<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 23, 1998
REGISTRATION NO. 333-59823
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AUDIOHIGHWAY.COM
(Exact Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 7375 77-0377306
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
</TABLE>
AUDIOHIGHWAY.COM
20600 MARIANI AVENUE
CUPERTINO, CA 95014
TELEPHONE (408) 255-5301
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
NATHAN M. SCHULHOF
AUDIOHIGHWAY.COM
20600 MARIANI AVENUE
CUPERTINO, CA 95014
TELEPHONE: (408) 255-5301
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
GROVER T. WICKERSHAM, ESQ. JOHN J. HALLE, ESQ.
DEBRA K. WEINER, ESQ. STOEL RIVES LLP
GROVER T. WICKERSHAM, P.C. 900 SW FIFTH AVENUE, SUITE 2300
430 CAMBRIDGE AVENUE, SUITE 100 PORTLAND, OR 97204
PALO ALTO, CA 94306
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE(1)
<S> <C> <C> <C>
Units,(2) each consisting of:..................................... 2,300,000 $6.00 $13,800,000
(i) one share of Common Stock; and............................. 2,300,000 -- --
(ii) one Warrant to purchase one share of Common Stock.......... 2,300,000 -- --
Units issuable upon exercise of the Representative's Warrants(3),
each consisting of:............................................. 200,000 7.20 1,440,000
(i) one share of Common Stock; and............................. 200,000 -- --
(ii) one Warrant to purchase one share of Common Stock.......... 200,000 -- --
Shares of Common Stock issuable upon exercise of Warrants,
including Warrants underlying Representative's Warrants(4)...... 2,500,000 9.00 22,500,000
Totals............................................................ $37,740,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Units,(2) each consisting of:..................................... $3,836.40
(i) one share of Common Stock; and............................. --
(ii) one Warrant to purchase one share of Common Stock.......... --
Units issuable upon exercise of the Representative's Warrants(3),
each consisting of:............................................. 400.32
(i) one share of Common Stock; and............................. --
(ii) one Warrant to purchase one share of Common Stock.......... --
Shares of Common Stock issuable upon exercise of Warrants,
including Warrants underlying Representative's Warrants(4)...... 6,255
Totals............................................................ $10,491.72(5)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as
amended.
(2) Includes 300,000 Units that Paulson Investment Company, Inc., the
representative of the several underwriters (the "Representative") has the
option to purchase to cover over-allotments, if any (the "Over-allotment
Option").
(3) In connection with the sale of the Units, the Registrant is granting to the
Representative warrants to purchase 200,000 Units (the "Representative's
Warrants").
(4) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issuable pursuant to the anti-dilution provisions
of the Warrants and the Representative's Warrants.
(5) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 23, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,000,000 UNITS
[AUDIOHIGHWAY.COM LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF
COMMON STOCK AND ONE COMMON STOCK PURCHASE WARRANT
audiohighway.com (the "Company") hereby offers 2,000,000 units (the
"Units"), each consisting of one share of Common Stock, no par value (the
"Common Stock") and one warrant to purchase an additional share of Common Stock
(the "Warrants"). The Units will separate upon issuance. Each Warrant entitles
the holder to purchase one share of Common Stock at a price of $ per share
(150% of the initial public offering price of the Units), subject to certain
adjustments. The Warrants are exercisable at any time, unless previously
redeemed, until the fifth anniversary of the date of this Prospectus. The
Company may redeem outstanding Warrants, in whole or in part, at any time upon
30 days' prior written notice to the registered holders thereof, at a price of
$0.25 per Warrant, provided the closing bid price of the Common Stock has been
at least $ (200% of the initial public offering price of the Units) for 20
consecutive trading days immediately preceding the date of notice of redemption.
See "Description of Securities--Warrants."
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants (collectively, the "Securities"). Application has been
made for quotation of the Securities on the Nasdaq SmallCap Market under the
symbols "AHWYU," "AHWY" and "AHWYW," respectively. It is currently estimated
that the initial public offering price of the Units will be $6.00 per Unit. The
initial public offering price of the Units will be determined by negotiation
between the Company and Paulson Investment Company, Inc. (the "Representative")
of the several underwriters (the "Underwriters"). See "Underwriting."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit.................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
(1) Excludes a nonaccountable expense allowance equal to 2% of the gross
proceeds of this offering, payable to the Representative of the several
Underwriters, and five-year warrants (the "Representative's Warrants")
entitling the Representative to purchase up to 200,000 Units at an exercise
price of $ per Unit (120% of the initial public offering price of the
Units). The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses payable by the Company, estimated at
$723,125, including the Representative's nonaccountable expense allowance.
(3) The Company has granted the Representative a 45-day option to purchase up to
300,000 additional Units on the same terms as set forth above to cover
over-allotments, if any (the "Over-allotment Option"). If the Representative
exercises such option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The Units offered by this Prospectus are offered by the several Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to the right to reject any order in whole or in part
and to certain other conditions. Delivery of the Units will be made on or about
, 1998.
PAULSON INVESTMENT COMPANY, INC.
The Date of this Prospectus is , 1998
<PAGE>
Artwork for Inside Front Cover: The inside front cover of the Prospectus is
divided roughly into three sections. The vertical section down the left margin
includes a list of Book Categories and AudioCasts available for download and
playback from the Company's Web site:
<TABLE>
<S> <C> <C>
BOOK CATEGORIES KIDS CORNER AUDIOCASTS
FICTION NON FICTION Ask Dr. Science
Best Sellers Autobiography Cyber Sleuths
Classics Business Dialogue
General Finance Executive Viewpoints
Humor Music New Dimensions Radio
Mystery Religion & Spirituality Old Time Radio
Poetry Science & Technology Professional Education
Science Fiction Self-Help Soundpoint
Short Stories Sports StarDate
YO! Radio
</TABLE>
At the bottom of the left hand section, slightly to the right of the list, is
the audiohighway.com logo.
Description of LOGO: The audiohighway.com logo consists of the word
"audiohighway.com" in white block letters inside a dark blue rectangular box,
with a yellow sqiggly line subtly outlined in blue below the box, with the upper
edges of the line slightly intersecting the box in three places along the length
of the box.
The center section of the Inside Front Cover consists of six graphic renditions
of screenprints from the Company's Web site, which cascade from left to right
down the middle of the page, depicting the first screen image introducing six of
the Web site's category channels. Included, from top to bottom, are screen
images of the following: Audio Books, Reference, Music, Hot Picks, AudioCast and
Audio News. Included on each screen are banner ads, sponsorships, the names and
logos of other advertisers and, on the left side of each screen, materials
available under the specific category. Prominently displayed toward the top of
each screen are the banner ads, containing the names and logos of advertisers.
At the top of the right hand sector of the page is the heading, "A Rich Source
of Audio Programming Downloaded to Your Computer." Below this heading, in two
columns, are addition category content lists as follows:
<TABLE>
<S> <C> <C>
Column No. 1: Column No. 2: REFERENCE TOPICS
WEB-RADIO NEWS MUSIC CATEGORIES Automotive
Associated Press Classical Career Tips
CNET Radio Electronica Computers
National Public Radio Jazz Finance
Newsweek on Air Knitting Factory Funerals
24-HOUR SATELLITE NEWS Latin and Salsa Golf
U.S. National New Age Health
U.S. Business Popular Household
Sports Reggae Kid's Activities
Horoscopes Rhythm & Blues Insurance
Entertainment Rock & Roll Legal
Canadian News Unsigned Bands Parenting
World Rhythms Personal Care
Pets
Real Estate
Sports Medicine
Wedding
</TABLE>
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and with quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
Audio Highway-TM-, audiohighway.com-TM-, AudioWiz-TM- and AudioCast-TM- are
trademarks of the Company. All other tradenames and trademarks appearing in this
Prospectus are the property of their respective holders.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
AND/OR WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE PROVIDES, ALL INFORMATION IN
THIS PROSPECTUS ASSUMES (I) A 1-FOR-3.837 REVERSE STOCK SPLIT OF THE OUTSTANDING
COMMON STOCK TO BE EFFECTED PRIOR TO THE EFFECTIVE DATE OF THE OFFERING, (II)
CONVERSION OF CERTAIN OUTSTANDING CONVERTIBLE PROMISSORY NOTES INTO AN AGGREGATE
409,933 SHARES OF COMMON STOCK, ASSUMING AN INITIAL PUBLIC OFFERING PRICE OF
$6.00; AND (III) NO EXERCISE OF THE OVER-ALLOTMENT OPTION, THE WARRANTS OR THE
REPRESENTATIVE'S WARRANTS, CURRENTLY OUTSTANDING OPTIONS OR WARRANTS OR
CONVERSION OF CERTAIN OUTSTANDING CONVERTIBLE DEBT. SEE "DESCRIPTION OF
SECURITIES" AND "UNDERWRITING."
THE COMPANY
audiohighway.com, founded in June 1994, offers a proprietary information and
entertainment service that enables its users to download and play back selected
audio content from the Internet (the "AudioCast System"). By entering into
licensing agreements with audio content providers such as National Public Radio
("NPR"), Penguin Books USA and Newsweek on Air, the Company has assembled a
continually expanding digital library of over 3,500 titles, including timely
news programs that are updated frequently, audio books, music and other forms of
information and entertainment. This digital library can be accessed over the
Internet at the Company's Web site, which was launched in November 1997. Once
audio programming has been selected, the user can either listen in real time to
"streaming" audio (in the case of certain content) or download and store the
selection in digital form so it can be retrieved and enjoyed at any time or
location the user finds convenient.
The Company's AudioCast System consists of (i) proprietary client/server
software developed by the Company that is specifically adapted to transmit audio
data over the Internet, (ii) proprietary application software, known as
AudioWiz, which is provided free of charge to the customer and which allows him
or her to download and play back audio selections and (iii) a growing library of
audio content that ranges from audio books to sports updates and music. The
Company also makes available a palm-sized, portable digital player/recorder (the
"ListenUp Player") to provide portability of audio content retrieved from the
Company's Web site.
In recent years, the Internet has become established as a principal medium
for the transmission of textual and graphic data. Transmitting high quality
audio data over the Internet presents a practical challenge because of the
volume of data required to transmit audio. In general, audio available over the
Internet has consisted of short samples, often of relatively poor quality.
Through the use of the Company's proprietary client/server software, users can
download from the Internet selected audio material of their choosing. By using
the ListenUp Player or other audio playback devices equipped with the Company's
proprietary software, the user can replay these selections at the time and place
of his or her choice. The Company's client/server system also supports Microsoft
Windows Media Player, an application program that permits a user to listen to
certain audio programming in "real time," a process known as "streaming."
Streaming audio is of somewhat lower quality than what is available on a
downloaded basis and requires a continuous Internet connection with the source.
To use the AudioCast System, a user must have a computer with an Internet
connection and must have installed AudioWiz or Microsoft Windows Media Player.
Either or both programs can be downloaded directly from the Company's Web site
following easy-to-use, menu-driven commands. With AudioWiz or Microsoft Windows
Media Player installed, the user obtains audio programs by connecting with the
Company's Web site, where he or she can select from the current menu of program
offerings. Relatively short programs can be downloaded in a few minutes. Larger
programs require longer download times. Download time can be reduced or the
process made more convenient through the use of high speed data connections, by
scheduling downloads for an off-peak period, or in some cases, such as audio
books, by downloading in segments. In most circumstances, the AudioWiz program
will operate without interfering with other applications being used at the same
time. Once downloaded, the content can be replayed on any
3
<PAGE>
audio-capable computer or other device incorporating AudioWiz software or
uploaded to the ListenUp Player, which provides portability and allows the
customer to replay the program at virtually any time or location.
The AudioCast System is compatible with Windows 95 and later versions of
Windows. During 1999, the Company expects to offer versions of its software that
will be compatible with other operating systems, such as System 8 (Apple) and
Windows CE used in palmtop computers, personal digital assistants ("PDAs") and
other portable computer devices.
Currently, the Company's audio content includes audio recordings of popular
and classical books, self improvement courses, information and news services,
magazines, music, sports updates, as well as various entertainment products such
as audio movie reviews and product information from a variety of product areas.
All of the content currently is offered to users free of charge and is supported
in part by audio advertisements inserted in the audio programs themselves,
graphical "banner" advertisements and channel sponsorships appearing on computer
screens viewed from the Company's Web site. The Company also expects to provide
"premium" audio content, including advertisement-free audio content, for a fee.
The Company contracts for audio content with the creators or owners of the
content on either a fixed monthly fee or a royalty basis.
The Company's strategic objective is to be the leading provider of audio
content over the Internet. The Company believes that there are a wide range of
potential applications for its technology, including the consumer market that it
currently addresses, as well as commercial markets, such as the dissemination of
information in audio format by businesses to their employees or investors or
audio-based promotional materials transmitted over the Internet. The Company
also plans to implement electronic merchandising ("e-commerce") during the first
quarter of 1999, thereby addressing the purchasing interests of an increasing
number of consumers who are accustomed to buying products over the Internet. The
Company expects to develop its consumer and commercial markets through direct
promotions and by entering into cooperative relationships with other Internet
companies that have large viewer bases but lack state-of-the-art technology for
the dissemination of audio materials.
The Company was incorporated in California in June 1994 under the name
Information Highway Media Corporation. In 1998, the Company changed its name to
audiohighway.com. References in this Prospectus to the "Company" refer to
audiohighway.com. Its executive offices are located at 20600 Mariani Avenue,
Cupertino California 95014 and its telephone number is (408) 255-5301. The
Company's Web site is located at HTTP://WWW.AUDIOHIGHWAY.COM ("Web site").
Information contained in the Company's Web site is not to be deemed to be a part
of this Prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,000,000 Units, each Unit consisting of one share of
Common Stock and one Warrant to purchase one additional
share of Common Stock. The Common Stock and Warrants
will trade separately immediately after the offering.
See "Description of Securities."
Warrants.......................... The Warrants will be exercisable at any time until they
expire on the fifth anniversary of the date of this
Prospectus. The Company may redeem the outstanding
Warrants, in whole or in part, at any time upon at least
30 days' prior written notice to the registered holders
thereof, at a price of $0.25 per Warrant, provided that
the closing bid price of the Common Stock has been at
least $ (200% of the initial public offering
price of the Units) for the 20 consecutive trading days
immediately preceding the date of notice of redemption.
See "Description of Securities--Warrants."
Common Stock Outstanding.......... 1,034,814 shares of Common Stock as of October 31,
1998(1); 3,444,747 shares of Common Stock after the
offering(2)
Risk Factors...................... An investment in the Units involves a high degree of
risk and should not be considered by investors who
cannot afford to lose their entire investment. See "Risk
Factors" for certain factors to be considered by
potential investors.
Use of Proceeds................... The net proceeds of the offering, estimated to be
approximately $10,325,000 (assuming an initial public
offering price of $6.00 per Unit), will be used to fund
expansion of sales and marketing activities, ongoing
research and development efforts, acquisition of capital
equipment and Internet infrastructure, content
acquisition and working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq SmallCap Market
Symbols......................... Application has been made for quotation of the Common
Stock, Warrants and Units on the Nasdaq SmallCap Market
under the symbols "AHWY," "AHWYW" and "AHWYU,"
respectively.
</TABLE>
- ------------------------
(1) Excludes (i) up to 950,747 shares of Common Stock issuable upon exercise of
outstanding options and warrants; and (ii) up to 435,995 shares of Common
Stock issuable upon conversion of outstanding convertible debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--Stock Option Plan" and "Description of
Securities--Existing Warrants" and "--Convertible Promissory Notes."
(2) Includes 409,933 shares of Common Stock issuable upon conversion of certain
outstanding convertible promissory notes, but excludes (i) up to 950,747
shares of Common Stock issuable upon exercise of outstanding options and
warrants; and (ii) up to 26,062 shares of Common Stock issuable upon
conversion of outstanding convertible debt. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Management--Stock Option Plan," "Description of Securities--Existing
Warrants" and "--Convertible Promissory Notes."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................... $ -- $ 4 $ -- $ 87
Operating expenses:
Cost of revenues..................................................... -- 35 -- 57
Marketing and sales.................................................. 850 1,634 927 1,040
Research and development............................................. 367 677 529 739
General and administrative........................................... 287 157 195 491
--------- --------- --------- ---------
Total expenses....................................................... 1,504 2,503 1,651 2,327
--------- --------- --------- ---------
Operating loss......................................................... (1,504) (2,499) (1,651) (2,240)
Interest expense....................................................... 77 1,292 973 1,095
--------- --------- --------- ---------
Net loss............................................................... $ (1,581) $ (3,791) $ (2,624) $ (3,335)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share (basic and diluted)................................. $ (2.10) $ (4.11) $ (2.87) $ (3.32)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share(1)......................... 752 923 915 1,006
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 171 $ 10,496
Working capital (deficit)............................................................... (2,022) 8,454
Total assets............................................................................ 732 11,057
Accumulated deficit..................................................................... (9,985) (11,812)
Shareholders equity (deficit)........................................................... (2,652) 8,819
</TABLE>
- ------------------------
(1) Based on an aggregate of 1,034,814 shares of Common Stock outstanding as of
September 30, 1998. Excludes (i) 950,747 shares of Common Stock issuable
upon exercise of outstanding options and warrants; and (ii) 435,995 shares
of Common Stock issuable upon conversion of outstanding convertible debt.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources," "Management--Stock Option
Plan" and "Description of Securities--Outstanding Warrants." See also Note 1
of Notes to Financial Statements for an explanation of the determination of
the number of shares used in computing net loss per share.
(2) Adjusted (i) to give effect to the sale by the Company of 2,000,000 Units
offered hereby at an assumed initial public offering price of $6.00 per
Unit, after deducting the underwriting discount and estimated offering
expenses and the receipt of the net proceeds therefrom, and as adjusted to
give pro forma effect to (ii) the conversion of $2,973,000 of outstanding
convertible subordinated notes into 409,933 shares of Common Stock and (iii)
a charge to retained earnings of $1,827,000, representing the unamortized
value of the warrants and beneficial conversion feature of convertible
subordinated notes issued by the Company. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Securities--Convertible Promissory Notes."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE UNITS BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING ANY OF THE UNITS OFFERED HEREBY. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL
AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
COMPETITION. The Company will face intense competition in every aspect of
its business, including competition for consumers of audio materials,
advertisers, providers of audio materials and vendors of products. The business
of providing data and other products using the Internet is currently
experiencing explosive growth and is characterized by extremely rapid
technological development, rapid changes in consumer habits and preferences,
massive infusions of capital and the emergence of a large number of new and
established companies with aspirations to control as much of the distribution
process as possible. A relatively small number of these companies, including
America Online and Yahoo!, currently control primary or secondary access of a
significant percentage of all Internet users and therefore have a competitive
advantage in marketing to those users. Other large and established companies,
such as local and long distance telephone companies, cable companies, satellite
programming providers and others have established relationships with large
customer bases and are rapidly expanding into the provision of Internet
services. Substantially all of these companies have financial, technological,
promotional and other resources that are much greater than those available to
the Company. Most, if not substantially all, of such providers could use or
adapt their current technology, or could purchase technology, to provide a
service directly competitive with the Company's AudioCast System. The Company's
attractiveness to advertisers, content providers and vendors, and its ability to
earn revenues, is directly related to the size and, to a lesser extent, the
quality of the customer base for its services, which is, in turn, dependent on
the size and quality of the product offerings the Company can make available to
its customers. There is no assurance that the Company will be able to compete in
its chosen market. See "Business--Competition."
UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM. The market
for Internet advertising has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants, although
Internet advertising continues to be dominated by the larger Web sites. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty. The Company's ability to generate advertising revenue will
depend on, among other factors, (i) the continued development of the Internet as
an advertising medium, (ii) pricing of advertising on other Web sites, (iii) the
amount of traffic on the Company's Web site, (iv) the Company's ability to
achieve and demonstrate user demographic characteristics that are attractive to
advertisers, (v) the development and expansion of the Company's advertising
sales force and (vi) the establishment and maintenance of desirable advertising
sales agency relationships. Most potential advertisers and their advertising
agencies have only limited experience with the Internet as an advertising medium
and have not historically devoted a significant portion of their advertising
expenditures to Web-based advertising. There is no assurance that advertisers or
advertising agencies will be persuaded to allocate or continue to allocate
portions of their budgets to Web-based advertising or, if so persuaded, that
they will find such advertising to be effective for promoting their products and
services relative to traditional print and broadcast media. No standards have
yet been widely accepted for the measurement of the effectiveness of Web-based
advertising, and there is no assurance that such standards will develop
sufficiently to enable Web-based advertising to become a significant advertising
medium. Acceptance of the Internet among advertisers and advertising agencies
will also depend, to a large extent, on the level of use of the Internet by
consumers and upon growth in the commercial use of the
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Internet. If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective and measurable medium for
advertising, the Company's business, results of operations and financial
condition would be materially adversely affected.
The Company's current arrangements with advertisers call for compensation
based solely and directly on the number of "impressions" recorded as viewers
call up the page on which the advertising is included or the number and duration
of audio ads delivered with audio content. Therefore, the Company does not
receive compensation simply for providing the advertising space. Accordingly,
its revenues from banner advertising, channel sponsorships and audio ads are
entirely dependent on the number of viewers accessing its Web site and the
number of pages called up by such viewers or the volume of downloaded audio
content. There is no assurance the Company will be able to attract a number of
viewers sufficient to attain profitable operations. See "Business--Sales and
Marketing."
LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE OPERATING RESULTS;
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company has a limited
operating history on which to base an evaluation of its business and prospects.
Among other things, the Company has a limited history of providing audio content
over the Internet, a minimal history of earning revenues of any kind and no
history of charging fees for audio content or of selling products made by other
vendors. Because of its limited operating history, the Company does not have
historical financial data on which it or prospective investors can plan or base
forecasts of revenues, earnings or capital requirements with any accuracy.
Moreover, the long-term acceptance of Web-based advertising is as yet uncertain.
Accordingly, there is no assurance that the Company's revenues will increase or
even continue at their current level or that the Company will generate
sufficient cash from operations in future periods. The Company currently intends
to increase substantially its operating expenses in order to, among other
things, (i) expand its distribution network capacity, (ii) fund increased sales
and marketing activities, (iii) license additional content, (iv) develop and
upgrade technology and (v) purchase equipment for its operations. The Company's
expense levels are based, in part, on its expectations with regard to future
revenues, and to a large extent, such expenses are fixed, particularly in the
short term. To the extent the Company is unsuccessful in increasing its
revenues, it may be unable to appropriately adjust spending in a timely manner
to compensate for any unexpected revenue shortfall or may have to reduce its
operating expenses, causing it to forego potential revenue generating
activities, either of which could cause a material adverse effect upon the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include (i) the cost of acquiring and the availability of content, (ii)
demand for Internet advertising, (iii) seasonal trends in advertising
placements, (iv) the advertising cycles for, or the addition or loss of,
individual advertisers, (v) the level of traffic on the Company's Web site, (vi)
the amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, (vii) price competition or pricing
changes in Internet advertising, (viii) the level of and seasonal trends in the
use of the Internet, (ix) technical difficulties or system downtime, (x) the
introduction of new products or services by the Company or its competitors and
(xi) general economic conditions and economic conditions specific to the
Internet, such as e-commerce and online media. Any one of these factors could
cause the Company's revenues and operating results to vary significantly in the
future. In addition, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions or acquisitions that could cause significant declines in the
Company's quarterly operating results.
DEPENDENCE ON ADVERTISERS. Virtually all of the Company's Web advertising
revenues are and, for the foreseeable future, are expected to continue to be,
derived from short-term contracts from a limited number of advertisers.
Consequently, many of the Company's advertising customers can cease advertising
on the Company's Web site quickly and without penalty, thereby increasing the
Company's exposure to
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competitive pressures. There is no assurance that the Company's current
advertisers will continue to purchase advertisements or that the Company will be
able to secure new advertising contracts from existing or future customers at
attractive rates or at all. Any failure of the Company to achieve sufficient
advertising revenue could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's current
inventory of available advertising "spots" is substantially greater than the
advertising purchased to date and there is no assurance that the Company will be
successful in its efforts to sell all or substantially all of its advertising
inventory. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES. The Company was
incorporated in June 1994 to deliver free, personalized audio via the Internet
and was in the development stage until the fourth quarter of 1997. The Company
first recognized revenues in November 1997 and has recorded net losses each year
and quarter since its inception. As of September 30, 1998, the Company had an
accumulated deficit of approximately $9,985,000, is continuing to operate at a
loss and has yet to generate significant operating revenues. The Company and its
prospects must be considered in light of the early stage of development,
particularly companies in new and rapidly evolving markets, including Internet
content, electronic commerce ("e-commerce") and Internet advertising. To achieve
and sustain profitability, the Company must, among other things, (i) provide
diverse content of interest to Internet users, (ii) effectively develop new and
maintain existing relationships with advertisers, advertising agencies and
content providers, (iii) continue to develop and upgrade its technology and
network infrastructure; (iv) respond to competitive developments, (v)
successfully introduce enhancements to its existing products and services to
address new technology standards and developments on the Internet, and (vi)
attract, retain and motivate qualified personnel. The Company's operating
results are also dependent on factors outside the control of the Company, such
as the availability of desirable content. There is no assurance that the Company
will be successful in addressing these risks and the failure to do so would have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company expects to continue to incur significant losses
on a quarterly and annual basis for the foreseeable future. For these and other
reasons, there is no assurance that the Company will ever achieve profitability
or, if profitability is achieved, that it can be sustained. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRODUCT DEVELOPMENT AND TECHNOLOGICAL OBSOLESCENCE. The market for Internet
information delivery is characterized by extensive research and development and
rapid technological change, frequent new product introductions and technological
innovation, resulting in short product life cycles and evolving industry
standards. Development by others of new or improved products, processes or
technology may render the Company's products and services less competitive or
obsolete. The emerging character of these products and services and their rapid
evolution will require the Company to effectively use leading technologies,
continue to develop its technological expertise, enhance its current services
and continue to improve the performance, features and reliability of its network
infrastructure. Changes in network infrastructure, transmission and content
delivery methods and underlying software platforms and the emergence of new
technologies could dramatically change the structure and competitive dynamic of
the market for the Company's products and services. There is no assurance that
the Company will be successful in responding quickly, cost effectively and
sufficiently to these or other such developments. In addition, the widespread
adoption of new Internet technologies or standards could require substantial
expenditures by the Company to modify or adapt its Web site and services. A
failure by the Company to rapidly respond to technological developments could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Business."
DEPENDENCE ON CONTENT PROVIDERS; LICENSE FEES PAYABLE TO CONTENT
PROVIDERS. The Company's success depends in large part upon its ability to
obtain rights to and deliver content of sufficient interest to users of the
Internet. The Company does not create its own content. Rather, the Company
relies on third party content providers, such as book publishers, news and
financial information services and music publishers
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for the content it makes available to users visiting its Web site. The Company's
ability to maintain its existing relationships with such content providers and
to build new relationships with additional content providers is critical to the
success of its business. Although many of the Company's agreements with third
party content providers are for an initial term of one year, with automatic
renewal unless cancelled, the content providers may choose to terminate such
agreements prior to the expiration of their terms. The Company's inability to
secure licenses from content providers or the termination of a significant
number of content provider agreements would decrease the availability of content
that the Company can offer users. This may result in decreased traffic on the
Company's Web site and, as a result, decreased advertising revenue, which would
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's agreements with most of its content
providers are nonexclusive, and many of the Company's competitors offer, or
could offer, content that is similar to or the same as that obtained by the
Company from such nonexclusive content providers. Some of the Company's
potential competitors have established relationships and financial and other
resources that could enable them to offer inducements to the Company's content
providers or potential content providers to enter into exclusive relationships
with them, thereby denying access to such content by the Company. Such direct
competition could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Competition."
License fees payable to content providers and other licensing agencies may
increase as the Company continues to accumulate content and as competition for
such content increases. There is no assurance that the Company's content
providers and other licensing agencies will enter into prospective agreements
with the Company on the same or similar terms as those currently in effect or on
terms acceptable to the Company, if no agreement is in effect. If the Company is
required to pay increased licensing fees, such increased payments could have a
material adverse effect on the Company's business, results of operations and
financial condition.
MANAGEMENT OF GROWTH. The Company anticipates that significant expansion of
its operations will be required in order to address potential market
opportunities. The Company expects that it will need to increase its personnel
significantly in the near future. The anticipated substantial growth is expected
to place a significant strain on its managerial, operational and financial
resources and systems. To manage its growth, the Company must implement, improve
and effectively use its operational, management, marketing and financial systems
and train and manage its employees. There is no assurance that the Company will
be able to manage effectively the expansion of its operations or that the
Company's current personnel, systems, procedures and controls will be adequate
to support the Company's operations. Any failure of management to manage
effectively the Company's growth could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"--Dependence on Key Personnel; Need for Additional Personnel."
RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY; SINGLE SITE. The
performance, reliability and availability of the Company's Web site and network
infrastructure are critical to its reputation and ability to attract and retain
users, advertisers and content providers. The Company's network infrastructure
is located at a single, leased facility in Cupertino, California. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, earthquakes, power loss, telecommunications failure, Internet breakdowns,
break-ins and similar events. The Company does not presently have redundant
facilities or a formal disaster recovery plan and carries only limited business
interruption insurance to compensate it for losses that may occur as a result of
system failure. Services based on sophisticated software and computer systems
often encounter development delays and the underlying software may contain
undetected errors that could cause system failures when introduced. Any system
error or failure that causes interruption in the availability of content or an
increase in response time could result in a loss of potential or existing users,
advertisers or content providers and, if sustained or repeated, could reduce the
attractiveness of the Company's Web site to such entities or individuals. In
addition, because the Company's Web advertising revenues are directly related to
the number of advertisements delivered by the Company to users, system
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interruptions that result in the unavailability of the Company's Web site or
slower response times for users would reduce the number of advertisements
delivered and reduce revenues.
A sudden and significant increase in traffic on the Company's Web site could
strain the capacity of the software, hardware and telecommunications systems
deployed or used by the Company, which could lead to slower response times or
system failures. The Company's operations also are, in part, dependent upon
receipt of timely feeds from certain of its content providers, and any failure
or delay in the transmission or receipt of such feeds, whether due to system
failure of the Company, its content providers, satellites or otherwise, could
disrupt the Company's operations. The Company is also dependent upon Web
browsers, Internet Service Providers ("ISPs") and online service providers
("OSPs") to provide Internet users access to the Company's Web site. Users may
experience difficulties accessing or using the Company's Web site due to system
failures or delays unrelated to the Company's systems. These difficulties may
result in intermittent interruption in programming. Any sustained failure or
delay could reduce the attractiveness of the Company's Web site to users,
advertisers and content providers. The occurrence of any of the foregoing events
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--The audiohighway.com Web
Site: Content and Technology."
SECURITY RISKS. Despite the implementation of security measures, the
Company's networks may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. A person who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
the Company's Internet operations. ISPs and OSPs have in the past experienced,
and may in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. The Company may be required to expend significant capital
or other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Although the Company intends to
continue to implement industry-standard security measures, there is no assurance
that measures implemented by the Company will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to users accessing the Company's
Web site, which could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--The
audiohighway.com Web Site Architecture."
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company may require additional capital to take full advantage of future growth
opportunities, fund its ongoing research and development efforts and continue to
upgrade its technology and network systems. The Company's future capital
requirements will depend on many factors, including, among others, market
acceptance of and demand for the Company's products and services, the acceptance
by advertisers of the Company's business concept, the successful implementation
and expansion of the e-commerce portion of its business, the costs of acquiring
desirable content and the Company's ability to attract distribution partners.
The Company has no current anticipated sources of funding beyond the proceeds
from this offering. The Company currently believes that the proceeds of this
offering will satisfy its capital requirements for at least the 12 months
following this offering. However, there is no assurance that additional
financing will not be required prior to that time. Moreover, there is no
assurance that additional equity or debt financing, if required, will be
available on acceptable terms or at all. The Company may receive additional
funds upon the exercise from time to time of the Warrants and other outstanding
warrants and stock options, but there is no assurance that any holders of
options or warrants will elect to exercise or that the amounts received will be
sufficient for the Company's purposes. If additional funds are raised by issuing
equity securities, further substantial dilution to existing shareholders,
including purchasers of the Units offered hereby, may result. The inability of
the Company to obtain financing on acceptable terms when needed would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. Rapid growth in use
of and interest in the Internet is a recent phenomenon and there is no assurance
that acceptance and use of the Internet will continue to develop or that a
sufficient base of users will emerge to support the Company's business. Because
global commerce and on-line exchange of information on the Internet is new and
evolving, it is difficult to predict with any assurance whether the Internet
will prove to be a viable commercial marketplace. Future revenues of the Company
will depend largely on the widespread acceptance and use of the Internet as a
source of multimedia information and entertainment and as a vehicle for commerce
in goods and services. The Internet may not be accepted as a viable commercial
medium for broadcasting multimedia content, if at all, for a number of reasons,
including (i) potentially inadequate development of the necessary
infrastructure, (ii) inadequate development of enabling technologies, (iii) lack
of acceptance of the Internet as a medium for distributing content, (iv)
inadequate commercial support for Web-based advertising and (v) the availability
of competing data delivery systems, such as cable or satellite-based systems. To
the extent that the Internet continues to experience an increase in users, an
increase in frequency of use or an increase in the bandwidth requirements of
users, there is no assurance that the Internet infrastructure will be able to
support the demands placed upon it, specifically the demands of delivering
high-quality audio content. In addition, the Internet could lose its viability
as a commercial medium due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in unacceptable response times and could adversely affect use of the
Internet generally and of the Company's Web site in particular. If use of the
Internet does not continue to grow or grows more slowly than expected, or if the
Internet infrastructure does not effectively support the growth that may occur,
the Company's business, results of operations and financial condition could be
materially adversely affected. See "Business."
DEPENDENCE UPON KEY PERSONNEL. The Company's success depends, to a
significant extent, upon the continued involvement of Nathan Schulhof, the
Company's President and Chief Executive Officer. The loss of Mr. Schulhof's
services could have a material adverse effect on the business of the Company.
The Company currently does not maintain "key person" life insurance on the lives
of any officers or employees, nor does it have employment agreements with its
key personnel. The Company's future success also depends on its continuing
ability to attract and retain highly qualified technical personnel and
management. Competition for such personnel is intense and there is no assurance
that the Company will be able to retain its key management and technical
employees or that it will be able to attract or retain additional qualified
technical personnel and management in the future. The inability to attract and
retain the necessary technical personnel and management could have a material
adverse effect upon the Company's business, result of operations and financial
condition. See "Management."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The
Company has filed several patent applications with respect to certain aspects of
the AudioCast System, and two patents have issued. Although the Company does not
believe that its existing patents provide a competitive advantage, there is no
assurance that in the future, patent protection will not be of substantial
importance to the Company's business and future prospects. There is no assurance
that patents will be issued pursuant to the pending applications or that the
patents that are issued will not be held invalid or unenforceable by a court
having jurisdiction over a dispute challenging their validity. Even if patents
are upheld and are not challenged, third parties might be able to develop
equivalent technologies or products without infringing such patents or the
Company could be required to expend substantial funds in order to defend its
patents.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success, and the Company relies on a
combination of copyright and trademark laws, trade secret protection,
confidentiality and non-disclosure agreements and contractual provisions with
its employees and with third parties to establish and protect its proprietary
rights. There is no assurance that these steps will be adequate, that the
Company will be able to secure trademark registrations for all of its marks in
the United States or other countries or that third parties will not infringe
upon or misappropriate
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the Company's copyrights, trademarks, service marks and similar proprietary
rights. The Company does not own any registered copyrights protecting its
products but claims common law copyrights in its software. There is no assurance
that common law copyright will provide adequate protection for the Company's
related intellectual property. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the content downloaded from the Company's Web site. In the future, litigation
may be necessary to enforce and protect the Company's trade secrets, copyrights
and other intellectual property rights.
The Company has filed trademark applications with the U. S. Patent Office
for several of its unregistered trademarks. The "ListenUp" trademark is licensed
from ListenUp, Inc. The Company intends to pursue the registration of its
trademarks based upon anticipated use internationally. There is no assurance
that the Company will be able to secure adequate protection for these trademarks
in foreign countries. In addition, there could be potential trademark or
trademark infringement claims brought by owners of other registered trademarks
or trademarks.
There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all. See "Business--Patents,
Trademarks and Proprietary Rights."
There is also no assurance that the measures taken by the Company will
adequately protect the confidentiality of the Company's proprietary information
or that others will not independently develop products or technology that are
equivalent or superior to those of the Company. See "--Liability for Internet
Content" and "--Government Regulation."
SINGLE SOURCE MANUFACTURING. Although the Company does not expect sales of
the ListenUp Player to provide a substantial source of revenues, it does believe
that the portability of its audio content will be considered an important or
desirable feature by many users of its audio Web site. The Company does not
manufacture the ListenUp Player and does not anticipate doing so in the future.
Accordingly, its success will depend in part upon its ability to have its
hardware product or products manufactured successfully in commercial volumes.
Sycom Technologies, Inc. ("Sycom") has agreed to manufacture of the ListenUp
Player for the Company through June 2001. While Sycom provides manufacturing
capacity and expertise, there is no assurance that it will meet the Company's
future demand for mass production on a timely basis. Inasmuch as the Company
does not have a second manufacturing source, any failure of Sycom to meet the
Company's requirements, as to quality, quantity or timing of delivery, may have
a material adverse effect on the Company. See "Business--Manufacturing."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTY. Although there are currently
few laws and regulations directly applicable to the Internet, it is likely that
new laws and regulations will be adopted in the United States and elsewhere
covering issues such as music licensing, broadcast license fees, copyrights,
privacy, pricing, sales taxes and characteristics and quality of Internet
services. The adoption of restrictive laws or regulations could slow Internet
growth or expose the Company to significant liabilities associated with content
available on its Web site. The application of existing laws and regulations
governing Internet issues such as property ownership, libel and personal privacy
is also subject to substantial uncertainty. There is no assurance that current
or new laws and regulations, or the application of existing laws and regulations
(including laws and regulations governing issues such as property ownership,
content, taxation, defamation and personal injury), will not expose the Company
to significant liabilities, significantly slow Internet growth or otherwise
cause a material adverse effect on the Company's business, results of operations
or financial condition. See "Business--Government Regulation."
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The Company currently does not intend to collect sales or other taxes with
respect to the sale of services or products in states and countries where the
Company believes it will not be required to do so. Some states and countries
have sought to impose sales or other tax obligations on companies that engage in
online commerce within their jurisdictions. A successful assertion by one or
more states or countries that the Company should collect sales or other taxes on
products and services, or remit payment of sales or other taxes for prior
periods, could have a material adverse effect on the Company's business, results
of operations and financial condition.
The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, there is no
assurance that similar laws will not be proposed and adopted. Although the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, results of
operations and financial condition.
POTENTIAL LIABILITY FOR INTERNET CONTENT. As a distributor of Internet
content, the Company faces potential liability for negligence, copyright,
patent, trademark, defamation, indecency and other claims based on the nature
and content of the materials that it makes available to Internet users. Such
claims have been brought, and sometimes successfully pressed, against Internet
content distributors. In addition, the Company could be exposed to liability
with respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Company's Units, Common Stock
or Warrants, and there is no assurance that an active public market for any of
the Company's Securities will develop or be sustained after this offering. The
initial public offering price was determined by negotiation between the Company
and the Representative of the Underwriters. See "Underwriting."
The trading price of the Company's Securities could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations or new products by the Company or its competitors, or other events
or factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices for many
technology and small capitalization companies. These broad market fluctuations
may materially and adversely affect the market price of the Common Stock or the
Warrants. Market valuations for companies offering Internet services have
recently experienced substantial increases. Any significant decrease in the
market valuation of such companies generally could cause a substantial decrease
in the price of the Company's securities unrelated to its operating results.
REDEMPTION OF WARRANTS. The outstanding Warrants will be subject to
redemption at $0.25 per Warrant on 30 days' written notice, provided that the
closing bid price of the Common Stock has been at least $ for the 20
consecutive trading days immediately preceding the date of notice of redemption.
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In the event the Company exercises the right to redeem the Warrants, a holder
would be forced either to exercise the Warrants or accept the redemption price.
See "Description of Securities--Warrants."
CURRENT PROSPECTUS REQUIRED TO EXERCISE WARRANTS. Purchasers of Units will
be able to exercise the Warrants included therein only if a current prospectus
relating to the shares of Common Stock underlying such Warrants is then in
effect. Although the Company has undertaken to use its best efforts to maintain
a current registration statement covering the Warrants until they expire or are
redeemed, there is no assurance that the Company will be able to do so. The
value of the Warrants may be impaired if a current prospectus covering the
Common Stock issuable upon exercise of the Warrants is not kept effective. See
"Description of Securities--Warrants."
SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby will incur
immediate and substantial dilution of approximately $3.44 per share, or
approximately 57%, in the pro forma net tangible book value per share of the
Common Stock from the initial public offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
Following this offering, there will be 3,444,747 shares of Common Stock
outstanding, of which the 2,000,000 shares offered hereby as a component of the
Units will be freely tradable without restriction under the Securities Act,
except for shares acquired in this offering by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act. The 1,444,747 shares
of Common Stock outstanding prior to the offering are shares of Restricted
Stock, are subject to lock-up agreements with the Representative and may not be
sold or otherwise transferred until expiration of the one-year lock-up for
directors, executive officers and principal shareholders (aggregating 419,506
shares) and the six month lock-up pertaining to the balance of the shares,
unless sooner released by the Representative in its sole discretion. Upon
expiration of the one-year lock-up agreements with the Representative, all such
shares of Common Stock will become eligible for sale in the public market,
subject to the provisions of Rule 144 or Rule 144(k). If the Representative
releases the shares from the lock-up agreements early, a significant portion of
the Restricted Stock will be available for sale immediately under either Rule
144 or Rule 144(k). In addition, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock reserved for
issuance under its stock option plan. Upon filing of such registration
statement, shares purchased upon exercise of options covered thereby will be
freely tradable without restriction, except for shares acquired by affiliates.
See "Shares Eligible For Future Sale."
ANTI-TAKEOVER PROVISIONS. The Company is authorized to issue 5,000,000
shares of Preferred Stock, with such designations, rights and preferences as may
be determined from time to time by the Board of Directors in accordance with the
Company's Articles of Incorporation and California law. Accordingly, the Board
of Directors will be empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock and the Preferred Stock offered hereby. In the event of such issuance, the
Preferred Stock could be used, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. See
"Description of Securities--Preferred Stock."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
expects to use approximately $4,000,000 of the net proceeds of the offering for
sales and marketing activities, approximately $2,000,000 each for product
development and capital equipment acquisition and approximately $1,500,000 for
content acquisition. The remaining net proceeds, estimated to be approximately
$825,000, will be used for working capital and applied to general corporate
purposes. The Company's management will have broad discretion to allocate the
proceeds of this offering. The amounts actually expended for each use may vary
significantly, depending on a number of factors, including the amount of future
revenue growth, the amount of cash generated or used by the Company's operations
and the progress of the Company's marketing efforts. See "Use of Proceeds."
15
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
Payment of any cash dividends will depend upon the results of operations,
financial condition and capital expenditure plans of the Company, as well as
such other factors as the Board of Directors, in its sole discretion, may
consider relevant. However, the Company presently intends to retain any earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,000,000 Units offered hereby are estimated to be approximately $10,325,000
(assuming an initial public offering price of $6.00 per Unit), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and assuming no exercise of the Warrants.
The Company intends to apply these net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT PERCENTAGE OF
OF NET PROCEEDS NET PROCEEDS
------------------- ---------------
<S> <C> <C>
Sales and Marketing......................................... $ 4,000,000 39%
Product Development......................................... 2,000,000 20
Acquisition of Capital Equipment(1)......................... 2,000,000 20
Content Acquisition......................................... 1,500,000 14
Working Capital............................................. 825,000 7
</TABLE>
- ------------------------
(1) The Company expects to expend a portion of the net proceeds for capital
expenditures consisting primarily of additions to the Company's networking
and computer infrastructure.
The Company believes the net proceeds of this offering will be sufficient to
fund its plan of operations for at least the next twelve months.
The above allocations represent the Company's best estimate based upon its
current plans. The amounts actually expended by the Company on any particular
use of proceeds may vary significantly depending on a number of factors,
including future revenue growth, the cash generated or used by the Company's
operations and the progress of the Company's marketing efforts. The Company
reserves the right to reallocate the net proceeds of this offering among the
various categories set forth above as it, in its sole discretion, deems
necessary or advisable.
Pending such uses, the net proceeds of this offering will be invested in
short-term, investment grade, interest-bearing securities.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998 (i) on an actual basis, (ii) with pro forma changes to
reflect conversion of certain convertible securities and (iii) as adjusted to
give effect to the sale by the Company of the 2,000,000 Units offered hereby at
an assumed initial public offering price of $6.00 per Unit and the receipt of
the net proceeds therefrom. This table should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED
--------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Convertible subordinated notes............................................. $ 1,146 $ -- $ --
Other debt................................................................. 796 796 796
Shareholder's equity (deficit):
Preferred stock, no par value: 5,000,000 shares authorized; none
outstanding actual, pro forma or as adjusted no shares outstanding
actual or as adjusted.................................................. -- -- --
Common stock, no par value: 50,000,000 shares authorized; 1,034,814
shares issued and outstanding, actual(1); 1,444,747 issued and
outstanding pro forma(1)(2); 3,444,747 shares issued and
outstanding(3), as adjusted............................................ 3,170 6,143 16,468
Additional paid in capital................................................. 4,163 4,163 4,163
Accumulated deficit........................................................ (9,985) (11,812) (11,812)
--------- ------------- -----------
Total shareholders' equity (deficit)..................................... (2,652) (1,506) 8,819
--------- ------------- -----------
Total capitalization................................................... $ (710) $ (710) $ 9,615
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) Excludes 1,386,742 shares of Common Stock reserved for issuance upon
conversion of all currently outstanding convertible promissory notes and
upon exercise of all currently outstanding options and warrants. See
"Management--Stock Option Plan," "Description of Securities--Convertible
Promissory Notes" and "--Warrants."
(2) Gives effect to the conversion of $2,973,000 outstanding of convertible
subordinated notes into 409,933 shares of Common Stock and a charge to
retained earnings of $1,827,000, representing the unamortized value of the
warrants and beneficial conversion feature of convertible subordinated notes
issued by the Company.
(3) Excludes an aggregate of 976,809 shares of Common Stock reserved for (i)
issuance upon conversion of certain outstanding convertible promissory notes
into 26,062 shares, and (ii) upon exercise of all outstanding options and
warrants into an aggregate of 950,747 shares. See "Management--Stock Option
Plan," "Description of Securities--Convertible Promissory Notes" and
"--Warrants."
17
<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing the net tangible book
value (total tangible assets less total liabilities) of the Company by the
number of shares of Common Stock outstanding.
At September 30, 1998, the net tangible book deficit of the Company was
($2,652,000), or ($2.56) per share of Common Stock. After giving effect to the
Pro Forma Adjustments (see footnote 2 of "Capitalization"), the pro forma net
tangible book deficit of the Company at September 30, 1998 would have been
$(1,506,000) or $(1.04) per share. After also giving effect to the sale by the
Company of the Units offered hereby, and the receipt of the estimated net
proceeds therefrom, assuming an initial public offering price of $6.00 (after
deducting the underwriting discount and the estimated offering expenses and
attributing no portion of the value of the Unit to the Warrant), the pro forma
net tangible book value of the Company as of September 30, 1998 would have been
$8,819,000 or $2.56 per share of Common Stock. This represents an immediate
increase in the net tangible book value of $3.60 per share to existing
shareholders and an immediate dilution in net tangible book value of $3.44 per
share to the purchasers of the Units in the offering.
The following table illustrates the per share dilution to purchasers of the
Units:
<TABLE>
<CAPTION>
Assumed initial public offering price............................... $ 6.00
<S> <C> <C>
Net tangible book deficit per share............................... $ (2.56)
Increase per share attributable to Pro Forma Adjustments.......... 1.52
---------
Pro forma net tangible book deficit before offering............... (1.04)
Increase attributable to new investors............................ $ 3.60
---------
Adjusted net tangible book value after offering..................... 2.56
---------
Dilution per share to new investors................................. $ 3.44
---------
---------
Dilution as a percentage of offering price.......................... 57%
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1998, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share (i) paid by
the existing shareholders and (ii) paid by the purchasers of the Units in this
offering, assuming the sale of 2,000,000 Units at an assumed public offering
price of $6.00 per Unit, before deduction of underwriting discounts and other
estimated offering expenses payable by the Company and ascribing no portion of
the value of a Unit to the Warrant. The calculation in this table with respect
to shares of Common Stock to be purchased by new investors in this offering
excludes shares of Common Stock issuable upon exercise of the Warrants.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............................. 1,444,747 41.9% $ 6,143,000 33.9% $ 4.25
New Investors..................................... 2,000,000 58.1 12,000,000 66.1 $ 6.00
---------- ----- ------------ -----
Total......................................... 3,444,747 100.0% $ 18,143,000 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
The foregoing table assumes conversion of certain outstanding convertible
notes into an aggregate of 409,933 shares of Common Stock but no exercise of the
Over-allotment Option, outstanding options or warrants, the Warrants or the
Representative's Warrants or certain other convertible promissory notes. At
September 30, 1998, there were convertible promissory notes, options and
warrants outstanding to purchase up to an aggregate of 1,386,742 shares of
Common Stock at exercise or conversion prices ranging from $1.92 to $14.39. See
"Management--Stock Option Plan," "Description of Securities--Existing Warrants,"
"--Convertible Promissory Notes" and the Notes to Financial Statements. To the
extent that these options and warrants are exercised, or the convertible notes
are converted, there will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1996 and 1997 and the selected balance sheet data at December 31,
1997 have been derived from, and are qualified by reference to, the Company's
financial statements included elsewhere in this Prospectus, which have been
audited by Grant Thornton LLP, independent auditors. The selected statements of
operations data for the nine month periods ended September 30, 1997 and 1998 and
the selected balance sheet data at September 30, 1998 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
In the opinion of management of the Company, such unaudited financial statements
have been prepared on a basis consistent with the audited financial information
and include all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the results for these periods and as of
such dates. The selected financial data provided below for the nine months ended
September 30, 1998 are not necessarily indicative of the future results of
operations or financial performance of the Company. The data set forth below
should be read in conjunction with the financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER
31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................. $ -- $ 4 $ -- $ 87
Operating expenses:
Cost of revenues........................................................ -- 35 -- 57
Marketing and sales..................................................... 850 1,634 927 1,040
Research and development................................................ 367 677 529 739
General and administrative.............................................. 287 157 195 491
--------- --------- --------- ---------
Total expenses........................................................ 1,504 2,503 1,651 2,327
--------- --------- --------- ---------
Operating loss............................................................ (1,504) (2,499) (1,651) (2,240)
Interest expense.......................................................... 77 1,292 973 1,095
--------- --------- --------- ---------
Net loss.................................................................. $ (1,581) $ (3,791) $ (2,624) $ (3,335)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share (basic and diluted).................................... $ (2.10) $ (4.11) $ (2.87) $ (3.32)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing net loss per share(1)............................ 752 923 915 1,006
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 5 $ 171
Working capital (deficit).................................................. (1,741) (2,022)
Total assets............................................................... 428 732
Accumulated deficit........................................................ (6,650) (9,985)
Shareholders equity (deficit).............................................. (2,445) (2,652)
</TABLE>
- --------------------------
(1) Based on an aggregate of 1,034,814 shares of Common Stock outstanding as of
September 30, 1998. Excludes (i) 950,747 shares of Common Stock issuable
upon exercise of outstanding options and warrants; and (ii) 435,995 shares
of Common Stock issuable upon conversion of outstanding convertible debt.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources," "Management--Stock Option
Plan" and "Description of Securities--Outstanding Warrants." See also Note 1
of Notes to Financial Statements for an explanation of determination of the
number of shares used in computing net loss per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the two fiscal
years ended December 31, 1996 and 1997 and the nine month periods ended
September 30, 1997 and 1998. The following discussion should be read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The following discussion contains forward-looking
statements. The Company's actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause future
results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in this Prospectus.
GENERAL
The Company offers a proprietary information and entertainment service that
enables its users to download and play back selected audio content from the
Internet (the "AudioCast System"). The AudioCast System consists of (i)
proprietary client/server software developed by the Company that is specifically
adapted to transmit audio data over the Internet, (ii) proprietary application
software, known as AudioWiz, which is provided free of charge to the customer
and which allows him or her to download and play back audio selections and (iii)
a growing library of audio content that ranges from audio books to sports
updates and music. The Company also makes available a palm-sized, portable
digital player/ recorder (the "ListenUp Player") to provide portability of audio
content retrieved from the Company's Web site.
The Company believes that what differentiates the AudioCast System from
other Internet-based information services is its focus on audio content versus
text, the downloading of audio content as digital files available for later use
and its emphasis on portability. The Company's system provides users with a
simple, easy to use method of selecting a diverse range of audio content from a
single Web site and the ability to listen to such programming in almost any
environment.
During the period from the Company's inception in June 1994 through December
31, 1996, the Company had no revenues and its operating activities related
primarily to the research and development efforts and initial planning and
development of the Company's Web site and operations. During 1997, the Company
generated minimal revenues from Web-based advertising, and the Company's
operating activities related to the continued development of its proprietary
software, building market awareness and the launch and continued enhancement of
its Web site. Throughout the Company's existence, it has expended significant
resources in the research and development of its technology and the aggregation
of content by obtaining Internet broadcasting rights to audio programming.
The Company's revenues are derived principally from the sale of audio
commercials included in its downloaded or streamed audio programming, channel
sponsorships and banner advertisements, all on short-term contracts. Advertising
revenues are recognized in the period in which the advertisement is delivered,
provided that collection of the resulting receivable is probable. For each hour
of downloaded content, the Company can distribute up to six minutes of audio
commercials. The audio selections, which include audio advertisements, are free
of charge to the user. In the future, the Company anticipates that it may
generate additional revenue streams through ad-free program charges and charges
for premium content, hardware sales of the ListenUp Player, e-commerce,
licensing and Intranet sales. However, the extent and timing of developing such
additional revenue sources is not currently known, and there is no assurance
that the Company will in fact generate revenues from all or any of these
potential sources at any time in the future.
The amount of revenue that the Company can generate is directly related to a
number of factors, including the volume of advertisers, the rates charged for
the various types of advertising, the number of
20
<PAGE>
users who visit the Company's Web site and the amount of audio content
downloaded or streamed. To date, the Company has generated a minimal amount of
advertising revenue, in part due to excess advertisement "inventory" resulting
from the fact the Company has attracted more customers than advertisements to
match with its audio content. The Company expects to use a significant portion
of the net proceeds of this offering for sales and marketing and thereby expects
to rapidly expand its advertising inventory. There is no assurance, however,
that the Company will successfully increase revenues or achieve profitability.
The Company has signed agreements with major media companies to provide a
wide selection of audio content such as news, books, self improvement programs,
magazine articles, radio and television programs and movie reviews. The Company
stores audio content on its Web site and is continually adding content to its
audio library. The cost of this content to the Company is, for the most part,
directly proportional to the duration of downloaded content. Certain of the
content is purchased on a flat fee basis.
The Company has incurred significant losses since its inception. As of
September 30, 1998, the Company had an accumulated deficit of approximately
$9,985,000 and is continuing to operate at a loss. The Company believes that its
success will depend largely on its ability to attract users to its Web site,
obtain advertising contracts and secure additional audio content of interest to
users. Accordingly, the Company intends to invest heavily in sales and
marketing, content acquisition and continued research and development efforts.
In view of the rapidly evolving nature of the Company's business and its
limited operating history, the Company believes that period-to-period
comparisons of its revenues and operating results, including its gross profit
margin and operating expenses as a percentage of total net revenues, are not
necessarily meaningful and should not be relied upon as indications of future
performance.
PLAN OF OPERATIONS
The Company intends to use the net proceeds of this offering to expand and
improve its AudioCast System. The Company expects expenditures to increase very
substantially across all expense categories as it seeks to increase its
advertising inventory, expand its digital audio content library and upgrade its
Web site following the offering. The Company expects the most significant
expense increases will occur in sales and marketing and research and
development.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues were $87,000 for the first nine months of 1998, while the
Company recognized no revenues for the same period in 1997. The Company launched
its Web site and began generating revenues in November 1997.
Cost of revenues was $57,000 for the first nine months of 1998. This
primarily represents licensing costs of content distributed on the Company's Web
site. Since there were no revenues recognized in the first nine months of 1997,
there was no cost of revenues in that period.
Selling and marketing expenses were $1,040,000 for the first nine months of
1998, up 12% from selling and marketing expenses of $927,000 for the same period
in 1997. The Company expects selling and marketing expenses to increase
substantially in future periods as the Company secures the financial resources
from this offering to grow its business.
Research and development expenses were $739,000 for the first nine months of
1998, up 40% from $529,000 for the same period in 1997. This increase was
primarily the result of increased staffing and use of consulting engineers. The
Company employs outside consulting engineers to facilitate a portion of its
development effort.
21
<PAGE>
General and administrative expenses ("G&A") were $491,000 for the first nine
months of 1998, compared to G&A expenses of $195,000 for the same period in
1997. This 152% increase was primarily the result of increased costs in rent,
legal fees and consulting fees. The Company also expanded into new office space
(8,000 square feet) in December 1997 to accommodate increased staffing.
The operating loss was $2,240,000 for the first nine months of 1998 compared
to an operating loss for the same period of 1997 of $1,651,000, an increase of
approximately 36%. As noted above, the increased loss was primarily the result
of increased expenses for rent, legal fees, advertising, marketing, engineering
and product development.
Interest expense increased approximately 13% to $1,095,000 during the first
nine months of 1998 from $973,000 in the same period in 1997. This was primarily
the result of amortizing the fair value attributed to warrants issued in
connection with the outstanding debt over the life of the related debt and the
amortization of beneficial conversion features of certain convertible debt over
the expected conversion period. Amortization for the first nine months of 1997
was $866,000 compared to $953,000 for the comparable period in 1998. In the nine
months ended September 30, 1998, the Company recorded interest expense of
$369,000 related to the amortization of beneficial conversion features of
convertible notes.
As a result of the factors described above, for the first nine months of
1998 the Company incurred a net loss of $3,335,000 compared to a net loss of
$2,624,000 for the same period in 1997.
The fair value of warrants issued in connection with debt is being amortized
as interest expense over the contractual life of the related debt and the
amortization of beneficial conversion features of certain convertible debt over
the expected conversion period. In the quarter in which this offering is
completed, the unamortized amounts, estimated at $1,827,000, will be recorded as
charges to operations for debt restructuring (as an extraordinary item and
additional interest expense) and will be reflected in the Company's statement of
operations for that period. These charges are likely to have a material effect
on the Company's reported earnings for that quarter, and as a result the Company
expects to have a significant net loss for the quarter in which the offering
occurs.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company's financial results in the years ended December 31, 1997 and
1996 were significantly affected by the amount of capital raised during the
respective periods. Since inception, the Company has funded its development
primarily through the sale of equity and debt securities. Capital constraints
have, on occasion, resulted in some delay of product development and of the
launching of the Company's Web site.
Net revenues for the year ended December 31, 1997 were $4,000. There were no
net revenues for the period ending December 31, 1996. The Company's business
model is primarily based on generating revenues from the sale of adverting and
on electronic commerce. During the last two months of 1997, the Company launched
its Internet Web site and began to generate advertising revenues.
Cost of revenues in 1997 was $35,000. Because the Company had not yet begun
generating revenues during 1996, there was no cost of sales in the prior year.
The increase in the cost of revenues was due to the launch of the Company's Web
site in November 1997 and content acquisition costs.
Selling and marketing expenses in 1997 increased $784,000, or 92%, to
$1,634,000 from $850,000 in 1996. This increased was due to an aggressive
advertising campaign designed to promote the launch of the Company's new Web
site in November 1997. The advertising campaign included exposure on radio and
television, Internet distribution sites and Internet "direct" e-mail. Selling
and marketing expenses in 1997 also included increased travel, entertainment and
marketing expenses related to trade shows and conferences that were designed to
gain exposure and promote the Company's Web site and proprietary technology.
22
<PAGE>
Research and development expenses in 1997 increased $310,000, or 85%, to
$677,000 from $367,000 in 1996. The increase reflected an increase in research
and development personnel. The Company also has employed outside engineering
consultants to facilitate a portion of its development effort, and in 1997, more
extensively used consultants than it had in 1996. During 1997, the Company
completed development of its Web site and its AudioWiz proprietary software.
However, in order to remain competitive in this rapidly evolving market, the
Company expects to have to continue to expend considerable sums on research and
development, and the Company has allocated a portion of the net proceeds of this
offering to that purpose.
General and administrative expenses in 1997 decreased $130,000, or 45%, to
$157,000 from $287,000 in 1996. The decrease reflected a decrease in
administrative personnel as well as the implementation of a cost control
program, which was put into place during the second quarter of 1997.
Based on the foregoing, the net loss from operations in 1997 increased
$995,000, or 66%, to $2,499,000 from $1,504,000 in 1996. As described above,
this was primarily the result of increased expenditures to expand research and
development combined with sales and marketing expenses related to the
introduction of the Company's Web site.
Interest expense was $1,292,000 in 1997 compared to $77,000 in 1996. The
increase reflects increased debt financing and the amortization in 1997 of
$1,009,000 representing the fair value of warrants issued in connection with
debt.
The resulting net loss in 1997 was $3,791,000 compared to a loss of
$1,581,000 in 1996. The Company expects to continue generating losses until at
least the fourth quarter of 1999. However, there is no assurance that the
Company will become profitable on this schedule or at any time thereafter.
The Company has no current tax liability, and management has determined that
the realization of its deferred tax assets is not probable. As such, the Company
has provided a full valuation allowance against its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception almost entirely from
the sale of equity and debt securities, supplemented with a bank line of credit.
As of September 30, 1998, the Company had cash and cash equivalents of $171,000
and a working capital deficit of $2,022,000. The Company currently is financing
its daily operations primarily through debt financing.
The Company has issued subordinated convertible promissory notes (the
"Notes") of which $2,973,000 in principal were outstanding at September 30,
1998. The Notes, which bear interest at 10%, are convertible into Common Stock
at rates ranging from $3.00 to $14.39 per share. During 1998, the Company
converted $729,000 of Notes and accrued interest of $60,000 into 85,219 shares
of Common Stock. The remaining Notes are all due on or before March 31, 2000. As
of December 31, 1997, officers and directors of the Company purchased $130,000
of the Notes, all of which were converted as described above prior to September
30, 1998. The Notes will convert into an aggregate of 409,933 shares of Common
Stock concurrently with the closing of this offering and such conversion is
reflected in the pro forma adjustments described elsewhere in this Prospectus.
The Company has also issued subordinated notes payable in the principal
amount of $963,000 to private investors, of which $100,000 is convertible into
Common Stock at $3.84 per share. These notes are subordinated to all other
indebtedness, require no payments until maturity, bear interest at rates ranging
from 8% to 12% per annum and are due by July 31, 1999.
The Company believes the net proceeds of this offering will be sufficient to
fund its operations for at least the next 12 months and that, during that
period, it will not be necessary for the Company to raise additional funds to
meet the expenditures required for operating its business. The proceeds of this
23
<PAGE>
offering, together with the bank line of credit, are the only sources of capital
currently available to the Company, other than existing cash and cash
equivalents.
The Company will make significant ongoing investments in research and
development for future generation products and services. It also expects to have
significant expenditures in sales and marketing and further content acquisition
in order to attract customers to its Web site. There is no assurance that the
Company's analysis of its capital requirements will be accurate, particularly in
light of the fact that it is entering a new business in a new market.
The Company's future expenditures and capital requirements will depend on a
number of factors including the development and implementation of next
generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet based products and services.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1997, the Company had approximately $6,250,000 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $3,125,000 of California net
operating loss carryforwards for tax reporting purposes which will expire
beginning in 1999.
The Tax Reform Act of 1986 imposes limitations on the use of net operating
loss carryforwards if certain stock ownership changes have occurred or could
occur in the future. The sale of the Units offered hereby constitutes such a
change in ownership.
YEAR 2000 COMPLIANCE
There are issues associated with the programming code in existing computer
systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company has evaluated its current systems, purchased necessary
upgrades and believes that its current hardware and software is Year 2000
compliant. Similarly, the Company believes that the products and services it
offers to its customers are not affected by the Year 2000 problem. The Company
has evaluated the potential impact on it of a Year 2000 problem on the part of
its important third party vendors and has found none. The Company plans to
continue to evaluate its systems and those of its important vendors in an effort
to minimize the effects of a Year 2000 problem. The Company does not anticipate
that the Year 2000 problem will have a material impact on its business or
operations.
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BUSINESS
The Company is an Internet-based information and entertainment company
which, through its AudioCast System, uses the capabilities of the World Wide Web
(the "Web") to deliver audio content. By entering into licensing agreements with
audio content providers such as National Public Radio ("NPR"), Penguin Books USA
and Newsweek on Air, the Company has assembled a continually expanding digital
library of over 3,500 titles, including timely news programs that are updated
frequently, audio books, music and other forms of information and entertainment.
Once a consumer has selected audio programming, he or she can either listen in
real time to "streaming" audio (in the case of certain content) or download and
store the program in digital form so it can be retrieved and enjoyed at any time
or location the user finds convenient. This digital library can be accessed over
the Internet at the Company's Web site. The AudioCast System was awarded the
"INNOVATIONS '97 DESIGN & ENGINEERING SHOWCASE AWARD" at the 1997 Consumer
Electronics Show, the "PEOPLE'S CHOICE AWARD" at the 1998 Internet Showcase
sponsored by Upside Magazine and, in June 1998, CommerceNet's "NEW INNOVATOR
AWARD."
To access the Company's digital library, a user simply visits the Company's
Web site located at HTTP://WWW.AUDIOHIGHWAY.COM, registers using his or her name
and e-mail address, then downloads and installs the Company's proprietary
AudioWiz software. Once on-line, the user may select any audio content of his or
her choice from the Company's audio content library. Certain of the user's
selections can be streamed in "real time" over the Internet, using Microsoft
Windows Media Player, which is available for free download on the Company's Web
site. Even more content selections are available for download to the user's
personal computer ("PC") memory.
Substantially all of the audio content provided by the Company is available
to users from other sources. Recorded music and audio books are available
through many retail outlets. Current audio programming, such as news and market
data, are available on radio and from a variety of data sources. The advantage
of the Company's AudioCast System is that it allows the user to select precisely
the content he or she wishes to hear, to download it directly from the Internet
to a home or office computer at any time and to play it back at any convenient
time. For example, a user can download market or other business information at
any time and can play it back during a commute to work or other automobile
travel when it would be impractical to view a video presentation of the same
information.
If the user has purchased the Company's proprietary ListenUp Player, a
hand-held device containing solid state digital memory, the downloaded audio
selections of the user's choice can be uploaded from his or her PC to the
ListenUp Player and stored for future playback. The Company's ListenUp Player,
which can be purchased from the Company's Web site, is a solid state portable
audio device that adds portability to the AudioCast System, allowing users to
choose and store a wide variety of audio programming for listening while
commuting, exercising, doing housework or in virtually any other setting,
typically by use of headphones or over the car stereo using a cassette adapter.
The Company has entered into a strategic alliance with Diamond Multimedia
Systems, Inc. ("Diamond") whereby Diamond will facilitate the interface of
Diamond's Rio Player with audiohighway.com's AudioWiz software. The alliance
will ultimately allow users of Diamond's Rio Player to download audio content
from the audiohighway.com Web site and to play back that content on the Rio
Player. The Company is currently working with a number of other third party
manufacturers of portable devices to interface their hardware with the Company's
AudioWiz software and Web site. As new generations of palmtops and other
handheld devices from various manufacturers add audio capability, the Company's
technology will enable users to upload audio programming to these other
compatible digital listening devices as well.
Listeners can visit the Company's Web site as often as they like and
download free audio content supported by the sponsorship of the Company's
advertisers. Because of the increasing acceptance of Internet commerce, the
Company believes that many consumers will be willing to purchase training
seminars or other premium audio content that is not offered on the
advertising-supported portion of the Web site and that still others will be
willing to pay to receive non-premium audio content on an advertising-
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free basis. To accommodate this market, the Company currently plans to begin
selling audio content to consumers on its Web site during the first quarter of
1999. This will be accomplished by delivering either a physical copy of the
content, such as a CD, to the customer or by delivering the content digitally,
over the Internet, directly to the listener's computer. However, there is no
assurance that the timing of the availability of premium content and
advertisement-free content on the Company's Web site will not be delayed for
business or other reasons.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET. The Internet has grown rapidly in recent years,
spurred by developments such as easy-to-use Web browsers, the availability of
multimedia PCs, the adoption of more robust network architectures and the
emergence of quality Web-based content and commercial applications. The broad
acceptance of the Internet Protocol ("IP") standard has also led to the
emergence of intranets and the development of a wide range of non-PC devices
that allow users to access the Internet and intranets. e-land estimates that the
number of Web users worldwide will increase from approximately 36 million at the
end of 1997 to approximately 142 million by the end of 2002. This represents an
average annual growth rate of 79%. The following graph illustrates historic and
projected use of the Internet.
GROWTH IN INTERNET USERS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MILLIONS OF USERS
<S> <C> <C>
Year United States Worldwide
1996 12.5 19
1997 24 36
1998 33 67
1999 39 92
2000 51 106
2001 58 127
2002 64 142
Source: e-land
</TABLE>
Much of the Internet's rapid evolution towards becoming a mass medium can be
attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and qualitatively improved users' on-line
experiences. Most notably, the Internet has evolved from a mass of static, text-
oriented Web pages and e-mail services to a much richer environment, capable of
delivering graphical, interactive and multimedia content. Prior to the
development of streaming media technologies, users could not play back audio and
video clips until the content was downloaded in its entirety. As a result, live
Internet broadcasts were not possible. The development of streaming media
products from companies such as Microsoft and RealNetworks enables the
simultaneous transmission and playback of continuous "streams" of audio and
video content over the Internet and intranets. These technologies have evolved
to
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deliver audio and video over widely used 28.8 kbps narrow bandwidth modems, yet
can scale in quality to take advantage of higher speed access that is expected
to be provided by xDSL, cable modems and other emerging broadband technologies.
THE INTERNET AS A NEW MEDIUM FOR ADVERTISING. The rapidly increasing number
of Web users and ubiquitous access to the Internet, both in the United States
and internationally, have resulted in the emergence of the Web as new mass
medium for advertising. An independent study conducted by e-land estimates that
the number of Web users doubled during 1996 to 19 million. A high rate of growth
is expected to continue over the next few years with over 140 million users
anticipated by the year 2002, including 64 million users in the United States
alone.
The proliferation of workstations and personal computers served by local
area networks has also resulted in the rapid increase in the number of potential
recipients for electronically distributed information. Forrester Research
estimates that electronic delivery of information to corporate desktops alone
will generate approximately $800 million in revenues by the year 2001. The
Global Internet Project estimates that the amount of information on the Internet
is doubling each year and that the number of pages currently on the Internet is
approximately 11 million.
The Web is an attractive medium for advertising because of its
interactivity, flexibility, targetability and measurability. Advertisers can
reach broad audiences and target advertisements to users with similar
demographic characteristics, specific regional populations, affinity groups or
selected individuals. The interactive nature of the Web enables advertisers to
determine customer preferences, using these to initiate ongoing commercial
relationships with potential customers. Advertisers can easily change their
advertising messages frequently. The Web is a measurable medium because
impression levels and demographic information concerning users can be tracked
and reported to advertisers.
According to e-land, United States Web ad spending in 1996 was approximately
$175 million and is projected to be as large as $8 billion by the year 2002, as
shown in the following graph:
U.S. ADVERTISING ON THE INTERNET
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEAR MILLIONS
<S> <C>
1995 $32
1996 $175
1997 $650
1998 $1,500
1999 $2,200
2000 $3,800
2001 $6,500
2002 $8,000
Source: e-land
</TABLE>
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INTERNET COMMERCE. The Web is also emerging as a new medium for global
commerce. A rapidly increasing number of consumers have begun transacting
business over the Web, such as paying bills, buying airline tickets, trading
securities and purchasing books and other consumer merchandise. Moreover, online
transactions can be faster, less expensive and more convenient than transactions
conducted via human interaction. Internet retailers can offer convenience and
value to their customers and simultaneously display in-depth information
concerning products or services selected by users according to their preferences
using a combination of text, video and sound. International Data Corporation
estimates that the total value of goods and services purchased on the Web will
increase from $2.6 billion in 1996 to $220 billion in 2001.
DEMAND FOR AUDIO CONTENT. The total market for audio content is substantial
and includes such diverse types of content as audio books, broadcast radio,
recorded and live music, business news, education and training. An increasing
number of commuters and other mobile listeners demand quality audio content.
This demand has not only fueled growth in the number of types of audio content,
but has also generated the development of new entertaining, useful and/or
educational forms of content. For example, in 1996, there were over $1.6 billion
in sales of audio books, a relatively recent product that was not widely
available until the late 1980's. The Company believes that, increasingly,
consumers will look to the Internet as a source for audio content.
THE AUDIOHIGHWAY.COM OPPORTUNITY: BUSINESS STRATEGY
Although several alternative means of providing audio content have achieved
acceptance by the general public, the Company believes that Internet
distribution of audio content can have cost or convenience advantages for the
consumer over both radio and physical merchandise, such as compact disks or
audio tapes. For example, a consumer can listen to broadcast radio but only to
whatever happens to be on the air at the time. The radio listener has limited
control over the selection of broadcast content (I.E., he or she can change the
channel) and has no control over the time at which specific programs can be
heard. The purchaser of CDs or audio tapes can make selections and determine
when to listen to the content but must pay for the entire recording even if only
selected portions are desired. In addition, the Company believes that
distribution over the Internet can provide significant price and convenience
advantages to users of its Web site by eliminating the need to physically visit
a retail store and to purchase hard copy out of the store's inventory.
The Company believes broadcasting audio content over the Internet offers
advantages over traditional media. The Company intends to exploit the advantages
of the Internet in capitalizing on the worldwide popularity of various kinds of
audio programming, including audio books, musical and comedy programs, and
timely news programs such as those provided by NPR and Newsweek. By offering
quality audio programming and by using the Web's graphical and interactive
capabilities to add value to its content, the Company hopes to increase brand
recognition for the audiohighway.com name. The Company believes that it can
build upon its brand recognition, its digital library of audio content and its
proprietary technology to pursue multiple revenue opportunities, including,
among others, advertising, merchandising, technology licensing and intranet
programs.
THE AUDIOHIGHWAY.COM WEB SITE: CONTENT AND TECHNOLOGY
After logging onto the Company's Web site at HTTP://WWW.AUDIOHIGHWAY.COM,
the customer can browse the Web site to learn more about the Company's digital
library. When a new customer decides to download or "AudioCast," he or she first
must register with audiohighway.com by providing limited personal information
such as name and e-mail address. The registration page permits the entry of
additional data, including personal listening category preferences, but the
system does not require this information nor does it require confidential
information that other sites require, such as home address and telephone number.
The data entered on the registration page is used by the AudioCast System to
route appropriate advertising targeted to the user's preferences.
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The Company has designed its Web site to offer a large and comprehensive
selection of audio programming and has the capability to "stream" audio content
on a real time basis or transfer it over the Internet to the user's PC for
storage and playback. The Company has actively sought out sources of audio
programming that it has then digitized and added to the library of material
stored electronically on the Company's Web site. On the News Channel, for
example, a consumer can download news stories and audio programs on a current
basis from a list of programs including National Public Radio, Associated Press,
Newsweek and Dow Jones. The user can assemble a personalized news broadcast from
his or her personal selection of sources chosen from the Company's audio content
library and play it back at a convenient place and time. The Company is actively
engaged in negotiations with numerous other providers of audio content and
believes that it has many opportunities to quickly expand its digital library
following its public offering. The Company intends to use a portion of the net
proceeds of the offering to rapidly expand its audio programming library.
All of the audio content currently available on the Company's Web site is
available to the user free of charge. However, the Company believes that the
delivery of user-selectable audio content over the Internet for a fee, as well
as advertising-free audio content, represents a significantly under-exploited
market segment. The Company intends to offer audio content and merchandise
through electronic commerce ("e-commerce") and revenue sharing arrangements with
existing and future content providers.
Initially, the Company has pursued a strategy of maturing, or "beta testing"
its Web site by offering all content free of charge, partially as a means of
encouraging a high level of usage. The Company believes that active usage of the
Web site has meaningfully accelerated development by identifying problem areas
and promoting the testing refinements. Based upon extensive marketing and
technical evaluation, the Company is currently initiating a commercial strategy
that contains the following elements: advertising, electronic commerce, category
channel sponsor fees, partnership sales and licensing.
AUDIOWIZ. The Company's proprietary AudioWiz software, which is downloaded
by the user free of charge, allows users to select, download from the Company's
Web site and play back content on his or her computer or compatible portable
listening device. The AudioWiz user interface consists of an onscreen player
that acts as a control panel, allowing the user to control the computer audio.
Using AudioWiz, the user can navigate through stored items of audio content that
have been downloaded using control functions much the same as those found on a
standard CD player. AudioWiz displays a description of each downloaded item. The
user can play back audio selections on his or her computer while simultaneously
using another application such as a word processor or spreadsheet. The AudioWiz
software also keeps track of the content selected by the user over time. This
enables the Company's Web site to select advertisements for the user based upon
previously selected content as well as the user's personal profile.
THE LISTENUP PLAYER AND PORTABILITY. The Company believes that the ability
to move the audio content from a PC to a portable listening device will be
important or desirable for many listeners on its Web site. The ListenUp Player
is a portable storage device that is connected to the user's personal computer
through a docking station. It has a simple control panel allowing precise access
to the stored content by displaying content location by title on a small LCD
screen. The ListenUp Player is about the same size as a typical pager, weighs
3.4 ounces and is small enough to fit into a shirt pocket. Content is received
by uploading previously downloaded material from the user's PC using the
AudioWiz software. The ListenUp Player can then be removed from its cradle, and
the audio selections can be played back through (i) the player's built-in
speaker, (ii) headphones, or (iii) through the car stereo using a cassette
adapter plugged into the car's cigarette lighter. Additionally, the ListenUp
Player includes a built in microphone, allowing it to be used as an audio memo
pad, so that the user may dictate notes directly into the ListenUp Player for
later playback.
The ListenUp Player can be ordered for $199 on the Company's Web site. While
the Company expects to generate revenue from the sale of the ListenUp Player, it
intends to focus its resources on providing diverse, quality downloaded audio
content. The Company does not believe that it can generate significant margins
from sales of ListenUp Players. The Company does not plan to manufacture the
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ListenUp Player and has entered into an agreement with Sycom Technologies, Inc.
to supply ListenUp Players. See "--Manufacturing."
In addition to achieving portability with the ListenUp Player, the Company
has entered into a strategic alliance with Diamond Multimedia Systems, Inc.
whereby Diamond will facilitate the interface of Diamond's Rio Player with
audiohighway.com's AudioWiz software. The alliance will ultimately allow users
of Diamond's Rio Player to download audio content from the audiohighway.com Web
site and to play back that content on the Rio Player.
The Company's technology can be adapted to allow owners of palmtop
computers, personal digital assistants ("PDAs") and other compatible hand-held
computing devices with speakers to be loaded with digital audio material
obtained by the user from the Company's Web site. The Company expects that in
the future there will be a number of portable listening devices with the
capability of receiving audio content downloaded from the Company's Web site.
ADVERTISING. Initially, the Company expects to derive the majority of its
revenue from advertising on its Web site. It uses three methods of advertising:
"banner" ads, audio ads and channel sponsorships. The Company's audio ads are
included as part of the downloaded and streaming audio content. Audio channel
sponsorships enable the Company to charge for focused advertising related to a
specific content channel. Banner advertisements allow interested readers to link
directly to the advertisers' own Web sites. The Company targets traditional
advertisers, such as consumer product and service companies, manufacturers and
automobile companies, as advertisers on its Web site.
Advertising revenue has been derived principally from short-term advertising
contracts on a per impression basis or for a fixed fee based on a minimum number
of impressions. Audio ads currently are $0.20 per 30 second ad, while the
Company's banner advertising rates generally range from $20 to $35 per one
thousand impressions.
The Company's audio material is divided by subject matter into category
channels. The Web site presently organizes the content into eight channels. The
channels include News, Business, Audio Books, Music, Travel, Sports,
Entertainment and Technology. The Company currently expects to expand the number
of channels during the first quarter of 1999. For each of the category channels
on the Company's Web site, the Company offers a premier content sponsorship to a
content provider who prefers to be prominently displayed on the Web site.
Channel sponsorships are currently priced at $20 per one thousand impressions.
To enable advertisers to verify the number of ad playbacks or visual
impressions made by their advertisements and monitor their advertisements'
effectiveness, the Company provides its advertisers with reports showing data on
impressions, click through and downloads applicable to their advertisements.
The Company believes that the majority of Internet consumers would be
willing to listen to advertisements as long as the advertisements are focused on
subject categories selected by the consumer. Additionally, the AudioWiz software
has been programmed to track and store information regarding the consumer's
download requests by subject and category and then to select advertisements
specifically targeted to the consumer's personal profile.
For example, a customer considering the purchase of a new computer may
request content from the Company's Technology channel. The AudioWiz software,
interfacing with the Company's proprietary advertising server software,
recognizes that the consumer is selecting the Technology channel, checks the
personal profile of the user, I.E.; age and Zip Code, and delivers a
topic-appropriate advertisement to the target consumer. This benefits both the
advertiser and the customer. The customer saves time and effort by receiving
relevant messages from various manufacturers prior to making a purchase, while
the advertiser reaches a prospective buyer at or near the time the consumer is
making a purchase decision.
The Company intends to maximize its resources by contracting with third
parties for order fulfillment of physical merchandise; however, the Company will
collect a commission-based fee for all product sales.
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With regard to downloaded digitized audio content, the Company will generally
obtain a fully paid-up license or enter into a revenue sharing agreement with
publishers or other audio content providers.
SECURE TRANSACTION ELECTRONIC COMMERCE. The Company plans to implement
electronic merchandising ("e-commerce") during the first quarter of 1999,
thereby addressing the purchasing interests of an increasing number of consumers
who are accustomed to buying products over the Internet. The Company has
negotiated a link to an established provider of secure financial communications
software so that it can offer users the ability to purchase and own permanent
recordings of audio selections available on the Company's Web site. Initially,
the Company will sell music, training seminars, audio books and archival sources
in digital form, downloaded to the customer's PC. The Company will also offer
physical merchandise directly related to the Company's audio content, such as
music CDs and cassette tapes and printed versions of audio books. Customers will
pay by credit card for merchandise or downloading at the time of ordering
directly over the Internet, using the Company's financial communications
software.
DISTRIBUTION PARTNERSHIPS. The Company intends to develop partnerships with
strategic Internet sites to increase the traffic to its Web site category
channels. The Company offers audio technology, audio content and audio
advertising capable of delivering audio to other companies' Web sites in order
to develop additional streams of revenue from audio advertising. These
partnerships can be easily implemented by putting a button on the partner's Web
site that will link the user to the audio content being made available by the
Company's server. Incremental increases in traffic generated from partnership
sites will increase the frequency of advertisement impressions on the Company's
Web site. The Company believes it can significantly increase total advertising
revenue from the increased traffic generated by partnered sites.
LICENSING AND INTRANET SALES. The Company believes the systems and
technology it has developed can be productively employed in many applications.
For example, many corporations and other large organizations have developed
internal network systems using telecommunications technology to facilitate
secure communications throughout the organization. Such systems, commonly
referred to as "intranets," are growing at a rate faster than the Internet
itself. The Company's technology can allow audio transfers on these networks
containing such things as announcements and bulletins, meeting summaries or
product descriptions.
The Company believes this application may be useful for internal training
for large corporations, such as for use in producing and distributing training
seminars to targeted groups of employees, such as to their sales force. The
audiohighway.com solution could accelerate and simplify the distribution of
information throughout national or international office networks, thereby
replacing conventional instructional tapes with digital, two-way communications.
The Company has entered into an agreement with the University of Texas at
Dallas, for use of the ListenUp Player in two distance learning programs at the
Graduate School of Management. The audio files containing course lectures,
faculty feedback on student projects and student team presentations that will be
delivered via the Company's Web site. The University of Texas MBA students, some
of whom travel extensively in their work, will be able to obtain lectures and
hear professors' comments on their projects while on the road.
AUDIO CONTENT. The Company seeks to enter into licensing agreements with a
wide variety of content providers in an effort to appeal to the broadest
possible market. Current categories include children's programming, commercial
programming and academic programming. Content providers currently include audio
recordings of popular and classical books, self improvement courses, information
and news services, magazines, music and sports updates, as well as various
entertainment products such as audio movie reviews and product information from
a variety of product areas.
The Company believes that the audiohighway.com concept has been well
received by content providers because it (i) represents a display shelf of
infinite length not limited by physical space such as in retail stores, and (ii)
provides them with additional distribution for their programming as well as the
incremental revenue stream that accompanies it.
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Different types of content typically have different types of licensing
terms. For the most part, the Company only pays for the content on a "per
download" basis, so the Company is not charged simply for having the content
available on its Web site. These download charges range from $0.40 to $0.60 per
download hour. Exceptions to this include the Brite Voice content (E.G., stock
market updates, sport scores, etc.), which is updated via satellite feed many
times per day for a flat fee.
Each item of audio content is digitized and added to the Company's content
library. This digital library is stored electronically and is located at the
Company's office. When a customer's content selection is received by the system,
the Company's proprietary routing, scheduling and queuing system will initiate
the AudioCast and storage of the user-selected content on the user's PC, which
may then be uploaded to the portable ListenUp Player or other compatible
portable listening device.
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AUDIOHIGHWAY.COM'S EXISTING LIBRARY. Since launching its Web site in
November 1997, the Company has collected a library of over 3,500 titles and
segments covering a broad range of subject categories, and it intends to rapidly
increase the size of its audio library upon completion of this offering. Current
audio content providers include, among others, ABC Tonight, Associated Press,
National Public Radio, CBS Tonight, Compact Classics, Dateline, Dow Jones, ESPN,
NBC Tonight, Newsweek, Penguin Books USA and PR Newswire.
The Company is actively pursuing additional sources of content in all areas
for which channels are offered on its Web site.
THE AUDIOHIGHWAY.COM WEB SITE ARCHITECTURE
The Company has developed a proprietary information publishing system
capable of disseminating a wide variety of audio content to a large population
of consumers using the Internet. The system is organized into a number of
software modules summarized below.
CONTENT MANAGEMENT MODULE. The Content Management Module is a
client/server-based software module that enables the system to add new files to
the Audio Content Database ("ACD"). In addition, it provides audio compression
of the digitized content file. This allows for rapid uploading from the user's
personal computer to the ListenUp Player or other compatible playback devices.
CATALOG SERVER. The Catalog Server is a Web Server-based software module
that provides a catalog interface into the ACD. This module allows end users to
browse the content library and select content for downloading. This module also
provides the user with a search engine for finding information quickly and
easily and includes secured identifiers for AudioWiz.
ADVERTISING SERVER. The Advertising Server consists of a database system
that provides advertising segments to logged-on users. This server identifies
certain advertisements based on its content and then matches them to recorded
user preferences or interest profiles. This technology allows users to receive
advertisements that correspond to their interests whether explicitly disclosed
in the user profile or based on content selections over time.
MERCHANT SYSTEM. The Merchant System is responsible for tracking and
managing all transactions. This is used for billing and system auditing as well
as sales and service of the ListenUp Player.
CUSTOMIZATION MODULE. The Customization Module allows the end-user to
customize the content delivery system to his or her specific needs. It further
allows for scheduled downloads and automated
e-mail notification of updates. In addition, it handles the end user's requests
and preferences for content and is the server interface to AudioWiz.
ADS AND CONTENT SERVER. The Audio Digitizing System ("ADS") is a hardware
and software-based system that provides the tools to digitize audio content from
DAT, audio cassette or broadcast sources and processes the content for loading
onto the Content Server. The Content Server is then responsible for distributing
the audio content to the end user.
AUDIOWIZ SOFTWARE. This software is a client application used to manage the
audio files on the end user's computer. Tasks such as uploading to the ListenUp
Player or other compatible listening device and simple file management are
performed using this utility. It is also used for configuring automated tasks,
such as pre-scheduled or automatic nightly downloads. The AudioWiz interfaces to
the end user's Windows 95 or newer version of Windows, as well as to the
ListenUp Player or other compatible listening device.
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MARKETING AND SALES
The Company attracts users to its Web site, primarily through Web-based
promotions. These can take the form of either advertisements on other targeted
Web sites or e-mail directed at selected Internet users. This use of e-mail is
the Internet version of direct marketing, and the Company feels it will prove to
be an important method by which it can continue to promote its Web site to an
increasing number of registered users. To a lesser extent, the Company plans to
attract new users through more traditional media, such as print ads and audio
spots on drive time radio.
The Company has gained significant recognition within the industry by its
participation in various tradeshows and through its public relations efforts.
The Company's AudioCast System won the "INNOVATIONS '97 DESIGN & ENGINEERING
SHOWCASE AWARD" at the 1997 Consumer Electronics Show, the "PEOPLE'S CHOICE
AWARD" at the 1998 UpSide Magazine Internet Showcase and, in June 1998,
CommerceNet's "NEW INNOVATOR AWARD."
The Company's in-house sales force develops and implements its advertising
strategies, including identifying strategic accounts and developing
presentations and promotional material. As of October 31, 1998, the Company
employs eight persons to carry out its sales and marketing activities. Each
sales person has been assigned an industry segment and solicits advertising
contracts from companies in those industries and their agencies. The Company
plans to use part of the proceeds of this offering to increase the size of its
sales force.
The Company also enters into cross-marketing relationships with other Web
sites, including NPR. This is primarily implemented through putting
click-through banners on each other's Web sites so that traffic generated on one
Web site has the ability to move easily to the cross-marketing partner's Web
site by simply clicking on the banner.
MANUFACTURING
The Company does not plan to become a manufacturing company. Rather, the
Company has executed a three-year agreement with Sycom Technologies whereby
Sycom has agreed to manufacture the ListenUp Player through June 2001, with
renewal options. Sycom is entitled to a royalty of up to 8% of the revenue
generated by advertisements uploaded to the Company's ListenUp Player.
RESEARCH AND DEVELOPMENT
Since inception, the Company has devoted significant time and financial
resources to research and development activities to develop its current
technology, products and services. The Company anticipates that a portion of its
ongoing operations will continue to include research and development activities
due to the rapid technological evolution of Internet-based commerce. Research
and development expenditures were $367,000 and $677,000 in 1996 and 1997,
respectively.
There is no assurance that the Company will successfully develop these
products or that competitors will not develop products sooner or products that
are superior to the Company's product offerings.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company has filed several patent applications with respect to certain
aspects of the AudioCast System, and two patents have issued. Although the
Company does not believe that its existing patents provide a competitive
advantage, there is no assurance that in the future, patent protection will not
be of substantial importance to the Company's business and future prospects.
There is no assurance that patents will be issued pursuant to the pending
applications or that the patents that are issued or may be issued in the future
will not be held invalid or unenforceable by a court having jurisdiction over a
dispute challenging their validity. Even if patents are upheld and are not
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challenged, third parties might be able to develop equivalent technologies or
products without infringing such patents or the Company could be required to
expend substantial funds in order to defend its patents.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success and relies on a combination of
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with its employees and with
third parties to establish and protect its proprietary rights. There is no
assurance that these steps will be adequate, that the Company will be able to
secure trademark registrations for all of its marks in the United States or
other countries or that third parties will not infringe upon or misappropriate
the Company's copyrights, trademarks, service marks and similar proprietary
rights. The Company does not own any registered copyrights protecting its
products but claims common law copyrights in its software. There is no assurance
that common law copyright will provide adequate protection for the Company's
related intellectual property. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the content downloaded from the Company's Web site. In the future, litigation
may be necessary to enforce and protect the Company's trade secrets, copyrights
and other intellectual property rights.
The Company has filed trademark claims for "Audio Highway," "AudioWiz" and
"AudioCast." The "ListenUp" trademark is licensed from ListenUp, Inc. The
Company intends to pursue the registration of its trademarks based upon
anticipated use internationally. There is no assurance that the Company will be
able to secure adequate protection for these trademarks in foreign countries. In
addition, there could be potential trademark or trademark infringement claims
brought by owners of other registered trademarks or trademarks.
There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.
There is no assurance that the measures taken by the Company will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. Moreover, the Company may also be subject
to litigation to defend against claims of infringement of the rights of others
or to determine the scope and validity of the intellectual property rights of
others. If competitors of the Company prepare and file applications in the
United States that claim trademarks used or registered by the Company, the
Company may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
the Company. Similarly, actions could be brought by third parties claiming that
the Company's products infringe patents owned by others. An adverse outcome
could require the Company to license disputed rights from third parties or to
cease using such trademark or infringing product. Any litigation regarding the
Company's proprietary rights could be costly and divert management's attention,
result in the loss of certain of the Company's proprietary rights, require the
Company to seek licenses from third parties and prevent the Company from selling
its products and services, any one of which could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, inasmuch as the Company licenses a substantial portion of its content
from third parties, its exposure to copyright infringement actions may increase
because the Company must rely upon such third parties for information as to the
origin and ownership of such licensed content. The Company generally obtains
representations as to the origins and ownership of such licensed content and
generally obtains
34
<PAGE>
indemnification to cover any breach of any such representations; however, there
can be no assurance that such representations will be accurate or that such
indemnification will adequately protect the Company.
COMPETITION
The Company will face intense competition in every aspect of its business,
including competition for consumers of audio materials, advertisers, providers
of audio materials and vendors of products. The business of providing data and
other products using the Internet as a medium is currently experiencing
explosive growth and is characterized by extremely rapid technological
development, rapid changes in consumer habits and preferences, massive infusions
of capital and the emergence of a large number of new and established companies
with aspirations to control as much of the distribution process as possible. A
relatively small number of these companies, including America On Line and
Yahoo!, currently control primary or secondary access of significant percentages
of all Internet users and therefore have a competitive advantage in marketing to
those users. Other large and established companies, such as local and long
distance telephone companies, cable companies, satellite programming providers
and others have established relationships with large customer bases and are
rapidly expanding into the provision of Internet services. Although the Company
does not believe that any of these companies currently are direct competitors
and believes that it provides services and has technology that could be
attractive to such companies as customers, substantially all of these companies
have financial, technological, promotional and other resources that are much
greater than those available to the Company. Most, if not substantially all, of
such providers could use or adapt their current technology, or could purchase
technology, to provide a service directly competitive with the Company's
AudioCast System.
The Company competes with (i) other Web sites and Internet broadcasters to
acquire and provide content to attract users, (ii) online services, other Web
site operators and advertising networks, as well as traditional media such as
television, radio and print, for a share of advertisers' total advertising
budgets, (iii) local radio and television stations and national radio and
television networks for sales of advertising spots and (iv) other Web site
operators engaged in e-commerce.
Competition among Web sites that provide content such as news, financial
information, music and audio books is intense and is expected to increase
significantly in the future. The Company competes against a variety of
businesses that provide content through one or more media, such as print, radio,
television, cable television and the Internet. Traditional media companies that
have not established a significant presence on the Internet may expend resources
to establish such a presence in the future. The Company competes generally with
other content providers for the time and attention of users and for advertising
revenues. To compete successfully, the Company must license and then provide
sufficiently compelling and popular content to generate users and support
advertising intended to reach such users. The Company believes that the
principal competitive factors in attracting Internet users include the quality
of service and the relevance, timeliness, depth and breadth of content and
services offered. The Company also competes for the time and attention of
Internet users with thousands of Web sites operated by businesses and other
organizations, individuals, governmental agencies and educational institutions.
The Company expects competition to intensify and the number of competitors to
increase significantly in the future. In addition, as the Company expands the
scope of its content and services, it will compete directly with a greater
number of Web sites and other media companies. Because the operations and
strategic plans of existing and future competitors are undergoing rapid change,
it is extremely difficult for the Company to anticipate which companies are
likely to offer competitive services in the future.
The Company also competes with online services, other Web site operators and
advertising networks, as well as traditional media such as television, radio and
print for a share of advertisers' total advertising budgets. The Company
believes that the principal competitive factors for attracting advertisers
include the number of users accessing the Company's Web site, the demographics
of the Company's users, the Company's ability to deliver focused advertising and
interactivity through its Web site and the overall cost-effectiveness and value
of advertising offered by the Company. There is intense competition for the sale
of
35
<PAGE>
advertising on high-traffic Web sites, which has resulted in a wide range of
rates quoted by different vendors for a variety of advertising services, making
it difficult to project levels of Internet advertising that will be realized
generally or by any specific company. Any competition for advertisers among
present and future Web sites, as well as competition with other traditional
media for advertising placements, could result in significant price competition.
The Company believes that the number of companies selling Web-based advertising
and the available inventory of advertising space have recently increased
substantially. Accordingly, the Company may face increased pricing pressure for
the sale of advertisements. Reduction in the Company's Web advertising revenues
would have a material adverse effect on the Company's business, results of
operations and financial condition. There is no assurance that the Company will
be able to compete in its chosen market.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as music licensing, broadcast
license fees, copyrights, privacy, pricing, sales taxes and characteristics and
quality of Internet services. It is possible that governments will enact
legislation that may be applicable to the Company in areas such as content,
network security, encryption and the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
majority of such laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any such
export or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase the Company's cost of doing business or increase the Company's legal
exposure, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition.
EMPLOYEES
As of October 31, 1998, the Company has 18 full time employees, eight in
marketing and sales, eight in research and development and two in finance and
administration. In addition, six consultants devote substantially all of their
time to the Company in the areas of system design and engineering. The Company
makes use of additional outside consultants and independent contractors to
perform various functions such as programming, engineering, development, and
accounting. The Company believes this approach not only allows it to limit
expenses, but also provides maximum flexibility to react to a rapidly changing
environment. None of the Company's employees is represented by a labor union.
The Company believes that its employee relations are good.
FACILITIES
The Company's executive offices are located in an approximately 9,600 square
foot facility located in Cupertino, California. This space, which houses the
Company's current operations in two neighboring buildings, is subject to
separate leases that expire in December 1999. The monthly base rental under the
combined leases (not including insurance) is approximately $28,200 per month.
LEGAL PROCEEDINGS
The Company is not presently a party to any material litigation.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of October 31, 1998
with respect to each person who is an executive officer or director of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Nathan M. Schulhof................................ 49 President, Chief Executive Officer and Director
Grant Jasmin...................................... 46 Executive Vice President, Chief Operating Officer,
Secretary and Director
Robert S. Leff.................................... 51 Director
Lee M. Gammill.................................... 62 Director
Muninderpal Rehki................................. 49 Director
Marvin M. Reiss................................... 54 Director
Gregory Sutyak.................................... 42 Chief Financial Officer
Marc Baum......................................... 35 Vice President, Product Development
Theodore Richards................................. 51 Vice President and Creative Director
Michael M. Lamb................................... 33 Vice President, Sales and Alliances
</TABLE>
Mr. Schulhof is one of the founders of the Company and has served as Chief
Executive Officer, President and a Director since the Company's inception in
June 1994. From January 1993 to May 1994, Mr. Schulhof was President and Chief
Executive Officer of TestDrive Corporation, a pioneer in the distribution of
computer software on CD-ROM ("TestDrive"), which he founded and sold to RR
Donnelley & Sons Co. For more than four years prior to forming TestDrive, Mr.
Schulhof worked as an independent management consultant to the computer
industry. Mr. Schulhof received a Bachelor of Arts degree in English from the
University of Wisconsin.
Mr. Jasmin is one of the founders of the Company and has served as Executive
Vice President, Chief Operating Officer, Secretary and a Director since the
Company's inception in June 1994. From June 1994 until January 1998, Mr. Jasmin
also served as the Company's Vice President, Finance. For more than five years
prior to joining the Company, Mr. Jasmin was engaged in the practice of law
specializing in corporate and securities law. Mr. Jasmin received the degree of
Juris Doctor from the University of California Hastings College of the Law,
Master of Business Administration from the University of Santa Clara and a
Bachelor of Arts degree in Economics from San Jose State University.
Mr. Leff has served as a Director of the Company since February 1995. Mr.
Leff has served as an independent financial consultant since December 1994.
Prior thereto, Mr. Leff was a founder of Softsel, Inc., the predecessor to
Merisel, Inc., a publicly-held company, where he served as Co-Chairman of the
Board for more than five years until December 1994. Merisel is one of the
world's largest distributor of microcomputer hardware and software and
associated products. Mr. Leff holds both a Master of Science degree and a
Bachelor of Science degree from the State University of New York at Albany.
Mr. Gammill has served as a Director of the Company since November 1997.
Since May 1997, Mr. Gammill has served as Chief Executive Officer of The Gammill
Group, a consultant to the insurance and financial industry. In May 1997, Mr.
Gammill retired from 40 year career with New York Life Insurance Company where
he served as Vice Chairman of the Board of Directors. Mr. Gammill also serves on
the Board of Directors of Guarantee Life Insurance Company, Omaha Nebraska, and
is a Trustee of the American College, Bryn Mawr, Pennsylvania. Mr. Gammill
received a Bachelor of Arts degree in Business Administration from Dartmouth
College.
37
<PAGE>
Mr. Rehki has served as a Director of the Company since April 1998. Mr.
Rehki has been Chief Executive Officer of TDP, Inc., a high technology software
consulting firm, since January 1998. From October 1997 to January 1998, he was
Chief Executive Officer of TransWeb, a software consulting firm to the medical
industry. TransWeb is a wholly-owned subsidiary of CyberPlus, an Internet-based
software medical support company in which Mr. Rehki served as Chief Executive
Officer and Director from February 1996 to October 1997. From December 1993 to
January 1996, Mr. Rehki was Vice President of Operations for Intellimatch, Inc.,
an Internet-based human resources company. Mr. Rehki received a Bachelor of Arts
degree in Economics and a Master of Arts degree in Economics from Christ Church
College, India.
Mr. Reiss has served as a Director of the Company since October 1998. For
more than the past five years, Mr. Reiss has been Chairman and Chief Executive
Officer of The Rebot Corporation, a record company that produces, manufactures
and distributes recorded music under various labels including Arabesque
Recordings. Mr. Reiss received the degrees of Master of Business Administration,
Master of International Affairs and Master of Arts in Sociology from Columbia
University, Bachelor of Law degree from Brooklyn Law School, Master of Science
degree in Physiology from the Fairleigh Dickenson Dental School, Master of
Science degree in Microbiology from Marquette University School of Medicine and
Bachelor of Arts degree in Biology from Yeshiva University.
Mr. Sutyak has served as Chief Financial Officer since January 1998. From
January 1995 through December 1997, Mr. Sutyak served as a consultant to the
Company performing financial services. From March 1996 through December 1997,
Mr. Sutyak was an independent consultant. From May 1993 through February 1996,
Mr. Sutyak was Chief Financial Officer for TestDrive. Mr. Sutyak received a
Bachelor of Arts degree in Economics from the University of Pittsburgh and a
Masters of Business Administration degree from the University of San Francisco.
Mr. Baum has served as Vice President, Product Development since April 1998.
From May 1996 through March 1998, Mr. Baum was Vice President of Paragon
Technology Corporation, a network company providing software and consulting
services to the financial, insurance and retail industries. From March1992
through April 1996, Mr. Baum was Director of Network Systems Products for U.S.
Robotics, a leading manufacturer of network and Internet connectivity products.
Mr. Baum received a Bachelor of Science degree in Computer Engineer from the
University of Illinois.
Mr. Richards has served as Vice President and Creative Director since July
1996. From November 1994 to July 1996, Mr. Richards was Vice President of User
Interface Design and Creative Director for SoftAd, a firm specializing in the
design and implementation of sales force automation and integrated
client-server-based Web sites. From January 1993 to July 1994, Mr. Richards was
Executive Creative Director and Vice President of TestDrive. Mr. Richards
received a Bachelor of Arts degree in Creative Writing from San Francisco State
University.
Mr. Lamb has served as Vice President, Sales and Alliances since July 1998.
From February 1995 to July 1998, he was Vice President, Business Development and
a director for Sycom Technologies, Inc., a consumer electronics company
specializing in digital audio technology where he still serves as a director.
From March 1991 until February 1995, Mr. Lamb was an associate with the law firm
of Green, Lundgren & Ryan, Haddonfield, New Jersey. Mr. Lamb received a Bachelor
of Science Degree in Electrical Engineering from Villanova University and a
Juris Doctor from Rutgers University School of Law.
All members of the Board of Directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation, or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.
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<PAGE>
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee exercises the Board's authority to determine the cash
and non-cash compensation of each officer, salaried employee and consultant of
the Company, to establish and administer the Company's insurance and benefits
plans and to administer the Company's stock option plans. The Compensation
Committee also recommends to the full Board of Directors the cash and non-cash
compensation (including stock options and awards) to be paid to each member of
the Board of Directors who serves as an officer, employee or consultant of the
Company. Mr. Jasmin and Mr. Rehki are currently the members of the Compensation
Committee.
The Audit Committee is responsible for reviewing and evaluating the scope
and results of audits and other services provided by the Company's independent
accountants and determining the adequacy of the Company's internal controls and
other financing reporting matters. Mr. Rehki and Mr. Gammill are currently the
members of the Audit Committee.
EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
Directors receive no fees, other than reimbursement of travel expenses, for
attendance at meetings of the Board of Directors. Each director (including
employee directors) receives a one-time grant of warrants to purchase 26,062
shares of Common Stock at a price equal to the fair market value on the date of
grant, which vest over a two year period.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and to each other executive officer who received salary
and bonus in excess of $100,000 in 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION--
AWARDS
ANNUAL COMPENSATION ---------------
--------------------- OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS(#)
- ------------------------------------------------------------------ --------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Nathan M. Schulhof ............................................... 1997 $ 157,500 $ -- --
CHIEF EXECUTIVE OFFICER, 1996 121,950 50,000 20,850
PRESIDENT AND CHAIRMAN 1995 117,500 -- 26,062(1)
OF THE BOARD
Grant Jasmin ..................................................... 1997 $ 108,000 $ --
EXECUTIVE VICE PRESIDENT, 1996 74,200 50,000 20,850
CHIEF OPERATING OFFICER 1995 20,000 -- 26,062(1)
Theodore Richards ................................................ 1997 $ 99,500 $ 4,000 --
VICE PRESIDENT AND 1996 46,000 -- 26,062
CREATIVE DIRECTOR
</TABLE>
- ------------------------
(1) Warrants to purchase Common Stock were issued to Mr. Schulhof and Mr. Jasmin
in their capacities as members of the Board of Directors, in keeping with
the compensation policy for all board members. The warrants are fully vested
as of January 15, 1998. See "--Director Compensation."
39
<PAGE>
EMPLOYMENT AGREEMENTS
The Company presently has no formal employment agreements with any of the
Named Executive Officers.
STOCK OPTION GRANTS AND EXERCISES
The Company has adopted a 1996 Stock Option Plan (the "1996 Plan"),
authorizing the grant of up to 364,869 options. The 1996 Plan was adopted to
promote and advance the interests of the Company and its shareholders by (i)
enabling the Company to attract, retain and reward managerial and other key
employees, non-employees and directors and (ii) strengthening the mutuality of
interests between participants in the 1996 Plan and the shareholders of the
Company in its long-term growth, profitability and financial success by offering
stock options.
No options under the 1996 Plan were granted to or exercised by any of the
Named Executive Officers during the year ended December 31, 1997.
The following table sets forth information concerning the value of
unexercised options as of December 31, 1997 held by the Named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE- MONEY OPTIONS AT
1997(#) DECEMBER 31, 1997($)(1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nathan M. Schulhof........................................ 44,306 2,606 $ 481,500 $ 22,500
Grant Jasmin.............................................. 44,306 2,606 $ 481,500 $ 22,500
Theodore Richards......................................... 13,031 13,031 $ 112,500 $ 112,500
</TABLE>
- ------------------------
(1) Based upon the difference between the fair market value of the securities
underlying the options at December 31, 1997 ($14.39 per share, as determined
by the Board of Directors) and the exercise price of the options.
CERTAIN TRANSACTIONS
In July 1998, the Company entered into a three-year Mobile Audio Delivery
Agreement with Sycom Technologies, Inc. (the "Sycom Agreement"). Michael M.
Lamb, who joined the Company as Vice President, Sales and Alliances in July
1998, is the former Vice President, Business Development of Sycom and remains a
member of Sycom's board of directors. Under the terms of the Sycom Agreement,
the Company has agreed to pay Sycom a royalty of 8% of the ongoing gross profits
(as defined in the Sycom Agreement) resulting from the use of the "Product," as
that term is defined in the Sycom Agreement, provided that Sycom does not supply
the Product to any competitor of the Company. Product is defined as any hand
held product manufactured by Sycom or using a Sycom Chip Set that is capable of
downloading digital audio from a PC, storing the audio in digital format and
playing it back. The royalty will be reduced to 6% at such time as Sycom begins
to receive revenues from any competitor of the Company, which, in no event, may
occur before July 1999. The Sycom Agreement further provides that the Company
shall be granted most favorable pricing for the Product that it purchases from
Sycom, if any; however, there are no minimum purchase requirements. In addition,
the Company and Sycom agreed on the payment of approximately $45,800 by the
Company to Sycom for past services and remaining development work on the
Product. The Sycom Agreement includes two successive two-year terms, which
automatically renew unless
40
<PAGE>
either party cancels the agreement 30 days prior to the expiration of the
current term. Mr. Lamb has no direct or indirect financial interest in the
transaction.
From October 1996 through June 1998, Marvin M. Reiss, a director of the
Company since October 1998, together with his wife, has invested in the Company
from time to time by purchasing Common Stock and by participating in certain of
the Company's convertible promissory note offerings. During the two year period
ended October 31, 1998, Mr. Reiss invested a total of $350,000. For his various
investments, he received 10% convertible notes and warrants to purchase an
aggregate of 12,618 shares of the Company's Common Stock. The promissory notes
are convertible into an aggregate of 13,642 shares. The warrants are exercisable
at exercise prices ranging from $4.50 to $7.67.
Mr. Reiss is the Chairman of the Board, Chief Executive Officer and a
principal shareholder of The Rebot Corporation, a record company that produces,
manufactures and distributes recorded music under various labels, including
Arabesque Recordings. In October 1998, the Company signed a sponsorship
agreement with Arabesque Recordings under the terms of which Arabesque became
the first sponsor of the Music Channel on the Company's Web site and, as such,
currently receives the premiere advertising position on the opening Web page of
the Music Channel. The Company also delivers Arabesque audio commercials in
connection with downloaded or streamed audio-based music content, for which
Arabesque receives a royalty. The Company cannot determine at this time the
financial value of this adverting relationship either to Arabesque or the
Company.
The Company has adopted a policy with respect to future related party
transactions. Pursuant to that policy, any future transactions with officers,
directors or affiliates of the Company will be approved or ratified by a
majority of independent, outside members of the Board of Directors who do not
have an interest in the transactions, and such transactions will be no less
favorable to the Company than those that can be obtained from unaffiliated third
parties. At all times, the Company expects to maintain at least two independent
directors on its Board.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of October 31, 1998,
and as of that date as adjusted to reflect the sale of the 2,000,000 Units
offered hereby, with respect to the beneficial ownership of the Company's Common
Stock by (i) each shareholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock; (ii) all directors of the Company;
(iii) the executive officers named in the Summary Compensation Table; and (iv)
all current executive officers and directors as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock issuable upon currently exercisable or
convertible securities or securities exercisable or convertible within 60 days
of October 31, 1998 are deemed beneficially owned and outstanding for computing
the percentage owned by the person holding such securities, but are not
considered outstanding for computing the percentage of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable community
property laws, each shareholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
shareholder's name.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1)(2) OWNED OFFERING OFFERING
- -------------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Nathan M. Schulhof........................................................ 306,663(3) 28.2% 10.0%
Grant Jasmin.............................................................. 193,293(3) 17.8 6.3
Jerome L. Strom and Rosie Ann Strom....................................... 66,484(4) 6.2 2.2
Robert S. Leff............................................................ 43,871(5) 4.1 1.4
Theodore Richards......................................................... 19,981(6) 2.0 *
Lee M. Gammill............................................................ 13,031(7) 1.2 *
Muninderpal Rehki......................................................... 6,906(8) * *
Marvin M. Reiss........................................................... 35,382(9) 3.3 1.2
All Executive Officers and Directors as a Group (7 persons)............... 621,033(10) 47.9 18.8
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of Messrs. Schulhof, Jasmin, Leff, Richards, Gammill, Rehki and
Reiss is c/o audiohighway.com, 20600 Mariani Avenue, Cupertino, California
95014. The address of Mr. and Mrs. Strom is 420 Cambridge Avenue, Palo
Alto, California 94306.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock that are beneficially owned by them.
(3) Includes 61,222 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of October 31,
1998.
(4) Includes 29,320 shares of Common Stock issuable upon exercise of
outstanding warrants exercisable within 60 days of October 31, 1998 and
26,062 shares of Common Stock issuable upon conversion of currently
convertible outstanding convertible promissory notes.
(5) Includes 29,971 shares of Common Stock issuable upon exercise of
outstanding warrants exercisable within 60 days of October 31, 1998.
(6) Includes 17,375 shares of Common Stock issuable upon exercise of
outstanding warrants exercisable within 60 days of October 31, 1998.
(7) Includes 9,773 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of October 31, 1998.
(8) Includes 6,903 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of October 31, 1998.
(9) Includes (i) 8,237 shares of Common Stock issuable upon exercise of
outstanding warrants exercisable within 60 days of October 31, 1998, (ii)
8,237 shares of Common Stock issuable upon conversion of currently
convertible outstanding convertible promissory notes, (iii) 5,405 shares of
Common Stock issuable upon conversion of currently convertible outstanding
convertible promissory notes held by Susan L. Reiss, Mr. Reiss' spouse, and
(iv) 4,381 shares of Common Stock issuable upon exercise of outstanding
warrants exercisable within 60 days of October 31, 1998 held by Mrs. Reiss.
(10) Includes 258,865 shares of Common Stock issuable upon exercise of
outstanding warrants and options exercisable within 60 days of October 31,
1998.
42
<PAGE>
DESCRIPTION OF SECURITIES
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value.
UNITS
Each Unit consists of one share of Common Stock and one redeemable Warrant.
The Common Stock and Warrants will become immediately separately transferable.
COMMON STOCK
As of October 31, 1998, there were 1,034,814 shares of Common Stock
outstanding held of record by approximately 150 shareholders. There will be
3,444,747 shares of Common Stock outstanding after giving effect to the sale of
the 2,000,000 Units offered hereby and the conversion of certain outstanding
convertible promissory notes into an aggregate of 409,933 shares, which will
convert concurrently with the closing of the offering.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Upon giving proper notice,
shareholders have rights to cumulate their votes in the election of directors
under the California General Corporation Law.
Subject to preferences that may be applicable to the holders of outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors from
time to time. In the event of liquidation, dissolution or winding up of the
Company, and subject to the rights of the holders of outstanding shares of
Preferred Stock, if any, the holders of shares of Common Stock shall be entitled
to receive PRO RATA all of the remaining assets of the Company available for
distribution to its shareholders. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable, and shares of Common Stock to be issued
pursuant to this offering will be, upon issuance, fully paid and nonassessable.
WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at an exercise price of $ per share (150% of the initial public offering
price of the Units). The Warrants will, subject to certain conditions, be
exercisable at any time until the fifth anniversary of the date of this
Prospectus, unless earlier redeemed. The outstanding Warrants are redeemable by
the Company, at a price of $0.25 per Warrant, upon 30 days' prior written
notice, if the closing bid price (as defined in the Warrant Agreement described
below) per share of the Common Stock for the 20 consecutive trading days
immediately preceding the date of notice of redemption equals or exceeds $
(200% of the initial public offering price of the Units). If the Company gives
notice of its intention to redeem, a holder would be forced either to exercise
his or her Warrant before the date specified in the redemption notice or accept
the redemption price.
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and U.S. Stock Transfer
Corporation, as warrant agent (the "Warrant Agent"). The shares of Common Stock
underlying the Warrants, when issued upon exercise of a Warrant, will be fully
paid and nonassessable, and the Company will pay any transfer tax incurred as a
result of the issuance of Common Stock to the holder upon its exercise.
The Warrants contain provisions that protect the holders against dilution by
adjustment of the exercise price. Such adjustments will occur in the event,
among others, of a merger, stock split or reverse stock split, stock dividend or
recapitalization. The Company is not required to issue fractional shares upon
the
43
<PAGE>
exercise of a Warrant. The holder of a Warrant will not possess any rights as a
shareholder of the Company until such holder exercises the Warrant.
A Warrant may be exercised upon surrender of the Warrant Certificate on or
before the expiration date of the Warrant at the offices of the Warrant Agent,
with the form of "Election to Purchase" on the reverse side of the Warrant
Certificate Completed and executed as indicated, accompanied by payment of the
exercise price (by certified or bank check payable to the order of the Company)
for the number of shares with respect to which the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Securities and Exchange Commission and
qualification in effect under applicable state securities laws (or applicable
exemptions from state qualification requirements) with respect to the issuance
of Common Stock (or other securities) underlying the Warrants. The Company has
agreed to use all commercially reasonable efforts to cause a registration
statement with respect to such securities under the Securities Act to be filed
and to become and remain effective in anticipation of and prior to the exercise
of the Warrants and to take such other actions under the laws of various states
as may be required to cause the sale of Common Stock (or other securities) upon
exercise of Warrants to be lawful. Under certain circumstances, the Company may,
at its option, and in lieu of permitting the exercise thereof, redeem the
Warrant by paying to the holder cash equal to the difference between the market
price of the Common Stock on the exercise date and the exercise price of the
Warrant. The Company will not be required to honor the exercise of Warrants if,
in the opinion of the Company's Board of Directors upon advice of counsel, the
sale of securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common Stock issuable upon exercise of the
Warrants. The Warrant holders may be expected to exercise their Warrants at a
time when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Warrants. Furthermore, the terms on which the Company could
obtain additional capital during the life of the Warrants may be adversely
affected.
PREFERRED STOCK
No shares of Preferred Stock are outstanding. As of the date of this
Prospectus, the Board of Directors has the authority, without further action by
the shareholders, to issue shares of Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
voting rights, terms of redemption, redemption prices, liquidation preferences,
number of shares constituting any series or the designation of such series.
Although it presently has no intention to do so, the Board of Directors, without
shareholder approval, could issue Preferred Stock with voting and conversion
rights that could adversely affect the voting power of the holders of Common
Stock. This provision may be deemed to have a potential anti-takeover effect and
the issuance of the Preferred Stock in accordance with such provision may delay
or prevent a change of control of the Company. The Company has adopted a policy
under which any issuance of Preferred Stock by the Company will be approved by a
majority of independent, outside members of the Company's Board of Directors who
will have access, at the Company's expense, to legal counsel.
EXISTING WARRANTS
As of September 30, 1998 the Company had issued warrants to purchase an
aggregate of 649,600 shares of Common Stock at exercise prices ranging from
$1.92 to $14.39. Each warrant is exercisable into
44
<PAGE>
one share of Common Stock, and the exercise price and number of shares is
subject to adjustment proportionately for any increase or decrease in the number
of issued shares of Common Stock resulting from a subdivision or consolidation
of shares of Common Stock or the payment of stock dividends or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company. The Company will not be
required to issue fractional shares upon exercise of a warrant. The holder of a
warrant does not possess any rights as a shareholder of the Company until such
holder exercised the warrant.
CONVERTIBLE PROMISSORY NOTES
At September 30, 1998, the Company had issued subordinated convertible
promissory notes in the aggregate principal amount of $2,973,000 bearing
interest at 10% per annum. These promissory notes are subordinate to all other
indebtedness, require no payment until maturity and are due on or before March
31, 2000. The promissory notes are convertible into Common Stock and may be
repaid by the Company without penalty at any time prior to maturity upon written
notice to the holder. Of the promissory notes, (i) $400,000 in aggregate
principal amount are convertible into Common Stock at 50% of the initial public
offering price of the Units; (ii) $626,000 in aggregate principal amount are
convertible into Common Stock at 75% of the initial public offering price of the
Units; and (iii) $1,947,000 in aggregate principal amount are convertible at
fixed conversion prices ranging from $11.51 to $14.39. Concurrently with the
closing of the offering, these convertible notes will convert into an aggregate
of 409,933 shares of Common Stock, assuming an initial public offering price of
$6.00. The Company will not be required to issue fractional shares upon
conversion of a promissory note. The holder of a promissory note does not
possess any rights as a shareholder of the Company until such holder converts
the promissory note to Common Stock.
As of September 30, 1998, the Company also has outstanding a convertible
promissory note in the principal amount of $100,000. This note, which matures on
July 31, 1999, bears interest at 10% per annum and is convertible into Common
Stock at a conversion price of $3.84. It is not anticipated that this note will
convert at the closing of the offering.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussions set forth certain federal income tax consequences,
under current law, relating to the purchase and ownership of the Units and the
Common and Warrants constituting the Units. The discussion is a summary and does
not purport to deal with all aspects of federal taxation that may be applicable
to an investor, nor does it consider specific facts and circumstances that may
be relevant to a particular investor's tax position. Certain holders (such as
deals in securities, insurance companies, tax exempt organizations, foreign
persons and those holding Common Stock or Warrants as part of a straddle or
hedge transaction) may be subject to special rules that are not addressed in
this discussion. This discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, and on administrative and judicial
interpretations as of the date hereof, all of which are subject to change. ALL
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THIS OFFERING, INCLUDING THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS.
ALLOCATION OF PURCHASE PRICE
Each Unit as a whole will have a tax basis equal to the cost of the Unit.
The measure of income or loss from certain transactions described below depends
upon the tax basis in each of the Warrant and the Common Stock comprising the
Unit. The tax basis for each of the Warrant and the Common Stock will be
determined by allocating the cost of the Unit between the securities that
comprise the Unit in proportion to the relative fair market values of these
elements at the time of acquisition.
45
<PAGE>
EXERCISE AND SALE OF WARRANTS
No gain or loss will be recognized by a holder of a Warrant on the purchase
of shares of Common Stock for cash pursuant to an exercise of a Warrant (except
that gain will be recognized to the extent cash is received in lieu of
fractional shares). The tax basis of Common Stock received upon exercise of a
Warrant will equal the sum of the holder's tax basis for the exercised Warrant
and the exercise price. The holding period of the Common Stock acquired upon the
exercise of the Warrant will begin on the date the Warrant is exercised and the
Common Stock is purchased (i.e., it does not include the period during which the
Warrant was held).
Gain or loss from the sale or other disposition of a Warrant (or loss in the
event the Warrant expires unexercised as discussed below), other than pursuant
to a redemption by the Company, will be capital gain or loss to its holder if
the Common Stock to which the Warrant relates would have been a capital asset in
the hands of such holder. Such capital gain or loss will be long-term capital
gain or loss if the holder has held the Warrant for more than 18 months at the
time of the sale, disposition or lapse. It is unclear whether the redemption of
a Warrant by the Company would generate ordinary or capital gain income.
SALE OF COMMON STOCK
The sale of Common Stock should generally result in the recognition of gain
or loss to the holder thereof in an amount equal to the difference between the
amount realized and such holder's tax basis in the Common Stock. If the Common
Stock constitutes a capital asset in the hands of the holder, gain or loss upon
the sale of the Common Stock will be characterized as long-term or short-term
capital gain or loss, depending on whether the Common Stock has been held for
more than 18 months.
EXPIRATION OF WARRANTS WITHOUT EXERCISE
If a holder of a Warrant allows it to expire without exercise, the
expiration will be treated as a sale or exchange of the Warrant on the
expiration date. The holder will have a taxable loss equal to the amount of such
holder's tax basis in the lapsed Warrant. If the Warrant constitutes a capital
asset in the hands of the holder, such taxable loss will be characterized as
long-term or short-term capital loss, depending upon whether the Warrant was
held for the required long-term holding period.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
U.S. Stock Transfer Corporation, Glendale, California, will serve as the
Transfer Agent and Registrar for the Common Stock and Warrant Agent for the
Warrants.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Company's
securities. Future sales of substantial amounts of Common Stock or Warrants in
the public market could adversely affect market prices prevailing from time to
time. Furthermore, because only a limited number of shares will be available for
sale shortly after this offering as a result of certain contractual and legal
restrictions on resale as described below, sales of substantial amounts of
Common Stock or Warrants in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 3,444,747 shares of Common Stock, assuming no exercise of the
Over-allotment Option and no exercise of the Warrants or any outstanding options
or warrants to purchase Common Stock. Of these shares, the 2,000,000 shares sold
in the Units offered hereby will be freely tradable without restriction or
further registration under the Securities Act (except for any shares purchased
by "affiliates," as that term is defined in Rule 144 under the Securities Act).
The remaining 1,444,747 shares are shares of Restricted Stock, as that term is
defined in Rule 144 promulgated under the Securities Act. Restricted Stock may
be sold in the public market only if registered or if it qualifies for an
exemption from registration under Rules 144 (including Rule 144(k)), which rules
are summarized below or if another exemption from registration is available. The
shares of Restricted Stock are subject to a lock-up agreement with the
Representative (the "Lock-up Agreements") as described below.
Pursuant to the provisions of Rule 144 (including Rule 144(k)), and without
taking into account the Lock-up Agreements, the shares of Restricted Stock would
be available for sale in the public market as follows: (i) 714,601 shares of
Restricted Stock, all of which have been held more than two years as of the date
of this Prospectus, would be eligible for immediate sale at any time after the
date of this Prospectus pursuant to Rule 144(k); (ii) 321,005 Restricted Shares,
all of which have been held more than one year as of the date of this
Prospectus, including all shares held by Affiliates, would be eligible for sale
at any time following 90 days after the date of this Prospectus pursuant to Rule
144; and (iii) the balance of the Restricted Shares would be eligible for sale
under Rule 144 upon expiration of the one year holding period applicable to
Restricted Stock, which expires on various dates between December 1998 and
September 1999.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 34,400 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq SmallCap Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.
All of the outstanding shares of Common Stock held immediately prior to the
effective date of this offering are subject to the Lock-up Agreements with the
Representative. The Company's executive officers, directors and principal
shareholders, owning an aggregate of 419,506 shares of Common Stock, have agreed
that they will not sell or otherwise transfer their shares until one year after
the date of this
47
<PAGE>
Prospectus without the prior consent of the Representative. The holders of the
remaining outstanding shares have agreed that they will not sell or otherwise
transfer their shares during the six month period following the date of this
Prospectus without the prior consent of the Representative. The Representative
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these Lock-up Agreements.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the 1996 Option
Plan. Based on the number of options outstanding or shares reserved for issuance
under the 1996 Option Plan, such registration statement would cover
approximately 275,997 shares issuable on exercise of options, of which 89,567
are currently exercisable and 75,145 of which vest between the date hereof and
August 2001. See "Management--Stock Option Plan." Such registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement and either issued prior to the effectiveness of such
registration statement or held by Affiliates will, subject to Rule 144 volume
limitations, be available for sale in the open market, unless such shares are
subject to the Lock-up Agreements described above.
48
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. is acting as Representative, have severally agreed,
pursuant to the terms and conditions of the Underwriting Agreement between the
Company and the several Underwriters (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of Units set forth in the table below at the price set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- --------------------------------------------------------------------------------- ----------
<S> <C>
Paulson Investment Company, Inc..................................................
----------
Total.......................................................................... 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase such Units are subject to certain conditions. The Underwriters are
committed to purchase all of the 2,000,000 Units offered by this Prospectus, but
not the 300,000 Units subject to the Over-allotment Option (described below), if
any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representative, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representative. After
the initial public offering of the Units, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted the Underwriters an option, expiring at the close of
business 45 days after the date of this Prospectus, to purchase up to 300,000
additional Units from the Company on the same terms as apply to the sale of the
Units set forth above (the "Over-allotment Option"). The Underwriters may
exercise the option only to cover over-allotments, if any, incurred in the sale
of the Units.
The Representative has informed the Company that it does not expect the
Underwriters to confirm sales of Units offered by this Prospectus on a
discretionary basis.
Until the distribution of the Units is completed, rules of the Securities
and Exchange Commission (the "Commission") may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
securities. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Common Stock
and/or Warrants. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of the Common Stock and/or Warrants.
If the Underwriters create a short position in the Units in connection with the
Offering, I.E., if they sell more Units than are set forth on the cover page of
this Prospectus, the Representative may reduce that short position by purchasing
Common Stock and Warrants in the open market. The Representative may also elect
to reduce any short position by exercising all or part of the Over-allotment
Option described above.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases Units in
the open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock and/or Warrants, they may
49
<PAGE>
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those securities as part of this offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor the Underwriters
makes any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Units,
Common Stock and/or Warrants. In addition, neither the Company nor the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required to be made in respect thereof. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
Company directors, officers and controlling persons of the Company pursuant to
the agreement between the Company and the Underwriters, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to two percent of the gross proceeds from the sale of Units
offered hereby, of which $35,000 has already been paid. In the event the
offering is not consummated, any nonaccountable portion of the advanced payment
will be promptly returned to the Company.
The Company has agreed to issue to the Representative the Representative's
Warrants, which entitle the holders to purchase up to an aggregate of 200,000
Units at an exercise price per Unit equal to $ . The Representative's
Warrants are not transferable for one year from the date of issuance, except to
individuals who are either a partner or an officer of an Underwriter, by will or
by the laws of descent and distribution. The Representative's Warrants are not
redeemable by the Company. The Company has agreed to maintain an effective
registration statement with respect to the issuance of the securities underlying
the Representative's Warrants, if necessary, to allow their public resale
without restriction, at all times during the period in which the
Representative's Warrants are exercisable, commencing one year after the date of
this Prospectus. Such securities are being registered on the Registration
Statement of which this Prospectus is a part.
The Company has agreed that, for a period of one year following the closing
of this offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the consent of the Representative. The
Company's officers, directors and the holders of 5% or more of the outstanding
Common Stock (aggregating 419,506 shares) have agreed that for a period of one
year following this offering, they will not offer, sell, contract to sell, grant
any option for the sale or otherwise dispose of any Common Stock of the Company
(other than intra-family transfers or transfers to trusts for estate planning
purposes) without the consent of the Representative, which will not be
unreasonably withheld, and thereafter, will give the Representative prior notice
of sales under Rule 144 for five years from the date of this Prospectus. All
other holders of outstanding Common Stock have similarly agreed, except that the
lock-up period for such holders is six months.
Prior to this offering, there has been no public market for the Company's
securities. Accordingly, the initial public offering price of the Units and the
exercise price of the Warrants have been determined in negotiations between the
Company and the Representative. Among the factors considered in determining the
initial public offering price of the Units and the exercise price of the
Warrants were the history and the prospects of the Company and the industry in
which it operates, the status and development prospects for
50
<PAGE>
the Company's proposed products and services, the experience and qualifications
of the Company's executive officers and the general condition of the securities
markets at the time of the offering.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by its counsel, Grover T. Wickersham, P.C., Palo Alto, California.
Attorneys in the firm are the holders of an aggregate of 10,424 warrants,
exercisable at an exercise price of $5.76. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Stoel Rives LLP,
Portland, Oregon.
EXPERTS
The balance sheet as of December 31, 1997, and the statements of operations,
stockholders' deficit, and cash flows for each of the two years then ended, have
been audited by Grant Thornton LLP, independent certified public accountants, as
set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended with respect to the Units,
Common Stock and Warrants offered hereby. This Prospectus omits certain
information contained in the Registration Statement and the exhibits thereto, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the securities, reference is hereby
made to the Registration Statement and such exhibits filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 75 Park
Place, 14th Floor, New York, NY 10007, and the Kluczynski Federal Building, 230
South Dearborn Street, Room 3190, Chicago, IL 60604. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission, upon payment of prescribed fees. The SEC maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC,
including the Registration Statement. The address of the SEC's World Wide Web
site is http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document referred to herein are not necessarily complete and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
audiohighway.com
We have audited the accompanying balance sheet of audiohighway.com (the
"Company"), as of December 31, 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the two 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997, and the results of its operations and its cash flows for each of the
two years then ended, in conformity with generally accepted accounting
principles.
San Jose, California
July 23, 1998 (except for Note 7
as to which the date is )
The foregoing auditors' report is in the form which will be signed upon
consummation of the transaction described in Note 7 to the financial statements.
GRANT THORNTON LLP
San Jose, California
July 23, 1998
F-1
<PAGE>
AUDIOHIGHWAY.COM
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 1997 30, 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 5 $ 171
Accounts receivable............................................... 2 36
Prepaid expenses.................................................. 43 175
----------- -----------
Total current assets............................................ 50 382
Property and equipment, net......................................... 378 350
----------- -----------
$ 428 $ 732
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long term debt.............................. $ 610 $ 962
Accounts payable.................................................. 824 980
Accrued expenses and other current liabilities.................... 357 462
----------- -----------
Total current liabilities....................................... 1,791 2,404
Long term debt...................................................... 1,082 980
Stockholders' deficit:
Preferred Stock, no par value; 5,000,000 shares authorized; none
issued.......................................................... -- --
Common Stock, no par value; 50,000,000 shares authorized; 944,313
and 1,034,814 issued and outstanding............................ 2,321 3,170
Additional paid-in capital........................................ 1,884 4,163
Accumulated deficit............................................... (6,650) (9,985)
----------- -----------
Total stockholders' deficit..................................... (2,445) (2,652)
----------- -----------
$ 428 $ 732
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
AUDIOHIGHWAY.COM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues........................................................... $ -- $ 4 $ -- $ 87
Costs and expenses:
Cost of revenues..................................................... -- 35 -- 57
Sales and marketing.................................................. 850 1,634 927 1,040
Research and development............................................. 367 677 529 739
General and administrative........................................... 287 157 195 491
--------- --------- --------- ---------
Total costs and expenses........................................... 1,504 2,503 1,651 2,327
--------- --------- --------- ---------
Loss from operations................................................... (1,504) (2,499) (1,651) (2,240)
Interest expense....................................................... 77 1,292 973 1,095
--------- --------- --------- ---------
Net loss........................................................... $ (1,581) $ (3,791) $ (2,624) $ (3,335)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss per share................................... $ (2.10) $ (4.11) $ (2.87) $ (3.32)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic and diluted net loss per share.......... 752 923 915 1,006
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AUDIOHIGHWAY.COM
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996................................. 654 $ 885 $ -- $ (1,278) $ (393)
Sale of common stock..................................... 151 983 -- -- 983
Issuance of Common Stock for services.................... 27 181 -- -- 181
Issuance of warrants with debt........................... -- -- 1,071 -- 1,071
Net loss................................................. -- -- -- (1,581) (1,581)
----- --------- ----------- ------------ ---------
Balance at December 31, 1996............................... 832 2,049 1,071 (2,859) 261
Sale of common stock..................................... 14 196 -- -- 196
Issuance of Common Stock from exercise of options and
warrants............................................... 93 10 -- -- 10
Issuance of Common Stock for services.................... 5 66 -- -- 66
Issuance of warrants with debt........................... -- -- 813 -- 813
Net loss................................................. -- -- -- (3,791) (3,791)
----- --------- ----------- ------------ ---------
Balance at December 31, 1997............................... 944 2,321 1,884 (6,650) (2,445)
Conversion of Subordinated Notes and accrued interest to
Common Stock (unaudited)............................... 85 789 -- -- 789
Issuance of Common Stock from exercise of options and
warrants (unaudited)................................... 3 18 -- -- 18
Issuance of Common Stock for services (unaudited)........ 3 42 -- -- 42
Beneficial conversion feature on convertible notes
(unaudited)............................................ -- -- 609 -- 609
Issuance of warrants with debt (unaudited)............... -- -- 1,670 -- 1,670
Net loss (unaudited)..................................... -- -- -- (3,335) (3,335)
----- --------- ----------- ------------ ---------
Balance at September 30, 1998 (unaudited).................. 1,035 $ 3,170 $ 4,163 $ (9,985) $ (2,652)
----- --------- ----------- ------------ ---------
----- --------- ----------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
AUDIOHIGHWAY.COM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (1,581) $ (3,791) $ (2,624) $ (3,335)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 14 86 71 74
Common Stock issued for services................................... 181 66 40 42
Amortization of debt discounts and conversion features............. 62 1,154 866 953
Changes in assets and liabilities:
Accounts receivable.............................................. -- (2) -- (34)
Prepaid expenses................................................. 48 (31) (73) (132)
Accounts payable................................................. 154 546 269 156
Accrued expenses and other current liabilities................... (68) 163 129 165
--------- --------- --------- ---------
Net cash used in operating activities.......................... (1,190) (1,809) (1,322) (2,111)
Cash flows from investing activities:
Acquisition of property and equipment................................ (293) (159) (135) (46)
Cash flows from financing activities:
Proceeds from issuance of Common Stock............................... 983 206 206 18
Proceeds from issuance of long term debt............................. 884 1,376 978 2,319
Repayment of long term debt.......................................... -- -- -- (14)
--------- --------- --------- ---------
Net cash provided by financing activities...................... 1,867 1,582 1,184 2,323
--------- --------- --------- ---------
Net change in cash and cash equivalents........................ 384 (386) (273) 166
Cash and cash equivalents at beginning of period....................... 7 391 391 5
--------- --------- --------- ---------
Cash and cash equivalents at end of period............................. $ 391 $ 5 $ 118 $ 171
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the period for:
Interest............................................................. $ 15 $ 23 $ 6 $ 18
Income taxes......................................................... -- -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
audiohighway.com (the "Company") is a global Internet media company that
offers a library of pre-recorded audio content via the World Wide Web (the
"Web"). The Company was incorporated in California in 1994 and, prior to October
1997, was in the development stage. The Company conducts its business within one
industry segment.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of audio
commercials included in its downloaded programming (or "deliveries") and from
the sale of banner advertisements, both on short-term contracts. Advertising
revenues on both banner advertisements and deliveries are recognized in the
period in which the advertisement is delivered, provided that collection of the
resulting receivable is probable. Advertisers are charged on a per impression or
delivery basis up to a maximum as specified in the contract. Standard rates for
advertising generally do not exceed thirty cents per impression or delivery. To
date, the duration of the Company's advertising commitments has not exceeded one
year and the Company does not guarantee a minimum number of impressions or
deliveries. Revenue sharing agreements with advertisers may provide that the
Company receive revenues from electronic commerce transactions. These revenues
are recognized by the Company upon notification from the advertiser of revenues
earned and, to date, have not been significant.
RESEARCH AND DEVELOPMENT
Costs incurred for the development and enhancement of new products and
services are charged to expense as incurred. Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based upon the Company's development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company does not incur any
direct-response advertising costs. Advertising expense totaled $2 for 1996 and
$367 for 1997. Advertising expense totaled $139 and $163 for the nine months
ended September 30, 1997 and 1998.
CASH AND CASH EQUIVALENTS
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash
F-6
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and cash equivalents are held in two financial institutions. Accounts receivable
are typically unsecured and are derived from revenues earned from customers
primarily located in the United States. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
At December 31, 1997, one customer accounted for all of the accounts receivable
balance. At September 30, 1998, four customers accounted for all of the
outstanding accounts receivable balance.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally two to five years. For leasehold
improvements, depreciation is computed over the shorter of the lease term or the
estimated useful life of the improvements.
INCOME TAXES
Income taxes are computed using an asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted tax
rates and laws.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
BASIC AND DILUTED NET LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share" during the year ended
December 31, 1997. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of convertible
securities (using the if-
F-7
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
converted method) and shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, accounts receivable and trade
payables approximates carrying value due to the short term nature of such
instruments. The fair value of long term obligations including subordinated debt
approximates carrying value based on terms available for similar instruments.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of September 30, 1998 and for the nine months
ended September 30, 1997 and 1998 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for fair presentation of the financial position at such dates and the
results of operations and cash flows for the periods then ended. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of results that may be expected for the entire year.
NOTE 2--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- ---------------
<S> <C> <C>
Property and equipment:
Computers and equipment........................................................... $ 453 $ 496
Furniture and fixtures............................................................ 8 10
Leasehold improvements............................................................ 22 23
----- -----
483 529
Less: accumulated depreciation.................................................... (105) (179)
----- -----
$ 378 $ 350
----- -----
----- -----
Accrued expenses and other current liabilities:
Employee compensation costs....................................................... $ 216 $ 240
Interest.......................................................................... 126 211
Other............................................................................. 15 11
----- -----
$ 357 $ 462
----- -----
----- -----
</TABLE>
F-8
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 3--LONG TERM DEBT
The Company has issued subordinated convertible promissory notes (the
"Notes") in the face amount of $2,142 at December 31, 1997 and $2,973 at
September 30, 1998. The Notes, which bear interest at 10%, are convertible into
Common Stock at rates ranging from $3.00 to $14.39 per share. During 1998, the
Company converted $729 of the Notes and accrued interest of $60 into 85,219
shares of Common Stock. The remaining Notes are all due by March 31, 2000. As of
December 31, 1997, officers and directors of the Company purchased $130 of the
Notes, of which none remain outstanding at September 30, 1998.
The Company had a $100 line of credit with a bank that expired on August 14,
1998. As of September 30, 1998, the outstanding balance had been repaid. At
December 31, 1997, $99 was outstanding.
The Company has also issued subordinated notes payable in the principal
amount of $119 at December 31, 1997 and $963 at September 30, 1998, to private
investors, of which $100 is convertible into Common Stock at $3.84. These notes
are subordinated to all other indebtedness; require no payments until maturity;
bear interest at 8% to 12% and are due by July 31, 1999.
Contractual maturities of long term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998.............................................................. $ 610
1999.............................................................. 1,082
---------
$ 1,692
---------
---------
</TABLE>
The Company has issued 248,382 warrants as of December 31, 1997 and 649,600
as of September 30, 1998, to purchase shares of Common Stock in connection with
the issuance of the Notes and other long term debt and for guarantees provided
by shareholders. The Company calculated the fair value of the warrants at the
date of issuance and is amortizing this amount as interest expense over the life
of the debt.
Beneficial conversion features of the Notes amounting to $609,000 are being
amortized to the date of the expected conversion.
The carrying value of long term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
Debt principal.................................................. $ 2,360 $ 3,936
Unamortized discounts and conversion features................... (668) (1,994)
------ -------------
Carrying value.................................................. $ 1,692 $ 1,942
------ -------------
------ -------------
</TABLE>
NOTE 4--STOCKHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS
The 1996 Stock Option Plan (the "Plan") allows for the issuance of incentive
stock options, non-qualified stock options and stock purchase rights to purchase
shares of the Company's Common Stock.
F-9
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED)
The Plan has authorized 364,869 shares of which 92,781 remain available for
granting at December 31, 1997. Under the Plan, incentive stock options may be
granted to employees, directors, and officers of the Company and non-qualified
stock options and stock purchase rights may be granted to consultants,
employees, directors, and officers of the Company. Options granted under the
Plan are for periods not to exceed ten years, and must be issued at prices not
less than 100% and 85%, for incentive and nonqualified stock options,
respectively, of the fair market value of the stock on the date of grant.
Options granted to shareholders who own greater than 10% of the outstanding
stock are for periods not to exceed five years and must be issued at prices not
less than 110% of the fair market value of the stock on the date of grant.
Options granted under the Plan generally vest within 3 to 5 years.
The Company has also granted options and warrants to purchase Common Stock
outside of the Plan to employees, directors and consultants. These instruments
generally vest within 3 to 5 years.
Stock option and warrant activity, excluding warrants issued in connection
with the Notes, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- -----------
<S> <C> <C>
Balance at January 1, 1996.............................................. 185,040 $ 1.42
Granted............................................................... 115,716 5.76
Exercised............................................................. -- --
Cancelled............................................................. -- --
--------- -----------
Balance at December 31, 1996............................................ 300,756 3.07
Granted............................................................... 78,186 13.16
Exercised............................................................. (93,823) 0.12
Cancelled............................................................. (13,031) 3.84
--------- -----------
Balance at December 31, 1997............................................ 272,088 6.98
Granted............................................................... 42,090 14.39
Exercised............................................................. -- --
Cancelled............................................................. (13,031) 14.39
--------- -----------
Balance at September 30, 1998........................................... 301,147 $ 7.69
--------- -----------
--------- -----------
</TABLE>
F-10
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options and warrants
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL TERM NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
- ------------------ ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.92 - $ 5.76 193,902 $ 4.45 5 156,372 $ 4.22
$ 11.51 - $14.39 78,186 $ 13.16 7 11,207 $ 11.51
----------- -----------
272,088 167,579
----------- -----------
----------- -----------
</TABLE>
The following table depicts the pro forma results of operations had
compensation expense been determined based on the fair value at the grant dates,
as prescribed in SFAS No. 123.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Net loss
As reported............................................................ $ (1,581) $ (3,791)
Pro forma.............................................................. (1,631) (3,876)
Basic and diluted net loss per share
As reported............................................................ $ (2.10) $ (4.11)
Pro forma.............................................................. (2.17) (4.20)
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant has been determined on the date of grant using the minimum value
method. The weighted average fair value of options and warrants granted to
employees during 1996 and 1997 was $0.36 and $0.75. The following weighted
average assumptions were used to perform the calculations: expected life of 4
years; interest rate 6%, and no dividend yield. The pro forma disclosures may
not be representative of pro forma effects on reported financial results for
future years as the above information does not include the effects of grants
made prior to 1995.
F-11
<PAGE>
AUDIOHIGHWAY.COM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1997. The
following table sets forth the primary components of deferred tax assets at
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss and credit carryforwards........................ $ 2,380
Nondeductible allowances and expenses.............................. 18
---------
Gross deferred tax assets.......................................... 2,398
Valuation allowance................................................ (2,398)
---------
$ --
---------
---------
</TABLE>
At December 31, 1997, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1997, the Company had approximately $6,250 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $3,125 of California net operating
loss carryforwards for tax reporting purposes which will expire beginning in
1999.
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event on an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change has occurred.
NOTE 6--COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
The Company has entered into an agreement whereby a vendor is to receive a
royalty up to a maximum of 8% of the revenue generated by deliveries made
directly to the Company's ListenUp Players. As of September 30, 1998, no such
royalties have been accrued.
OPERATING LEASES
The Company leases its operating facilities under operating leases that
expire in 1999. Future minimum lease payments are $319 in 1998 and $310 in 1999.
Rent expense under operating leases totaled $101 in 1996 and $100 in 1997. Rent
expense was $76 and $234 for the nine months ended September 30, 1997 and 1998.
NOTE 7--PROPOSED TRANSACTIONS
The Company's Board of Directors has approved a proposed initial public
offering of the Company's Common Stock. In connection with this offering, the
Board of Directors approved a 1 for 3.837 reverse split of the Common Stock. All
references to the number of shares of Common Stock, weighted average common
shares, and per share amounts in the accompanying financial statements reflect
the effect.
F-12
<PAGE>
Artwork for Inside Back Cover: Photograph of the Company's ListenUp Player
resting in the palm of a hand with the phrase "Portable Audio Via The Internet"
superimposed on the photograph.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAVE BEEN NO CHANGES IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 7
Dividend Policy............................... 16
Use of Proceeds............................... 16
Capitalization................................ 17
Dilution...................................... 18
Selected Financial Data....................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 20
Business...................................... 25
Management.................................... 37
Principal Shareholders........................ 42
Description of Securities..................... 43
Shares Eligible for Future Sale............... 47
Underwriting.................................. 49
Legal Matters................................. 51
Experts....................................... 51
Additional Information........................ 51
Financial Statements.......................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,000,000 UNITS
[AUDIOHIGHWAY.COM LOGO]
EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE COMMON STOCK PURCHASE WARRANT
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The California Corporations Code provides for the indemnification of
directors, officers, employees and Agents of the corporation under certain
circumstances as set forth in section 317. Section 317 permits a corporation to
indemnify its agents, typically directors and officers, for expenses incurred or
settlements or judgments paid in connection with certain legal proceedings. Only
those legal proceedings arising out of such persons' actions as agents of the
corporation may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case depends upon
whether the agent wins, loses or settles the suit and upon whether a third party
or the corporation itself is the plaintiff. The section provides for mandatory
indemnification, no matter who the plaintiff is, when an agent is successful on
the merits of a suit. In all other cases, indemnification is permissive.
If the agent loses or settles a suit brought by a third party, he or she may
be indemnified for expenses incurred and settlements or judgments paid. Such
indemnification may be authorized upon a finding that the agent acted in good
faith and in a manner he or she reasonably believed to be in the best interests
of the corporation.
If the agent loses or settles a suit brought by or on behalf of the
corporation, his or her right to indemnification is more limited. If he or she
is adjudged liable to the corporation, the court in which such proceeding was
held must determine whether it would be fair and reasonable to indemnify him or
her for expenses which such court shall determine. If the agent settles such a
suit with court approval, he or she may be indemnified for expenses incurred
upon a finding that the agent acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the corporation and, in
addition, that he or she acted with the care, including reasonable inquiry, of
an ordinarily prudent person.
The indemnification discussed above may be authorized by a majority vote of
the disinterested directors or shareholders (the person to be indemnified is
excluded from voting his or her shares) or the court in which the proceeding was
brought. The Company's Board of Directors makes all decisions regarding the
indemnification of its officers and directors on a case-by-case basis.
Any provision in the corporation's Articles of Incorporation or Bylaws or
contained in a shareholder or director resolution that indemnifies its officers
or directors must be consistent with section 317. Moreover, such a provision may
prohibit permissive, but not mandatory, indemnification as described above.
Last, a corporation has the power to purchase indemnity insurance for its agents
even if it would not have the power to indemnify them.
The Company's articles authorize the board of directors to provide
indemnification of its agents through bylaw provisions or indemnification
agreements, or both, in excess of the indemnification otherwise permitted by
section 317, subject to the limits on such excess indemnification set forth in
section 204 of the California Corporations Code.
Insofar as indemnification for liabilities under the Act may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities being registered, excluding the
Representative's nonaccountable expense allowance, all of which expenses will be
paid by the Registrant::
<TABLE>
<CAPTION>
<S> <C> <C>
SEC registration fee.......................................... $ 27,834
NASD filing fees.............................................. 9,935
Accounting fees and expenses.................................. 30,000 *
Legal fees and expenses....................................... 300,000 *
Printing and related expenses................................. 50,000 *
Blue sky legal fees and expenses.............................. 35,000 *
Transfer agent and expenses................................... 5,000 *
Miscellaneous expenses........................................ 17,231 *
---------
Total....................................................... $ 475,000 *
---------
---------
</TABLE>
- ------------------------
* Estimated expenses
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Registrant has issued and sold the
following unregistered securities on the dates and for the consideration
indicated:
On August 16, 1995, the Registrant issued an aggregate of 18,504 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $71,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. Such exemption was
predicated on the fact that the sales were made to a small number of
sophisticated, accredited investors. Each investor had access to business and
financial information about the Registrant, were purchasing for their own
account and not with a view towards distribution of the securities acquired.
On September 6, 1995, the Registrant issued an aggregate of 5,212 shares of
common stock to one investors in exchange for consideration of $20,000 in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On October 12, 1995, the Registrant issued an aggregate of 6,516 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $25,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 5,859 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On December 23, 1995, Registrant issued an aggregate of 17,677 shares of
common stock to certain individuals in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) and Rule 506 under the Securities Act. Such exemption was
predicated on the fact that the sales were made to a small number of
sophisticated, accredited investors. Each investor had access to business and
financial information about the Registrant, were purchasing for their own
account and not with a view towards distribution of the securities acquired.
II-2
<PAGE>
On December 24, 1995, the Registrant issued an aggregate of 15,029 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $86,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued 1,052 shares of common stock to one individual in exchange for
services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act. Such exemption was predicated on the fact that the sales were made to a
small number of sophisticated, accredited investors. Each investor had access to
business and financial information about the Registrant, were purchasing for
their own account and not with a view towards distribution of the securities
acquired.
On February 20, 1996, the Registrant issued an aggregate of 12,771 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $73,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 5,838 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On March 1, 1996, the Registrant issued an aggregate of 6,776 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $39,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. Such exemption was
predicated on the fact that the sales were made to a small number of
sophisticated, accredited investors. Each investor had access to business and
financial information about the Registrant, were purchasing for their own
account and not with a view towards distribution of the securities acquired.
On March 1, 1996, Registrant issue to an individual warrants to purchase
6,516 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sales were made to a small number of sophisticated, accredited investors.
Each investor had access to business and financial information about the
Registrant, were purchasing for their own account and not with a view towards
distribution of the securities acquired.
On March 6, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $15,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On March 8, 1996, the Registrant issued an aggregate of 7,818 shares of
common stock to an individual investor in exchange for consideration of $45,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On April 24, 1996, the Registrant issued an aggregate of 9,382 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $54,000 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued 391 shares of common stock to one individual in exchange for
services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act. Such exemption was predicated on the fact that the sales were made to
II-3
<PAGE>
a small number of sophisticated, accredited investors. Each investor had access
to business and financial information about the Registrant, were purchasing for
their own account and not with a view towards distribution of the securities
acquired.
On April 26, 1996, the Registrant issued an aggregate of 1,824 shares of
common stock to an individual investor in exchange for consideration of $10,500
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sale was made to a single sophisticated, accredited investor. The investor had
access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On April 30, 1996, the Registrant issued an aggregate of 4,344 shares of
common stock to an individual investor in exchange for consideration of $25,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. On the same date the Registrant issued 434 shares
of common stock to one individual in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) and Rule 506 under the Securities Act. Such exemption was
predicated on the fact that the sale was made to a single sophisticated,
accredited investor. The investor had access to business and financial
information about the Registrant, was purchasing for his own account and not
with a view towards distribution of the securities acquired.
On May 1, 1996, Registrant issue to an individual warrants to purchase
26,062 shares of common stock in exchange for services performed on the behalf
of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sale was made to a single sophisticated, accredited investor. The
investor had access to business and financial information about the Registrant,
was purchasing for his own account and not with a view towards distribution of
the securities acquired.
On June 1, 1996, Registrant issue to an individual warrants to purchase
6,516 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On June 20, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $15,000
in reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sale was made to a single sophisticated, accredited investor. The investor had
access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On June 30, 1996, the Registrant issued an aggregate of 72,670 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $418,252 in reliance on the exemption from registration
provided by Section 4(2) and Rule 506 under the Securities Act. On the same date
the Registrant issued an aggregate of 10,487 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On July 1, 1996, the Registrant issued an aggregate of 2,867 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $16,500 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
II-4
<PAGE>
Registrant issued an aggregate of 10,625 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On September 1, 1996, the Registrant issued an aggregate of 2,606 shares of
common stock to certain individual investors in exchange for consideration of
$30,000 in reliance on the exemption from registration provided by Section 4(2)
and Rule 506 under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On September 30, 1996, Registrant issue to an individual warrants to
purchase 1,629 shares of common stock in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sale was made to a single sophisticated, accredited investor. The
investor had access to business and financial information about the Registrant,
was purchasing for his own account and not with a view towards distribution of
the securities acquired.
On October 1, 1996, the Registrant issued an aggregate of 148 shares of
common stock to an individual investor in exchange for consideration of computer
equipment in reliance on the exemption from registration provided by Section
4(2) and Rule 506 under the Securities Act. Such exemption was predicated on the
fact that the sale was made to a single sophisticated, accredited investor. The
investor had access to business and financial information about the Registrant,
was purchasing for his own account and not with a view towards distribution of
the securities acquired.
On October 30, 1996, the Registrant issued an aggregate of 12,032 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $138,500 in reliance on the exemption from registration
provided by Section 4(2) and Rule 506 under the Securities Act. On the same date
the Registrant issued an aggregate of 178 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On November 15, 1996, the Registrant issued an aggregate of 4,795 shares of
common stock to certain individual investors in exchange for consideration of
$55,200 in reliance on the exemption from registration provided by Section 4(2)
and Rule 506 under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On December 18, 1996, the Registrant issued an aggregate of 2,694 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $20,508 in reliance on the exemption from registration provided
by Section 4(2) and Rule 506 under the Securities Act. On the same date the
Registrant issued an aggregate of 4,244 shares of common stock to certain
individuals in exchange for services performed on the behalf of the Company in
reliance on the exemption from registration provided by Section 4(2) and Rule
506 under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
II-5
<PAGE>
On December 31, 1996, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On January 3, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due January 3, 1997 in the aggregate principal
amount of $784,500, together with common stock purchase warrants exercisable for
102,228 shares in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On February 17, 1997, Registrant issued an aggregate of 740 shares of common
stock to certain individuals in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sales were made to a small number of sophisticated, accredited investors.
Each investor had access to business and financial information about the
Registrant, were purchasing for their own account and not with a view towards
distribution of the securities acquired.
On February 28, 1997, Registrant issued an aggregate of 91,217 shares of
common stock to two individuals upon exercise of warrants previously issued to
them in exchange for performed on the behalf of the Company in reliance on the
exemption from registration provided by Section 4(2) under the Securities Act.
Such exemption was predicated on the fact that the sales were made to a small
number of sophisticated, accredited investors. Each investor had access to
business and financial information about the Registrant, were purchasing for
their own account and not with a view towards distribution of the securities
acquired.
On March 15, 1997, Registrant issued an aggregate of 2,606 shares of common
stock to an individual upon exercise of warrants previously issued to them in
exchange for performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) under the Securities Act. Such
exemption was predicated on the fact that the sale was made to a single
sophisticated, accredited investor. The investor had access to business and
financial information about the Registrant, was purchasing for his own account
and not with a view towards distribution of the securities acquired.
On March 29, 1997, the Registrant issued an aggregate of 6,620 shares of
common stock to certain individual investors in exchange for consideration of
$95,250 in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On March 31, 1996, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
II-6
<PAGE>
On April 10, 1997, the Registrant issued an aggregate of 4,325 shares of
common stock to certain individual investors in exchange for an aggregate
consideration of $62,230 in reliance on the exemption from registration provided
by Section 4(2) under the Securities Act. On the same date the Registrant issued
an aggregate of 1,518 shares of common stock to certain individuals in exchange
for services performed on the behalf of the Company in reliance on the exemption
from registration provided by Section 4(2) and Rule 506 under the Securities
Act. Such exemption was predicated on the fact that the sales were made to a
small number of sophisticated, accredited investors. Each investor had access to
business and financial information about the Registrant, were purchasing for
their own account and not with a view towards distribution of the securities
acquired.
On April 22, 1997, the Registrant issued an aggregate of 2,606 shares of
common stock to an individual investor in exchange for consideration of $37,500
in reliance on the exemption from registration provided by Section 4(2) under
the Securities Act. Such exemption was predicated on the fact that the sale was
made to a single sophisticated, accredited investor. The investor had access to
business and financial information about the Registrant, was purchasing for his
own account and not with a view towards distribution of the securities acquired.
On June 30, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999 in the aggregate principal
amount of $236,248, together with common stock purchase warrants exercisable for
16,419 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On June 30, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On August 17, 1997, Registrant issued an aggregate of 1,043 shares of common
stock to an individual in exchange for services performed on the behalf of the
Company in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act. Such exemption was predicated on the fact that the
sale was made to a single sophisticated, accredited investor. The investor had
access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On September 1, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due September 1, 1999 in the aggregate
principal amount of $250,500, together with common stock purchase warrants
exercisable for 17,410 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act. Such exemption was predicated
on the fact that the sales were made to a small number of sophisticated,
accredited investors. Each investor had access to business and financial
information about the Registrant, were purchasing for their own account and not
with a view towards distribution of the securities acquired.
On September 30, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due September 30, 1999 in the aggregate
principal amount of $586,125, together with common stock purchase warrants
exercisable for 40,735 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act. Such exemption was predicated
on the fact that the sales were made to a small number of sophisticated,
accredited investors. Each investor had access to business and financial
information about the Registrant, were purchasing for their own account and not
with a view towards distribution of the securities acquired.
II-7
<PAGE>
On September 30, 1997, Registrant issue to an individual warrants to
purchase 4,072 shares of common stock in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sale was made to a single sophisticated, accredited investor. The
investor had access to business and financial information about the Registrant,
was purchasing for his own account and not with a view towards distribution of
the securities acquired.
On November 25, 1997, Registrant issued an aggregate of 525 shares of common
stock to an individual in exchange for services performed on the behalf of the
Company in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act. Such exemption was predicated on the fact that the
sale was made to a single sophisticated, accredited investor. The investor had
access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On December 23, 1997, Registrant issued an aggregate of 1,134 shares of
common stock to certain individuals in exchange for services performed on the
behalf of the Company in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On December 31, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due December 31, 1999 in the aggregate
principal amount of $283,750, together with common stock purchase warrants
exercisable for 19,720 shares in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act. Such exemption was predicated
on the fact that the sales were made to a small number of sophisticated,
accredited investors. Each investor had access to business and financial
information about the Registrant, were purchasing for their own account and not
with a view towards distribution of the securities acquired.
On December 31, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On March 31, 1997, Registrant issued to certain investors subordinated
convertible 10% promissory notes due March 31, 1999 in the aggregate principal
amount of $419,000, together with common stock purchase warrants exercisable for
29,120 shares in reliance on the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sales were made to a small number of sophisticated, accredited investors.
Each investor had access to business and financial information about the
Registrant, were purchasing for their own account and not with a view towards
distribution of the securities acquired.
On March 31, 1997, Registrant issue to an individual warrants to purchase
4,072 shares of common stock in exchange for services performed on the behalf of
the Company in reliance in the exemption from registration provided by Section
4(2) under the Securities Act. Such exemption was predicated on the fact that
the sale was made to a single sophisticated, accredited investor. The investor
had access to business and financial information about the Registrant, was
purchasing for his own account and not with a view towards distribution of the
securities acquired.
On May 1, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due May 1, 2000 in the aggregate principal
amount of $400,000, together with common stock purchase warrants exercisable for
59,260 shares, in reliance on the exemption from registration provided by
II-8
<PAGE>
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On May 31, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999 in the aggregate principal
amount of $285,000 together with common stock purchase warrants exercisable for
28,148 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On June 30, 1998, Registrant issued to certain investors subordinated
convertible 10% promissory notes due June 30, 1999, in the aggregate principal
amount of $341,000, together with common stock purchase warrants exercisable for
21,334 shares, in reliance on the exemption from registration provided by
Section 4(2) under the Securities Act. Such exemption was predicated on the fact
that the sales were made to a small number of sophisticated, accredited
investors. Each investor had access to business and financial information about
the Registrant, were purchasing for their own account and not with a view
towards distribution of the securities acquired.
On July 17, 1998, Registrant issued to one investor subordinated 10%
promissory notes due July 17, 1998 in the principal amount of $223,681, together
with common stock purchase warrants exercisable for 25,000 shares, in reliance
on the exemption from registration provided by Section 4(2) under the Securities
Act. Such exemption was predicated on the fact that the sale was made to a
single sophisticated, accredited investor. The investor had access to business
and financial information about the Registrant, was purchasing for its own
account and not with a view towards distribution of the securities acquired.
On August 31, 1998, Registrant issued to certain investors subordinated 10%
promissory notes due March 1, 1999 in the aggregate principal amount of
$420,000, together with common stock purchase warrants exercisable for 42,000
shares, in reliance on the exemption from registration provided by Section 4(2)
under the Securities Act. Such exemption was predicated on the fact that the
sales were made to a small number of sophisticated, accredited investors. Each
investor had access to business and financial information about the Registrant,
were purchasing for their own account and not with a view towards distribution
of the securities acquired.
On September 14, 1998, Registrant issued to one investor subordinated 8%
promissory notes due March 15, 1999 in the principal amount of $200,000,
together with common stock purchase warrants exercisable for 35,000 shares, in
reliance on the exemption from registration provided by Section 4(2) under the
Securities Act. Such exemption was predicated on the fact that the sale was made
to a single sophisticated, accredited investor. The investor had access to
business and financial information about the Registrant, was purchasing for its
own account and not with a view towards distribution of the securities acquired.
II-9
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
1.1(1) Form of Underwriting Agreement
3.1.1(1) Articles of Incorporation of the Registrant
3.1.2(1) Certificate of Amendment of Articles of Incorporation of the Registrant
3.1.3(3) Certificate of Amendment of Articles of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(3) Specimen Common Stock Certificate
4.2(1) Form of Warrant Agreement among the Registrant and U.S. Stock Transfer
Corporation, as Warrant Agent, including the form of Warrant
4.3(1) Form of Representative's Warrants
5.1(3) Opinion of Grover T. Wickersham, P.C.
10.1(1) Office Building Lease dated June 15, 1994 between Information Highway Media
Corporation (audiohighway.com) and Eldon Hoffman for premises located at
20600 Mariani Ave., Cupertino, California
10.2(1) Standard Sublease dated September 16, 1997 between Audio Highway
(audiohighway.com) and Packeteer, Inc. for premises located at 10495 DeAnza
Boulevard, Cupertino, California
10.3(1) High Speed Services agreement dated April 3, 1998 between Audio Highway and
UUNET Technologies, Inc.
10.4(1) Edge Information Systems Mission Critical Tricord Maitenance Agreement dated
March 28, 1997 between Audio Highway and Edge Information Systems, Inc.
10.5(1) Settlement Agreement and Mutual Release dated April 24, 1998 between Tricord
Systems, Inc. and Audio Highway
10.6(1) Mobile Audio Delivery Agreement dated July 13, 1998 between Sycom
Technologies, Inc. and Audio Highway
10.7(2) 1996 Stock Option Plan
23.1(2) Consent of Grant Thornton LLP, independent auditors (see page II-13)
23.2(2) Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1)
24.1.1 Power of Attorney (see page II-9 of the originally-filed Registration
Statement)
27.1(2) Financial Data Schedule
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's original filing of the Registration
Statement on Form SB-2, filed July 24, 1998.
(2) Filed herewith.
(3) To be filed by amendment.
II-10
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant 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 the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "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 securities offered and any deviation from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include additional or changed material information on the plan
of distribution, and PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is on Form S-8, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That for purposes of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) That for purposes of determining liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) That for purposes of determining any liability under the Securities
Act of 1933, as amended, 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 initial bona fide offering thereof.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(7) To provide the Underwriters, at the closing specified in the
Underwriting Agreement Certificates representing the Units in such
denominations and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this amended
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cupertino, California, on November 23, 1998.
<TABLE>
<S> <C> <C>
AUDIOHIGHWAY.COM
By: /s/ NATHAN M. SCHULHOF
-----------------------------------------
Nathan M. Schulhof
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amended Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ NATHAN M. SCHULHOF Officer and Director
- ------------------------------ (Principal Executive November 23, 1998
Nathan M. Schulhof Officer)
/s/ GREGORY SUTYAK Chief Financial Officer
- ------------------------------ (Principal Financial and November 23, 1998
Gregory Sutyak Accounting Officer)
/s/ GRANT JASMIN
- ------------------------------ Director November 23, 1998
Grant Jasmin
/s/ ROBERT S. LEFF*
- ------------------------------ Director November 23, 1998
Robert S. Leff
/s/ LEE M. GAMMILL*
- ------------------------------ Director November 23, 1998
Lee M. Gammill
/s/ MUNINDERPAL REHKI*
- ------------------------------ Director November 23, 1998
Muninderpal Rehki
- ------------------------------ Director
Marvin M. Reiss
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ GRANT JASMIN
-------------------------
Grant Jasmin
ATTORNEY-IN-FACT
</TABLE>
II-12
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated July 23, 1998, accompanying the financial
statements of audiohighway.com contained in this Registration Statement and
Prospectus, which will be signed upon consummation of the transaction described
in Note 7 to the Financial Statements. We consent to the use of the
aforementioned report in this Registration Statement and Prospectus, and to the
use of our name as it appears under the captions "Selected Financial Data" and
"Experts."
GRANT THORNTON LLP
San Jose, California
November 20, 1998
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1(1) Form of Underwriting Agreement
3.1.1(1) Articles of Incorporation of the Registrant
3.1.2(1) Certificate of Amendment of Articles of Incorporation of the Registrant
3.1.3(3) Certificate of Amendment of Articles of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(3) Specimen Common Stock Certificate
4.2(1) Form of Warrant Agreement among the Registrant and U.S. Stock Transfer Corporation, as Warrant
Agent, including the form of Warrant
4.3(1) Form of Representative's Warrants
5.1(3) Opinion of Grover T. Wickersham, P.C.
10.1(1) Office Building Lease dated June 15, 1995 between Information Highway Media Corporation
(audiohighway.com) and Eldon Hoffman for premises located at
20600 Mariana Ave., Cupertino, California
10.2(1) Standard Sublease dated September 16, 1997 between Audio Highway Media (audiohighway.com) and
Packeteer, Inc. for premises located at 10495 DeAnza Boulevard, Cupertino, California
10.3(1) High Speed Services agreement dated April 3, 1998 between Audio Highway and UUNET Technologies, Inc.
10.4(1) Edge Information Systems Mission Critical Tricord Maintenance Agreement dated March 28, 1997 between
Audio Highway and Edge Information Systems, Inc.
10.5(1) Settlement Agreement and Mutual Release dated April 24, 1998 between Tricord Systems, Inc. and Audio
Highway
10.6(1) Mobile Audio Delivery Agreement dated July 13, 1998 between Sycom Technologies, Inc. and Audio
Highway
10.7(2) 1996 Stock Option Plan
23.1(2) Consent of Grant Thornton LLP, independent auditors (see page II-13)
23.2(3) Consent of Grover T. Wickersham, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-9 of the originally-filed Registration Statement)
27.1(2) Financial Data Schedule
</TABLE>
- ------------------------
(1) Filed as an exhibit to the Registrant's original filing of the Registration
Statement on Form SB-2, filed July 24, 1998.
(2) Filed herewith.
(3) To be filed by amendment.
<PAGE>
AUDIO HIGHWAY
1996 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1996 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Audio Highway, a California corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not, provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of (i) sick leave; (ii) military leave; (iii)
any other leave of absence approved by the Administrator, provided that such
leave is for a period of not more than ninety (90) days, unless reemployment
upon the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to Company policy adopted from time to time;
or (iv) in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or their respective successors. For purposes of this
Plan, a change in status
<PAGE>
from an Employee to a Consultant or from a Consultant to an Employee will not
constitute an interruption of Continuous Status as an Employee or Consultant.
(i) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the last market trading day prior to the time of determination, as reported
in THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(1) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an Option.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option.
2
<PAGE>
(q) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(r) "PLAN" means this 1996 Stock Option Plan.
(s) "REPORTING PERSON" means an officer, director, or greater than
ten percent shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(t) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
as the same may be amended from time to time, or any successor provision.
(u) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section I I of the Plan.
(v) "STOCK EXCHANGE" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(w) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 1,400,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, the unpurchased Shares that were subject thereto shall, unless the Plan
shall have been terminated, become available for future grant under the Plan.
In addition, any shares of Common Stock which are retained by the Company upon
exercise of an Option in order to satisfy the exercise or purchase price for
such Option or any withholding taxes due with respect to such exercise shall be
treated as not issued and shall continue to be available under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees or Consultants who are not
Reporting Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With
respect to grants of Options to Employees who are Reporting Persons, the Plan
shall be administered by (A) the Board if the Board may administer the Plan in
compliance with Rule 16b-3 with respect to a plan intended to qualify thereunder
as a discretionary plan, or (B) a committee designated by the Board to
3
<PAGE>
administer the Plan, which committee shall be constituted in such a manner as to
permit the Plan to comply with Rule 16b-3 with respect to a plan intended to
qualify thereunder as a discretionary plan. Once appointed, such committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the committee and thereafter directly
administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a
plan intended to qualify thereunder as a discretionary plan. No person serving
as a member of an Administrator that has authority with respect to grants to
Reporting Persons shall be eligible to receive any grant under the Plan which
would cause such member to cease to be "disinterested" within the meaning of
Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options to Employees or Consultants who
are not Reporting Persons, the Plan shall be administered by (A) the Board or
(B) a committee designated by the Board, which committee shall be constituted in
such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of California corporate
and securities laws, of the Code and of any applicable Stock Exchange (the
"Applicable Laws"). Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options or any
combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
4
<PAGE>
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any option granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he or she is
otherwise eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares subject to an Incentive Stock Option shall be determined as
of the date of the grant of such Option.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case
5
<PAGE>
of an Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of the grant.
(B) granted to any person, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (i) cash, (ii)
check, (iii) promissory note, (iv) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (v) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (vi) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any
6
<PAGE>
applicable income or employment taxes, (vii) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (viii) any combination of the
foregoing methods of payment, or (ix) such other consideration and method of
payment for the issuance of Shares to the extent permitted under Applicable
Laws. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE: RIGHTS AS A Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided that such Option shall become exercisable at the rate of
at least twenty percent (20%) per year over five (5) years from the date the
Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section I 1 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three (3) months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was
7
<PAGE>
not entitled to exercise it at the date of such termination. To the extent
that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the
Optionee is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding the provisions of Section 9(b) above, in
the event of termination of an Option's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled
to exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant, or within
thirty (30) days following the termination of the Optionee's Continuous Status
as an Employee or Consultant, the Option may be exercised, at any time within
six (6) months following the date of death (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise the Option at the date of death or, if
earlier, the date of termination of the Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
8
<PAGE>
(e) RULE 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of
the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the
Administrator;
(d) if the Optionee is a Reporting Person, the election must comply
with the
9
<PAGE>
applicable provisions of Rule 16b-3 and shall be subject to such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is, deferred under Section 83 of the Code because no election
is filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or that have been returned to the Plan upon cancellation or expiration
of an Option, as well as the price per share of Common Stock covered by each
such outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale of all
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation, unless the successor
corporation does not agree to assume the Option or to substitute an equivalent
option, in which case such Option shall terminate upon the consummation of the
merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or
10
<PAGE>
stock of the Company) without receipt of consideration by the Company, the
Administrator may, in its discretion, appropriately adjust the price per share
of Common Stock covered by each outstanding Option to reflect the effect of such
distribution.
12. NON-TRANSFERABILITY OF OPTIONS. Options may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised or purchased
during the lifetime of the Optionee, only by the Optionee.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 or with Section 422
of the Code (or any other applicable law or regulation, including the
requirements of any Stock Exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
16. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction
11
<PAGE>
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
17. AGREEMENTS. Options shall be evidenced by written agreements in such
form as the Administrator shall approve from time to time.
18. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange. All Options issued under the Plan shall become
void in the event such approval is not obtained.
19. INFORMATION TO OPTIONEES. The Company shall provide financial
statements at least annually to each Optionee during the period such Optionee
has one or more Options outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of Options under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information.
12
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 5 171
<SECURITIES> 0 0
<RECEIVABLES> 2 36
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 50 382
<PP&E> 483 529
<DEPRECIATION> (105) (179)
<TOTAL-ASSETS> 428 732
<CURRENT-LIABILITIES> 1,791 2,404
<BONDS> 1,082 980
0 0
0 0
<COMMON> 2,321 3,170
<OTHER-SE> (4,766) 5,822
<TOTAL-LIABILITY-AND-EQUITY> 428 732
<SALES> 4 87
<TOTAL-REVENUES> 4 87
<CGS> 35 57
<TOTAL-COSTS> 35 57
<OTHER-EXPENSES> 2,468 2,270
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,292 1,095
<INCOME-PRETAX> (3,791) (3,335)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,791) (3,335)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,791) (3,335)
<EPS-PRIMARY> (4.11) (3.32)
<EPS-DILUTED> (4.11) (3.32)
</TABLE>
