assumptions used in determining these fair values in our
financial statements and we believe these assumptions are reasonable. However,
the use of different valuation models, or assumptions differing from ours, could
cause materially different values to be assigned these instruments and could
have a significant impact, positive or negative, on our reported results of
operations. During 2003, we issued warrants in connection with our bank line of
credit and certain agreements to provide investor relation services. See
"Relationships and Transactions with Selling Stockholders." Expenses relating to
the value of those warrants totaled $144,000.
RESULTS OF OPERATIONS
Years Ended December 31, 2003 and 2002
Our revenues are derived from the sale of home networking products and
services. Revenues were $9,251,000 in 2003, compared to $10,447,000 in 2002, a
decrease of 11%. The reduction was primarily attributable to reduced hardware
sales in 2003 (from $4.3 million in 2002 to $2.5 million in 2003, or a reduction
of 42%), partially offset by increased services revenues. During 2003, unit
sales of hardware decreased by 20% (from 13.7 million units to 10.9 million
units) and average hardware selling prices decreased by 27% (from $317 to $230).
In addition, during the first two months of 2004, orders for hardware products
decreased 57% as compared to the same period during 2003. Hardware sales
accounted for 27% of revenues in 2003, as compared to 42% in 2002. The decline
in hardware sales reflects several factors, including our strategic decisions to
concentrate on cost reduction measures and the sale of hardware primarily
through the still-developing Sears Connected Home program as well as price
competition. Based upon increased price competition during 2003, we reduced our
average hardware selling prices by 20% in the fourth quarter of 2003 as compared
to the third quarter of 2003. Although we have limited ability to project future
revenues from hardware sales since shipments are generally made in the same
month orders are received, we expect pricing pressure to abate during 2004 as
pricing stabilizes.
On the services side, revenues increased by 11% in 2003 as compared to
2002. During 2003, we signed several new contracts to provide networking
solutions to numerous home builders and, during the fourth quarter of 2003, we
opened an office in Colorado Springs to provide networking solutions, with
Classic Homes as our first customer. In the first two
12
months of 2004, sales orders for home installation services increased by 37% as
compared to the same period in 2003.
Total costs and expenses were $14,170,000 in 2003, compared to
$9,210,000 in 2002. The increase in 2003 was primarily attributable to the
non-recurring nature of the gain of $4,516,000 from the extinguishment of
certain liabilities in 2002 and the provision for abandonment of facility of
$684,000, offset in part by reduced research and development expenses of
$437,000, during 2003. Cost of revenues were $7,251,000, or 78% of revenues, in
2003 as compared to $7,021,000, or 67% of revenues, in 2002. Cost of revenues in
2003 were adversely affected by decreased average hardware selling prices and
charges related to inventory. During the fourth quarter of 2003, we recorded
expenses for disposal of or provisions for obsolete inventory of approximately
$956,000. Factors leading to the charges in the fourth quarter included a
decline in hardware sales which we believe was related principally to the
technological obsolescence of certain inventory and our inability to compete
with products of a more recent design. We believe that we may have increased
future research and development expenses, resulting primarily from hiring
additional engineering personnel and increased licensing costs as we plan to
improve and broaden our product offerings. From time-to-time, we may incur
additional professional fees and other costs in connection with possible future
attempts to expand our product offerings.
Our net loss in 2003 was approximately $4,986,000, as compared to a net
loss of approximately $2,009,000 in 2002. The increase was primarily
attributable to:
o the fact that we had no extinguishment of liabilities in 2003
while we had a gain of $4.5 million from the extinguishment of
certain liabilities in 2002;
o other expenses (net) of $3,258,491 million associated with
HDT's convertible notes that were retired on conversion in
December 2002 (described below);
o a provision of approximately $684,000 for abandonment of
facility recorded in 2003; and
o the inventory charge of $956,000 recorded in 2003.
Years Ended December 31, 2002 and 2001
Total revenues consisted of revenues from the sale of home networking
products and services. Revenues were $10.4 million in 2002, compared to $13.2
million in 2001, a decrease of 21%. This decrease was due primarily to inventory
shortages stemming from cash constraints that affected our relations with
certain key vendors during the first half of 2002 and our inability to recapture
or replace new home building projects and hardware business in the second half
of that year.
Total expenses in all categories decreased substantially in 2002
compared to 2001. For 2002 compared to 2001, cost of revenues decreased by
approximately $1.8 million (or 20%) which was primarily attributable to
decreased revenues. For 2002, general and administrative expenses decreased by
approximately $2.2 million (or 41%), sales and marketing expenses decreased by
approximately $3.5 million (or 60%) and research and development expenses
decreased by approximately $5.4 million (or 88%). Cost reduction measures which
contributed to these decreases included a reduction in headcount, a reduction in
spending on new product development, a reduction in marketing and promotional
expenses and a change in sales strategy for our products.
Interest expense for 2002 was adversely affected by certain expenses
related to HDT's sale of convertible notes. The charges included interest
accrued on HDT's convertible notes, which were paid to investors by the issuance
of shares of HDT's common stock immediately prior to the merger, and
amortization of costs of the offering of the notes, which raised essential
capital. All of the convertible notes were automatically converted into HDT
common stock immediately prior to the merger. Although management views the
underlying economic basis of issuance of convertible debt as a sale of HDT
common stock, generally accepted accounting principles require the third-party
costs associated with the convertible notes to be treated as fees paid for
obtaining debt financing which are then amortized over the expected term of the
financing, which was from the date of the issuance of the convertible notes
through the date of the merger.
13
We recognized a $4.5 million gain from the extinguishment of certain
liabilities in 2002 as a result of a debt restructuring by HDT.
Our net loss in 2002 was approximately $2.0 million, as compared to a
net loss of approximately $30.4 million in 2001. The substantial improvement was
primarily attributable to the items discussed above, the elimination of goodwill
amortization as a result of a required change in accounting principle and the
non-recurrence of various restructuring charges incurred in 2001.
LIQUIDITY AND CAPITAL RESOURCES
As a result of our continuing losses, particularly during the fourth
quarter of 2003, and our current inability to borrow additional funds under our
bank line of credit, we face an acute shortage of working capital. We are
addressing our working capital needs by seeking additional financing through a
new bank line of credit that will enable us to pay our outstanding bank loan and
obtain additional advances against our receivables and through additional sales
of equity securities. On March 3, 2004 we signed a term sheet with a potential
replacement lender for a proposed new line of credit of up to $750,000 at an
interest rate of 10% per annum. However, we can provide no assurance that a
definitive agreement will be entered into on the terms set forth in the term
sheet or at all and even if such an agreement is entered into, we do not believe
the financing contemplated by the term sheet will be adequate for our working
capital needs beyond June 30, 2004. Our operations may suffer and may ultimately
have to be discontinued if we are unable to obtain necessary financing on a
timely basis.
Historically our operations have never been self-sustaining, and we
have financed our continuing operations through a series of private offerings of
debt and equity and by obtaining advances under the bank line of credit. We
cannot predict when, if ever, our business will produce sufficient cash to
reduce or eliminate our dependence on external financing as our primary source
of working capital.
Private Placement
In December 2003 and January 2004, we raised gross proceeds of
$3,226,315 in a private placement of equity units consisting of 3,470,679 shares
of Common Stock and three-year warrants to purchase 3,470,679 shares of Common
Stock at exercise prices ranging from $1.068 to $1.298 per share. Net proceeds
of $1,740,000 was received in 2003 and is reflected in the balance sheet as of
December 31, 2003, and the remaining net proceeds of $860,000 was received in
January 2004. We paid the placement agent cash compensation of $370,000, which
includes reimbursement for non-accountable expenses, and issued the placement
agent five-year warrants to purchase 1,388,272 shares of Common Stock at
exercise prices ranging from $1.068 to $1.298 per share.
Loan Agreement
In July 2003, we entered into a Loan and Security Agreement with
Venture Banking Group, a Division of Cupertino National Bank, providing for a
revolving line of credit of up to $1,000,000 at any time outstanding. Advances
under the Loan Agreement are limited to 80% of our eligible receivables (as
defined) and bear interest at the lender's prime rate plus 0.5% (4.5% as of
March 1, 2004), subject to a minimum rate of 4.75%. Amounts owing under the Loan
Agreement are secured by substantially all of our assets. As of December 31,
2003 and March 1, 2004, the balance outstanding under the Loan Agreement was
$300,000.
In October 2003 and again in February 2004, the lender notified us of
the occurrence of an event of default under the Loan Agreement as a result of
our failure to comply with certain financial covenants. Although the lender has
not exercised its default remedies (which include the right to demand immediate
repayment of the outstanding balance), it is not providing further advances.
Cash
As of December 31, 2003, we had cash, cash equivalents, investments and
interest receivable totaling approximately $66,000.
Cash used in 2003 totaled $2.5 million. Of that amount approximately
$730,000 was used for payments of fees for legal, accounting and financial
advisory services in connection with the merger. The balance was primarily used
to fund the cash operating loss ($3,752,000), a decrease in accounts payable and
accrued expenses ($651,000) and an increase in accounts receivable ($226,000),
offset in part by net proceeds from the issuance of Common Stock ($1,740,000)
and net borrowings under the bank line of credit ($300,000).
14
Net cash used in operating activities was $4.0 million for 2003 and
$5.1 million for 2002. Net cash used for both periods in operating activities
was primarily for funding of operating losses, increases in accounts receivable
and payments to reduce accounts payable. Payments to reduce accounts payable in
2003 were primarily for legal and accounting fees of $480,000 related to the
merger.
Net cash used in investing activities was $98,000 for 2003. $873,000
of net cash was provided by investing activities for 2002. Cash was used in
investing activities during 2003 primarily to purchase property and equipment.
Cash was provided by investing activities during 2002 primarily from cash
acquired in the merger.
Net cash provided by financing activities was $1.6 million for 2003 and
$6.2 million for 2002. Net cash provided by financing activities during 2003
resulted primarily from the proceeds received from the sale of Common Stock and
warrants and borrowings under the bank line of credit, offset in part by the
payment of a $250,000 fee to the Company's financial adviser in connection with
the merger. The net cash provided by financing activities during 2002 was
primarily proceeds from the issuance of HDT's convertible notes, which were
converted into shares of our Common Stock in connection with the merger, offset
in part by merger costs and payments to a related party.
Going Concern Considerations
As a result of our losses from operations, default under the line of
credit, dependence upon financing operations through a series of private
offerings of debt and equity, and our uncertainty about the adequacy of funding
during 2004, our independent auditors have included an explanatory paragraph in
their report on the accompanying financial statements indicating there is
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
15
BUSINESS
We design, manufacture, sell and install home networking solutions that
can interconnect security systems, audio systems, video services, televisions,
utilities, personal computers and the Internet. Our products are marketed
primarily for installation in new homes. Customers for our home networking
systems include some of the largest home builders in the United States,
including KB Homes, Richmond America, DR Horton, Lennar and Arvida. Through our
relationships and marketing arrangements with these and other home builders, we
have direct access to home buyers that we use to facilitate additional sales of
our products while the buyers are in the process of selecting options for their
new homes. Our products have been sold to over 60,000 home owners in the United
States and Canada.
Our home networking solutions are intended to function as the
electronic foundation for linked access to third-party services and
technologies, including those that are currently available and those that may be
offered in the future. Within a "connected" or "networked" home, our proprietary
Network Connection Center can be used to interconnect a number of devices,
appliances or gateways so they can be centrally controlled. With a properly
featured Home Director system, a home owner can listen to music from speakers
throughout the home, play different music in different areas of the home, view
and manage digital photographs on television, network a number of computers
within the home, remotely view other areas of the home, change or reconfigure
telecommunications options within the home, and perform a variety of other
automated functions.
We believe that as information and telecommunications technology
continue to develop and electronic access to entertainment and other content
becomes increasingly a staple of contemporary culture, a home networking
infrastructure that offers central and distributed access to information sources
located throughout the home will become a virtually standard new-home feature.
Based on this expectation, we have targeted the new home construction market and
positioned our business to provide a cost-effective and flexible infrastructure
option for the average new home buyer.
Our business is channeled through several marketing programs.
Since January 2001, we have generated sales of our networking systems
and related products and services through direct involvement as integrators and
installers of our systems, acting primarily as subcontractors for builders in
their new home developments. In the local areas where we perform these services,
we act as a single source supplier, participating directly in sales to consumers
and offering assistance ranging from pre-sale design to post-installation
support and including pre-packaged and custom options. We currently carry on
these systems installation activities in California, Florida, Colorado and
Texas.
Through a strategic relationship with Sears, Roebuck & Co., we are
now actively engaged with Sears in an important marketing initiative called the
Sears Connected Home program. This marketing initiative began as a pilot program
in Florida in 2002, and, under an agreement with Sears entered into in April
2003, we are now supporting Sears in the implementation of the Connected Home
program on a national basis. The Sears Connected Home program is intended to
capitalize on Sears' established reputation and contacts in the home building
industry by offering builders a reputable single source for technology-based
lifestyles options in their new home projects. Through the program, Sears offers
builders a variety of home networking options, arranges for installation of
selected network solutions through pre-certified local and regional integrators
and provides quality assurances that differentiate its program from the limited
local service typically available to developers. Home Director is the preferred
product supplier for the Sears program and acts as an integrator for the
program, primarily in areas where Sears has not yet certified other local
service providers.
Under the Sears program, Sears contracts with a builder for
installation of home networking systems in the builder's new houses, typically
in a multi-home development. Simultaneously, Sears contracts with one of its
authorized integrators in the area (which may be Home Director or its Digital
Interiors subsidiary in the regions where we operate) to fulfill the Sears
contract with the builder. Under our agreement with Sears (which expires in
April 2005), we are the preferred supplier of hardware products used in the home
networking systems installed by Sears authorized integrators. Home Director
products are supplied to these integrators (other than Home Director or its
subsidiary) through an authorized Home Director distributor.
Important aspects of the Sears Connected Home program include:
16
o Sears' objective is to have the largest nationwide network of
certified installers providing home networking solutions to
the homebuilding industry. To this end, it has showcased the
Connected Home program at major builders' expos and
tradeshows.
o Sears is already a leading supplier of appliances and other
products for new homes and has an established reputation in
the home-builder community and existing relationships with
many home builders.
o Sears certifies local integrators for the program based on a
thorough approval process which requires both technical and
financial qualification. Sears has received numerous
applications for certification by integrators seeking to
participate in the program and has granted a limited number of
certifications.
o The network of certified integrators offers home builders easy
access to reliable and technically qualified installers who
may otherwise be difficult to identify in a business that is
characterized by the presence of numerous small independent
concerns.
o Home Director is the preferred supplier of home networking
hardware products for the program. We expect that this status
will facilitate increased sales of our products over the next
several years as more certified integrators and builders join
the program.
The term of our agreement with Sears expires on April 17, 2005, subject
to each party's right to terminate the agreement at any time, with or without
cause and without penalty or liability, upon 120 days' notice. During the term
of the agreement, we are prohibited from entering into similar agreements with
other parties (except under certain specified circumstances).
While we have high expectations for the Sears Connected Home program,
we can provide no assurance that our strategic relationship with Sears will
continue or that it will result in any increase in our revenue.
We also continue to sell our hardware and software networking products
throughout the United States and Canada to distributors primarily for resale to
regional integrators and installers who carry out their own installation
activities, frequently with our technical and training assistance.
INDUSTRY OVERVIEW AND MARKET OPPORTUNITY
Target Market
The new home construction industry offers the principal market for
Home Director's products and services. An average of more than 1.5 million new
homes (including residential apartment units) have been built in the United
States during each of the past 10 years, and 1.6 million new homes were built in
2002. (Source: United States Bureau of the Census.) Based on our own experience,
we believe that only a relatively small number of these new homes were built
with electronic networking capabilities but that the percentage of new homes
incorporating these capabilities has been increasing.
Industry Evolution
The market for solutions that will facilitate the distribution and
control of data within the home is relatively new and we believe is still in an
early stage of evolution. This market appears to be driven by a number of recent
trends, including the following:
o a demand for video, audio and voice capabilities throughout
the home rather than in a single location;
o the growing number of households with multiple personal
computers and Internet capabilities;
o the rise in the number of people who work from home;
o the increase in the availability of "last mile" high speed
bandwidth, via cable modem, DSL and satellite;
17
o the proliferation of new technology and digital applications;
o the expectation that devices and technology will perform
multiple functions; and
o the decreasing cost of relatively sophisticated home
networking solutions.
OUR SOLUTION
In our effort to exploit this evolving market, and by contrast to the
many small-scale local businesses that offer limited low-tech network functions,
we offer scaleable and upgradeable technology, established distribution
channels, and, in sections of California, Florida, Colorado and Texas, and in
other areas served by certified integrators of the Sears Connected Home program,
a single-source for products and professional sales and service. We believe we
address prospective obsolescence by providing a structured wiring infrastructure
that handles multiple mediums, is scaleable and can be functionally upgraded by
means of hardware and software. Our home networking solutions can be controlled
from inside the home or remotely from web-access devices. We offer a full range
of support from pre-sale design and installation to post-installation service,
at prices we believe to be competitive. To meet a broad range of demand from
entry level to custom homes, we employ standardized base packages or modules
with a menu of functional add-ons or upgrades to provide a range of performance
capabilities responsive to the individual consumer's budget and needs.
Our home networking solutions enable shared high-speed Internet access,
linked computer peripherals, centrally controlled home security systems,
distributed entertainment content and other services and capabilities. These
solutions allow home owners to access information and entertainment in any room
in the home and centrally control their security, energy and lighting. We couple
our networking hardware with scaleable and upgradeable proprietary software that
delivers functionality and an intuitive "plug and play" user interface. Devices
connected into our system can be controlled through television sets in the home
or remotely by both wired and wireless web-access devices.
OUR PRODUCTS AND SERVICES
Our home networking solution consists of structured wiring and
proprietary hardware and software. This solution is based on our proprietary
communications device, called the Network Connection Center, which has received
awards from the National Association of Home Builders, Popular Science Magazine
and the Home Automation and Networking Association. The Network Connection
Center is a hardware installation offered in several configurations which houses
structured wiring terminals and, in conjunction with applications software,
connects and coordinates that includes all of the networked applications and
devices within the home. The structured wiring infrastructure can be scaled to
high or low capacity levels in accordance with specific builder or consumer
requirements. The Network Connection Center can support a variety of hardware
and software products to allow for the integration of "best of breed"
technologies. With the Network Connection Center, we offer a menu of hardware
and software add-ons and upgrades which determine the scope and capacity of each
individual system. For example, our AudioZone is a home audio product that
allows homeowners to distribute music over network wiring, and our WebPoint is a
suite of wired and wireless computer networking and broadband Internet sharing
products. The cost of a system varies depending on the size of the home and the
number of selected features. Typically, the price to consumers of a complete,
installed home networking solution ranges from $1,500 to $4,000, plus the cost
of any audio, video, security and other peripheral components and systems,
including speakers, which may be linked to the network and included in the
installed package.
Packages
Our installed systems are currently offered to home builders in four
distinct "packages". In planning a new-home development, a participating builder
selects and purchases the package that affords the performance capabilities it
believes will best suit the kind and style of homes it plans to build. Every
package incorporates our proprietary Network Connection Center. All packages
include high performance cables which replace traditional telephone and
television wiring. Outlets are installed throughout the home in appropriate
configurations to accommodate specific technologies and services to be connected
and integrated. The four packages now offered are as follows:
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o Starter Package - appropriate for smaller homes and
multi-dwelling units.
o Basic Package - includes video amplification capabilities.
o Personal Package - features additional locations to accommodate
automation and security accessories and has premium video
amplification and distribution capabilities.
o Signature Package - features additional locations for routers,
cable modems, DSL modems, security circuit boards and other
accessories.
SALES AND MARKETING STRATEGY
We currently target our products and services primarily to the new home
market. Our systems involve in-wall construction activities and are therefore
inherently more expensive and inconvenient to install in existing residences
than in new homes under construction. To reach the new-home market, we
concentrate our marketing efforts on creating and enhancing relationships with
home builders and developers who have direct access to purchasers of new homes
at the very time when they are making decisions regarding the design, function
and financing of their new homes.
We recognize an additional potentially huge market for network retro
fitting of existing homes and businesses. We believe that custom retrofitting of
existing homes currently represents a relatively insignificant segment of the
overall market for home networking systems. We believe, however, that the
development of this segment of the market must await the further development and
improvement of existing wireless technologies which will make retro fitting
economically feasible on a broader scale.
Home Builders
Our "Intelligent Home Marketing Program" is intended to standardize and
streamline a home builder's sales, design, installation and customer support for
our networking solutions. Using each participating builder's blueprints for a
home development project, we recommend the most appropriate standard packages
and application modules for potential buyers and identify standard locations for
voice, video, data, security and home management features within the framework
of the overall designs contemplated by the blueprints. We display our products
and systems in the builder's showroom or model, where a sales representative is
available to consult with each home buyer at the same time the buyer is
selecting other home options, such as cabinets, carpeting and tile.
We currently have joint marketing relationships with home builders in
parts of California, Florida, Colorado and Texas. Subject to demand, the
availability of capital and the requirements of the Sears Connected Home
Program, we may establish similar relationships with builders in other
geographic areas. In our existing relationships, we try to obtain the builder's
commitment to purchase and include a home networking package in all of the
housing units within a new-home development. With this commitment, we receive
revenue from each home built in the development, based on the package selected
by the builder, and further revenue from sales of add-ons, upgrades and
application modules selected by individual home buyers.
We believe our home networking solutions are flexible enough to
accommodate builders' requirements for virtually all levels of housing units,
including production, semi-custom and custom homes. Builders of production and
semi-custom homes provide high-volume deployment of our networking
infrastructure and products and services. Builders of custom homes provide early
deployment of new technology in high-end home solutions and tend to yield useful
feedback for future product and service offerings.
Builders generally are interested in including home networking packages
in their new home developments for a variety of reasons which may include any of
the following:
o The home networking package is marked up and included in the
gross sales price of each home and therefore represents an
incremental item of net revenue to the builder.
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o The package represents a relatively inexpensive value
enhancement to prospective home buyers, particularly younger
buyers who have grown up with newer communications
technologies, and increases the marketability of a new home.
o Inclusion of a network package facilitates sales of video,
security, telecommunications and other applications which
represent further potential net revenue to the builder.
o Consumer demand and competition from other builders make it
essential.
Distributors
We also sell our products to distributors in the U.S. and Canada who
stock our line of home network hardware products and related software and sell
them primarily to regional installers and integrators or home builders. To
support this business, we offer technical assistance and training to our
distributors and their customers.
MANUFACTURING
Our employees design the hardware and software components that are
offered as options within our Network Connection Centers. Hardware components
are manufactured to our specifications by several third party suppliers in the
United States and abroad. We are not currently dependent upon any single
supplier, and we believe that alternative manufacturing sources would be readily
available without material delay in the event of the interruption of supplies
from any of our current sources.
INTELLECTUAL PROPERTY
We own or have rights to use proprietary technology that we believe
afford us a current competitive advantage. We have filed and intend to continue
to file patent applications on various technologies in the United States and
have obtained two patents. We have also licensed intellectual property from
several companies, including major computer and communications manufacturers. We
also rely on a combination of trade secret, copyright and trademark law,
nondisclosure agreements and technical measures to protect our proprietary
technology. We have four trademarks registered and seven trademarks pending in
the United States, as well as trademarks registered in other countries.
We have received written notice from a third party alleging breach of
contract and violation of trademark law in connection with our use of the "Home
Director" trademark. We have taken what we believe is appropriate remedial
action and do not believe that there is any remaining basis for a claim by the
third party, nor has the third party taken further action to pursue its claim.
Nevertheless, it is possible that the third party will initiate legal action
seeking damages and/or injunctive relief against us. If any such litigation
should be resolved adversely, we could be compelled to pay damages and/or
royalties to the third party for our use of the Home Director name and/or to
limit or discontinue its use as a trademark. Any significant limitations on our
use of the Home Director name could adversely impact our marketing program and
our efforts to establish brand recognition.
COMPETITION
Our competitors are rapidly changing. They currently include domestic
and foreign manufacturers of competitive products and local and regional systems
integrators who piece together and install products and services from disparate
hardware, software and residential gateway providers. Other competitors are
businesses that offer various aspects of home networking using a home's existing
electrical wiring or wireless home networking for data connectivity.
In the production and marketing of hardware for networking
installations, our principal competitors include OnQ Technologies, Inc.,
Leviton, USTec, and LifeStyle Innovations, Inc.
RESEARCH AND DEVELOPMENT
Our expenses related to research and development activities were
approximately $6,087,067 in 2001, $714,804 in 2002, and $277,631 in 2003. We
expect our expenses for research and development to increase in 2004
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and subsequent years as we seek to develop new and improved products to enhance
our competitive position and the adaptability of our networks to more complex
applications.
EMPLOYEES
As of March 4, 2004, we had approximately 90 full-time employees, 60 of
whom are located in California, 14 in Colorado, 10 in Florida and three in each
of North Carolina and Texas. Of our total workforce, 28 are engaged in business
development, product research and development, finance and administration, and
the balance in operations. None of our employees is covered by a collective
bargaining agreement, nor have we experienced any work stoppages. We believe
that our relations with our employees are good.
DESCRIPTION OF PROPERTY
Our corporate headquarters are located in Livermore, California. The
Livermore facility has 11,470 square feet and is also used as our northern
California service center and for general warehouse storage. Our sublease for
the Livermore facility expires in 2008 and requires average monthly lease
payments of $14,390. We expect that we will need to seek additional corporate
office space in or around Livermore during 2004. Based on the current market for
office space in the area, we do not anticipate any difficulties in identifying
and leasing sufficient space for our needs on appropriate terms in the
foreseeable future.
LEGAL PROCEEDINGS
On June 18, 2001, Point West Ventures, LP filed a complaint against HDT
and Spencer Trask Ventures, Inc., the placement agent for HDT's convertible
preferred stock financing, in New York Supreme Court. Point West, one of the
investors in that financing, alleged misrepresentation in connection with that
financing and sought recission of its $500,000 investment. Subsequent to the
filing of the complaint, Point West was placed in receivership and the action
was stayed and remains inactive. The receiver may determine to pursue the action
at some future date.
We are occasionally subject to legal proceedings and claims that arise
in the ordinary course of our business. It is impossible for us to predict with
any certainty the outcome of pending disputes, and we cannot predict whether any
liability arising from pending claims and litigation will be material in
relation to our consolidated financial position or results of operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our directors and
executive officers. The term of each director expires at our next annual meeting
of stockholders. All of our executive officers are appointed by our Board of
Directors and hold office until our next annual meeting of stockholders or until
replaced at the discretion of our Board of Directors.
NAME AGE POSITION
---- --- --------
Michael Liddle 37 President, Chief Executive
Officer and Director
Daryl Stemm 43 Chief Financial Officer and
Secretary
Jerry Steckling 53 Vice President, Advanced
Technology and Chief Technology
Officer
Ezra P. Mager 62 Chairman of the Board of Directors
Kent M. Klineman 71 Director
Stephen B. Ste. Marie 54 Director
Michael L. Wise 60 Director
Michael Liddle became our Chief Executive Officer as of January 1, 2004
and President and a director on March 3, 2004. From May 2002 to December 2003,
Mr. Liddle was Managing Director of VBO Holdings, LLC, a consulting firm
specializing in growth strategies for undervalued public software companies.
From August 2001 to April 2002, he was President of Universal Internet, an
internet service provider, and from November 2000 to August 2001, he was
Managing Director of VBO Partners, LLC, a financial consulting firm. From August
1999 to November 2000, he was Executive Vice President and Chief Operating
Officer of Eyematic Interiors. Prior to that, Mr. Liddle was principal of
Emerging Technology Partners, a firm providing strategic direction to venture
capitalists and early-stage companies. Mr. Liddle received a B.A. in Economics
from the University of California, San Diego.
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Daryl Stemm became our Chief Financial Officer and Secretary upon the
merger. He has been Director of Finance of HDT since January 2001. Prior to
joining HDT, Mr. Stemm was Director of Finance of Digital Interiors, Inc. (now
our wholly-owned subsidiary) from January 2000 to December 2000. From June 1998
to December 1999, Mr. Stemm was Director of Finance and Administration of
Amazing Smart Card Technologies, and from September 1989 to May 1998 he was
Chief Financial Officer and Controller of Catalyst Semiconductor, Inc. Mr. Stemm
received a B.A. in business economics from the University of California, Santa
Barbara.
Jerry Steckling became our Vice President, Advanced Technology, and
Chief Technology Officer as of January 7, 2004. From June 1997 to November 2002,
Mr. Steckling was the Chief of Acoustical Engineering at Skywalker Sound, a
division of Lucas Digital Ltd.
Ezra P. Mager has been a director of the Company since April 28, 2003
and Chairman of the Board since March 3, 2004. Since March 1998 he has been
President of The Torrey Funds, a New York based investment fund that invests in
hedge funds. He is a director of Casabyte, Inc., a manufacturer of cell phone
reliability testing equipment, and Close-Call America, a provider of local, long
distance and cellular telephone services. Mr. Mager was a founding member of
Furman Selz, an investment banking firm. He received a B.A. from Cornell
University and an M.B.A. from Harvard Business School.
Kent M. Klineman became an officer of Netword LLC (Netword's
predecessor) in December 1996, a manager of that entity in 1997, and a director
and officer of Netword at its inception in 1999. He continued to serve as a
director and officer of Netword until the merger in December 2002 and has served
as a director of the Company since the merger. Since 1994, he has owned and
operated Klineman Holding Corp., a New York venture capital firm. He is also
Chairman of the Board of Business Alliance Capital Corp., a commercial finance
company, and a manager of UV Equities LLC, a private investment fund, and a
managing partner of Eagle Pass Ranch L.P., a South Dakota cattlebreeding ranch.
Mr. Klineman is a graduate of Dartmouth College and Harvard Law School and holds
a masters degree in taxation from N.Y.U. Law School's graduate tax program.
Stephen B. Ste. Marie became a director of the Company upon the merger
and has been a director of HDT since January 2001. He is a founding partner of
Comstock Capital Partners LLC, a private equity firm. From March 2001 until July
2002, he was President and Chief Operating Officer of Intertainer, an Internet
Protocol and cable entertainment-on-demand service. From July 1998 until October
2000, he was Chief Executive Officer of CareerPath.com. Prior to that, he helped
launch DIRECTV Inc. where he served for six years as Senior Vice President. Mr.
Ste. Marie also previously served as Senior Vice President at American
Television and Communications Corporation (now Time Warner Cable). Mr. Ste.
Marie earned his M.B.A. at Pace University and a B.S. in industrial management
at the Georgia Institute of Technology.
Michael L. Wise became an officer of Netword LLC (Netword's
predecessor) in December 1996, a manager of that entity in 1997, and Chairman of
the Board, President and Chief Executive Officer of Netword at its inception in
1999. He continued to serve in those capacities until the merger in December
2002 and has served as a director of the Company since the merger. Mr. Wise was
a director from 1999-2002 of Finelot plc, which was in the art and antique
auction business. He has been a director since 1996 of Chesapeake Composites
Corp, a private company in the composite metals business. Mr. Wise has been a
director of nStor Technologies, Inc., a manufacturer of RAID subsystems and
information storage solutions, since 1988. Mr. Wise served as Chairman of the
Board and an officer of nStor Technologies, Inc. from 1992 to 1997. He founded
IMNET Systems, Inc., an imaging and information solutions systems provider, and
served as a director and officer of that company from 1986 to 1995. Mr. Wise has
a Ph.D. in theoretical physics from Brandeis University.
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EXECUTIVE COMPENSATION
Summary Compensation Table
For the periods indicated, the following table sets forth the
compensation we and our subsidiaries paid to our former Chief Executive Officer
and our other executive officers whose total compensation for 2003 exceeded
$100,000.
[Enlarge/Download Table]
ANNUAL LONG-TERM COMPENSATION
COMPENSATION COMPENSATION
------------------- --------------------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING
POSITIONS YEAR SALARY ($) BONUS $ OPTIONS
-------------------------------- ---------- -------------------- ----------- --------------------------
Donald B. Witmer(1) 2003 235,688 50,000(2) 180,000(3)
Chairman and Chief 2002 303,202 100,000(4) 6,339
Executive Officer 2001 270,675 48,125(5) 7,974
Robert N. Wise(6) 2003 219,926 __ 180,000(7)
President and Chief 2002 235,276 __ 4,305
Operating Officer 2001 __ 944
Daryl Stemm 2003 100,848 __ 15,000
Chief Financial Officer and 2002 116,380 __ 4,134
Secretary 2001 96,462 __ 325
------------------------------
(1) Mr. Witmer's employment terminated upon the expiration of his employment
agreement on December 31, 2003. Michael Liddle was named Chief Executive
Officer as of January 1, 2004. Mr. Liddle's employment agreement is
described below.
(2) Earned in 2002 and paid to Mr. Witmer in 2003.
(3) Of these options, 120,000 expired unexercised on December 31, 2003 upon the
termination of Mr. Witmer's employment and the remaining 60,000 may be
exercised by Mr. Witmer on or before March 31, 2004.
(4) Paid to Mr. Witmer in connection with the merger.
(5) Earned in 2001 and paid to Mr. Witmer in 2002.
(6) Mr. Wise resigned as President, Chief Operating Officer and a director on
March 3, 2004. Mr. Wise is unrelated to Michael L. Wise, a director.
(7) Of these options, 60,000 expired unexercised on March 3, 2004 upon Mr.
Wise's resignation and the remaining 120,000 may be exercised by Mr. Wise
on or before March 3, 2005.
Option Grants in Fiscal 2003
The following table summarizes stock options that were granted to the
above named executive officers during 2003.
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[Enlarge/Download Table]
NUMBER OF PERCENTAGE OF TOTAL
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES
NAME GRANTED IN 2003 EXERCISE PRICE EXPIRATION DATE
------------------------------- ----------------- ----------------------- ------------------- ----------------------
Donald B. Witmer 180,000 33.2% $3.75 03/31/2004(1)
Robert N. Wise 180,000 33.2% 3.75 03/03/2005(2)
Daryl Stemm 15,000 2.8% 3.75 01/16/2013
---------------
(1) Mr. Witmer's employment terminated upon the expiration of his
employment agreement on December 31, 2003. As of that date, Mr. Witmer
held immediately exercisable options to purchase 73,718 shares of
Common Stock. Under the terms of HDT's Stock Incentive Plan (which
governs Mr. Witmer's pre-merger options), options to purchase 13,718
shares expired on December 31, 2003, and under the terms of the
Company's Amended and Restated Stock Option Plan (which governs Mr.
Witmer's post-merger options), the remaining options to purchase 60,000
shares will expire unless exercised by Mr. Witmer on or before March
31, 2004.
(2) Mr. Wise resigned as President, Chief Operating Officer and a director
on March 3, 2004. His options to purchase 67,834 shares of Common Stock
expired unexercised as of March 3, 2004. Under the terms of a
Separation and Release Agreement (described below), Mr. Wise may
exercise options to purchase 120,000 shares of Common Stock at $3.75
per share on or before March 3, 2005.
Option Exercises in 2003
The following table contains information about options exercised by our
named executive officers during 2003 and the option values as of December 31,
2003.
[Enlarge/Download Table]
VALUE OF IN-THE-MONEY
NUMBER OF SHARES UNDERLYING OPTIONS AT
NUMBER OF UNEXERCISED OPTIONS AT DECEMBER 31, 2003
SHARES ACQUIRED VALUE REALIZED DECEMBER 31, 2003 EXERCISABLE/UNEXERCISABLE
NAME ON EXERCISE ON EXERCISE EXERCISABLE/UNEXERCISABLE (IN DOLLARS)
--------------------- -------------------- ------------------ ------------------------------ ----------------------------------
Donald B. Witmer __ __ 73,718/121,240 (1) --/--
Robert N. Wise __ __ 67,834/120,000(2) --/--
Daryl Stemm __ __ 7,622/11,837 --/--
---------------
(1) Upon termination of Mr. Witmer's employment as of December 31, 2003, his
options to purchase 13,718 shares of Common Stock expired unexercised. Mr.
Witmer may exercise the remaining options to purchase 60,000 shares of
Common Stock until March 31, 2004.
(2) Upon termination of Mr. Wise's employment on March 3, 2004, his options to
purchase 67,834 shares of Common Stock expired. Under the terms of a
Separation and Release Agreement (described below), Mr. Wise may exercise
options to purchase 120,000 shares of Common Stock until March 3, 2005.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Michael Liddle, Chief Executive Officer. Mr. Liddle is employed by the
Company as its Chief Executive Officer under an employment agreement dated
December 31, 2003, which expires on December 31, 2006, subject to automatic
renewal for successive one-year terms unless terminated by the Company or Mr.
Liddle prior to renewal. The agreement provides for an annual base salary of
$216,000, subject to increase in the discretion of the Board of Directors. Mr.
Liddle's annual base salary will increase to $300,000 if the Company achieves
two consecutive
24
profitable quarters, and he may be entitled to an annual cash bonus of up to 50%
of his base salary, of which 75% is contingent upon the Company's achievement of
certain targeted financial objectives approved by the Board of Directors and 25%
is within the discretion of the Compensation Committee of the Board of
Directors.
In connection with his employment, Mr. Liddle was granted options to
purchase 420,464 shares of Common Stock at $1.30 per share (the market price of
the Common Stock as of the date of grant), vesting in 36 equal monthly
installments commencing on January 31, 2004. The number of shares of Common
Stock underlying these options represents 3% of the Company's issued and
outstanding Common Stock and shares of Common Stock underlying "in-the-money"
warrants as of January 21, 2004. In addition to this initial grant, Mr. Liddle
is entitled to receive additional stock option grants (up to a total of 1.75% of
the outstanding Common Stock and "in-the-money" warrants) at the end of 2004 and
again at the end of 2005, if the Company achieves certain targeted financial
objectives approved by the Board of Directors for each of those years.
Under the terms of the Company's Amended and Restated Stock Option
Plan, if Mr. Liddle's employment is terminated by the Company for cause, or if
he terminates his employment without the Company's consent, his unexercised
options will immediately expire.
If Mr. Liddle's employment is terminated without cause, he will be
entitled to receive his base salary (as paid to him during the preceding 12
months or any shorter period of his employment), plus any unpaid bonus earned in
the calendar year preceding such termination. If Mr. Liddle has been employed
for at least six months during the calendar year in which his employment is
terminated without cause, he will be eligible to receive a pro-rata portion of
any bonus earned during such year, based upon the Company's achievement of
applicable performance targets and subject to the discretion of the Compensation
Committee of the Board of Directors. Also, in case of termination of Mr.
Liddle's employment by the Company without cause, (i) all of his unvested stock
options will become and remain immediately exercisable until expiration of their
respective terms and (ii) he will be entitled to receive benefits under the
Company's employee benefit plans for up to 12 months after the termination date
or until he obtains employee benefits in connection with new employment.
Upon termination of his employment, Mr. Liddle will be subject to a two
year restriction on certain activities that compete with the Company.
Donald B. Witmer. Mr. Witmer was employed as our Chairman and Chief
Executive Officer under an employment agreement that expired on December 31,
2003, at which time he resigned from these positions. All options to purchase
shares of Common Stock granted to Mr. Witmer before the merger expired on
December 31, 2003. On January 16, 2003, the Company granted Mr. Witmer options
to purchase 180,000 shares of Common Stock at an exercise price of $3.75 per
share, of which 60,000 have vested and remain exercisable through March 31, 2004
and the other 120,000 terminated upon his resignation. Mr. Witmer resigned as a
director of the Company on February 12, 2004.
Robert Wise. On March 3, 2004, Mr. Wise resigned as the President,
Chief Operating Officer and a director of the Company and entered into a
Separation and Release Agreement with the Company. Under the terms of this
agreement, the Company retained Mr. Wise as an independent consultant for a
transition period of 30 days and the Company's obligation to employ Mr. Wise as
its President and Chief Operating Officer under his Employment Agreement was
terminated. We agreed to pay Mr. Wise (i) $10,000 during the transition period,
(ii) $50,000 upon his resignation, (iii) 2% of the Company's first year revenues
derived from certain contracts and projects, and (iv) 1% of the Company's second
year revenues derived from such contracts and projects. In addition, the Company
agreed to continue to provide Mr. Wise with benefits under the Company's
employee benefit plans until December 31, 2004 and to pay the remaining
installments due under an automobile lease and the balance of the purchase price
of the leased automobile upon expiration of the lease. The Company and Mr. Wise
exchanged releases. Pursuant to his employment agreement, Mr. Wise remains
subject to certain restrictions on his post-employment activities for up to 12
months after his resignation.
All options to purchase shares of Common Stock granted to Mr. Wise
before the merger expired upon his resignation. On January 16, 2003, the Company
granted Mr. Wise options to purchase 180,000 shares of Common Stock at an
exercise price of $3.75 per share. Upon Mr. Wise's resignation, 60,000 of such
options expired
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unexercised and under the terms of the Separation and Release Agreement, 120,000
of such options are exercisable through March 3, 2005.
Compensation of Directors
As compensation for service to the Company, each director who is not an
employee of the Company is entitled to receive (1) an annual fee of $12,000, (2)
an additional fee of $1,000 for attendance at each meeting of the Board of
Directors, and (3) $500 for attendance at each meeting of a committee of the
Board of Directors (if such committee meeting is not on the same day as a
meeting of the Board of Directors). Ezra P. Mager, the Chairman of the Board, is
entitled to receive an annual fee of $50,000 for his services in that capacity.
In addition, each non-employee director of the Company is entitled to receive an
annual grant of non-qualified options to purchase 12,500 shares of Common Stock
at an exercise price equal to the fair market value of the Common Stock on the
date of grant.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 10, 2003, we entered into a Placement Agency Agreement with
Spencer Trask Ventures, Inc. ("Spencer Trask"), under which we retained Spencer
Trask as our placement agent for the private sale of Common Stock and warrants
which took place in December 2003 and January 2004. Pursuant to the Placement
Agency Agreement, we paid Spencer Trask cash compensation of $370,000, including
reimbursement of its expenses. In addition, we granted Spencer Trask five-year
warrants to purchase a total of 1,388,270 shares of Common Stock at exercise
prices ranging from $1.068 to $1.298 per share. The shares underlying these
warrants may be offered for resale pursuant to this prospectus.
In connection with the merger, the Company agreed to include Michael L.
Wise and Kent M. Klineman (who were officers and directors of Netword) in
management's slate of nominees for director until December 19, 2005. In
addition, certain former stockholders of HDT (now stockholders of the Company)
agreed to vote all of their shares of Common Stock for Mr. Wise and Mr. Klineman
as directors of the Company for up to two years after the merger.
Prior to the merger, HDT entered into a Placement Agency Agreement with
Spencer Trask, under which HDT retained Spencer Trask as placement agent for a
private sale of HDT's convertible debt. HDT paid Spencer Trask cash compensation
of $738,974, plus $213,550 as reimbursement for its non-accountable expenses,
and granted Spencer Trask warrants to purchase shares of HDT common stock, now
entitling the holder to purchase 1,463,316 shares of our Common Stock at $1.01
per share. The shares underlying these warrants may be offered for resale
pursuant to this prospectus. Spencer Trask was granted the right, until December
19, 2003, to designate either a nominee or an adviser to the Company's Board of
Directors. Ezra P. Mager was designated by Spencer Trask as its nominee, and he
has been a director of the Company since April 28, 2003 and Chairman of the
Board since March 3, 2004.
On March 28, 2003, we entered into a Consulting Agreement under which
we retained Spencer Trask as our non-exclusive corporate finance consultant,
financial adviser and investment banker. Under this agreement, we agreed that
until March 28, 2004, we would compensate Spencer Trask, in cash and/or warrants
to purchase Common Stock, for advisory services in connection with acquisitions,
mergers, combinations, private and public equity offerings, debt financing and
other similar business transactions. No compensation has been paid under this
agreement.
On January 22, 2003, we transferred all of Netword's intellectual
property to Rabbit Media, Inc. (then our wholly-owned subsidiary), and sold all
of the stock of Rabbit Media, Inc. to Michael L. Wise, a director of the Company
and former chief executive officer of Netword. As consideration for the sale,
Mr. Wise agreed to (1) indemnify the Company against future claims related to
the Netword intellectual property in the event that such claims are not
discharged by Rabbit Media, Inc. and (2) pay the Company 10% of any
consideration that he receives from any sale of the Rabbit Media stock on or
before January 22, 2005.
26
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
the beneficial ownership of Common Stock held of record as of March 4, 2004, by
(1) all persons who are owners of 5% or more of our Common Stock, (2) each of
our named executive officers, (3) each director, and (4) all of our executive
officers and directors as a group.
[Enlarge/Download Table]
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
Mr. Kevin Kimberlin(1)
c/o Spencer Trask & Co.
535 Madison Avenue
New York, NY 10022 3,391,340(2) 32.6
Castlerigg Master Investments Ltd.
Citco Fund Services (Curacao) N.V.
Kaya Flamoyan 9, PO Box 812
Curacao P7 702,576(3) 9.3
Cedar Crescent Holdings, Ltd.
Shirlaw House
87 Shirley Street
Nassau, Bahamas C5 00000 702,576(4) 9.3
Kent M. Klineman
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 89,334(5) 1.2
Michael Liddle(6)
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 46,720(7) *
Ezra P. Mager
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 85,343(8) 1.2
Jerry Steckling(9)
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 -- *
Stephen B. Ste. Marie
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 13,327(10) *
Daryl Stemm
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 10,155(11) *
Michael L. Wise 33,114(12)
27
c/o Home Director, Inc.
2525 Collier Canyon Road
Livermore, CA 94551 33,114(12) *
Robert N. Wise(13)
5569 Perugia Circle
San Jose, CA 95125 142,293(14) 1.9
Donald B. Witmer(15)
2006 Margot Place
San Jose, CA 95125 103,297(16) 1.4
Executive officers and directors as a group (9
persons) 538,583 7.1
---------------------------
* Less than 1%
(1) Spencer Trask & Co. is a Delaware corporation of which Mr. Kevin Kimberlin
is the controlling stockholder. Spencer Trask Ventures, Inc. is a Delaware
corporation and a wholly-owned subsidiary of Spencer Trask & Co. Spencer
Trask Investment Partners, LLC is a Delaware limited liability company of
which Mr. Kimberlin is the non-member manager. William P. Dioguardi is the
president of Spencer Trask Ventures, Inc. and the manager of Trask Partners
LLC, the general partner of Spencer Trask Private Equity Fund I LP and
Spencer Trask Private Equity Fund II LP, each a Delaware limited
partnership. The mailing address of all of the foregoing entities is c/o
Spencer Trask & Co., 535 Madison Avenue, New York, NY 10022.
(2) Based on information provided by Spencer Trask & Co. Includes (i) 8,727
shares of Common Stock held by Spencer Trask Ventures, Inc., (ii) 134,325
shares of Common Stock held by Spencer Trask Private Equity Fund I LP,
(iii) 79,205 shares of Common Stock held by Spencer Trask Private Equity
Fund II LP, (iv) 3,095,369 shares of Common Stock issuable upon exercise of
warrants held by Spencer Trask Ventures, Inc. that are exercisable within
60 days, (v) 25,544 shares of Common Stock issuable upon exercise of
warrants held by Spencer Trask Investment Partners LLC that are exercisable
within 60 days, (vi) 24,085 shares of Common Stock that are issuable upon
exercise of warrants held by Spencer Trask Private Equity Fund I LP that
are exercisable within 60 days and (vii) 24,085 shares of Common Stock that
are issuable upon exercise of warrants held by Spencer Trask Private Equity
Fund II LP that are exercisable within 60 days.
(3) Represents 351,288 shares of Common Stock held by Castlerigg Master
Investments Ltd. and 351,288 shares of Common Stock issuable upon exercise
of warrants held by Castlerigg Master Investments Ltd. that are exercisable
within 60 days.
(4) Represents 351,288 shares of Common Stock held by Cedar Crescent Holdings,
Ltd. and 351,288 shares of Common Stock issuable upon exercise of warrants
held by Cedar Crescent Holdings, Ltd. that are exercisable within 60 days.
(5) Includes 12,500 shares of Common Stock issuable upon exercise of options
held by Mr. Klineman that are exercisable within 60 days and 17,615 shares
of Common Stock issuable upon exercise of warrants held by Mr. Klineman
that are exercisable within 60 days.
(6) Mr. Liddle was appointed Chief Executive Officer as of January 1, 2004 and
has been a director and President since March 3, 2004. See "Management."
(7) Includes 46,720 shares of Common Stock issuable upon exercise of options
held by Mr. Liddle that are exercisable within 60 days. Does not include
373,744 shares of Common Stock that are issuable upon exercise of options
held by Mr. Liddle that are not exercisable within 60 days.
(8) Includes 12,500 shares of Common Stock issuable upon exercise of options
held by Mr. Mager that are exercisable within 60 days.
(9) Mr. Steckling was appointed Vice President, Advanced Technology and Chief
Technology Officer as of January 7, 2004. See "Management."
(10) Includes 13,327 shares of Common Stock issuable upon exercise of options
held by Mr. Ste. Marie that are exercisable within 60 days.
28
(11) Includes 9,331 shares of Common Stock issuable upon exercise of options
held by Mr. Stemm that are exercisable within 60 days. Does not include
10,128 shares of Common Stock that are issuable upon exercise of options
held by Mr. Stemm that are not exercisable within 60 days.
(12) Includes 12,500 shares of Common Stock issuable upon exercise of options
held by Mr. Wise that are exercisable within 60 days. Does not include
43,337 shares of Common Stock beneficially owned by Mr. Wise's spouse, of
which he disclaims beneficial ownership.
(13) Robert N. Wise was President, Chief Operating Officer and a director of the
Company until March 3, 2004. See "Management."
(14) Includes 120,000 shares of Common Stock issuable upon exercise of options
held by Mr. Wise that are exercisable within 60 days and 5,498 shares of
Common Stock issuable upon exercise of a warrant held by Mr. Wise that is
exercisable within 60 days. All options held by Mr. Wise will expire on
March 3, 2005 unless exercised on or before that date.
(15) Mr. Witmer was Chairman and Chief Executive Officer of the Company until
December 31, 2003 and a director until February 12, 2004. See "Management."
(16) Includes 60,000 shares of Common Stock issuable upon exercise of options
held by Mr. Witmer that are exercisable within 60 days and 16,004 shares of
Common Stock issuable upon exercise of warrants held by Mr. Witmer that are
exercisable within 60 days. All options held by Mr. Witmer will expire on
March 31, 2004 unless exercised on or before that date.
29
SELLING STOCKHOLDERS
This prospectus covers the offering of 10,588,633 shares of Common
Stock by selling stockholders, including up to 7,100,279 shares of Common Stock
that may be issued to them upon the exercise of outstanding warrants.
The shares to be offered by the selling stockholders, including those
that may be issued upon exercise of warrants, are or will be "restricted"
securities under applicable federal and state securities laws and are being
registered under the Securities Act to give the selling stockholders the
opportunity to publicly sell these shares. The registration of these shares does
not require that any of the shares be offered or sold by the selling
stockholders or that any warrants be exercised. The selling stockholders may
from time to time offer and sell all or a portion of their shares in the
over-the-counter market, in negotiated transactions, or otherwise, at prices
then prevailing or related to the then current market price or at negotiated
prices.
The registered shares may be sold directly or through brokers or
dealers, or in a distribution by one or more underwriters on a firm commitment
or best efforts basis. To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in a
prospectus supplement. See "Plan of Distribution." Each of the selling
stockholders reserves the sole right to accept or reject, in whole or in part,
any proposed purchase of the registered shares to be made directly or through
agents. The selling stockholders and any agents or broker-dealers that
participate with the selling stockholders in the distribution of registered
shares may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
registered shares may be deemed to be underwriting commissions or discounts
under the Securities Act.
We have agreed to bear the expenses of registration of the shares,
except for the underwriting discounts, selling commissions, expense allowances
and attorney's fees and disbursements of the selling stockholders or their
agents or broker-dealers.
We will sell the shares of Common Stock underlying the warrants listed
below to the holders of such warrants if and when they choose to exercise them.
If a registration statement is then in effect with respect to such shares, once
the warrant holders have exercised their warrants, they will be free to re-sell
the shares they receive at such time or times as they may choose, just as any
purchaser of shares in the open market is allowed to do. We do not know how many
of such shares these investors will hold or re-sell upon exercise of their
warrants.
SELLING STOCKHOLDER INFORMATION
The following is a list of the selling stockholders who own or who have
the right to acquire the shares of Common Stock that may be offered pursuant to
this prospectus. Some of these selling stockholders hold or have held a
position, office or other material relationship with us or our predecessors or
affiliates within the past three years. See "Relationships and Transactions with
Selling Stockholders." As of March 4, 2004, there were 7,222,146 shares of
Common Stock outstanding, including 3,488,354 shares that may be offered
pursuant to this prospectus.
[Enlarge/Download Table]
BEFORE OFFERING AFTER OFFERING
--------------- --------------
NUMBER SHARES TOTAL
OF ACQUIRABLE SHARES NUMBER OF
NAME OF SELLING SHARES UPON EXERCISE BENEFICIALLY PERCENTAGE SHARES NUMBER OF PERCENTAGE
STOCKHOLDER OWNED OF WARRANTS OWNED(1) OWNED (1)(2) OFFERED(3) SHARES OWNED (4) OWNED (4)
----------- ------- ----------- ------------- ------------ ----------- ---------------- ---------
Isaac Abishour(5) 4,817 4,817 9,634 * 9,634 -- --
Clarence A. Abramson(6) 10,616 10,616 21,232 * 21,232 -- --
Artie Agajanian(5) 38,536 38,536 77,072 1.1 77,072 -- --
Dr. Jan Arnett(5) 12,042 12,042 24,084 * 24,084 -- --
Howard Asher(5) 9,634 9,634 19,268 * 19,268 -- --
David T. Barry(5) 10,616 10,616 21,232 * 21,232 -- --
30
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BEFORE OFFERING AFTER OFFERING
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SHARES
NUMBER ACQUIRABLE TOTAL SHARES NUMBER OF NUMBER OF
OF SHARES UPON EXERCISE BENEFICIALLY PERCENTAGE SHARES SHARED PERCENTAGE
NAME OF SELLING STOCKHOLDER OWNED OF WARRANTS OWNED(1) OWNED(1)(2) OFFERED(3) OWNED OWNED(4)
--------------------------------- ----------- --------------- -------------- ------------- ------------ ---------- -----------
Craig Beem(5) 48,170 48,170 96,340 1.3 96,340 -- --
Joe & Jamie Behrendt(6)
Revocable Trust 10/20/96 26,539 26,539 53,078 * 53,078 -- --
Lon Bell(6) 106,157 106,157 212,314 2.9 212,314 -- --
Harold S. Berzow(7) 5,855 5,855 11,710 * 11,710 -- --
Robert G. Betterman(7) 14,052 14,052 28,104 * 28,104 -- --
Blue & Gold Enterprises
LLC(5) 144,509 144,509 289,018 3.9 289,018 -- --
David Boim(7) 23,419 23,419 46,838 * 46,838 -- --
Delaware Charter G&T Co.
FBO Elizabeth H. Bone SEP
IRA(6) 5,308 5,308 10,616 * 10,616 -- --
Dorothy Breslin(7) 117,096 117,096 234,192 3.2 234,192 -- --
Brockington Securities, Inc.(8) -- 100,000 100,000 1.4 100,000 -- --
Castlerigg Master
Investments Ltd. (7) 351,288 351,288 702,576 9.3 702,576 -- --
Cedar Crescent Holdings,
Ltd.(7) 351,288 351,288 702,576 9.3 702,576 -- --
Chicago Private Investments,
Inc.(5) 30,000 30,000 60,000 * 60,000 -- --
Donald E. Cohen(6) 10,616 10,616 21,232 * 21,232 -- --
Donna Cohen(6) 37,155 37,155 74,310 1.0 74,310 -- --
Thomas & Elizabeth
Colacino(7) 5,855 5,855 11,710 * 11,710 -- --
Andrew Davidoff(9) 500 400 900 * 900 -- --
Steven A. Dawes(5) 9,634 9,634 19,268 * 19,268 -- --
Steven H. Deutsch & Wilma
K. Deutsch(6) JTWROS 53,079 53,079 106,158 1.5 106,158 -- --
DioGuardi Family Trust(10)
DTD April 14, 2000 -- 24,254 24,254 * 24,254 -- --
James M. Domasek MD &
April L. Hollis JTWROS(7) 10,616 10,616 21,232 * 21,232 -- --
Double A Ventures Ltd.(9) 100 80 180 * 180 -- --
Ronald Eller(5) 14,451 14,451 28,902 * 28,902 -- --
Iona S. Elliott(7) 5,855 5,855 11,710 * 11,710 -- --
E.P.S. DAS(9) 2,000 1,600 3,600 * 3,600 -- --
31
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BEFORE OFFERING AFTER OFFERING
-------------------------------------------------------- ----------------------
SHARES
NUMBER ACQUIRABLE TOTAL SHARES NUMBER OF NUMBER OF
OF SHARES UPON EXERCISE BENEFICIALLY PERCENTAGE SHARES SHARED PERCENTAGE
NAME OF SELLING STOCKHOLDER OWNED OF WARRANTS OWNED(1) OWNED(1)(2) OFFERED(3) OWNED OWNED(4)
------------------------------- ----------- --------------- -------------- ------------- ------------ ---------- -----------
Elliot Feit(6) 10,616 10,616 21,232 * 21,232 -- --
Field & Field
Limited Partnership(7) 58,548 58,548 117,096 1.6 117,096 -- --
Jonathan Fleisig(7) 117,096 117,096 234,192 3.2 234,192 -- --
Harold S. Gault(7) 58,548 58,548 117,096 1.6 117,096 -- --
Richard & Linda Gearns(7) 17,564 17,564 35,128 * 35,128 -- --
Richard Genovese(6) 106,157 106,157 212,314 2.9 212,314 -- --
Garfield Associates,
LLC(5)(10) 14,933 14,933 29,866 * 29,866 -- --
Greater Bay Bancorp -- 23,684 23,684 * 23,684 -- --
Donald Greenwald(5) 9,634 9,634 19,268 * 19,268 -- --
Francisco J. Gonzalez-Paez(9) 625 400 1,025 * 1,025 -- --
Steve Goodman(7) 117,096 117,096 234,192 3.2 234,192 -- --
Maurice & Stacy Gozlan
TIE(7) 29,274 29,274 58,548 * 58,548 -- --
G2 Investments(9) 1,000 800 1,800 * 1,800 -- --
Yael Halevi(5) 28,902 28,902 57,804 * 57,804 -- --
Gerald Hannahs(5) 96,339 96,339 192,678 2.6 192,678 -- --
Joseph & Mary Hartigan 9,634
JTWROS(5) 9,634 19,268 * 19,268 -- --
Byron C. & Julie L. Hughey
Tenants by the Entirety(7) 11,710 11,710 23,420 * 23,420 -- --
DCG&T c/o Robert G. 7,962
Heidenreich IRA(6) 7,962 15,924 * 15,924 -- --
Charlie Humber(9) 100 80 180 * 180 -- --
Alec Jaret(5) 9,634 9,634 19,268 * 19,268 -- --
David G. King Jr.(9) 600 480 1,080 * 1,080 -- --
Kirlin Securities(11) -- 214,970 214,970 2.9 214,970 -- --
Abraham Klein & Dinah
Klein JTWROS(5) 5,973 5,973 11,946 * 11,946 -- --
Christian Kolster(6) 31,847 31,847 63,694 * 63,694 -- --
Athanasios Koukoulis(6) 5,308 5,308 10,616 * 10,616 -- --
Martin Lamb(9) 1,000 800 1,800 * 1,800 -- --
32
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BEFORE OFFERING AFTER OFFERING
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SHARES
NUMBER ACQUIRABLE TOTAL SHARES NUMBER OF NUMBER OF
OF SHARES UPON EXERCISE BENEFICIALLY PERCENTAGE SHARES SHARED PERCENTAGE
NAME OF SELLING STOCKHOLDER OWNED OF WARRANTS OWNED(1) OWNED(1)(2) OFFERED(3) OWNED OWNED(4)
-------------------------------- ----------- --------------- ---------------- ------------- ------------ ---------- -----------
DCG&T
c/o Scott Leishman IRA
Rollover(7) 14,637 14,637 29,274 * 29,274 -- --
Robert Levy Jr. (5) 24,085 24,085 48,170 * 48,170 -- --
--
Lincoln Associates, LLC(5)(10) 14,933 14,933 29,866 * 29,866 --
Thomas A. Masci, Jr.(5) 9,634 9,634 19,268 * 19,268 -- --
Meister Brothers Investors
LP(9) 1,000 800 1,800 * 1,800 -- --
Richard J. McCready(9) 250 200 450 * 450 -- --
Richard Molinsky(6) 53,079 53,079 106,158 1.5 106,158 -- --
Gus & Karen Nicolopoulis(7) 11,710 11,710 23,420 * 23,420 -- --
Northstar Capital Investment
Group -- 8,400 8,400 * 8,400 -- --
Northstar Capital Partners(9) 10,000 8,000 18,000 * 18,000 -- --
Edward J. O'Connell(7) 29,274 29,274 58,548 * 58,548 -- --
Gilbert S. Omenn(5) 9,634 9,634 19,268 * 19,268 -- --
John Orlando(7) 58,548 58,548 117,096 1.6 117,096 -- --
Reed S. Oslan(6) 21,231 21,231 42,462 * 42,462 -- --
Gregory Peck(9) 400 320 720 * 720 -- --
Christopher K. Pepper(7) 11,710 11,710 23,420 * 23,420 -- --
Sheldon Perl & Ruth Perl *
TIC(5) 19,268 19,268 38,536 38,536 -- --
K.V. Rajagopalan(5) 8,189 8,189 16,378 * 16,378 -- --
Elisha Rothman(7) 58,548 58,548 117,096 1.6 117,096 -- --
Louis & Randi Rosen(6) 10,616 10,616 21,232 * 21,232 -- --
Steven B. Rosner(6)(12) 53,079 53,079 106,158 1.5 106,158 -- --
Murray Rubin(9) 100 80 1,430(13) * 180 1,250 *
Richard Sakakeeny(7) 17,564 17,564 35,128 * 35,128 -- --
Wayne Saker(7) 58,548 58,548 117,096 1.6 117,096 -- --
David Segal -- 2,132 2,132 * 2,132 -- --
Richard Scheffel(5) 4,817 4,817 9,634 * 9,634 -- --
Daniel R. Schmidt(7) 11,710 11,710 23,420 * 23,420 -- --
Ralph Shaoul(6) 7,962 7,962 15,924 * 15,924 -- --
Arla Sheinwald(5) 14,451 14,451 28,902 * 28,902 -- --
33
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BEFORE OFFERING AFTER OFFERING
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SHARES
NUMBER ACQUIRABLE TOTAL SHARES NUMBER OF NUMBER OF
OF SHARES UPON EXERCISE BENEFICIALLY PERCENTAGE SHARES SHARED PERCENTAGE
NAME OF SELLING STOCKHOLDER OWNED OF WARRANTS OWNED(1) OWNED(1)(2) OFFERED(3) OWNED OWNED(4)
------------------------------ ----------- --------------- ----------------- --------------- ----------------- ---------- ----------
Ronald M. Shippel(7) 29,274 29,274 58,548 * 58,548 -- --
Arthur Silverman(6) 7,962 7,962 15,924 * 15,924 -- --
SLD Capital(12) -- 100,000 100,000 1.4 100,000 -- --
Elliott Sokolow(5) 9,634 9,634 19,268 * 19,268 -- --
Spencer Trask Investment
Partners, LLC(5)(10) -- 25,544(14) 25,544(14) * 25,544 -- --
Spencer Trask Private Equity
Fund I LP(5)(10) 158,410(15) 24,085 158,410(15) 2.2 48,170 110,240 1.5
Spencer Trask Private Equity
Fund II LP(5)(10) 103,290(16) 24,085 103,290(16) 1.1 48,170 55,120 *
Spencer Trask Private Equity
Accredited Fund III(5)(10) 24,085 24,085 48,170 * 48,170 -- --
Spencer Trask Illumination
Fund LLC(5)(10) 24,085 24,085 48,170 * 48,170 -- --
Spencer Trask Ventures,
Inc. (17) 8,727 3,095,369 3,095,369(18) 30.0(18) 3,104,096(18) 8,727 *
Adam K. Stern(5)(19) 29,274 29,274 58,548 * 58,548 -- --
Stranco Investments, Ltd.(5) 96,315 96,315 192,630 2.6 192,630 -- --
Robert Streett(5) 9,634 9,634 19,268 * 19,268 -- --
Joanna Struett(5) 24,085 24,085 48,170 * 48,170 -- --
Jack Swartz(7) 11,710 11,710 23,420 * 23,420 -- --
Amy Taus(5) 19,268 19,268 38,536 * 38,536 -- --
Vital Ventures, Inc.(6) 159,236 159,236 318,472 4.3 318,472 -- --
WEC Partners, LLC(5) 96,339 96,339 192,678 2.6 192,678 -- --
West End Convertible Fund,
LP(5) 96,339 96,339 192,678 2.6 192,678 -- --
Ralph C. Wintrode Trust
dated May 9, 2001(6) 21,231 21,231 42,462 * 42,462 -- --
Gidon Wise(5) 21,589 19,268 40,857 * 38,536 2,321 *
Robert N. Wise(20) 17,090 5,203 142,293(21) 1.9 5,203 137,090 1.9
Donald B. Witmer(22) 43,297 16,004 103,297(23) 1.4 16,004 77,090 1.1
Ray Y. Yamada(7) 5,855 5,855 11,710 * 11,710 -- --
Michael Zimmerman(7) 11,710 11,710 23,420 * 23,420 -- --
----------------------
34
* Less than 1%.
(1) Includes shares of Common Stock of which the selling stockholder has the
right to acquire beneficial ownership within 60 days.
(2) Based on 7,222,146 shares of Common Stock outstanding on March 4, 2004.
(3) This table assumes that each selling stockholder will sell all shares which
it may offer for sale pursuant to this prospectus. Stockholders are not
required to sell their shares.
(4) Assumes that all shares of Common Stock which may be sold pursuant to this
prospectus have been sold.
(5) Purchased units consisting of shares of Common Stock and warrants to
purchase shares of Common Stock on January 21, 2004 in
a private placement.
(6) Purchased units consisting of shares of Common Stock and warrants to
purchase shares of Common Stock on December 19, 2003 in a private
placement.
(7) Purchased units consisting of shares of Common Stock and warrants to
purchase shares of Common Stock on December 9, 2003 in a private placement.
(8) Brockington Securities, Inc. received warrants to purchase 100,000 shares
of Common Stock in connection with its agreement to act as the Company's
non-exclusive financial adviser. See "Relationships and Transactions with
Selling Stockholders."
(9) Received registration rights in connection with a private placement by
Netword in 1999.
(10) William P. Dioguardi is the president of Spencer Trask Ventures, Inc., the
managing member of Garfield Associates, LLC and the managing member of
Lincoln Associates, LLC. In addition, Mr. Dioguardi is (i) the president of
LLC Management, Inc., the manager of Spencer Trask Illumination Fund LLC,
(ii) the manager of Spencer Trask Private Equity Accredited Fund
Management, LLC, the manager of Spencer Trask Private Equity Accredited
Fund III and (iii) the manager of Trask Partners LLC, the general partner
of Spencer Trask Private Equity Fund I LP and Spencer Trask Private Equity
Fund II LP. See "Relationships and Transactions with Selling Stockholders."
(11) Kirlin Securities, Inc., as a sub-agent of Spencer Trask Ventures, Inc.,
acted as placement agent in a 2002 private placement by HDT. See
"Relationships and Transactions with Selling Stockholders."
(12) Steven B. Rosner is the president of SLD Capital Corp. On December 9, 2003,
SLD Capital Corp. received warrants to purchase 100,000 shares of Common
Stock pursuant to a consulting agreement with the Company. On December 19,
2003, Mr. Rosner purchased units consisting of 53,079 shares of Common
Stock and three-year warrants to purchase 53,079 shares of Common Stock at
$1.178 per share in a private placement. See "Relationships and
Transactions with Selling Stockholders--SLD Capital Corp."
(13) Includes 1,250 shares of Common Stock issuable upon exercise of options
held by Mr. Rubin that are exercisable within 60 days.
(14) Represents warrants to purchase 25,544 shares of Common Stock held by
Spencer Trask Investment Partners LLC that are exercisable within 60 days.
The warrants were received in connection with a loan made to HDT in
February 2002. See "Relationships and Transactions with Selling
Stockholders--Spencer Trask."
(15) Includes (i) 110,240 shares of Common Stock owned by Spencer Trask Private
Equity Fund I LP and (ii) units consisting of 24,085 shares of Common
Stock and immediately exercisable warrants to purchase 24,085 shares
of Common Stock at $1.298 per share acquired by Spencer Trask Private
Equity Fund I LP on J anuary 21, 2004.
(16) Includes (i) 55,120 shares of Common Stock owned by Spencer Trask Private
Equity Fund II LP and (ii) units consisting of 24,085 shares of Common
Stock and immediately exercisable warrrants to purchase 24,085 shares of
Common Stock at $1.298 per share acquired by Spencer Trask Private Equity
Fund II LP on January 21, 2004.
(17) Kevin Kimberlin is the controlling stockholder of Spencer Trask & Co., a
Delaware corporation. Spencer Trask Ventures, Inc. is a Delaware
corporation and a wholly-owned subsidiary of Spencer Trask & Co. Spencer
Trask Ventures, Inc. acted as the Company's placement agent in the private
placements described in notes 5,6 and 7 above and also acted as placement
agent in HDT's private convertible debt offering in 2002. See
"Relationships and Transactions with Selling Stockholders--Spencer Trask."
(18) Includes (i) 8,727 shares of Common Stock held by Spencer Trask Ventures,
Inc., and (ii) 3,095,369 shares of Common Stock issuable upon exercise of
warrants held by Spencer Trask Ventures, Inc. that are exercisable within
60 days. Does not include shares
35
held by Spencer Trask Investment Partners, LLC, Spencer Trask Private
Equity Fund I LP and Spencer Trask Private Equity Fund II LP. The holdings
of each of the foregoing entities are listed separately in this table.
(19) Adam Stern is an officer of Spencer Trask Ventures, Inc.
(20) Robert N. Wise resigned as the President, Chief Operating Officer and a
director of the Company on March 3, 2004. See "Management."
(21) Includes 17,090 shares of Common Stock owned by Mr. Wise, 120,000 shares of
Common Stock issuable upon exercise of options held by Mr. Wise that are
exercisable within 60 days and 5,203 shares of Common Stock issuable upon
exercise of warrants held by Mr. Wise that are exercisable within 60 days.
See "Relationships and Transactions with Selling Stockholders" and
"Principal Stockholders."
(22) Donald B. Witmer resigned as the Chairman and Chief Executive Officer of
the Company upon the expiration of his employment agreement on December 31,
2003 and as a director of the Company on February 12, 2004. See
"Management."
(23) Includes 43,297 shares of Common Stock owned by Mr. Witmer, 60,000 shares
of Common Stock issuable upon exercise of options held by Mr. Witmer that
are exercisable within 60 days and 16,004 shares of Common Stock issuable
upon exercise of warrants held by Mr. Witmer that are exercisable within 60
days. See "Relationships and Transactions with Selling Stockholders" and
"Principal Stockholders."
RELATIONSHIPS AND TRANSACTIONS WITH SELLING STOCKHOLDERS
Spencer Trask
In December 2003 and January 2004, we privately sold equity units,
consisting of 3,470,679 shares of Common Stock and warrants to purchase
3,470,679 shares of Common Stock, for gross proceeds of $3,226,315. Spencer
Trask Ventures, Inc. ("Spencer Trask") acted as placement agent for the units
pursuant to a Placement Agency Agreement dated November 10, 2003. All of the
shares of Common Stock included in the units (including the shares of Common
Stock underlying the warrants) may be offered pursuant to this prospectus.
For its services as placement agent, we paid Spencer Trask cash
compensation of $370,000, including reimbursement of expenses. In addition, we
granted Spencer Trask warrants to purchase an aggregate of 1,388,270 shares of
Common Stock at exercise prices ranging from $1.068 to $1.298 per share. These
warrants are exercisable for five years and contain weighted average
anti-dilution provisions that will result in an adjustment in the number of
shares purchasable and the exercise price per share if we issue shares of Common
Stock in the future at a price that is less than the then-adjusted exercise
price of these warrants. The shares of Common Stock underlying these warrants
may be offered pursuant to this prospectus.
Before the merger, Spencer Trask acted as placement agent in HDT's $8.9
million private sale of convertible notes pursuant to a Placement Agency
Agreement dated April 10, 2002. HDT paid Spencer Trask $738,974 for its
services, plus $213,550 as a non-accountable expense allowance and granted
Spencer Trask warrants to purchase shares of HDT's common stock that now entitle
the holder to purchase 1,463,316 shares of Common Stock at $1.01 per share. The
shares of Common Stock underlying these warrants may be offered pursuant to this
prospectus.
On January 21, 2004, each of Spencer Trask Private Equity Fund I LP,
Spencer Trask Private Equity Fund II LP, Spencer Trask Private Equity Accredited
Fund III and Spencer Trask Illumination Fund LLC purchased 24,085 units in our
private placement. The shares of Common Stock included in these units (including
those underlying warrants) may be offered pursuant to this prospectus. William
P. Dioguardi, the president of Spencer Trask, is (i) the manager of Trask
Partners LLC, the general partner of Spencer Trask Private Equity Fund I LP and
Spencer Trask Private Equity Fund II LP, (ii) the manager of Spencer Trask
Private Equity Accredited Fund Management LLC, the manager of Spencer Trask
Private Equity Accredited Fund III, and (iii) the president of LLC Management,
Inc., the manager of Spencer Trask Illumination Fund LLC.
On January 21, 2004, each of Garfield Associates, LLC and Lincoln
Associates, LLC purchased 14,933 units in our private placement. The shares of
Common Stock included in these units (including those underlying
36
warrants) may be offered pursuant to this prospectus. Mr. Dioguardi, the
president of Spencer Trask, is the managing member of Garfield Associates, LLC
and Lincoln Associates, LLC.
In May 2002, HDT issued a warrant to purchase 162,500 shares of its
common stock to the Dioguardi Family Trust in connection with a demand loan made
to HDT by Mr. Dioguardi. After various adjustments, this warrant now entitles
the holder to purchase 24,254 shares of Common Stock at $0.67 per share. The
shares of Common Stock underlying this warrant may be offered pursuant to this
prospectus.
In February 2002, HDT issued a convertible promissory note and a
warrant to purchase shares of HDT's common stock to Spencer Trask Investment
Partners, LLC in connection with a loan it made to HDT. The convertible note was
converted into 74,412 shares of Common Stock and, after various adjustments, the
warrant now represents the right to purchase 25,544 shares of Common Stock at
$10.57 per share. The shares of Common Stock underlying this warrant may be
offered pursuant to this prospectus.
Under the 2002 Placement Agency Agreement with HDT, Spencer Trask was
granted the right to designate one nominee for election to our Board of
Directors or an adviser to our Board of Directors. Ezra P. Mager was designated
by Spencer Trask as its nominee and has been a director since April 28, 2003 and
Chairman of the Board since March 3, 2004. Spencer Trask's right to designate a
nominee or adviser to our board expired on December 19, 2003.
Kirlin Securities, Inc.
Kirlin Securities, Inc. was engaged as a sub-agent of Spencer Trask in
HDT's 2002 private sale of convertible notes. For its services, Kirlin received
cash compensation of $147,518 and warrants to purchase shares of HDT's Common
Stock. After various adjustments, these warrants now entitle the holder to
purchase 214,970 shares of Common Stock at $1.01 per share. The shares of Common
Stock underlying these warrants may be offered pursuant to this prospectus.
Brockington Securities, Inc.
On December 9, 2003, we engaged Brockington Securities, Inc. to provide
us with certain financial advisory and investment banking services in exchange
for three-year warrants to purchase 100,000 shares of Common Stock at $1.15 per
share. These warrants are currently exercisable as to 50,000 shares and will
become exercisable as to the remaining 50,000 shares if and when the Company
satisfies the American Stock Exchange's initial listing requirements for 15
consecutive trading days. The shares of Common Stock underlying these warrants
may be offered pursuant to this prospectus. Brockington's engagement expires on
June 9, 2004, subject to earlier termination by either party on 30 days' notice.
Brockington makes a market in our Common Stock.
SLD Capital Corp.
On December 9, 2003, we engaged SLD Capital Corp. to provide us with
certain investor relations services for a monthly fee of $6,000 and warrants to
purchase 100,000 shares of Common Stock at $1.15 per share. These warrants are
currently exercisable as to 50,000 shares and will become exercisable as to the
remaining 50,000 shares if and when the Company satisfies the American Stock
Exchange's initial listing requirements for 15 consecutive trading days. The
shares of Common Stock underlying these warrants may be offered pursuant to this
prospectus. SLD's engagement expires on July 15, 2004.
On December 19, 2003, Steven B. Rosner, SLD's president, purchased
53,079 units in our private placement. The shares of Common Stock included in
these units (including the shares underlying warrants) may be offered pursuant
to this prospectus.
Greater Bay Bancorp
In connection with the extension of credit to us by Cupertino National
Bank pursuant to a Loan and Security Agreement, dated July 2003, we issued a
warrant to purchase 23,684 shares of Common Stock at $1.90 per share to Greater
Bay Bancorp, Cupertino's parent. The shares of Common Stock underlying this
warrant may be
37
offered pursuant to this prospectus. For a description of the Loan and Security
Agreement, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Robert N. Wise
On March 3, 2004, Mr. Wise resigned as our President, Chief Operating
Officer and a director and entered into a Separation and Release Agreement with
us. He had served in these capacities since the merger. Prior to the merger, Mr.
Wise was the President and Chief Operating Officer of HDT. In February 2002, he
received a warrant to purchase 785,714 shares of HDT's common stock in
connection with a loan he made to HDT. After various adjustments, this warrant
now represents the right to purchase 5,203 shares of Common Stock at $10.57 per
share. The shares of Common Stock underlying this warrant may be offered
pursuant to this prospectus.
See also "Management."
Donald B. Witmer
Mr. Witmer resigned as our Chairman and Chief Executive Officer upon
expiration of his employment agreement at the end of 2003 and as a director on
February 12, 2004. He had served in these capacities since the merger. Prior to
the merger, Mr. Witmer was the Chairman and Chief Executive Officer of HDT. In
February and May 2002, Mr. Witmer received warrants to purchase 1,571,429 and
37,500 shares of HDT's common stock in connection with loans he made to HDT.
After various adjustments, these warrants now represent the right to purchase
10,407 shares of Common Stock at $10.57 per share and 5,597 shares of Common
Stock at $0.67 per share. The shares of Common Stock underlying these warrants
may be offered pursuant to this prospectus. See also "Management."
Murray Rubin
Mr. Rubin was Netword's Chief Financial Officer and Treasurer until the
merger.
PLAN OF DISTRIBUTION
We are registering shares of Common Stock under the Securities Act for
sale by the selling stockholders. As used in this prospectus, "selling
stockholders" includes the pledgees, donees, transferees or others who may later
hold the selling stockholders' interests. We have agreed to pay the costs and
fees of registering the shares, including the preparation of the registration
statement that includes this prospectus, but the selling stockholders will pay
any brokerage commissions, discounts or other expenses relating to the sale of
the shares, including attorneys' fees.
The selling stockholders may sell the shares in the over-the-counter
market or otherwise, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, or at negotiated prices. In addition,
the selling stockholders may sell some or all of their shares through:
o a block trade in which a broker-dealer may resell a portion of
the block, as principal, in order to facilitate the transaction;
o purchases by a broker-dealer, as principal, and resale by the
broker-dealer for its account; or
o ordinary brokerage transactions and transactions in which a
broker solicits purchasers.
When selling the shares, the selling stockholders may enter into
hedging transactions. For example, the selling stockholders may:
o enter into transactions involving short sales of the shares by
broker-dealers;
o sell shares short themselves and redeliver such shares to close
out their short positions;
38
o enter into option or other types of transactions that require the
selling stockholder to deliver shares to a broker-dealer, who
will then resell or transfer the shares under this prospectus; or
o loan or pledge the shares to a broker-dealer, who may sell the
loaned shares or, in the event of default, sell the pledged
shares.
The selling stockholders may negotiate and pay broker-dealers
commissions, discounts or concessions for their services. Broker-dealers engaged
by the selling stockholders may allow other broker-dealers to participate in
resales. However, the selling stockholders and any broker-dealers involved in
the sale or resale of the shares may qualify as "underwriters" within the
meaning of Section 2(a)(11) of the Securities Act. In addition, the
broker-dealers' commissions, discounts or concession may qualify as
underwriters' compensation under the Securities Act. If the selling stockholders
qualify as "underwriters," they will be subject to the prospectus delivery
requirements of Section 5(b)(2) of the Securities Act.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Securities 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 Regulation 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 pursuant to this prospectus. 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 registration statement must be filed with the Securities and
Exchange Commission.
In addition to selling their shares under this prospectus, the selling
stockholders may:
o agree to indemnify any broker-dealer or agent against certain
liabilities related to the selling of the shares, including
liabilities arising under the Securities Act;
o transfer their shares in other ways not involving market makers
or established trading markets, including directly by gift,
distribution, or other transfer; or
o sell their shares pursuant to Rule 144 under the Securities Act
rather than pursuant to this prospectus, if the shares are
eligible for such sale and the transaction meets the requirements
of Rule 144.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 42,000,000 shares, including
40,000,000 shares of Common Stock, par value $0.01 per share, and 2,000,000
shares of preferred stock, par value $0.01 per share. Our Board of Directors may
designate the rights and preferences of the preferred stock. Preferred stock
could be used, under certain circumstances, as a way to discourage, delay or
prevent a takeover of the Company. See "Anti-Takeover Provisions." As of March
4, 2004, there were issued and outstanding 7,222,146 shares of Common Stock and
no shares of preferred stock.
COMMON STOCK
Under our Restated Certificate of Incorporation, shares of our Common
Stock are identical in all respects, and each share entitles the holder to the
same rights and privileges as are enjoyed by other holders and is subject to the
same qualifications, limitations and restrictions as apply to other shares.
Holders of our Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Holders of
our Common Stock do not have cumulative voting rights. Accordingly, subject to
any voting rights of holders of any preferred stock that may be issued, holders
of a plurality of our Common Stock present at a meeting at which a quorum is
present are able to elect all of the directors eligible for election. The
presence of a majority of the voting power of our outstanding capital stock
constitutes a quorum.
39
The holders of our Common Stock are entitled to dividends when and if
declared by our board of directors from legally available funds. The holders of
our Common Stock are also entitled to share pro rata in any distribution to
stockholders upon the Company's liquidation or dissolution.
None of the shares of our Common Stock:
o have preemptive rights;
o are redeemable;
o are subject to assessments or further calls;
o have conversion rights; or
o have sinking fund provisions.
PREFERRED STOCK
We are currently authorized to issue 2,000,000 shares of preferred
stock in one or more series. No series has been designated. Our Board of
Directors may determine the terms of the preferred stock at the time of its
issuance without action by our stockholders. The terms of any issuance of
preferred stock may include:
o voting rights, including the right to vote as a series on
particular matters, which could be superior to those of our
Common Stock;
o preferences over our Common Stock as to dividends and
distributions in liquidation;
o conversion and redemption rights, including the right to convert
into shares of our Common Stock; and
o sinking fund provisions.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
Certain provisions in our Restated Certificate of Incorporation could
have the effect of making a change in control of the Company more difficult,
even if a change in control would be beneficial to our stockholders. In
particular, our Board of Directors may issue up to 2,000,000 shares of preferred
stock with rights and privileges that might be senior to our Common Stock,
without the consent of the holders of our Common Stock, and has the authority to
determine the price, rights, preferences, privileges and restrictions of the
preferred stock. Although the ability to issue preferred stock may provide us
with flexibility in connection with possible acquisitions and other corporate
purposes, any such issuance might make it more difficult for a third party to
acquire a majority of our outstanding voting stock. Our Restated Certificate of
Incorporation provides that stockholders may not act by written consent but only
at a duly convened stockholders meeting after proper notice.
TRANSFER AGENT
The transfer agent for our Common Stock is Continental Stock Transfer &
Trust Company, located at 17 Battery Place, New York, New York 10002.
Continental Stock Transfer & Trust Company's telephone number is (212) 509-4000.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Restated Certificate of Incorporation provides that we shall
indemnify our directors and officers to the fullest extent permitted by Delaware
law and that none of our directors will be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
o for any breach of the director's duty of loyalty to the Company
or its stockholders;
40
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of the law;
o under section 174 of the Delaware General Corporation Law for the
unlawful payment of dividends; or
o for any transaction from which the director derives an improper
personal benefit.
These provisions require the Company to indemnify its directors and
officers unless restricted by Delaware law and eliminate the Company's rights
and those of its stockholders to recover monetary damages from a director for
breach of his fiduciary duty of care as a director except in the situations
described above. The limitations summarized above, however, do not affect the
Company's ability or that of its stockholders to seek non-monetary remedies,
such as an injunction or rescission, against a director for breach of his
fiduciary duty.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, the Company has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
LEGAL MATTERS
The validity of the shares of Common Stock offered pursuant to this
prospectus will be passed upon for the Company by Kronish Lieb Weiner & Hellman
LLP, New York, New York.
EXPERTS
The consolidated financial statements of Home Director, Inc. at
December 31, 2003 and December 31, 2002, included in and made a part of this
prospectus, have been audited by Mahoney & Cohen & Company CPA, P.C.,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 14 to the
consolidated financial statements), and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
We have not changed or had any material disagreements with our
independent accountants within the last two fiscal years. Since the merger was a
reverse acquisition and HDT was the acquirer for accounting purposes, the
pre-acquisition financial statements of HDT are now our historical financial
statements. Those financial statements were audited by Ernst & Young LLP.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information
with the SEC. You may read and copy any reports, statements or other information
we file at the SEC's public reference rooms in Washington D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at http://www.sec.gov.
We have filed a registration statement on Form SB-2 under the
Securities Act with the SEC covering the Common Stock to be offered by the
selling stockholders. As permitted by the rules and regulations of the SEC, this
document does not contain all information set forth in the registration
statement and exhibits thereto, all of which are available for inspection as set
forth above. For further information, please refer to the registration
statement, including the exhibits thereto. Statements contained in this document
relating to the contents of any contract or other document referred to herein
are not necessarily complete, and reference is made to the copy of that contract
or other document filed or incorporated as an exhibit to the registration
statement, and each statement of this type is qualified in all respects by that
reference.
41
No person is authorized to give any information or make any
representation not contained in this document. You should not rely on any
information provided to you that is not contained in this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
purchase the securities described herein in any jurisdiction in which, or to any
person to whom, it is unlawful to make the offer or solicitation. Neither the
delivery of this document nor any distribution of shares of Common Stock made
hereunder shall, under any circumstances, create any implication that there has
not been any change in our affairs as of any time subsequent to the date hereof.
42
HOME DIRECTOR, INC.
Index to Financial Statements
-----------------------------
Page
----
Independent Auditor's Reports F-1
Consolidated Balance Sheets as of December 31, 2003
and 2002 F-2
Consolidated Statements of Operations for the Years
Ended December 31, 2003 and 2002 F-3
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2003
and 2002 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Home Director, Inc.
We have audited the accompanying consolidated balance sheets of Home
Director, Inc. as of December 31, 2003 and 2002 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years then ended. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Home Director, Inc. at December 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for the year then ended, in conformity with
accounting principles 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 14 to the
financial statements, the Company has suffered recurring losses from operations,
is in default of its line of credit, has been dependent upon financing its
operations through a series of private offerings of debt and equity and the
uncertainty about the adequacy of funding during 2004 that raise substantial
doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 14. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Mahoney Cohen & Company CPA, P.C.
New York, New York
March 8, 2004
F-1
HOME DIRECTOR, INC.
Consolidated Balance Sheets
December 31, 2003 and 2002
ASSETS
------
[Enlarge/Download Table]
2003 2002
--------------- ----------------
Current assets:
Cash and cash equivalents $ 65,733 $ 2,557,214
Accounts receivable, net of allowances of $290,966
in 2003 and $115,897 in 2002. 1,452,934 1,226,479
Inventories, net of allowance of $847,363 in 2003
and $1,087,719 in 2002 818,421 1,499,014
Other current assets 195,128 140,366
--------------- ----------------
Total current assets 2,532,216 5,423,073
Property and equipment, net 280,463 645,328
Customer lists, net of accumulated amortization of
$670,321 in 2003 and $648,552 in 2002 87,075 108,844
Goodwill, net of accumulated amortization of $1,654,837
in 2003 and 2002 5,825,652 5,825,652
--------------- ----------------
$ 8,725,406 $ 12,002,897
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,770,922 $ 2,249,712
Payables to related parties --- 291,793
Line of credit 300,000 ---
Notes payable 125,000 125,000
Current portion of capital lease obligations 116,313 125,626
--------------- ----------------
Total current liabilities 2,312,235 2,792,131
Capital lease obligations, less current portion 10,077 123,781
Other long-term liabilities 393,975 ---
Commitments and contingencies (Notes 9 and 12)
Shareholders' equity:
Preferred stock, $0.01 par value as of December 31, 2003
and 2002, respectively
Authorized - 2,000,000 as of December 31, 2003 and 2002, respectively
Issued and outstanding - none as of December 31, 2003
and 2002, respectively --- ---
Common stock, $0.01 par value as of December 31, 2003
and 2002, respectively
Authorized - 40,000,000 shares as of
December 31, 2003 and 2002, respectively
Issued and outstanding - 6,163,071 and 3,751,467
as of December 31, 2003 and 2002, respectively 61,631 37,515
Additional paid-in capital 77,582,890 75,699,296
Accumulated deficit (71,635,402) (66,649,826)
--------------- ----------------
Total shareholders' equity 6,009,119 9,086,985
--------------- ----------------
$ 8,725,406 $ 12,002,897
=============== ================
See accompanying notes.
F-2
HOME DIRECTOR, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2003 and 2002
[Enlarge/Download Table]
2003 2002
------------------- ----------------
Revenue $ 9,251,252 $ 10,446,654
Costs and expenses:
Cost of revenue 7,250,744 7,021,446
General and administrative 3,194,168 3,178,643
Sales and marketing 2,366,904 2,279,489
Research and development 277,631 714,804
Depreciation and amortization 396,967 531,262
Extinguishment of certain liabilities --- (4,515,504)
Provision for abandonment of facility 683,966 ---
--------------- ----------------
Total costs and expenses 14,170,380 9,210,140
--------------- ----------------
Income (loss) from operations (4,919,128) 1,236,514
Other income (expense):
Interest income 4,310 12,957
Interest expense (70,758) (3,258,491)
--------------- ----------------
Net other income (expense) (66,448) (3,245,534)
--------------- ----------------
Net loss $ (4,985,576) $ (2,009,020)
=============== ================
Net loss per common share - basic and diluted:
Shares used in computing basic and diluted net loss
per common share 3,875,811 742,723
=============== ================
Loss per share $ (1.29) $ (2.70)
============== ================
See accompanying notes.
F-3
[Enlarge/Download Table]
HOME DIRECTOR, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2003 and 2002
Common Stock Additional Total
------------------------ Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------------ -------- --------------- --------------- -------------
Balance at December 31, 2001 616,843 $ 6,168 $ 65,160,567 $ (64,640,806) $ 525,929
Exercise of common stock options and
warrants 8,902 89 33,347 - 33,436
Compensation related to consulting
services - - 218,943 - 218,943
Issuance of common stock warrants in
connection with bridge note financing - - 230,481 - 230,481
Beneficial conversion for convertible debt - - 230,481 - 230,481
Issuance of common stock warrants as
consideration for services - - 1,448,714 - 1,448,714
Issuance of common stock in connection
with conversion of convertible debt 2,558,041 25,580 9,154,761 - 9,180,341
Recapitalization, net of merger costs 567,681 5,678 (777,998) - (772,320)
Net loss - - - (2,009,020) (2,009,020)
----------- --------- --------------- --------------- --------------
Balance at December 31, 2002 3,751,467 $ 37,515 $ 75,699,296 $ (66,649,826) $ 9,086,985
Reclassification of merger costs - - 39,784 - 39,784
Expenses related to convertible note - - (16,595) - (16,595)
Issuance of common stock warrants as
consideration for services - - 144,372 - 144,372
Issuance of common stock in connection
with private placement, net of expenses 2,411,604 24,116 1,716,033 - 1,740,149
Net loss - - - (4,985,576) (4,985,576)
------------ --------- --------------- --------------- --------------
Balance at December 31, 2003 6,163,071 $ 61,631 $ 77,582,890 $ (71,635,402) $ 6,009,119
============ ========= =============== =============== ==============
See accompanying notes.
F-4
HOME DIRECTOR, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002
[Enlarge/Download Table]
2003 2002
------------------- -----------------
Cash flows from operating activities:
Net loss $ (4,985,576) $ (2,009,020)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 396,967 531,262
Loss on disposal of assets --- 20,490
Deferred rent 9,251 71,950
Provision for abandonment of facility 683,996 ---
Gain from extinguishment of certain liabilities --- (4,515,504)
Non-cash consulting fees --- 218,943
Amortization of discount on convertible debt --- 460,962
Issuance of common stock warrants as consideration
for services 144,372 1,448,714
Non-cash exercise of common stock options and
warrants --- 33,436
Changes in operating assets and liabilities, net of
assets and liabilities acquired:
Accounts receivable (226,455) 13,679
Inventories 680,593 (264,696)
Other current assets (54,762) 131,390
Accounts payable and accrued expenses (650,741) (1,216,669)
--------------- -----------------
Net cash used in operating activities (4,002,355) (5,075,063)
--------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (97,870) (58,002)
Cash acquired in Netword acquisition --- 930,673
---------------- -----------------
Net cash provided by (used in) investing
activities (97,870) 872,671
---------------- -----------------
Cash flows from financing activities:
Borrowing under line of credit 400,000 ---
(Payments) to reduce line of credit (100,000) ---
Net payments of payables to related parties (291,793) (1,288,399)
Repayment of capital lease obligations (123,017) (287,476)
Merger costs --- (1,407,906)
Proceeds from issuance of common stock, net of expenses 1,740,149 -
Proceeds from (payments of) issuance of convertible debt (16,595) 9,180,341
---------------- -----------------
Net cash provided by financing activities 1,608,744 6,196,560
--------------- -----------------
Net increase (decrease) in cash (carried forward) $ (2,491,481) $ 1,994,168
---------------- -----------------
See accompanying notes.
F-5
HOME DIRECTOR, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002
[Enlarge/Download Table]
2003 2002
------------------ -----------------
Net increase (decrease) in cash (brought forward) $ (2,491,481) $ 1,994,168
Cash and cash equivalents at beginning of year 2,557,214 563,046
--------------- -----------------
Cash and cash equivalents at end of year $ 65,733 $ 2,557,214
=============== =================
Supplemental Disclosure of Cash Flow Information
2003 2002
------------------ -----------------
Cash paid during the year for:
Interest $ 39,347 $ 1,159,169
=============== =================
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligations incurred $ 32,549 $ 261,428
Reclassification of merger costs $ 39,784 $ ---
Issuance of common stock in connection with
conversion of convertible debt $ --- $ 9,180,341
See accompanying notes.
F-6
Note 1 - Organization and Description of Business
Home Director Technologies Inc. (formerly Home Director, Inc. "HDT") was
incorporated on October 13, 1999 under the laws of the State of Delaware. On
December 19, 2002, HDT was acquired by Netword, Inc. (now Home Director, Inc.)
in a merger of Netword's special purpose subsidiary into HDT (the "Merger"). In
the Merger, HDT's stockholders received shares of Netword common stock in
accordance with the exchange ratio described in the merger agreement. Upon
completion of the Merger, HDT's stockholders owned approximately 86% of the
outstanding Netword common stock. The Merger was treated as a reverse merger,
with HDT being the acquirer for accounting purposes. The pre-acquisition
financial statements of HDT became the historical financial statements of the
combined companies. The transaction was accounted for as the issuance of common
stock by HDT for the net monetary assets of Netword, accompanied by a
recapitalization to reflect the legally issued and outstanding shares of the
merged companies. Pre-acquisition stockholders' equity of HDT was retroactively
restated for the equivalent number of shares of Netword received by HDT in the
Merger, with differences between the par value of Netword's and HDT's stock
recorded as paid-in capital. Transaction costs related to the Merger were also
charged directly to equity. The transaction did not result in any additional
goodwill or other intangible assets. All common share and per share amounts for
all periods presented in the accompanying consolidated financial statements have
been retroactively restated to reflect the effect of the Merger. References in
these notes to "the Company" are references to HDT as it existed before the
Merger and the combined companies after the Merger.
The Company, which is headquartered in Livermore, California, commenced
operations on December 8, 1999, subsequent to acquiring the assets of and
assuming certain liabilities of IBM Corporation's Home Director business unit.
The Company operates in a single industry, the provision of infrastructure
components for home networking, and is engaged in the design, sale and
installation of home networking products and services for the new home
construction market.
In January 2003, the Company transferred all of the intellectual property
associated with Netword to Netword's subsidiary, Rabbit Media, Inc., and
subsequently sold all of the stock of Rabbit Media, Inc. to a director and the
former President of Netword. As consideration for the sale, the buyer agreed to
indemnify the Company for future claims related to the Netword intellectual
property in the event that such claims are not discharged by Rabbit Media, Inc.
and to pay the Company 10% of any consideration that it receives from any sale
of the Rabbit Media, Inc. stock within two years after the date of the
agreement.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Home Director, Inc. (formerly Netword, Inc.) and its wholly-owned
subsidiaries, HDT and Digital Interiors. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates include
the allowance for doubtful accounts and the allowance for obsolete and
slow-moving inventory. Actual results can differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original or remaining maturity of less than three months at the date of
purchase to be cash equivalents.
Inventories
Inventories consist of finished goods and are stated at the lower
of cost or market. Cost is determined by the weighted average costing method.
F-7
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable and accrued liabilities
approximate fair value because of their short maturities.
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to
credit risk consist principally of accounts receivable and cash investments.
Receivables are unsecured. The Company provides an allowance for doubtful
accounts equal to the estimated losses expected to be incurred in the collection
of accounts receivable.
Cash and cash equivalents consist of cash deposits, money market
funds and highly rated commercial paper held at banks. Deposits held at banks
may at times exceed the amount of insurance provided. Generally, these deposits
may be redeemed upon demand and therefore bear minimal risk.
As of December 31, 2003, three customers accounted for 38% and one
customer accounted for 36% of the accounts receivable balance and annual
revenue, respectively. As of December 31, 2002, two customers accounted for 53%
and 57% of the accounts receivable balance and annual revenue, respectively.
The Company is not currently dependent upon any single
manufacturer and it believes that alternative manufacturing sources would be
readily available without material delay in the event of the interruption of
supplies from any of its current sources.
Loss Per Share
In accordance with SFAS 128, basic and diluted net loss per common
share has been computed using the weighted-average number of shares of common
stock outstanding during the period.
The effect of options to purchase 477,128 and 101,206 shares of the
Company's common stock outstanding during 2003 and 2002, respectively, was not
included in the computation of diluted net income per share because their effect
would be antidilutive.
The effect of warrants to purchase 5,769,883 and 584,439 shares of
the Company's common stock outstanding during 2003 and 2002, respectively, was
not included in the computation of diluted net income per share because their
effect would be antidilutive.
Revenue Recognition
The Company's revenues consist primarily of sales of home
networking products and services. The Company generally recognizes product
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is reasonably
assured. The Company accrues for sales returns, rebate programs and warranty
costs based on its experience.
The Company recognizes revenue on installation projects using the
percentage of completion method, based primarily on revenue milestones. On
certain other installation projects, the Company recognizes revenue using the
percentage of completion method, based upon actual costs incurred compared to
total estimated contract costs under the project. Changes to total estimated
contract costs or losses, if any, are recognized in the period in which they are
determined. For these other installation projects, revenue recognized in excess
of amounts billed of $203,808 and $208,648 at December 31, 2003 and 2002,
respectively, is classified as current assets under "Accounts Receivable."
Amounts billed in excess of revenue recognized to date of $17,675 and $25,106 at
December 31, 2003 and 2002, respectively, are classified as current liabilities
under "Accounts Payable and Accrued Expenses."
Property and Equipment
Property and equipment is recorded at cost and depreciated using
the straight-line method over their estimated useful lives which generally range
from two to five years. Property and equipment includes certain equipment under
capital leases. These items are depreciated over the shorter of the lease period
or the estimated useful life of the equipment.
F-8
Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which is required to be applied for fiscal years beginning after
December 15, 2001. The Company has adopted SFAS 142 as of January 1, 2002. SFAS
142 eliminates the amortization of goodwill and certain other intangible assets.
It also requires the Company to complete a test for impairment of these assets
annually, as well as a transitional goodwill impairment test within six months
from the date of adoption. The results of these tests did not indicate
additional impairment of the Company's recorded goodwill. The Company will
perform its next impairment test as of December 31, 2004.
The summary of estimated amortization expense for customer lists is
as follows:
Fiscal Year
Ending
December 31,
------------
2004 $ 21,769
2005 21,769
2006 21,769
2007 21,768
--------
$ 87,075
========
Research and Development Costs
Research and development costs are charged to operations as
incurred.
Advertising Costs
The Company expenses advertising costs as incurred. The amount of
advertising expensed during the years ended December 31, 2003 and 2002 was
$71,938 and $149,852, respectively.
Income Taxes
The Company accounts for income taxes using the liability method
which requires the recognition of deferred tax assets or liabilities for the
temporary differences between the financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted statutory
rates in effect for the years in which the differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. In addition, valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized. The Company has not recorded any income tax expense or
benefit as a result of its available net operating loss carryforwards, which are
fully reserved by a valuation allowance.
Accounting for Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has
elected to account for its stock-based compensation to employees and outside
directors, where appropriate, under the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations and amendments. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44 and 65, Amendment of FASB
Statement No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4,
"Reporting Gains
F-9
and Losses from Extinguishment of Debt," and an amendment of that statement,
SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." The statement will require gains or losses from extinguishment of
debt to be classified as operating items, as opposed to extraordinary items,
unless they meet the more stringent criteria of APB No. 30. The statement
requires retroactive reclassification for comparative financial statements
issued after adoption.
The Company began applying SFAS No. 145 in 2003 and, as a result, for
year ended December 31, 2002, has reclassified the extraordinary gain from
extinguishment of certain liabilities to operating income in its comparative
financial statements issued after adoption. This reclassification did not have
an impact on the previously reported net loss.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123," ("SFAS 148"). This statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation." ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS 123 regarding disclosure are effective
for financial statements for fiscal years ending after December 15, 2002. The
Company will continue to make the appropriate fair value disclosures required.
At December 31, 2003, the Company has a stock-based compensation plan
(the "Plan"), more fully described in the Company's proxy statement for its 2003
annual meeting of stockholders. The Company accounts for the Plan under the
recognition and measurement principals of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation is reflected in net income, as all options granted under the Plan
had an exercise price equal to the market value of the underlying common stock
on the date of grant.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation.
[Enlarge/Download Table]
Dec 31, 2003 Dec 31, 2002
----------------------------------------------
Net income (loss), as reported $(4,985,576) $(2,009,020)
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of income tax effects (384,400) (46,330)
----------------------------------------------
Pro forma net income (loss) $(5,369,976) $(2,055,350)
==============================================
Net income (loss) per share:
Basic - as reported $(1.29) $(2.70)
==============================================
Diluted - as reported $(1.29) $(2.70)
==============================================
Basic - proforma $(1.39) $(2.78)
==============================================
Diluted - proforma $(1.39) $(2.78)
==============================================
Pro forma information regarding net loss is also required by SFAS
123 and has been determined as if the Company had accounted for all of its
employee stock options under the fair value method of that statement. The
Company computes fair value for this purpose using the minimum value
option-pricing model. The weighted-average assumptions used in this model to
estimate fair value and the resulting values are as follows:
[Download Table]
2003 2002
------------- -----------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 4.4% 3.98%
Expected life (in years) 10.0 3.0
Weighted-average fair value per share $ 3.57 $ 1.81
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." This statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or
modified after June 30, 2003, except as for provisions that relate to SFAS No.
133 implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective dates. The adoption of this pronouncement did not have a
material effect on the results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities in
statements of financial position. Most of the guidance in 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 adoption of this pronouncement did not have a
material effect on the results of operations or financial position.
F-10
Note 3 - Property and Equipment
At December 31, property and equipment consists of:
[Download Table]
2003 2002
-------------- ------------
Computer equipment and software $ 592,009 $ 536,781
Furniture and fixtures 518,586 518,585
Office equipment 36,092 35,453
Vehicles 374,525 341,976
Leasehold improvements 44,784 35,331
------------ ------------
1,565,996 1,468,126
Less: Accumulated depreciation and amortization 1,285,533 822,798
------------ ------------
$ 280,463 $ 645,328
============ ============
The cost basis of assets acquired under capital leases at December
31, 2003 and 2002 was $374,525 and $341,976, respectively.
Note 4 - Income Taxes
The Company had no income tax expense for the years ended December
31, 2003 and 2002 due to net losses. At December 31, 2003, the Company had
federal and state net operating loss carryforwards of approximately $64,000,000.
The federal net operating loss carryforwards expire beginning in the year 2020
and the state net operating loss carryforwards begin to expire in 2016. The
deferred tax asset of $25,643,000 and $24,171,000 relating primarily to
differences between book and tax treatment of net operating losses, was fully
reserved as of December 31, 2003 and 2002. The Company has established a
valuation allowance of $25,643,000 and $24,171,000 for the year ended December
31, 2003 and 2002 to reduce the deferred tax assets due to the uncertainty
surrounding the realization of such assets. The Tax Reform Act of 1986 contains
provisions that limit the ability to utilize net operating loss carryforwards in
the case of certain events including significant changes in ownership interests.
The Company has not evaluated whether it has undergone an ownership change
pursuant to this act. If such ownership changes are found to exist, the net
operating loss carryforwards as reported below could be significantly limited.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows at
December 31:
[Download Table]
2003 2002
--------------- ----------------
Deferred tax assets:
Net operating loss carryforwards 25,415,000 23,581,000
Other 228,000 590,000
--------------- ----------------
Deferred tax assets 25,643,000 24,171,000
Less: Valuation allowance 25,643,000 24,171,000
--------------- ----------------
Net deferred tax assets $ - $ -
=============== ================
Total tax expense for 2003 and 2002 differs from the amount
computed by applying the federal statutory rate of 34% primarily due to the
valuation allowance established against net operating loss carryforwards. The
Company's effective tax rate was 0% for 2003 and 2002.
Note 5 - Capital Stock
On April 1, 2002, the Board of Directors approved a one-for-ten
reverse common stock split which was subsequently approved by shareholders as of
May 2, 2002. An amendment to the Company's Certificate of Incorporation
effecting the stock split was filed with the State of Delaware on May 2, 2002.
All common share and per common share amounts for all periods presented in the
accompanying consolidated financial statements have been restated to reflect the
effect of this common stock split.
F-11
As of December 31, 2003, the Company has authorized 40,000,000
shares of common stock with a par value of $0.01. The Company also has
authorized 2,000,000 shares of preferred stock, which are undesignated, with a
par value of $0.01.
Note 6 - Stock-Based Compensation
The Company has reserved a total of 750,000 shares of common stock
for issuance under its stock option plan (the "Plan"). The Plan permits the
granting of incentive stock options and non-qualified stock options. The terms
of stock option grants are determined by the Compensation Committee of the Board
of Directors. The Company's stock options generally vest over three years and
have a maximum life of ten years. Separate from the Plan, the Company has
granted stock options and warrants to consultants as compensation for their
consulting services. Shares available for future issuance under the Plan total
261,492 at December 31, 2003.
The following summarizes the stock option activity for the years
ended December 31, 2003 and 2002:
[Download Table]
Weighted
Average
Options Exercise
Outstanding Price
----------------------------------
Balance at December 31, 2001 38,010 $ 123.37
Granted (exercise price = fair value) 20,119 3.63
Assumption of Netword options 59,342 54.30
Exercised (7,524) (8.64)
Cancelled (8,741) (155.23)
------------- --------------
Balance at December 31, 2002 101,206 64.84
Granted (exercise price = fair value) 542,100 3.72
Exercised --- ---
Cancelled (166,178) (9.08)
--------- ------
Balance at December 31, 2003 477,128 $ 14.82
============= ==============
During the year ended December 31, 2003, the Company recorded
non-cash expense of $31,412 for the fair value of stock options granted as
consideration for services provided to the Company. This expense, which equates
to a per share amount of $0.04 for the year ended December 31, 2003, was
computed using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used in this model: expected dividend yield of
0%, risk-free interest rate of 4.4%, expected life of 7.0 years and stock price
volatility of 70%.
During the year ended December 31, 2003, the Company recorded
non-cash expense of $112,960 for the fair value of stock options granted as
consideration for services provided to the Company. This expense, which equates
to a per share amount of $0.04 for the year ended December 31, 2003, was
computed using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used in this model: expected dividend yield of
0%, risk-free interest rate of 4.4%, expected life of 3.0 years and stock price
volatility of 70%.
F-12
Selected information regarding stock options as of December 31,
2003 follows:
[Download Table]
Weighted
Average
Number Remaining Number
Exercise of Options Life in of Options
Prices Outstanding Years Exercisable
------------- ------------- ------------- --------------
$ 2.50 12,500 9.29 6,250
3.63 16,123 8.33 9,187
3.75 377,100 9.21 114,033
7.26 23 6.99 23
50.00 49,591 0.13 49,591
60.00 1,875 0.64 1,875
79.83 7,087 7.72 197
80.00 7,875 1.19 7,875
163.28 96 6.83 96
362.84 4,858 7.06 3,129
------------- -----------
477,128 192,257
============= ===========
Note 7 - Common Stock Reserved for Future Issuance
At December 31, 2003, the Company had reserved a total of 6,548,503
of its authorized 40,000,000 shares of common stock for future issuance as
follows:
Outstanding common stock warrants 5,769,883
Possible future issuance of common stock warrants 40,000
Outstanding stock options 477,128
Possible future issuance under stock option plans 261,492
------------
6,548,503
Note 8 - Leases
The Company leases certain furniture and equipment under various
non-cancellable capital leases and its office space and certain equipment under
non-cancellable operating leases. Future minimum payments under the
non-cancellable capital and operating leases at December 31, 2003 are as
follows:
[Download Table]
Year Capital Operating
Ending Leases Leases
------ ------------- -----------
2004 $ 119,267 $ 315,397
2005 9,161 257,326
2006 1,166 194,986
2007 - 200,493
2008 - 33,492
------------- --------------
Total minimum payments 129,594 $ 1,001,695
==============
Less: Amounts representing interest 3,204
-------------
Present value of minimum lease payments 126,390
Less: Current portion of capital lease obligations 116,313
-------------
Long-term portion of capital lease obligations $ 10,077
=============
Rent expense charged to operations during the years ended December
31, 2003 and 2002 was $283,595 and $272,319, respectively.
F-13
Note 9 - Related Party Transactions
Related Party Payables
Included in payables to related parties at December 31, 2002 is
$291,793, which consists primarily of accrued fees owed to a shareholder at
December 31, 2002.
Placement and Other Fees
In February 2002, Donald B. Witmer, former chairman of the Board of
Directors and chief executive officer, Robert Wise, former president, chief
operating officer and director of the Company, and Spencer Trask Venture
Partners, LLC, an affiliate of the Company's financial adviser, Spencer Trask
Ventures, Inc. ("Spencer Trask"), purchased $110,000, $55,000 and $270,000 of
the Company's exchangeable notes, respectively, which included 17,127
detachable warrants to purchase the Company common stock at $.70 per share. The
exchangeable notes were exchangeable into convertible notes upon satisfying the
minimum sale requirements of the private placement of convertible debt. These
notes were exchanged for an equal principal amount of the Company's convertible
notes in May 2002. Of the $705,000 proceeds received by the Company, $230,481
was assigned as the fair value of the detachable warrants. The exchangeable
notes contained a beneficial conversion feature determined to be $230,481 at the
date of issuance. These amounts were recorded as an increase to interest expense
during the quarter ended June 30, 2002 when the notes were exchanged into
secured convertible notes. In fiscal 2002 (prior to the merger with Netword),
the Company sold $9,200,000 principal amount of its 8% secured convertible notes
which were converted into the Company common stock at a price of $.10 per share
immediately prior to the merger with Netword. Upon the merger, all outstanding
shares of the Company (including the shares that were issued upon conversion of
the Company's convertible notes) were exchanged for shares of Netword common
stock at the rate of 36.3 shares of the Company common stock for each share of
Netword common stock.
In connection with the secured convertible note offering in 2002,
the Company incurred placement fees of approximately $1,369,000, of which a
significant portion was paid to Spencer Trask. In addition, Spencer Trask
also received warrants to purchase 407,323 shares of the Company's common stock
at a price of $3.63 per share (valued at $1,038,549 using the Black-Scholes
pricing model) as part of the placement fee arrangement. Both amounts were
recorded as an increase to interest expense during the year ended December 31,
2002.
In connection with the private placement of common stock and
warrants in December 2003, the Company incurred placement fees of approximately
$227,000, paid to Spencer Trask. The placement fees were recorded as a reduction
to amounts raised. In addition, Spencer Trask also received warrants to purchase
657,846 shares of the Company's common stock at a price of $1.068 per share and
warrants to purchase 306,795 shares of the Company's common stock at a price of
$1.178 per share as part of the placement fee arrangement.
On March 28, 2003, the Company entered into a Consulting Agreement
under which it retained Spencer Trask as its non-exclusive financial adviser and
investment banker. Under this agreement, the Company agreed that until March 28,
2004, it would compensate Spencer Trask, in cash and/or warrants to purchase
Common Stock, for advisory services in connection with acquisitions, mergers,
combinations, private and public equity offerings, debt financing and other
similar business transactions. No compensation has been paid under the
agreement.
Note 10 - Employee Benefit Plan
The Company has a 401(k) plan which covers substantially all
employees. Employees may elect to contribute up to 15% of eligible compensation
during any plan year subject to IRS limits. Matching contributions to the plan
are made at the discretion of the Board of Directors. For the years ended
December 31, 2003 and 2002, the Company has not made any matching contributions
to the 401(k) plan.
Note 11 - Gain from Extinguishment of Certain Liabilities
Throughout early 2002, the Company completed a restructuring of
several liabilities through negotiations with vendors for settlements and/or
abatement, which resulted in the satisfaction of approximately $7,000,000 of
debt, accounts payable and other liabilities for total payments of approximately
$2,500,000. In connection with this restructuring of liabilities, the Company
recorded a gain from extinguishment of certain liabilities of approximately
$4,500,000.
F-14
Note 12 - Commitments and Contingencies
The Company is subject to various legal proceedings and claims,
which have arisen in the ordinary course of its business and have not been fully
adjudicated. It is impossible at this time for the Company to predict with any
certainty the outcome of such litigation. However, management is of the opinion,
based upon information presently available, that it is unlikely that any such
liability, to the extent not provided for through insurance or otherwise, would
be material in relation to the Company's consolidated financial position or
results of operations.
On June 18, 2001, Point West Ventures, LP ("Point West") filed a
complaint against HDT and Spencer Trask Ventures, Inc., the placement agent for
HDT's Series B convertible preferred stock financing in 2000, in New York State
Supreme Court. Point West, one of the investors in that financing, alleged
misrepresentation in connection with that financing and sought rescission of its
$500,000 investment. Subsequent to the filing of the complaint Point West was
placed in receivership and the action against the Company and Spencer Trask was
stayed and remains inactive. The receiver may determine to pursue the action at
some future date.
The Company has received written notice from a third party alleging
breach of contract and violation of trademark law in connection with the use of
the "Home Director" trademark. The Company has taken what it believes is
appropriate remedial action and does not believe that there is any remaining
basis for a claim by the third party, nor has the third party taken further
action to pursue its claim. Nevertheless, it is possible that the third party
will initiate legal action seeking damages and/or injunctive relief against
the Company. If any such litigation should be resolved adversely, the Company
could be compelled to pay damages and/or royalties to the third party for its
use of the Home Director name and/or to limit or discontinue its use as a
trademark.
Michael Liddle is employed by the Company as its chief executive
officer under an employment agreement dated December 31, 2003, which expires on
December 31, 2006, subject to automatic renewal for successive one-year terms
unless terminated by the Company or Mr. Liddle prior to renewal. The agreement
provides for an annual base salary of $216,000, subject to increase in the
discretion of the Board of Directors. Mr. Liddle's annual base salary will
increase to $300,000 if the Company achieves two consecutive profitable
quarters, and he may be entitled to an annual cash bonus of up to 50% of his
base salary, of which 75% is contingent upon the Company's achievement of
certain targeted financial objectives approved by the Board of Directors and 25%
is within the discretion of the Compensation Committee of the Board of
Directors.
In connection with his employment, Mr. Liddle was granted options to
purchase 420,464 shares of Common Stock at $1.30 per share (the market price of
the Common Stock as of the date of grant), vesting in 36 equal monthly
installments commencing on January 31, 2004. The number of shares of Common
Stock underlying these options represents 3% of the Company's issued and
outstanding Common Stock and shares of Common Stock underlying "in-the-money"
warrants as of January 21, 2004. In addition to this initial grant, Mr. Liddle
is entitled to receive additional stock option grants (up to a total of 1.75% of
the outstanding Common Stock and "in-the-money" warrants) at the end of 2004 and
again at the end of 2005, if the Company achieves certain targeted financial
objectives approved by the Board of Directors for each of those years.
Under the terms of the Company's Amended and Restated Stock Option
Plan, if Mr. Liddle's employment is terminated by the Company for cause, or if
he terminates his employment without the Company's consent, his unexercised
options will immediately expire.
If Mr. Liddle's employment is terminated without cause, he will be
entitled to receive his base salary (as paid to him during the preceding 12
months or any shorter period of his employment), plus any unpaid bonus earned in
the calendar year preceding such termination. If Mr. Liddle has been employed
for at least six months during the calendar year in which his employment is
terminated without cause, he will be eligible to receive a pro-rata portion of
any bonus earned during such year, based upon the Company's achievement of
applicable performance targets and subject to the discretion of the Compensation
Committee of the Board of Directors. Also, in case of termination of Mr.
Liddle's employment by the Company without cause, (i) all of his unvested stock
options will become and remain immediately exercisable until expiration of their
respective terms and (ii) he will be entitled to receive benefits under the
Company's employee benefit plans for up to 12 months after the termination date
or until he obtains employee benefits in connection with new employment.
Upon termination of his employment, Mr. Liddle will be subject to a two
year restriction on certain activities that compete with the Company.
Donald B. Witmer was employed as our Chairman and Chief Executive
Officer under an employment agreement that expired on December 31, 2003, at
which time he resigned from these positions. All options to purchase shares of
Common Stock granted to Mr. Witmer before the merger expired on December 31,
2003. On January 16, 2003, the Company granted Mr. Witmer options to purchase
180,000 shares of Common Stock at an exercise price of $3.75 per share, of which
60,000 have vested and remain exercisable through March 31, 2004 and the other
120,000 terminated upon his resignation. Mr. Witmer resigned as a director of
the Company on February 12, 2004.
On March 3, 2004, Robert N. Wise resigned as the President, Chief
Operating Officer and a director of the Company and entered into a Separation
and Release Agreement with the Company. Under the terms of this agreement, the
Company retained Mr. Wise as an independent consultant for a transition period
of 30 days and the Company's obligation to employ Mr. Wise as its President and
Chief Operating Officer under his Employment Agreement was terminated. We agreed
to pay Mr. Wise (i) $10,000 during the transition period, (ii) $50,000 upon his
resignation, (iii) 2% of the Company's first year revenues derived from certain
contracts and projects, and (iv) 1% of the Company's second year revenues
derived from such contracts and projects. In addition, the Company agreed to
continue to provide Mr. Wise with benefits under the Company's employee benefit
plans until December 31, 2004 and to pay the remaining installments due under an
automobile lease and the balance of the purchase price of the leased automobile
upon expiration of the lease. The Company and Mr. Wise exchanged releases.
Pursuant to his employment agreement, Mr. Wise remains subject to certain
restrictions on his post-employment activities for up to 12 months after his
resignation.
All options to purchase shares of Common Stock granted to Mr. Wise
before the merger expired upon his resignation. On January 16, 2003, the Company
granted Mr. Wise options to purchase 180,000 shares of Common Stock at an
exercise price of $3.75 per share. Upon Mr. Wise's resignation, 60,000 of such
options expired unexercised and under the terms of the Separation and Release
Agreement, 120,000 of such options are exercisable through March 3, 2005.
Note 13- Provision for Abandonment of Facility
In June 2003, the Company exited its Durham, North Carolina warehouse
facility and relocated the operations to its Livermore, California facility. The
Company agreed to a settlement of $657,891 to be repaid over four years. As a
result, the Company recorded a discounted provision of $590,000 related to the
remaining lease commitment associated with the Durham facility. In December
2003, the Company determined that certain fixed assets located in North Carolina
would not be used and wrote off $93,966. There were no severance costs
associated with this abandonment.
[Download Table]
Balance at Balance at
12/31/02 Provision Payments 12/31/03
-------- --------- -------- ----------
Facility
Abandonment --- $590,000 $(68,657) $521,343
Approximately $127,369 of the balance at December 31, 2003 is recorded
as part of accounts payable and accrued expenses and $393,974 is recorded as
other long-term liabilities.
Note 14 - Liquidity
As a result of the Company's continuing losses, particularly during the
fourth quarter of 2003, and its current inability to borrow additional funds
under its bank line of credit, the Company faces an acute shortage of working
capital during at least the first half of 2004. The Company is addressing its
working capital needs by seeking additional financing through a potential new
bank line of credit that will enable the Company to pay its outstanding bank
loan and obtain additional advances against its receivables and through
additional sales of equity securities. There is no certainty that the Company
will be able to obtain working capital when it needs it, and its operations may
suffer and the Company may ultimately have to be discontinued if it is unable to
obtain necessary financing on a timely basis.
Historically the Company's operations have never been self-sustaining,
and it has financed its continuing operations through a series of private
offerings of debt and equity and by obtaining advances under the Loan Agreement.
The Company cannot predict when, if ever, its business will produce sufficient
cash to reduce or eliminate its dependence on external financing as its primary
source of working capital.
Private Placement
In December 2003 and January 2004, the Company raised gross proceeds of
$3,226,315 in a private placement of equity units consisting of 3,470,679 shares
of Common Stock and three-year warrants to purchase 3,470,679 shares of Common
Stock at exercise prices ranging from $1.068 to $1.298 per share. Net proceeds
of $1,740,000 was received by the Company in 2003 and is reflected in the
balance sheet as of December 31, 2003, and the remaining net proceeds of
$860,000 was received in 2004. The Company paid the placement agent $369,421 as
cash compensation and for reimbursement of its non-accountable expenses and
issued the placement agent five-year warrants to purchase 1,388,272 shares of
Common Stock at exercise prices ranging from $1.068 to $1.298 per share.
F-15
Loan Agreement
In July 2003, the Company entered into a Loan and Security Agreement
with Venture Banking Group, a Division of Cupertino National Bank, providing for
a revolving line of credit of up to $1,000,000 at any time outstanding. Advances
under the Loan Agreement are limited to 80% of the Company's eligible
receivables (as defined) and bear interest at the lender's prime rate plus 0.5%
(4.5% as of March 1, 2004), subject to a minimum rate of 4.75%. Amounts owing
under the Loan Agreement are secured by substantially all of the Company's
assets. As of December 31, 2003 and March 1, 2004, the balance outstanding under
the Loan Agreement was $300,000.
In October 2003 and again in February 2004, the lender notified the
Company of the occurrence of an event of default under the Loan Agreement as a
result of its failure to comply with certain financial covenants. Although the
lender has not exercised its default remedies (which include the right to demand
immediate repayment of the outstanding balance), it is not providing further
advances. On March 3, 2004, the Company signed a Term Sheet with a potential
replacement lender for a proposed new line of credit of up to $750,000 at an
interest rate of 10%. However, the Company can provide no assurance that a
definitive agreement will be entered into on the terms set forth in the Term
Sheet or at all and even if such an agreement is entered into, the Company does
not believe the financing contemplated by the Term Sheet will be adequate for
its working capital needs beyond June 30, 2004.
As a result of the recurring losses from operations, default of the
line of credit, dependence upon financing operations through a series of private
offerings of debt and equity, and the uncertainty about the adequacy of funding
during 2004, our independent auditors have included an explanatory paragraph in
their report on the accompanying financial statements indicating there is
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Note 15 - Notes Payable
Notes payable consist of $125,000 remaining on a note payable to an
individual that matured on August 24, 2001 and is currently in default. The
note charged interest at 10% and accrued interest of $21,000 was recorded at
December 31, 2001. No interest was accrued or paid during 2002.
F-16
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 - INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under our Restated Certificate of Incorporation and Amended and
Restated Bylaws, our directors and officers are entitled to be indemnified to
the fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law. Additionally, under our Restated Certificate of Incorporation
and Amended and Restated Bylaws, our directors are not subject to personal
liability to us or our stockholders for monetary damages resulting from a breach
of fiduciary duty or failure to exercise any applicable standard of care, except
that our directors may be subject to personal liability for monetary damages in
circumstances involving:
o a breach of the duty of loyalty;
o acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends, stock purchases or redemptions
under the Delaware General Corporation Law; or
o transactions from which the director derives an improper personal
benefit.
ITEM 25 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Company in connection with the offering described in this registration
statement. None of these costs and expenses will be paid by any of the selling
stockholders.
Securities and Exchange Commission Registration Fee.... $ 2,964.89
Legal Fees and Expenses................................ $ 100,000.00
Accounting Fees and Expenses........................... $ 15,000.00
Other Expenses......................................... $ 15,000.00
Total Costs and Expenses............................... $ 132,964.89
ITEM 26 - RECENT SALES OF UNREGISTERED SECURITIES
In December 2003 and January 2004, we sold units consisting of
3,470,679 shares of Common Stock and warrants to purchase 3,470,679 shares of
Common Stock, for aggregate consideration of $3,226,315. The units were sold to
persons we reasonably believed were accredited investors, without public
solicitation or advertising, the certificates issued therefor were endorsed with
an appropriate restrictive legend, and the transaction was therefore exempt from
registration pursuant to Rule 506 under the Securities Act. We paid Spencer
Trask, our placement agent, cash compensation of $370,000, including
reimbursement for its non-accountable expenses. In addition, we issued Spencer
Trask warrants to purchase 1,388,270 shares of Common Stock at exercise prices
ranging from $1.068 to $1.298 per share.
On December 9, 2003, in separate transactions, we engaged Brockington
Securities, Inc. and SLD Capital Corp. to provide certain services to us and
issued to each of them a warrant to purchase 100,000 shares of Common Stock at
$1.15 per share. See "Relationships and Transactions with Selling Stockholders."
The warrants were issued in negotiated transactions without solicitation, the
recipients of the warrants represented to us that they were accredited
investors, the certificates for the warrants were endorsed with an appropriate
restrictive legend, and the transactions were therefore exempt from registration
pursuant to Rule 506 under the Securities Act.
II-1
On July 24, 2003, in connection with an extension of credit to us, we
issued a warrant to purchase 23,684 shares of Common Stock at $1.90 per share to
Greater Bay Bancorp. The warrant was issued to a single purchaser in a
negotiated transaction, the purchaser was an accredited investor, the
certificate for the warrant was endorsed with an appropriate restrictive legend,
and the transaction was therefore exempt from registration pursuant to Rule 506
under the Securities Act.
During the past three years, we have issued options to purchase shares
of our Common Stock from time to time under our Amended and Restated Stock
Option Plan. The exercise prices of such options are equal to the fair market
value of our Common Stock on the respective grant dates. The stock option grants
were exempt from registration pursuant to Section 4(2) of the Securities Act,
since they were made to a small number of informed persons who were provided
with all information relevant to their investment decisions. In addition,
pursuant to the merger, we assumed all outstanding options under HDT's Stock
Incentive Plan (subject to necessary adjustments to reflect the exchange ratio
under the merger agreement), which were granted by HDT without registration
pursuant to the exemption from registration available under Rule 701 under the
Securities Act. We plan to register under the Securities Act the offering of
Common Stock pursuant to all options granted or which may be granted under our
Amended and Restated Stock Option Plan (including the HDT options assumed in the
merger).
ITEM 27 - EXHIBITS.
The following exhibits are filed with this document:
Exhibit
Number Exhibit Title+
--------- --------------
2.1 Asset Purchase Agreement by and among Home Director, Inc., Spencer
Trask Intellectual Capital Company LLC and International Business
Machines Corporation, dated as of December 7, 1999.****
2.2 Agreement and Plan of Merger and Reorganization among Home Director,
Inc., DI Acquisition, Inc., Digital Interiors, Inc. and Donald B.
Witmer as Stockholders' Agent, dated as of October 24, 2000.****
2.3 Asset Purchase Agreement, dated May 14, 2001, by and among Digital
Interiors, Inc., Los Gatos Home Theater, Inc. and Joseph J. Paris.****
2.4 Agreement and Plan of Merger, dated as of April 9, 2002, by and among
Netword, Inc., Webspeak Acquisition Corp. and Home Director, Inc.*
2.5 Amendment No. 1 to Agreement and Plan of Merger, dated as of July 31,
2002, by and among Netword, Inc., Webspeak Acquisition Corp. and Home
Director, Inc.*
2.6 Amendment No. 2 to Agreement and Plan of Merger, dated as of October
25, 2002, by and among Netword, Inc., Webspeak Acquisition Corp. and
Home Director, Inc.**
2.7 Stock Purchase Agreement, dated as of January 22, 2003, between Home
Director, Inc. and Michael L. Wise.****
3.1 Certificate of Incorporation of Netword, Inc. ++
3.2 First Certificate of Amendment to the Certificate of Incorporation of
Netword, Inc.***
3.3 Restated Certificate of Incorporation of Home Director, Inc.***
3.4 Bylaws of Home Director, Inc., as amended and restated on March 3,
2004. (Filed herewith).
3.5 Certificate of Merger merging Webspeak Acquisition Corp. with and into
Home Director, Inc.***
II-2
4.1 Form of Warrant to purchase shares of Common Stock of Netword, Inc.
issued to members of Netword, LLC in connection with the merger of
Netword, LLC and Netword, Inc. ++
4.2 Warrant to purchase shares of Common Stock of Netword, Inc., dated
May 1, 1999, issued to Pryor, Cashman, Sherman & Flynn LLP. ++
4.3 Form of Subscription Agreement to purchase shares of Common Stock of
Netword, Inc. executed in connection with the Rule 506 sale of 782,000
units consummated on July 28, 1999 and August 5, 1999.++
4.4 Form of Warrant to purchase shares of Common Stock of Netword, Inc.
issued to purchasers in the Rule 506 offering to David Segal and to
NorthStar Capital Partners LLC.++
4.5 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated March 3, 2000, issued to
the McKenna Group. ****
4.4 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 4, 2001, issued to
the McKenna Group.****
4.7 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 5, 2000, issued
to Motorola, Inc.****
4.8 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 11, 2000, issued
to Spencer Trask Ventures, Inc.****
4.9 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 11, 2001, issued
to Mary Walker.****
4.10 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated January 25, 2001, issued
to Spencer Trask Ventures, Inc.****
4.11 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 14, 2001, issued to
Joseph J. Paris.****
4.12 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 11, 2001, issued
to The Conrado Company, Inc.****
4.13 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated December 3, 2001, issued
to Peter Blaettler.****
4.14 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated February 6, 2002, issued
to Spencer Trask Investment Partners, LLC.****
4.15 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated February 6, 2002, issued
to Donald B. Witmer.****
II-3
4.16 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated February 6, 2002, issued
to Robert N. Wise.****
4.17 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 1, 2002, issued to
Southport Park Limited Partnership.****
4.18 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 8, 2002, issued to
the Dioguardi Family Trust.****
4.19 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 8, 2002, issued to
Donald B. Witmer.****
4.20 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 8, 2002, issued to
Spencer Trask Ventures, Inc.****
4.21 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated May 14, 2002, issued to
Spencer Trask Ventures, Inc.****
4.22 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated June 26, 2002, issued to
Spencer Trask Ventures, Inc.****
4.23 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated July 8, 2002, issued to
Spencer Trask Ventures, Inc.****
4.24 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated July 26, 2002, issued to
Spencer Trask Ventures, Inc.****
4.25 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated September 30, 2002,
issued to Spencer Trask Ventures, Inc.****
4.26 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 7, 2002, issued
to Spencer Trask Ventures, Inc.****
4.27 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated September 30, 2002,
issued to Kirlin Securities, Inc.****
4.28 Warrant to purchase shares of Common Stock of Home Director, Inc.
(subsequently adjusted in accordance with the terms of the Agreement
and Plan of Merger (see Exhibit 2.4)), dated October 7, 2002, issued
to Kirlin Securities, Inc.****
4.29 Warrant to purchase shares of Series B Convertible Preferred Stock of
Home Director, Inc. (subsequently adjusted in accordance with the
terms of the Agreement and Plan of Merger
II-4
(see Exhibit 2.4)), dated April 3, 2000, issued to Spencer Trask
Ventures, Incorporated.****
4.30 Warrant to purchase shares of Series C Convertible Preferred Stock of
Home Director, Inc. (subsequently adjusted in accordance with the
terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated
July 6, 2000, issued to Spencer Trask Ventures, Incorporated.****
4.31 Stock Option Plan of Home Director, Inc., as amended through October
1, 2002****
4.32 Form of Award Letter for Optionees. ++
4.33 Warrant to purchase shares of Common Stock of Home Director, Inc.
issued to Brockington Securities, Inc. on December 9, 2003. (Filed
herewith).
4.34 Warrant to purchase shares of Common Stock of Home Director, Inc.
issued to SLD Capital Corp. on December 9, 2003. (Filed herewith).
4.35 Form of warrant to purchase shares of Common Stock of Home Director,
Inc. issued to investors in December 2003 and January 2004. (Filed
herewith).
4.36 Form of warrants to purchase shares of Common Stock of Home Director,
Inc. issued to Spencer Trask Ventures, Inc. in December 2003 and
January 2004. (Filed herewith).
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP (Filed herewith).
9.1 Voting Agreement, dated as of April 30, 2002, among Netword, Inc.,
Spencer Trask Intellectual Capital Company LLC, Spencer Trask
Ventures, Inc., Cisco Systems, Inc., Motorola, Inc., Donald Witmer,
Robert Wise and Daryl Stemm.*
9.2 Stockholders Agreement, dated as of July 16, 2002, among Home
Director, Inc., Netword, Inc., Spencer Trask Investment Partners, LLC,
Spencer Trask Intellectual Capital Company LLC, Spencer Trask
Ventures, Inc., Motorola, Inc., Cisco Systems, Inc., Donald Witmer,
Daryl Stemm, Kent M. Klineman, Jordan Klineman, Justine Klineman,
Michael Wise, Batya Wise, David Wise, Gidon Wise, Joseph S. Reiss,
Gary and Lynn Gettenberg as joint tenants, The Lawrence Charitable
Trust, Klondike Resources, Inc., the Jesurum Family Limited
Partnership and Stilwell Holding LLC.*
9.3 Letter Agreement, dated as of April 30, 2002, among Netword, Inc.,
Spencer Trask Investment Partners, LLC, Spencer Trask Intellectual
Capital Company, LLC, Spencer Trask Ventures, Inc., Donald B. Witmer,
Robert Wise and Daryl Stemm.*
10.3 Employment Agreement, dated as of September 24, 2001, between Home
Director, Inc. and Donald B. Witmer.****
10.4 Employment Agreement, dated as of September 24, 2001, between Home
Director, Inc. and Robert N. Wise.****
10.5 Sublease Agreement, dated July 23, 2002, among Adaptec, Inc., Home
Director, Inc. and Shea Center Livermore, LLC.****
10.6 Lease Agreement, dated as of April 19, 2000, by and between Southport
Business Park Limited Partnership and Home Director, Inc., as
amended.****
10.7 Placement Agency Agreement, dated April 10, 2002, by and between Home
Director, Inc. and Spencer Trask Ventures, Inc.****
10.8 Agreement, dated as of April 17, 2003, by and between Sears, Roebuck &
Co. and Home Director, Inc.[+/+] Portions of this exhibit have been
omitted pursuant to a request for confidential treatment. The term
"confidential treatment" and the mark "*" used throughout this exhibit
mean that the material has been omitted and separately filed with the
SEC.
II-5
10.9 Loan and Security Agreement, dated as of July 24, 2003, by and between
Venture Banking Group, a Division of Cupertino National Bank, and Home
Director, Inc., Home Director Technologies, Inc. and Digital
Interiors, Inc. [+/+] [+/+]
10.10 Placement Agency Agreement, dated as of November 10, 2003, by and
between Spencer Trask Ventures, Inc. and Home Director, Inc. (Filed
herewith).
10.11 Letter Agreement, dated as of December 9, 2003, by and between Home
Director, Inc. and Brockington Securities, Inc. (Filed herewith).
10.12 Letter Agreement, dated as of December 9, 2003, by and between Home
Director, Inc. and SLD Capital Corp. (Filed herewith).
10.13 Form of Subscription Agreements to purchase shares of Common Stock and
Warrants to purchase shares of Common Stock between Home Director,
Inc. and the several purchasers of its equity units sold on December
9, 2003, December 19, 2003 and January 21, 2004. (Filed herewith).
10.14 Form of Registration Rights Agreement between Home Director, Inc. and
the several purchasers of its equity units sold on December 9, 2003,
December 19, 2003 and January 21, 2004. (Filed herewith).
10.15 Employment Agreement, dated as of December 31, 2003, by and between
Home Director, Inc. and Michael Liddle. (Filed herewith).
10.16 Employment Agreement, dated as of January 7, 2004, by and between Home
Director, Inc. and Jerry Steckling. (Filed herewith).
10.17 Separation and Release Agreement by and between Robert N. Wise, Home
Director, Inc., Home Director Technologies, Inc. and Digital
Interiors, Inc., dated as of March 3, 2004. (Filed herewith).
21 List of subsidiaries of Home Director, Inc.****
23.1 Consent of Mahoney Cohen & Company, CPA. P.C. (Filed herewith).
23.2 Consent of Kronish Lieb Weiner & Hellman LLP (included in Exhibit
5.1).
---------------
+ Exhibits that pre-date the merger on December 19, 2002 and
refer to Home Director, Inc. are references to Home Director
Technologies, Inc., now a wholly-owned subsidiary of the
registrant (See Exhibit 21), and exhibits that pre-date the
merger and refer to Netword, Inc. are references to Home
Director, Inc., the registrant.
++ Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Netword's registration
statement on Form SB-1 (Reg. No. 333-86873) filed with the
Securities and Exchange Commission on September 9, 1999.
* Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Netword's Registration
Statement on Form S-4 (Reg. No. 333-86873), filed with the
Securities and Exchange Commission on August 2, 2002.
** Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Amendment No. 1 to Netword's
Registration Statement on Form S-4, filed with the Securities
and Exchange Commission on October 28, 2002.
*** Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Home Director's report on
Form 8-K, filed with the Securities and Exchange Commission on
December 20, 2002.
II-6
**** Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Home Director's report on
Form 10-KSB for the fiscal year ended December 31, 2002, filed
with the Securities and Exchange Commission on March 31, 2003.
[+/+] Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Home Director's report on
Form 10-QSB for the fiscal quarter ended June 30, 2003, filed
with the Securities and Exchange Commission on August 19,
2003.
[+/+][+/+] Incorporated by reference to the corresponding exhibit
previously filed as an exhibit to Home Director's report on
Form 10-QSB for the fiscal quarter ended September 30, 2003,
filed with the Securities and Exchange Commission on November
17, 2003.
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 Section 10(a)(3) of the
Securities 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 the
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 a
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum 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
Securities 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 arising under the Securities Act may be
permitted to directors, officers and controlling persons of Home Director, Inc.
pursuant to the foregoing provisions, or otherwise, Home Director, Inc. has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Home Director, Inc. of
expenses incurred or paid by a director, officer or controlling person of Home
Director, Inc. 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, Home Director, Inc. 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 of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Livermore, State of California, on March 8, 2004.
HOME DIRECTOR, INC.
(Registrant)
By: /s/ MICHAEL LIDDLE
--------------------------------
Michael Liddle
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
/s/ MICHAEL LIDDLE
---------------------------- Chief Executive Officer
Michael Liddle and Director March 8, 2004
/s/ DARYL STEMM Chief Financial and March 8, 2004
---------------------------- Accounting Officer and Secretary
Daryl Stemm
/s/ KENT M. KLINEMAN Director March 8, 2004
----------------------------
Kent M. Klineman
/s/ EZRA P. MAGER Chairman of the Board of Directors March 8, 2004
---------------------------
Ezra P. Mager
/s/ STEPHEN B. STE. MARIE Director March 8, 2004
---------------------------
Stephen B. Ste. Marie
/s/ MICHAEL L. WISE
-------------------
Michael L. Wise Director March 8, 2004
S-1
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘SB-2’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/06 | | 27 | | 61 | | | 10KSB, 10KSB/A |
| | 12/19/05 | | 29 |
| | 4/17/05 | | 20 |
| | 3/3/05 | | 26 | | 61 |
| | 1/22/05 | | 29 |
| | 12/31/04 | | 28 | | 61 | | | 10KSB, 5 |
| | 7/15/04 | | 40 | | | | | 4 |
| | 6/30/04 | | 17 | | 63 | | | 10QSB, 4 |
| | 6/9/04 | | 40 |
| | 3/31/04 | | 26 | | 61 | | | 10QSB, NT 10-K, NT 10-Q |
| | 3/28/04 | | 29 | | 60 |
| Filed on: | | 3/8/04 | | 1 | | 71 |
| | 3/4/04 | | 1 | | 42 |
| | 3/3/04 | | 13 | | 69 |
| | 3/1/04 | | 17 | | 63 |
| | 2/12/04 | | 28 | | 61 | | | 5 |
| | 1/31/04 | | 28 | | 61 |
| | 1/21/04 | | 28 | | 69 |
| | 1/7/04 | | 9 | | 69 | | | 3, 8-K |
| | 1/1/04 | | 9 | | 31 | | | 3 |
| | 12/31/03 | | 7 | | 69 | | | 10KSB, 4, 5, NT 10-K |
| | 12/19/03 | | 29 | | 69 | | | 3, SC 13G |
| | 12/9/03 | | 38 | | 69 | | | 3, 4, 4/A, 8-K |
| | 11/17/03 | | 70 | | | | | 10QSB, NT 10-Q |
| | 11/10/03 | | 29 | | 69 |
| | 9/30/03 | | 70 | | | | | NT 10-Q |
| | 8/19/03 | | 70 | | | | | 10QSB |
| | 7/24/03 | | 65 | | 69 |
| | 6/30/03 | | 56 | | 70 | | | 10QSB, NT 10-Q |
| | 6/15/03 | | 56 |
| | 5/31/03 | | 56 |
| | 4/28/03 | | 25 | | 40 |
| | 4/17/03 | | 14 | | 68 |
| | 3/31/03 | | 70 | | | | | 10KSB, 10QSB |
| | 3/28/03 | | 29 | | 60 | | | 3, 8-A12G |
| | 3/3/03 | | 14 |
| | 1/22/03 | | 29 | | 65 |
| | 1/16/03 | | 28 | | 61 |
| | 12/31/02 | | 15 | | 70 | | | 10KSB |
| | 12/20/02 | | 69 | | | | | 8-K |
| | 12/19/02 | | 5 | | 69 | | | 8-K |
| | 12/15/02 | | 56 |
| | 10/28/02 | | 69 | | | | | S-4/A |
| | 10/25/02 | | 65 |
| | 10/7/02 | | 67 |
| | 10/1/02 | | 68 |
| | 9/30/02 | | 67 | | | | | 10QSB |
| | 8/2/02 | | 69 | | | | | S-4 |
| | 7/31/02 | | 65 |
| | 7/26/02 | | 67 |
| | 7/23/02 | | 68 |
| | 7/16/02 | | 68 | | | | | 10QSB |
| | 7/8/02 | | 67 |
| | 6/30/02 | | 60 | | | | | 10QSB |
| | 6/26/02 | | 67 |
| | 5/14/02 | | 67 |
| | 5/8/02 | | 67 |
| | 5/2/02 | | 57 |
| | 5/1/02 | | 67 |
| | 4/30/02 | | 68 |
| | 4/10/02 | | 39 | | 68 | | | 8-K |
| | 4/9/02 | | 65 |
| | 4/1/02 | | 57 |
| | 2/6/02 | | 66 | | 67 |
| | 1/1/02 | | 55 |
| | 12/31/01 | | 16 | | 63 | | | 10KSB |
| | 12/15/01 | | 55 |
| | 12/3/01 | | 66 |
| | 10/11/01 | | 66 |
| | 9/24/01 | | 68 |
| | 8/24/01 | | 63 |
| | 6/18/01 | | 24 | | 61 |
| | 5/14/01 | | 65 | | 66 |
| | 5/9/01 | | 37 |
| | 5/4/01 | | 66 |
| | 1/25/01 | | 66 |
| | 10/24/00 | | 65 |
| | 10/11/00 | | 66 |
| | 10/5/00 | | 66 |
| | 7/6/00 | | 68 |
| | 4/19/00 | | 68 |
| | 4/14/00 | | 34 |
| | 4/3/00 | | 68 |
| | 3/3/00 | | 66 |
| | 12/8/99 | | 53 |
| | 12/7/99 | | 65 |
| | 10/13/99 | | 53 |
| | 9/9/99 | | 69 |
| | 8/5/99 | | 66 |
| | 7/28/99 | | 66 |
| | 5/1/99 | | 66 |
| | 2/18/99 | | 5 |
| List all Filings |
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