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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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AMERICAN MULTIPLEXER CORPORATION
(Exact name of Registrant as specified in its charter)
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NORTH CAROLINA 56-2006165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
575 NORTH PASTORIA AVENUE
SUNNYVALE, CALIFORNIA 94086
(Address of Principal Executive Offices)
408-730-8200
(Registrant's Telephone Number, Including Area Code)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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ITEM 1. BUSINESS.
This Registration Statement on Form 10 includes forward-looking
statements within the meaning of the Securities Exchange Act of 1934 (the
"Exchange Act"). These statements are based on management's current beliefs and
assumptions about the Registrant and the industry in which the Registrant
competes, and on information currently available to management. Forward-looking
statements include, but are not limited to, the information concerning possible
or assumed future results of operations of the Registrant set forth under the
headings "Management's Discussion and Analysis of Financial Condition and Result
of Operations" and "Business." Forward-looking statements also include
statements in which words such as "expect," "anticipate," "intend," "plan,"
"believe," "estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Registrant's future results
and shareholder values may differ materially from those expressed or implied in
these forward-looking statements. Readers are cautioned not to put undue
reliance on any forward-looking statements.
OVERVIEW
American Multiplexer Corporation ("AMC" or "we") has developed a system
of delivery of high-speed, global, interactive, multimedia services on the
public Internet using an integrated satellite and terrestrial-based network. We
believe that our system overcomes several of the data transmission and delivery
limitations of currently available Internet connections and provides for the
high-speed or high bandwidth, sometimes referred to as broadband, delivery of
large data files and video simultaneously to multiple specifically identified
computer users. We provide an end-to-end solution, which means a user of our
services can implement an application from one desktop on a local area network,
or LAN, to another desktop on another LAN, with a web browser.
We were incorporated on April 8, 1996 under the laws of the State of
North Carolina. During 1996 we were not yet operational and conducted no
business activity. Our operations commenced January 7, 1997, when we acquired
the assets and technology of Temasek Telephone, Inc. We initially focused on
developing multiplexers and high-speed Digital Subscriber Line ("DSL") devices
for Internet use. Multiplexers are equipment that can combine many different
kinds of information (video, data and voice) into one integrated waveform for
delivery to a customer.
In May 1998, we made strategic changes in our business and focused on
acquiring additional technologies to bolster our satellite communication
development expertise. In September 1998, we acquired the assets of SatCom Media
Corporation after that company had filed for bankruptcy, and have since worked
on developing our services described above. The satellite technology skills to
develop these services were acquired with the SatCom acquisition and have not as
yet generated any revenue.
Our common stock currently trades on the OTC Bulletin Board under the
Trading Symbol "AMUT".
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THE INTERNET
To understand and appreciate our current and proposed services, our
proprietary software and equipment and the unique architecture of our data and
video delivery system, you must have a good understanding of the public Internet
and its current data and video delivery and transmission methods and
limitations. We have provided a very basic discussion of the Internet below in
order to help you understand our business and services. However, the Internet
and how it works is extremely complicated and this discussion can not fully
describe all of the aspects of the Internet. You should seek advice and
information from other sources if you do not fully understand the concepts and
terms described in this Registration Statement.
The Internet - A Brief Definition.
The Internet is a loose organization of computer networks that are
physically attached to one another by pathways that allow the exchange of
information, data and files. Each of the computers in, for example, your place
of business, company or school, may be connected to one another in a network.
These relatively small groups of connected computers are often called local area
networks or LANs. Many different LANs are then connected in consortiums known as
regional networks. Numerous regional networks are also connected to one another.
Regional networks are often connected to one another by a high speed backbone. A
backbone is a high speed copper, fiber or cable connection created and
maintained by a large corporation or governmental organization. The aggregate of
these local and regional networks, together with other types of computer
networks and individual computers maintained by Internet service providers,
online services, companies, governmental agencies and others make up the
Internet. All of these computers are connected to the Internet so that they can
share information, data and files. The myriad of data transmission methods,
equipment and software on the Internet is beyond the scope of this discussion,
but we will explain, where relevant to our business and services, how we believe
information is currently shared over the Internet.
The physical connections, or pathways, between the numerous computer
networks can take many forms, but the most common are telephone lines, fiber
optic cables with microwave links and satellite transmissions, Integrated
Services Digital Network ("ISDN") telephone lines, Digital Subscriber Lines
("DSL") and television cables.
Getting Onto the Internet.
You can get onto the Internet by dialing in to a large computer that is
connected to the Internet by either an online service or a dial-in Internet
service provider ("ISP") or by a direct connection such as a DSL or cable modem.
Once you are connected to the Internet, you may request information from other
computers on the Internet or you may send information to other computers. When
you request or send information over the Internet, software that is maintained
on your computer, on the main computer on your LAN or by your ISP will break the
information into groups called "packets" and convert the data into a language
that the various computers and equipment on the Internet can understand. The
language that can be understood by the various computers on the Internet is
called Transmission Control Protocol and Internet Protocol ("TCP/IP"). The data
packets contain the information necessary to direct your data to the proper
location and perform the requested task. Information is passed between networks
by routers, a type of computer hardware. Routers direct the flow of data
packets, usually to another router that is closer to the destination of your
data. When data is sent from one regional network to another, it is usually
first sent to a Network Access Point ("NAP"), which is a large computer that
routes the data through high speed backbones to another NAP and then to another
network and
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computer. Information is then sent back to you using the same or similar types
of connections. Other equipment and software is necessary for the delivery of
data on the Internet but is beyond the scope of this description.
THE DATA TRANSMISSION LIMITATIONS OF THE INTERNET
The Path Your Data Takes on the Internet.
How much information you can send or receive over the Internet, and how
fast you can send it, depends on the physical architecture of Internet and your
connection to the Internet. If you are using the telephone system to get onto
the Internet, your connection will follow the ordinary phone line, DSL or ISDN
line that you are using until it reaches the telephone company's local exchange
switching office. The telephone company then routes the data through its own
network of copper, fiber optic or satellite links or to a long distance
carrier's point of presence, or POP. The data is then routed to the local
exchange switching office nearest your ISP. The ISP then passes the data through
its own copper, fiber or cable line link to a computer on a backbone or through
a transmission line leased from another carrier (a leased line), where it is
directed to the appropriate network or computer. The response is sent back to
you by the same or a similar path.
The various physical connections between computers on the Internet have
different data transmission capabilities and limitations. Modems that convert
digital information from your computer to analog for transmission over an
ordinary phone line typically operate at 56Kbps (kilobits per second). ISDN
lines transfer digital data at up to 128Kbps and DSL lines transmit digital data
at 144Kbps or faster. T1 lines transfer data at 1.54 Mbps (megabytes per second)
and cable modems at 1.5Mbps.
The Local Access Bottleneck.
Regardless of the method of connection from the computer user to the
Internet, the actual speed of the connection is usually determined by the
transmission capabilities and limitations of the "weakest link" in the
transmission chain. One of the greatest challenges facing service providers
offering high-speed (up to 1.54 Mbps) data access services has been the
inconsistent quality or lack of high-speed service to and from local exchange
carriers to the computer user. While the Internet has architecture in place to
move data relatively quickly through the various types of lines between regional
networks (i.e., on T1 and T3 lines and through the backbone that can transmit
data at 1.54Mbps and 45Mbps, respectively), the connection between the user and
telephone company's local exchange switching office is usually relatively slow,
usually 56Kbps
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or less. The connection from the user to the local exchange switching office, or
the "last mile", is usually by ordinary phone line, DSL or ISDN lines. The "last
mile" is often referred to as the "local access bottleneck." Data must also
travel through the equipment of other networks on the Internet, some of which is
overburdened, has low transmission capacity or otherwise delays the timely
delivery of the data. Cable is currently offered as a faster or less congested
service that existing phone services, however, cable providers experience
similar low speed or delay problems due to network loading as their customer
base increases.
Satellite connections to the Internet also currently exist. To use a
satellite connection, you need a satellite dish at your home or place of
business. For example, the currently available systems (see
"Business - Competition") can deliver information to your computer at up to
400Kbps. Instead of transferring data back to you over telephone lines, the
source of the requested data sends the information to the satellite company's
network operating center via special high speed links. The network operating
center sends the information to the satellite and the satellite sends the
information to your dish. However, in this type of system, the high speed
connection is from the network operating center to your computer only - data can
only be sent from your computer to the network operating center via other
land-based, or terrestrial, connections such as those described above. See
"Business - Satellite Industry Overview." Our system is based on this type of
hybrid terrestrial and satellite Internet access configuration. As described
herein, however, we believe that our equipment and proprietary software further
expands upon the data delivery capabilities and applications of the satellite
system to allow for Internet enabled multicasting.
Sending and Receiving High Quality Video or Large Data File Transfers.
One implementation being used to improve web site response times
involves broadcasting data simultaneously to geographically dispersed servers
that are closer to the person requesting the information, thereby avoiding
potential congestion that could occur on standard terrestrial networks. This
broadcasting of data from one location to many locations is known as
multicasting. The delivery of large data files or video over the Internet is
called IP Multicasting. An IP Multicast can be of either data or video. The term
IP Data Multicast refers to a file download from a single computer user to
multiple users. The term IP Video Multicast refers to video streaming to
multiple users. The delivery of data or video from one source to one user is
called unicasting, and the delivery from one source to many undefined or
unidentified users is called broadcasting.
We believe that the none of the currently available Internet connection
methods other than satellite systems can support IP Multicast services. Due to
the existing structure of the Internet, only unicast services can be transmitted
over the Internet, which enables the video and email services that can be viewed
now. The Internet contains millions of routers that are not multicast enabled
(they do not have the hardware or software to support multicast delivery) and
will effectively block multicast services.
The local access bottleneck effectively prevents computer users that
rely on ordinary phone lines from receiving high quality video or large data
file transfers because dial-up access (standard 28.8Kbps or 56Kbps modems) is
too slow. High quality video and large data file transfers require transfer
speed capabilities of at least 1.5Mbps. Computer users can avoid the local
access bottleneck in varying degrees in a number of ways: one, by obtaining
leased dedicated telephone lines from the telephone company; two, by obtaining
cable modems, T1 lines, ISDN or analog DSL lines; and three, by participating in
a satellite enabled Internet connection system.
A dedicated network provides one solution to the bottleneck and
multicasting limitation problems. Historically, telephone companies have offered
dedicated switched services (i.e., a network of dedicated switched services
telephone lines) to companies that wish to establish a secure network. A network
of dedicated switched services telephone lines (and users) is called a dedicated
network. Dedicated networks are faster because only network members have
physical access to the data transmission lines, so high traffic does not slow
the lines. The potential for increased speed and the direct connections between
users on a dedicated network may allow multicasting. However, the cost of a
dedicated network, particularly where there are many users or users that are
geographically diverse, can be prohibitive, especially to small and medium sized
businesses.
ISDN's 128Kbps dial-up is often not available and high-speed
leased-line alternatives, such as dedicated T1 lines are cost-prohibitive for
most computer users, particularly individuals
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and small and medium-sized organizations. DSL service has a distance
limitation that requires the user to be within 2 to 3 miles from the telephone
company's central office, and the further from the central office, the lower the
speed.
Although the costs for the various connectivity methods mentioned are
constantly changing, the approximate cost for ISDN line use is $175 per month
for an Internet connection or $.50 per minute for a dedicated ISDN line; DSL is
approximately $260 per month; a T1 line is approximately $375 per month for a
local Internet connection and $1,600 per month for a regional dedicated T1,
increasing to $4,000 per month for a US coast to coast dedicated T1 line.
Currently available satellite services also provide a partial solution
for the bottleneck problem - however, requests for information must still be
transmitted to the service provider (usually at its Web site) through the local
exchange switching office by currently available connection methods. This
solution is effective where the amount of data contained in a request for
information is much smaller than the amount of data contained in the response.
SATELLITE INDUSTRY OVERVIEW
Satellite communications systems consist of satellites, or the space
segment, and ground-based transmitting and receiving systems, or the ground
segment. The space segment consists of one or more satellites orbiting the
earth, which typically provide continuous communications coverage over a wide
geographic area. Satellites usually contain multiple transponders, each capable
of independently receiving and transmitting one or more signals from and to
multiple users simultaneously. A transponder is a device that receives signals
from transmitting earth stations, translates these received signals into
transmit signals and amplifies and transmits these signals to receiving earth
stations. See "Business - The Space Segment - Satellites." The ground segment
consists principally of one or more earth stations, which provide a
communications link to the end user either directly or through a terrestrial
network. An earth station is an integrated system consisting of antennas, radio
signal transmitting and receiving equipment, modulation/demodulation equipment,
monitor and control systems and voice, data and video network interface
equipment. See "Business - The Ground Segment - The Network Operating Center."
Satellite communications is a rapidly growing segment of the global
communications infrastructure. Satellites are increasingly becoming important in
light of the growth of the Internet and other broadband applications and the
globalization of communications. New broadband satellite systems offer services
similar to newly built broadband terrestrial systems. Pioneer Consulting, LLC,
an independent research firm, projects that global broadband satellite services
revenues will increase from approximately $230 million in 1999 to approximately
$37 billion in 2008, with broadband business-related revenues increasing from
approximately $150 million to approximately $16 billion during the same time
period.
We believe satellites provide the following advantages over terrestrial
alternatives for broadband applications:
- Satellites enable high-speed communications services where
terrestrial alternatives are unavailable or inadequate. Many
areas of the world lack the sophisticated fiber optic cable and
digital switching infrastructure required for the high-speed
transmission of data. Satellites are well suited to connect these
areas that cannot be connected efficiently or cost-effectively by
terrestrial transmission systems.
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- Satellite networks can be rapidly installed, upgraded and
reconfigured. In contrast, the installation of fiber optic cable
is time consuming and requires obtaining rights-of-way.
- Satellite networks bypass much of the often complex terrestrial
networks. This avoids the service level issues related to
potential terrestrial network congestion as well as the use of
multiple network service providers.
- Satellite networks, because of their broadcast nature, are
capable of transmitting data simultaneously from one point to
multiple locations. However, we believe currently available
satellite systems do not allow a computer user to multicast data
from his or her computer over the Internet to users on a LAN,
unless it is through a private dedicated network. Where a
computer user wishes to deliver a large amount of data to one or
more other users on a LAN and does not have access to a private
dedicated network, the transmission speed is still limited by the
local access bottleneck, both on his end and on the target users'
end. We believe that our system of multicasting delivery, unlike
other satellite enabled systems, fulfills the promise of IP
Multicasting.
- Satellite networks, in some situations, are more cost-effective
than terrestrial alternatives where the flow of data traffic to
the user is greater than the flow of data from the user. Capacity
can go unused on many terrestrial networks due to this uneven
flow of traffic, whereas satellite networks are capable of
providing capacity on an imbalanced, or asymmetric, basis.
- The cost to provide satellite services does not increase with the
distance between sending and receiving locations. In contrast,
the cost of terrestrial network transmission increases with
distance.
We also believe a number of technological advances will stimulate demand
for satellite-based communications services:
- Internet Protocol. Internet Protocol ("IP") is transforming the
communications industry by allowing all forms of communications
to be carried in one format using a standard protocol. Therefore,
IP allows for the transmission of voice, video, and data on a
single network. These networks use bandwidth efficiently, thereby
reducing transmission costs and allowing for enhanced
applications. We believe the reduction in transmission costs and
enhanced applications will continue to stimulate demand for
communications services worldwide including satellite-based
services.
- Enhancements in satellite technology help reduce costs. The
latest generation of satellites has up to three times more power
than satellites launched in the early 1990s. As technology
improves, satellites in the future will be even more powerful and
longer-lived than current satellites. In addition, we believe
satellites in the future will carry more transponders and
therefore provide more transmission capacity. We expect these new
satellites will decrease the cost of capacity, thereby increasing
the demand for satellite-based communications services.
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- Ka-band technology. Newer satellites utilize Ka-band technology
The Ka-band transponders will offer five to ten times the
bandwidth of today's transponders. Ka-band technology typically
uses smaller, more high-powered spot beams, which allow for
smaller ground antennas and lower cost per data transmitted. The
use of Ka-band technology is expected to lead to less expensive
capacity and increase the demand for satellite-based
communications.
- Broadband technology. While broadband technology is increasingly
available on fiber optic networks, sophisticated urban cable
networks and through high-bandwidth telephone line technologies,
and demand for robust applications like delivery of multimedia
content that narrow-band technologies cannot satisfy is
increasing, we believe that satellites can provide the principal
means to deliver broadband applications beyond the geographical
limitations of both existing and future broadband terrestrial
networks.
THE AMC NETWORK
The Demand for Our Services.
We believe that small to medium-sized businesses and their employees
desire the same speed and services that large corporations and institutions
enjoy through their dedicated networks. They require a way to deliver large data
files and high quality video to multiple users that is cost-effective, easy to
install and that operates transparently, with little intervention or on-going
technical support. For users who can't afford dedicated networks or who have no
access to cable modems, T1 lines or DSL, and who want the high-speed capability
to send VCR quality video or large data files to multiple users, the multicast
capability of a satellite connection is an attractive option. Unlike other
currently available satellite systems, our network allows multiple users to
order, schedule and receive IP Multicast information over the Internet, while
using the bandwidth only once from the sender, rather than for each user on the
corporate LAN. We believe that our customers will be able to receive data and
video simultaneously and that our alternative will give the user the benefits of
a dedicated leased line, including instant network access, at a substantially
lower cost than using a dedicated network.
We believe that our potential customers will use IP Multicast services
to deliver corporate training, infomercials, and other content sessions across
the corporate computer network and to distribute banking networks or
geographically dispersed software development operations, among other things.
IP Multicasting Services.
We are currently offering Internet enabled IP Video Multicast and IP
Data Multicast delivery services. Our customers can order, schedule and monitor
IP Multicast servicer through our website and send video or data files to us at
our website. Our Network Operating Center can multicast data files or video
content to customers live from a desktop in a LAN, from broadcast studio feeds
or tapes, or from data or video previously provided by a customer for later
distribution (called "store and forward" distribution). When data or video is
provided live or contemporaneously with satellite delivery from a desktop in a
LAN, the data or video is unicast over the Internet to the Network Operating
Center through our Virtual Private Network, or VPN, "tunnel." See "Business -
Our Virtual Private Network" and "Business - The Ground Segment - The Network
Operating Center." In some cases, the delivery of such information may require a
dedicated line or other high speed delivery access from the customer to our
Network Operating Center. See "Business - The AMC Network Architecture" for a
description of the types of
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connections available between our customers and our Network Operating Center. A
high speed connection to our Network Operating Center is not necessary for
customers that will not originate live video or large data files for
contemporaneous multicasting, or where we broadcast studio feeds or tapes, or
store and forward data or video.
After we receive the information at our Network Operating Center, we
then use a satellite to multicast the information from our Network Operating
Center to our customers. The satellite component of our network allows IP
Multicast services to "bypass" the Internet and go directly to the customer
without going "through" a large portion of the Internet. Customers can send a
large file (100 Mbytes for example) through our Network Operating Center to
multiple users simultaneously at very high speed (up to 10Mbps). See "Business -
Competition" for a description of the capabilities and limitations of competing
satellite systems. While other satellite systems can only multicast to
individual computers, each of which must be connected to a satellite dish, and
cannot receive information to multicast over the Internet, we can multicast to a
LAN, and to all customers on the LAN, and receive the multicast information over
the Internet. In other words, clients can have one satellite dish and router for
a LAN with multiple users, and all users on the LAN can receive the multicast
services. Clients can use the Internet to monitor, send and receive our IP
Multicast services. Our proprietary software, together with the hardware at our
Network Operating Center and the hardware that must be installed at the
customer's site is uniquely designed and configured to deliver motion picture
quality IP based multicast video, voice and data. See "Business - Intellectual
Property" for a description of our proprietary intellectual property. We believe
that our system is uniquely able to provide delivery of data or video traffic
from one desktop to other corporate LANs, as well as to televisions with Web
enabled service. We can deliver video at the quality the customer requires, from
1 Mbps MPEG 1 to full motion MPEG 2 at 6Mbps. Our network allows full motion
live video and data content to be delivered directly to business customers in a
cost effective way, because we can deliver IP Multicast services to a large
group or number of users simultaneously, and only bill the customer for the
single transmission of the information, rather than for system usage of each
user receiving the information. See "Business - The AMC Network Architecture"
for a description of the connection between our customers and our Network
Operating Center and delivery from our Network Operating Center via satellite to
our customers. Also See "Business - Pricing Model."
Video broadcast content may be provided by customers or by companies
that produce content for their target markets and applications. We can also
co-produce "infomercial" type or other content for customers that wish to
disseminate full motion video or infomercial content via their web sites. See
"Business -- Our Network Architecture." Content can be aggregated at our Network
Operating Center and delivered through our IP Data Multicast and IP Video
Multicast services directly to multiple sites, or stored on our video servers
for scheduled or on-demand delivery. Customers, strategic alliance partners and
other content providers will be responsible for obtaining the rights to any
content they want to be delivered from our Network Operating Center through our
services. There are currently no agreements in place for the rights to deliver
content at this time.
We intend to sub-contract third party content production engineering
services to customers that have no content production capabilities, such as
online auction houses, retailers, and educational institutions. Additional fees
will be billed to our customers for these services. We do not currently offer
outsourced content production engineering services, but we expect to complete
the necessary contractual relationships with providers during the year 2000.
We believe that we have all necessary contracts with vendors and all of
the necessary equipment to deliver our IP Data Multicasting and IP Video
Multicast services beginning in the third quarter of 2000.
Our Network Architecture.
Transmission of data on our network and provision of our multicasting
services involves two main steps; (1) a terrestrial line from the computer user
to our Network Operating Center, where our equipment is housed and from where
our services are provided, and (2) a satellite
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download from our Network Operating Center to the computer user. See "Business -
The AMC Network Operating Center" for a description of the equipment maintained
at the Network Operating Center.
1. The Customer's Connection to Our Network Operating Center.
Upon entering into a service contract with us, our clients must
purchase, or lease, and install our client premises equipment, which consists of
a satellite dish and router. See "Business - Client Premises Equipment" for a
description of the equipment that each of our customers must obtain. Our
customers must then establish a terrestrial connection to our Network Operating
Center and Internet access through an ISP in order to reach our Web site and
initiate our services.
Through our Web site customers can order or schedule services, arrange
for the delivery of data or video to our Network Operating Center through our
VPN "tunnel", and schedule or receive consulting or other services. This
connection is usually made through the customer's existing ISP Internet access.
The ISP does not have to offer our services in order for the customer to reach
the web site. The customer's connection to an ISP may be maintained in any of
the several methods described in the description of the Internet above. In some
cases a dedicated line can be provided if the bandwidth available through the
existing ISP connection is not sufficient for the desired application, such as
sending live video to our Network Operating Center.
After a terrestrial connection is made, data or video is forwarded from
a customer through the terrestrial connection to the POP maintained by Level 3
Communications closest to the customer. See "Business-Ground Segment - The
Network Operation Center" and "Business-Material Contracts" for a description of
our relationship with Level 3 Communications. From the Level 3 Communications
POP, the data or request packets are then forwarded to our Network Operating
Center over the Internet backbone. Our Network Operating Center then services
the request or data packets by routing to our e-commerce Web site or to the
Internet World Wide Web site the customer is requesting, and then routes the
information back to our Network Operating Center.
When a customer transmits data or video to our Network Operating Center,
we will provide a VPN "tunnel" through the Internet for such data or video
delivery. In simple terms, a VPN "tunnel" is a path through the Internet to our
Network Operating Center that is created by attaching a set of instructions to
the information packets sent by the customer to our Network Operating Center.
The instructions direct the packets through the myriad of routers and other
equipment along the Internet path from the customer to our Network Operating
Center. The instructions provide, among other things, security for the
information and delivery instructions and addresses for delivery of the
information to multiple addresses after it reaches our Network Operating Center
(i.e., the multicasting leg of the transmission). The special instructions are
necessary because many of the routers and other equipment that the information
packets will encounter along its path are not multicasting enabled, in other
words, they will drop or delay multicasting requests that do not contain the
special instructions. The instructions are generated by software at our Network
Operating Center and are delivered to the customer via the connection to our Web
site.
The router provided to our customers to convert the signal received by
the satellite into a form that the customer's computer can understand also
establishes and monitors an "always on" connection to the Internet via our
Network Operating Center. Through programs with providers such as Level 3
Communications, we can include access to terrestrial lines as part of our
service offering. For example, through the Level 3 Communications relationship,
a T1 dedicated line can be made available to our customers through the local
exchange carrier to the Internet backbone, in many cases for a few hundred
dollars per month, and then sent across the U.S. over the Internet
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backbone for as low as $50 per month. An equivalent dedicated T1 service would
cost the customer several thousand dollars per month. A dedicated line and
direct access to the Level 3 Communications POP increases the transmission
capabilities over the "last mile" and avoids much of the local access bottleneck
when data is sent by the user.
The path from the customer to our Network Operating Center is currently
limited to terrestrial connections. However, a 64-384 Kbps satellite link is
planned for introduction during the first quarter of the year 2001, primarily
for markets outside the U.S. where the infrastructure is either not available or
costs are as much as ten times the price of the same service in the U.S. Our
proposed 64-384 Kbps satellite up-link (customer to our Network Operating Center
via satellite) will utilize a hybrid spread spectrum technology that will
provide connectivity to customers who are geographically unable to obtain
adequate bandwidth connections to support multicast services. Spread spectrum is
a way to provide communications between many users without interference
limitations. It is currently used in the U.S. PCS cellular market. Hybrid spread
spectrum is a modification of this standard to improve the number of customers
that can use a satellite without interference.
2. Network Operating Center Connection to the Customer.
After our Network Operating Center receives the data from the customer,
the data is sent as directed via satellite at speeds of up to 10Mbps, thereby
avoiding much of the other network equipment on the Internet and the local
access bottleneck. The benefit to the customer of our integrated
satellite-terrestrial network topology is the ability to use the Internet for
multicasting applications and to bypass the public Internet in the response
direction by going "over" the Internet. The Network Operating Center can
multicast the information to the users via satellite. We believe that other
systems are not Web enabled and can only multicast the information from a
network operating center to users that are each connected to a satellite dish.
We also believe that other systems cannot receive the information to be
multicast via the Internet. In other words, users of other systems that
integrate the use of satellites can not use the Internet to provide data or
video to the network operating center for multicasting over the satellite.
The data that we transmit through the satellite is configured in the
internationally accepted DVB/MPEG-2 and Internet TCP/IP standards that will
interface with existing corporate systems. DVB is an international standard for
the delivery of entertainment video for broadcasting. MPEG-2 is an international
standard for compressing signals in order to be able to transmit more
information in the bandwidth available. We plan to develop some of our own
applications and will be adapting or offering applications developed by others
for use with our services.
OUR VIRTUAL PRIVATE NETWORK
Many aspects of our services are provided in a secure Virtual Private
Network, or VPN, environment. VPN is an industry standard term for business
services that guarantee privacy, levels of security and performance using
special software to direct information sent over the Internet, rather than a
network of dedicated switched services telephone lines. Virtual private networks
offer the appearance, functionality and usefulness of a dedicated private
network at a lower cost because they use shared networks. Furthermore, virtual
private networks not only allow access to internal corporate information, but
can also be used to provide telephony services using IP and to transmit video or
a combination of any of these three.
Historically, telephone companies have offered private dedicated
networks at above standard phone rates. Dedicated networks are secure because
only network members have
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physical access to the data transmission lines. VPNs compete against dedicated
networks by using the Internet, coupled with new industry technology in order to
provide security at a lower cost. VPN charges to a customer involve a premium
over straight carrier "bandwidth" charges that do not include the VPN services.
The VPN that we will offer is created and maintained using our satellite router
and our proprietary software to "tunnel" customer requests through the Internet
to our Network Operating Center. IP based security ("scrambling") and encryption
technology purchased through third party vendors is added to the "tunnel" to
ensure data privacy, thereby providing security to the users. The security of
the satellite system is addressed by encrypting each customer's information with
a separate encryption key. We will control who has access to the data being
distributed by controlling assignment of the encryption key.
Other VPNs are currently available in the market. However, we are not
marketing our VPN as a stand-alone service, our VPN is only available in
connection with the provision of our IP Multicast services, and we believe that
IP Multicast services using the Internet to corporate LANs are not available and
that we will be offering these services for the first time.
We are also not offering high-speed Internet access service as of
through any ISP at this time. Our high speed information delivery services are
only available in connection with the provision of IP Multicasting.
THE GROUND SEGMENT - THE NETWORK OPERATING CENTER
Our first commercial Network Operating Center is located at Level 3
Communications in Sunnyvale, California. Level 3 Communications operates a
national Internet tier one backbone in the U.S. that has a fiber-optic
infrastructure. A tier one backbone refers to a fiber optic Internet backbone
infrastructure that is owned and operated by the service provider. Installation
of our Network Operating Center at Level 3 Communications began in September
1999 and was completed in December 1999. Our Network Operating Center is a
physical location that includes network management equipment, data and video
servers, routers, firewalls, and Internet backbone access equipment, satellite
uplink and downlink equipment including an antenna and RF transceiver; gateway
equipment including the video processing equipment, IP encoders, IP gateway,
modulators, demodulators, MPEG encoders, network management system, and billing
and encryption system, and servers and service delivery and monitoring
equipment. The network of customer premises equipment is managed and services
are enabled at the Network Operating Center. Our Network Operating Center
communicates with the satellite and with the Level 3 Communications
infrastructure, manages the satellite network, performs accounting and billing
services tailored to customer requirements, originates video content sent to
customers, and provides Web server access to customers to manage and initiate IP
Multicast services. Our Network Operating Center will also host our customers'
e-commerce web servers.
The Network Operating Center provides traffic reports and throughput
statistics for each customer in support of service-level agreements. If a
subscriber regularly hits peak utilization rates, the Network Operating Center
can then migrate the user upon request to a higher speed service, at a
correspondingly higher usage based billing rate. The above equipment has been
purchased, installed and certified as operational in out Sunnyvale facility by
our operations and test engineers. The number of customers that a Network
Operating Center can handle depends of the number of satellite transponders and
server capacity available at the Network Operating Center, and the bandwidth
requirements of each customer. A single transponder has about 30Mbps of
bandwidth or speed available at a given time.
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We also have a research and development Network Operating Center located
at our corporate headquarters. However, the services delivered from our
corporate Network Operating Center are intended to gain customer feedback on the
service and reliability, and provide demonstration capability for services in
Latin America, but are not a revenue generating service.
In order to provide our services on a global basis, we plan to deploy
additional Network Operating Centers, which will access multiple satellites in
conjunction with tier one bandwidth service providers. We would seek to deploy
additional Network Operating Centers similar to the one currently located at the
Level 3 Communications facility in Sunnyvale California at other terrestrial
Internet fiber optic backbone carriers that own and operate access Points of
Presence ("POPs") throughout the U.S., Europe and Asia. Additional Network
Operating Centers to be deployed will require an analysis of the footprint (area
covered by the satellite), type of satellite to be used (C-band or Ku-band),
services to be offered, equipment costs and availability, and regulatory
requirements of local and federal governments. The costs to deploy a Network
Operating Center (approximately $3 million for the Sunnyvale Network Operating
Center) will vary depending on the above requirements.
CUSTOMER PREMISES EQUIPMENT
Customers that subscribe to our services must obtain a satellite
terminal, which will consist of a satellite dish (.65 to 1.8 meter) with a low
noise block ("LNB") amplifier to receive information from the Network Operating
Center and a satellite router and receiver box. Philips Corporation has
developed a satellite router (with our assistance) that complies with the
functionality requirements of our system. We have agreed to purchase satellite
routers from Philips to provide to our customers. The router is not proprietary
to AMC and we do not have an exclusive supply contract with Philips. The Philips
satellite router may be used by other satellite systems, although our
proprietary software would not be included. The satellite router is available
from AMC and Philips Corporation as a co-branded product. See "Business -
Material Contracts" for the terms of our agreement with Philips Corporation. The
satellite router may be used by customers that have existing standard Cisco
Systems or other routers installed in their LAN. The satellite router provides
the satellite receiver as well as the return path for the Cisco Router "send" or
request path and all of the functionality of the VPN "tunnel", IP security, and
IP Multicast services. We plan to continue to provide development support to
Philips Corporation to maintain the required product performance for the
satellite terminals and routers.
We will provide and install the satellite dish and router at the
customer's place of business for approximately $10,000 per site. A cable will be
run from the satellite to the satellite router, which would typically be located
in the customer's equipment room. The satellite router is then connected to the
LAN or to a computer. The equipment will enable the customer to request
information via their terrestrial lines (customer to Network Operating Center
path) and receive information via satellite (Network Operating Center to
customer path). Each customer site would need a satellite dish and router, while
individual users would not need a satellite dish or router if they are part of a
LAN customer.
We propose to contract with a third party installation and support
company to install and maintain the customer equipment. Our own service and
support engineers will train the third party installers. Negotiations are in
process with a third party installation company to cover the U.S. although no
agreement has been reached. Whenever possible, we will purchase off the shelf
customer equipment to build our systems and perform software design
modifications and software integration for our customers.
As previously discussed, we plan to offer a customer to Network
Operating Center path over the satellite (via a 2-way satellite terminal) for
certain applications that do not have an adequate terrestrial link. In all cases
information must go from the customer to the Network
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Operating Center. We are in the process of developing a proprietary technology
for such a 2-way satellite return channel. We expect this technology to be
completed over the next twelve to eighteen months although we cannot assure that
such development will be completed during such period, if at all. We will
initially focus on the U.S. and major Latin American commercial centers where
the existing infrastructure is more advanced and 2-way satellite system is not
necessary for Internet access or connection to our Network Operating Center.
THE SPACE SEGMENT - SATELLITES
We have contracted with Satelites Mexicanos S.A. de C.V. ("SatMex"), the
owner/operator of satellites, to secure the necessary satellite bandwidth to
provide our services. See "Business - Material Contracts" for the terms of our
contract with SatMex. We will provide our services through existing Ku Band and
C Band geosynchronous satellites owned by SatMex that are stationed in fixed
orbits over the equator. Ku Band Satellites are satellites that operate in the
FCC designated Ku frequency band 14-14.5 Gbps (billion cycles per second) up to
the satellite and 11.7 - 12.2 Gbps down from the satellite. C Band Satellites
operate in the FCC designated C frequency band 5.5 - 6.2 Gbps up and 3.7 - 4.2
Gbps down. Ku Band Satellites are partitioned into several transponders in order
to serve different customers and applications. There are 24 transponders on the
SatMex 5 satellite, each of which operates at 36 million cycles per second
("MHz") or approximately 31 Kbps.
Our agreement with SatMex provides for the lease of two Ku Band
transponders on the SatMex 5 satellite for the next five years. One satellite
transponder will cover the U.S. and the other will cover South America. This
relationship is intended to provide the initial capacity to cover contemplated
services beginning in the first quarter of the year 2000 in the U.S. followed by
service in South America. We will add additional satellite coverage as necessary
depending upon several factors, including the number of customers and the
aggregate usage of our system by our customers. We expect that the existing
satellite coverage with be adequate through the end of 2000. We estimate that
16,000 customers could be served with our existing satellite coverage, based on
contracted usage of 1.8Gbytes per month of data at 1.5Mbps.
SatMex is a member of the Loral Global Alliance worldwide network of
satellite services providers. The Loral Global Alliance provides a network of
regional and global satellites through owner/operators including SatMex,
EuropeStar and Loral Skynet. By developing a relationship with a member of the
Loral Global Alliance, it may be easier and less expensive for us to contract
for additional or new satellite space or transfer transponder time between
satellites due to the relationship of satellite owners within the Alliance.
Although we do not anticipate a problem, we can give no assurances that we will
be able to obtain adequate satellite coverage beyond our current contract with
SatMex, if at all.
OTHER SERVICES AND VALUE ADDED APPLICATIONS
Provision of low cost, high-speed services and value added applications
have become a competitive requirement for today's business applications
provider. Value added applications refer to software application packages that
may be offered over a network. We anticipate that our IP Multicast customers
will also eventually expect additional value added applications to be made
available on our system. Value added applications include Intranets, Extranets,
email, electronic commerce, Web hosting, video conferencing, distance learning,
collaborative computing and multimedia.
The technologies which have been developed for the Internet have been
used in the creation of private corporate networks, or Intranets. Intranets
provide employees in
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geographically dispersed locations with access to corporate databases and other
private corporate information. There is a rapidly growing marketplace for
Intranet services in the United States and other developed countries, as
corporations have recognized their benefits. We believe that there is an ongoing
transformation of communication networks within large and medium sized
businesses in order to provide, among other things, employee training and
communication, division to headquarters ordering and logistics tracking,
customer support, marketing and advertisement distribution, and international
cross-border communication through Intranets and Extranets. Intranets are
corporate collaborative infrastructures (i.e., a group of computers within a
corporate organization that are all connected in a network) whereby information
within a company is disseminated via secure corporate Web Servers. The Intranet
can be accessed through the Internet and financial, accounting, collaborative
engineering, manufacturing, and sales functions, among other things, can be
managed in the Intranet. In parts of the world where land-based networks are
inadequate or unavailable, we believe Intranets represent a rapidly growing
market for satellite-based communications services. The growth of intranets is
being supported by the evolution of VPN technology and services that ensure the
security of sensitive corporate data when transmitted over the Internet or other
shared networks.
Extranets are an extension of the corporate Intranets that include
suppliers and vendors to improve collaboration between a corporation's internal
operations and the "outside" world of their business connections. In an
Extranet, a limited trust is defined and established between the networked
computer resources of two or more companies. The connection between
organizations or networks in an Extranet is made with a secured hybrid link
between the relatively unsecured Internet and the secured Intranets of the
participants. The connection of Intranets to establish and Extranet is called
Wide Area Networking ("WAN"). A WAN is accomplished with a fixed or virtual
link, depending upon traffic volume. With the improvement in IP security,
including firewalls and VPN tools, Extranets are emerging as the preferred
interconnectivity vehicle for business to business applications. Solving the
connectivity issues are important in the WAN infrastructure to deliver broadband
services.
We intend to develop and offer Intranet/Extranet market solutions for
target businesses and government organizations through the use of our VPN
"tunnel" technology and satellite services, as well as technologies that we may
develop as needed in the future. Some illustrative uses of our projected
corporate Intranet/Extranet services are product announcements, promotional
announcements with visual displays and advertisement layouts, product placement
and shelving diagrams. Our proposed services may include delivery information
and tracking, just-in-time inventory response to logistics and problems, and
collaborative forecasting and control of imports and exports. These service
areas facilitate reduction of delivery lead times and inventory that result in
potential cost savings to business and government end users. Third Party
Software Applications.
We are testing third party application software packages for video
streaming, collaboration, meetings and video conferencing, among other things,
in order to determine which applications may or should be offered with our
current services. We have not developed any specific applications, although the
design of some applications such as Video Conferencing has been started, and no
development contracts are currently in place for developing specific
applications. We anticipate that packages for applications such as movies on
demand or distance learning may be developed by subcontractors or by strategic
partners for selected vertical markets. Third party applications that we elect
to offer will likely reside on the customer's computers and will be managed at
our Network Operating Center. We may have to modify our servers in our Network
Operating Center or obtain additional equipment to host co-branded software
applications or to monitor third party software applications over our network.
The cost of such modifications and new equipment will depend on the particular
software application that
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we elect to offer and can not be determined at this time. The customer will need
our satellite dish and router for the application to work, even if the customer
does not also utilize our IP Multicast services. The charges for such software
application services will be based on usage as opposed to reselling software. In
some cases the customer application will require consulting services, either
offered by us or a third party such as Hewlett Packard to enable the customer
network to receive our services.
We also plan to offer additional network solutions requiring high-speed
services by developing as well as using existing technologies for IP
encapsulation and encryption, conditional access security, hybrid spread
spectrum, error-correction, modulation and Radio Frequency ("RF") techniques.
Conditional access is a form of security encryption of the Digital Video
Broadcast ("DVB") signal that authorizes a single customer or group of customers
to receive content to the exclusion of other customers. An example is pay per
view in the entertainment broadcast market. Spread spectrum is a way to provide
communications between many users without interference limitations. It is
currently used in the U.S. PCS cellular market. Hybrid spread spectrum is a
modification of this standard to improve the number of customers that can use a
satellite without interference. Through these existing enabling technologies, we
plan to deliver our services to the end customer through an infrastructure that
integrates a terrestrial Internet fiber optic backbone network with a satellite
delivery system.
MATERIAL CONTRACTS
SATMEX. On October 1, 1999, we entered into an agreement with Satelites
Mexicanos, S.A. DE C.V., or SatMex, under which SatMex provides us with
international service of signal conduction via satellite, through the Mexican
Satellite System ("Sistema de Satelites Mexicanos"), by means of the space
segment assignation in the category of Non-Preemptible service on the Ku band,
of the NAFTA Ku1 region, of the Satmex 5 satellite, with a total bandwith of
72.00 MHz. This agreement terminates on December 31, 2004.
We will receive service at 72 MHz bandwith on a 4K transponder until
December 31, 2004. We may increase our capacity in a third, fourth or fifth
transponder by written notice. We pay for the service in monthly payments in
advance for the total amount of $19,059,600 in accordance with a set calendar.
If we cease to cover a monthly payment, the service will be suspended. We have
guaranteed payment under this agreement for an amount equivalent to two times
the monthly service payment of the service, by means of a Letter of Credit
issued by Bank of America, on behalf of SatMex, for a total amount of $310,800.
We may cancel part of the capacity or terminate the contract by
notifying SatMex at least thirty working days in advance in writing. SatMex may
rescind the contract if (i) without having prior written authorization from
SatMex, we transmit the rights and/or obligations derived from the agreement;
(ii) we stop paying more than one monthly invoice of the service or for three
suspensions of same in the term of one year; (iii) we do not adjust to satellite
access parameters indicated by SatMex; (iv) we do not attend appropriately
and/or carry out the necessary adjustments on the generated signals on our
equipment that cause or may cause affectations to third parties; (v) we do not
grant or maintain the guarantee by letter of credit in time and form; (vi) we
dissolve or liquidate, or if we are declared bankrupt or are in suspension of
payments, or if we are in any of the cases stipulated in Article 2nd of the
Mexican Law of Bankruptcy and Suspension of Payments; (vii) we decide not to
accept relocation assigned to us by SatMex in its satellites; or (viii) we, in
general, do not fulfill any of the obligations derived from the agreement.
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LEVEL 3. We receive bandwidth and co-location services from Level 3
Communications, LLC, or Level 3 through executed customer orders. The fee for
these services is approximately $28,000 per month and we are billed on a monthly
basis. Level 3 may terminate any of our customer orders and discontinue service
without liability: (i) if we fail to pay a past due balance for services within
thirty days of written notice provided by Level 3; (ii) if we violate any law,
rule, regulation or policy of any government authority having jurisdiction over
the services; if we make a material misrepresentation in any submission of
information in a customer order or other submission of information to Level 3;
if we engage in any fraudulent use of the services; or if a court or other
government authority having jurisdiction over the services prohibits Level 3
from furnishing the services; (iii) if we fail to cure our breach of any
provision of the terms and conditions or any customer order within thirty days
of written notice provided by Level 3; (iv) if we file for bankruptcy, for
reorganization, or fail to discharge an involuntary petition therefore within
sixty days; and (v) if our use of the services materially exceeds our credit
limit, unless within fourteen days of written notice thereof by Level 3, we
provide adequate security for payment of the services. We may terminate the
services under certain terms and conditions, including the unavailability of
service for certain defined periods, and we may terminate upon sixty days prior
written notice.
OTHER SIGNIFICANT CONTRACTS.
HEWLETT-PACKARD. We entered into a Statement of Work, with a date of issue of
March 20, 2000, with Hewlett-Packard, specifically HP Network Services
Operation, for a Network Services, Implementation and Operation Plan. The
objective of the service is to design and implement a project plan to build and
operate our network and define the responsibilities and relationships between
Hewlett Packard and us for pre and post sales support to offer our products and
services to national and international clients. The Statement contemplates a
strategic relationship whereby HP becomes the service integration arm bringing
our services to our clients. The project start date was March 20, 2000, with
project timelines and milestones to be determined as part of the plan
development. For the implementation and integration service, we our invoiced per
a payment schedule under which HP invoices us upon delivery of networking
services.
PHILIPS. We have placed a purchase order with Philips Digital Video Systems
Company, or Philips, under an agreement dated December 14, 1999, in which we
agreed to purchase 200 Philips Satellite Routers - Model 1, and 1800 Philips
Satellite Routers - Model 2. The total amount of the sale was to be $6,589,000.
The purchase was conditional upon the satisfaction of mutually agreeable
technical specifications, and our completion of testing of the Helius prototype
satellite router and such product meeting acceptable expectations for
performance. To date, 50 units have been delivered under this agreement.
OUR INTELLECTUAL PROPERTY
The aspect of our network that is proprietary to the company is the
software that creates the VPN "tunnel" that allows for IP Multicasting over the
Internet, the Web based multicast management software, the terrestrial/satellite
split path routing software and Code Division Multiple Access (CDMA)
implementation software for the two-way satellite system. Other than our
software, our network is made up primarily of technology available from outside
vendors, including (1) the terrestrial connection from the customer to our
Network Operating Center, (2) ISP services that allow the customer to access our
Web site, (3) the satellite dish that is installed at the customers' site, (4)
the router developed in conjunction with Philips Corporation and (5) satellite
services. Our software, however, allows us to receive information for
multicasting via the Internet and to provide IP Multicast services over the
Internet to a LAN rather than simply to a single computer.
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We are also developing a "Hybrid" two-way satellite system. The two-way
satellite system may involve hardware, equipment or software that is proprietary
to the company. We have completed the system design and are now in the ASIC
design phase of the receiver and transmitter. Field trials are schedules for the
first quarter of 2001.
We are also working on developing direct sequence spread spectrum
waveforms for wideband applications. We believe that we can develop a system
that will use a special form of synchronous Frequency Division Multiple Access
("FDMA") and Code Division Multiple Access ("CDMA") integrated with Global
Positioning System ("GPS") timing for maximum satellite bandwidth utilization.
The external specifications and feasibility simulation studies have been
completed for the maximum satellite bandwidth utilization system. The Hybrid
CDMA modems and controllers, including the Application Specific Integrated
Circuit ("ASIC") chip design will be implemented through a contract with a third
party end-to-end design house. We intend to prepare two patent applications for
proprietary coding algorithms and we intend to submit these applications to the
U.S. Patent and Trademark Office after further technical evaluation.
We do not hold any patents nor do we hold any trademark or servicemark
registrations. We do not have any U.S. patent applications pending.
Our success and ability to compete are substantially dependent upon
technology and intellectual property. While we will rely on copyright, trade
secret and trademark law to protect our technology and intellectual property, we
believe that factors such as the technological and creative skills of our
personnel, new service developments and frequent service enhancements are more
essential than establishing and maintaining an intellectual property leadership
position.
We anticipate entering into confidentiality agreements with our
employees and consultants. We will implement confidentiality agreements, which
require our employees and consultants to hold in confidence and not disclose any
of our proprietary information. Despite our efforts to protect our proprietary
information, unauthorized parties may attempt to obtain and use our proprietary
information. Policing unauthorized use of our proprietary information is
difficult, and the steps we will take might not prevent misappropriation,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as do the laws of the United States.
OUR PRICING MODEL
Our business model is based on selling services rather than hardware.
The customer premise equipment required to receive the services that are
delivered from our Network Operating Center will be provided through third party
vendors. Our service pricing model is a "usage" based billing model, whereby the
customer pays for what they use rather than how long they are connected. If the
customer is not using the network by sending data, he does not pay. The
satellite and Level 3 Communications network resources are then re-allocated to
another customer. Our initial pricing is based on charging customers $1.00 per
MegaByte (one million bytes) of information sent via the IP Multicast services.
Services are being marketed today at these prices. For example, a customer may
sign a contract for us to deliver 50,000 Mbytes of data files per month over a
two year period. At $1.00 per Mbyte, our proposed fee, the customer would pay
$50,000 per month for the service, regardless of the number of sites receiving
the information. There should be cost savings for the customer, which will
depend on the number of sites utilizing the multicast service, and the bandwidth
required for the services. Customers will typically have a cost alternatives to
compare against our solution. The more sites receiving the
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service, the more favorable the comparison for our solution. For example, we are
aware of one company pricing for content distribution of a two hour audio
concert, based on a 30 Kilobit file distributed to 10,000 Internet users, at a
fee of $.01 per MBytes, which would cost the content provider $2,700 per event.
The AMC pricing at $1.00 per Mbytes is $27 per event.
We will require service agreements with customers for our services. We
believe that revenue will be generated beginning approximately 30 days following
the signing of the service agreement. We have not generated any revenues to date
for the IP Data or Video Multicast services, however, we anticipate that revenue
will begin in the second half of the year 2000 from the provision of IP
Multicast services. We anticipate that revenues will be recognized from data and
video content based on usage contracts over the applicable contractual period,
billed on a monthly basis.
We intend to generate additional revenue by bundling our enhanced
carrier services and value added applications with terrestrial Internet access
through a co-location agreement with Level 3 Communications. No such revenues
have been generated to date, and the amount of such revenues, if any, will
depend on a number of factors, and we can provide no estimate of any such
revenues.
OUR MARKETS AND CUSTOMERS
As the Internet takes on increased importance as an information source
and e-commerce vehicle, we anticipate large growth in the demand for interactive
high-speed services and multimedia applications. According to Frost and
Sullivan, a market research firm, the growth in demand for high speed services
is expected to increase from $200 million in 1999 to $3 billion in 2004 (article
on page 74 in the December 1999 issue of Internet World). Our target market
consists of small and mid-size companies, together with the corporate employees
and business groups who work out of the home but need to be integrated with
other parts of their company (the Small Office, Home Office market) and
institutional users such as educational, health care and government
institutions. Our target corporate customers will be companies with between
50-450 employees. We believe that these companies will subscribe to our
high-speed services to reduce their telecommunications costs, improve their
Intranet or Extranet networks, and implement applications currently unavailable
due to bandwidth and network limitations. An example of our target corporate
market is a network of real estate agents around the country who could use
specialized real estate accounting, legal and listing applications along with IP
Multicast Video to share home listings with other real estate sites around the
country simultaneously.
Distance Learning applications are in the educational institutions
market segment, which includes colleges and universities, private educational
institutions as well as the grades K through 12 school system. For distance
learning applications, we believe that our network will enable an instructor
located at his home site, equipped with the latest teaching aids, to broadcast a
live teaching session to students located in remote classrooms or offices. In
the classrooms or at their desktop, students would be able to watch the teacher
on a television screen or computer monitor and ask or respond via video
conferencing, IP text window, or IP voice call interaction. The teacher could
then remotely control the video camera in the classroom to zoom in or pan the
classroom. The teacher could also take the classroom to an Internet website,
representing the subject discussed, by hyperlinking to the site, thus
facilitating further instructional interactivity. The students may take
web-based tests with real-time interaction with the remote teacher. Enhanced
features such as file transfer of instructional notes that have been converted
into electronic form via voice recognition software, as well as help desks, fax,
and remote printing are a few of the service features that may be delivered by
our system. According to discussions with
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teachers and professionals in the business, an interactive distance learning
system capability can enhance learning productivity and help reduce training
costs. Although there is some customer premise equipment involved, it is
expected that the total costs can be distributed over sufficient schools or
sites to make it cost effective. We are evaluation application packages that
provide distance learning capabilities for our network and service offering. The
cost savings for the user are dependent on the number of sites and students in
the network.
We intend to develop our customers through vertical market channel
partners such as integrators, consulting companies, marketing companies, trade
associations, broadband data service providers, content providers, local
exchange carriers that wish to enhance their data service offerings and ISPs
that are developing application packages and targeting special markets and
corporate users. We also intend to pursue direct accounts. We have a Director of
Business Development who will be responsible for developing a viable channel
marketing program. We plan to build joint channel market programs with companies
that will use our services to enhance their product offerings as well as refer
customers to us. We believe that SatMex, from whom we currently purchase
satellite transponder time, may wish to expand its business by offering our
services in Latin America. Our discussions with SatMex involve potential
referrals by SatMex of users of their satellite services for South America and
joint selling efforts in Mexico by our business development department and their
business development department. Channel marketing is a proven method for
utilizing sales resources of other companies that have an existing product or
customer base where a joint program will benefit both parties.
We intend to maximize market penetration and optimize network
technologies for interactive broadband applications through strategic alliances
and joint ventures with leading manufacturers, communications companies,
enterprise sales and consulting organizations, content providers and Internet
Service Providers ("ISPs"). We have entered into agreements with Hewlett
Packard, Level 3 Communications and Philips. Negotiations are taking place with
other companies.
We currently have a Director of Sales, two outside sales
representatives, an outside system engineer and two internal sales
representatives. They are making sales calls to potential users to set up
demonstrations and determine the best business applications to generate sales.
Based on current projections, we expect to have approximately 30 sales people by
the end of 2000.
OUR COMPETITION
The Company competes in the streaming video, video services and Internet
services markets involving transmission of data by wired and wireless methods
including satellite, radio and other signals, telephone wires, cable, etc. This
market was, until recently, relatively limited. Video via the Internet has
become the "hot application" for the present and near future and many large
companies (such as Microsoft, IBM, and others) are now producing applicable
products and offering related services. There currently are several hundred
competitors offering identical or nearly identical products and services. We
believes that we have an advantage, however, because we offer a form of video
delivery service that no other service providers currently offer - IP
Multicasting services using the Internet.
We believe there are a handful of dominant players in the Internet video
field against whom we indirectly compete, including Real Networks, Microsoft
(via its Windows Media Player), Broadcast.com, Intervu, and several others.
Because of the extreme interest in the field, many mergers are underway and
major players change fairly regularly. The Company
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<PAGE> 21
believes that the fluid nature of the industry allows newcomers to thrive and
emerge in leadership positions if they have technically superior, cost
effective, properly marketed products and services. Competition is by direct
competition in the marketplace, through affiliations with other companies with
dominant positions in their fields, and through high-profile, capital-intensive
marketing and advertising campaigns.
We also compete with other providers of satellite communications
services, of which there are several. One direct competitor of which we are
aware is Hughes Network Systems' DirecPC, which offers high-speed connectivity
and IP based services delivered over a proprietary satellite transport system.
The DirecPC system delivers information to a single PC, rather than a LAN, that
has many PCs. For Web based business applications at the desktop in the
corporate enterprise LAN, the system must have software that can handle the
multicasting routing and security issues, as well as the multicast limitations
of the Internet. We do not believe that Hughes' DirecPC system can currently
provide such services. Also systems such as DirecPC do not offer download speeds
of 10 Mbps because they were designed for consumer Internet access applications,
where the Internet had a limitation in speed that information could be
downloaded off the Internet of approximately 400 Kbps.
Although we provide high-speed, high-bandwidth methods of delivery of
large data files and video over the Internet, and we provide a VPN for users of
such services, we do not provide an alternative method of access to the
Internet. Therefore, we do not believe that ISPs and the several providers of
terrestrial high-speed connectivity services are our direct competitors. We
currently require, and will probably require for the foreseeable future, our
customers to establish a terrestrial connection to our Network Operating Center
and a connection to an ISP to access our Web site. Therefore, for part of our
network, we are not competing with such service providers, but instead, our
customers are part of the customer base of these service providers. However,
when our customers utilize our satellite delivery services, they will be
avoiding the use of terrestrial connections for that part of the data or video
delivery process. We believe that the current methods of terrestrial
connectivity may be used only for single user unicasting and do not allow for IP
Multicasting over a LAN so, although we provide an alternative to terrestrial
connections for part of the data and video delivery process, we provide a method
of delivery that is not offered by traditional terrestrial connectivity service
providers.
We will seek opportunities to cross market our services with the
high-speed terrestrial connectivity services offered by other providers. Such
opportunities may include bundling our services with terrestrial connectivity or
ISP services as a package or providing cross referrals. We believe that ISPs may
be willing to offer our services in the same manner as they offer DSL and other
connectivity services from other providers. We believe that in order to generate
additional revenue, either through existing customers or new customers, ISPs may
be interested in offering new services, such as ours, to their customers. We
have, however, not entered into any agreements with terrestrial connectivity
services providers for this purpose and can provide no assurances that any
cooperative agreements or relationships can be established in a timely manner,
if at all.
Several other providers offer VPN services. However, we do not offer a
VPN as a stand alone service and only offer our VPN in connection with our IP
Multicasting, so we do not compete with such providers. Also, a web cache at our
Network Operating Center can deliver Internet content to customers without
having to go to the Internet each time. This technology is also currently
commercially available from suppliers such as Sun Microsystems, Oracle and Cisco
Systems. We are only competing with such service providers indirectly because we
will offer that service only in connection with our primary IP Multicasting
services.
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<PAGE> 22
REGULATIONS
We have obtained an FCC transmission license for the satellite
connection at our commercial Network Operating Center located at the Level 3
Communications in Sunnyvale. Each Network Operating Center located in the U.S.
is under the jurisdiction of the FCC and will require a separate FCC license. It
took approximately three months to obtain the license for the Network Operating
Center located at the Level 3 Communications in Sunnyvale, but we believe that
additional licenses for additional Network Operating Centers may be obtained in
as little as three weeks. We can, however, give no assurances that we can obtain
additional licenses in a timely manner, if at all.
Customer premise equipment does not require FCC approval because it does
not transmit information to the satellite. Prior to the introduction of our
"Hybrid" two-way satellite terminal, FCC approval must be obtained. We
understand that we will not need a separate license for each customer, but
instead, a blanket license may be issued for all of our two-way terminals.
Although we do not anticipate a problem with obtaining a license for a two-way
satellite system, we can provide no assurances that we can obtain such license
in a timely manner, if at all.
Outside of the U.S., additional licenses and permits may be necessary
depending upon the laws of the applicable country or jurisdiction. Application
for foreign licenses and permits typically involves the telephone authority of
the applicable country. We will attempt to develop strategic partnerships with
the host country telephone authority in order to obtain the necessary permits
and legal documentation. In addition, satellite operators from whom we will
attempt to lease satellite services in these countries already hold many of
these permits. We understand that SatMex, a member of the Loral Global Alliance
with whom we already have a contractual relationship, holds many of such permits
that we may be able to take advantage of. We believe that both the satellite
operators and the host country telephone authorities will be receptive to
entering into strategic or contractual relationships with us because the
provision of our services to customers will necessarily utilize their products
and services: our customers will use the products and services of telephone
authorities to gain terrestrial access to our to be developed Network Operating
Centers and we will seek to lease satellite access from satellite operators. The
amount of time and cost of obtaining a license or permit in a foreign
jurisdiction will vary depending upon many factors, including the political
environment and state of nationalization or privatization of the telephone
industry. We can not predict how long it will take, or how much it will cost, to
obtain any such foreign licenses of permits.
RESEARCH AND DEVELOPMENT
Our product service development and engineering efforts focus on the
design and development of new technologies and product services to increase the
speed and efficiency of satellite communications and to increase the number of
users on our network. Our research and development expenses for the years ended
December 31, 1997, 1998 and 1999 and for the three months ended March 31, 1999
and March 31, 2000 were $306,637, $507,082, $4,653,240, $74,420 and $1,223,000,
respectively.
EMPLOYEES
As of March 31, 2000, we employed 37 employees and one independent
contractor located in our Sunnyvale, California headquarters. Our employees are
not covered by any collective bargaining agreements. We believe that our current
employee relations are satisfactory. There is significant competition in the San
Francisco Bay Area for employees with the managerial,
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<PAGE> 23
technical, marketing, sales and other skills required to operate our business.
Our future success will depend in significant part upon our ability to attract,
retain and motivate employees.
AVAILABLE INFORMATION
Prior to the effectiveness of this Registration Statement, we have not
been required to file periodic reports with the Securities and Exchange
Commissions.
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<PAGE> 24
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements appearing elsewhere in this
Registration Statement. The statement of operations data set forth below for the
years ended December 31, 1996, 1997, 1998 and 1999, and the balance sheet data
at December 31, 1998 and 1999 are derived from our audited financial statements
included elsewhere in this Registration Statement, except for 1996 and 1997.
Other annual and quarterly statement of operations data set forth below is
derived from our unaudited annual and quarterly financial statements not
included elsewhere herein. In our opinion, these unaudited financial statements
have been prepared on the same basis as our audited financial statements and
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations and financial
position for these periods. The historical results are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- ------------------------
1995(1) 1996(1) 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales ............................... $ 157 $ -- $ -- $ -- $ -- $ -- $ --
Cost of goods sold .................. (47) -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit (loss) ................. 110 -- -- -- -- -- --
Operating expenses:
Selling and marketing ............... 47 193 1,715 587 3,215 90 439
General and administrative .......... 137 191 520 1,188 6,246 608 745
Research and development ............ -- 29 307 507 4,653 74 1,223
Write-off of inventory .............. -- -- -- 1,283 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses ............ 184 413 2,542 3,565 14,114 772 2,407
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations ................ (74) (413) (2,542) (3,565) (14,114) 772 (2,407)
Other income ........................ -- 56 3 16 754 -- 359
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss ............................ (74) $ (357) $ (2,539) $ (3,549) $ (13,360) $ 772 $ (2,048)
=========== =========== =========== =========== =========== =========== ===========
Historical basic and diluted
loss per share(2) .................. -- $ (0.02) $ (0.13) $ (0.16) $ (0.43) $ .03 $ .08
=========== =========== =========== =========== =========== =========== ===========
Shares used to compute historical
basic and diluted loss per share .. 17,919,800 17,919,800 19,671,300 21,589,772 31,870,966 23,774,425 31,870,966
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------------------------- -------------------
1995(1) 1996(1) 1997 1998 1999 1999 2000
----------- ------- ---- ---- ----- ---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
----------- ------- ---- ---- ------ ---- ------
BALANCE SHEET DATA:
Cash and cash equivalents ......... 17 85 1 6 15,306 62 10,947
Working capital ................... (59) 114 (48) (289) 14,921 286 10,885
Total assets ...................... 52 765 824 712 18,258 1,191 16,110
Long term debt and capital lease
obligations ....................... 6 6 -- -- -- -- --
Total stockholders' equity ........ 38 691 89 205 17,547 1,089 15,552
</TABLE>
(1) Predecessor company (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
(2) Please see the financial statements and the notes to such statements
appearing elsewhere in this Registration Statement for the determination of
shares used in computing basic and diluted net loss per share.
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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Registration Statement contains forward-looking statements, the
accuracy of which involves risks and uncertainties. We use words such as
"anticipates," "believes," "plans," "expects," "future," "intends," and similar
expressions to identify forward-looking statements. The discussion and analysis
of financial condition and results of operations is based upon and should be
read in conjunction with the financial statements of the Company and the notes
thereto included elsewhere in this Registration Statement, as well as the
information contained under the headings, "Business" and "Risk Factors."
OVERVIEW
We plan to offer multicast services to consumers and corporate users.
The market for our services is rapidly evolving and is characterized by an
increasing number of new technologies, which include both satellite and
terrestrial network solution providers. Our Company and prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for our product services. See
"Risk Factors," generally.
We have experienced accumulated net losses from operations of
$21,496,931 or $0.87 per share (basic and diluted), since inception in April,
1996 through March 31, 2000. We anticipate that we will continue to incur net
losses into the year 2000. These losses have developed mainly from our
activities to develop our product services and establish brand recognition
through the development of a viable sales channel.
We have not yet generated revenue. We intend our revenue to be generated
in the future from the sale of high speed Internet access, the delivery of
content and the maintenance and support services. We intend to market to various
channels, including multiple business and dwelling units and manufacturing
companies. Our policy is to recognize revenue as earned on a monthly basis or as
usage charges are incurred.
We originally began operations by developing multiplexers and high-speed
DSL devices for Internet use. In May 1998, we made the strategic decision to
abandon the sales and marketing efforts behind our MUX-6 Multiplexer and DigiCop
internet connector products to pursue other lines of business. We have written
down all of the finished inventory and the parts and raw materials related to
these product services to their estimated net realizable value. The total amount
of write downs related to the abandonment was $1,282,975.
We continue to expend substantial resources on sales and marketing in
our attempts to establish our product services as a viable alternative in the
MSP market. There can be no assurances, however, that we will achieve or sustain
profitability or positive cash flow from our operations. See "Risk Factors--We
Have a Limited Operating History," "--We May Have Insufficient Capital For
Future Operations," and "--We Face Obstacles Relating To Market Acceptance and
Distribution."
Sales and marketing expenses consist primarily of compensation, costs of
promotional material, travel and advertising. Since inception in April 1996
through March 31, 2000, sales and marketing expenses have been $5,956,541.
During 1997 and 1998, we expended considerable resources in Asia in an attempt
to establish a distribution channel and secure contracts with vendors for the
MUX-6 and DigiCop product, which included governments and private companies. Our
sales and marketing expenses will grow rapidly as we
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<PAGE> 26
expand the sales and marketing efforts nationwide and internationally. We have
hired 5 additional sales personnel in the first quarter of the year 2000.
General and administrative expenses consist primarily of costs
associated with the internal costs of pursuing capital investment in the
Company, accounting and human resources needs, professional expenses, leasing of
facilities, insurance, legal, depreciation expenses, and compensation. Since
inception in April 1996 through December 31, 1999, general and administrative
expenses amounted to $7,954,302.
As of December 31, 1999, we had operating loss carry forwards of
approximately $6,060,000 for federal purposes and $3,030,000 for state purposes.
The federal and state net operating loss carry forwards expire on various dates
through 2019. We have provided full valuation allowance against our deferred tax
assets, consisting primarily of net operating loss carry forwards, because of
the uncertainty regarding their realization. Further, such net operating loss
carry forwards could be subject to limitations due to changes in our ownership
resulting from equity financings.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue. We have not recognized any revenues for the years ended
December 31, 1998 and 1999.
Research and development expenses. Research and development expenses
were $4,653,240 for the year ended December 31, 1999, an increase from $507,082
for the year ended December 31, 1998. Research and development expenses for
December 31, 1998 related to DigiCop and December 31, 1999 related primarily to
the effort to complete the development and testing our NOCs and the 2-way system
under development which we expect to have available for implementation in the
fourth quarter of the year 2000. The increase resulted primarily from additional
costs related to new employees increase from 18 to 33, transponder fees, rent
and compensation costs of approximately $2,598,750 related to the issuance of
warrants.
Sales and marketing expenses. Sales and marketing expenses were
$3,214,723 for the year ended December 31, 1999, an increase from $586,529 for
the year ended December 31, 1998. This increase resulted primarily from the
hiring of additional sales and marketing personnel increase from 2 to 10 and the
sales and marketing to develop the business, including compensation costs of
approximately $2,598,750 related to the issuance of warrants.
General and administrative expenses. General and administrative expenses
were $6,246,080 for the year ended December 31, 1999, an increase from
$1,188,071 for the year ended December 31, 1998. This increase was primarily due
to increases in administrative personnel increase from 4 to 8, professional
fees, facility expenses to support the growth of operations, including higher
rent, supplies and other office expenses, including compensation costs of
approximately $2,598,750 related to the issuance of warrants.
Warrants on up to 3,000,000 shares of our common stock were issued to
three of our employees in November 1998. One employee is the engineering
director, another is the marketing director and the third is the operations
director. Half of these warrants are exercisable based upon target prices of our
common stock. The other half are exercisable based upon the achievement of
certain research and development milestones. All milestones and certain of the
target prices were reached at December 31, 1999. Amounts are expensed in each
category, based upon the nature of the warrant and the work performed by the
individual.
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<PAGE> 27
Other income. Other income was $754,028 for the year ended December 31,
1999, an increase from $15,561 for the year ended December 31, 1998. This
increase was principally due to higher interest income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue. We have not recognized any revenues for the years ended
December 31, 1997 and 1998.
Research and development expenses. Research and development costs in
1998 were $507,082, an increase from $306,637 in 1997. This increase was
primarily due to the purchase, in the fourth quarter of 1998, of certain
technologies in the form of in-process research and development, from SatCom
Media Corporation. Related expenses of $406,000 were charged to research and
development because the technology acquired and related products were in the
early stages of development and had not yet achieved technological feasibility.
The change from 1997 to 1998, net of the $406,000 charge, decreased due to the
fact that in 1997 the DigiCop product incurred extensive development costs while
the significant costs related to the NOC did not begin until the first quarter
of 1999.
Sales and marketing expenses. Sale and marketing expenses were $586,529
in 1998, a decrease from $1,715,649 in 1997. This decrease was primarily due to
the significant costs incurred in 1997 in an attempt to secure contracts and
commitments in Asia. The costs included consulting fees related to establishing
a contract with the Republic of China for our multiplexer product. Sales and
marketing expenses for 1998 related primarily to the attempt to sell our
multiplexer product and Digicop products through May 1998.
General and administrative expenses. General and administrative expenses
were $1,188,071 in 1998, an increase from $520,151 in 1997. This increase was
primarily due to increases in the number of administrative personnel increase
from 2 to 4, professional services fees and facility expenses to support the
growth of our operations, including higher rent, supplies and other office
expenses.
In January 1997 we acquired certain assets and rights to the MUX-6
multiplexer product from Temasek Telephone, Inc. Temasek Telephone, Inc. was
deemed to be a predecessor corporation, and accordingly, certain financial
information for the years ended December 31, 1996 and 1995 (unaudited) are
included in selected financial data. There was little activity by the
predecessor corporation in 1996 and 1995, due to lack of capital. The expenses
primarily related to personnel, business development and facilities costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenue. We have not recognized any revenues for the three months ended
March 31, 2000 and 1999.
Research and development expenses. Research and development expenses
were $1,223,045 for the three months ended March 31, 2000, an increase from
$74,500 for the three months ended. Research and development expenses for March
31, 1999 and March 31, 2000 related primarily to the effort to complete the
development and testing our Network Operating Center and the 2-way system under
development which we expected to have available for implementation in the fourth
quarter of the year 2000. The increase resulted primarily from additional costs
related to new employees [increase from 8 to 21], transponder fees, rent and
compensation costs.
Sales and marketing expenses. Sales and marketing expenses were $439,640
for the three months ended March 31, 2000, an increase from $75,467 for the
three months ended March 31, 1999. This increase resulted primarily from the
hiring of additional sales and marketing personnel [increase from 2 to 8] and
the sales and marketing expenses to develop the business.
General and administrative expenses. General and administrative
expenses were $745,035 for the three months ended March 31, 2000, an increase
from $155,872 for the three months ended March 31, 1999. This increase was
primarily due to increases in administrative personnel [increase from 3 to 6],
professional fees, facility expenses to support the growth of operations,
including higher rent, supplies and other office expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, net cash used in operations was
$4,186,935 primarily as a result of the $13,360,015 net loss incurred in the
year, less the non-cash expenses for depreciation and amortization, charges
taken on issuance of common stock, and inventory write downs totaling
$9,242,181.
We invested $2,330,906 in new property and equipment, most of which is
associated with NOC equipment, lab equipment, and equipment and furnishings for
our facility.
We financed our operations, purchases and advances on notes receivable
through net proceeds of $27,014,242 from the issuance of common stock and net
proceeds of $821,238 from the issuance of preferred stock. Additionally,
advances on notes receivable were paid to a shareholder of the company in the
amount of $5,975,540. At December 31, 1999, we had a cash balance of
$15,306,130, a $15,300,469 increase from December 31, 1998.
For the year ended December 31, 1998, our operations used $2,357,027 of
cash primarily as a result of the $3,549,096 net loss for the period, less
$2,375,774 of non-cash expenses. We invested $406,000 for
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<PAGE> 28
the purchase of in-process research and development and $441,025 for the
purchase of property and equipment. We financed our operations, purchases of
in-process research and development, and purchases of property and equipment
through proceeds of $3,422,056 from the issuance of common stock. At December
31, 1998, we had a cash balance of $5,661, $4,634 increase from December 31,
1997.
For the year ended December 31, 1997, our operations used $1,205,354 of
cash primarily as a result of the $2,539,237 net loss for the period, less
$1,405,614 of non-cash expenses. We invested $38,359 for the purchase of
property and equipment and paid advances on a note receivable to a shareholder
of the company in the amount of $100,000. We funded our operations and investing
activities through the issuance of common stock in the amount of $1,114,740.
For the three months ended March 31, 2000, net cash used in operations
was $2,038,965 primarily as a result of the $2,048,583 net loss incurred.
We invested $2,192,022 in new property and equipment, most of which is
associated with Network Operating Center equipment, lab equipment, and equipment
and furnishings for our facility.
We financed our operations, through the use of available cash as our
cash balance decreased from $15,306,130 at December 31, 1999 to $10,942,143 at
March 31, 2000.
The company believes that its existing cash and cash equivalents will be
sufficient to satisfy its working capital and capital expenditure requirements
over the next 12 months. However, we may be required, or could elect, to seek
additional funding from the capital markets prior to that time. Our future
capital requirements will depend on many factors, including the rate of revenue
generation and growth, the timing and extent of spending to support development
efforts and expansion of sales and marketing, the timing of introductions of new
product services and enhancements to existing product services, and marketing
acceptance of our product services. We cannot assure that additional equity or
debt financing, if required, will be available on acceptable terms or at all.
YEAR 2000 COMPLIANCE
Many computers, software, and other equipment are coded to accept only
two digit entries in the date code field. Beginning in the year 2000, these code
fields will need to accept four digit entries to distinguish between the year
2000 and 21st century dates from other 20th century dates. As a result, computer
systems and/or software products used by many companies may need to be upgraded
to solve this problem.
Assessment. The year 2000 problem may affect the computers, software,
and other equipment that we use, operate or maintain for our operations. Based
on inquiries that we have made of the third party suppliers of products that we
use, we believe that all computer driven equipment within our infrastructure is
Y2K compliant.
External Infrastructure. We rely on the general communications
infrastructure maintained by the established telecommunications companies to
transmit our data to a Network Operating Center uplink site, to uplink to a
satellite, and for rebroadcast by the satellite to our customers. Accordingly,
if the telecommunications companies and satellite operators do not have their
systems year 2000 compliant, then we and our customers could suffer the
consequences of the failure of one or more components of the telecommunications
infrastructure in common with other users. The consequences could be that
customers will refuse to pay for our product services and we could suffer a
decline in revenues. In addition, costs would go up as we would seek to mitigate
any problems.
Product Services. To date, we are not aware of any problems with our
existing product services prior to releasing them to customers. We currently do
not expect any year 2000 problems to arise with our product services.
Possible consequences of year 2000 problems by external infrastructures.
We expect to identify and resolve all year 2000 problems that could adversely
affect our business operations. However, we believe that it is not possible to
determine with complete certainty that all year 2000 problems affecting us have
been identified and corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, no
one can predict the how many year 2000 problem-related
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<PAGE> 29
failures will occur or the severity, duration or financial consequences of the
year 2000 related failures. In general, we believe that any year 2000 problems
will occur in the telecommunications infrastructure. As a result, we believe
that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers and our customers that will divert
management's time and attention and financial resources from ordinary
business activities;
- business disputes or penalties due to year 2000 related problems; and
- business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination.
Contingency plans. We have only made generalized contingency plans for
year 2000 contingencies and have not spent any funds in connection with year
2000 compliance. If such problems occur which interrupt our services to our
customers, we intend to immediately seek to obtain such services from
telecommunications companies that are able to continue offering services. We may
also seek to replace on an accelerated basis, any affected equipment or
software. We may also have increased work hours for our personnel and hire
additional contract personnel to correct any year 2000 problems on an
accelerated basis.
Additional Factors. The discussion of our efforts and expectations
relating to year 2000 compliance are forward-looking statements. Our ability to
achieve year 2000 compliance and the level of incremental costs associated
therewith, could be adversely affected by, among other things, availability and
cost of programming and testing resources third party suppliers' ability to
modify proprietary software, and other unanticipated problems.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note A to the financial statement appearing elsewhere in this
Registration Statement.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
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<PAGE> 30
RISK FACTORS
You should carefully consider the risks applicable to our company
described below. The risks and uncertainties described below are not the only
ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
investors may lose all or part of their investment.
This Form 10 Registration Statement also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described below and
elsewhere herein.
WE HAVE A LIMITED OPERATING HISTORY
Because we recently began operations, it is difficult to evaluate our
business and our prospects. Our revenue and income potential is unproven and our
business model is still emerging. We were incorporated on April 8, 1996 and did
not begin any activity until 1997 and have a limited operating history.
Furthermore, our prospects must be evaluated in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
the early stage of their development. We may not be successful in addressing
these risks and our business strategy may not be successful. These risks include
our ability to:
- develop new product services equal to or superior to those of our
competitors;
- attract customers and maintain strong relationships with them;
- execute our sales and marketing strategy;
- expand our market share;
- expand our domestic and international operations;
- reduce our costs of equipment used to provide services;
- respond to competitive pressures; and
- continue to attract, retain and motivate highly qualified personnel,
particularly in the areas of engineering, sales and marketing.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
We have incurred losses since we commenced operations in April, 1996. We
incurred net losses of $2,539,237 in 1997, $3,549,096 in 1998, $13,360,015 in
1999 and $2,048,583 for the three months ended March 31, 2000. As of March 31,
2000 we had an accumulated deficit of $21,496,931. We have not yet generated any
revenue or achieved profitability and we cannot be certain that we will realize
sufficient revenue to achieve profitability in the future. Even if we do achieve
profitability, we cannot make any assurances that we can sustain or increase
profitability on a quarterly or annual basis in the future. If future revenues
fail to materialize or grows slower than we anticipate, if gross margins are not
generated in the future or if operating expenditures exceed our expectations or
cannot adjust accordingly, we may continue to experience significant
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losses on a quarterly basis. Accordingly, we are dependent upon the successful
completion of future capital infusions to continue operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE EXPECT TO CONTINUE TO EXPERIENCE NEGATIVE CASH FLOW FROM OPERATIONS AND MAY
BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS THROUGH THE ISSUANCE OF
ADDITIONAL SECURITIES
Since inception in April, 1996, we have experienced negative cash flow
from operations and we expect to continue to experience negative cash flow from
operations for the foreseeable future. Therefore, we have relied primarily on
issuances of equity securities to fund our operations to date. We currently
anticipate that our existing cash balances will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. We may need to raise additional funds if our estimates of
revenue, working capital and/or capital expenditure requirements change or prove
inaccurate or in order for us to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities. We cannot
be certain that additional financing, through the issuance of equity securities
or otherwise, will be available to us on favorable terms when required, or at
all. Furthermore, if we raise additional funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our common and preferred stock
and our stockholders may experience additional dilution. If adequate funds are
not available, or are not available on acceptable terms, we may not be able to
take advantage of market opportunities, develop new product services or
otherwise respond to competitive pressures which could adversely affect our
ability to achieve and sustain positive cash flow and profitability in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR FINANCIAL RESULTS FROM PERIOD TO PERIOD MAY FLUCTUATE AS A RESULT OF SEVERAL
FACTORS, ANY OF WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
It is possible that in some future periods our operating results may be
below the expectations of investors. In this event, the price of our common
stock may fall. Once we begin to generate revenue, our revenue and operating
results may vary significantly from period to period due to a number of factors,
many of which are not in our control. These factors include:
- continued market acceptance of our product services;
- fluctuations in demand for our product services;
- variations in the timing of orders;
- the timing of new product and service introductions by us or our
competitors;
- the mix of product services sold and the mix of distribution channels
through which they are sold;
- our ability to obtain sufficient supplies of sole or limited source
components for our product services;
- unfavorable changes in the prices of the components we purchase;
- our ability to attain and maintain quality levels for our product
services; and
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- our ability to integrate new technologies we develop or acquire into
our product services.
We cannot assure you that we will be able to generate initial revenues
or to sustain or improve our financial results in the future. As a result, we
may experience substantial period to period fluctuations in future operating
results and adversely affected financial results. A variety of factors may
affect our financial results, including the following:
- the type of distribution channel through which we sell our product
services;
- the volume of product services offered and sold;
- our product service sales mix; and
- the average selling prices of our product services.
We also anticipate that orders for our product services may vary
significantly from period to period for various reasons, including the success
of our sales and marketing efforts. As a result, operating expenditures and
inventory levels in any given period could be disproportionately high. In some
circumstances, customers may delay purchasing our current product services in
favor of next-generation product services, which could affect our operating
results in any given period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for detailed information on our
period to period operating results.
THE MARKET IN WHICH WE SELL OUR PRODUCT SERVICES IS INTENSELY COMPETITIVE AND
OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE FAIL TO DEVELOP OR RETAIN MARKET
SHARE OR OTHERWISE FAIL TO SUCCESSFULLY COMPETE IN THIS MARKET
We compete with many other companies. We will face competition from
numerous sources, including terrestrial and satellite-based online and Internet
service providers and others with the technical capabilities and expertise which
would encourage them to develop and commercialize competitive product services.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their product services than we can.
Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with other third parties
to increase their ability to gain market share rapidly by addressing the needs
of our prospective customers. These competitors may enter our existing or future
markets with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than our solutions. Given the
opportunity in our market, we also expect that other companies may enter our
market with better product services and technologies. If any technology that is
competing with ours is more reliable, faster, less expensive or has other
advantages over our technology, the demand for our product services would
decrease, which would seriously harm our business.
We expect our competitors to continue to improve the performance of
their current product services and introduce new product services or new
technologies as industry standards and customer requirements evolve that may
supplant or provide lower cost alternatives to our product services. Successful
new product service introductions or enhancements by our competitors could
reduce the sales or market acceptance of our product services, perpetuate
intense price competition or make our product services obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and
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marketing and customer support. We cannot be sure that we will have sufficient
resources to make such investments or that we will be able to make the
technological advances necessary to be competitive. As a result, we may not be
able to compete effectively against our competitors. Our failure to maintain and
enhance our competitive position within the market may seriously harm our
business.
Increased competition is likely to result in price reductions, longer
sales cycles and loss of market share, any of which would seriously harm our
business and results of operations once we begin to generate revenue. We cannot
be certain that we will be able to compete successfully against current or
future competitors or that competitive pressures will not seriously harm our
business.
IF WE FAIL TO ENHANCE OUR EXISTING PRODUCT SERVICES OR DEVELOP AND INTRODUCE NEW
PRODUCT SERVICES AND FEATURES IN A TIMELY MANNER TO MEET CHANGING CUSTOMER
REQUIREMENTS AND EMERGING INDUSTRY STANDARDS, OUR ABILITY TO GROW OUR BUSINESS
WILL SUFFER
The markets in which we compete is characterized by rapidly changing
technologies and short product life cycles. Our future success will depend in
large part upon our ability to:
- identify and respond to emerging technological trends in the market;
- develop and maintain competitive product services;
- enhance our product services by adding innovative features that
differentiate our product services from those of our competitors;
- bring product services to market on a timely basis at competitive
prices;
- respond effectively to new technological changes or new product
service announcements by others; and
- respond to emerging broadband access technologies such as DSL,
wireless and cable modems.
We will not be competitive unless we continually introduce new product
services and product service enhancements that meet these emerging standards. In
the future we may not be able to effectively address the compatibility and
interoperability issues that arise as a result of technological changes and
evolving industry standards.
The technical innovations required for us to remain competitive are
inherently complex, require long development cycles and are dependent in some
cases on sole source suppliers. We will be required to continue to invest in
research and development in order to attempt to maintain and enhance our
existing technologies and product services, but we may not have the funds
available to do so. Even if we have sufficient funds, these investments may not
serve the needs of customers or be compatible with changing technological
requirements or standards. Most development expenses must be incurred before the
technical feasibility or commercial viability of new or enhanced product
services can be ascertained. Revenue from future product services or product
service enhancements may not be sufficient to recover the associated development
costs.
WE DEPEND ON OUR KEY PERSONNEL WHO MAY NOT CONTINUE TO WORK FOR US
Our future success depends in large part upon the continued services of
our key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. The loss of any of our
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senior management or other key research, development, sales and marketing
personnel, particularly if lost to competitors, could harm our business. In
particular, the services of Edward Tan, President and Chief Executive Officer,
Ronald Everoski, Chief Technical Officer and Vice President of Research and
Development and Douglas Hanson, Vice President of Sales and Marketing, would be
difficult to replace. We do not maintain "key person" life insurance for any of
our personnel. See "Directors and Executive Officers" for more detailed
information on our key personnel.
IF WE ARE NOT SUCCESSFUL IN EXPANDING OUR BUSINESS IN INTERNATIONAL MARKETS, OUR
GROWTH WILL SUFFER
We intend to expand our operations domestically and internationally, and
will seek to expand the range of our product services and penetrate new
geographic markets; however, we have no experience in effectuating rapid
expansion or in managing operations which are geographically dispersed. Although
we believe we have an adequate infrastructure, there can be no assurance that
our current management, personnel and other corporate infrastructure will be
adequate to manage our growth.
As part of our strategy to address the global needs of our customers we
plan to develop international sales and support channels in advance of revenue.
We cannot assure you that our efforts to develop international sales and support
channels will be successful. Moreover, international sales are subject to a
number of risks, including changes in foreign government regulations and
communications standards, export license requirements, tariffs and taxes, other
trade barriers, difficulty in collecting accounts receivable, difficulty in
managing foreign operations, and political and economic instability. To the
extent our customers may be impacted by currency devaluations or general
economic crises, the ability of these customers to purchase our services could
be adversely affected. Payment cycles for international customers are typically
longer than those for customers in the United States. We cannot assure you that
foreign markets for our product services will not develop more slowly than
currently anticipated, if at all. In addition, if the relative value of the U.S.
dollar in comparison to the currency of our foreign customers should increase,
the resulting effective price increase of our product services to these foreign
customers could result in decreased sales.
We anticipate that our foreign sales will generally be invoiced in U.S.
dollars and, accordingly, we do not currently plan to engage in foreign currency
hedging transactions. However, as we expand our international operations, we may
allow payment in foreign currencies and exposure to losses in foreign currency
transactions may increase. We may choose to limit any currency exposure through
the purchase of forward foreign exchange contracts or other hedging strategies.
We cannot assure you that any currency hedging strategy we may adopt would be
successful in avoiding exchange-related losses.
OUR PRODUCT SERVICES MUST COMPLY WITH COMPLEX GOVERNMENT REGULATIONS WHICH MAY
PREVENT US FROM GENERATING OUR REVENUE OR ACHIEVING PROFITABILITY
In the United States, our services must comply with various regulations
and standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, product services that we develop may be required
to comply with standards established by telecommunications authorities in
various countries as well as with recommendations of the International
Telecommunications Union. If we fail to obtain timely domestic or foreign
regulatory approvals or certificates, we would not be able to sell our product
services where these regulations apply, which may prevent us from generating our
revenue or achieving profitability.
We have obtained and are required to maintain a licenses from the FCC
for our existing Network Operating Center. This license should be renewed by the
FCC in the normal course as long as we are in compliance with the FCC rules and
regulations. However, we cannot guarantee that additional licenses will be
granted by the FCC when our existing license expires, nor are we assured that
the FCC will not adopt new or modified technical requirements that will require
us to incur expenditures to modify or upgrade our equipment as a condition of
retaining our license.
Regulatory schemes in countries in which we may seek to provide our
services may impose impediments on our operations. Some countries in which we
intend to operate have telecommunications laws and regulations that do not
currently contemplate technical advances in telecommunications technology like
Internet/intranet transmission by satellite. We cannot assure you that the
present regulatory environment in any of those countries will not be changed in
a manner which may have a material adverse impact on our business. Either we or
our local partners typically must obtain authorization for each country in which
we provide our satellite-delivered data communications services. The regulatory
schemes in each country are different, and thus there may be instances of
noncompliance of which we are not aware. We cannot assure you that our licenses
and approvals are or will remain sufficient in the view of foreign regulatory
authorities, or that necessary licenses and approvals will be granted on a
timely basis in all jurisdictions in which we wish to offer our products and
services or that applicable restrictions will not be unduly burdensome.
REGULATION OF THE INTERNET
Due to the increasing popularity and use of the Internet it is possible
that a number of laws and regulations may be adopted at the local, national or
international level with respect to the Internet, covering issues including user
privacy and expression, pricing of products and services, taxation, advertising,
intellectual property rights, information security or the convergence of
traditional communication services with Internet communications. It is
anticipated that a substantial portion of our Internet operations will be
carried out in countries which may impose greater regulation of the content of
information coming into the country than that which is generally applicable in
the United States, for example, privacy regulations in Europe and content
restrictions in countries like the Republic of China. To the extent that we
provide content as a part of our Internet services, it will be subject to laws
regulating content. Moreover, the adoption of laws or regulations may decrease
the growth of the Internet, which could in turn decrease the demand for our
Internet services or increase our cost of doing business or in some other manner
have a material adverse effect on our business, operating results and financial
condition. In addition, the applicability to the Internet of existing laws
governing issues including property ownership, copyrights and other intellectual
property issues, taxation, libel and personal privacy is uncertain. The vast
majority of these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the unique
issues of the Internet and related technologies. Changes to these laws intended
to address these issues, including some recently proposed changes, could create
uncertainty in the marketplace which could reduce demand for our products and
services, could increase our cost of doing business as a result of costs of
litigation or increased product development costs, or could in some other manner
have a material adverse effect on our business, financial condition and results
of operations.
TELECOMMUNICATIONS TAXATION, SUPPORT REQUIREMENTS, AND ACCESS CHARGES
All telecommunications carriers providing domestic services in the
United States are required to contribute a portion of their gross revenues for
the support of universal telecommunications services; and some
telecommunications services are subject to special taxation and to contribution
requirements to support services to special groups, like persons with
disabilities. Our services may be subject to new or increased taxes and
contribution requirements that could affect our profitability, particularly if
we are not able to pass them through to customers for either competitive or
regulatory reasons.
Internet services are currently exempt from charges that long distance
telephone companies pay for access to the networks of local telephone companies
in the United States. Efforts have been made from time to time, and may be made
again in the future, to eliminate this exemption. If these access charges are
imposed on telephone lines used to reach Internet service providers, and/or if
flat rate telephone services for Internet access are eliminated or curtailed,
the cost to customers who access our satellite facilities using telephone
company-provided facilities could increase to an extent that could discourage
the demand for our services. Likewise, the demand for our services in other
countries may be affected by the availability and cost of local telephone or
other telecommunications facilities to reach our facilities.
EXPORT OF TELECOMMUNICATIONS EQUIPMENT
The sale of our communications services outside the United States is
subject to compliance with the regulations of the United States Export
Administration Regulations. The absence of comparable restrictions on
competitors in other countries may adversely affect our competitive position. In
addition, in order to ship our products into other countries, the products must
satisfy the technical requirements of that particular country. If we were unable
to comply with these requirements with respect to a significant quantity of our
products, our sales in those countries could be restricted, which could have a
material adverse effect on our business, financial condition and results of
operations.
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IF INTERNET USAGE DECLINES OR THE INTERNET INFRASTRUCTURE IS NOT ADEQUATELY
MAINTAINED AND EXPANDED, DEMAND FOR OUR PRODUCT SERVICES MAY DECLINE
The Internet has recently begun to develop and is rapidly evolving. As a
result, the commercial market for product services designed to enable high-speed
access to the Internet has only recently begun to develop. Our success will
depend in large part on increased use of the Internet and other networks based
on Internet protocol by corporate telecommuters and small offices. Critical
issues concerning the commercial use of the Internet remain unresolved and are
likely to affect the development of the market for our product services. These
issues include security, reliability, cost, ease of access, government
regulation and quality of service. The adoption of the Internet for commerce and
communications, particularly by enterprises that have historically relied upon
alternative means of commerce and communications, generally requires the
acceptance of a new method of conducting business and exchanging information.
The recent growth in the use of the Internet has caused frequent periods of
performance degradation that have prompted efforts to upgrade the Internet
infrastructure. Any perceived degradation in the performance of the Internet as
a whole could undermine the benefits of our product services. Potentially
increased performance and other benefits provided by our product services and
the product services of others are ultimately limited by, and are reliant upon,
the speed and reliability of the Internet backbone itself. Consequently, the
emergence and growth of the market for our product services will depend on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OTHER
COMPANIES MAY USE OUR INTELLECTUAL PROPERTY TO DEVELOP COMPETITIVE PRODUCT
SERVICES THAT MAY REDUCE DEMAND FOR OUR PRODUCT SERVICES
We currently rely on a combination of copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We have two pending U.S. trademark applications for trademarks relating
to our system hardware and product services.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our product services or technology.
We cannot assure you that these precautions will prevent misappropriation or
infringement of our intellectual property. Monitoring unauthorized use of our
product services is difficult, and we cannot assure you that the steps we have
taken will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT ARE COSTLY
TO DEFEND AND COULD LIMIT OUR ABILITY TO USE CERTAIN TECHNOLOGIES IN THE FUTURE
Our industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the data
communications and networking markets have extensive patent portfolios with
respect to modem and networking technology. We cannot be sure that the products,
services, technologies, and advertising we employ in our business do not or will
not infringe valid patents, trademarks, copyrights or other intellectual
property rights held by third parties. We may be subject to legal proceedings
and claims from time to time relating to the intellectual property of others in
the ordinary course of our business. We may incur substantial expenses in
defending against these third-party claims, regardless of their merit.
Successful infringement claims against us may result in substantial monetary
liability and/or may materially disrupt the conduct of, or necessitate the
cessation of, our business. We expect that we may increasingly be subject to
infringement claims as the numbers of product services and competitors in the
small office market for shared Internet access solutions grow and the
functionality of product services overlaps.
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We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all. In
the event of a successful claim of infringement and our failure or inability to
develop non-infringing technology or license the proprietary rights on a timely
basis, our business would be harmed.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH TRYING TO BECOME YEAR 2000
COMPLIANT
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. As a
result, computer systems and software used by many companies and governmental
agencies should have been upgraded to comply with year 2000 requirements. There
is some risk that if such upgrades were not made, system failure or
miscalculations which may cause disruptions of normal business activities may
still occur in the future. While we have passed the year 2000 effective date,
there may still be as yet unknown risks associated with being year 2000
compliant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
INSIDERS HAVE SUBSTANTIAL CONTROL OVER THE COMPANY THAT COULD DELAY OR PREVENT
A CHANGE IN OUR CORPORATE CONTROL
Our executive officers, and directors and their affiliates will, in the
aggregate, own approximately 24% of our outstanding common stock. As a result,
our officers, directors and affiliates will have the ability to influence the
election of our board of directors and the outcome of corporate actions
requiring stockholder approval. This concentration of ownership may have the
effect of delaying or preventing a change in our corporate control. We do not
have cumulative voting in the election of directors; and the minority
shareholders will not be able to elect any director to our Board of Directors.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
Sales of a substantial number of shares of common stock after the filing
of this Form 10, either through sales by us of additional shares or sales by
third parties of currently outstanding shares, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of additional equity securities. As of March 31, 2000 we had 37,647,866
shares of common stock outstanding.
WE MAY HAVE INSUFFICIENT CAPITAL FOR FUTURE OPERATIONS AFTER THE YEAR 2000
We anticipate, based on current proposed plans and assumptions relating
to its operations, that current cash reserves, together with projected cash flow
from operations, will be sufficient to satisfy our contemplated cash
requirements for the next 12 months. Thereafter, we may require substantial
additional financial resources to fund our operations. The expansion into new
product areas will also require substantial financial funding. The failure to
acquire additional funding when required will have a material adverse effect on
the our business prospects.
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WE FACE OBSTACLES RELATING TO MARKET ACCEPTANCE AND DISTRIBUTION
We are at an early stage of development and our earnings growth depends
primarily upon market acceptance of our product services. There can be no
assurance that our product service development efforts will progress further
with respect to any potential new product services or that they will be
successfully completed. In addition, there can be no assurance that our
potential new product services will be capable of being produced in commercial
quantities at reasonable costs or that these potential product services, if
introduced, will be successfully marketed or will achieve customer acceptance.
We do not have sufficient experience in marketing our product services
to determine the optimum distribution methods. Accordingly, we might be in a
position requiring change in our sales, distribution, and marketing strategies
and implementation.
WE WILL BE DEPENDENT ON NEW PRODUCTS AND PRODUCT ENHANCEMENT INTRODUCTIONS,
PRODUCT DELAYS MAY NEGATIVELY AFFECT OUR BUSINESS
Our success in our business depends on, among other things, the timely
introduction of successful new product services or enhancements of existing
product services to replace declining revenues from product services at the
latter stage of a product service cycle. Consumer preferences for product
services are difficult to predict, and few product services achieve sustained
market acceptance. If revenues from new product services or enhancements do not
replace declining revenues from existing product services, our business,
operating results and financial condition could be materially adversely
affected. The process of developing broadband services is extremely complex and
is expected to become more complex. A significant delay in the introduction of
one or more new product services or enhancements could have a material adverse
effect on our ultimate success of such product services and on our business,
operating results and financial condition.
WE ARE PARTICIPATING IN A DEVELOPING MARKET, NEW ENTRANTS MAY DOMINATE THE
MARKET SEGMENT
The markets in which we compete are rapidly evolving and is
characterized by an increasing number of market entrants who have introduced or
developed product services. Although we currently believe that the diverse
segments of the market will provide opportunities for more than one supplier of
product services similar to ours, it is possible that a single supplier may
dominate one or more market segment.
IF THE SATELLITE COMMUNICATIONS INDUSTRY FAILS TO CONTINUE TO DEVELOP OR NEW
TECHNOLOGY MAKES IT OBSOLETE, OUR BUSINESS AND FINANCIAL CONDITION WILL BE
HARMED.
Our business is dependent on the continued success and development of
satellite communications technology, which competes with terrestrial
communications transport technologies like terrestrial microwave, coaxial cable
and fiber optic communications systems. If the satellite communications industry
fails to continue to develop, or any technological development significantly
improves the cost or efficiency of competing terrestrial systems relative to
satellite systems, then our business and financial condition would be materially
harmed.
WE MAY RELY ON RELATIONSHIPS WITH RESELLERS IN DEVELOPING COUNTRIES WITH
EMERGING MARKETS FOR SALES OF OUR PRODUCTS AND SERVICES
We intend to provide our products and services in developing countries
where we have little or no market experience. We may rely on resellers in those
markets to provide their expertise and knowledge of the local regulatory
environment in order to make access to customers in emerging markets easier. If
we are unable to maintain these relationships, or develop new ones in other
emerging markets, our ability to enter into and compete successfully in
developing countries would be adversely affected.
OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD SERIOUSLY
HARM OUR ABILITY TO EFFECTIVELY RUN OUR BUSINESS
Since our inception, we have continued to increase the scope of our
operations. This growth has placed, and our anticipated growth will continue to
place, a significant strain on our personnel, management, financial and other
resources. Any failure to manage our growth effectively could seriously harm our
ability to respond to customers, monitor the quality of our products and
services and maintain the overall efficiency of our operations. In order to
continue to pursue the opportunities presented by our satellite-based
communications services, we plan to continue to hire a significant number of key
officers and other employees and to increase our operating expenses by
broadening our customer support capabilities, expanding our sales and marketing
operations and improving our operating and financial systems. If we fail to
manage any future growth in an efficient manner, and at a pace consistent with
our business, our revenues, financial condition and business will be harmed.
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE OUR SOLE OR A LIMITED SOURCE OF
SUPPLY
We currently obtain most of our critical components and services from
single or limited sources and generally do not maintain significant inventories
or have long-term or exclusive supply contracts with our source vendors. We may,
from time to time, experienced delays in receiving products from vendors due to
lack of availability, quality control or manufacturing problems, shortages of
materials or components or product design difficulties. Replacement services or
products may not be available when needed, or at all, or at commercially
reasonable rates or prices. If we were to change some of our vendors, we would
have to perform additional testing procedures on the service or product supplied
by the new vendors, which would prevent or delay the availability of our
products and services. Furthermore, our costs could increase significantly if we
need to change vendors. If we do not get timely deliveries of quality products
and services, or if there are significant increases in the prices of these
products or services, it could have a material adverse effect on our business,
results of operations and financial condition.
WE MAY BE UNABLE TO LEASE TRANSPONDER SPACE ON SATELLITES, WHICH COULD LIMIT OUR
ABILITY TO PROVIDE OUR SERVICES TO OUR CUSTOMERS
We lease transponder space on satellites in order to provide our
multicasting services to our customers. The supply of transponder space serving
a geographic region on earth is limited by the number of satellites that are in
orbit above that geographic region. If companies that own and deploy satellites
in orbit underestimate the demand for transponder space in a given geographic
area or they are simply unable to build and launch enough satellites to keep up
with increasing demand, the price for leasing transponder space could rise,
increasing our cost of operations, or we simply may not be able to lease enough
transponder space to meet the demands of our customers.
WE CURRENTLY RELY ON SATMEX FOR OUR MAIN SUPPLY OF TRANSPONDER SPACE ON
SATELLITES
We currently depend on SatMex for our transponder space on satellites.
If SatMex is unable to develop its business or if we are unable to continue to
rely on their supply for transponder space, then we will have to find
alternative suppliers. If we are unable to find another supplier of transponder
space or if we are unable to find one on terms favorable to us, then our
business may be harmed. See "Business - Material Contracts".
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES WHICH COULD DISRUPT OUR SERVICES
Our network infrastructure may be vulnerable to computer viruses,
break-ins, denial of service attacks and similar disruptive problems caused by
our customers or other Internet users. Computer viruses, break-ins, denial of
service attacks or other problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. There currently
is no existing technology that provides absolute security, and the cost of
minimizing these security breaches could be prohibitively expensive. We may face
liability to customers for such security breaches. Furthermore, these incidents
could deter potential customers and adversely affect existing customer
relationships.
SATELLITES UPON WHICH WE RELY MAY BE DAMAGED OR LOST, OR MALFUNCTION
The damage, loss or malfunction of any of the satellites used by us, or
a temporary or permanent malfunction of any of the satellites upon which we
rely, would likely result in the interruption of our satellite-based
communications services. This interruption would have a material adverse effect
on our business, results of operations and financial condition.
ITEM 3. PROPERTIES.
Our headquarters are located in Sunnyvale, California, where we lease
approximately 12,400 square feet of space in a single building. The lease for
our facility expires on November 30, 2003 and we have an option to extend the
term for an additional five-year period at such time, provided that it is not
then in default of any material provisions of our lease. We believe that our
facility provides adequate space for our anticipated needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of our voting stock as of December 31, 1999 by (i) all
persons known by the Company to beneficially own more than 5% of any class of
the Company's voting securities, (ii) each director and Named Executive Officer
of the Company and (iii) all directors and executive officers of the Company as
a group. As of March 31, 2000, we had outstanding 200,000 shares of Series A
Preferred Stock and 37,647,866 shares of common stock.
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<PAGE> 38
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The address for each listed director and officer is
c/o American Multiplexer Corporation, 575 North Pastoria Avenue, Sunnyvale,
California 94086. Except as indicated by footnote, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of stock shown as beneficially owned
by them. The number of shares of common stock outstanding used in calculating
the percentage for each listed person includes the shares of common stock
underlying options or warrants held by such person that are exercisable within
60 days of December 31, 1999, but excludes shares of common stock underlying
options or warrants held by any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
------------------------ ---------- ----------
<S> <C> <C>
5% Beneficial Owners
Series A Preferred Stock
Montblanc International Ltd.(1) ..................... 100,000 50.0%
Merrill Lynch Bank (Suisse) S.A.
Stockerstrasse
CH-8001 Zurich
Switzerland
Wegelin & Co.(1) .................................... 100,000 50.0%
Bohl 17
CH-9004 St. Gallen
Switzerland
Common Stock
Karl Schleicher....................................... 4,000,000 10.6
Credit Suisse
Ch-Zurich-Oerlikon
Switzerland
E-Yan Betty Lau....................................... 3,450,000 9.2
4A Lermit Road
Singapore 258637
On Kei Leong.......................................... 2,000,000 5.3
12 Repulse Bay Drive
Hong Kong
Wegelin & Co.......................................... 1,900,000 5.0
Bohl 17
CH-9004 St. Gallen
Switzerland
Officers and Directors
Edward S.C. Tan(2).................................... 15,000,000 34.4
Douglas Hanson(3)..................................... 1,001,000 2.6
Louk Wilem Jurgens.................................... 20,000 *
All directors and executive officers as a group
(4 persons)(4).................................... 17,022,000 37.3
</TABLE>
* Less than one percent (1%).
(1) Refers to numerical and percentage ownership of the Company's outstanding
preferred stock.
(2) Includes 6,000,000 shares of common stock issuable upon exercise of a
warrant presently exercisable.
(3) Includes 1,000,000 shares of common stock issuable upon exercise of a
warrant exercisable within 60 days of December 31, 1999.
(4) Includes an aggregate of 8,000,000 shares of common stock issuable upon
exercise of warrants presently exercisable or exercisable within 60 days of
December 31, 1999, provided certain conditions are met.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth certain information with respect to each
of the directors and executive officers of the Company:
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<PAGE> 39
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward S.C. Tan.................. 51 Chief Executive Officer, President
and Chairman of the Board
Ronald Everoski.................. 55 Chief Technology Officer and Vice
President of Research and
Development
Douglas Hanson................... 59 Vice President of Sales & Marketing
and Director
Louk Wilem Jurgens............... 55 Director
</TABLE>
Edward S.C. Tan, the Company's founder, has served as its President and
Chief Executive Officer and as a director since January 1997. From September
1991 to December 1996 he was the President and Chief Executive Officer and a
director of Temasek Telephone, Inc., a telecommunications equipment company. In
January 1997, the Company acquired certain assets of Temasek Telephone, Inc. in
exchange for shares of the Company's common stock.
Ronald Everoski has served as the Company's Chief Technology Officer and
Vice President of Research and Development since November 1998. From February
1996 to July 1998 he was the Chief Technology Officer for Satcom Media
Corporation,(1) a multimedia company and from January 1990 to April 1994 he was
the Chief Executive Officer of Global Telesys, a telecommunications company.
Douglas Hanson has served as the Company's Vice President of Sales and
Marketing since November 1998 and as a director since June 1999. From June 1995
to July 1998 he was the Vice President of Marketing for Satcom Media
Corporation,(1) a multimedia satellite communications company and from January
1994 to June 1995 he was Senior Vice President for the EIC Group, a real estate
investment company.
Louk Wilem Jurgens has served as a director of the company since May
1999. In April 1999 he founded Jurgens & Associates, a consulting firm focusing
on satellite communications. From April 1998 to April 1999 he was Vice President
of Business Development for Loral-Orion Asia Pacific, a satellite communications
company in Singapore. From April 1995 to December 1997 he was an Executive
Director for PT Satelindo, a satellite communications company in Indonesia. From
October 1993 until April 1995 he was Managing Director of PT PSN in Jakarta,
Indonesia, a satellite communications company.
The Company's Bylaws provide that a director shall be appointed by the
shareholders and hold office until the next annual meeting of the shareholders
or until such director's successor is duly elected and qualified. The Company's
Articles of Incorporation and Bylaws currently contain no provisions for a
classified board.
Executive officers are appointed by the board of directors, serve at the
board's pleasure and may be removed from office at any time without cause. There
are no family relationships among any of the Company's directors or executive
officers.
(1) Mr. Everoski and Mr. Hanson were executive officers of Satcom Media
Corporation when that company filed for bankruptcy under the Federal bankruptcy
laws.
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<PAGE> 40
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth the total compensation earned for
services to the Company in all capacities during the fiscal year ended December
31, 1999 by our Chief Executive Officer, President and Chairman of the Board,
also referred to as the Named Executive Officer. No other executive officer
employed by us earned salary and bonus in excess of $100,000 during the fiscal
year ended December 31, 1999. The Named Executive Officer was granted a warrant
to purchase 6,000,000 shares of common stock during the fiscal year ended
December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- --------------------------
# OF SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY WARRANTS
--------------------------- -------- --------------------------
<S> <C> <C>
Edward S.C. Tan.................. $180,000 6,000,000
</TABLE>
The directors of the Company do not receive compensation for their
services as directors but may be reimbursed for their reasonable expenses for
attending Board meetings.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On November 30, 1998 the Company loaned $125,000 to Edward S.C. Tan, its
President, Chief Executive Officer and Chairman of the Board pursuant to a
promissory note payable upon demand which bore interest at the rate of nine
percent. This promissory note was repaid in January, 1999.
On March 31, 1999 the Company loaned $250,000 to Edward S.C. Tan, its
President, Chief Executive Officer and Chairman of the Board pursuant to a
promissory note due and payable on December 31, 1999. The loan bears interest at
the rate of nine percent. The unpaid balance at December 31, 1999 is $175,000.
On May 14, 1999 the Company granted to Edward S.C. Tan, its President,
Chief Executive Officer and Chairman of the Board a warrant exercisable up to
five years from the date of issuance covering 6,000,000 shares of the Company's
Common Stock at an exercise price of $5.06 per share.
On June 2, 1999 the Company loaned $3,375,000 to Edward S.C. Tan, its
President, Chief Executive Officer and Chairman of the Board pursuant to a
promissory note due and payable on December 31, 1999. The loan bears interest at
the rate of nine percent. The full amount of this note is currently outstanding.
The proceeds of this loan were used by Mr. Tan to purchase an aggregate 807,960
shares of the Company's Common Stock in a series of transactions made through a
designee. These purchases were made between May 18, 1999 and October 15, 1999 at
prices ranging from $4.15 to $5.73 per share.
On July 1, 1999 the Company loaned $725,000 to Edward S.C. Tan, its
President, Chief Executive Officer and Chairman of the Board pursuant to a
promissory note due and payable on December 31, 1999. The loan bears interest at
the rate of nine percent. The unpaid balance at December 31, 1999 is $550,540.
ITEM 8. LEGAL PROCEEDINGS.
We are not a party to any current pending legal proceedings.
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<PAGE> 41
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Our Common Stock has been traded on the OTC Bulletin Board under the
trading symbol "AMUT." The following table sets forth the high and low bid
prices for the Company's Common Stock since it began trading in the fourth
quarter of 1997 through the fourth quarter of 1999. The Company's Common Stock
has been ineligible for listing on the OTC Bulletin Board since July 1, 1999.
The quotations below reflect inter-dealer prices, with no retail mark-up,
mark-down or commissions and may not represent actual transactions. The
information presented has been obtained from the National Quotation Bureau, LLC.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
1997 FISCAL YEAR
Fourth Quarter 6 2 5/8
1998 FISCAL YEAR
First Quarter 3 5/8 1 1/8
Second Quarter 3 9/16 1 7/16
Third Quarter 1 7/16 3/4
Fourth Quarter 2 7/8 1 1/16
1999 FISCAL YEAR
First Quarter 1 13/16 1 3/16
Second Quarter 6 1/8 1 5/16
Third Quarter 5 3/8 4
Fourth Quarter 4 7/8 3 1/2
2000 FISCAL YEAR
First Quarter 4 7/8 2 5/8
</TABLE>
As of March 31, 2000, there were 208 holders of record of the
Company's Common Stock.
The Company has never declared a dividend on its Common Stock, and it is
anticipated that any earnings which might be available for distribution as
Common Stock dividends will be retained for the Company's operations for the
foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding the issuance and sales of
securities by the Company without registration for the past three (3) years. No
such sales involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
a) The Company was organized in January 1997. The Company was initially
capitalized on January 7, 1997, through a share for asset exchange with
Temasek Telephone, Inc. On January 7, 1997 the Company issued
17,919,800 shares of "restricted" (as that term is defined
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<PAGE> 42
under Rule 144 of the Securities Act of 1933) common stock to
eighty-nine (89) stockholders of Temasek Telephone, Inc. in exchange for
the assets of Temasek Telephone, Inc. The assets were valued at
$247,154. The recipients of the stock were the initial stockholders of
the Company, and include Edward S.C. Tan, Goh Mong Ken, Chew Chan Yong,
Heng Tin Meng, Ivan L. Feil and Stephanie E. Feil, Joseph Chua, James,
McGivern, M.J. Saul, Tan Sim Hua, Freddy Lee, Ira J. Hunt, Gary J.
Palmer, Ang Swee Eng, Joseph E. Hutchens, John M. McGrath and Marlene A.
McGrath, Kumi Kao, Frank Piro, John Porgie, Tng Chin Guan, Tim Higgins,
Dennis Burt, David Chew, John Walker, Tan Sim Jin, Peidad Reyes, Elly
Paittimusa Poa, James Raymond Treierweiler and Frances Douglas, Don
Ernst and Teri Ernst, Lenny Simi and Casey Simi, Patrick McGovern, Roger
Mintz and Nancy Mintz, Biostim, Inc., Narasingham Sunderaj, Yip Choi
Heng, Joyce Vancina and James Vancina, Koo Wong Keng, Stephanie E. Feil,
Victor Feil and Darlene Feil, Randall E. Fischer, the Clark Family
Trust, Heng Kim Tian, Ngo Tee Hiang, Thomas Glasgow, Ken Bhorman and
Sharon Bhorman, Pita Travel, Pacific Falls Int. Corp., Joann
Enfantino-Ernst and Martin Ernst, Elaine MicGivern and James McGivern,
Thanos Panagoulias and Irene Panagoulias, Glenn Young, Richard
Fritzgerald and Christine Fritzgerald, Tan Chin Eng, Amy Good, Allyn
Tognoli, Mark Gooch, Chin On, Teo Cheng Chong, James Randall and June
Randall, Roy Day, Daniel Boone and Laura Boone, Palmira Gelardi, Charles
E. Messagie Sr. and Edward Messagie, Chan Hoh, Richard Nicholas Alloy,
Joseph Cammarata, John A. Maneastis, Trustee of the Maneastis Family
Trust, Brian E. Jones and Joan Jones, Michael C. Coates and Diana
Coates, Lauren Teel and Richard Teel, Anthony M. Bolla, Dallas Allen,
Jeanne Katsuro, Lilian M. Look, Lorena Higgins, Jaquiline Higgins,
Eugene W. Ernst and Margaret L. Ernst, Trustees of the Ernst Family
Trust, Ng Choo Kit, Tng Huee Leng, Mark A. Lucas, Barbara Johnson,
Christina A. Schrieber, Chin Chee Nang, Joel M. Sugarmann and Suzanne F.
Sugarmann, Lee Pak Ming, Susan L. Bruce and Edwin G. Bruce, Lee Bee
Ting, John Spero, Tng Chin Tzong and Annamarie McDonald and Edward D.
McDonald. The issuance was an isolated transaction not involving a
public offering and consequently conducted under an exemption under
Section 4(2) of the Securities Act of 1933.
b) On April 10, 1997 the Company issued 1,620,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933)
common stock for services provided to the Company valued at $1,377,000.
The securities were issued to the following entities and individuals
under the exemption provided in Section 4(2) of the Securities Act of
1933: Y.S. Kong, Federal Economic Technology, Full Tact & Co. and Chek
Tan. In addition, on April 10, 1997 the Company issued 2,000 shares of
"restricted" (as that term is defined under Rule 144 of the Securities
Act of 1933) common stock under the exemption provided in Section 4(2)
of the Securities Act of 1933 to Renata Pearson.
c) On May 1, 1997 the Company issued 800,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $1,000,000. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Rhoda Aloy,
Wendy Bricker, Terry Caggert, Johnny Tio Co., William D'Alexander,
Jeffrey Gallegos, Alan Gitlin, Heng Tin Heng, Edward Hew, Timothy
Higgins, Clifford Hong, Jeffrey Hubbard, Jeanne Katsuro, Ghassan Khalaf,
Kon Wai Kiat, Yew Seng Kong, Hun Liang Kuah, Yew Heng Kuah, Chi Heng
Lee, Leap Wah Lee, Lee Kim Yew Trading PTE LT, Melissa lIndsay, Wan Beng
Looi, John Maneastis, Patrick McGivern, George McNutt, John Mendez,
Wilson Moranda, Yew Meng Mok, Brian and Myrna O'Neil, Kamarlzarnan
Othman Bin, Frank Piro, Kiat Poh, Lawrence Raithaus, Peter Rimmel,
Pauline Sanchez, Aichen Lee, Christine Sheehan, Kevin Sheehan, Tony
Sheehan, Harold Spear, Amber Speakman, William Spiers, Lydia Stough,
James Strattos, Anne Taylor, Palmer Tilden, Kevin Tognoli, Mark Tognoli,
Gerald Tomory, Joseph Tringali, Terence Wade, Kathlene Wilkes Fong Ping
Wong and Keong Yong Yeoh.
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<PAGE> 43
d) On May 12, 1997 the Company issued 2,500 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) common
stock for total consideration of $2,150. The securities were issued to
Tony Sheehan under the exemption provided in Section 4(2) of the
Securities Act of 1933.
e) On January 12, 1998 the Company issued 255,000 shares of "restricted"
(as that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $358,500. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: G.D. Fish,
Patrick McGivern, Richard Palomba, Frank Piro, John Porgie and Lawrence
Raithaus.
f) On March 12, 1998 the Company issued 476,666 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $625,000. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Claud Flouty,
Bedikian Johnny, Frank Savarese, Salma Karim, Capital Investment, John
Porgie, Lawrence Raithaus, Hassan Khalaf and Nicasio Chua.
g) On April 16, 1998 the Company issued 251,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $315,000. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Ang Swee Eng,
Stacey Holden, Tan Sim Hwee, Tony Sheehan and Lee Thiam Yew.
h) On July 16, 1998 the Company issued 194,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $274,946. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Goh Choon Huat,
Ng Bee Bee, Ngiam Tong Tau, Kevin Sheehan, Pauline Sanchez, Christine
Sheehan, Tan Si Mae, Tony Sheehan, Lu Kwan Chow, Wong Woon Wai and Loh
Peck Soon.
i) On July 31, the Company issued 182,000 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) common
stock for total consideration of $234,185. The securities were issued to
Egan Publishing under the exemption provided in Section 4(2) of the
Securities Act of 1933.
j) On August 3, 1998 the Company issued 124,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $153,982. The securities were
issued to the following individuals under the exemption provided in
Section 4(2) of the Securities Act of 1933: Geoff Egan and William
Spiers.
k) In November 1998 the Company issued 1,294,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $1,460,443. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Egan Publishing,
Egan Super Fund, Goh Tiong Peng, Lee Boon Peng, Ng Chong Man, Benny Tay,
William Spiers, Kevin Sheehan, Timemac Pty Ltd, the Sheehan Revocable
Trust, George Wu, Bukarasamwong Bunjong, Steven Park, Deborah Lee, Cindy
Fan and Tony Sheehan.
l) On November 5, 1998 the Company issued warrants to purchase 3,000,000
shares of "restricted" (as that term is defined under Rule 144 of the
Securities Act of 1933) common stock for total consideration of
$243,750. The securities were issued to the following employees of the
Company under the exemption provided in Section 4(2) of the Securities
Act of 1933: Chew Chan Yong, Douglas Hanson and R. Everoski.
m) On March 2, 1998 the Company issued 100,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
Preferred Stock for total consideration of $500,000. The securities were
issued to Montblanc Pty Ltd under the exemption provided in Section 4(2)
of the Securities Act of 1933.
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<PAGE> 44
n) In March 1999 the Company issued 644,800 shares of "restricted" (as that
term is defined under Rule 144 of the Securities Act of 1933) common
stock for total consideration of $1,133,778. The securities were issued
to the following entities and individuals under the exemption provided
in Section 4(2) of the Securities Act of 1933: Cindy Fan, Jeffrey
Gamble, Goh Mong Ken, R.J. Gritter, Joyce Martin, Mike Joyce, Donal
Lynch, John Manning, John Porgie, William Spiers, Zara McDonnell,
Wegelin & Co., Tony Sheehan, Daniel Murtagh, Thomas O'Callahan, Timemac
Pty Ltd and Karl Schleicher.
o) On May 5, 1999 the Company issued 8,173,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $13,087,659. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Credit Suisse,
Terence Loh, Loh Kin Nung, Wegelin & Co., Betty Lau, Lo Tak Shin, Tony
Sheehan, Kevin Sheehan, Loh Peck Soon, Chek Han Seng, Zara McDonnell,
Leong On-Kei and Joseph Chua.
p) On June 8, 1999 the Company issued 5,514,800 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $13,183,505. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: T.S. Lo, Zargana
Marks, Ingomobil MBH, Gustan Struck Terence Loh, John Manning, Karl
Schleicher and Zara McDonnell.
q) In September 1999 the Company issued 290,300 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $1,194,550. The securities were
issued to the following entities and individuals under the exemption
provided in Section 4(2) of the Securities Act of 1933: Ingomobil MBH,
Ingomobil BHN, Terence Lori, Stephen Park, Young Lee and Rowena Curiel.
r) On October 31, 1999 the Company issued 4,000 shares of "restricted" (as
that term is defined under Rule 144 of the Securities Act of 1933)
common stock for total consideration of $10,000. The securities were
issued to Young Lee under the exemption provided in Section 4(2) of the
Securities Act of 1933.
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<PAGE> 45
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock, each with no par value.
As of March 31, 2000, there were 37,647,866 shares of Common Stock
outstanding which were held of record by 208 shareholders and 200,000 shares of
Preferred Stock outstanding.
The following summary description of all of the material terms relating
to the capital stock of the Company does not purport to be complete and is
qualified in its entirety by reference to the Company's Articles of
Incorporation and bylaws. The Company's Articles of Incorporation and bylaws are
included as exhibits to this Form 10.
COMMON STOCK
The Company's common shareholders receive one vote for each share held
on all matters upon which shareholders have the right to vote. The Company's
common shareholders are entitled to such dividends as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. Upon a dissolution, the Company's common shareholders are entitled to
share pro rata in our assets remaining
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<PAGE> 46
after payment in full of all of our liabilities and obligations, including
payment of the liquidation preference if any, of any preferred stock then
outstanding.
The Company's common shareholders have dissenters' rights to appraisal
with respect to their shares as provided by statute in connection with certain
types of merger or share exchange transactions. Dissenters' rights are also
available with respect to certain sales of all or substantially all of our
property and certain amendments to our articles of incorporation that materially
and adversely affect certain enumerated rights of a dissenter's shares. The
Company's common shareholders do not have any preemptive rights, redemption
privileges, sinking fund privileges or conversion rights.
PREFERRED STOCK
The Company's preferred shareholders receive one vote for each preferred
share held on all matters upon which the Company's shareholders have the right
to vote. The Company's preferred shareholders are entitled to receive, in
addition to all dividends offered to holders of the Company's common stock,
when, if and as declared by the Board of Directors, out of funds legally
available therefore and in preference to any dividends on common stock: (i) in
the year 2000, a dividend of $1.50 per share of preferred stock held, up to a
maximum aggregate dividend payable by the Company of $6,000,000; (ii) in the
year 2001, a dividend of $2.50 per share of preferred stock held, up to a
maximum aggregate dividend payable by the Company of $10,000,000; and (iii) in
the year 2002, a dividend of $3.50 per share of preferred stock held, up to a
maximum aggregate dividend payable by the Company of $14,000,000. Dividends on
the Company's preferred stock are cumulative and the right to such dividends
shall accrue to holders of preferred stock until declared by the Board of
Directors. Each share of the Company's preferred stock is convertible at any
time, at the option of the holder thereof, into two (2) shares of the Company's
common stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that the Company's
directors shall not have personal liability arising out of action by or in the
right of the Company or otherwise for monetary damages for breach of any duty as
a director; except as to (i) acts or omissions that such director at the time of
such breach knew of believed were clearly in conflict with the best interests of
the Company, (ii) any liability under Section 55-8-33 of the North Carolina
Business Corporation Act (the "NCBCA") or any successor provision, (iii) any
transaction from which such director derived an improper personal benefit or
(iv) acts or omissions occurring prior to the date of the effectiveness of the
Articles of Incorporation. "Improper personal benefit" is defined so as not to
include a director's reasonable compensation or other reasonable incidental
benefit for or on account of his or her services as a director, officer,
employee, independent contractor, attorney or consultant of the Company.
In general, Sections 55-8-50 through 55-8-58 of the NCBCA allow a
corporation to indemnify its directors, officers, employees or agents under
nonexclusive statutory and nonstatutory schemes of indemnification. Under the
statutory scheme, a corporation may, with certain exceptions, indemnify a
director, officer, employee or agent of the corporation who was, is, or is
threatened to be made, a party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative, because of the fact that such person is or was a director,
officer, agent or employee of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assesses with
respect to an employee benefit plan) and reasonable expenses incurred in
connection with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer, agent or employee
(i) conducted himself in good faith, (ii) reasonably believed (x) that any
action taken in his official capacity with the corporation was in the
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<PAGE> 47
best interest of the corporation or (y) that in all other cases his conduct at
least was not opposed to the corporation's best interest and (iii) in the case
of any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of conduct for the
type of indemnification set forth above is determined by the board of directors,
a committee of directors, special legal counsel or the shareholders in
accordance with Section 55-8-55. A corporation may not indemnify a director
under the statutory scheme in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with a proceeding in which a director was adjudged liable on the
basis of having received an improper personal benefit.
Section 55-8-57 of the NCBCA permits a corporation to include in its
articles of incorporation or bylaws a provision indemnifying any of its
directors, officers, employees or agents against liability and expenses
(including attorneys' fees) in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in any of the foregoing capacities; provided, however, that a
corporation may not indemnify or agree to indemnify a person against liability
or expenses such person may incur on account of activities that were clearly in
conflict with the best interests of the corporation. The Company's bylaws
provide for indemnification to the fullest extent permitted under the NCBCA.
Sections 55-8-52 and 55-8-56 of the NCBCA require a corporation, unless
its articles of incorporation provide otherwise, to indemnify a director or
officer who has been wholly successful, on the merits or otherwise, in the
defense of any proceeding to which such director or officer was a party. Unless
prohibited by the Articles of Incorporation, a director or officer also may make
application and obtain court-ordered indemnification if the court determines
that such director or officer is fairly and reasonably entitled to such
indemnification as provided in Sections 55-8-54 and 55-8-56. The Company's
Articles of Incorporation do not contain any prohibition of this type of
indemnification.
Section 55-8-57 of the NCBCA provides that a corporation may purchase
and maintain insurance on behalf of any individual who is or was a director,
officer, employee or agent of the corporation against certain liabilities
incurred by such persons, whether or not the corporation is otherwise authorized
by the NCBCA to indemnify such party. Our directors and officers are not
currently covered under such directors' and officers' insurance policies.
The foregoing summaries of North Carolina law dealing with
indemnification of directors and officers are not intended to be complete
descriptions of the relevant statutory provisions. They are qualified in their
entirety by reference to Sections 55-8-50 through 55-8-58 of the NCBCA, which
contain the specific indemnification provisions.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 15.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-46-
<PAGE> 48
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
American Multiplexer Corporation
We have audited the accompanying balance sheets of American Multiplexer
Corporation (a development stage company) as of December 31, 1998 and 1999 and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999, and for the
period January 1, 1997 through December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 American Multiplexer
Corporation (a development stage company) as of December 31, 1998 and 1999, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, and for the period January 1, 1997 through
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
GRANT THORNTON LLP
San Francisco, California
March 16, 2000
F-1
<PAGE> 49
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ ------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,661 $ 15,306,130 $ 10,942,143
Accounts receivable 9,043 7,001 4,500
Prepaid expenses
27,658 100,011 50,230
Notes receivable from stockholder 125,000 -- --
Notes receivable from employee -- -- 133,000
Interest receivable -- 216,126 310,694
Inventory 50,000 2,387 2,388
------------ ------------ ------------
Total current assets 217,362 15,631,655 11,442,955
PROPERTY AND EQUIPMENT, NET 465,922 2,568,510 4,509,166
Other noncurrent assets 29,004 57,422 157,422
------------ ------------ ------------
$ 712,288 $ 18,257,587 $ 16,109,543
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 165,181 $ 672,160 $ 518,949
Accrued liabilities 300,000 38,775 38,775
Deposit received in advance for purchase
of common stock 41,630 -- --
------------ ------------ ------------
Total current liabilities 506,811 710,935 557,724
STOCKHOLDERS' EQUITY
Preferred stock - authorized 10,000,000 shares,
no par value; issued and outstanding,
200,000 shares in 1999 and 2000 -- 821,238 821,238
Common stock - authorized 50,000,000 shares,
no par value; issued and outstanding shares:
1998, 23,120,966; and 1999 and 2000, 37,647,866 6,293,810 42,274,302 42,328,052
Accumulated deficit during the development stage (6,088,333) (19,448,348) (21,496,931)
Notes receivable from stockholders -- (6,100,540) (6,100,540)
------------ ------------ ------------
Total stockholders' equity 205,477 17,546,652 15,551,819
------------ ------------ ------------
$ 712,288 $ 18,257,587 $ 16,109,543
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 50
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED JANUARY 1,
YEAR ENDED DECEMBER 31, MARCH 31, 1997 THROUGH
--------------------------------------------- --------------------- MARCH 31,
1997 1998 1999 1999 2000 2000
------------ ------------ ------------ ----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses
Selling and marketing 1,715,649 586,529 3,214,723 51,958 439,640 5,956,541
General and administrative 520,151 1,188,071 6,246,080 103,916 745,035 8,699,337
Research and development 306,637 507,082 4,653,240 74,420 1,223,045 6,690,004
Write down of inventory -- 1,282,975 -- -- -- 1,282,975
------------ ------------ ------------ ----------- ----------- ------------
2,542,437 3,564,657 14,114,043 230,294 2,407,720 22,628,857
------------ ------------ ------------ ----------- ----------- ------------
Operating loss (2,542,437) (3,564,657) (14,114,043) (230,294) (2,407,720) (22,628,857)
Interest income -- -- 671,088 -- 359,137 1,030,225
Other income 3,200 15,561 82,940 -- -- 101,701
------------ ------------ ------------ ----------- ----------- ------------
NET LOSS $ (2,539,237) $ (3,549,096) (13,360,015) $ (230,294) $(2,048,583) $(21,496,931)
============ ============ ============ =========== =========== ============
Net loss attributable to common shares
Net loss $ (2,539,237) $ (3,549,096) $(13,360,015) $ (230,294) $(2,048,583) $(21,496,931)
Preferred dividends -- -- (326,087) -- (342,391) (668,478)
------------ ------------ ------------ ----------- ----------- ------------
$ (2,539,237) $ (3,549,096) (13,686,102) $ (230,294) $(2,390,974) $(22,165,409)
============ ============ ============ =========== =========== ============
Basic and diluted net loss per share $ (0.13) $ (0.16) $ (0.43) $ (0.01) $ (0.06) $ (0.87)
============ ============ ============ =========== =========== ============
Shares used in calculation of net loss
per share 19,671,300 21,589,772 31,870,966 23,774,425 37,647,866 25,357,684
============ ============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 51
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY
Three Years ended December 31, 1999 and
the Three Months ended March 31, 2000
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
------------------ ------------------------ ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT DEFICIT SHAREHOLDER TOTAL
------- -------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock in exchange
for certain assets of $0.01 per
share on 01/07/1997 -- -- 17,919,800 247,154 -- -- 247,154
Issuance of common stock for
services at $0.85 per share
on 04/10/1997 -- -- 600,000 510,000 -- -- 510,000
Issuance of common stock for
services at $0.85 per share
on 04/10/1997 -- -- 500,000 425,000 -- -- 425,000
Issuance of common stock for
services at $0.85 per share
on 04/10/1997 -- -- 500,000 425,000 -- -- 425,000
Issuance of common stock to charity
at $0.85 per share on 04/10/1997 -- -- 2,000 1,700 -- -- 1,700
Issuance of common stock for
services at $0.85 per share
on 04/10/1997 -- -- 20,000 17,000 -- -- 17,000
Issuance of common stock for cash
through a private placement at
$1.25 per share on 05/01/1997 -- -- 800,000 1,000,000 -- -- 1,000,000
Issuance of common stock for cash at
$0.86 per share on 05/12/1997 -- -- 2,500 2,150 -- -- 2,150
Net loss -- -- -- -- (2,539,237) -- (2,539,237)
------- -------- ---------- ----------- ------------ ----------- ------------
Balance at December 31, 1997 -- -- 20,344,300 2,628,004 (2,539,237) -- 88,767
Issuance of common stock for cash at
$1.50 per share on 01/12/1998 -- -- 24,000 36,000 -- -- 36,000
Issuance of common stock for cash at
$1.56 per share on 01/12/1998 -- -- 32,000 50,000 -- -- 50,000
Issuance of common stock for cash at
$1.50 per share on 01/12/1998 -- -- 75,000 112,500 -- -- 112,500
Issuance of common stock for cash at
$1.50 per share on 01/12/1998 -- -- 20,000 30,000 -- -- 30,000
Issuance of common stock for cash at
$1.41 per share on 01/12/1998 -- -- 46,000 65,000 -- -- 65,000
Issuance of common stock for cash at
$1.12 per share on 01/12/1998 -- -- 58,000 65,000 -- -- 65,000
Issuance of common stock for cash at
$2.00 per share on 03/12/1998 -- -- 10,000 20,000 -- -- 20,000
Issuance of common stock for cash at
$2.00 per share on 03/12/1998 -- -- 10,000 20,000 -- -- 20,000
Issuance of common stock for cash at
$2.00 per share on 03/12/1998 -- -- 30,000 60,000 -- -- 60,000
Issuance of common stock for cash at
$2.00 per share on 03/12/1998 -- -- 25,000 50,000 -- -- 50,000
Issuance of common stock for cash at
$1.50 per share on 03/12/1998 -- -- 66,666 100,000 -- -- 100,000
Issuance of common stock for cash at
$1.12 per share on 03/12/1998 -- -- 94,000 105,000 -- -- 105,000
Issuance of common stock for cash at
$1.25 per share on 03/12/1998 -- -- 16,000 20,000 -- -- 20,000
Issuance of common stock for cash at
$2.00 per share on 03/12/1998 -- -- 25,000 50,000 -- -- 50,000
Issuance of common stock for cash at
$1.00 per share on 03/12/1998 -- -- 200,000 200,000 -- -- 200,000
Issuance of common stock for cash at
$1.25 per share on 04/16/1998 -- -- 100,000 125,000 -- -- 125,000
Issuance of common stock for cash at
$2.50 per share on 04/16/1998 -- -- 6,000 15,000 -- -- 15,000
Issuance of common stock for cash at
$1.00 per share on 04/16/1998 -- -- 25,000 25,000 -- -- 25,000
Issuance of common stock for cash at
$2.00 per share on 04/16/1998 -- -- 30,000 60,000 -- -- 60,000
Issuance of common stock for cash at
$1.00 per share on 04/16/1998 -- -- 90,000 90,000 -- -- 90,000
</TABLE>
F-4
<PAGE> 52
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
------------------ ------------------------ ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT DEFICIT SHAREHOLDER TOTAL
------- -------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 1,000 2,992 -- -- 2,992
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 4,500 13,490 -- -- 13,490
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 5,000 15,000 -- -- 15,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 1,000 1,000 -- -- 1,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 1,000 1,000 -- -- 1,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 1,000 1,000 -- -- 1,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 10,000 10,000 -- -- 10,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 100,000 100,000 -- -- 100,000
Issuance of common stock for cash at
$1.00 per share on 07/16/1998 -- -- 40,500 40,500 -- -- 40,500
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 10,000 29,994 -- -- 29,994
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 10,000 29,985 -- -- 29,985
Issuance of common stock for cash at
$3.00 per share on 07/16/1998 -- -- 10,000 29,985 -- -- 29,985
Issuance of common stock for cash at
$1.25 per share on 08/03/1998 -- -- 120,000 149,982 -- -- 149,982
Issuance of common stock for cash at
$1.00 per share on 08/03/1998 -- -- 4,000 4,000 -- -- 4,000
Issuance of common stock for cash at
$1.15 per share on 07/31/1998 -- -- 182,000 234,185 -- -- 234,185
Issuance of common stock for cash at
$1.15 per share on 11/12/1998 -- -- 394,000 429,792 -- -- 429,792
Issuance of common stock for cash at
$1.13 per share on 11/12/1998 -- -- 28,000 31,607 -- -- 31,607
Issuance of common stock for cash at
$1.28 per share on 11/12/1998 -- -- 40,000 51,250 -- -- 51,250
Issuance of common stock for cash at
$1.00 per share on 11/12/1998 -- -- 100,000 100,000 -- -- 100,000
Issuance of common stock for cash at
$1.25 per share on 11/12/1998 -- -- 8,000 9,990 -- -- 9,990
Issuance of common stock for cash at
$0.93 per share on 11/12/1998 -- -- 20,000 18,500 -- -- 18,500
Issuance of common stock for cash at
$0.85 per share on 11/12/1998 -- -- 5,000 4,250 -- -- 4,250
Issuance of common stock for cash at
$1.00 per share on 11/12/1998 -- -- 1,000 1,000 -- -- 1,000
Issuance of common stock for cash at
$1.23 per share on 11/12/1998 -- -- 48,000 59,100 -- -- 59,100
Issuance of common stock for cash at
$1.00 per share on 11/12/1998 -- -- 10,000 9,984 -- -- 9,984
Issuance of common stock for cash at
$1.25 per share on 11/12/1998 -- -- 20,000 25,000 -- -- 25,000
Issuance of common stock for cash at
$1.20 per share on 11/30/1998 -- -- 100,000 119,985 -- -- 119,985
Issuance of common stock for cash at
$1.00 per share on 11/30/1998 -- -- 50,000 50,000 -- -- 50,000
Issuance of common stock for cash at
$1.20 per share on 11/30/1998 -- -- 400,000 479,985 -- -- 479,985
Issuance of common stock for cash at
$1.00 per share on 11/30/1998 -- -- 50,000 50,000 -- -- 50,000
Issuance of common stock for cash at
$1.00 per share on 11/30/1998 -- -- 20,000 20,000 -- -- 20,000
Issuance of common stock warrants on
11/05/1998 -- -- -- 243,750 -- -- 243,750
Net loss -- -- -- -- (3,549,096) -- (3,549,096)
------- -------- ---------- ----------- ------------ ----------- ------------
Balance at December 31, 1998 -- -- 23,120,966 6,293,810 (6,088,333) -- 205,477
Issuance of preferred stock for cash
at $5.00 per share on 03/02/99 100,000 500,000 -- -- -- -- 500,000
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 50,000 50,000 -- -- 50,000
</TABLE>
F-5
<PAGE> 53
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
------------------ ------------------------ ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT DEFICIT SHAREHOLDER TOTAL
------- -------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 100,000 100,000 -- -- 100,000
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 110,000 110,000 -- -- 110,000
Issuance of common stock for cash at
$1.24 per share on 03/10/1999 -- -- 5,200 6,441 -- -- 6,441
Issuance of common stock for cash at
$1.25 per share on 03/10/1999 -- -- 4,000 5,000 -- -- 5,000
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 8,000 8,000 -- -- 8,000
Issuance of common stock for cash at
$1.25 per share on 03/10/1999 -- -- 12,600 15,730 -- -- 15,730
Issuance of common stock for cash at
$1.25 per share on 03/10/1999 -- -- 16,000 20,000 -- -- 20,000
Issuance of common stock for cash at
$0.82 per share on 03/10/1999 -- -- 45,000 37,000 -- -- 37,000
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 5,000 5,000 -- -- 5,000
Issuance of common stock for cash at
$1.00 per share on 03/10/1999 -- -- 10,000 10,000 -- -- 10,000
Issuance of common stock for cash at
$1.81 per share on 03/18/1999 -- -- 10,000 18,100 -- -- 18,100
Issuance of common stock for cash at
$1.25 per share on 03/18/1999 -- -- 20,000 25,000 -- -- 25,000
Issuance of common stock for cash at
$1.25 per share on 03/18/1999 -- -- 1,000 1,250 -- -- 1,250
Issuance of common stock for cash at
$0.80 per share on 03/18/1999 -- -- 20,000 16,000 -- -- 16,000
Issuance of common stock for cash at
$0.80 per share on 03/18/1999 -- -- 5,000 4,000 -- -- 4,000
Issuance of common stock for cash at
$1.81 per share on 03/18/1999 -- -- 23,000 41,630 -- -- 41,630
Issuance of common stock for cash at
$1.61 per share on 03/18/1999 -- -- 100,000 160,627 -- -- 160,627
Issuance of preferred stock for cash
(net of commissions) at $5.00 per
share on 03/18/99 100,000 821,238 -- -- -- -- 821,238
Issuance of common stock for cash at
$2.50 per share on 05/05/1999 -- -- 400,000 999,982 -- -- 999,982
Issuance of common stock for cash at
$2.50 per share on 05/05/1999 -- -- 100,000 249,980 -- -- 249,980
Issuance of common stock for cash at
$2.50 per share on 05/05/1999 -- -- 50,000 124,985 -- -- 124,985
Issuance of common stock for cash
(net of commissions) at $2.50 per
share on 05/05/1999 -- -- 1,000,000 1,692,780 -- -- 1,692,780
Issuance of common stock for cash
(net of commissions) at $2.50 per
share on 05/05/1999 -- -- 1,000,000 1,692,780 -- -- 1,692,780
Issuance of common stock for
commissions on sale of common stock
at $4.50 per share on 05/05/1999 -- -- 400,000 1,800,000 -- -- 1,800,000
Issuance of common stock for cash at
$1.00 per share on 05/05/1999 -- -- 1,000,000 999,960 -- -- 999,960
Issuance of common stock for cash at
$1.00 per share on 05/05/1999 -- -- 500,000 500,000 -- -- 500,000
Issuance of common stock for cash at
$1.00 per share on 05/05/1999 -- -- 2,000 2,000 -- -- 2,000
Issuance of common stock for cash at
$1.50 per share on 05/05/1999 -- -- 1,000 1,500 -- -- 1,500
Issuance of common stock for services
at $4.50 per share on 05/05/1999 -- -- 260,000 1,170,000 -- -- 1,170,000
Issuance of common stock for cash at
$1.50 per share on 05/05/1999 -- -- 3,000 4,500 -- -- 4,500
Issuance of common stock for cash at
$1.50 per share on 05/05/1999 -- -- 3,000 4,500 -- -- 4,500
Issuance of common stock for cash at
$1.50 per share on 05/05/1999 -- -- 4,000 6,000 -- -- 6,000
Issuance of common stock for cash
(net of commissions) at $2.50 per
share on 05/05/1999 -- -- 1,450,000 2,588,707 -- -- 2,588,707
Issuance of common stock for cash at
$1.00 per share on 05/05/1999 -- -- 1,000,000 1,000,000 -- -- 1,000,000
Issuance of common stock for cash at
$0.25 per share on 05/05/1999 -- -- 1,000,000 249,985 -- -- 249,985
</TABLE>
F-6
<PAGE> 54
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
------------------ ------------------------ ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT DEFICIT SHAREHOLDER TOTAL
------- -------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
commissions on sale of common stock
at $5.44 per share on 06/08/1999 -- -- 2,000 10,875 -- -- 10,875
Issuance of common stock for cash at
$2.50 per share on 06/08/1999,
net of commissions -- -- 4,000,000 8,682,403 -- -- 8,682,403
Issuance of common stock for cash at
$2.50 per share on 06/08/1999 -- -- 20,000 49,980 -- -- 49,980
Issuance of common stock for cash at
$2.50 per share on 06/08/1999 -- -- 10,000 25,994 -- -- 25,994
Issuance of common stock for
commissions on sale of common stock
at $5.44 per share on 06/08/1999 -- -- 20,000 108,800 -- -- 108,800
Issuance of common stock for
commissions on sale of common stock
at $5.44 per share on 06/08/1999 -- -- 123,000 669,120 -- -- 669,120
Issuance of common stock for cash at
$2.50 per share on 06/08/1999 -- -- 204,500 511,250 -- -- 511,250
Issuance of common stock for cash at
$2.50 per share on 06/08/1999 -- -- 58,300 125,750 -- -- 125,750
Issuance of common stock for
commissions on sale of common stock
at $5.44 per share on 06/08/1999 -- -- 277,000 1,506,880 -- -- 1,506,880
Issuance of common stock for cash at
$2.50 per share on 06/08/1999 -- -- 800,000 1,492,453 -- -- 1,492,453
Issuance of common stock for
commissions on sale of common stock
at $4.88 per share on 09/08/1999 -- -- 198,900 969,638 -- -- 969,638
Issuance of common stock for
commissions on sale of common stock
at $4.88 per share on 09/08/1999 -- -- 29,900 145,912 -- -- 145,912
Issuance of common stock for cash at
$2.50 per share on 09/08/1999 -- -- 500 1,250 -- -- 1,250
Issuance of common stock for cash at
$2.50 per share on 09/08/1999 -- -- 30,000 75,000 -- -- 75,000
Issuance of common stock for cash at
$2.50 per share on 09/08/1999 -- -- 30,000 75,000 -- -- 75,000
Issuance of common stock for cash at
$2.50 per share on 09/15/1999 -- -- 1,000 2,500 -- -- 2,500
Issuance of common stock warrants -- -- -- 7,796,250 -- -- 7,796,250
Issuance of common stock for cash at
$2.50 per share on 10/31/99 -- -- 4,000 10,000 -- -- 10,000
Net loss -- -- -- -- (13,360,015) -- (13,360,015)
Note receivable from shareholders -- -- -- -- -- (6,100,540) (6,100,540)
------- -------- ---------- ----------- ------------ ----------- ------------
Balance at December 31, 1999 200,000 821,238 37,647,866 42,274,303 (19,448,348) (6,100,540) 17,546,652
Issuance of stock options -- -- -- 53,750 -- -- 53,750
Net loss -- -- -- -- (2,048,583) -- (2,048,583)
------- -------- ---------- ----------- ------------ ----------- ------------
Balance at March 31, 2000
(unaudited) 200,000 $821,238 37,647,866 $42,328,052 $ 21,496,931 $ 6,100,540 $ 15,551,819
======= ======== ========== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 55
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FROM
YEAR ENDED THREE MONTHS ENDED JANUARY 1, 1997
DECEMBER 31, MARCH 30, THROUGH
------------------------------------------ ------------------------- MARCH 30,
1997 1998 1999 1999 2000 2000
----------- ----------- ------------ --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(2,539,237) $(3,549,096) $(13,360,015) $(230,294) $(2,048,583) $(21,496,931)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 26,914 31,548 228,318 7,887 251,366 538,146
Write down of intangible assets -- 80,000 -- -- -- 80,000
Write down of inventory -- 1,282,976 47,613 -- -- 1,330,589
Write down of purchased in-process
research and development -- 406,000 -- -- -- 406,000
Provision for bad debts -- 331,500 -- -- -- 331,500
Common stock issued for services 1,377,000 -- 1,170,000 -- 53,750 2,600,750
Common stock warrants issued for
compensation -- 243,750 7,796,250 -- -- 8,040,000
Common stock issued to charity 1,700 -- -- -- -- 1,700
Changes in operating assets and
liabilities:
Accounts receivable (6,749) (333,794) 2,042 9,043 2,501 (336,000)
Interest receivable -- -- (216,126) -- -- (216,126)
-- -- --
Inventory (569,755) (753,657) -- -- (94,568) (1,417,980)
Prepaid expenses -- (27,658) (72,353) -- (1) (100,012)
Other noncurrent assets -- (29,004) (28,418) -- 49,781 (7,641)
Accounts payable 504,773 (339,592) 506,979 (27,274) (100,000) 572,160
Accrued liabilities -- 300,000 (261,225) (362,576) (153,211) (114,436)
----------- ----------- ------------ --------- ----------- -----------
Net cash used in operating (1,205,354) (2,357,027) (4,186,935) (603,214) (2,038,965) (9,788,281)
Cash flows from investing activities
Purchase of in-process research and
development -- (406,000) -- -- -- (406,000)
Purchase of property and equipment (38,359) (441,025) (2,330,906) (287,000) (2,192,022) (5,002,312)
Advance on notes receivable from
shareholder (100,000) (25,000) -- -- -- 125,000)
----------- ----------- ------------ --------- ----------- -----------
Net cash used in investing
activities (138,359) (872,025) (2,330,906) (287,000) (2,192,022) (5,533,312)
Cash flows from financing activities
Proceeds from issuance of common
stock 1,114,740 3,422,056 27,014,242 292,149 -- 31,551,038
Proceeds from issuance of preferred
stock -- -- 821,238 821,238 -- 821,238
Advance on notes receivable from
shareholder-net -- -- (5,975,540) -- (5,975,540)
(123,944) (133,000) (133,000)
Cash deposit received for sale of
common stock 230,000 (188,370) (41,630) (41,630) -- --
----------- ----------- ------------ --------- ----------- -----------
Net cash provided by financing
activities 1,344,740 3,233,686 21,818,310 947,813 (133,000) 26,263,736
----------- ----------- ------------ --------- ----------- -----------
NET INCREASE IN CASH 1,027 4,634 15,300,469 57,599 (4,363,987) 10,942,143
Cash at beginning of period -- 1,027 5,661 5,661 15,306,130 --
----------- ----------- ------------ --------- ----------- -----------
Cash and cash equivalents at end
of period $ 1,027 $ 5,661 $ 15,306,130 $ 63,260 $10,942,143 $10,942,143
=========== =========== ============ ========= =========== ===========
Supplemental cash flow disclosures
Cash paid for interest $ 324 $ 3,354 $ -- $ 20 $ -- $ 3,678
Cash paid for income taxes $ 800 $ 800 $ 800 $ -- $ -- $ 2,400
Supplemental schedule of noncash
and financing activities
Issuance of common stock in
1997 in exchange for cash of
$112,590 and:
Inventory $ 9,564
Equipment 25,000
Intellectual property 100,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 56
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Multiplexer Corporation (the "Company"), a development stage
company, was incorporated on April 16, 1996 and had no activities through
December 31, 1996. In January 1997, the Company commenced operations through the
issuance of 17,919,800 shares of common stock in exchange for certain assets and
rights to the product, the MUX-6 Multiplexer. The Multiplexer was designed to
expand underground cable capacity by allowing six different telephone numbers to
be carried on a single pair of copper wire. In 1998, the Company abandoned the
marketing of the MUX-6 Multiplexer and has refocused its efforts in the area of
satellite communications.
The Company will provide high speed Internet access and broadband
interactive services for corporate, institutional and Small Office Home Office
("SOHO") users through its satellite and terrestrial based network.
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company is a development stage
company and has not generated any revenues and has net losses since inception
through December 31, 1999 and such losses continued through the unaudited period
ended March 31, 2000. The Company's continued existence is ultimately dependent
upon its ability to use the funds to develop and market services and the success
of future operations. There can be no assurance that the Company will achieve
profitability or positive cash flow from operations.
Cash and Cash Equivalents
All liquid investments instruments with an original maturity of three
months or less are considered cash equivalents.
The Company maintains cash balances, which exceed federally insured
limits, at financial institutions. The Company has not experienced any losses in
such accounts and believes it is not exposed to significant risk or loss.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market. All inventory as of December 31, 1999, was reduced to salvage value as
it related to products that are no longer being developed.
F-9
<PAGE> 57
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated lives of three to ten years.
Maintenance and repairs are charged to operations as incurred.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using current enacted tax rates. A valuation allowance is
established if it is likely that some portion or all of the deferred tax assets
will not be realized.
Fair Value of Financial Instruments
The fair value of cash, accounts receivable, notes receivable, accounts
payable and accrued liabilities approximate carrying value due to the short-term
nature of such instruments.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting For The Impairment of Long-Lived Assets and For
Long-Lived Assets To Be Disposed Of, which requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes indicate that the carrying amount of an asset may not be recoverable.
The Company's policy is to review the recoverability of all intangible assets at
a minimum on an annual basis and, in addition, whenever events or changes
indicate that the carrying amount of an asset may not be recoverable.
Basic and Diluted Net Loss Per Share
Basic loss per share is computed by dividing net loss available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. However, due to the Company's net loss position for
all periods presented, diluted loss per share excludes common equivalent shares,
as their effect is anti-dilutive (See Notes F, G and H).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management of the Company to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenditures during the
reporting period. The amounts estimated could differ from actual results.
F-10
<PAGE> 58
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principle Board Opinion No.
25, "Accounting For Stock Issued to Employees."
Stock Pricing
All per share sales prices for the Company's common and preferred stock
were approved by the Board of Directors of the Company.
Non-Cash Consideration
The Company used the fair market value to record non-cash consideration in
exchange for the issuance of common stock. The fair market value was the quoted
market price of the common stock on the day the transaction occurred. Before the
Company's stock was traded, the value assigned to non-cash issuances was the
value of the services received.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total, the change in its net assets
during the period from non-owned sources and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has no comprehensive income items to report for the period from
January 1, 1997 (inception) to December 1999. The Company currently has no
reportable segments under SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133, as amended by SFAS No. 137, is
effective for the Company in fiscal 2001. Although the Company has not fully
assessed the implications of SFAS Nos. 133 and 137, the Company does not believe
that the adoption of this statement will have a material impact on the Company's
financial position or results of operations.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment comprise the following as of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999 March 31, 2000
---------- ---------- --------------
<S> <C> <C> <C>
Automobile $ 25,000 $ 5,000 $ 5,000
Equipment 438,145 2,370,510 4,559,060
Furniture and fixtures 41,239 459,780 463,251
---------- ---------- ----------
504,384 2,835,290 5,027,311
Less accumulated depreciation 38,462 266,780 518,145
---------- ---------- ----------
$ 465,922 $2,568,510 $4,509,166
========== ========== ==========
</TABLE>
F-11
<PAGE> 59
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE C - PURCHASE OF CERTAIN ASSETS
During November 1998, the Company purchased certain assets from a
company that was controlled by the courts under Chapter 7 bankruptcy
proceedings. The total purchase price was $805,000. Of this amount, $505,000 was
paid in November 1998, and the balance was paid by June 30, 1999. The purchase
price was allocated among equipment, furniture and in-process research and
development.
At the time of purchase, the Company determined that the technological
feasibility of the purchased research and development had not yet been
established and that such technology had no future alternative uses. As such,
the Company expensed all of the purchased in-process research and development.
NOTE D - INCOME TAXES
The components of the net deferred tax assets are as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward $ 2,192,000 $ 2,278,000
Compensation expense-common
stock warrants 100,000 --
Accrued expenses -- 16,000
Valuation allowance (2,292,000) (2,294,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $6,060,000 and $3,030,000, respectively,
available to offset future taxable income. The Company's federal and state net
operating loss carryforwards expire through 2019 and 2004, respectively. The
increase in the valuation allowance for deferred tax assets increased $1,360,000
in 1998 and $2,000 in 1999.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carryforwards could be restricted.
F-12
<PAGE> 60
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE E - RELATED PARTY TRANSACTIONS
Stockholder notes receivable balances as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Demand note receivable in the amount of $125,000 $125,000 $ --
Demand note receivable in the amount of $250,000, bearing
interest at 9% per annum -- 175,000
Note receivable in the amount of $3,375,000, due and payable
on June 30, 2000, bearing interest at 9% per annum -- 3,375,000
Note receivable in the amount of $725,000, due and payable on
June 30, 2000, bearing interest at 9% per annum -- 550,540
Note receivable in the amount of $2,000,000, due and payable
on June 30, 2000, bearing interest at 9% per annum -- 2,000,000
-------- ----------
Total $125,000 $6,100,540
======== ==========
</TABLE>
NOTE F - PREFERRED STOCK
The Company has authorized the issuance of 10,000,000 shares of Series A
Preferred Stock ("the Preferred shares"). The Preferred shares have no par value
and may be converted into two shares of the Company's common stock at any time
subsequent to issuance. The Preferred shares are entitled to cumulative
dividends, payable only when, if and as declared by the Board of Directors of
the Company, which are cumulative, at a rate of $1.50, $2.50 and $3.50 per share
for the years ending December 31, 2000, 2001 and 2002, respectively.
Additionally, Preferred shareholders are entitled to the full amount of any
common stock dividends. The Preferred shares have full voting privileges with
regard to matters submitted to the shareholders for a vote and, with proper
notice, have the right to cumulate votes for the election of Directors of the
Company. In calculating the loss per share effect of the preferred dividends,
the total of all cumulative dividends will be allocated over the period from the
date of issuance through December 31, 2002.
F-13
<PAGE> 61
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE G - STOCK WARRANTS
In November 1998 the Company issued warrants for the purchase of
3,000,000 shares of common stock to three employees of the Company. The exercise
price of each warrant is $1.00 per share of common stock and can be exercised up
to three years from date of vesting. Warrants to purchase 1,500,000 shares of
common stock are exercisable upon the Company's common stock price reaching
certain price levels ("price warrants") and warrants to purchase 1,500,000
shares of common stock are exercisable upon the Company reaching certain
milestones related to the development and marketing of certain product lines and
service ("milestone warrants"). Once the contingencies have been satisfied, the
warrants vest and can be exercised over three years. During 1998 and 1999,
300,000 and 900,000, respectively, of the price warrants vested as certain price
levels were reached. Also during 1999, 1,500,000 of the milestone warrants
vested as all developing and marketing milestones were reached during the year.
The total expense recorded for the vested warrants was $243,730 in 1998,
$7,796,250 in 1999 and 53,750 for the three month period ended March 31, 2000.
In May 1999, the Company issued warrants to purchase 6,000,000 shares of
common stock to an officer of the company. The warrants entitle the holder to
purchase one share of common stock at $5.06 per share, which is equal to the
fair value per share of common stock at the date of issue. At December 31, 1999,
all of the warrants were outstanding and exercisable at any time through May 14,
2004.
NOTE H - STOCK OPTION PLAN
In February 1999, the Board of Directors approved a stock option plan
(the "Plan") intended to qualify as an incentive stock option plan as defined in
Section 422 of the Internal Revenue Code. The Plan is accounted for under the
provisions of APB No. 25 and generally provides that exercise prices will not be
less than fair market value per share on the date the option is granted. Options
granted prior to adoption of the Plan were issued at fair market value.
Therefore, no compensation cost has been recognized for the options granted. The
options are exercisable cumulatively, to the extent of 25% on the one-year
anniversary date and an additional 1/36 on the last day of each calendar month.
Had compensation cost for the options granted been determined based on
the fair value of the options at the grant dates consistent with the method
prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net losses would have been increased to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------- Three Months Ended
1998 1999 March 31, 2000
----------- ------------ ------------------
<S> <C> <C> <C>
Net loss: applicable to common stockholders
As reported $(3,549,096) $(13,686,102) $(2,390,974)
Pro forma $(3,831,741) $(17,348,403) $(2,644,249)
Net loss per share applicable to common stockholders
As reported $ (0.16) $ (0.43) $ (0.06)
Pro forma $ (0.18) $ (0.54) $ (0.08)
</TABLE>
F-14
<PAGE> 62
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE H - STOCK OPTION PLAN (continued)
The fair value of each option grant is determined on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used: no expected dividends: expected volatility of 109%;
risk-free interest rate of 6%; an expected forfeiture rate of zero; and expected
lives of 10 years. A summary of the status of the options outstanding is
presented as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1998 -- $ --
Granted (weighted average fair value per share, $1.22) 700,000 1.54
--------- -----
Outstanding at December 31, 1998 700,000 1.54
Granted (weighted average fair value per share, $3.68) 886,000 3.92
Forfeited (110,000) 4.99
--------- -----
Outstanding at December 31, 1999 1,476,000 $2.71
========= =====
</TABLE>
The following information applies to options outstanding at December 31,
1999. No options are exercisable at December 31, 1999.
<TABLE>
<CAPTION>
Number Remaining
Exercise outstanding Contractual
Price at 12/31/99 Life (in years)
---------- ----------- ---------------
<S> <C> <C> <C>
$1.00 450,000 8.83
1.56-1.88 216,000 9.15
2.88 100,000 9.08
3.06-3.38 60,000 8.88
4.00-4.31 575,000 9.72
4.62-4.87 35,000 9.65
5.00-5.12 40,000 9.54
--------- ----
1,476,000 9.28
========= ====
</TABLE>
F-15
<PAGE> 63
AMERICAN MULTIPLEXER CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999, 1998 and 1997
(Information related to the period January 1, 2000
through March 31, 2000 is unaudited)
NOTE I - RETIREMENT PLAN
On January 1, 1999, the Company adopted the AMC 401(k) Plan (the "Plan")
which is a standardized profit sharing and trust under section 401(k) of the
Internal Revenue Code. The Plan allows for employees with at least six months of
service, to contribute to the Plan the maximum amount of salary as permitted
under Section 401(k). The Company may make discretionary contributions to the
Plan. All such contributions are 100% vested at the time the contribution is
made. Employees can borrow against their account balances for hardship or
financial necessity for a minimum of $1,000 and a maximum of $50,000. Upon the
retirement age of 60, employees receive a lump sum distribution of their account
value. In 1999, the Company contributed $57,584 to the Plan.
NOTE J - COMMITMENTS
The Company is presently leasing office space under leases expiring at
various dates through 2003. Rent expense was $322,050, $82,965 and $34,551 for
the years ended December 31, 1999, 1998 and 1997, respectively.
The Company is presently leasing signal conduction via satellite
service. The lease expires December 31, 2004. The lease expense was $808,699 for
the year ended December 31, 1999.
Future minimum lease payments under these noncancellable operating
leases are as follows at December 31, 1999:
<TABLE>
<CAPTION>
Year ending December 31,
-----------------------
<S> <C>
2000 $ 3,990,012
2001 4,010,428
2002 4,023,341
2003 4,006,710
2004 3,687,600
-----------
$19,718,091
===========
</TABLE>
In December 1999, the Company entered into a commitment to purchase
approximately $6,000,000 in satellite routers.
F-16
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN MULTIPLEXER CORPORATION
(Registrant)
Date: July 14, 2000 By /s/ Edward S. C. Tan
-----------------------------------------
Edward S. C. Tan, Chief Executive Officer
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Articles of Incorporation of American Multiplexer Corporation
3.2 Bylaws of American Multiplexer Corporation
4.1 Form of Common Stock Certificate of American Multiplexer
Corporation
10.1 Lease Agreement with SCP-I
10.2 Warrant to Purchase Common Shares
10.3 Form of Incentive Stock Option Agreement
10.4 Form of Restricted Stock Warrant Agreement
10.5 Agreement between American Multiplexer Corporation and Satelites
Mexicanos, S.A. de C.V. dated October 1, 1999
10.6 Terms and Conditions of Service Agreement with Level 3
Communications
27.1 Financial Data Schedule
</TABLE>
