<PAGE>
As filed with the Securities and Exchange Commission on June 18, 1999
Registration No. 333-77269
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 3
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
RAVISENT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7372 23-2763854
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Mr. Francis E.J. Wilde III
Chief Executive Officer and President
RAVISENT Technologies Inc.
One Great Valley Parkway, Malvern, Pennsylvania 19355, (800) 700-0362
(Name address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Jonathan G. Shapiro, Esq. Gregory C. Smith, Esq.
Alan K. Tse, Esq. Michael J. Cordero, Esq.
Brian E. Covotta, Esq. Spencer G. Park, Esq.
BROBECK, PHLEGER & HARRISON LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Two Embarcadero Place 525 University Ave.
2200 Geng Road Suite 220
Palo Alto, California 94303 Palo Alto, California 94301
(650) 424-0160 (650) 470-4500
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
---------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
PROSPECTUS
5,000,000 Shares
[RAVISENT TECHNOLOGIES INC. LOGO]
Common Stock
-----------
We are offering 5,000,000 shares of our common stock. This is our initial
public offering.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "RVST." We estimate that the initial public offering price will be
between $11.00 and $13.00 per share.
See "Risk Factors" beginning on page 9 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discounts and commissions........................... $ $
Proceeds, before expenses, to us................................. $ $
</TABLE>
-----------
The underwriters may purchase up to an additional 750,000 shares of common
stock from us at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares in New York, New York on or about
, 1999.
-----------
Bear, Stearns & Co. Inc.
SG Cowen
Volpe Brown Whelan & Company
The date of this prospectus is , 1999.
<PAGE>
(Inside Front Cover)
An enlarged copy of the RAVISENT logo centered on the page, which consists
of the word "RAVISEnT(TM)" in capital letters except for the letter "n," with a
wave running through the lower half of each of the letters and below and
towards the right of which appears the word "TECHNOLOGIES" in capital letters.
Underneath the logo are the words "What the digital world watches." On the
bottom of the page is the address and telephone number of RAVISENT's
headquarters.
<PAGE>
(Gatefold)
A two page graphic across both pages of the gatefold. Across the top is the
statement "RAVISENT(TM) Brings It All Home." Underneath is a picture of a two
story house with shuttered windows surrounded by trees and a lawn. On the left
side of the house are the words "What do we do? We develop the digital audio
and video technologies inside the products you use every day. Whether it's
playing a new DVD, watching HDTV, recording your favorite TV program, or
sending a video of Sally's dance recital over the Internet. Our customers are
the manufacturers of your favorite name-brand personal computer and consumer
electronics products." On the right side of the picture are the words "Compaq,
Dell, Fountain, Fujitsu, Gateway, Hewlett-Packard, Micron, Packard-Bell NEC,
Tottori-Sanyo, Yamaha and others rely on us to make sure you can just sit back
and enjoy. Who are we? We're the people who bring the digital world home."
Centered below this text is the word "RAVISENT.(TM)" Lines are drawn from five
of the windows and the roof to pictures appearing below the house and blocks of
text appearing below these pictures.
The first window shows a line to a television set, below which appears the
text "Turning the average PC into a state-of-the-art digital VCR can become a
reality with our emerging digital video and audio encoding software
technologies." The second window shows a line to a camcorder, below which
appears the text "With our CineMaster(TM) RT Encoder software, camcorder video
can be digitized, viewed, stored and copied on a PC; and sent over the Internet
to family and friends." The third window shows a line to a personal computer,
below which appears the text "Award-winning CineMaster(TM) products bring the
theater-quality experience of DVD technology to millions of homes on personal
computers from the world's leading manufacturers." The fourth window shows a
line to a DVD player, below which appears the text "Our state-of-the-art
digital audio and video software powers brand name DVD players and other
consumer electronics appliances driving the digital home theater revolution."
The fifth window shows a line to a projection television set, below which
appears the text "Already demonstrating High Definition Television on personal
computers, we are developing the technologies that will make HDTV a cost-
effective reality in 1999." A line also runs from the roof to a satellite dish,
below which appears the text "We are demonstrating live satellite TV on a
personal computer, and we are adding full DBS viewing and recording
capabilities to our CineMaster(TM) family of software solutions."
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our consolidated financial
statements and the notes thereto before making an investment decision.
RAVISENT Technologies Inc.
We design, develop, license and market innovative modular software solutions
that enable digital video and audio stream management in personal computer
systems and consumer electronics devices. We also license supporting hardware
designs to selected customers and provide customization services and customer
support. "Stream management" includes recording, playback and other
manipulation of a video or audio input or "stream." Our solutions enable
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk, or DVD; direct broadcast satellite, or DBS, or its
European counterpart, digital video broadcasting or DVB; and high definition
television, or HDTV, on existing personal computer and consumer electronics
platforms. Our digital solutions incorporate industry standards such as MPEG-1
MPEG-2 and Dolby Digital, for video and audio compression, the process of
storing video or audio content in digital form, while using the same powerful,
easily customizable and modular software architecture and remaining independent
of operating systems and silicon components. As digital technology continues to
evolve and standards change, we can add new modules to our software to provide
additional functionality without needing to alter existing core components of
our digital solution. Moreover, our modular approach provides our customers
with enhanced flexibility and adaptability that enables the rapid introduction
of new products to market. We intend to leverage the flexibility of our
products to capitalize on the shift from analog to digital content across the
media and entertainment industries.
Our products focus on two important markets, the personal computer market
and the consumer electronics market. Our products incorporate a common or
"core" high-performance software code across multiple applications in each
market. This allows personal computer and consumer electronics manufacturers to
achieve faster time-to-market, to cross-market their product offerings, to
develop a customizable, consistent look and feel across product lines and to
reduce technical support costs. Personal computer and peripherals manufacturers
currently shipping products that incorporate our technology include ATI
Technologies Inc., Compaq Computer Corporation, Dell Computer Corporation,
Fountain Technologies, Inc., Fujitsu Microelectronics, Inc., Gateway
2000, Inc., Hewlett-Packard Company, Micron Electronics, Inc. and Packard Bell
NEC Europe. Consumer electronics manufacturers that have agreed to incorporate
our technology include Tottori-Sanyo Electric Co., Ltd. (a subsidiary of Sanyo
Electronics Corporation, Inc.) and Yamaha Corporation of America. We also have
strategic relationships with ATI Technologies, Dolby Laboratories, Inc., Intel
Corporation and STMicroelectronics (formerly SGS-Thomson Microelectronics).
Consumers are increasingly demanding capabilities that analog technology
cannot provide. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrum and
the ability to deliver customized and interactive services. As a result, a
growing number of consumer electronics manufacturers are using digital
technologies in their video and audio devices. Government regulation and the
expanding digital content market have accelerated this trend. As a result, all
existing television sets, video cassette recorders, stereos, set-top boxes and
personal computers are now candidates for upgrade to digital
technologies. In order to capitalize on upgrade cycles for existing products
and enter new markets, personal computer and consumer electronics manufacturers
are seeking digital product solutions that permit rapid time-to-market and
incorporate the latest features and functionality.
3
<PAGE>
Our strategy is to be the leading global provider of digital video and audio
solutions to personal computer and consumer electronics manufacturers. We
believe that the most effective way to achieve our strategy is to license our
technology to manufacturers that will in turn use our solutions to penetrate
very large personal computer and consumer electronics markets. The key elements
of our strategy include growing our licensing business model among top tier
personal computer and consumer electronics manufacturers, extending our
technological leadership, leveraging our technology and expertise into new
markets and focusing on our strategic relationships.
We currently offer two complete solutions for DVD playback on personal
computers. These solutions are incorporated into the products of seven of the
top ten personal computer manufacturers, based on total unit sales. These
include Software CineMaster 98, a software-only solution, and Hardware
CineMaster 98, a software solution with a supporting hardware platform design.
We also offer CineMaster CE, a software solution with multiple supporting
hardware platform designs that enables DVD playback across a variety of
consumer electronics products. CineMaster CE was introduced in late 1998 and we
have already signed agreements with Sanyo Electronics and Yamaha to license
this solution. In addition, we are developing a software-only DVD encoding
solution that enables the recording of video and audio streams in the DVD
format, a software solution that enables digital television viewing on a
consumer electronics device and a software solution that enables the viewing of
digital cable television streams using a personal computer or digital cable
set-top device. We receive a per unit license fee from personal computer and
consumer electronics devices manufacturers that incorporate our technology in
addition to any license fees we may receive from manufacturers of
semiconductors used in these devices.
----------------
We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994 and to Divicore Inc. in May 1999. Effective in June 1999, we will change
our name to RAVISENT Technologies Inc. We are planning to reincorporate in
Delaware prior to the consummation of the offering.
----------------
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................... 5,000,000 shares
Common stock to be outstanding after the offering.. 15,488,322 shares
Use of proceeds.................................... For general corporate
purposes, including
working capital, product
development, capital
expenditures and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol............. RVST
</TABLE>
The common stock outstanding after this offering is based on the number of
shares outstanding at March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after this offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock options
outstanding on March 31, 1999 at a weighted average exercise price of
$1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock options
granted subsequent to March 31, 1999 at an exercise price of $10.20 per
share;
. 2,725,000 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1995 Stock Option Plan; and
. 500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Capitalization," "Management--Benefit Plans," "Description of Capital
Stock" and Notes 12 and 19 of the notes to our consolidated financial
statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the year ended December
31, 1998 include the operations of Viona Development Hard & Software
Engineering GmbH from April 1998, the date of acquisition by RAVISENT.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services
..................... $ 825 $ 1,445 $ 3,447 $ 10 $ 2,290
Hardware ............. 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues.......... 4,195 6,821 30,288 3,143 10,812
Cost of revenues:
License and services.. 472 331 354 15 135
Hardware.............. 2,664 8,072 24,192 3,062 7,264
--------- --------- --------- --------- ---------
Total cost of revenues.. 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit............ 1,059 (1,582) 5,742 66 3,413
Operating loss.......... (1,950) (7,772) (12,961) (1,417) (265)
--------- --------- --------- --------- ---------
Net loss.............. $ (2,055) $ (7,253) $ (13,683) $ (1,544) $ (310)
========= ========= ========= ========= =========
Basic and diluted net
loss per common
share................ $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation............ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share........... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation...... 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
</TABLE>
The weighted average shares outstanding used in the pro forma per common
share calculation reflects the conversion of all outstanding preferred stock
into common stock as though it occurred on the date of issuance and excludes:
. 920,006 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to be
exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon the exercise of warrants
at a weighted average exercise price of $0.36 per share which will
remain outstanding following this offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 2,175 $ 5,898 $60,198
Working capital (deficit)..................... (489) 3,234 57,534
Total assets.................................. 14,511 19,950 74,250
Debt and capital lease obligations, less
current portion.............................. 977 352 352
Mandatory redeemable convertible preferred
stock........................................ 14,871 -- --
Total stockholders' equity (deficit).......... (12,779) 8,156 62,456
</TABLE>
The balance sheet data set forth above is shown:
. on an actual basis;
. on a pro forma basis to give effect to:
. the conversion of all outstanding shares of preferred stock into
common stock;
. the exercise of outstanding warrants to purchase 920,006 shares of
common stock at an exercise price of $0.66 per share upon the
consummation of this offering;
. the exercise of outstanding warrants to purchase 1,659,251 shares of
common stock at a weighted average exercise price of $0.36 per share;
and
. the issuance of 675,152 shares of preferred stock subsequent to March
31, 1999 and the conversion of such shares into common stock; and
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering price
of $12.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
----------------
Except as set forth in the consolidated financial statements or as otherwise
specified in this prospectus, all information in this prospectus assumes:
. a one-for-six reverse split of the outstanding shares of common stock;
. the conversion of all of our outstanding preferred stock into common
stock;
. the exercise of all of our outstanding warrants to purchase common stock
and preferred stock;
. our reincorporation in Delaware; and
. no exercise of the underwriters' over-allotment option.
7
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. implementing our business strategy;
. obtaining and expanding market acceptance of the products we offer;
. meeting our requirements with our customers;
. forecasts of digital video penetration in the personal computer and
consumer electronics industries;
. competition in the digital video and audio stream management market;
and
. the existence and timing of any consumer shift from analog-based to
digital-based products and the corresponding development of the
digital media market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. Actual
results and events may vary significantly from those discussed in the forward-
looking statements. A description of certain risks that could cause our results
to vary appears under the caption "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus, and we assume no obligation to update them or to explain the
reasons why actual results may differ. In light of these assumptions, risks and
uncertainties, the forward-looking events discussed in this prospectus might
not occur.
8
<PAGE>
RISK FACTORS
An investment in our shares is extremely risky. You should consider
carefully the following risks, in addition to the other information presented
in this prospectus, in evaluating us and our business.
Risks Related to RAVISENT
We are in the process of changing our business model from selling hardware to
licensing software and supporting hardware designs, and our revenues are
expected to decline as a result
RAVISENT was founded in April 1994 as a provider of hardware-based digital
video solutions. In November 1997 we changed our strategic focus from selling
hardware-based digital solutions to licensing software-based digital solutions,
and in early 1999 we began to discontinue direct sales of hardware-based
solutions altogether to focus exclusively on licensing software-based solutions
and supporting hardware platform designs. This change required us to adjust our
business processes and make additions to our engineering and marketing teams.
In addition, we expect to recognize lower revenues in 1999 than in 1998 in part
because we will no longer be selling hardware solutions. Before investing, you
should consider the risks and challenges we may face as a result of our change
in business model, which include, among others:
. increasing demand for our products and services;
. maintaining and increasing our base of personal computer and consumer
electronics manufacturers;
. competing effectively with existing and potential competitors; and
. developing further our new and unproven business model.
We cannot be certain that our change in business strategy will be successful
or that we will successfully address these risks. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our transition to a software and hardware design licensing model depends on our
ability to enter into new contractual arrangements with our customers, which we
have not concluded
We may not be able to enter into agreements with our customers that are
necessary in order to transition to a business model based on licensing
software and hardware designs from our traditional product sales model. We have
agreements with several of our customers that require us to supply them with
hardware. Under our old business model, we would contract with third party
manufacturers which would produce hardware for us, which we in turn would ship
to customers. Under our new business model, we will license the hardware design
to our customers, and we will not contract with third party manufacturers.
Instead, our customers will be directly responsible for the manufacture of the
design licensed from us and will either manufacture the design internally or
contract directly with a third-party manufacturer. However, we have not yet
concluded a contract implementing this arrangement with Dell Computer to which
we license our hardware. For the year ended December 31, 1998 and for the three
months ended March 31, 1999, 88.7% and 78.8% of our total revenues,
respectively, resulted from hardware sales rather than licenses of our hardware
design. We may not be successful in concluding this contract. Accordingly, we
will remain responsible for securing hardware for Dell until a contractual
arrangement is reached. This may be for a potentially indefinite period of
time. The completion of our transformation from a sales revenue model to a
licensing revenue model will be delayed until we reach an agreement with Dell.
9
<PAGE>
We have a limited history operating under our current business model, and our
historical financial information is of limited value in projecting our future
operating results or evaluating our operating history
As a result of our relatively brief operating history as a licensor of
digital software solutions and supporting hardware designs, our historical
financial information is of limited value in projecting future operating
results. We believe that comparing different periods of our operating results
is not meaningful and you should not rely on the results for any period as an
indication of our future performance. In addition at some point in the future,
these fluctuations may cause us to perform below the expectations of public
market analysts and investors. If our results were to fall below market
expectations, the price of our common stock may fall significantly. Our limited
operating results have varied widely in the past, and we expect that they will
continue to vary significantly from quarter-to-quarter as we attempt to
establish our products in the market.
You should expect our quarterly operating results to fluctuate in future
periods and they may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:
. variations in demand for our products and services, which are
relatively few in number;
. the timing of sales of our products and services and the timing of
new releases of personal computer systems, consumer electronics
devices and semiconductors that incorporate our products;
. delays in introducing our products and services;
. changes in our pricing policies or the pricing policies of our
competitors;
. the timing and accuracy of royalty reports received from our
customers, which we have to date not audited;
. the timing of large contracts that materially affect our operating
results in a given quarter;
. changes in the usage of digital media;
. our ability to develop and attain market acceptance of enhancements
to our CineMaster products;
. new product introductions by competitors;
. the mix of license, service and hardware revenues;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
administrative and product management personnel;
. our ability to expand our operations; and
. global economic conditions as well as those specific to personal
computer, consumer electronics, peripherals and semiconductor
manufacturers and other providers of digital video and audio stream
management solutions.
We plan to significantly increase our operating expenses to expand our sales
and marketing operations, including opening new sales offices and adding
additional sales professionals, broaden our product management and customer
support capabilities and fund greater levels of research and development,
particularly in the consumer electronics markets. We determine our operating
expenses largely on the basis of anticipated revenue trends and a high
percentage of our expenses are fixed in the short term and are significant. As
a result, any
10
<PAGE>
delay in generating or recognizing revenue could cause significant variations
in our operating results from quarter-to-quarter and could result in
substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall significantly. See "--Since our license revenue is based upon
customer sales reports and we have never audited our customers, we may be
required to restate our recognized revenues or adjust our revenues for
subsequent periods, which could cause our stock price to drop" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have a history of losses and we may not be able to achieve profitability in
the future
We incurred net losses of approximately $0.3 million for the three months
ended March 31, 1999, $13.7 million for the year ended December 31, 1998, $7.3
million for the year ended December 31, 1997 and $2.1 million for the year
ended December 31, 1996. As of March 31, 1999, we had an accumulated deficit of
approximately $24.2 million. To date, we have not achieved profitability on a
quarterly or annual basis, and revenues from our software solutions and
supporting hardware designs may not result in sufficient revenues to generate
profitability in any future period. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability on a quarterly or
annual basis, particularly to the extent that we face price competition. In
addition, we expect to significantly increase our sales and marketing, product
development, engineering and administrative expenses to grow. As a result, we
will need to generate significant revenues to achieve and maintain
profitability.
Increasing competition may cause our prices to decline, which would harm our
operating results
We expect our prices for our CineMaster products to decline over the next
few years. Most of our current revenues are derived from license fees
originating from sales of personal computer systems which use our Software
CineMaster product as their DVD solution. We expect to face increased
competition in this market, which will make it more difficult to maintain our
revenues and profit margins even if our sales volumes increase. If anticipated
increases in sales volume did not keep pace with anticipated pricing pressures,
our revenues would decline and our business could be harmed. Despite our
efforts to introduce enhancements to our products, we may not be successful in
maintaining our pricing. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our business currently depends upon our CineMaster products, and it is
uncertain whether the market will continue to accept these products
During 1997 and 1998, we derived virtually all of our license revenues from
the sale of personal computers and peripherals incorporating our CineMaster
products. We expect that license revenues from our CineMaster products will
continue to account for a significant portion of our revenues for the
foreseeable future. In particular, our business will be harmed if our existing
manufacturing customers do not continue to incorporate our CineMaster products
or if we are unable to obtain new customers for our CineMaster products. In
seeking market acceptance, it may be difficult for our digital solutions to
displace incumbent solutions employed by manufacturers not currently licensing
our CineMaster products. Manufacturers that are using other solutions would
need to invest in additional training and development tools and convert
software for existing hardware solutions in order to change to a new digital
solution. Accordingly, potential customers may not accept our digital
solutions, which could limit our growth opportunities and harm our prospects.
See "Business--Products and Services."
The loss of a single customer could significantly harm our business because a
majority of our revenues is derived from a small number of customers
A substantial portion of our license revenues come from three customers,
Dell Computer Corporation, ATI Technologies Inc. and Gateway 2000, Inc. During
1998, Dell Computer accounted for 81% of our total
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revenues and 38% of our gross profit, while ATI Technologies accounted for 6%
of total revenues and 33% of gross profit. In the quarter ending March 31,
1999, Dell Computer, ATI Technologies and Gateway accounted for 74%, 6% and 11%
of our total revenues and 34%, 18% and 29% of our gross profit, respectively.
We expect a relatively small number of customers to account for a majority of
our revenues and gross profit, if any, for the foreseeable future. The loss of
any of these or other primary customers, or a material decrease in revenue from
these customers, would immediately harm our business.
Since most of our revenue is derived from a small number of customers, problems
those customers experience will directly impact our business
As a result of our concentrated customer base, problems that our customers
experience could materially harm our business. These risks are beyond our
control. For example, because we do not control the business practices of our
customers, we do not influence the degree to which they promote our technology
or set the prices at which the products incorporating our technology are sold
to end users. Risks that may influence the success or failure of the personal
computer or consumer electronics manufacturers that are our customers include:
. the competition the manufacturer faces and the market acceptance of
its products;
. the engineering, marketing and management capabilities of the
manufacturer and the technical challenges unrelated to our
technology that it faces in developing its products;
. the financial and other resources of the manufacturer;
. new governmental regulations or changes in taxes or tariffs
applicable to the manufacturer; and
. the failure of third parties to develop and introduce content for
DVD and other digital media applications in a timely fashion.
The inability of us or our customers to successfully address any of these risks
could harm our business. See "Business--Customers."
Since our customers have not executed long term contracts with us, our revenues
could decline significantly with little or no notice
We have received purchase orders and do not have a licensing agreement with
one customer, Gateway, that accounted for 11.0% of our revenues in the quarter
ending March 31, 1999. In addition, our agreements with our customers are
typically of limited duration and do not contain minimum purchase commitments
or are terminable with little or no notice. Rather than long term contracts, we
typically enter into licensing agreements with one-year terms that
automatically renew each subsequent year unless a written cancellation is
received by either party. As a result, these customers could elect not to renew
these agreements and we could have little warning of this election. Also, since
our agreements with our customers do not include minimum purchase requirements,
the demand for our products is unpredictable. As a result of competition or
fluctuations in demand, we could be required to reach an accommodation with our
customers with respect to contractual provisions such as price or delivery time
in order to obtain additional business and maintain our customer relationships.
Any termination, decrease in orders or election not to renew a contract by our
principal customers would harm our business.
We depend upon technology licensed from third parties, and if we do not
maintain these license arrangements, we will not be able to ship our DVD
product and our business will be seriously harmed
We license technology that is used in our CineMaster products from third
parties under agreements with a limited duration and we may not be able to
maintain these license arrangements. If we fail to maintain these license
arrangements, we would not be able to ship our products for the DVD market, and
our business would be seriously harmed. In 1998 all of our revenue was derived
from DVD-related products. We have a
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license agreement with Dolby Laboratories for the audio format that is used in
all of our DVD-related products. Without this technology, we could not ship
product for DVD markets. In addition, we license encryption and decryption
software technology from Matsushita Electric, which must also be included in
any DVD products we ship. The license for the Dolby Digital technology is for a
term expiring at the expiration of the patent covered thereby with the furthest
expiration date from the date of the license. The license for the encryption
and decryption technology may be terminated by Matsushita at any time after the
giving of notice. We may not be able to renew either license. If we failed to
renew either of these licenses, we would not be able to ship products for the
DVD market, and we would accordingly lose a substantial amount of our revenue.
The loss of any of our strategic relationships would make it more difficult to
keep pace with evolving industry standards and to design products that appeal
to the marketplace
We rely on strategic relationships, such as those with Intel Corporation,
STMicroelectronics, Inc., Dolby Laboratories Licensing Corporation and ATI
Technologies to provide us with state of the art technology, assist us in
integrating our products with leading industry applications and help us make
use of economies of scale in manufacturing and distribution. Through our
interaction with our strategic partners, we gain valuable insights on evolving
industry standards and trends. For example, we may be able to learn about
future product lines in advance so that we can more efficiently design products
that our customers find valuable. However, we do not have written agreements
with any of our strategic partners that can ensure these relationships will
continue for a significant period of time. All of our agreements with these
partners are informal, and may be terminated by them at any time. The loss of
any one of these relationships could harm our business. See "Business--Sales
and Marketing."
Delays in providing our products to our customers may affect how much business
we receive
Our product development efforts may not be successful and we may encounter
significant delays in bringing our products to market. Since the product life
cycle in the personal computer and consumer electronics industries can be as
short as six to twelve months or less, if our product development efforts are
not successful or are significantly delayed, our business will be harmed. In
the past, we have failed to deliver new products, upgrades or customizations on
time, including customization projects for DVD products that are requested from
time to time by our customers. In the future, our efforts to remedy this
situation may not be successful and we may lose customers as a result. Delays
in bringing to market new products, enhancements to old products or interfaces
between existing products and new models of personal computers or consumer
electronics devices could be exploited by our competitors. If we were to lose
market share as a result of lapses in our product management, our business
would be harmed.
Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed
Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable
materials. If we are not successful in protecting our intellectual property,
our business could be substantially harmed.
Our pending patents may never be issued, and even if issued, may provide us
with little protection.
We regard the protection of patentable inventions as important to our future
opportunities. We currently have four U.S. patent applications pending relating
to our digital video and audio stream management technology. However, none of
our technology is patented outside of the United States nor do we currently
have any international patent applications pending. It is possible that:
. our pending patent applications may not result in the issuance of
patents;
. our patents may not be broad enough to protect our proprietary
rights;
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. any issued patent could be successfully challenged by one or more
third parties, which could result in our loss of the right to
prevent others from exploiting the inventions claimed in those
patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our
patents; and
. effective patent protection may not be available in every country in
which we do business.
We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value.
We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently
have a pending trademark application for the mark "RAVISENT" and a second
pending trademark application for the mark "CineMaster" which has been approved
for publication by the PTO. However, none of our trademarks are registered
outside of the United States, nor do we have any trademark applications pending
outside of the United States. Moreover, despite any precautions which we have
taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon
state or foreign law which precede our federal registration of such
marks;
. current federal laws that prohibit software copying provide only
limited protection from software "pirates," and effective trademark,
copyright and trade secret protection may be unavailable or limited
in certain foreign countries;
. policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming and we are unable to
determine the extent to which piracy of our products and trademarks
may occur, particularly overseas;
. we have provided our source code for Software CineMaster to one of
our customers, ATI Technologies, as part of our licensing
arrangements with it and the procedures and practices implemented
under the terms of this license may not be sufficient to prevent it
from exploiting the source code; and
. the tamper-resistant copy protection codes in our software have been
broken in the past and may not be successful in preventing
unauthorized use of our software in the future.
See "Business--Intellectual Property and Proprietary Rights."
We may become involved in costly and time consuming litigation over proprietary
rights
Intellectual property litigation is typical in our industry.
Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software and hardware in our industry may be
increasingly subject to third-party infringement claims as the number of
competitors grows and the functionality of products in different industry
segments overlaps. Third parties may currently have, or may eventually be
issued, patents that would be infringed by our products or technology. We
cannot be certain that any of these third parties will not make a claim of
infringement against us with respect to our products and technology.
Any litigation, brought by us or others, could result in the expenditure of
significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technology
or require us
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to enter into royalty or license agreements even before the issue of
infringement has been decided on the merits. If any litigation were not to be
resolved in our favor, we could become subject to substantial damage claims and
be enjoined from the continued use of the technology at issue without a royalty
or license agreement. These royalty or license agreements, if required, might
not be available on acceptable terms, or at all, and could harm our business.
If a successful claim of infringement were made against us and we could not
develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could be
significantly harmed.
We have received notices of claims that may result in litigation.
From time to time, we have received, and we expect to continue to receive,
notice of claims of infringement of other parties' proprietary rights. For
example:
. Our digital video stream management solutions comply with industry
DVD specifications, which incorporates technology known as MPEG-2
that governs the process of storing a video input in digital form.
We have recently received notice from two of our largest customers
which are personal computer manufacturers, that a third party with a
history of litigating its proprietary rights and which has
substantial financial resources has alleged that aspects of MPEG-2
technology infringe upon patents held by the third party. These
customers may in the future seek compensation or indemnification
from us arising out of the third-party claims and may be required to
agree to indemnify them to secure future business or otherwise. We
do not have written agreements with these customers that limit our
liability to these customers should litigation ensue. Moreover, we
may be required to pay license fees in connection with the use of
the third party's technology in the future.
. A group of companies mostly comprised of consumer electronics
manufacturers has formed a consortium known as MPEG-LA to enforce
the proprietary rights of other holders of patents covering
essential aspects of MPEG-2 technology that are incorporated into
our products. MPEG-LA has notified a number of personal computer
manufacturers, including our customers, that patents owned by
members of the consortium are infringed by the personal computer
manufacturers in their distribution of products that incorporate the
MPEG-2 technology. MPEG-LA has requested that these personal
computer manufacturers pay license fees for use of the technology
covered by MPEG-LA patents. These personal computer manufacturers
may in the future seek compensation or indemnification from us
arising out of the MPEG-LA claims, and we may be required to pay
license fees in connection with the use of MPEG-2 technology in the
future.
. A third party has asserted that the parental control features of our
CineMaster products infringe patents held by the third party. A
court could determine that we did infringe these patents and we
would be liable for resulting damages.
Any of these notices could result in litigation, which would include all of the
risks discussed above. See "Business--Intellectual Property and Proprietary
Rights."
We may not be able to profit from growth in our business if we are unable to
effectively manage the growth
Our ability to successfully offer our CineMaster products and other products
and services in a rapidly evolving digital video and audio stream management
market requires an effective planning and management process. We have limited
experience in managing rapid growth. In the last several months, we have added
engineering, sales, marketing, administrative and other management personnel.
Our business will suffer dramatically if we fail to manage our growth. On March
31, 1999, we had a total of 106 employees compared to a total of 30 employees
on March 31, 1998. Our growth so far has placed strains on our managerial,
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financial and personnel resources. We expect these strains to continue in the
future. The pace of our expansion, together with the complexity of the
technology involved in our products, demands an unusual amount of focus upon
the operational needs of our customers for quality, reliability, timely
delivery and post-installation field support. Our existing licenses rely
heavily on our technical expertise in customizing our digital solutions to
their new products. In addition, relationships with new manufacturing customers
generally require significant engineering support. Therefore, any increases in
adoption of our products by existing or new customers will increase the strain
on our resources, especially our engineers. To reach our goals, we will need to
continue hiring on a rapid basis while, at the same time, investing in our
infrastructure. We will also need to increase the scale of our operations. We
expect that we will also have to expand our facilities, and we may face
difficulties identifying and moving into suitable office space. In addition, we
will need to:
. successfully train, motivate and manage new employees;
. expand our sales and support organization;
. integrate new management and employees into our overall operations;
. implement a more effective cash management system;
. adopt and staff an investor relations program; and
. establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that growth
will impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our results of operations will suffer.
We may not be able to successfully make acquisitions of or investments in other
companies
We have very limited experience in acquiring or making investments in
companies, technologies or services. From time to time we have had discussions
with companies regarding our acquiring, or investing in, their businesses,
products or services. We have no present understanding or agreement relating to
any acquisition or investment. In the future, from time to time, we may make
acquisitions or investments in other companies, products or technologies.
Acquisitions in our industry are particularly difficult to assess because of
the rapidly changing technological standards in our industry. If we make any
acquisitions, we will be required to assimilate the personnel, operations and
products of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. However, the key personnel of the
acquired company may decide not to work for us. Moreover, acquisitions may
cause disruptions in our operations and divert management's attention from day-
to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. We may be unable to maintain
uniform standards, controls, procedures and policies if we fail in our efforts
to assimilate acquired businesses which could make management of our business
very difficult.
We are dependent upon our key management for our future success, and few of our
managers are obligated to stay with us
Our success depends on the efforts and abilities of our senior management
and certain other key personnel, particularly technical personnel in our
engineering subsidiary in Germany. Many of our officers and key employees are
employed at will. In addition, Mr. Wilde and the principal engineers in our
German subsidiary, Messrs. Sigmund, Horak and Ringelberg, are the only
employees upon whom we have obtained key man life insurance and we do not
expect to obtain life insurance on any of our other senior managers. If any of
these or other key employees left or was seriously injured and unable to work
and we were unable to find a qualified replacement, then our business could be
harmed. We have recently hired new managers and intend to continue hiring key
management personnel. We may not be able to successfully assimilate our
recently hired managers or to hire qualified key management personnel to
replace them. See "Management--Employment Contracts, Termination of Employment
Agreements and Change in Control Arrangements."
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We may not be able to hire and retain qualified employees, which would impair
our ability to grow
We intend to hire a significant number of additional sales, support,
marketing, engineering and product management personnel in 1999 and beyond.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Hiring qualified personnel, particularly sales, marketing, engineering
and product management personnel, is very competitive in our industry due to
the limited number of people available with the necessary technical skills and
understanding of the digital video and audio stream management industry. In
addition, we are headquartered in Malvern, Pennsylvania and we have in the past
and expect in the future to face difficulties locating qualified personnel in
this location. We expect to face greater difficulty attracting these personnel
with equity incentives as a public company than we did as a privately held
company. See "Business--Employees."
We may encounter significant difficulties in integrating our newest subsidiary
which could result in unexpected future expenses and difficulties in financial
reporting
In April 1998, we completed the acquisition of Viona. However, we may not be
able to successfully integrate the two companies. Combining our companies
requires, among other things, integrating our respective technologies,
coordinating our research and development and financial reporting efforts, and
continuously evaluating whether existing systems and procedures meet our growth
requirements, especially our financial and internal control systems and
management structure. Important aspects of the integration, such as improving
financial controls and reporting, are still in process and may not be completed
smoothly or successfully. If we fail to integrate these areas, we may be unable
to maintain uniform standards, procedures, controls and policies. Integrating
operations such as engineering, may require our management to dedicate
resources which may temporarily distract them from our day-to-day business,
including from the development of new products, which could result in delays in
introducing these new products. Coordinating geographically separated
organizations with distinct cultures may increase the difficulty of our
integration. If we fail to successfully complete the integration of Viona's
operations, our business could be harmed.
We may be subject to product returns, product liability claims and reduced
sales because of defects in our products
Products as complex as our CineMaster products frequently contain undetected
errors. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Errors may also arise as a
result of defects in the products into which our products are incorporated.
Despite our extensive quality assurance process, we have in the past shipped
product releases with some defects, and have discovered other errors in our
products after their commercial shipment. Despite our quality assurance process
and that of our customers, defects and errors may be found in new products or
in new versions or enhancements of existing products after commercial shipment
has begun. We may be required to devote significant financial resources and
personnel to correct any defects. Known or unknown errors or defects that
affect the operation of our products could result in the following, any of
which could harm our business:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. failure of our products to achieve market acceptance;
. increased service and warranty costs; and
. litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition,
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our product liability insurance may not be adequate to cover our losses in the
event of a product liability claim resulting from defects in our products and
may not be available to us in the future. See "Business--Products and
Services."
Since our license revenue is based upon customer sales reports and we have
never audited our customers, we may be required to make an adjustment to our
revenues for subsequent periods, which could cause our stock price to drop
We receive a license royalty for each personal computer system, peripheral
or consumer electronics product sold that contains our Software CineMaster
product and a royalty for each silicon device sold by a semiconductor
manufacturer that incorporates our technology. In collecting these fees,
preparing our financial reports, projections and budgets and in directing our
sales efforts and product development, we rely on our customers to accurately
report the number of units sold. We have never undertaken an audit of any of
our customers to verify that its reported sales unit numbers were accurate.
These reports are subject to potential revision by these manufacturers. If any
of our customers revised their product sales reports, we might be required to
adjust our revenues for subsequent periods, which could harm our business and
the price of our common stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability
In 1998, we derived approximately 22% of our revenues from shipments to
foreign subsidiaries of U.S. companies, and we expect to derive an increasing
amount of our revenue from sales outside North America. We have limited
experience in marketing and distributing our products internationally. In
addition, there are many risks inherent in doing business on an international
basis, including, among others:
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. problems in collecting accounts receivable;
. political and economic instability;
. changes in diplomatic and trade relationships;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. variance and unexpected changes in local laws and regulations.
Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We
do not use derivative instruments to hedge foreign exchange risk. In the
future, we may conduct sales in local currencies, in which case, changes in
exchange rates could adversely affect our operating results. In addition, if we
conduct sales in local currencies, we may engage in hedging activities, which
may not be successful and could expose us to additional risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Qualitative and Quantitative Disclosures About Market Risk."
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It may be difficult to raise needed capital in the future, which could
significantly harm our business
We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 1999. Our
capital requirements will depend on many factors, including:
. acceptance of and demand for our products;
. the number and timing of acquisitions;
. the costs of developing new products;
. the costs associated with our expansion; and
. the extent to which we invest in new technology and research and
development projects.
To the extent that the proceeds of this offering, our existing sources of
cash and cash flow from operations, if any, are insufficient to fund our
activities, we may need to raise additional funds. If we issue additional stock
to raise capital, your percentage ownership in RAVISENT would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources."
We recently changed our name
In May 1999, we changed our name from Quadrant International, Inc. to
Divicore Inc. Effective in June 1999, we will change our name again to RAVISENT
Technologies Inc. It is likely that for a period of time after our name change
occurs, potential customers and the market in general may not recognize our new
name. If potential customers do not realize who we are, we may lose future
business to competitors, which would harm our business.
Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately 33.3% of our outstanding common stock
following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. See "Principal
Stockholders."
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to shareholders
After this offering, the board of directors will have the authority to issue
up to 5,000,000 shares of preferred stock. Further, without any further vote or
action on the part of the stockholders, the board of directors will have the
authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever
issued, may have preference over and harm the rights of the holders of common
stock. Although the issuance of this preferred stock will provide us with
flexibility in connection with possible acquisitions and other corporate
purposes, this issuance may make it more difficult for a third party to acquire
a majority of our outstanding voting stock. We currently have no plans to issue
preferred stock.
Our certificate of incorporation and by-laws include provisions that may
have the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
RAVISENT. Furthermore, upon reincorporation, our board of directors will be
divided into three classes, only one of which is elected each year. Directors
will only be capable of being removed by the affirmative vote of 66 2/3% or
greater of all classes of voting stock. These factors may further delay or
prevent a change of control of
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RAVISENT. See "Description of Capital Stock--Antitakeover Effects of Provisions
of the Certificate of Incorporation, By-laws and Delaware Law."
Risks Related to our Industry
Our revenues are dependent upon acceptance of products that incorporate our
digital video technologies in the personal computer and consumer electronics
industries, particularly DVD-related products
We rely on the personal computer and consumer electronics industries, and
these industries have risks and uncertainties that are beyond our control.
The personal computer and consumer electronics industries are presently the
only markets for our digital video and audio solutions. As a result, our
results of operations will depend almost entirely on consumer acceptance of the
products that incorporate our digital video technology. Our dependence on these
industries involves several risks and uncertainties, including:
. whether semiconductor manufacturers developing silicon devices for
personal computer and consumer electronics manufacturers will design
our digital solutions into their devices and successfully introduce
these devices;
. changes in consumer requirements and preferences;
. the small number of product manufacturers in these industries and
the short product life cycles which can be six months or less;
. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications, such as handheld
personal computers and set-top boxes, which have only recently been
introduced to the market; and
. the current lack of open industry standards for software and
hardware in the consumer electronics industry.
We currently depend upon demand for DVD-related products, which may not be
sustained.
Our success currently depends upon continued demand for DVD-related products
in the consumer electronics and personal computer markets. All of our revenues
in 1998 resulted from sales of DVD-related products. In addition to the risks
inherent in the personal computer and consumer electronics industries, the
market for DVD-related products also contains risk and uncertainties,
including:
. the developing and marketing of content by third party content
providers for end-user systems such as DVD players and desktop
computers in a format compatible with our digital solutions;
. the sustaining and developing of the demand for DVD players or other
existing applications; and
. the potential for declining demand for DVD solutions in lower price
personal computers.
Factors negatively affecting the consumer electronics or personal computer
industries in general or the DVD market in particular could harm our business.
Moreover, to the extent that the performance, functionality, price and power
characteristics of our digital solutions fail to satisfy customers who have a
critical need for specific digital applications, the use of our digital
solutions could become confined to a limited segment of these industries. See
"Business--Sales and Marketing" and "--Strategy."
Competition in our markets is likely to continue to increase and could harm our
business
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing and which are characterized by short product life cycles
and price erosion. Our principal competitors in the software-based digital
solution market are Mediamatics, Inc. (a subsidiary of National Semiconductor,
Inc.), Zoran
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Corporation and Xing Technology Corporation (which has agreed to be acquired by
RealNetworks, Inc.). Our principal competitor in the hardware-based digital
solution market is Sigma Designs, Inc. and we also compete against several
smaller companies. We also compete with the internal research and development
departments of other software companies as well as those of personal computer,
peripherals, consumer electronics and semiconductor manufacturers who are in
the market for specific digital video or audio software applications. Numerous
other major personal computer manufacturers, software developers and other
companies are focusing significant resources on developing and marketing
products and services that will compete with our CineMaster products. At least
two semiconductor manufacturers, including C-Cube Microsystems and Zoran, are
positioning their products as offering hardware-based digital video and audio
management capabilities and marketing such products as equal or superior to our
CineMaster products. In the future, operating system providers with a larger
established customer base, such as Microsoft, may enter the digital video or
audio stream management markets by building video or audio stream management
applications into their operating systems. For example, Microsoft currently
markets a very basic MPEG-1 compliant digital solution that is bundled into its
operating system, which is used by a substantial number of personal computer
users. If Microsoft were to successfully develop or license a more
sophisticated DVD-compliant digital video solution and incorporate the solution
into its operating system, our revenues could be substantially harmed.
We anticipate continued growth and competition in the digital video industry
and the entrance of new competitors into our markets, and that, accordingly,
the market for our products will remain intensely competitive. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may
have significantly more personnel or greater financial, technical, marketing
and other resources than either we or our current competitors do. Furthermore,
our future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business. See "Business--Competition."
If we fail to manage technological change, respond to evolving industry
standards or enhance our products' interoperability with the products of our
customers, demand for our products will drop and our business will suffer
Future versions of software and hardware platforms embodying new
technologies or the emergence of new industry standards could render our
products obsolete or uncompetitive. The market for digital video and audio
stream management hardware and software is characterized by rapid technological
change, and evolving industry standards, such as standards for DVD audio, DVD
random access memory and DTV in Europe. If we fail to respond to evolving
industry standards, our products could rapidly become obsolete, which would
harm our business. If the characteristics of our digital solutions are not
compatible with the requirements of specific system or program applications,
the likelihood that our customers will design our products into their systems
and devices will decrease and our business will be harmed. See "Business--
Research and Development."
21
<PAGE>
We may not be able to respond to rapidly changing consumer preferences
Our results of operations will depend on the extent to which our CineMaster
products are incorporated into the products of leading personal computer,
consumer electronics, peripherals and semiconductor manufacturers. Their
willingness to incorporate our products depends upon whether we succeed in
developing enhancements and new generations of our software and hardware that
satisfy consumer preferences in our markets and introduce these new
technologies to the marketplace in a timely manner. We must constantly modify
or improve our products to keep pace with changing consumer preferences. For
example, DVD drives became widespread on new personal computers in the last two
years. It is particularly difficult to keep pace with changing consumer
preferences in the personal computer and consumer electronics industries as a
result of a number of factors, including:
. the difficulty of anticipating and timely responding to the latest
consumer trends and requirements;
. the introduction by our competitors of new products embodying
popular new technologies or features that appeal to consumers; and
. the significant investment that is often required before commercial
viability is achieved to market a new feature or function.
Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition,
we may not have the financial and other resources necessary to develop any
enhancements or new generations of the technology that generate revenue in
excess of the costs of development.
Year 2000 issues present technological risks to our business and could harm
sales
In order to save valuable memory, many existing computer systems and
software programs were designed to calculate or refer to the year in any
calendar date using the last two digits and presuming that the first two digits
are "19." As a result, these systems and programs may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results known as Year 2000 failures. If
the systems or programs look ahead of the current date for any reason, they may
need to refer to dates occurring after December 31, 1999. As a result, Year
2000 failures may occur at any time, including prior to January 1, 2000.
Neither our Hardware CineMaster nor our Software CineMaster products make
use of calendar clocks in any way. However, our products are incorporated into
software and hardware of personal computer, consumer electronics, computer
peripheral and semiconductor manufacturers, some of which may make use of
calendar clocks and may therefore experience Year 2000 failures. We have
recently initiated a comprehensive assessment of the possibility of Year 2000
failures affecting us and we have replaced our internal computer systems and
application software as a precaution. However, we cannot assure you that third-
party software and hardware that is incorporated into our information systems
will not need to be revised or replaced as well. If we were required to replace
these third-party products, our business could be harmed. In addition, we have
performed operational tests on our products as incorporated into those of our
customers and these tests have not resulted in Year 2000 failures. Nonetheless,
these tests may not be completely accurate and Year 2000 failures may occur. If
our customers' hardware or software were to suffer Year 2000 failures, such
failures might cause our CineMaster products to fail as well. Changes required
to respond to Year 2000 failures caused by interoperability issues could be
expensive and time consuming and lead to lost revenues, breach of contract
claims, higher operating costs, loss of customers and other business
interruptions, any of which could harm our business.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
suffer Year 2000 failures. If these entities were to suffer Year 2000 failures,
a systemic failure might occur which is beyond our control, such as a prolonged
Internet, telecommunications or electrical failure. A systemic failure could
prevent us from delivering our
22
<PAGE>
services to our customers or cause other business disruptions, such as
preventing our customers or potential customers from accessing our Internet web
site. Any significant disruption in the infrastructure on which we rely could
harm our business. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Year 2000 Compliance."
We face risks from the uncertainties of any future governmental regulation
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally.
However, due to the increasing popularity and use of the digital delivery
mediums, it is possible that future laws and regulations may be adopted that
regulate DSS/DBS or other markets in which our products are sold. Future
regulatory measures may include, among other things:
. pricing;
. content;
. copyrights;
. export controls (particularly regarding data encryption);
. distribution; and
. characteristics and quality of products and services.
The growth and development of the digital media market may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business in this segment. The adoption of any
additional laws or regulations may decrease the expansion of this market and
harm our business. Our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the digital media market.
Risks Related to this Offering
Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be appropriately used
We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on marketing, research and development and product
management. We may also use some of the proceeds to acquire other businesses,
products or technology which would complement our existing products, expand our
market coverage or enhance our technological capabilities. We have no specific
plan as to how we will spend the proceeds of this offering. As a result, our
management will have discretion over how to use all of the funds provided by
this offering. If our management uses poor judgment in spending the proceeds,
our business will be adversely affected. We cannot assure you that investment
of the proceeds will yield a favorable return or any return. See "Use of
Proceeds."
The price of our common stock may be volatile
The trading price of the shares being sold in this offering may fluctuate
widely as a result of a number of factors, most of which are outside our
control. Some of these factors include:
. quarter-to-quarter variations in our operating results;
. our announcements about the performance of our products and our
competitors' announcements about performance of their products;
. changes in earnings estimates by, or failure to meet the
expectations of, analysts;
. government regulatory action;
. increased price competition;
23
<PAGE>
. developments or disputes concerning intellectual property rights;
and
. general conditions in the computer industry.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.
We are negotiating the initial offering price of the common stock with the
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial public offering
price. See "Underwriting."
There has been no prior public market for our common stock, and a public market
may not develop
Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop in the future. If an active trading
market does develop, it may not last. The lack of an active trading market may
impair your ability to dispose of your shares at the time you wish to sell them
or at a price which you consider reasonable. Moreover, the lack of an active
market may reduce the fair market value of our shares. An inactive market may
also impair our ability to raise capital by selling shares and may impair our
ability to acquire other companies or technology by using our shares as
consideration.
As our currently outstanding stock becomes eligible for sale, the introduction
of this stock into the market may cause our stock price to decline
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options and warrants, the trading price of our common
stock could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
15,488,332 shares of common stock (based upon shares outstanding as of March
31, 1999), assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options after March 31, 1999. Of these shares, the
5,000,000 shares sold in this offering will be freely tradable. Another
9,726,785 shares will be eligible for sale in the public market 180 days from
the date of this prospectus, substantially all of which are subject to lock up
agreements. Bear, Stearns & Co. Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. The remaining 761,547 shares will be restricted securities
that have been held for less than one year and are not yet saleable under Rule
144. See "Shares Eligible for Future Sale."
After this offering, if certain conditions are met, the holders of
approximately 5,716,192 shares of common stock and the holders of warrants to
purchase up to approximately 2,551,325 shares of common stock will be entitled
to require us to register their shares under the Securities Act. These
shareholders also have the right to participate in any registration of our
shares which we undertake on our own. If these shareholders exercise their
registration rights, a large number of our shares may be registered and sold in
the public market. This could adversely affect the trading price for our
shares. If we attempted to raise money through a registration and sale of our
stock and these shareholders forced us to allow them to participate in the
registration, our ability to raise the amount of money we need to execute our
business plan could be adversely affected. See "Description of Capital Stock--
Registration Rights."
You will experience substantial dilution in the value of your shares
immediately following this offering
The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."
24
<PAGE>
USE OF PROCEEDS
The net proceeds to RAVISENT from the sale and issuance of the 5,000,000
shares of common stock offered hereby are estimated to be $54.3 million
(approximately $62.7 million if the underwriters' over-allotment option is
exercised in full), at the assumed initial public offering price of $12.00 per
share after deducting the underwriting discount and estimated offering
expenses. RAVISENT is conducting this offering primarily to increase its equity
capital, create a public market for its common stock and to facilitate future
access by RAVISENT to public equity markets. RAVISENT intends to use a portion
of the net proceeds for general corporate purposes, including working capital,
marketing, research and development, product management and capital
expenditures. In addition, RAVISENT may use a portion of the net proceeds to
acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. RAVISENT has no commitments with
respect to any acquisition or investment, and it is not involved in any
negotiations with respect to any similar transaction. In addition, RAVISENT has
not performed any studies or made any decisions with its financial advisors or
otherwise regarding the use of proceeds from this offering. Pending these uses,
the net proceeds of this offering will be invested in short-term, interest-
bearing, investment grade securities. See "Risk Factors--We have substantial
discretion as to how to use proceeds from this offering" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DIVIDEND POLICY
RAVISENT has never declared or paid dividends on its capital stock and does
not anticipate declaring or paying cash dividends in the foreseeable future.
RAVISENT anticipates that it will retain all future earnings, if any, for use
in its operations and the expansion of its business. Payments of future
dividends, if any, will be at the discretion of RAVISENT's board of directors
after taking into account various factors, including its financial condition,
operating results, current and anticipated cash needs and plans for expansion.
Moreover, pursuant to agreements with its lender, RAVISENT is prohibited from
declaring or paying dividends without the prior written consent of the lender.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CORPORATE INFORMATION
RAVISENT Technologies Inc. was incorporated in Pennsylvania in April 1994 as
Quadrant Sales International, Inc. and changed its name to Quadrant
International, Inc. in May 1994, to Divicore Inc. in May 1999 and will change
its name again to RAVISENT Technologies Inc. effective in June 1999. RAVISENT
Technologies Inc. plans to reincorporate in Delaware prior to the consummation
of the offering. RAVISENT's assets are held by two Delaware corporations,
Liuco, Inc., a finance subsidiary, and Divico, Inc., an operating subsidiary,
each of which is a wholly-owned subsidiary of RAVISENT Technologies Inc., and a
Nevada corporation, DVA, Inc., an intellectual property subsidiary, which is a
wholly-owned subsidiary of Liuco, Inc. RAVISENT's assets in Germany are held by
two German corporations, Erste Cinco Vermogensverwaltungs GmbH and Viona
Vervatungs GmbH, each of which is a wholly-owned subsidiary of DVA, Inc., and a
German limited partnership, Viona Development Hard and Software Engineering
GmbH, which is a wholly-owned subsidiary of the two German corporations.
References in this prospectus to "RAVISENT," "we," "our," and "us" collectively
refer to RAVISENT Technologies Inc., a Delaware corporation, and all of its
U.S. and German subsidiaries, and not to the underwriters. RAVISENT's principal
executive offices are located at One Great Valley Parkway, Malvern,
Pennsylvania, 19355 and its telephone number is (800) 700-0362.
RAVISENT, the RAVISENT logo and CineMaster are trademarks of RAVISENT
Technologies Inc. Each trademark, trade name or service mark of any other
company appearing in this prospectus belongs to its holder.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of RAVISENT as of March
31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to:
. the conversion of all outstanding shares of preferred stock into
common stock;
. the exercise of outstanding warrants to purchase 920,006 shares of
common stock at an exercise price of $0.66 per share upon the
consummation of this offering;
. the exercise of outstanding warrants to purchase 1,659,251 shares of
common stock at a weighted average exercise price of $0.36 per share;
and
. the issuance of 675,152 shares of preferred stock subsequent to March 31,
1999 and the conversion of such shares into common stock;
. on a pro forma, as adjusted basis to give effect to the sale of the
shares of common stock by us at an assumed initial public offering price
of $12.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses.
This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------
Pro As
Actual Forma Adjusted
-------- -------- --------
(In thousands, except
share data)
<S> <C> <C> <C>
Current portion of long-term obligations......... $ 2,073 $ 2,073 $ 2,073
======== ======== ========
Long-term obligations, excluding current
portion......................................... 977 352 352
-------- -------- --------
Mandatory redeemable convertible preferred stock:
31,523,684 shares, $.06 par value per share,
authorized, actual and pro forma; 5,000,000
shares, $.001 par value per share, authorized,
as adjusted; 3,913,072 shares $.06 par value per
share, issued and outstanding, actual net of
subscription receivable of $625,000 for 125,502
shares; no shares issued and outstanding,
pro forma; no shares, $.001 par value per share,
issued and outstanding, as adjusted............. 14,871 -- --
Stockholders' equity:
Common stock: 80,000,000 shares, $.06 par value
per share, authorized, actual and pro forma;
50,000,000 shares, $.001 par value per share,
authorized, as adjusted; 3,520,851 shares, $.06
par value per share, issued, actual; 10,488,332
shares, $.06 par value per share, issued,
pro forma; 15,488,322 shares, $.001 par value
per share, issued and outstanding, as adjusted.. 211 641 15
Additional paid-in capital....................... 13,110 34,115 89,041
Deferred stock compensation...................... (1,182) (1,182) (1,182)
Stockholders' equity (accumulated deficit)....... (24,152) (24,152) (24,152)
Cumulative foreign currency translation
adjustment...................................... (46) (46) (46)
Subscription note receivable..................... -- (500) (500)
Treasury stock, at cost, 200,000 shares.......... (720) (720) (720)
-------- -------- --------
Total stockholders' equity (deficit)........... (12,779) 8,156 62,456
-------- -------- --------
Total capitalization........................... $ 3,069 $ 8,508 $ 62,808
======== ======== ========
</TABLE>
26
<PAGE>
The common stock outstanding after this offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock
options outstanding on March 31, 1999 at a weighted average exercise
price of $1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock
options granted subsequent to March 31, 1999 at an exercise price of
$10.20 per share.
. 2,725,000 shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
. 500,000 shares of common stock reserved for issuance under
RAVISENT's 1999 Employee Stock Purchase Plan.
See "Management--Benefit Plans," "Description of Capital Stock" and Notes 12
and 19 the of notes to the consolidated financial statements.
27
<PAGE>
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of shares of common stock in the offering exceeds the net
tangible book value per share of common stock after the offering. The pro forma
net tangible book value per share of common stock is determined by subtracting
RAVISENT's total liabilities from the total book value of its tangible assets
and dividing the difference by the number of shares of common stock deemed to
be outstanding on the date as of which such book value is determined.
The pro forma net tangible book value of RAVISENT at March 31, 1999, was
approximately $3,781,000, or $0.36 per share. After giving effect to the sale
of the shares of common stock offered by RAVISENT at the assumed initial public
offering price of $12.00 per share, and after deducting underwriting discounts
and estimated offering expenses, RAVISENT's pro forma net tangible book value
at March 31, 1999, would have been $58,081,000, or $3.75 per share. This
represents an immediate increase in net tangible book value of $3.39 per share
to existing stockholders and an immediate dilution of $8.25 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share as of March 31,
1999........................................................... $0.36
Pro forma increase attributable to new investors................ $3.39
-----
Pro forma net tangible book value per share after the offering.... 3.75
------
Pro forma dilution per share to new investors..................... $ 8.25
======
</TABLE>
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to RAVISENT and the average
price per share paid by existing stockholders and by new investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $12.00 per share (before deducting the underwriting discount and
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per-Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 10,488,332 67.7% $34,757,000 36.7% $ 3.31
New investors.............. 5,000,000 32.3% $60,000,000 63.3% $12.00
---------- ----- ----------- ------ ------
Totals................... 15,488,322 100.0% $94,757,000 $100.0%
========== ===== =========== ======
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of March 31, 1999 and includes:
. 920,006 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.66 per share to
be exercised upon consummation of the offering;
. 1,659,251 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $0.36
per share which will remain outstanding following the offering; and
. 675,152 shares of common stock issuable upon conversion of preferred
stock issued subsequent to March 31, 1999.
The common stock outstanding after the offering excludes:
. 2,252,528 shares of common stock issuable upon exercise of stock
options outstanding on March 31, 1999 at a weighted average exercise
price of $1.86 per share;
. 481,555 shares of common stock issuable upon exercise of stock
options granted subsequent to March 31, 1999 at an exercise price of
$10.20 per share;
28
<PAGE>
. 2,725,000 shares of common stock reserved for issuance under the
1999 Stock Incentive Plan which incorporates our 1995 Stock Option
Plan; and
. 500,000 shares of common stock reserved for issuance under the 1999
Employee Stock Purchase Plan.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization," "Management--
Benefit Plans," "Description of Capital Stock" and Notes 12 and 19 of the notes
to the consolidated financial statements.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1998, and the consolidated balance sheet
data at December 31, 1997 and 1998, are derived from the consolidated financial
statements of RAVISENT which have been audited by KPMG LLP, independent
accountants, and are included elsewhere in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1995, and the
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
audited consolidated financial statements of RAVISENT not included in this
prospectus. The consolidated statement of operations data for the period from
April 1994 (inception) to December 31, 1994 and the consolidated balance sheet
data at December 31, 1994, are derived from the unaudited consolidated
financial statements of RAVISENT not included in this prospectus. The
consolidated statement of operations data for the year ended December 31, 1998
include the operations of Viona Development Hard & Software Engineering GmbH
from April 1998, the date of acquisition by RAVISENT. The 1998 pro forma
consolidated statement of operations data is presented as if the acquisition
occurred on January 1, 1998. The consolidated statement of operations data for
each of the three-month periods ended March 31, 1998 and 1999, and the
consolidated balance sheet data at March 31, 1999, are derived from unaudited
interim consolidated financial statements of RAVISENT included elsewhere in
this prospectus. The unaudited interim consolidated financial statements have
been prepared on substantially the same basis as the audited consolidated
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for such periods. The historical
results are not necessarily indicative of results to be expected for any future
period. The selected consolidated financial data set forth below should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements of
RAVISENT and the notes thereto and the unaudited pro forma financial statements
included elsewhere in this prospectus. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations."
<TABLE>
<CAPTION>
Period from
April 1994 Three Months Ended
(inception) Year Ended December 31, March 31,
to ------------------------------------------------------- --------------------
December 31, 1998
1994 1995 1996 1997 1998 Pro Forma 1998 1999
------------ --------- --------- --------- --------- ----------- --------- ---------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services... $ -- $ 229 $ 825 $ 1,445 $ 3,447 $ 3,447 $ 10 $ 2,290
Hardware............... 127 972 3,370 5,376 26,841 26,841 3,133 8,522
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.......... 127 1,201 4,195 6,821 30,288 30,288 3,143 10,812
Cost of revenues:
License and services... -- 115 472 331 354 354 15 135
Hardware............... 62 661 2,664 8,072 24,192 24,192 3,062 7,264
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues.. 62 776 3,136 8,403 24,546 24,546 3,077 7,399
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............ 65 425 1,059 (1,582) 5,742 5,742 66 3,413
Research and
development............ 78 319 1,034 1,828 3,121 3,037 498 1,465
Sales and marketing..... 63 305 731 1,158 1,964 1,995 465 1,062
General and
administrative......... 35 497 1,198 1,710 4,673 4,692 505 837
Depreciation and
amortization........... 3 23 46 86 906 1,146 15 314
Compensation related to
stock options.......... -- -- -- 1,408 139 139 -- --
Acquired in-process
research and
development............ -- -- -- -- 7,900 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating loss.......... (114) (719) (1,950) (7,772) (12,961) (5,267) (1,417) (265)
Interest expense, net... 3 36 105 197 722 711 127 45
Other income............ -- -- -- 716 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss............... $ (117) $ (755) $ (2,055) $ (7,253) $ (13,683) $ (5,978) $ (1,544) $ (310)
========= ========= ========= ========= ========= ========= ========= =========
Basic and diluted net
loss per common
share(1)............... $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (4.94) $ (2.03) $ (0.73) $ (0.18)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
computing per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 2,920,677 3,316,782 2,103,654 3,320,851
Pro forma basic and
diluted net loss per
common share(1)........ $ (0.08) $ (0.49) $ (1.19) $ (3.52) $ (2.60) $ (1.01) $ (0.73) $ (0.08)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
pro forma per common
share calculation(1)... 1,491,069 1,545,856 1,720,922 2,060,668 5,547,260 5,943,365 2,103,654 7,233,923
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
March 31,
1994 1995 1996 1997 1998 1999
----------- ---- ------ ------ -------- -----------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $61 $ 17 $ 53 $ 607 $ 1,024 $ 2,175
Total assets............ 25 707 1,900 2,569 17,374 14,511
Debt and capital lease
obligations, less
current portion........ 130 557 725 732 1,418 977
Mandatory redeemable
convertible preferred
stock.................. -- -- -- -- 14,589 14,871
Total stockholders'
equity (deficit)....... (66) (774) (922) (6,084) (12,236) (12,779)
</TABLE>
See Note 1 of the notes to the consolidated financial statements for a
detailed explanation of the determination of the shares used to compute basic
and diluted net loss per share.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of RAVISENT should be read in conjunction with the consolidated
financial statements and notes thereto and the unaudited pro forma financial
statements included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. RAVISENT's
actual results could differ from those anticipated in these forward-looking
statements as a result of various factors including but not limited to, those
discussed in "Risk Factors," "Business" and elsewhere in this prospectus.
Overview
RAVISENT designs, develops, licenses and markets innovative modular software
solutions that enable digital video and audio stream management in personal
computer systems and consumer electronics devices. RAVISENT also licenses
supporting hardware designs to selected customers and provides customization
services and customer support. RAVISENT's solutions enable decoding and
encoding multimedia formats such as DVD, DBS/DVB and HDTV on existing personal
computer and consumer electronics platforms. RAVISENT's digital solutions
incorporate industry standards for video and audio compression and are
independent of operating systems and silicon components.
RAVISENT's customers consist primarily of personal computer and consumer
electronics manufacturers. In addition, RAVISENT supplies its software
solutions and hardware designs to selected peripherals providers and
semiconductor manufacturers. In 1998 and the quarter ended March 31, 1999,
RAVISENT generated substantially all of its total revenues, respectively, from
personal computer and peripherals manufacturers. However, RAVISENT anticipates
that an increasing percentage of revenues, beginning in the second half of
1999, will be derived from consumer electronics and semiconductor
manufacturers.
Prior to 1998, RAVISENT generated revenue primarily from direct sales of its
hardware solutions to retail distributors and end users. In 1998, substantially
all of RAVISENT's revenues were derived from Software CineMaster 98 and
Hardware CineMaster 98. RAVISENT introduced the first in its line of digital
video products in March 1997 with the launch of CineMaster, a hardware and
software solution sold to personal computer manufacturers, which enabled DVD
playback on a personal computer. In December 1997, RAVISENT introduced its
second generation hardware and software solution called Hardware CineMaster 98.
The first released version of this product, release 1.2, accounted for 100% of
hardware sales or $26.8 million in the year ended December 31, 1998. In the
quarter ended March 31, 1999, RAVISENT phased release 1.2 out of production in
favor of a new release, version 3.0. For the quarter ended March 31, 1999
revenues from sales of release 1.2 were $4.6 million or approximately 54.5% of
hardware revenues, and revenues from release 3.0 were $3.9 million or
approximately 45.5% of hardware revenues. In August 1998, RAVISENT launched its
software-only solution, Software CineMaster 98, and began to transition its
business model from a direct product sales approach to a license approach.
License revenues from Software CineMaster 98 are currently RAVISENT's sole
source of license revenue. RAVISENT currently expects to release the successor
product to Software CineMaster 98 during the summer of 1999. As part of its
license approach, in February 1999, RAVISENT began entering into manufacturing
and license agreements with third parties under which RAVISENT will no longer
manufacture Hardware CineMaster 98. Instead, RAVISENT will receive a per unit
license fee on all future sales of Hardware CineMaster 98. RAVISENT is
currently in the process of completing its transition to a license model and,
in the future, RAVISENT expects that most of its revenues will be derived from
licenses of its software and its hardware designs. As a result of this change,
RAVISENT will recognize lower revenues in 1999 than in 1998, which RAVISENT
expects to be accompanied by a decrease in its cost of revenues.
RAVISENT's revenues are comprised of hardware revenues, license revenues and
services revenues. Hardware revenues, consisting of direct sales of hardware
subsystems to personal computer and peripherals manufacturers, have represented
most of RAVISENT's total revenues in the past but are expected to be nominal in
the future. License revenues consist of fees paid on a per unit basis, or
sometimes with new
32
<PAGE>
customers in advance, each time a manufacturer ships a product that
incorporates RAVISENT's software solutions or software with supporting hardware
designs. Service revenues consist of engineering fees from consumer
electronics, personal computer, peripherals and semiconductor manufacturers for
custom engineering services. Services are generally billed on either a time and
material basis or on a project or contract basis.
License revenues are recognized when earned, which is generally based on
receiving notification from a licensee detailing the shipments of products
incorporating RAVISENT technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers.
RAVISENT's license agreements generally have a term of one year or less, and
typically require payment within 45 or 60 days after the end of the calendar
quarter in which the product is shipped. Some of RAVISENT's contracts may also
require payment of an up-front license fee. License fees paid in advance, with
no further future commitment, are recognized in the period that the license
agreement is signed, the technology is delivered and collectibility is
probable. The amount and timing of prepaid fees could cause RAVISENT's
operating results to vary significantly from period to period. Services
revenues are recognized upon delivery of the service in the case of time and
material contracts or on a percentage completion basis in the case of project-
based contracts. Hardware product sales are recognized upon shipment of the
product to the manufacturer or end user.
RAVISENT's revenues are concentrated among a few customers. In 1998, Dell
Computer accounted for approximately 81% of total revenues and 38% of gross
profit. ATI Technologies accounted for approximately 6% of total revenues and
33% of gross profit. Revenues from ATI Technologies made a relatively larger
contribution to gross profit because revenues from ATI Technologies consisted
entirely of license fees. In the quarter ended March 31, 1999, Dell Computer,
ATI Technologies and Gateway accounted for 74%, 6% and 11% of RAVISENT's
revenues and 34%, 18% and 29% of its gross profit, respectively. While RAVISENT
believes that the number of customers incorporating its technology into their
products will grow, RAVISENT expects that a significant portion of revenue will
continue to be concentrated among a relatively small number of customers for
the foreseeable future. The revenues from particular customers may vary widely
from period to period depending on the addition of new contracts and the
volumes and prices at which licensees sell RAVISENT-enabled products to end
users in any given period.
RAVISENT sells its products directly to personal computer and consumer
electronics manufacturers in the United States and Europe and through a sales
representative in Japan. To date, companies based in the Pacific Rim and Europe
have accounted for a small portion of RAVISENT's revenues. Sales outside of the
United States have been primarily through U.S. manufacturers that distribute
their products to end users overseas.
In April 1998, RAVISENT acquired Viona, a German engineering services
company. Prior to the acquisition, RAVISENT had contracted Viona to co-develop
its products and a significant portion of its software and systems
architecture. The purchase price was approximately $11.4 million, and the
acquisition was recorded under the purchase method of accounting. The results
of operations of Viona have been included in RAVISENT's operating results since
the date of acquisition. In connection with the acquisition, RAVISENT expensed
$7.9 million of the purchase price as acquired in-process research and
development. The remaining portion of the purchase price was attributable to
acquired assets, which were primarily fixed assets and accounts receivable,
recorded at fair market value, in the amount of $0.5 million, and intangible
assets totaling $3.5 million less, liabilities acquired of $0.6 million. The
intangible assets consisted of goodwill valued at $3.5 million and workforce in
place valued at $0.04 million. RAVISENT plans to amortize the remaining
goodwill and other intangibles associated with the acquisition over the next
four years. See "--Acquired In-Process Research and Development" and Note 4 of
the notes to consolidated financial statements.
In April 1999, RAVISENT completed a financing in which it issued convertible
securities to an affiliate of Intel of $4.7 million and entered into a license
agreement covering certain Intel technology.
RAVISENT's future net income and cash flow will also be affected by its
ability to apply its net operating losses, which totaled approximately $14.1
million for federal tax reporting purposes as of December 31, 1998, against
taxable income in future periods. Due to the uncertainty of RAVISENT's ability
to realize the benefit of
33
<PAGE>
the deferred tax assets, the deferred tax assets are fully offset by a
valuation allowance. Under the Tax Reform Act of 1986, the use of net operating
losses may be impaired or limited in certain circumstances, including a
cumulative ownership change of greater than 50% over a three-year period. The
consummation of this offering, together with previous equity transactions, will
most likely result in a cumulative ownership change of greater than 50%.
Accordingly, RAVISENT's net operating losses incurred prior to this offering
that can be used to reduce future taxable income for federal tax purposes will
most likely be limited. Future changes of ownership, including this offering,
could further limit RAVISENT's use of net operating losses and could have an
adverse effect on its net income and cash flow. Changes in tax laws in the
United States or in our status may limit RAVISENT's ability to use its net
operating losses. Any limitation on RAVISENT's ability to use its net operating
losses could harm its business. See Note 15 of the notes to consolidated
financial statements.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items reflected in RAVISENT's
consolidated statements of operations:
<TABLE>
<CAPTION>
Three
Months
Year Ended Ended
December 31, March 31,
---------------------- -------------
1996 1997 1998 1998 1999
----- ------ ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License and services............... 19.7% 21.2% 11.3% 0.3% 21.2%
Hardware........................... 80.3 78.8 88.7 99.7 78.8
----- ------ ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License and services............... 11.2 4.9 1.2 .5 1.2
Hardware........................... 63.6 118.3 79.8 97.4 67.2
----- ------ ----- ----- -----
Total cost of revenues............... 74.8 123.2 81.0 97.9 68.4
----- ------ ----- ----- -----
Gross profit......................... 25.2 (23.2) 19.0 2.1 31.6
Research and development............. 24.6 26.8 10.3 15.8 13.6
Sales and marketing.................. 17.4 17.0 6.5 14.8 9.8
General and administrative........... 28.6 25.0 15.4 16.1 7.7
Depreciation and amortization........ 1.1 1.3 3.0 0.5 2.9
Compensation related to stock
options............................. -- 20.6 0.5 -- --
Acquired in-process research and
development......................... -- -- 26.1 -- --
----- ------ ----- ----- -----
Operating loss....................... (46.5) (113.9) (42.8) (45.1) (2.4)
Interest expense, net................ 2.5 2.9 2.4 4.0 0.4
Other income......................... -- 10.5 -- -- --
----- ------ ----- ----- -----
Net loss......................... (49.0)% (106.3)% (45.2)% (49.1)% (2.8)%
===== ====== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 and 1999
Revenues. Total revenues increased 244% from $3.1 million for the quarter
ended March 31, 1998 to $10.8 million for the quarter ended March 31, 1999.
License and services revenue increased to $2.3 million for the quarter ended
March 31, 1999, due primarily to growth in license fees associated with
RAVISENT's Software CineMaster 98 product and increased customization services
related to RAVISENT's consumer electronics business. Software CineMaster 98 was
introduced during the quarter ended June 30, 1998. Hardware revenues increased
172% from $3.1 million for the quarter ended March 31, 1998 to $8.5 million for
the quarter ended March 31, 1999, due primarily to increased market acceptance
of RAVISENT's Hardware Cinemaster 98 product. In the quarter ended March 31,
1999, CineMaster release 1.2 was phased out of production, in favor of a new
release, CineMaster release 3.0. For the quarter ended March 31, 1999 revenues
34
<PAGE>
from sales of release 1.2 were $4.6 million or approximately 54.5% of hardware
revenues, and revenues from release 3.0 were $3.9 million or approximately
45.5% of hardware revenues.
Cost of Revenues. Cost of revenues consist primarily of manufacturing costs
associated with Hardware CineMaster 98, costs associated with shipment of
Software CineMaster 98 and license fees paid to third parties for technologies
incorporated into RAVISENT's products, including Dolby Digital technology. Cost
of revenues increased 140% from $3.1 million for the quarter ended March 31,
1998 to $7.4 million for the quarter ended March 31, 1999. The increase in cost
of revenues was primarily due to increased product costs associated with the
manufacturing of RAVISENT's Hardware CineMaster 98 product.
Gross Profit. Gross profit increased from $0.07 million for the quarter
ended March 31, 1998 to $3.4 million for the quarter ended March 31, 1999,
primarily due to increased revenues. As a percentage of total revenues, gross
profit increased from 2% for the quarter ended March 31, 1998 to 32% for the
quarter ended March 31, 1999, primarily as a result of a higher proportion of
license revenues associated with RAVISENT's transition during this quarter to a
business model based on licensing its technology rather than direct sales of
hardware products. For the quarter ended March 31, 1998, hardware revenue
represented 99.7% of total revenues compared to 78.8% of total revenues for the
quarter ended March 31, 1999.
Research and Development Expenses. Research and development expenses consist
primarily of engineering and related costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 194%, from
$0.5 million for the quarter ended March 31, 1998 to $1.5 million for the
quarter ended March 31, 1999. As a percentage of total revenues, research and
development expenses decreased from 16% to 14%. The increase in research and
development expenses in absolute dollars was due primarily to supporting an
expanded customer base. The decrease in research and development expenses as a
percentage of total revenues resulted primarily from RAVISENT's increased
revenue base. RAVISENT expects research and development expenses to continue to
increase in absolute dollars in 1999 compared to 1998 as RAVISENT adds
additional engineering staff and capabilities.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, travel expenses and costs associated with trade shows, advertising
and other marketing efforts, as well as technical support costs. Sales and
marketing expenses increased 128% from $0.5 million for the quarter ended March
31, 1998 to $1.1 million for the quarter ended March 31, 1999. As a percentage
of total revenues, sales and marketing expenses decreased from 15% to 10%. The
increase in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States. The decrease in sales and marketing
expenses as a percentage of total revenues resulted primarily from RAVISENT's
increased revenue base. RAVISENT expects sales and marketing expenses to
increase in absolute dollars in 1999 compared to 1998.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and support costs for RAVISENT's finance, human
resources, information systems and other management departments. General and
administrative expenses increased 66% from $0.5 million for the quarter ended
March 31, 1998 to $0.8 million for the quarter ended March 31, 1999. As a
percentage of total revenues, general and administrative expenses decreased
from 16% to 8%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. General and administrative expenses decreased as a
percentage of total revenues primarily due to RAVISENT's increased revenue
base. RAVISENT expects general and administrative expenses to increase in
absolute dollars in 1999 compared to 1998 as it continues to build the
necessary infrastructure to support its business operations and incurs greater
legal and accounting expenses as a public company.
Deferred Stock Compensation. In September 1998 and February 1999, RAVISENT
recorded $0.8 million and $0.5 million, respectively, of deferred stock
compensation in connection with grants of stock options. RAVISENT will amortize
this amount as compensation expense over the four year vesting period of the
options which will approximate $0.08 million per quarter.
35
<PAGE>
Depreciation and Amortization Expense. RAVISENT recorded depreciation and
amortization expense of $0.3 million for the quarter ended March 31, 1999
primarily related to the goodwill recorded as part of the Viona acquisition.
See "--Acquired In-Process Research and Development Expense."
Years Ended December 31, 1997 and 1998
Revenues. Total revenues increased 344% from $6.8 million in 1997 to $30.3
million in 1998. License and services revenue increased 139% from $1.4 million
in 1997 to $3.4 million in 1998, primarily due to RAVISENT's launch of its
first software solution, Software CineMaster 98. Hardware revenues increased
399% from $5.4 million in 1997 to $26.8 million in 1998, primarily due to sales
to Dell Computer which incorporated RAVISENT's solution into a particular line
of personal computers.
Cost of Revenues. Cost of revenues increased 192%, from $8.4 million in 1997
to $24.5 million in 1998. The increase in cost of revenues was due to increased
product costs associated with the manufacturing of RAVISENT's hardware related
products.
Gross Profit. Gross profit increased from a negative $1.6 million in 1997 to
$5.7 million in 1998. As a percentage of total revenues, gross profit increased
from a negative 23% to 19% in 1998. The increase in gross profit both in
absolute dollars and as a percentage of total revenues in 1998 was primarily
due to growth in RAVISENT's license and services business, which contributed
$3.1 million or 54% of gross profit, and growth in sales of hardware
subsystems, which contributed $2.6 million or 46% of gross profit.
Research and Development Expenses. Research and development expenses
increased 71% from $1.8 million in 1997 to $3.1 million in 1998. As a
percentage of total revenues, research and development expenses decreased from
27% in 1997 to 10% in 1998. The increase in research and development expenses
in absolute dollars was due to increased headcount associated with research and
development. The decrease in research and development expenses as a percentage
of total revenues resulted primarily from RAVISENT's increased revenue base.
Sales and Marketing Expenses. Sales and marketing expenses increased 70%
from $1.2 million in 1997 to $2.0 million in 1998. As a percentage of total
revenues, sales and marketing expenses decreased from 17% to 6%. The increase
in absolute dollars was primarily due to the building of the sales and
marketing teams in the United States with increased emphasis on enhancing
market awareness. The decrease in sales and marketing expenses as a percentage
of total revenues resulted primarily from RAVISENT's shift from a retail-
oriented distribution model, which required greater advertising expenses.
General and Administrative Expenses. General and administrative expenses
increased 173% from $1.7 million in 1997 to $4.7 million in 1998. As a
percentage of total revenues, general and administrative expenses decreased
from 25% to 15%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to RAVISENT's increased revenue
base.
Depreciation and Amortization Expense. RAVISENT recorded depreciation and
amortization expense in 1998 of $0.9 million primarily related to the goodwill
recorded as part of the Viona acquisition. Additionally RAVISENT wrote off $7.9
million of acquired in-process research and development. See "--Acquired In-
Process Research and Development."
Years Ended December 31, 1996 and 1997
Revenues. Total revenues increased 63% from $4.2 million in 1996 to $6.8
million in 1997. License and services revenue increased 75% from $0.8 million
in 1996 to $1.4 million in 1997. The increase in license and services revenue
was primarily due to the addition of a licensing customer, Digital Processing
Systems, Inc.
36
<PAGE>
Hardware revenues increased 60% from $3.4 million in 1996 to $5.4 million in
1997. The increase in hardware revenues was primarily due to increased market
acceptance of RAVISENT's software solutions with supporting hardware platform
designs.
Cost of Revenues. Cost of revenues increased 168% from $3.1 million in 1996
to $8.4 million in 1997. The increase in cost of revenues was primarily due to
increased product costs associated with the manufacturing of RAVISENT's
hardware related products.
Gross Profit. Gross profit decreased from $1.1 million in 1996 to a negative
$1.6 million in 1997. Gross profit decreased both in absolute dollars and as a
percentage of total revenues in 1997. This decrease was primarily due to
expenses associated with obsolete inventory, which reduced gross profit by
approximately $0.7 million, price protection charges, which reduced gross
profit by approximately $0.4 million, a $0.5 million decrease in higher margin
services revenue and a greater portion of 1997 revenue was attributable to
lower margin hardware sales.
Research and Development Expenses. Research and development expenses
increased 77% from $1.0 million in 1996 to $1.8 million in 1997. As a
percentage of total revenues, research and development expenses increased from
25% in 1996 to 27% in 1997. The increase in research and development expenses
in absolute dollars and as a percentage of total revenues was due primarily to
increased headcount associated with new product development.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$0.7 million in 1996 to $1.2 million in 1997. As a percentage of total
revenues, sales and marketing expenses remained constant at 17% in 1996 and
1997.
General and Administrative Expenses. General and administrative expenses
increased 43% from $1.2 million in 1996 to $1.7 million in 1997. As a
percentage of total revenues, general and administrative expenses decreased
from 29% to 25%. The increase in absolute dollars was primarily due to
expenditures on administrative infrastructure to support RAVISENT's growing
business operations. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to RAVISENT's increased revenue
base.
37
<PAGE>
Quarterly Results of Operations
The following tables present certain unaudited quarterly consolidated
statements of operations data, both in absolute dollars and as a percentage of
revenues, for the eight quarters ended March 31, 1999. In the opinion of
management, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of RAVISENT.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License and services... $ 461 $ 139 $ 6 $ 10 $ 987 $1,717 $ 733 $2,290
Hardware............... 2,834 1,398 612 3,133 3,867 8,091 11,750 8,522
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 3,295 1,537 618 3,143 4,854 9,808 12,483 10,812
Cost of revenues........ 4,347 808 1,811 3,077 3,713 7,413 10,343 7,399
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (1,052) 729 (1,193) 66 1,141 2,395 2,140 3,413
Research and
development............ 432 497 513 498 944 697 982 1,465
Sales and marketing..... 289 262 259 465 476 478 545 1,062
General and
administrative......... 384 378 765 505 1,201 1,318 1,649 837
Depreciation and
amortization........... 12 13 13 15 281 297 313 314
Compensation related to
stock options.......... -- 1,408 -- -- -- -- 139 --
Acquired in-process
research and
development............ -- -- -- -- 7,900 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (2,169) (1,829) (2,743) (1,417) (9,661) (395) (1,488) (265)
Interest expense, net... 31 38 101 127 350 95 150 45
Other income............ 716 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. $(1,484) $(1,867) $(2,844) $(1,544) $(10,011) $ (490) $(1,638) $ (310)
======= ======= ======= ======= ======== ====== ======= ======
As a Percentage of Total
Revenues:
Revenues:
License and services... 14.0 % 9.0 % 1.0 % 0.3 % 20.3 % 17.5 % 5.9 % 21.2 %
Hardware .............. 86.0 91.0 99.0 99.7 79.7 82.5 94.1 78.8
------- ------- ------- ------- -------- ------ ------- ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 131.9 52.6 293.0 97.9 76.5 75.6 82.9 68.4
------- ------- ------- ------- -------- ------ ------- ------
Gross profit............ (31.9) 47.4 (193.0) 2.1 23.5 24.4 17.1 31.6
Research and
development............ 13.1 32.3 83.0 15.8 19.5 7.1 7.9 13.6
Sales and marketing..... 8.8 17.0 41.9 14.8 9.8 4.9 4.4 9.8
General and
administrative......... 11.7 24.6 123.8 16.0 24.8 13.4 13.2 7.7
Depreciation and
amortization........... 0.3 0.8 2.1 0.5 5.8 3.0 2.5 2.9
Compensation related to
stock options.......... -- 91.6 -- -- -- -- 1.1 --
Acquired in-process
research and
development............ -- -- -- -- 162.7 -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Operating loss.......... (65.8) (118.9) (443.8) (45.0) (199.1) (4.0) (12.0) (2.4)
Interest expense, net... 0.9 2.5 16.3 4.1 7.2 1.0 1.2 0.4
Other income............ 21.7 -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------ ------- ------
Net loss............. (45.0)% (121.4)% (460.1)% (49.1)% (206.3)% (5.0)% (13.2)% (2.8)%
======= ======= ======= ======= ======== ====== ======= ======
</TABLE>
Hardware revenues decreased in the quarters ending September 30, 1997 and
December 31, 1997 from prior periods due to RAVISENT'S transition away from
distributors and retail customers towards top tier personal computer
manufacturer customers. License and services revenue increased $1.6 million in
the quarter ending March 31, 1999 from the immediately preceding quarter due to
the Company's transition towards a licensing model. License and services
revenue increased $0.7 million in the quarter ending September 30, 1998
primarily due to revenues from an up-front license fee. Hardware revenues
decreased $3.2 million in the quarter ending March 31, 1999 from the
immediately preceding quarter primarily due to RAVISENT's transition away from
a hardware sales model towards a licensing model. Cost of revenues increased
$1.0 million in the quarter ending December 31, 1997 from the immediately
preceding quarter due to the write-off of inventory of approximately $0.7
million, with the balance of the increase attributable to price protection
38
<PAGE>
associated with RAVISENT's transition away from the retail distribution
channel. Gross profit decreased by $0.3 million in the quarter ending December
31, 1998 from the immediately preceding quarter. The decline, both in absolute
dollars and as a percentage of revenues, was primarily due to upfront license
fees received in the preceding quarter. In April 1998, RAVISENT expensed $7.9
million of the purchase price as acquired in-process research and development
in connection with the acquisition of Viona. The increase in general and
administrative expense beginning in the quarter ending June 30, 1998 is
primarily the result of increased personnel costs of $0.2 million, and
increased professional fees of approximately $0.2 million to support the growth
of RAVISENT's infrastructure. General and administrative expenses declined by
$0.8 million for the quarter ended March 31, 1999 as compared to the
immediately preceding quarter primarily due to reclassification of overhead
costs in order to more accurately reflect departmental reporting and one-time
fees for professional services, which decreased by $0.1 million. The increase
in depreciation and amortization expense beginning in the quarter ending June
30, 1998 is the result of the amortization of goodwill and other intangible
assets in connection with the acquisition of Viona in April 1998. Compensation
expense related to stock options in the quarters ending September 30, 1997 and
December 31, 1998 relates to stock options granted to certain employees of
RAVISENT at less than the estimated fair market value of RAVISENT's common
stock on the date of grant and other grants to non-employees.
RAVISENT's business is subject to a variety of risks, many of which are
outside of RAVISENT's control, including those discussed elsewhere in this
prospectus. See "Risk Factors--You should expect our quarterly operating
results to fluctuate in future periods and they may fail to meet expectations
of securities analysts or investors, which could cause our stock price to
decline."
Acquired In-Process Research and Development
In April 1998, RAVISENT completed the acquisition of Viona, a company
specializing in the development of digital video technology. RAVISENT paid $6.1
million in cash, of which $2.6 million was paid at closing, $2.1 million will
be paid during 1999, and $1.4 million will be paid in equal installments at the
end of each of the next three fiscal years, issued 1,204,820 shares of
RAVISENT's common stock valued at $4.8 million and incurred transaction costs
of $0.8 million. For accounting purposes, payments due in future periods have
been discounted.
The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process
research and development technology, which resulted in a charge of
approximately $7.9 million to RAVISENT's operations in April 1998. The in-
process research and development technology was valued using a cash flow model,
under which projected income and expenses attributable to the purchased
technology were identified, and potential income streams were discounted using
a 30%-35% discount rate for risks, probabilities and uncertainties, including
the stage of development of the technology, viability of target markets, and
other factors.
As of the acquisition date, Viona was conducting significant ongoing
research and development into five new software and hardware products including
enhancements to the existing digital video and audio system solutions
previously developed by RAVISENT. At the date of acquisition, these projects
had not reached technological feasibility and there was no alternative future
use for them. The five research and development projects included:
. CineMaster LC Hardware DVD Decoder, a single circuit board or card
that can be added to a personal computer to allow the personal
computer to process digital video signals. At the time of the
acquisition, Viona was conducting research and development to
integrate this product into a single chip-based design in an effort
to reduce manufacturing costs and to improve playback performance
quality. This research and development project had completed only
alpha testing and was approximately 80% complete at the date of
acquisition. Viona had incurred approximately $117,000 of research
and development expense and estimated that $35,000 would be required
to complete the development of the project. Development was
completed during 1998.
39
<PAGE>
. CE DVD Set-top Player/Portable Player, a DVD playback set-top
reference design for equipment manufacturers which was expected to
provide full DVD playback capabilities such as fast forward,
rewinding, multi-language and surround sound audio. At the time of
the acquisition, this project had not yet completed alpha testing
and there was significant uncertainty of completion. RAVISENT
estimated that the project was approximately 5% complete. Viona had
incurred approximately $30,000 of research and development expense
and estimated that $500,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. DVD Software Encoder, a software solution to enable the processing
of digital video signals which is designed to eliminate the need for
a DVD encoder chip or circuit board by utilizing software to record
DVD and video streams on a personal computer. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. RAVISENT estimated
that the project was approximately 40% complete. Viona had incurred
approximately $121,000 of research and development expense and
estimated that $203,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Hardware Decoder, a circuit board or card that could enable
personal computers to process HDTV signals. At the time of the
acquisition, this project had not yet completed alpha testing and
there was significant uncertainty of completion. RAVISENT estimated
that the project was approximately 35% complete. Viona had incurred
approximately $63,000 of research and development expense and
estimated that $111,000 would be required to complete the
development of the project. Development is expected to be completed
within the next twelve months.
. HDTV Software Decoder, a software solution designed to allow a
personal computer to process HDTV signals without the need for a
hardware solution. At the time of the acquisition, this project had
not yet completed alpha testing and there was significant
uncertainty of completion. RAVISENT estimated that the project was
approximately 15% complete. Viona had incurred approximately $15,000
of research and development expense and estimated that $150,000
would be required to complete the development of the project.
Development is expected to be completed within the next twelve
months.
The efforts required to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can meet their design requirements, including function, features
and technical performance requirements.
RAVISENT based its determination of the acquired in-process technology
allocation on recently issued guidance by the Securities and Exchange
Commission and considered such factors as degree of completion, technological
uncertainties, costs incurred and projected costs to complete. Acquired in-
process technology projects continue to progress, in all material respects,
consistent with management's original assumptions used to value the acquired
in-process technology. See Note 4 of Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Since inception, RAVISENT has financed its operations primarily through the
issuance and sale of debt and equity securities to investors. As of March 31,
1999 RAVISENT had approximately $2.2 million in cash and cash equivalents.
Net cash provided by operating activities for the three months ended March
31, 1999 was $0.9 million. Net cash used by operating activities for the three
months ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $2.1
million, $2.0 million, $2.5 million and $9.7 million, respectively. Cash used
in
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operating activities in each of these periods was primarily the result of net
losses, adjusted for non-cash items, including in 1997 and 1998 compensation
expense; in 1998, acquired in-process research and development expense; and in
1998 and the three months ending March 31, 1999, depreciation and amortization
expense primarily related to the goodwill recorded with the acquisition of
Viona, offset by increases in accounts receivable and increases in inventory
associated with the increase in hardware sales.
Net cash provided by investing activities for the three months ended March
31, 1999 was $8,000. Net cash used by investing activities for the three months
ended March 31, 1998 and the years ended 1996, 1997 and 1998 was $0.06 million,
$0.1 million, $0.03 million and $4.0 million, respectively. Cash used in
investing activities in each period consisted primarily of net purchases of
furniture and equipment. In 1998, cash used in investing activities also
included the costs associated with the Viona acquisition.
Net cash provided by financing activities for the three months ended March
31, 1998 and 1999 and the years ended 1996, 1997 and 1998 was $4.2 million,
$0.3 million, $2.1 million, $3.0 million and $14.2 million, respectively. Cash
provided by financing activities was primarily attributable to net proceeds
from the issuance of debt and equity securities to investors.
As of March 31, 1999, RAVISENT's principal commitments consisted of
obligations outstanding under equipment leases and notes payable to partially
fund its operations and capital purchases. The equipment leasing arrangements
consist primarily of RAVISENT paying rental fees to third party leasing
providers at interest rates between 15% to 18%, that maintain title to the
leased equipment. In most cases, there are no obligations for RAVISENT to
purchase the equipment at the end of the term. Although RAVISENT has no
material commitments for capital expenditures, it anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. In addition,
RAVISENT has approximately $2.5 million at March 31, 1999 of payments due over
the next two years to the former owners of Viona.
As of March 31, 1999, RAVISENT had a $5 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable and inventory, as defined in the
credit documentation, and bear interest at a rate of prime plus 1% per annum
(8.75% at March 31, 1999). In addition, RAVISENT must:
. maintain a tangible net worth of an amount equal to $1.8 million plus 75%
of RAVISENT's net profits for the previously completed fiscal quarter;
. supply Silicon Valley Bank within ten days after the end of each month,
monthly receivables, payables reconciliations and perpetual inventory
reports; and
. supply Silicon Valley Bank within 30 days after the end of each month,
monthly unaudited financial statements and compliance certificates.
At March 31, 1999 approximately $1.3 million was outstanding and $1.7
million was available under the line of credit. At March 31, 1999, RAVISENT was
not in compliance with the tangible net worth covenant but had received a
waiver from Silicon Valley Bank for this violation. In addition, Silicon Valley
Bank agreed to lower the tangible net worth requirement to $1.0 million. This
line of credit expires in July 2000. Silicon Valley Bank has senior security
interest in substantially all of the assets of RAVISENT.
Although it has not conducted any studies or had discussions with advisors,
RAVISENT presently anticipates that the net proceeds from this offering,
together with existing sources of liquidity and cash anticipated to be provided
by operations, if any, together with borrowings available under its line of
credit, will be adequate to meet its cash needs for at least the next twelve
months.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit
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entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
In February 1999, RAVISENT initiated a Year 2000 compliance program. The
program is directed by RAVISENT's quality assurance manager and includes an
intra-company task force with members from each of RAVISENT's principal
internal divisions, including finance and administration, systems, engineering
and marketing. The task force is charged with identifying areas of potential
risk within each department, and making the appropriate evaluation,
modification, upgrade or replacement, as appropriate.
Scope of Year 2000 Assessment
RAVISENT's Year 2000 compliance program is in the process of investigating
Year 2000 compliance in each of RAVISENT's offices, in Malvern and Lancaster,
Pennsylvania, San Jose California and Karksruhe, Germany. The departments under
investigation include:
. product management;
. program management;
. marketing;
. sales;
. human resources;
. engineering;
. quality assurance;
. development analysis;
. production;
. procurement;
. certification;
. administration;
. finance;
. operations;
. management information systems; and
. internet.
In addition, RAVISENT is examining its operations for Year 2000 impact and
compliance. The operational areas under investigation include:
. products;
. software applications;
. facilities;
. suppliers and vendors; and
. computer systems.
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Budget and Schedule
RAVISENT has allocated a total of approximately $50,000 for completing its
Year 2000 compliance plan. RAVISENT has budgeted approximately $30,000 for cash
outlays for software and hardware replacement. In addition, under the
compliance plan designated RAVISENT employees are required to spend a portion
of their time in support of the compliance program. RAVISENT currently
estimates personnel costs associated with the Year 2000 task force to be
approximately $20,000. RAVISENT estimates that it has expended approximately
20% of its budget for Year 2000 compliance.
Phase 1 of RAVISENT's compliance plan commenced in February 1999. The last
phase of the compliance plan is expected to conclude in October 1999. The major
milestones for each phase, and their expected dates of completion, are as set
forth below:
<TABLE>
<CAPTION>
Task Anticipated Completion Date
---- ---------------------------
<S> <C>
Identify risk areas March 1999
Evaluation of potential risks June through July 1999
Modify, upgrade or replace affected
systems July 1999
Test high risk areas October 1999
Make additional changes as necessary October 1999
Re-testing November 1999
Implement back-up plan October 1999
</TABLE>
RAVISENT is currently in the process of identify its potential risk areas.
This process includes contacting third parties that provide services used in
RAVISENT's operations. The result of this inquiry is discussed below.
Products
RAVISENT's products have no inherent time or date function. RAVISENT
reviewed the engineering specifications for its products, and made the
determination that because there is no inherent time or date function, no
testing of the products was necessary.
Third Party Hardware and Software Systems and Services
RAVISENT is in the process of evaluating all of the third party systems and
software that it uses in its business. RAVISENT has been informed by its
payroll and commercial banker that their systems are Year 2000 compliant.
RAVISENT has not yet received its response to its request for Year 2000
certification from its manufacturing subcontractors, raw materials providers,
office suppliers and benefits providers.
RAVISENT has identified approximately 150 commercial software packages
(including multiple releases of the packages) and an additional approximately
50 hardware and software systems that are used in RAVISENT's business. RAVISENT
has received assurances satisfactory to it from a majority of the providers of
these hardware and software systems that the systems are Year 2000 complaint.
RAVISENT has further determined that Year 2000 "patch kits" are available for a
majority of the commercial software applications it uses in its business for
which it has not received assurances of Year 2000 compliance. RAVISENT has not
yet received assurances as to Year 2000 compliance from those parties from
which it licenses in material technology, including Dolby audio technology and
encryption and decryption software. Should raw materials used in RAVISENT's
Hardware CineMaster product, such as semiconductors, or the software RAVISENT
licenses related to audio technology or encryption and decryption, not be Year
2000 compliant, RAVISENT would not be able to ship its product, it would not be
able to fulfil its contractual obligations and its business would be severely
harmed.
RAVISENT's Year 2000 compliance program has to date revealed that its
telephone system is the only third party system that is not compliant and will
need to be replaced. The cost of replacing the hardware and software associated
with this system is estimated to be approximately $3,000.
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Contingency Plan
As noted above, RAVISENT's Year 2000 compliance plan currently is expected
to be substantially complete by November 1999. This includes re-testing non-
compliant areas and developing a back-up plan by no later than October 1999.
Moreover, RAVISENT may discover Year 2000 compliance problems in its systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into RAVISENT's information systems may need
to be revised or replaced, all of which could be time-consuming and expensive
and result in the following, any of which could adversely affect RAVISENT's
business, financial condition and results of operations:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to RAVISENT's reputation;
. increased service and warranty costs; and
. litigation costs.
The failure of RAVISENT to fix or replace its third-party software, hardware
or services on a timely basis could result in lost revenues, increased
operating costs, the loss of customers and other business interruptions.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Positions, or SOP, No. 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. The adoption of SOP No. 98-1 did not have
a material effect on RAVISENT's capitalization policy.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. RAVISENT has expensed these costs historically, therefore, the
adoption of SOP No. 98-5 did not have a material impact on RAVISENT's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because RAVISENT does not
currently hold any derivative instruments and does not engage in hedging
activities, RAVISENT expects that the adoption of SFAS No. 133 will not have a
material impact on its financial position or results of operations. RAVISENT
will be required to implement SFAS No. 133 for the year ending December 31,
1999.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. RAVISENT does not expect the adoption of SOP 98-9 to have a material
effect on its results of operations or financial condition.
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Qualitative and Quantitative Disclosures About Market Risk
RAVISENT develops products in the United States and sells such products in
North America, Asia and Europe. As a result, RAVISENT's financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. As all sales are currently made in
U.S. dollars, a strengthening of the dollar could make RAVISENT's products less
competitive in foreign markets. RAVISENT does not use derivative instruments to
hedge its foreign exchange risk. RAVISENT's interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of its investments are in short-term instruments. Due to the nature of
RAVISENT's short-term investments, RAVISENT has concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.
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BUSINESS
RAVISENT designs, develops, licenses and markets innovative modular software
solutions that enable digital video and audio stream management in personal
computer systems and consumer electronics devices. RAVISENT also licenses
supporting hardware designs to selected customers and provides customization
services and customer support. "Stream management" includes recording, playback
and other manipulation of a video or audio input or "stream" in a useful way.
RAVISENT's solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk, or DVD; direct broadcast
satellite, or DBS, or its European counterpart, digital video broadcasting, or
DVB; and high definition television, or HDTV, on existing personal computer and
consumer electronics platforms. RAVISENT's digital solutions incorporate
industry standards, such as MPEG-1, MPEG-2 and Dolby Digital, for video and
audio compression, the process of storing video or audio content in digital
form, using the same powerful, easily customizable and modular software
architecture and remaining independent of operating systems and silicon
components. As digital technology continues to evolve and standards change,
RAVISENT can add new modules to its software to provide additional
functionality without requiring the altering of existing core components of its
digital solution. Moreover, RAVISENT's modular approach provides its customers
with enhanced flexibility and adaptability that enables the rapid introduction
of new products to market. RAVISENT intends to leverage the flexibility of its
products to capitalize on the shift from analog to digital content across the
media and entertainment industries.
RAVISENT's products focus on two important markets, the personal computer
market and the consumer electronics market. RAVISENT's products incorporate a
common, or "core," high-performance software code across multiple applications
in each market. This allows personal computer and consumer electronics
manufacturers to achieve faster time-to-market, to cross-market their product
offerings, to develop a customizable, consistent look and feel across product
lines and to reduce technical support costs. In the personal computer market,
RAVISENT's current products consist of high-performance digital video and audio
decoding and encoding solutions. In the consumer electronics market, RAVISENT's
current product is a high-performance software solution with multiple
supporting hardware platform designs that provides digital audio and video
stream management. RAVISENT's digital solutions provide personal computer and
consumer electronics manufacturers with a foundation to support future
components, operating systems and functionalities in a rapid and cost effective
manner.
RAVISENT's DVD solutions are incorporated into the products of seven of the
top ten personal computer manufacturers, based on total unit sales. Personal
computer and peripherals manufacturers currently shipping RAVISENT's products
include ATI Technologies Inc., Compaq Computer Corporation, Dell Computer
Corporation, Fountain Technologies, Inc., Fujitsu Microelectronics, Inc.,
Gateway 2000, Inc., Hewlett-Packard Company, Micron Electronics, Inc. and
Packard Bell NEC Europe. Consumer electronics manufacturers that have agreed to
incorporate RAVISENT's technology include Tottori-Sanyo Electric Co., Ltd. (a
subsidiary of Sanyo Electronics Corporation, Inc.) and Yamaha Corporation of
America. RAVISENT also has strategic relationships with ATI Technologies, Dolby
Laboratories, Inc., Intel Corporation and STMicroelectronics.
Industry Background
Historically, the personal computer and consumer electronics industries
addressed video and audio content using different technologies. The personal
computer developed around digital technology using the central processing unit,
or CPU, which was initially expensive and unable to simultaneously run the
operating system and manipulate video and audio inputs at satisfactory
performance levels. As a result, digital video content was managed by a stand-
alone semiconductor device or module. In contrast, the consumer electronics
industry evolved using lower cost analog solutions that were able to provide
acceptable performance, but were typically passive and did not permit the users
to edit or enhance the content. Advances in semiconductor technology have
dramatically lowered the price of high performance microprocessors, allowing
personal computers and consumer electronics devices to employ software
solutions to manage video and audio streams in a digital format without
overburdening their CPUs. Moreover, today, when evaluating a digital personal
computer or consumer electronics device, consumers are increasingly demanding
digital video and audio capabilities such as
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3-D graphics, editing and compression. Analog formatted devices cannot provide
these capabilities. Meanwhile, digital formats have emerged that provide higher
image resolution and quality, the opportunity to deliver a wide range of new
services and content, more efficient use of limited transmission spectrums and
the ability to deliver customized and interactive services. As a result, a
growing number of personal computer and consumer electronics manufacturers are
storing, accessing and playing video and audio streams in a digital format.
A number of trends are accelerating the migration of manufacturers from
analog to digital technology, including advances in technology, the evolution
of standards, government and private initiatives and the increasing
availability of content.
. Advances in Technology. In the past, multiple silicon devices were
needed to process digital video and audio streams. As silicon
technology progressed, in many instances one such device was needed.
Today, as microprocessor computing speeds continue to increase,
software-only solutions are capable of providing video and audio
stream management at a lower cost and at a performance level
indistinguishable from dedicated silicon approaches.
. Evolution of Standards. Historically, a significant barrier to the
growth of digital video and audio technology was the lack of widely
accepted technological standards. Today, industry participants have
adopted a video compression standard known as MPEG-2 that enables
video and audio compression for digital transmission and storage.
MPEG-2 is currently deployed as the DVD solution in personal
computers and DVD players and has been adopted as the standard for
digital television, or DTV, and HDTV. In addition, Dolby Digital,
formerly known as AC-3, designed by Dolby Laboratories, has emerged
as an industry standard for audio compression.
. Government and Private Initiatives. A number of government and
private initiatives have also emerged to fuel the shift from analog
to digital technology. For example, the cable television industry
has adopted the "OpenCable" standard under which digital cable boxes
will be manufactured and sold through retail channels similar to
personal computers and television sets, thereby creating a new
product market. Also, under the Telecommunications Act of 1996, all
broadcasters are required to change their broadcasting formats to
digital and to cease carrying analog broadcasts by 2006. This will
require every owner of an analog television set to purchase either a
new digital television set or a digital converter box in the next
seven years.
. Increasing Availability of Content. The introduction of many forms
of stand-alone content for digital media will lead consumers to shop
for devices, such as DVD players and recorders, digital cable set-
top devices and digital television sets, on which stand-alone
content can be seen, heard, edited and stored. Already, there are
over 2,300 movie titles available in DVD format. The recording
industry has adopted the DVD format to be used in next-generation
audio devices. Cable television providers have adopted content
strategies intended to capitalize on the trend toward digital
technology through increased channel capacity and higher-resolution,
interactive digital programming.
Advances in microprocessor speed and capacity coupled with the shift to
digital technology are leading the personal computer and consumer electronics
markets to converge at an accelerating pace. As the personal computer and
consumer electronics industries converge, two major trends have emerged. First,
the integration of video and audio streams with digital technology is
increasing the complexity of product design. Second, products have shorter life
cycles as a result of rising digital processing capabilities, falling prices of
semiconductors and rapidly improving software. In the past, consumer
electronics products relied on multiple special-purpose silicon devices to
provide the necessary system performance, with each device performing a
particular function such as video or audio decoding. Similarly, the personal
computer industry has historically been driven by the latest in semiconductor
innovation and has timed product introductions around microprocessor advances,
which typically have occurred twice a year. The strategy of relying upon a
special-purpose silicon device carried two major risks: high product
development cost and premature product obsolescence. The risk of high product
development cost came from the time and effort required to adapt a silicon-
based solution to address each new feature or product platform. The risk of
product obsolescence resulted from the fixed-function nature of the special-
purpose silicon device and the inability of manufacturers
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to rapidly change product offerings in light of changes in consumer preferences
for applications or functionality. As the speed of microprocessors increased,
the ability to shift more and more complex tasks from a special-purpose silicon
device to software increased. As a result, personal computer and consumer
electronics manufacturers are now able to use digital solutions with a more-
adaptable and inexpensive software-only format, giving them the flexibility to
innovate without the risk of quick obsolescence.
RAVISENT believes that personal computer and consumer electronics
manufacturers are seeking to leverage their expertise and brand recognition in
order to deliver digital products that provide a new set of choices for
consumers in new markets. For example, all existing television sets, video
cassette recorders, stereos, set-top boxes and personal computers are
candidates for upgrade to digital technologies. To enter into these new markets
and capitalize on upgrade cycles for these products, personal computer and
consumer electronics manufacturers are seeking new digital product solutions
that permit rapid time-to-market with the latest features and functionality.
RAVISENT believes that these product solutions must be extensible and have a
customizable architecture that allows product differentiation and facilitates
migration across product lines and markets. In particular, in order to keep
pace with the rapidly-changing product cycles of personal computer and consumer
electronics manufacturers and be cost effective, these product solutions must
rely on software that is independent of operating system platforms and not on
the design of a special-purpose silicon device and its associated operating
systems.
The RAVISENT Solution
RAVISENT designs, develops, licenses and markets innovative modular software
solutions and supporting hardware designs that enable digital video and audio
stream management in personal computer systems and consumer electronics
devices. RAVISENT's solution is based upon a common, or "core," software code
and contains high-performance digital video and audio decoding and encoding
engines that implement complex algorithms, which optimize the performance of
the solution within a particular system or device. These engines, in turn,
enable decoding and encoding of media formats such as DVD, DBS/DVB and HDTV on
existing personal computer and consumer electronics platforms. RAVISENT's
digital solutions incorporate industry standards for video and audio
compression and are independent of operating systems and silicon components. By
using RAVISENT's solution, its customers can provide various video and audio
processes normally completed by special-purpose silicon devices with software
modules at a fraction of the cost.
RAVISENT believes that its digital solutions provide a number of significant
advantages for personal computer and consumer electronics manufacturers.
RAVISENT's personal computer and consumer electronics products are built using
the same powerful, easily customizable and modular software architecture. This
modular approach provides RAVISENT's customers with enhanced flexibility,
enabling them to rapidly introduce products to market. In addition, using
RAVISENT's software solutions frees these customers from semiconductor design
cycles. As digital technology evolves and standards change, RAVISENT can add
new modules to its software to address the changes without needing to alter
existing components of its digital solution.
Examples of how RAVISENT's digital solutions are being implemented include:
. In the personal computer market, Dell Computer uses RAVISENT's DVD
decoding solutions in all of its DVD-enabled desktop personal
computers. Dell Computer has migrated RAVISENT's solution across
multiple product cycles through RAVISENT's customization and
optimization services, even when the different cycles involve
changing graphics requirements and different microprocessors. The
RAVISENT digital solution allows Dell Computer to use the same user
interface in each of these DVD-enabled product lines while
maintaining high quality video and audio performance and rapid time-
to-market delivery.
. In the consumer electronics market, Sanyo Electronics, by using
RAVISENT's software solution and supporting hardware platform
design, can now offer high quality video and audio performance
together with significant cost savings in its DVD players.
RAVISENT's technology is designed to enable Sanyo Electronics to
migrate this platform to accommodate additional technologies such as
DBS/DVB, DTV and HDTV.
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Strategy
RAVISENT's strategy is to be the leading global provider of digital video
and audio solutions to personal computer and consumer electronics
manufacturers. RAVISENT believes that the most effective way to achieve its
strategy is to become an intellectual property company that licenses its
technology to manufacturers that will, in turn, use RAVISENT's solutions to
penetrate very large personal computer and consumer electronics markets. Key
elements of RAVISENT's strategy include:
Grow License Business Model Among Top Tier Personal Computer and Consumer
Electronics Manufacturers. RAVISENT's strategy is to license its software
solutions and supporting hardware designs to leading personal computer and
consumer electronics manufacturers. RAVISENT believes that the success of its
manufacturing customers in the digital video and audio markets will continue to
validate its technology. RAVISENT intends to leverage its existing customer
relationships into additional product lines and to seek out additional personal
computer and consumer electronics manufacturers as customers. RAVISENT believes
that its license model avoids the pitfalls of manufacturing, storing and
distributing hardware-based digital solutions while simultaneously increases
profitability. RAVISENT also believes that by developing customized solutions
in partnership with its customers, it will avoid commoditization of its
products.
Extend Technological Leadership. RAVISENT has established its line of
CineMaster products as a leading DVD solution for the personal computer market.
RAVISENT's experience in providing digital video and audio technologies has
enabled it to stay at the forefront of the transition to digital technologies.
For example, RAVISENT believes it was the first company to display a working
DVD decode solution on a personal computer, the first company to demonstrate an
HDTV decode solution on a personal computer and the first company to display an
all-software HDTV decode solution. RAVISENT intends to continue to invest in
research and development both internally and in conjunction with its customers
and strategic partners to maintain its technological leadership, improve its
current product offerings and leverage its proprietary technologies.
Leverage Technology and Expertise into New Markets. RAVISENT intends to
leverage its modular software solutions and DVD expertise into multiple
consumer electronics markets, such as the emerging DTV, HDTV, DBS/DVB and
digital cable markets. RAVISENT believes that these markets will undergo
dramatic growth in the next few years and that the extensibility of its
products across multiple digital markets will provide it with an advantage over
competitors focused on a single product, technology or market. In the future,
RAVISENT plans to supplement its distribution channel by establishing an
Internet presence to maximize direct contact with its customers, facilitate
electronic sales of its products and sell associated products directly to end
users. In May 1999, RAVISENT launched the web site Cinemazing.com, through
which it currently provides access to DVD rentals and sales through a "click
through" arrangement with on-line DVD distributors, such as DVDExpress, NetFlix
and Barnesandnoble.com.
Focus on Strategic Relationships. RAVISENT's solutions are incorporated into
the products of seven of the top ten personal computer manufacturers and two
leading consumer electronics manufacturers. In addition, RAVISENT has
established strategic relationships with leading technology companies, such as
ATI Technologies, Dolby Laboratories, Intel and STMicroelectronics. RAVISENT
believes these industry relationships better position it to stay abreast of
industry trends, respond to the needs of its customers, provide input into
industry standards and improve its product planning process. RAVISENT intends
to continue to develop its existing strategic relationships and develop new
strategic relationships in targeted areas.
Technology
RAVISENT has designed its digital video and audio stream management
solutions to be independent of the hardware platform on which they run.
RAVISENT's designs are based on a modular software architecture, whereby each
of the technical standards that are used for various digital media is addressed
through an independent self-contained module of RAVISENT's software. For
example, compliance with MPEG-2 and Dolby Digital has been achieved through
completely discrete components of RAVISENT's software that can be "plugged in"
to each other or to other modules addressing other standards or features of
RAVISENT's
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products. Furthermore, each of these modules can address particular
semiconductors or central processing units (CPUs) as needed. As a result,
RAVISENT's architecture allows personal computer and consumer electronics
manufacturers to choose different combinations of software and hardware
configurations for their products while maintaining a consistent look and feel.
RAVISENT's module-based approach to its digital solutions is designed to
provide flexibility and adaptability as relevant technologies evolve and
standards change. For example, as new digital technology develops, whether
hardware or software-based, RAVISENT can add new modules to address the new
technology without altering other components of its digital solution. In
addition, as the processing speeds and capabilities of personal computers and
graphics cards improve, hardware-based modules can be replaced with software
modules, again without requiring the alteration of other components of
RAVISENT's overall architecture. The same flexibility also applies to the user
interface and storage modules. For example, as new platforms and operating
environments arrive, only the interface modules will need to be altered to
adapt.
RAVISENT identifies emerging technologies necessary for future platforms
which address various media sources such as those shown below. RAVISENT then
applies its high-performance modular software solution to manage these sources
in a digital format, enabling manufacturers to support these technologies in
various devices:
[Graphic appears here]
Description of graphic
The graphic consists of three columns of boxes with blocks of text inside of
them. The first column has four small boxes, the second column has one large
box and the third column has two medium-sized boxes. Arrows point from each box
in the first column to the box in the middle column and from the box in the
middle column to each of the two boxes in the third column.
Over the first column is the word "Sources." The words appearing in the first
box in the first column are "Recorded Media" (in bold) and below the words
"DVD, DVD-ROM, CD, CD-ROM, Video CD." The words appearing in the second box in
the column are "Broadcast Media" (in bold), and below the words "Digital
Satellite, DTV, HDTV, Digital Cable." The words appearing in the third box in
the first column are "Legacy Media" and below the words "TV, Analog Cable, VCR,
Analog Inputs." The words appearing in the fourth box in the first column are
"Network Media" and below the words "Streaming MPEG Video and Digital Audio."
Over the second column are the words "RAVISENT Solution." The words appearing
in the single box in the second column are "Software Algorithms and IP Cores,"
"Software Drivers," "Hardware Designs," "Applications Programming Interfaces"
and "End User Applications." All of these words are in large bold print and
each phrase appears over the next.
Over the third column is the word "Devices." The words appearing in the first
box in the third column are "PC Products," (in bold). Below are the words
"Desktop and Laptop Systems Incorporating:" (in bold) and below this (not in
bold) are the words "DVD, HDTV, Digital Satellite, Digital Cable, Digital VCR."
The words appearing in the second box in the third column are "CE Products" (in
bold) below which are the words "DVD Players, DVD portable players, DVD game
consoles, HDTV decoder boxes, Digital Satellite set-tops, Digital Cable set-
tops, Digital VCRs."
. Software Algorithms and IP Cores
Software algorithms are designed to work with multiple
microprocessors, operating environments or semiconductor devices.
They exist in high level language forms but perform silicon level
functions such as video decoding and encoding.
. Software Drivers
Software drivers control the core software or hardware
implementations. They are designed for specific operating systems
and typically run in Microsoft operating environments; nonetheless,
the core design allows for porting to other environments. Software
drivers are the "middleware" that connects the algorithms of
RAVISENT's solution to the operating environments.
. Hardware Designs
Hardware designs are developed with a modular approach to allow for
flexible silicon device selection and adaptation to industry
standard interfaces. RAVISENT licenses its hardware designs to
enable its software licensees to deliver a complete product.
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. Application Programming Interfaces
Application programming interfaces, or APIs, allow for the use of
RAVISENT software drivers or hardware components by third party
applications as well as independent application development by
RAVISENT teams. These tools are developed around multiple industry
standards and interfaces to allow for full-feature access.
. End User Applications
End user applications are delivered to RAVISENT customers as
complete multi-language installations which provide customizable,
full-featured graphical user interfaces.
The diagram below represents the digital media flow through the RAVISENT
solution:
[Graphic appears here]
Description of graphic
The graphic consists of a flowchart of boxes with arrows pointing from each box
toward one or more boxes below or to the right. There is a column of four boxes
on the left under the word "Sources." These boxes are the same as appear in the
first column of boxes in the graphic on page 46 and the same words appear
inside each of them, respectively. To the right of this column is a group of
boxes encircled by a dotted rectangular line with the words "RAVISENT Solution"
appearing above and outside of this dotted line. All of the boxes are inside
the dotted line except the four boxes in the "sources" column
The four boxes in the "Sources" column on the left each point to a single long
rectangular box inside of which are the words "Source Management." This box
points to another long rectangular box inside of which are the words "Media
Router." Below this box is a small square box inside of which are the words
"Media Caching." An arrow points to and from this box and the "Media Router"
box. Arrows point from the "Media Router" box to each of two small square boxes
inside of which are the words "Media Decode" and "Convergence User Interface"
respectively. Below the "Convergence User Interface" box is a small square box
inside of which are the words "Intelligent Agent." An arrow points to and from
this box and the "Convergence User Interface" box. Arrows also point from each
of the "Media Decode" and "Convergence User Interface" boxes to a small square
box inside of which are the words "User Presentation."
. Source Management
RAVISENT's digital video and audio source management solution starts
by controlling and decoding multiple video and audio streams from
either digital or digitally converted analog sources.
. Media Router/Media Caching
After the streams are received and converted, they are directed via
the "Media Router" module to either store the streams for future
playback using a temporary memory storage module called the "Media
Caching" module, or deliver them to the "Media Decode" module for
immediate presentation.
. Media Decode/Convergence User Interface/Intelligent Agent
Upon delivery, the "Media Decode" module translates the compressed
data into video and audio streams. At this point, RAVISENT's
"Convergence User Interface" module allows users to
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control the final presentation of the stream as well as to provide a
customized look and feel. RAVISENT plans to add intelligent agents
that would enable user habit-based automatic programming and
simultaneous playback and recording capabilities.
. User Presentation
As a final step, RAVISENT's "User Presentation" module converts the
audio and video streams to the proper output format for presentation
on multiple devices including computer monitors, television sets and
speakers.
Products and Services
Products
RAVISENT licenses its high-performance, customizable, modular software
solutions and supporting hardware designs to manufacturers to enable digital
video and audio playback and recording within the personal computer and
consumer electronics industries. Overall, RAVISENT has 22 individual licenses
with its customers for technology incorporated into their products. RAVISENT
currently licenses the following three products:
. Hardware CineMaster 98, a software DVD solution with a supporting
hardware platform design that is incorporated into the systems of
three major personal computer manufacturers to enable DVD playback
in their products. A Dell Computer system incorporating Hardware
CineMaster 98 won the Editors' Choice Award for high-end personal
computers in December 1998 in both PC World and PC Magazine. Both
awards cited the quality of the DVD playback in general and
RAVISENT's solution in particular. Historically, RAVISENT derived
hardware revenue from, and was responsible for, the manufacture and
delivery of this product. In early 1999, RAVISENT began to contract
with third party manufacturers to manufacture and deliver this
product directly to RAVISENT's customers. RAVISENT will receive a
license fee for each unit sold. During the year ended December 31,
1998 and the quarter ended March 31, 1999, RAVISENT sold 0.3 million
units and 0.1 million units, respectively, of Hardware
CineMaster 98.
. Software CineMaster 98, a software-only DVD solution that has been
licensed to seven of the top ten personal computer manufacturers to
enable DVD playback in their products. Software CineMaster 98 is
incorporated into the operating system of personal computers or sold
separately as part of an after-market solution bundled with a
graphics card. Compaq Computer and Gateway systems incorporating
Software CineMaster 98 won the PC Magazine Editors' Choice Award in
March 1999 and December 1998, respectively. These awards cited both
the quality of the DVD playback in these systems and RAVISENT's
Software CineMaster 98 product as responsible for DVD decoding in
these systems. RAVISENT receives a per unit license fee from
manufacturers for each system or device sold by them which
incorporates this product. During the year ended December 31, 1998
and the quarter ended March 31, 1999, RAVISENT received license fees
for 5.1 million units sold and 1.8 million units sold, respectively,
that incorporated Software CineMaster 98.
. CineMaster CE, a software solution with multiple supporting hardware
platform designs that enables DVD playback across a variety of
consumer electronic products. CineMaster CE was developed through
RAVISENT's strategic relationship with STMicroelectronics to which
RAVISENT has licensed the product on a nonexclusive basis.
CineMaster CE includes a complete DVD set-top reference design,
including lower level software, a complete hardware design and a
front-end graphical user interface. CineMaster CE was introduced in
late 1998 and Sanyo Electronics and Yamaha have already signed
agreements to license this solution. RAVISENT receives a per unit
license fee for each microprocessor that incorporates its technology
in addition to the license fee it receives on a per unit basis from
the consumer electronics device manufacturer.
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Services
Although RAVISENT's solutions fall into certain basic product formulations
such as its Software CineMaster or Hardware CineMaster solutions, RAVISENT
works with each of its customers to customize elements of its solutions (such
as the graphical user interface) to their products and to mutually agreed upon
specifications. In addition, RAVISENT typically adds specific features that a
customer requests which may be different from those installed in the product of
another customer, even where the solutions installed in both customers'
products are the same basic product (e.g., Software CineMaster 98). RAVISENT
also modifies its software drivers to ensure compatibility with hardware
components (such as different graphics cards) which differ among its customers
and among the various models of a single customer. Finally, RAVISENT assists
its customers in managing Microsoft's "WHQL" process, under which Microsoft
certifies that a particular computer system is compatible with the Microsoft
Windows operating system.
Markets and Applications
Over the next ten years, RAVISENT expects the consumer electronics market to
experience a significant upgrade cycle as analog devices such as VCRs, set-top
cable boxes, audio players and televisions are replaced with digital devices.
RAVISENT believes its digital video and audio solutions will enable personal
computer and consumer electronics manufacturers to provide the next generation
of digital devices required in this upgrade cycle. A few of the current and
future applications for these devices are the following:
Digital Versatile Disk. DVD is the next generation of five-inch optical disc
technology. A DVD is the same size as a compact disc but holds up to twenty-
five times more data and is up to nine times faster. DVD drives are also
"backward-compatible" with compact disc drives. This increased capacity allows
a DVD to store both high-quality digital video and audio and positions DVD as
the natural successor to compact discs, especially in home application segments
such as personal computers, video entertainment and video game consoles. As
this transition occurs and rental markets, software developers and hardware
vendors embrace the new technology, the DVD market is expected to experience
rapid growth. International Data Corporation predicts that the number of DVD
ROM units sold worldwide will grow from 6.1 million units in 1998 to
19.2 million units in 1999 and 97.4 million units in 2002, representing a
compound annual growth rate of 100%. These market projections are based upon
assumptions regarding the level of growth in sales of personal computers, the
desire of personal computer manufacturers to offer additional functionality by
upgrading CD ROM drives to DVD-ROM, the current supply of necessary components
and the speed with which the prices of DVD-ROM drives is expected to decline.
There can be no assurance that these projections will be achieved. RAVISENT is
currently shipping various products for the decoding and playback of DVD titles
on a personal computer, including a software-only solution and a software
solution with a supporting hardware platform design. RAVISENT also offers a
software solution with multiple supporting hardware designs for DVD playback on
consumer electronics platforms and is developing a software-only DVD encoding
solution that enables the recording of video and audio streams in the DVD
format.
Digital Television. A key strategy of RAVISENT is to pursue the DTV market,
which RAVISENT expects to be the next major technological advancement in home
electronics. According to The Yankee Group, there is an installed base of 250
million analog television sets in the United States alone that will ultimately
require a separate set-top box or upgrade to accommodate digital technologies.
Digital broadcast television was first successfully launched in the United
States in 1996 via DBS, with DBS now delivering direct broadcast television to
over five million households today. DTV has also begun to move into the large
over-the-air market and by the end of 1999, there is expected to be one digital
broadcast station in each of the top ten U.S. markets. These market projections
are based upon assumptions that competition, technological advances and
economies of scale will lead prices to decline and sales volume to
correspondingly increase, that digital programming will grow as sales increase,
that consumers receiving broadcast channels will have the equipment to allow
them to tune into digital programming and that major cable providers will be
willing to add digital broadcast channels as digital programming increases and
potential viewership grows. There can be no assurance that these projections
will be achieved. Under the Telecommunications Act of 1996, all broadcasts
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must be in a digital format by 2006. RAVISENT is currently developing a
software-only solution and a software solution with a supporting hardware
platform design that enable the viewing of DTV streams on a personal computer.
RAVISENT is also developing a software solution with multiple supporting
hardware designs for DTV viewing on consumer electronics platforms.
Digital Cable. In an effort to deliver more channels and services, including
online and interactive services, cable providers are beginning to upgrade
analog cable boxes with digital boxes. For example, Tele-Communications, Inc.
and eight other multiple cable system operators announced in January 1999 the
purchase of 15 million digital cable set-tops from General Instrument
Corporation. RAVISENT has not shipped any digital cable products to date, but
is developing a software-only solution and a software solution with a
supporting hardware platform design that will enable the viewing of digital
cable television streams using a personal computer or digital cable set-top
device.
Sales and Marketing
RAVISENT's sales and marketing activities are focused on establishing and
maintaining license arrangements with personal computer, peripherals, consumer
electronics and semiconductor manufacturers. RAVISENT licenses its digital
solutions on a non-exclusive worldwide basis to personal computer, peripherals
and consumer electronics manufacturers which sell products incorporating these
technologies to end users. RAVISENT also licenses its digital solutions on a
non-exclusive worldwide basis to semiconductor manufacturers which incorporate
RAVISENT's technology in products for personal computers and consumer
electronics devices.
RAVISENT sells its digital solutions to personal computer manufacturers in
the United States and Europe through its direct sales force, and to personal
computer manufacturers in Japan through an independent sales representative.
RAVISENT is beginning to market its digital solutions to consumer electronics
manufacturers. Sales to these manufacturers will be managed domestically and in
Europe through its direct sales force and in Japan through a strategic sales
partner.
RAVISENT establishes strategic relationships with peripherals and
semiconductor manufacturers in order to establish RAVISENT's modular software
solution as the standard of the digital video and audio stream management
industry. In addition to its strategic relationships with semiconductor
manufacturers such as STMicroelectronics, RAVISENT works closely with major
software and hardware providers such as Advanced Micro Devices, Inc., ATI
Technologies and Intel in designing its digital solutions so that its final
product will interact smoothly with their software and hardware platforms.
RAVISENT also maintains close relationships with a wide variety of graphics
card vendors to maximize its product flexibility and support. RAVISENT works
closely with its customers to anticipate market demand and user requirements
and to maximize consumer acceptance and long-term viability of its solutions.
RAVISENT intends to supplement its distribution channel in the future by
establishing an Internet presence to maximize direct contact with its
customers, facilitate electronic sales of its products and sell associated
products directly to end users.
RAVISENT participates in industry conferences to market and demonstrate its
technology and distributes quarterly press kits to disseminate information
regarding its latest advances.
Customers
RAVISENT's typical customers are personal computer, consumer electronics,
peripherals and semiconductor manufacturers that benefit from a software-only
or combination software and hardware solution. As of March 31, 1999, computer
and peripherals manufacturers shipping products that incorporate RAVISENT
technology included: ATI Technologies, Compaq Computer, Dell Computer, ELSA,
Fountain Technologies, Fujitsu Microelectronics, Gateway, Hewlett-Packard,
Micron Electronics, Packard-Bell NEC Europe and Sony Electronics, Inc. In
addition, consumer electronics manufacturers who have incorporated RAVISENT's
technology include Sanyo Electronics, STMicroelectronics and Yamaha. In 1998,
one customer, Dell Computer,
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accounted for in excess of 10% of RAVISENT's revenues; in 1997, two customers,
Hi-Val, Inc. and Pacific Digital Products, Inc., accounted for in excess of 10%
of RAVISENT's revenues; and in 1996, one customer, UEP Systems, Inc. accounted
for in excess of 10% of RAVISENT's revenues. With the exception of our
arrangements with ATI Technologies and STMicroelectronics, which have terms in
excess of one year, all of our agreements have a duration of a year or less or
may be cancelled by the customer following notice at any time.
Research and Development
RAVISENT believes that its future competitive position will depend in large
part on its ability to develop new and enhanced digital video and audio
solutions and its ability to meet the evolving and rapidly changing needs of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers. In April 1998, RAVISENT acquired Viona Development Hard &
Software Engineering, in order to bolster RAVISENT's research and development
and engineering capabilities. RAVISENT has invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups within RAVISENT
and is designed to provide a framework for defining and addressing the
activities required to bring product concepts and development projects to
market. RAVISENT has assembled a core team of experienced software architects,
software engineers and system hardware engineers.
As of March 31, 1999, RAVISENT employed a total of 63 research and
development personnel in three offices. In the years ending December 31, 1996,
1997 and 1998, RAVISENT's research and development expenditures totaled $1.0
million, $1.8 million and $3.1 million, respectively. To date, RAVISENT has not
capitalized any research and development expenses.
Intellectual Property and Proprietary Rights
RAVISENT relies upon a combination of patent, copyright, trade secret and
trademark laws to protect its intellectual property. RAVISENT currently has
three pending U.S. patent applications related to its digital video and audio
stream management technology. These patents are expected to cover future
products, and do not relate directly to RAVISENT's current products. In
addition, RAVISENT has a pending trademark application for the mark "RAVISENT"
and a second pending trademark application for the mark "CineMaster" which has
been approved for publication by the United States Patent and Trademark Office.
Although RAVISENT relies on patent, copyright, trade secret and trademark laws
to protect its technology, RAVISENT believes that factors such as the
technological and creative skill of its personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining technology leadership position.
RAVISENT generally enters into confidentiality or license agreements with
its employees and consultants and corporations with whom it has strategic
relationships, and generally controls access to and distribution of its
software, documentation and other proprietary information. In addition,
RAVISENT often incorporates the intellectual property of its strategic
customers into its designs and has obligations with respect to the use and
disclosure of such intellectual property.
RAVISENT licenses technology from Dolby Laboratories for the audio format
that is used in all DVD-related products. RAVISENT pays a royalty to Dolby on a
per-unit shipped basis. The technology, called Dolby Digital, permits audio
from a DVD to be routed to different speakers in a multi-speaker set up to
permit "theatre quality" audio. The Dolby Digital technology is part of the
industry standard DVD specification. In addition, RAVISENT licenses encryption
and decryption software technology from Matsushita Electric. This technology is
designed to prevent unauthorized persons from accessing DVD content such as
movies. RAVISENT has a royalty-free license from Matsushita. The license for
the Dolby Digital technology is for a term expiring at the expiration of the
patent covered thereby with the furthest expiration date from the date of the
license. The license for the encryption and description technology may be
terminated at any time. If these license agreements were not renewed,
RAVISENT's business would be severely harmed, and it would not be able to ship
product for the DVD market. See "Risk Factors--We depend upon technology
licensed from third parties, and if we do not maintain these license
arrangements, are business will be seriously harmed."
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The market for digital video and audio software and hardware solutions is
characterized by vigorous protection and pursuit of intellectual property
rights. From time to time, RAVISENT has received, and it expects to continue to
receive, notice of claims of infringement of other parties' proprietary rights.
For example, RAVISENT has recently received notice from two of its largest
customers which are personal computer manufacturers that a third party with a
history of litigating its proprietary rights and that has substantial financial
resources has alleged that aspects of MPEG-2 technology infringe upon patents
held by the third party. The third party has invited these customers to license
the technology covered by the patents. These customers have contacted RAVISENT
for assistance in determining whether its technology falls within the scope of
the asserted patent claims and may in the future seek compensation or
indemnification from us arising out of the third-party claims. In addition, a
consortium of companies known as MPEG-LA has notified a number of personal
computer manufacturers, including our customers, that patents owned by members
of the consortium are infringed by the personal computer manufacturers in their
distribution of MPEG-2 technology. MPEG-LA has requested that these personal
computer manufacturers pay license royalties for use of the technology covered
by MPEG-LA patents. These personal computer manufacturers may in the future
seek compensation or indemnification from RAVISENT arising out of the MPEG-LA
claims. Also, a third party has asserted that the parental control features of
RAVISENT's CineMaster products infringe certain patents held by the third
party. RAVISENT believes these claims to be without merit. These and any other
claims of infringement against RAVISENT, whether or not such claims have merit,
could result in litigation which could severely harm our business. See "Risk
Factors--Our business model depends upon licensing our intellectual property,
and if we fail to protect our proprietary rights our business will fail" and
"--We may become involved in costly and time consuming litigation over
proprietary rights."
Competition
RAVISENT competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. RAVISENT competes on the basis of performance,
functionality, feature sets and price in both the software-based and hardware-
based video and audio stream management markets. RAVISENT's competitors in the
software-based digital solution market include Mediamatics, Inc. (a division of
National Semiconductor), Zoran Corporation and Xing Technology Corporation
(which has agreed to be acquired by RealNetworks, Inc.). RAVISENT's competitors
in the hardware-based digital solution market include Sigma Designs, Inc. and
several smaller competitors. RAVISENT also competes with the research and
development departments of other software companies, as well as those of
personal computer, consumer electronics, peripherals and semiconductor
manufacturers who are in the market for specific digital video or audio
software applications. RAVISENT is aware of numerous other major personal
computer manufacturers, software developers and other companies that are
focusing significant resources on developing and marketing products and
services that will compete with RAVISENT's CineMaster products. Currently, at
least two semiconductor manufacturers, C-Cube Microsystems and Zoran
Corporation, are positioning their products to compete with RAVISENT and, in
the future, operating system providers with a larger established customer base,
such as Microsoft, may enter the digital video or audio stream management
markets by building video or audio stream management applications into their
operating systems that competes with those of RAVISENT. For example, Microsoft
currently markets a very basic MPEG-1 compliant digital solution that is
bundled into its operating system, which is used by a substantial number of
personal computer users. If Microsoft were to successfully develop or license a
more sophisticated DVD-compliant digital video solution and incorporate the
solution into its operating system, RAVISENT's revenues could be substantially
harmed. See "Risk Factors--Competition in our markets is likely to continue to
increase and could harm our business."
Employees
As of March 31, 1999, RAVISENT had a total of 106 full-time employees, 63 of
whom were engaged in research and development, 11 in operations, 14 in sales
and marketing, 10 in program management and 8 in administration. RAVISENT's
future performance depends in significant part upon the continued services of
its key technical, sales and senior management personnel. The loss of the
services of one or more of RAVISENT's key employees could harm its business.
RAVISENT's future success also depends on its continuing ability to
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attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for highly qualified personnel is intense, particularly
in the Philadelphia area, where RAVISENT is headquartered. RAVISENT may not be
able to retain or attract key personnel in the future. None of RAVISENT's
employees are represented by a labor union. RAVISENT has not experienced any
work stoppages and considers its relations with employees to be good.
Facilities
RAVISENT leases an aggregate of approximately 12,000 square feet in an
office complex located in Malvern, Pennsylvania. RAVISENT occupies this space
under a lease expiring in September 2003. In addition to its principal office
space in Malvern, RAVISENT also leases office space in Lancaster, Pennsylvania,
San Jose, California and Karlsruhe, Germany. These leases are for facilities
ranging from 1,200 square feet to 8,600 square feet and have terms ranging from
month-to-month to 10 years. As of March 31, 1999, 65 of RAVISENT's employees
worked in its Malvern facility, 10 in its Lancaster facility, 14 in its San
Jose facility and 17 in its Karlsruhe facility. RAVISENT expects that it will
need to obtain additional office space in the next twelve months.
Legal Proceedings
On May 25, 1999 Zoran Corporation filed a complaint against RAVISENT in the
Superior Court of California, Santa Clara County alleging breach of oral and
written contract and other claims totaling approximately $1.2 million. Zoran
was formerly a supplier of semiconductors to RAVISENT used in its Hardware
CineMaster 98 version 1.2 product. The particular semicondutor at issue was
manufactured for Zoran by Motorola Corporation, which in turn had obtained the
part from a third party contract manufacturer. RAVISENT refused to pay amounts
Zoran claimed it was owed as a result of quality problems in the Zoran parts.
RAVISENT is evaluating its options and response to this lawsuit, and intends to
defend it vigorously. This litigation, should it continue, may be costly, may
distract management's attention and be significantly time consuming. The
resolution of this litigation could harm RAVISENT's financial condition.
From time to time, RAVISENT has received, and expects to continue to
receive, notices of claims of infringement of other parties' proprietary rights
and other claims in the ordinary course of its business. See "Risk Factors--We
may become involved in costly and time consuming litigation over proprietary
rights."
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of RAVISENT as of May 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Francis E.J. Wilde III.. 48 Chief Executive Officer, President and Director
Jason C. Liu............ 29 Chief Financial Officer, Vice President, Finance and Secretary
Michael R. Harris....... 30 Chief Technology Officer
Robert S. Russell....... 41 Vice President, Strategic Engineering Projects
Leonard D. Sharp........ 40 Vice President, Internet Division
Sharon K. Taylor........ 31 Vice President, Product Management
E. Joseph Vitetta, 42 Vice President, Worldwide Sales
Jr. ...................
William H. Wagner....... 40 Vice President, Engineering
Frederick J. Beste 53 Director
III(1).................
Peter X. Blumenwitz..... 31 Director
Walter L. 53 Director
Threadgill(2)..........
Paul A. Vais(1)(2)...... 40 Director
</TABLE>
- ----------
(1) Member of compensation committee
(2) Member of audit committee
Francis E.J. Wilde III. Mr. Wilde joined RAVISENT in August 1997 as a
director and President. In April 1998, Mr. Wilde was appointed Chief Executive
Officer. Prior to joining RAVISENT, from March 1995 to August 1997, Mr. Wilde
served as Vice President of Academic Systems Corporation, an instructional
software company. From January 1994 to March 1995, Mr. Wilde served as the
Senior Vice President of Summa Graphics Corporation, a computer-aided design
graphics peripherals company. From January 1993 to December 1993, Mr. Wilde
served as the Chief Executive Officer of Collaborative Technology Corporation,
an electronic meeting software company. Mr. Wilde holds a B.A. in Business
Administration from Seton Hall University.
Jason C. Liu. Mr. Liu joined RAVISENT in November 1994 as the Director of
Operations. In June 1996, he became RAVISENT's Chief Financial Officer, Vice
President of Finance and Secretary. Prior to joining RAVISENT, from July 1992
to August 1994, Mr. Liu was a management consultant with Deloitte & Touche
Management Consulting, an international consulting company. Mr. Liu holds a
B.A. in Finance and Accounting from Washington University and an M.B.A. from
the Wharton School at the University of Pennsylvania.
Michael R. Harris. Mr. Harris is a co-founder of RAVISENT. From May 1994 to
September 1995, he served as its Vice President of Engineering. In September
1995, he became Vice President of Technology and in September 1998, he became
the Chief Technology Officer. Prior to co-founding RAVISENT, from January 1993
to May 1994, Mr. Harris served as Chief Executive Officer and founder of
Checkmate Technologies, a multimedia design consulting firm. Mr. Harris holds a
B.S. in Computer and Electrical Engineering from Purdue University.
Robert S. Russell. Mr. Russell joined RAVISENT in April 1995 as a senior
Software Engineer. In June 1996, Mr. Russell became Director of Engineering and
in November 1997, became Vice President of Engineering. Since March 1999, Mr.
Russell has served as Vice President of Strategic Engineering Projects. Prior
to joining RAVISENT, from July 1992 to April 1995, Mr. Russell served as the
Vice President of Development for JFK Associates, Inc., an engineering services
company. Mr. Russell holds a B.S. in Computer Engineering from Iowa State
University.
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Leonard D. Sharp. Mr. Sharp joined RAVISENT in January 1998 as Vice
President of Marketing & Sales. In September 1998, Mr. Sharp became Vice
President of Marketing and in March 1999, he became Vice President of
RAVISENT's Internet Division. Prior to joining RAVISENT, from August 1996 to
December 1997, Mr. Sharp served as a principal of Sharp Marketing Group, a
marketing and sales consulting company. From November 1995 to August 1996, Mr.
Sharp served as Director of Marketing & Sales for the Paradise Multimedia
Products Division of Philips Electronics, N.A., a consumer electronics company.
From February 1993 to October 1995, Mr. Sharp served as the Vice President of
Marketing for the Imaging Products division of Western Digital Corporation, an
information storage products company.
Sharon K. Taylor. Ms. Taylor joined RAVISENT in August 1998 as Product Line
Director for Consumer Electronics. In February 1999, Ms. Taylor became Vice
President of Product Management. Prior to joining RAVISENT, from September 1994
to July 1998, Ms. Taylor served at Toshiba America Consumer Products, Inc.,
first as Product Marketing Manager and later as Director of Product Marketing.
From November 1993 to August 1994, Ms. Taylor served as Director of New Product
Development at CIDCO, Inc., a telephone and telephony device company. From
August 1990 to October 1993, Ms Taylor served as Production Manager and Quality
Development Manager at AT&T Consumer Products. Ms. Taylor holds an A.A. in
Computer Science from American University of Paris, a B.A. in Linguistics from
the University of California at Davis and an M.B.A. from Columbia University.
E. Joseph Vitetta, Jr. Mr. Vitetta joined RAVISENT in July 1998 as a
Strategic Account Manager. He became Vice President of Worldwide Sales in
December 1998. Prior to joining RAVISENT, from September 1996 to July 1998, Mr.
Vitetta served as Director of Partnerships for Academic Systems Corporation, an
instructional software company. From January 1995 to September 1996, Mr.
Vitetta served as the Vice President of National Sales for C-Phone Corporation,
a video communications company. From April 1994 to January 1995, Mr. Vitetta
served as the Director of National Sales for Zig Ziglar Corporation, a
motivational training company. From February 1993 to April 1994, Mr. Vitetta
served as the Vice President of Sales and Marketing for Collaborative
Technology Corporation, an electronic meeting software company. Mr. Vitetta
holds a B.S. in Industrial Design Graphics from Arizona State University.
William H. Wagner. Mr. Wagner joined RAVISENT in September 1998 as the
Director of Product Development. He became the Vice President of Engineering in
March 1999. Prior to joining RAVISENT, from June 1997 to August 1998, Mr.
Wagner served as President of Eggplant Systems Corporation, a software
consulting company for which he still serves as a director. From July 1992 to
May 1997, Mr. Wagner served as Director of Software Engineering at Cirrus
Logic, Inc., a precision linear circuit supplier. Mr. Wagner holds a B.S. in
Electrical Engineering from Pennsylvania State University.
Frederick J. Beste III. Mr. Beste has served as a director of RAVISENT since
April 1999, and he previously served as a director of RAVISENT from May 1995 to
April 1998. Mr. Beste has served as the President of the general partner of the
NEPA/Mid-Atlantic family of venture capital partnerships since May 1985. From
November 1981 to September 1984, Mr. Beste served as the chief executive
officer of Kentucky Highlands Investment Corp. He also serves on a number of
boards of directors, including: Allegheny Child Care Academy, Inc., Blue Rock
Management Corporation, Delex Systems, Inc., Medtrex, Inc., Outdoor Venture
Corporation, Form Design Corporation, Casecraft Corporation, NEPA II Management
Corporation, MAVF III Management Corporation, Storeroom Solutions, Inc. and the
NET Ben Franklin Technology Center. Mr. Beste holds a B.A. in Economics from
Stetson University.
Peter X. Blumenwitz. Mr. Blumenwitz has served as a Director of RAVISENT
since April 1999. Since August 1997, Mr. Blumenwitz has served as Assistant
Director of Apax Partners & Co. Beteilgungsberatung A.G., a European private
equity firm. From June 1993 to August 1997, Mr. Blumenwitz served as an
Investment Manager for Technologieholding VC GmbH, a German venture capital
firm and KBG, a quasi- governmental investment firm. Prior to June 1993, he
served as a credit analyst for Allgemeine Kredit, a credit insurer based in
Germany. Mr. Blumenwitz also serves on the boards of directors of ENBA p.l.c.,
Dublin, Ireland and iMediation S.A., Paris, France. Mr. Blumenwitz holds a B.S.
in business administration from the Fachhochschule Munich.
59
<PAGE>
Walter L. Threadgill. Mr. Threadgill has served as a director of RAVISENT
since January 1998. Since February 1996, Mr. Threadgill has served as General
Managing Partner of Atlantic Coastal Ventures, L.P., a venture capital firm.
Since June 1979, Mr. Threadgill has also served as President and Chief
Executive Officer of Multimedia Broadcast Investment Corporation (or MBIC), a
venture capital company specializing in broadcast financing. Prior to forming
MBIC, Mr. Threadgill was Divisional Vice President of Fiduciary Trust Company
in New York and Senior Vice President, Chief Operating Officer of United
National Bank in Washington, D.C. He also serves on several boards of directors
including: ICG Communications, Inc., Citywide Broadcasting, Inc. and Unisource
Network Services, Inc. Mr. Threadgill holds a B.A. in Business Administration
from Bernard M. Baruch College, City University of New York, an M.B.A. from
Long Island University and an M.A. in International and Telecommunications Law
from Antioch School of Law.
Paul A. Vais. Mr. Vais has served as a director of RAVISENT since April
1998. Mr. Vais has been a Managing Director of Patricof & Co. Ventures, Inc., a
venture capital firm, since March 1997. From March 1995 to December 1996, Mr.
Vais served as Vice President of Enterprise Partners V.C., a venture capital
firm. From October 1994 to March 1995, Mr. Vais served as a consultant for
International Business Machines and several early stage companies, providing
expertise in strategic marketing and technology development. Mr. Vais also
worked at NeXT Computer, Inc., from July 1988 to October 1994, where he served
as the Executive Director of Worldwide Marketing, and with Apollo Computer, an
engineering workstation company. Mr. Vais serves as a director of Icarian,
Inc., Oblix, Inc. and InfoLibria, Inc. Mr. Vais holds an A.B. in Computer
Science from the University of California at Berkeley.
Board of Directors and Committees
RAVISENT currently has authorized five directors. Following this offering,
the board will consist of five directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Mr. Beste is a Class I director
whose term will expire in 2000, Messrs. Blumenwitz and Wilde are Class II
directors whose terms will expire in 2001 and Messrs. Vais and Threadgill are
Class III directors whose terms will expire in 2002. The officers serve at the
discretion of the board. There are no familial relationships between any of
RAVISENT's officers and directors.
RAVISENT has established an audit committee composed of independent
directors, which reviews and supervises RAVISENT's financial controls,
including the selection of its auditors, reviews the books and accounts, meets
with its officers regarding its financial controls, acts upon recommendations
of auditors and takes further actions as the audit committee deems necessary to
complete an audit of RAVISENT's books and accounts, as well as other matters
which may come before it or as directed by the board. The audit committee
currently consists of two directors, Messrs. Vais and Threadgill.
RAVISENT has established a compensation committee, which reviews and
approves the compensation and benefits for RAVISENT's executive officers,
administers its stock plans and performs other duties as may from time to time
be determined by the board. The compensation committee currently consists of
two directors, Messrs. Beste and Vais. None of RAVISENT's executive officers
serve on the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the board or
compensation committee.
Director Compensation
RAVISENT currently does not compensate any non-employee member of the board.
Directors who are also employees of RAVISENT do not receive additional
compensation for serving as directors. Non-employee directors will be eligible
to receive discretionary option grants and stock issuances under the 1999 Stock
Incentive Plan. Individuals who are serving as non-employee board members on
the date of execution of the underwriting agreement for this offering will
receive automatic option grants on such date. In addition, under the 1999 Stock
Incentive Plan, non-employee directors will receive automatic option grants
upon becoming directors and on the date of each annual meeting of stockholders.
See "Management--Benefit Plans."
60
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation
during the year ended December 31, 1998 of each person who served as RAVISENT'S
chief executive officer and each of the four other most highly compensated
executive officers who earned more than $100,000 for the fiscal year ended
December 31, 1998, who are referred to in this prospectus as the named
executive officers. No individual who would otherwise have been includable in
such table on the basis of salary and bonus earned during 1998 has resigned or
otherwise terminated his employment during 1998. The compensation table
excludes other compensation in the form of perquisites and other personal
benefits that constitutes the lesser of $50,000 or ten percent (10%) of the
total annual salary and bonus of each of the named executive officers in 1998.
On June 9, 1999, the Company granted options to Mr. Wilde and Mr. Liu to
purchase 150,000 and 20,833 shares, respectively, at an exercise price of
$10.20 per share. Twenty-five percent of the options granted to Mr. Wilde and
Mr. Liu vest one year following the grant date and the remaining 75% vest in 36
equal monthly installments thereafter.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Fiscal Annual Compensation Securities
Name and Principal Year -------------------- Underlying All Other
Position Ended Salary ($) Bonus ($) Options(1) Compensation
------------------ ------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Francis E.J. Wilde
III................... 1998 $123,000 $98,625 173,729 --
Chief Executive
Officer, President
and Director
Jason C. Liu........... 1998 112,875 27,125 59,281 --
Chief Financial
Officer, Vice
President,
Finance and Secretary
Michael R. Harris...... 1998 116,250 22,500 56,875 --
Chief Technology
Officer
Robert S. Russell...... 1998 112,875 25,125 49,490 --
Vice President,
Strategic Engineering
Projects
Leonard D. Sharp....... 1998 123,750 33,125 176,667(2) --
Vice President,
Internet Division
Gregg W. Garnick(3).... 1998 64,437 -- 5,927 $125,000
Former Chief Executive
Officer
</TABLE>
- ----------
(1) Includes pre-existing options, originally granted from 1996 to 1998 but
with a higher exercise price, that were repriced in 1998 as follows:
<TABLE>
<S> <C>
Francis E.J. Wilde III......................................... 169,563
Jason C. Liu................................................... 53,656
Michael R. Harris.............................................. 52,708
Robert S. Russell.............................................. 44,802
Leonard D. Sharp............................................... 84,375
Gregg W. Garnick............................................... 2,802
-------
407,906
=======
</TABLE>
(2) Includes 84,375 shares granted to Mr. Sharp in the last fiscal year, which
were repriced in 1998 at a new exercise price.
(3) Mr. Garnick resigned as chief executive officer in April 1998 and as a
director in April 1999. Mr. Garnick received a severance payment of
$125,000, equal to one year's salary, in June 1998.
61
<PAGE>
The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in 1998, including the
potential realizable value over the five-year term of the options, based on an
assumed offering price of $12 per share and assumed rates of stock appreciation
of 5% and 10%, compounded annually. The exercise price per share of each option
was equal to the fair market value of common stock on the date of grant as
determined by the board of directors. In determining the fair market value of
the common stock on each grant date, the board of directors considered, among
other things, RAVISENT's absolute and relative levels of revenues and operating
results, the state of RAVISENT's technology development, increases in operating
expenses, the absence of a public trading market for RAVISENT's securities, the
intensely competitive nature of RAVISENT's market and the appreciation of stock
values of a number of generally comparable companies. These assumed rates of
appreciation comply with the rules of the Securities and Exchange Commission
and do not represent RAVISENT's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the future performance
of RAVISENT's common stock. No stock appreciation rights were granted during
1998.
<TABLE>
<CAPTION>
Potential
Realizable Value
Using Assumed
Initial Public
Offering Price of
Individual Grants $12
------------------------------------------------------ -------------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998 (%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Francis E.J. Wilde III(4).. 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
166,667(1) 9.30 2.52 09/22/02 552,561 1,221,022
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
813(1) 0.05 2.52 09/22/02 2,695 5,956
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Option Grants in 1998
Jason C. Liu(5)............ 1,563(2) 0.09% $6.00 02/26/03 $ 5,182 $ 11,451
1,563(2) 0.09 4.98 04/13/03 5,182 11,451
417 0.02 2.52 09/22/03 1,383 3,055
1,563(3) 0.09 2.52 02/26/03 5,182 11,451
531(1) 0.03 2.52 09/22/02 1,760 3,890
1,563(3) 0.09 2.52 04/13/03 5,182 11,451
50,000(1) 2.79 2.52 09/22/03 165,768 366,306
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Michael R. Harris.......... 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
626(1) 0.03 2.52 09/22/02 2,075 4,586
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
50,000(1) 2.79 2.52 09/22/02 165,768 366,306
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Robert S. Russell.......... 1,042(2) 0.06% $6.00 02/26/03 $ 3,455 $ 7,634
1,563(2) 0.09 4.98 04/13/03 5,182 11,451
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
531(1) 0.03 2.52 09/22/02 1,760 3,890
1,563(3) 0.09 2.52 04/13/03 5,182 11,451
41,667(1) 2.32 2.52 09/22/02 138,141 305,257
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Potential
Realizable Value
Using Assumed
Initial Public
Offering Price of
Individual Grants $12
----------------------------------------------------- -----------------
Number of Percent
Securities of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted(#) Fiscal 1998(%) Per-Share ($) Date 5% 10%
---- ---------- --------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leonard D. Sharp........ 83,333(2) 4.65% $ 6.00 02/26/03 $276,279 $610,508
5,833(2) 0.33 1.50 02/26/03 19,338 42,733
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
83,333(3) 4.65 2.52 02/26/03 276,279 610,508
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
Gregg W. Garnick........ 1,042(2) 0.06% $ 6.00 02/26/03 $ 3,455 $ 7,634
1,042(2) 0.06 4.98 04/13/03 3,455 7,634
1,042(3) 0.06 2.52 02/26/03 3,455 7,634
719(1) 0.04 2.52 09/22/03 2,384 5,267
1,042(3) 0.06 2.52 04/13/03 3,455 7,634
1,042 0.06 2.52 10/20/03 3,455 7,634
</TABLE>
- ----------
(1) The option was granted prior to 1998 and repriced on September 23, 1998 to
an exercise price of $2.52 per share, the fair market value per share of
common stock on the date of regrant.
(2) The option was originally granted during 1998 with an exercise price in
excess of $2.52 per share and was repriced on September 23, 1998 to an
exercise price of $2.52 per share, the fair market value per share of
common stock on the date of regrant. The repricing of the option is deemed
to be a new option grant and is included in this table. See footnote (3).
(3) This is not a new option grant but instead reflects the repricing on
September 23, 1998 of the options granted during 1998 prior to the
repricing date; the repricing of the options is deemed to be a new option
grant.
(4) On June 9, 1999, RAVISENT granted Mr. Wilde an option to purchase 150,000
shares of common stock at an exercise price of $10.20 per share. Based on
an assumed initial public offering price of $12.00 per share and assumed
rates of stock appreciation of 5% and 10% annually, the potential
realizable value over the five-year term of the option is $2,983,824 and
$693,508, respectively.
(5) On June 9, 1999, RAVISENT granted Mr. Liu an option to purchase 20,833
shares of common stock at an exercise price of $10.20 per share. Based on
an assumed initial public offering price of $12.00 per share and assumed
rates of stock appreciation of 5% and 10% annually, the potential
realizable value over the five-year term of the option is $414,420 and
$915,765, respectively.
In 1998, RAVISENT granted options to purchase up to an aggregate of
1,792,897 shares to employees, directors and consultants, of which 572,170
grants were attributable to deemed regrants of options granted prior to
September 23, 1998 as the result of their repricing on such date to an exercise
price of $2.52 per share. Options to purchase 783,333 shares were granted
outside of RAVISENT's 1995 Stock Option Plan and options to purchase 1,009,563
shares were granted under RAVISENT's 1995 Stock Option Plan at exercise prices
at the fair market value of RAVISENT's common stock on the date of grant, as
determined in good faith by the board of directors. The exercise price may be
paid in cash, with shares of common stock or through a cashless exercise price.
All options became exercisable over a four-year period, with 25% of the shares
vesting on the one year anniversary of the grant date and the remainder vesting
in 36 equal monthly installments. To the extent not already exercisable, all of
these options will become exercisable in the event of an acquisition of
RAVISENT. All options have a term of five years, subject to earlier termination
in certain situations related to termination of employment. Notwithstanding the
foregoing, Mr. Wilde was granted options to purchase
63
<PAGE>
grant. In addition, options granted to Mr. Sharp to purchase 5,833 shares were
subject to certain performance goals for vesting purposes, which were met and
these options have fully vested.
Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning the number and value
of shares of common stock underlying the options held by the named executive
officers. No options or stock appreciation rights were exercised during 1998
and no stock appreciation rights were outstanding as of December 31, 1998. The
value of unexercised in-the-money options at December 31, 1998 is calculated on
the basis of the assumed initial public offering price of $12, less the
aggregate exercise price of such options.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Francis E.J. Wilde III.. 166,921 5,767 $1,582,411 $ 54,671
Jason C. Liu............ 90,691 7,032 859,751 66,663
Michael R. Harris....... 343,453 5,638 3,255,934 53,448
Robert S. Russell....... 46,852 6,095 444,157 57,781
Leonard D. Sharp........ 5,833 86,458 55,297 819,622
Gregg W. Garnick........ 40,105 3,544 380,195 33,597
</TABLE>
Benefit Plans
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to RAVISENT's 1995 Stock Option Plan. RAVISENT's 1999 Stock
Incentive Plan was adopted by the board in April 1999 and is expected to be
approved by the stockholders in June 1999. The 1999 Stock Incentive Plan became
effective upon its adoption by the board. All outstanding options under
RAVISENT's existing 1995 Stock Option Plan will be transferred to the 1999
Stock Incentive Plan on the date of this offering, and no further option grants
will be made under the 1995 Stock Option Plan. The transferred options will
continue to be governed by their existing terms, unless RAVISENT's compensation
committee decides to extend one or more features of the 1999 Stock Incentive
Plan to those options. Except as otherwise noted below, the transferred options
have substantially the same term as will be in effect for grants made under the
discretionary option grant program of RAVISENT's 1999 Stock Incentive Plan.
Share Reserve. 2,725,000 shares of RAVISENT's common stock have been
authorized for issuance under the 1999 Stock Incentive Plan. This share reserve
consists of the number of shares RAVISENT estimates will be carried over from
the 1995 Stock Option Plan plus an additional increase of 891,667 shares. The
share reserve under RAVISENT's 1999 Stock Incentive Plan will automatically
increase on the first trading day in January each year, beginning January 1,
2000, by an amount equal to one percent of the total number of shares of common
stock outstanding on the last trading day of the prior month, but in no event
will this annual increase exceed 200,000 shares. In addition, no participant in
RAVISENT's 1999 Stock Incentive Plan may be granted stock options or direct
stock issuances for more than 700,000 shares of common stock in total in any
calendar year.
Programs. RAVISENT's 1999 Stock Incentive Plan has three separate programs:
. the discretionary option grant program, under which eligible individuals
in RAVISENT's employ may be granted options to purchase shares of
RAVISENT's common stock at an exercise price determined by the plan
administrator;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or upon the completion of a period of service or
as a bonus for past services; and
64
<PAGE>
. the automatic option grant program, under which option grants will be
made at periodic intervals to eligible non-employee board members to
purchase shares of common stock at an exercise price equal to the fair
market value of those shares on the grant date.
The individuals eligible to participate in RAVISENT's plan include its
officers and other employees, its board members and any consultants it hires.
Administration. The discretionary option grant and stock issuance programs
will be administered by RAVISENT's compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding.
Plan Features. RAVISENT's 1999 Stock Incentive Plan will include the
following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of RAVISENT's common stock valued at fair market value
on the exercise date. The option may also be exercised through a same-
day sale program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from RAVISENT's 1995 Stock Option Plan, in return
for the grant of new options for the same or different number of option
shares with an exercise price per share based upon the fair market value
of RAVISENT's common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from RAVISENT equal
to the fair market value of the shares subject to the surrendered
options less the exercise price payable for those shares. We may make
the payment in cash or in shares of RAVISENT's common stock. None of the
options under RAVISENT's 1995 Stock Option Plan have any stock
appreciation rights.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program, and these
rights may also be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with
this feature may be surrendered to RAVISENT upon the successful
completion of a hostile tender offer for more than 50% of RAVISENT's
outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount
per surrendered option share based upon the highest price per share of
RAVISENT's common stock paid in that tender offer.
Change in Control. The 1999 Stock Incentive Plan will include the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
. If RAVISENT is acquired by merger or asset sale or a board-approved sale
of more than fifty percent of RAVISENT's stock by its stockholders, each
outstanding option under the discretionary option grant program which is
not to be assumed or continued by the successor corporation will
immediately become exercisable for all the option shares, and all
outstanding unvested shares will immediately vest, except to the extent
RAVISENT's repurchase rights with respect to those shares are to be
assigned to the successor corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with RAVISENT or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under RAVISENT's 1999
Stock Incentive Plan may be accelerated upon similar terms and
conditions.
65
<PAGE>
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of RAVISENT's outstanding voting stock or a
change in the majority of RAVISENT's board through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
. The options currently outstanding under RAVISENT's 1995 Stock Option
Plan will immediately vest upon an acquisition of RAVISENT by merger or
asset sale or sale of more than fifty percent of RAVISENT's outstanding
stock by its stockholders. There are no other change in control
provisions currently in effect for those options. However, the
compensation committee may extend the acceleration provisions of
RAVISENT's 1999 Stock Incentive Plan to any or all of those options.
Automatic Option Grant Program. Each individual who is serving as a non-
employee board member on the date the underwriting agreement for this offering
is executed will automatically receive on such date an option to purchase
20,000 shares of RAVISENT's common stock, provided he has not been in the prior
employ of RAVISENT. Each individual who first becomes a non-employee board
member at any time after this offering will automatically receive on the date
of his or her appointment, an option to purchase 20,000 shares of RAVISENT's
common stock. On the date of each annual stockholders meeting following this
offering, each individual who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 5,000 shares of
RAVISENT's common stock, provided he or she has served on the board for at
least six months.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The option
will be immediately exercisable for all of the option shares; however, any
unvested shares purchased under the option will be subject to repurchase by
RAVISENT, at the exercise price paid per share, should the optionee cease board
service prior to vesting in those shares. The shares subject to each 20,000
share initial automatic option grant will vest over a four year period in
successive equal annual installments upon the individual's completion of each
year of board service over the four year period measured from the option grant
date. Each 5,000 share subsequent automatic option grant will vest upon the
individual's completion of one year of board service measured from the option
grant date. However, the shares subject to each automatic grant will
immediately vest in full upon certain changes in control or ownership of
RAVISENT or upon the optionee's death or disability while a board member.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan
will terminate no later than April 29, 2009.
1999 Employee Stock Purchase Plan
Introduction. RAVISENT's 1999 Employee Stock Purchase Plan was adopted by
the board in April 1999 and is expected to be approved by the stockholders in
June 1999. The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow
eligible employees of RAVISENT and its participating subsidiaries to purchase
shares of common stock, at semi-annual intervals, with their accumulated
payroll deductions.
Share Reserve. 500,000 shares of common stock will initially be reserved for
issuance.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering covered by
this prospectus is signed and will end on the last business day in July 2001.
The next offering period will start on the first business day in August 2001,
and subsequent offering periods will be set by RAVISENT's compensation
committee. Shares will generally be purchased on the last business day of
January and July during each offering period.
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Reset Feature. If the fair market value per share of RAVISENT's common stock
on any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of February and August each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of January and July
each year. In no event, however, may any participant purchase more than 1,300
shares on any purchase date, and not more than 125,000 shares may be purchased
in total by all participants on any purchase date.
Change in Control. Should RAVISENT be acquired by merger or sale of
substantially all of RAVISENT's assets or more than fifty percent of its voting
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to 85% of the market value per share on the
participant's entry date into the offering period in which an acquisition
occurs or, if lower, 85% of the fair market value per share immediately prior
to the acquisition.
The plan will terminate no later than the last business day of July 2009.
The board may at any time amend, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
In August 1997, RAVISENT entered into an employment letter agreement with
Mr. Wilde. The annual base salary for Mr. Wilde is $125,000 per annum. Under
the employment letter agreement, RAVISENT paid $25,000 to Mr. Wilde as a
signing bonus and granted to Mr. Wilde a stock option to purchase 166,667
shares of RAVISENT common stock at an exercise price of $6.00 per share. These
stock options have fully vested. These stock options were regranted on
September 23, 1998 at $2.52 per share. In addition, in the event of a sale of
all of the assets or a merger in which RAVISENT is not the surviving entity and
in which RAVISENT is valued at $80,000,000 or more, Mr. Wilde is entitled to
the greater of 2.5% of the proceeds or $2,000,000 in cash.
In November 1997, RAVISENT entered into an employment agreement with Mr.
Harris, in which RAVISENT hired Mr. Harris as its Chief Technology Officer for
a two year term at a base salary of $125,000 per year, an annual cash bonus of
$35,000 and incentive stock options to purchase up to 4,167 shares of common
stock in minimum blocks of 2,083 shares at an exercise price of $1.50 per
share. In addition, if Mr. Harris is terminated for any reason other than gross
malfeasance or gross nonfeasance, he will be paid his then-current salary for
six additional months. Finally, if Mr. Harris is terminated, his options
immediately vest.
In November 1997, RAVISENT entered into an employment agreement with Mr.
Liu, in which RAVISENT hired Mr. Liu as its Chief Financial Officer for a term
of two years at a base salary of $125,000 per year plus an annual cash bonus of
$35,000 and options to purchase up to 4,167 shares of common stock per year for
significant performance and an additional 2,083 shares of common stock for
exceptional performance. In addition, if Mr. Liu is terminated for any reason
other than gross malfeasance or gross nonfeasance, he will be paid his then-
current salary for six additional months.
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<PAGE>
In December 1997, RAVISENT entered into an employment agreement with Mr.
Sharp, in which RAVISENT hired Mr. Sharp as Vice President of Sales and
Marketing for a two year term at a base salary of $125,000 per year, an annual
cash bonus of $35,000, a commission in 1998 of three percent of the gross
contribution margin in excess of $9,236,000 and options to purchase up to
83,333 shares of common stock at an exercise price of $6.00 per share that
immediately vest upon a change of control or the resignation, termination or
demotion of Mr. Wilde. In addition, Mr. Sharp may be awarded additional options
to purchase up to 4,167 shares of common stock per year for significant
performance and options to purchase up to an additional 2,083 shares of common
stock for exceptional performance. Finally, if Mr. Sharp is terminated for any
reason other than gross malfeasance or gross nonfeasance, he will be paid his
then-current salary for six additional months.
In December 1997, RAVISENT entered into an employment agreement with Mr.
Russell, in which RAVISENT hired Mr. Russell as the Director of Engineering for
a two year term for a base salary of $125,000 per year, an annual cash bonus of
$35,000 per year and options to purchase up to 4,167 shares of common stock per
year for significant performance and an additional 2,083 shares of common stock
per year for exceptional performance. In addition, if Mr. Russell is terminated
for any reason other than gross malfeasance or gross nonfeasance, he will be
paid his then-current salary for six additional months.
In February 1998, RAVISENT entered into an employment agreement with Mr.
Garnick, in which RAVISENT employed Mr. Garnick as Chairman of the Board and
Chief Executive Officer for an initial two year term commencing January 1, 1998
at a base salary of $125,000. In March 1998, this employment agreement was
amended, as a result of which Mr. Garnick resigned as Chief Executive Officer
but remained employed by RAVISENT and remained as a director. The amendment
provided that if Mr. Garnick was terminated by RAVISENT (other than for gross
malfeasance or gross non-feasance) or if he resigned his employment at RAVISENT
or if he were removed as Chairman of the Board, he would nonetheless remain a
director of RAVISENT until either a merger or an initial public offering of
RAVISENT stock.
In April 1999, RAVISENT entered into a letter agreement with Gregg W.
Garnick, pursuant to which Mr. Garnick resigned as a director of RAVISENT and
agreed to enter into a consulting agreement to perform marketing and other
special projects for a term expiring on the earlier of one year or seven months
from the closing of this offering. In addition, RAVISENT accelerated 2,635 of
Mr. Garnick's unvested options.
Limitation of Liability and Indemnification
RAVISENT's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, subject to certain exceptions,
directors' personal liability to RAVISENT or its stockholders for monetary
damages for breaches of fiduciary duties. The certificate of incorporation does
not, however, eliminate or limit the personal liability of a director for the
following:
. any breach of the director's duty of loyalty to RAVISENT or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
RAVISENT's bylaws provide that RAVISENT shall indemnify its directors and
executive officers to the fullest extent permitted under the Delaware General
Corporation Law and may indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law. In addition,
RAVISENT has entered into an indemnification agreement with each of its
directors and officers. The indemnification agreements contain provisions that
require RAVISENT, among other things, to indemnify its directors and executive
officers against certain liabilities (other than liabilities arising from
intentional or knowing and
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culpable violations of law) that may arise by reason of their status or service
as directors or executive officers of RAVISENT or other entities to which they
provide service at the request of RAVISENT and to advance expenses they may
incur as a result of any proceeding against them as to which they could be
indemnified. RAVISENT believes that these bylaw provisions and indemnification
agreements are necessary to attract and retain qualified directors and
officers. Prior to the consummation of the offering, RAVISENT will obtain an
insurance policy covering directors and officers for claims they may otherwise
be required to pay or for which RAVISENT is required to indemnify them, subject
to certain exclusions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of RAVISENT where indemnification will be
required or permitted, and RAVISENT is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
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CERTAIN TRANSACTIONS
Sales of Securities
Since January 1996, RAVISENT has raised capital primarily through the sale
of its securities, including:
. In March 1996, RAVISENT sold a combination of subordinated notes and
warrants to purchase an aggregate of 83,635 shares of Series A
preferred stock at an exercise price of $0.746352 per share to NEPA
Venture Fund II, L.P. for an aggregate consideration of $125,000.
. In March 1998, RAVISENT entered into a Development and License
Agreement with ATI Technologies Inc. whereby RAVISENT agreed to allow
ATI Technologies to convert up to $125,000 in prospective royalty
payments due to RAVISENT per quarter in each of the first four
quarters of royalty payments and $500,000 in the fourth quarter of
the second year of royalty payments into 200,803 shares of Series B
preferred stock and warrants to purchase 81,727 shares of common
stock at an exercise price of $0.06 per share.
. In December 1997 and March 1998, RAVISENT borrowed $1,770,000 from
Atlantic Coastal Ventures L.P. pursuant to 6% convertible
subordinated debentures due March and May 1998. In April 1998,
Atlantic Coastal Ventures received interest on the debentures in the
form of common stock and exercised warrants received with the
debentures for 208,682 shares of common stock. In addition, Atlantic
Coastal Ventures converted the debentures into 355,422 shares of
Series B preferred stock.
. In April 1998, RAVISENT sold to various investors including entities
affiliated with Patricof & Co. Ventures, Inc. and Atlantic Coastal
Ventures an aggregate of 3,226,908 shares of Series B preferred stock
and warrants to purchase 1,313,351 shares of its common stock at an
exercise price of $.06 per share for an aggregate consideration of
$16,070,000.
. In May 1998, RAVISENT sold to ATI Technologies an aggregate of
502,008 shares of Series B preferred stock and warrants to purchase
204,317 shares of common stock at $0.06 per share for an aggregate
consideration of $2,500,000.
The following table summarizes the shares of common stock, preferred stock
and warrants purchased by RAVISENT's executive officers, directors and 5%
stockholders and persons associated with them since January 1996. The number
of total shares on an as-converted basis reflects a one-to-one conversion to
common stock ratio for each share of Series A and Series B preferred stock.
<TABLE>
<CAPTION>
Total
Warrants to shares on
Series A Series B Purchase an As-
Common Preferred Preferred Common Converted
Investor Stock Stock Stock Stock Basis
- -------- ------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NEPA Venture Fund II, L.P. .. -- 83,635 -- -- 83,635
Entities affiliated with
Patricof & Co.
Ventures.................... -- -- 2,108,434 858,133 2,966,566
Atlantic Coastal Ventures
L.P. ....................... 208,682 -- 355,422 -- 564,104
ATI Technologies Inc. ....... -- -- 702,811 286,044 988,855
------- ------ --------- --------- ---------
208,682 83,635 3,166,667 1,144,177 4,603,160
======= ====== ========= ========= =========
</TABLE>
Agreements with Officers and Directors
Messrs. Vais and Threadgill are on the board of directors pursuant to
agreements with RAVISENT.
In March 1996, RAVISENT entered into a series of salary deferral
transactions with each of Gregg W. Garnick, Jason C. Liu and Robert S.
Russell, whereby in exchange for salary deferral, each officer received non-
plan stock options to purchase 50,510 shares of common stock at an exercise
price of $0.60 per share.
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In April 1998, RAVISENT repurchased 200,000 shares of RAVISENT common stock
from Gregg W. Garnick, at a price of $3.60 per share for an aggregate
consideration of $720,000.
In September 1998, RAVISENT entered into an agreement with Michael Harris
and Brenda Harris in which the Harrises borrowed $60,000 payable in three years
with no interest accruing in those three years. In addition, if Mr. Harris
achieves each of his quarterly performance goals with RAVISENT, at the end of
each year, RAVISENT will forgive one-third of the principal amount. If Mr.
Harris voluntarily leaves or is terminated for cause, the note is immediately
due and payable. However, if RAVISENT completes an initial public offering of
its stock, RAVISENT will completely forgive the note. The parties also entered
into an agreement confirming that the note is immediately payable upon
termination and that the outstanding principal will be forgiven upon an initial
public offering of RAVISENT common stock.
Agreement with ATI Technologies Inc.
In March 1998, RAVISENT entered into a Development and License Agreement
with ATI Technologies for a term of two years, and extendable for one year
terms thereafter, pursuant to which RAVISENT granted a worldwide, non-exclusive
license to ATI Technologies to RAVISENT's Software DVD, Video Encoder Software,
and Hardware DVD technology in exchange for a royalty for each copy of Video
Encoder Software sold by ATI Technologies. ATI Technologies agreed to pay to
RAVISENT a minimum quarterly royalty payment of $750,000 during the first year
of royalty payments and $900,000 during the second year of royalty payments;
however, ATI Technologies is allowed to convert up to $125,000 of prospective
quarterly royalty payments in each of the first four quarters of royalty
payments and $500,000 of prospective quarterly royalty payments in the fourth
quarter of the second year of royalty payments into shares of Series B
preferred stock and warrants to purchase common stock. This agreement may be
terminated by either party for a material breach of the agreement or for a
repeated breach of the agreement subject to certain notice requirements. In
April 1999, RAVISENT issued 25,100 shares of Series B preferred stock and
warrants to purchase 10,216 shares of common stock under this agreement. Also
in April 1999, RAVISENT amended the agreement to terminate ATI Technology's
right to receive Series B preferred stock and warrants and issued to ATI
Technologies 100,402 shares of Series B preferred stock and warrants to
purchase 40,863 shares of common stock in exchange for which RAVISENT received
promissory notes with an aggregate value of $500,000. Since March 1998, the
beginning of RAVISENT's relationship with ATI Technologies, ATI Technologies
has contributed approximately $3,775,000 to RAVISENT consisting of equity
investments totaling $2,875,000 ($375,000 of which were made pursuant to the
Development and License Agreement), license fees relating to video encoder
software totaling $1,875,000 (all of which were made pursuant to the
Development and License Agreement) and development fees of $25,000 relating to
the development and assignment of proprietary rights to ATI Technologies with
respect to teletext source code.
Other Related Party Transactions
RAVISENT has entered into employment agreements with its executive officers.
See "Management--Employment Contracts, Termination of Employment and Change in
Control Arrangements."
Holders of shares of preferred stock are entitled to certain registration
rights in respect of the common stock issued or issuable upon conversion
thereof. See "Description of Capital Stock--Registration Rights."
RAVISENT has also granted additional options and issued common stock to
certain of its executive officers and directors. See "Management--Director
Compensation," and "Principal Stockholders."
RAVISENT has entered into an indemnification agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities
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arising from willful misconduct of a culpable nature) and to advance expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. See "Management--Limitation on Liability and Indemnification
Matters."
RAVISENT has entered into non-competition and confidentiality agreements
with certain of its officers.
RAVISENT believes that all of the transactions set forth above were made on
terms no less favorable to RAVISENT than could have been otherwise obtained
from unaffiliated third parties. All future transactions, including loans, if
any, between RAVISENT and its officers, directors and principal stockholders
and their affiliates and any transactions between RAVISENT and any entity with
which its officers, directors or 5% stockholders are affiliated will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to RAVISENT than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
RAVISENT's common stock as of May 31, 1999, by the following individuals or
groups:
. Each person or entity who is known by RAVISENT to own beneficially
more than 5% of RAVISENT's outstanding stock
. Each of the named executive officers
. Each director of RAVISENT
. All directors and executive officers as a group
As used in the table, beneficial ownership refers to the sole or shared
power to vote the shares of RAVISENT's common stock or make decisions regarding
whether to sell the shares of RAVISENT's common stock.
The percentage of shares beneficially owned prior to the offering in the
following table is based upon, for each person or entity listed, 10,488,332
shares of common stock outstanding as of May 31, 1999 (assuming the conversion
of all shares of preferred stock outstanding on May 31, 1999 and the exercise
of all warrants outstanding on May 31, 1999) plus applicable options for the
shareholder.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o RAVISENT Technologies Inc., One Great Valley Parkway,
Malvern, Pennsylvania 19355. Except as otherwise indicated, 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 common stock held by
them.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Name and Address of Number of Shares ------------------------------------
Beneficial Owner Beneficially Owned Prior to Offering After the Offering
- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
NEPA Venture Fund II,
L.P.(1)................ 920,006 8.8% 5.9%
Entities affiliated with
Patricof & Co.
Ventures, Inc.(2)...... 2,966,566 28.3% 19.2%
Atlantic Coastal
Ventures L.P.(3)....... 564,104 5.4% 3.6%
ATI Technologies,
Inc.(4)................ 988,855 9.4% 6.4%
Frank E.J. Wilde
III(5)................. 167,651 1.6% 1.1%
Jason C. Liu(6)......... 165,138 1.6% 1.1%
Michael R. Harris(7).... 515,695 4.8% 3.3%
Robert S. Russell(8).... 47,700 * *
Leonard D. Sharp(9)..... 32,179 * *
Frederick J. Beste
III(1)................. 920,006 8.8% 5.9%
Peter X. Blumenwitz(2).. 2,966,566 28.3% 19.2%
Walter L.
Threadgill(3).......... 564,104 5.4% 3.6%
Paul A. Vais(2)......... 2,966,566 28.3% 19.2%
Gregg W. Garnick(10).... 1,046,618 9.9% 6.7%
All directors and
executive officers as a
group
(twelve persons)(11)... 5,395,705 48.2% 33.3%
</TABLE>
- ----------
*Less than 1%.
(1) Principal Address is 125 Goodman Drive, Bethlehem, PA 18015. Includes
warrants to purchase 836,371 shares of Series A preferred stock at an
exercise price of $0.5978262 per share and warrants to purchase 83,635
shares of Series A preferred stock at an exercise price of $0.746352 per
share. NEPA Venture Fund, II, L.P. has one general partner, NEPA II
Management Corporation, which has three
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officers: Frederick Beste, Glen Bressner and Marc Benson. Each of these
officers shares voting and investment power over the shares held by NEPA
Venture Fund. Mr. Beste disclaims beneficial ownership of all RAVISENT
shares except to the extent of his pecuniary interest in NEPA Venture Fund
II, L.P.
(2) Principal Address is 445 Park Avenue, New York, NY 10022. Represents
133,374 shares of common stock and warrants to purchase 54,283 shares of
common stock at an exercise price of $0.06 per share held by Coutts & Co.
(Cayman) Ltd., 602,410 shares of common stock and warrants to purchase
245,181 shares of common stock at an exercise price of $0.01 per share
held by The P/A Fund III, L.P., 602,410 shares of common stock and
warrants to purchase 245,181 shares of common stock at an exercise price
of $0.06 per share held by Apax Germany II L.P., 14,458 shares of common
stock and warrants to purchase 5,884 shares of common stock at an exercise
price of $0.06 per share held by Patricof Private Investment Club, L.P.,
and 755,783 shares of common stock and warrants to purchase 307,604 shares
of common stock at an exercise price of $0.06 per share held by APA
Excelsior IV, L.P. Mr. Vais is a Vice President of Patricof Co. Ventures,
Inc. and a director of RAVISENT. APA Excelsior IV Partners, L.P. is the
general partner of Coutts & Co. (Cayman) Ltd., Patricof Private Investment
Club, L.P. and APA Excelsior IV, L.P. APA Excelsior IV Partners, L.P. has
one general partner, Patricof & Co. Managers, Inc. The sole shareholder of
Patricof & Co. Managers, Inc. is Alan Patricof. APA Pennsylvania Partners
III, L.P. is the general partner of The P/A Fund III, L.P. APA
Pennsylvania Partners III, L.P. has one general partner, Patricof & Co.
Managers, Inc. whose sole shareholder is Alan Patricof. Alan Patricof has
sole voting and investment power over the shares held by Coutts & Co.
(Cayman) Ltd., Patricof Private Investment Club, L.P., APA Excelsior IV,
L.P. and The P/A Fund III, L.P. Apax Partners & Co. (Germany) II, Ltd. is
the managing general partner of Apax Germany II L.P. Apax Partners & Co.
(Germany) II, Ltd. has six directors: Alan Patricof, Maurice Tchenio,
Richard Rich, Ronald Cohen, Patrick de Giovanni and Adrian Beecroft. Each
of these directors shares voting and investment power over the shares held
by Apax Germany II L.P. Mr. Vais disclaims beneficial ownership of all
RAVISENT shares, except to the extent of his pecuniary interest in
Patricof Private Investment Club, L.P. Mr. Blumenwitz is an Assistant
Director of Apax Partners & Co. Beteilgungsberatung A.G. and a director of
RAVISENT. Mr. Blumenwitz disclaims beneficial ownership of all RAVISENT
shares, except to the extent of his pecuniary interest in Apax Germany II
L.P. Mr. Vais disclaims beneficial ownership of all RAVISENT shares,
except to the extent of his pecuniary interest in Patricof Private
Investment Club, L.P. Mr. Blumenwitz is an Assistant Director of Apax
Partners & Co. Beteilgungsberatung A.G. and a director of RAVISENT. Mr.
Blumenwitz disclaims beneficial ownership of all RAVISENT shares, except
to the extent of his pecuniary interest in Apax Germany II L.P.
(3) Principal Address is 3101 South Street N.W., Washington, D.C. 20007.
Includes 564,104 shares of common stock held by Atlantic Coastal Ventures,
L.P. Mr. Threadgill is a General Partner of Atlantic Coastal Ventures,
L.P. and a director of RAVISENT. Mr. Threadgill has sole voting and
investment power over the shares held by Atlantic Coastal Ventures. Mr.
Threadgill disclaims beneficial ownership of all RAVISENT shares, except
to the extent of his pecuniary interest in Atlantic Coastal Ventures, L.P.
(4) Principal address is 33 Commerce Valley Drive East, Thornhill, Ontario
Canada L3T7N6. Includes 702,811 shares of common stock and warrants to
purchase 286,044 shares of common stock at an exercise price of $0.06 per
share. Mr. Hartog is a Vice President of Engineering for ATI Technologies,
Inc. Mr. Hartog disclaims beneficial ownership of all RAVISENT shares. The
board of directors of ATI Technologies, as a whole, has sole dispositive
and voting power over the shares held by ATI Technologies and makes all
dispositive decisions and significant voting decisions to be made with
respect to the shares. As a practical matter, the board acts through the
corporate officers of ATI Technologies, but the discretion of these
officers is limited, except with respect to voting decisions considered to
be insignificant to RAVISENT. The board members of ATI Technologies are
Alan Horn, Jim Fleck, K.Y. Ho, Lee Lau and Paul Fox and the corporate
officers are K.Y. Ho (President and CEO), Jim Chwartacky (Vice President
and CFO) and Tom Ward, Adrian Hartog, Benny Lau, Lee Lau, Ed Grondahl and
Henry Quan, each of whom are Vice Presidents.
(5) Includes 167,651 shares of common stock issuable upon exercise of
immediately exercisable options.
(6) Includes 91,701 shares of common stock issuable upon exercise of
immediately exercisable options.
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(7) Includes 341,160 shares of common stock issuable upon exercise of
immediately exercisable options.
(8) Includes 47,700 shares of common stock issuable upon exercise of
immediately exercisable options.
(9) Includes 32,179 shares of common stock issuable upon exercise of
immediately exercisable options.
(10) Includes 43,649 shares of common stock issuable upon exercise of
immediately exercisable options.
(11) Includes 700,058 shares of common stock issuable upon exercise of
immediately exercisable options.
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DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of RAVISENT
will consist of 50,000,000 shares of common stock, $.001 par value, and
5,000,000 shares of preferred stock, $.001 par value, covered by the
assumptions contained in the summary. An aggregate of 15,488,332 shares of
common stock will be issued and outstanding, assuming the conversion of all
outstanding shares of preferred stock and the exercise of all outstanding
warrants for the purchase of common stock and preferred stock but excluding
shares issued upon exercise of outstanding options. No shares of preferred
stock will be issued and outstanding.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock that may come into existence,
the holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of RAVISENT, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be outstanding
upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
RAVISENT's board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of preferred stock of RAVISENT with any
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of preferred stock may possess voting,
dividend, liquidation and redemption rights superior to that of the common
stock. The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching RAVISENT's board
of directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of RAVISENT. RAVISENT has no present plans to issue any shares of or
designate any series of preferred stock.
Warrants
At March 31, 1999, there were warrants outstanding to purchase a total of
1,608,171 shares of common stock on an as-converted basis, including:
. Warrants to purchase 34,970 and 20,982 shares of common stock at
$0.7473 per share, which will expire in June 2003 and November 2003,
respectively.
. Warrants to purchase 12,500, 33,333 and 16,667 shares of common
stock at $3.558 per share, which will expire in June 2004, January
2005 and July 2005, respectively.
. Warrants to purchase 7,500, 20,080 and 10,843 shares of common stock
at $4.98 per share, which will expire in February 2001, March 2001
and April 2001, respectively.
. Warrants to purchase 1,376,452, 40,863, 10,216, 10,216 and 10,216
shares of common stock at $0.06 per share, which will expire in
April 2003, May 2003, July 2003, September 2003 and December 2003,
respectively.
. Warrants to purchase 3,333 shares of common stock at $6.00 per
share, which will expire in April 2003.
76
<PAGE>
Registration Rights
Upon completion of the offering, the holders of an aggregate of
approximately 5,716,192 shares of common stock and the holders of warrants to
purchase up to approximately 2,551,325 shares of common stock will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act of 1933, as amended, or the Securities Act. Under the terms of
the registration rights agreements, if RAVISENT proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, these holders
are entitled to notice of such registration and are entitled to include shares
of common stock in the registration. The rights are subject to conditions and
limitations, among them the right of the underwriters of an offering subject to
the registration to limit the number of shares included in such registration.
Holders of these rights may also require RAVISENT to file a registration
statement under the Securities Act at its expense with respect to their shares
of common stock, and RAVISENT is required to use its best efforts to effect
such registration, subject to conditions and limitations. Furthermore,
stockholders with registration rights may require RAVISENT to file additional
registration statements on Form S-3, subject to conditions and limitations.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
RAVISENT's certificate of incorporation authorizes the board to establish
one or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance without stockholder action. See
"--Preferred Stock." The certificate of incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders
and not by written consent. In addition, the certificate of incorporation and
bylaws do not permit stockholders of RAVISENT to call a special meeting of
stockholders. Only RAVISENT's board of directors are permitted to call a
special meeting of stockholders. The certificate of incorporation also provides
that the board of directors is divided into three classes, with each director
assigned to a class with a term of three years, and that the number of
directors may only be determined by the board of directors. The bylaws also
require that stockholders give advance notice to RAVISENT's secretary of any
nominations for director or other business to be brought by stockholders at any
stockholders' meeting, and that the Chairman has the authority to adjourn any
such meeting. The bylaws also require a supermajority vote of members of the
board of directors and/or stockholders to amend certain bylaw provisions. These
provisions of the restated certificate of incorporation and the bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of RAVISENT. These provisions also may have the effect of preventing
changes in the management of RAVISENT. See "Risk Factors--We have adopted
certain anti-takeover provisions."
RAVISENT is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
77
<PAGE>
. on or subsequent to that date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The transfer agent and registrar for RAVISENT's common stock is BankBoston,
N.A.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has not been any public market for RAVISENT's
common stock, and no prediction can be made as to the effect, if any, that
market sales of shares of common stock or the availability of shares of common
stock for sale will have on the market price of the common stock prevailing
from time to time. Nevertheless, sales of substantial amounts of common stock
in the public market could adversely affect the market price of RAVISENT's
common stock and could impair RAVISENT's future ability to raise capital
through the sale of RAVISENT's equity securities.
Upon the completion of this offering, RAVISENT's will have an aggregate of
15,488,332 shares of common stock outstanding, assuming exercise of all
outstanding warrants but assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in the offering will be freely tradable, except
that any shares held by our "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act, and may only be sold in compliance with
the limitations described below. The remaining 10,488,332 shares of common
stock will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ------------------------------------------------------------------
<C> <S>
5,000,000 After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock up
9,726,785 After 180 days from the date of this prospectus, the 180-day lock-
up is released and these shares are saleable under Rule 144
(subject, in some cases, to volume limitations), Rule 144(k) or
Rule 701
761,547 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Rule 144
In general, under Rule 144, as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate, who
has beneficially owned shares for at least one year is entitled to sell, within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then-outstanding
shares of RAVISENT's common stock, which will be approximately 154,883 shares
immediately after the offering, or the average weekly trading volume in
RAVISENT's common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares were acquired from one of RAVISENT's affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
Stock Options
As of March 31, 1999, options to purchase a total of 2,252,528 shares of
common stock were outstanding, 1,221,290 of which were currently exercisable.
RAVISENT intends to file a Form S-8 registration statement under the Securities
Act to register all shares of common stock issuable under its option plan.
Accordingly, shares of common stock underlying such options will be eligible
for sale in the public markets, subject to vesting restrictions or the lock-up
agreement described below. See "Management--Benefit Plans."
79
<PAGE>
Lock-up Agreements
RAVISENT, each of its directors and officers and substantially all of its
securityholders have agreed, subject to specified exceptions, not to, without
the prior written consent of the representatives of the underwriters, sell or
otherwise dispose of any shares of RAVISENT's common stock or options to
acquire shares of RAVISENT's common stock during the 180-day period following
the date of this prospectus. Bear, Stearns & Co. Inc. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. See "Underwriting."
Following this offering, under specified circumstances and subject to
customary conditions, holders of 5,716,192 shares of our outstanding common
stock and the holders of warrants to purchase 2,551,325 shares of common stock
will have certain demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require RAVISENT to register their shares of common stock under the Securities
Act, and certain rights to participate in any future registration of securities
by RAVISENT. If the holders of these registrable securities request that
RAVISENT register their shares, and if such registration is effected, these
shares will become freely tradable without restriction under the Securities
Act. Any sales of securities by these stockholders could have a material
adverse effect on the trading price of RAVISENT's common stock. See
"Description of Capital Stock--Registration Rights."
80
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation, and Volpe Brown Whelan & Company, LLC
are acting as representatives, have severally agreed with RAVISENT, subject to
the terms and conditions of the underwriting agreement (the form of which has
been filed as an exhibit to the registration statement on Form S-1 of which
this prospectus is a part), to purchase from RAVISENT the aggregate number of
shares of common stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. ........................................
SG Cowen Securities Corporation..................................
Volpe Brown Whelan & Company, LLC................................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. RAVISENT has agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the underwriters may be required to make in respect
of such liabilities.
RAVISENT has been advised that the underwriters propose to offer the shares
of common stock directly to the public initially at the public offering price
set forth on the cover page of this prospectus and to certain selected dealers
at such price less a concession not to exceed $ per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $ per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed. The common stock is offered subject to receipt and acceptance
by the underwriters, and to various other conditions, including the right to
reject orders in whole or in part. The representatives of the underwriters have
advised RAVISENT that the underwriters do not expect to confirm sales to any
accounts over which they exercise discretionary authority.
RAVISENT has granted to the underwriters an option to purchase in the
aggregate up to 750,000 additional shares of common stock to be sold in this
offering solely to cover over-allotments, if any. The option may be exercised
in whole or in part at any time within 30 days after the date of this
prospectus. To the extent the option is exercised, the underwriters will be
severally committed, subject to certain conditions, including the approval of
certain matters by counsel, to purchase the additional shares of common stock
in proportion to their respective purchase commitments as indicated in the
preceding table.
The following table shows the per share and total underwriting discounts and
commission to be paid to the underwriters by RAVISENT. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
Total............................................... $ $
</TABLE>
81
<PAGE>
The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business affiliates and related
persons of RAVISENT who have expressed an interest in purchasing shares. The
number of shares available for sale to the general public will be reduced to
the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
RAVISENT, its executive officers, directors and substantially all of its
securityholders have agreed that, subject to certain limited exceptions, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc., they will not:
. directly or indirectly, issue, sell, offer or agree to sell or
otherwise dispose of any shares of RAVISENT common stock (or
securities convertible into, exchangeable for or evidencing the
right to purchase shares of common stock);
. nor enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the
economic consequence of RAVISENT ownership of RAVISENT common stock,
whether any such swap transaction is to be settled by delivery of
common stock or other securities, in cash or otherwise, or exercise
their rights, as applicable, to require RAVISENT to register common
stock.
The restrictions described in the previous paragraph do not apply to:
. transactions by any person other than RAVISENT relating to shares of
common stock or other securities acquired in open market
transactions after the completion of this offering; or
. certain specified transfers, provided that, following such
transfers, the transferees are subject to transfer restrictions
similar to those described above.
Bear, Stearns & Co. Inc., may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among RAVISENT and the representatives of the
underwriters. Among the factors considered in making such determination were:
. RAVISENT's financial and operating history and condition;
. market valuations of other companies engaged in activities similar
to RAVISENT's;
. RAVISENT's prospects and prospects for the industry in which it does
business in general;
. the management of RAVISENT;
. prevailing equity market conditions; and
. the demand for securities considered comparable to those of
RAVISENT.
In order to facilitate this offering, the underwriters participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by RAVISENT. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect
82
<PAGE>
of these transactions may be to stabilize or maintain the market price of the
common stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the common
stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered will be passed upon for RAVISENT by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of RAVISENT Technologies
Inc. as of December 31, 1997 and 1998 and for each of the years in the three
year period ended December 31, 1998 and the financial statements of Viona
Development Hard & Software Engineering GmbH as of and for the year ended
December 31, 1997 have been included in this prospectus and in the registration
statement in reliance upon the reports of KPMG LLP and KPMG Deutsche Treuhand-
Gesellschaft AG, respectively, independent certified public accountants,
appearing elsewhere in this prospectus, and upon the authority of said firms as
experts in accounting and auditing.
ADDITIONAL INFORMATION
RAVISENT has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, under the Securities Act, as amended, a registration statement on
Form S-1 relating to the common stock offered. This prospectus does not contain
all of the information set forth in the registration statement and its exhibits
and schedules. For further information with respect to RAVISENT and the shares
RAVISENT is offering pursuant to this prospectus you should refer to the
registration statement, including its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are not necessarily complete, and you should refer
to the copy of that contract or other document filed as an exhibit to the
registration statement or any other document. You may inspect a copy of the
registration statement without charge at the Public Reference Section of the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
SEC's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The SEC maintains an Internet site that contains reports,
proxy information statements and other information regarding registrants that
file electronically with the SEC. The SEC's web site is www.sec.gov.
RAVISENT intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. RAVISENT intends to furnish these other reports
as it may determine or as may be required by law.
Information contained in RAVISENT's web site is not a prospectus and does
not constitute a part of this prospectus.
83
<PAGE>
RAVISENT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements
RAVISENT Technologies Inc.
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998, and March 31,
1999 (unaudited)..................................................... F-3
Consolidated Statements of Operations, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficiency, Years
ended December 31, 1996, 1997 and 1998, and the three months ended
March 31, 1999 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).......................................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Viona Development Hard & Software Engineering GmbH
Independent Auditors' Report.......................................... F-27
Balance Sheets, December 31, 1997 and March 31, 1998 (unaudited)...... F-28
Statements of Operations, Year ended December 31, 1997 and three
months ended March 31, 1998 (unaudited) ............................. F-29
Statements of Stockholders' Equity, Year ended December 31, 1997 and
three months ended March 31, 1998 (unaudited)........................ F-30
Statements of Cash Flows, Year ended December 31, 1997 and three
months ended March 31, 1998 (unaudited) ............................. F-31
Notes to Financial Statements......................................... F-32
Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Financial Information............................. F-36
Unaudited Pro Forma Combined Statement of Operations, Year ended
December 31, 1998.................................................... F-37
Notes to Unaudited Pro Forma Combined Financial Statements............ F-38
</TABLE>
F-1
<PAGE>
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position
to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
RAVISENT Technologies Inc.:
We have audited the accompanying consolidated balance sheets of RAVISENT
Technologies Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, changes in stockholders'
deficiency, and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RAVISENT
Technologies Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
April 27, 1999, except as to the last paragraph
of Note 19, which is as of June , 1999
F-2
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 607 $ 1,024 $ 2,175
Accounts receivable, net of allowance for
doubtful accounts of $467 in 1997 and $265
in 1998 and 1999............................ 999 11,111 4,886
Inventory.................................... 619 1,296 3,783
Prepaid expenses............................. 38 72 109
-------- -------- --------
Total current assets........................ 2,263 13,503 10,953
Furniture and equipment, net................... 175 875 789
Goodwill and other intangibles, net of
accumulated amortization of $664 in 1998 and
$886 in 1999.................................. -- 2,881 2,659
Debt issuance costs, net of accumulated
amortization of $22 in 1997, $62 in 1998 and
$64 in 1999................................... 65 25 23
Loan receivable--officer....................... -- 60 60
Other assets................................... 66 30 27
-------- -------- --------
Total assets................................ $ 2,569 $ 17,374 $ 14,511
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable............................. $ 4,675 $ 9,916 $ 7,255
Secured borrowings........................... 278 -- --
Bank line of credit.......................... 998 -- 1,252
Bridge loan.................................. 1,500 -- --
Deferred revenue............................. 126 -- --
Accrued expenses and other................... 279 1,114 862
Other current liabilities.................... 44 2,560 2,060
Loan payable--officer........................ 4 -- --
Current installments of obligations under
capital leases.............................. 17 13 13
-------- -------- --------
Total current liabilities................... 7,921 13,603 11,442
Subordinated notes payable..................... 625 625 625
Other long-term liabilities.................... 89 788 350
Obligations under capital leases, excluding
current installments.......................... 18 5 2
-------- -------- --------
Total liabilities........................... 8,653 15,021 12,419
-------- -------- --------
Commitments and contingencies (note 13)
Mandatory redeemable convertible preferred
stock, $.06 par value; 31,523,684 shares
authorized; none outstanding in 1997,
3,913,072 Series B outstanding in 1998 and
1999; liquidation preference of approximately
$19,487 at 1998 and 1999; net of subscription
receivable of $625 for 125,502 shares at 1998
and 1999 ..................................... -- 14,589 14,871
Stockholders' deficiency:
Common stock, $.06 par value (80,000,000
shares authorized; 2,103,653, 3,520,851 and
3,520,851 shares issued in 1997, 1998 and
1999)....................................... 126 211 211
Additional paid-in capital................... 3,949 12,889 13,110
Deferred stock compensation.................. -- (749) (1,182)
Accumulated deficit.......................... (10,159) (23,842) (24,152)
Accumulated other comprehensive income....... -- (25) (46)
Treasury stock at cost, 200,000 shares....... -- (720) (720)
-------- -------- --------
Total stockholders' deficiency.............. (6,084) (12,236) (12,779)
-------- -------- --------
Total liabilities and stockholders'
deficiency................................. $ 2,569 $ 17,374 $ 14,511
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
License and services.. $ 825 $ 1,445 $ 3,447 $ 10 $ 2,290
Hardware.............. 3,370 5,376 26,841 3,133 8,522
--------- --------- --------- --------- ---------
Total revenues...... 4,195 6,821 30,288 3,143 10,812
Cost of revenues:
License and services.. 472 331 354 15 135
Hardware.............. 2,664 8,072 24,192 3,062 7,264
--------- --------- --------- --------- ---------
Total cost of
revenues........... 3,136 8,403 24,546 3,077 7,399
--------- --------- --------- --------- ---------
Gross profit........ 1,059 (1,582) 5,742 66 3,413
Research and
development............ 1,034 1,828 3,121 498 1,465
Sales and marketing..... 731 1,158 1,964 465 1,062
General and
administrative......... 1,198 1,710 4,673 505 837
Depreciation and
amortization........... 46 86 906 15 314
Compensation related to
stock options.......... -- 1,408 139 -- --
Acquired in-process
research and
development............ -- -- 7,900 -- --
--------- --------- --------- --------- ---------
Operating loss...... (1,950) (7,772) (12,961) (1,417) (265)
Other (income) expense:
Interest expense,
net.................. 105 197 722 127 45
Other income.......... -- (716) -- -- --
--------- --------- --------- --------- ---------
Net loss................ (2,055) (7,253) (13,683) (1,544) (310)
--------- --------- --------- --------- ---------
Accretion of discount on
mandatory redeemable
preferred stock........ -- -- 754 -- 283
--------- --------- --------- --------- ---------
Loss attributable to
common stockholders.... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
========= ========= ========= ========= =========
Basic and diluted net
loss per common share.. $ (1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========= ========= ========= ========= =========
Weighted average shares
outstanding used in per
common share
calculation (basic and
diluted)............... 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional Deferred other Total
---------------- paid-in stock Accumulated comprehensive Treasury stockholders'
Shares Amount capital compensation deficit income stock deficiency
--------- ------ ---------- ------------ ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995....... 1,545,856 $ 44 $ 32 $ -- $ (851) $ -- $ -- $ (775)
Issuance of common
stock................... 444,464 23 1,881 -- -- -- -- 1,904
Adjustment for stock
splits.................. -- 52 (52) -- -- -- -- --
Issuance of warrants to
acquire 501,808 shares
of Series A
preferred stock......... -- -- 3 -- -- -- -- 3
Net loss................ -- -- -- -- (2,055) -- -- (2,055)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1996....... 1,990,320 119 1,864 -- (2,906) -- -- (923)
Issuance of common
stock................... 113,333 7 619 -- -- -- -- 626
Issuance of warrants to
acquire shares of common
stock................... -- -- 57 -- -- -- -- 57
Compensation related to
stock options........... -- -- 1,409 -- -- -- -- 1,409
Net loss................ -- -- -- -- (7,253) -- -- (7,253)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1997....... 2,103,653 126 3,949 -- (10,159) -- -- (6,084)
Issuance of warrants in
connection with debt
financing............... -- -- 68 -- -- -- -- 68
Issuance of warrants in
connection with the sale
of Series B preferred
stock, net of
transaction costs....... -- -- 3,754 -- -- -- -- 3,754
Issuance of common stock
to acquire Viona........ 1,204,820 72 4,699 -- -- -- -- 4,771
Repurchase of common
stock................... -- -- -- -- -- -- (720) (720)
Deferred stock
compensation related to
stock options........... -- -- 799 (799) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 50 -- -- -- 50
Compensation related to
stock options........... -- -- 139 -- -- -- -- 139
Issuance of common stock
as consideration for
interest payments....... 12,962 1 64 -- -- -- -- 65
Issuance of common stock
upon exercise of
warrants................ 199,416 12 171 -- -- -- -- 183
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- (754) -- -- -- -- (754)
Foreign currency
translation adjustment.. -- -- -- -- -- (25) -- (25)
Net loss................ -- -- -- -- (13,683) -- -- (13,683)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of
December 31, 1998....... 3,520,851 211 12,889 (749) (23,842) (25) (720) (12,236)
Deferred stock
compensation related to
stock options........... -- -- 504 (504) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 71 -- -- -- 71
Accretion of discount on
mandatory redeemable
preferred stock......... -- -- (283) -- -- -- -- (283)
Foreign currency
translation adjustment.. -- -- -- -- -- (21) -- (21)
Net loss (unaudited).... -- -- -- -- (310) -- -- (310)
--------- ---- ------- ------- -------- ----- ----- --------
Balances as of March 31,
1999 (unaudited)........ 3,520,851 $211 $13,110 $(1,182) $(24,152) $ (46) $(720) $(12,779)
========= ==== ======= ======= ======== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(2,055) $(7,253) $(13,683) $(1,544) $ (310)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 46 86 906 15 314
Noncash compensation and
other expenses......... 1 1,367 414 28 74
Acquired in-process
research and
development............ -- -- 7,900 -- --
Changes in items
affecting operations:
Accounts receivable... (598) (229) (10,112) (1,380) 6,225
Inventory............. (258) (15) (677) (1,806) (2,487)
Loan receivable--
officer.............. -- -- (60) -- --
Prepaid expenses...... (198) 167 (34) 3 (37)
Accounts payable...... 461 3,686 5,241 2,387 (2,661)
Deferred revenue...... 550 (424) (126) -- --
Accrued expenses and
other................ 71 142 549 176 (253)
------- ------- -------- ------- ------
Net cash provided by (used
in) operating activities.. (1,980) (2,473) (9,682) (2,121) 865
------- ------- -------- ------- ------
Cash flows from investing
activities:
Capital expenditures...... (110) (26) (813) (57) (78)
Proceeds from sale of
furniture and
equipment................ -- -- -- -- 86
Acquisition, net of cash
acquired................. -- -- (3,231) -- --
------- ------- -------- ------- ------
Net cash provided by (used
in) investing activities.. (110) (26) (4,044) (57) 8
------- ------- -------- ------- ------
Cash flows from financing
activities:
Repayments under capital
lease obligations........ (14) (14) (18) (4) (3)
Secured borrowings
(repayments)............. -- 278 (278) 1,198 --
Proceeds from bridge
loans.................... -- 1,500 3,320 2,520 --
Proceeds from
subordinated notes
payable.................. 50 -- -- -- --
Net proceeds from
issuance of common
stock.................... 1,885 626 183 -- --
Net proceeds from Series
B preferred stock........ -- -- 12,769 -- --
Net borrowings
(repayments) under bank
line of credit........... 140 663 (998) 452 1,252
Borrowings (repayments)
under other
liabilities.............. 65 -- (90) -- (950)
Repurchase of common
stock.................... -- -- (720) -- --
------- ------- -------- ------- ------
Net cash provided by
financing activities...... 2,126 3,053 14,168 4,166 299
------- ------- -------- ------- ------
Effect of exchange rate
changes on cash and cash
equivalents............... -- -- (25) -- (21)
------- ------- -------- ------- ------
Net increase in cash and
cash equivalents.......... 36 554 417 1,988 1,151
Cash and cash equivalents:
Beginning of year......... 17 53 607 607 1,024
------- ------- -------- ------- ------
End of year............... $ 53 $ 607 $ 1,024 $ 2,595 $2,175
======= ======= ======== ======= ======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest................. $ 102 $ 133 $ 683 $ 77 $ 62
Noncash investing and
financing activities:
Equipment acquired under
capital lease
obligations............. 18 -- -- -- --
Issuance of warrants in
connection with bank
line of credit and
bridge loans............ 3 57 68 -- --
Issuance of options in
connection with equity
transactions and grants
below fair value........ 150 1,409 139 -- --
Issuance of common stock
and preferred stock as
consideration for
services (1996) and
private placement fees
(1998).................. 19 -- 542 -- --
Amortization of deferred
stock compensation...... -- -- 50 -- 71
Bridge loans converted
to Series B preferred
stock................... -- -- 4,820 -- --
Issuance of common stock
as consideration for
interest................ -- -- 65 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to March 31, 1998 and 1999 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
RAVISENT Technologies Inc., which changed its name from Divicore Inc. in
June 1999 and from Quadrant International, Inc. in May 1999, designs, develops,
licenses and markets core-based modular software solutions that enable digital
video and audio stream management in personal computer systems and consumer
electronic devices. The company also provides supporting hardware designs to
selected customers as well as customization services and customer support. The
company's solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk (DVD); direct broadcast
satellite (DBS) and high-definition television (HDTV) on existing personal
computers and consumer electronics platforms. The company's customers consist
principally of personal computer and consumer electronics manufacturers.
During 1998 the company's revenue was substantially generated from selling
hardware-based digital video solutions to personal computer and consumer
electronics original equipment manufacturers and prior to 1998 through
wholesale distributors. The company has recently changed its strategic focus
from selling a hardware-based digital video solution to licensing its
proprietary technology to provide software-based digital video solutions to
primarily personal computer and consumer electronics original equipment
manufacturers.
The company was incorporated in Pennsylvania in April 1994.
The company has sustained significant net losses and negative cash flows
from operations since its inception. The company's ability to meet its
obligations in the ordinary course of business is dependent upon its ability to
establish profitable operations or raise additional financing through public or
private equity financing, bank financing or other sources of capital. During
1998, the company sold approximately $18.6 million of its preferred stock.
Management believes that its current funds combined with other available
sources of funding will be sufficient to enable the company to meet its planned
expenditures through at least December 31, 1999. The company may require
additional capital to finance its future operations and fund its ongoing
research and development activities beyond 1999. Additional financing may not
be available when needed and, if such financing is available, it may not be
available on terms favorable to the company.
(b) Unaudited Interim Financial Information
The interim consolidated financial statements of the company for the three
months ended March 31, 1998 and 1999, included herein have been prepared by the
company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the company
at March 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1999.
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of
the company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
F-7
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(d) Cash and Cash Equivalents
For purposes of the statement of cash flows, the company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.
(e) Inventory
Inventory, which principally consists of finished goods, is valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method (FIFO). Inventory is net of reserves of approximately $400,000 and
$174,000 at December 31, 1997 and 1998, respectively.
(f) Furniture and Equipment
Furniture and equipment are stated at cost. Equipment under capital leases
is stated at the present value of the minimum lease payments. Depreciation and
amortization is calculated on the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Purchased software............................................... 5 years
Computer equipment............................................... 5 years
Research and development equipment............................... 5 years
Furniture and fixtures........................................... 7 years
</TABLE>
(g) Goodwill and Other Intangibles
Goodwill and other intangibles are amortized using the straight-line method
from the date of acquisition over the expected period to be benefited,
estimated at four years. The company assesses the recoverability of goodwill,
as well as other long-lived assets, in accordance with 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 the
company to review for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. When
such an event occurs, the company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the
undiscounted expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized.
(h) Deferred Offering Costs
As of March 31, 1999, specific incremental costs directly attributable to
the planned initial public offering process have been deferred. These costs
will be charged against additional-paid-in-capital in connection with the
consummation of this offering.
(i) Revenue Recognition
Licensing revenues for one-time license fees are recognized in the period in
which the license agreement is signed, the fee is fixed and determinable,
delivery of the technology has occurred and collectibility is probable. Up-
front license fees are recognized as revenue when the license agreement is
signed, the fee is fixed and determinable, delivery of the technology has
occurred, and collectibility is probable. The up-front license fee terms
generally provide an agreed-upon level of sales of a licensee's products below
which a licensee will not be obligated to remit royalty payments and that the
up-front fees are nonrefundable even in the event such
F-8
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
level is not attained. Licensing revenues consisting of fees paid on a per unit
basis are recognized when earned, which is generally based on receiving
notification from licensees stating the number of products sold which
incorporate the licensed technology from the company and for which license
fees, based on a per unit basis, are due. The terms of the license agreements
generally require the licensees to give notification to the company within 45
to 60 days of the end of the quarter during which the sales of the licensee's
products take place. In a number of cases, the revenue recorded by the company
will occur in the quarter following the sale of the licensee's products to its
customers.
Revenue is recognized upon shipment of products to customers. Prior to 1998
an allowance for returned merchandise was provided for sales to distributors
based on the company's historical experience. The company's sales to original
equipment manufacturers do not provide a right of return unless in the event of
manufacturing defect, which is the responsibility of the company's third party
contract manufacturer. Revenue related to services are recognized upon delivery
of the service in the case of time and material contracts. Revenue related to
development contracts involving significant modifications or customization of
hardware or software under unilateral or joint development arrangements is
recognized using the percentage-of-completion method, based on performance
milestones specified in the contract where such milestones fairly reflect
progress toward contract completion. In other instances, progress toward
completion is based on individual contract costs incurred to date compared with
total estimated contract costs. Losses on contracts are recognized when the
loss is apparent.
Other income represents amounts received in connection with the cancellation
of a development project by a customer during 1997. A total of approximately
$1,134,000 was received from the customer, of which approximately $418,000 was
recorded as revenue based on costs of revenue incurred. The remaining
approximately $716,000 was recorded in other income as a cancellation fee.
(j) Research and Development Costs
Research and development costs are expensed as incurred.
(k) Income Taxes
In September 1996, the stockholders elected "C" corporation status for
federal and state income tax purposes. Effective with this election, income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards.
(l) Financial Instruments
The company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital lease obligations that
are carried at cost which approximates fair value.
(m) Stock Options
In 1996, the company adopted SFAS No. 123, Accounting for Stock-based
Compensation, which provides the alternative to adopt the fair value method for
expense recognition of employee stock options and stock-based awards or to
continue to account for such items using the intrinsic value method as outlined
under
F-9
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) with pro forma disclosures of results of operations as if
the fair value method had been applied. The company has elected to continue to
apply APB 25 for stock options and stock-based awards to employees and has
disclosed pro forma net loss as if the fair value method had been applied (note
12).
(n) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(o) Long-Lived Assets
The company reviews long-lived assets and certain identifiable intangibles
to be held and used by an entity for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
(p) Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
deficiency in the accompanying consolidated financial statements.
(q) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The company adopted SFAS No. 130 during 1998.
(r) Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per
Share
The company computes earnings per share in accordance with SFAS No. 128,
Computation of Earnings Per Share. In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Dilutive earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method), and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the if-
converted method). Common equivalent shares are excluded from the calculation
if their effect is anti-dilutive. Pursuant to SEC Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share, as
if they were outstanding for all periods presented. To date, the company has
not had any issuances or grants for nominal consideration.
F-10
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
the convertible preferred stock (using the if-converted method), which will
automatically convert into common stock upon an IPO as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is anti-dilutive.
The following table sets forth the computation of loss per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted loss
per common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 2,920,677 2,103,654 3,320,851
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $(1.19) $ (3.52) $ (4.94) $ (0.73) $ (0.18)
========== ========== ========= ========== ==========
Pro forma loss per
common share:
Numerator: Loss
attributable to common
stockholders........... $ (2,055) $ (7,253) $ (14,437) $ (1,544) $ (593)
Denominator: Weighted-
average shares
outstanding basic and
diluted................ 1,720,922 2,060,668 5,547,260 2,103,654 7,233,923
---------- ---------- --------- ---------- ----------
Basic and diluted loss
per common share..... $ (1.19) $ (3.52) $ (2.60) $ (0.73) $ (0.08)
========== ========== ========= ========== ==========
</TABLE>
(s) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is
effective for financial statements for the years beginning after December 15,
1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The adoption of this standard
did not have a material effect on the company's capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the company has expensed these costs historically, the adoption of this
standard did not have an impact on the company's results of operations,
financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As the company does not currently engage or plan
to engage in derivative or hedging activities there will be no impact to the
company's results of operations, financial position or cash flows upon the
adoption of this standard.
F-11
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The company does not expect the adoption of SOP 98-9 to have a
material effect on its financial condition or results of operations.
(2) Comprehensive Income
The components of comprehensive income (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three months
ended
Years ended December 31, March 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
Net loss....................... $(2,055) $(7,253) $(13,683) $(1,544) $(310)
Foreign currency translation
adjustment.................... -- -- (25) -- (21)
------- ------- -------- ------- -----
Comprehensive loss........... $(2,055) $(7,253) $(13,708) $(1,544) $(331)
======= ======= ======== ======= =====
</TABLE>
(3) Furniture and Equipment
Furniture and equipment consist of the following at December 31, 1997 and
1998, and March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ------ ------
<S> <C> <C> <C>
Furniture and fixtures................................... $ 27 $ 292 $ 288
Leasehold improvements................................... -- 67 72
Computer equipment....................................... 124 547 543
Research and development equipment....................... 122 333 301
Software................................................. 13 138 144
---- ------ ------
286 1,377 1,348
Less: accumulated depreciation........................... 111 502 559
---- ------ ------
Furniture and equipment, net............................. $175 $ 875 $ 789
==== ====== ======
</TABLE>
Assets recorded under capital lease are approximately $58,000 and related
accumulated amortization is approximately $17,000 and $25,000 as of
December 31, 1997 and December 31, 1998, respectively.
(4) Acquisition
In April 1998, the company completed the acquisition of Viona Development
Hard & Software Engineering GmbH (Viona) a company located in Karlsruhe,
Germany specializing in the development of digital video technology.
The company paid a total of $11.4 million consisting of: $5.8 million in
cash, of which $2.6 million was paid at closing, $2.1 million will be paid
during 1999, and $1.35 million, recorded at a discounted value of $1.1 million,
will be paid in equal installments at the end of each of the next three fiscal
years; issued 1,204,820 shares of the company's common stock valued at $4.8
million; and incurred transaction costs of $0.8 million.
F-12
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The acquisition of Viona was recorded under the purchase method of
accounting. The results of operations of Viona have been included in the
company's consolidated financial statements from April 1, 1998. A portion of
the purchase price was allocated to in-process research and development
technology, which resulted in a charge of approximately $7.9 million to the
company's operations in April 1998. At the date of acquisition, Viona had five
development projects that had not reached technological feasibility and for
which there was no alternative future use. The in-process research and
development technology was valued using a cash flow model, under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted using a 30%-35%
discount rate for risks, probabilities and uncertainties, including the stage
of development of the technology, viability of target markets and other
factors. The five development projects ranged in percentage of completion at
the date of acquisition from 5% to 80%.
The excess of the purchase price over the fair value of the net identifiable
assets and in-process research and development technology acquired of $3.5
million has been recorded as goodwill and other intangibles and is amortized on
a straight-line basis over four years.
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired....................................... $ 542
Goodwill............................................................ 3,503
Workforce in place.................................................. 42
In-process research and development technology...................... 7,900
Liabilities acquired................................................ (557)
-------
$11,430
=======
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the company and Viona as if the acquisition
occurred on January 1, 1997, after giving effect to certain adjustments,
primarily amortization of goodwill and excluding the $7.9 million write-off of
acquired in-process research and development. The unaudited pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisition been completed on January 1, 1997.
<TABLE>
<CAPTION>
Year ended
December 31,
(in thousands
except per
share data)
----------------
1997 1998
------- -------
<S> <C> <C>
Revenues.................................................. $ 6,925 $30,288
Net loss.................................................. $(8,075) $(5,978)
Net loss per common share (basic and diluted)............. $ (3.92) $ (2.03)
</TABLE>
(5) Bank Line of Credit
In June 1997 the company refinanced its line of credit with a bank to an
aggregate amount of $1 million, subject to certain borrowing limitations based
on accounts receivable and inventory. The line of credit charged interest at
the prime rate plus 2% (10.5% at December 31, 1997) and was secured by
substantially all the assets of the company. The bank was provided warrants
(note 12) to acquire 45,833 shares of the company's common stock at an exercise
price of $3.56 per share. The estimated fair value of the warrants issued was
$33,964 and has been recorded as debt issuance costs. This amount was amortized
over the term of the line of credit. The line of credit required the company,
among other things, to maintain certain financial ratios, minimum working
F-13
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
capital and tangible net worth on a quarterly basis. The company was not in
compliance with these covenants at December 31, 1997. In April 1998, the
Company received a waiver of these covenant violations from the bank and issued
warrants to the bank to acquire 16,667 shares of the company's common stock at
an exercise price of $3.56 per share. The estimated fair value of the warrants
issued is $22,600 and has been recorded as interest expense.
In July 1998, the company executed a loan and security agreement with a
commercial bank that provides the company a line of credit in the amount of the
lesser of $5 million or the borrowing base, as defined (principally limited to
a percentage of eligible accounts receivable and eligible inventory). The line
of credit provides for the company to issue a maximum of $2 million in the form
of letters of credit which reduces the amount of available borrowings under the
line of credit. The line of credit matures in July 2000 and bears interest at
the prime rate plus 1% (8.75% at December 31, 1998). The line of credit is
collateralized by substantially all of the assets of the company. The company
is required to comply with a tangible net worth covenant, as defined in the
loan and security agreement, and was not in compliance with this covenant at
December 31, 1998 and March 31, 1999. The company received a waiver of these
covenant violations in April 1999. There was no amount and approximately
$1,252,000 outstanding under the line of credit at December 31, 1998 and March
31, 1999, respectively, and approximately $3,510,000 and $1,696,000 was
available under the terms of the line of credit at December 31, 1998 and
March 31, 1999, respectively.
At December 31, 1998 and March 31, 1999, there were approximately $1,490,000
and $500,000 of letters of credit outstanding, respectively.
(6) Bridge Financing
In December 1997 the company entered into an agreement to borrow $1.5
million of short-term bridge loans. The loans bear interest at 6% with an
original maturity date of March 31, 1998. The term of the debt was extended to
April 30, 1998, and the interest rate was increased to 15%. In connection with
this financing, the company issued warrants (note 12) to acquire 45,000 shares
of the company's common stock. The estimated fair value of the warrants issued
was approximately $23,000. This amount has been recorded as debt issuance costs
and was amortized over the term of the debt.
In February, March and April 1998 the company entered into various
agreements to borrow additional amounts of short-term bridge loans aggregating
$3.32 million. The terms of the debt were substantially identical with the
amount borrowed in December 1997. The company issued warrants (note 12) to
acquire 48,182 shares of the company's common stock at an exercise price equal
to the price per share at the time of closing of the company's round of equity
financing in April 1998. The estimated fair value of the warrants issued was
approximately $46,000 and has been recorded as additional interest expense
through the date of the conversion of the bridge loans into Series B preferred
stock.
The $4.82 million of short-term bridge loans were converted to Series B
preferred stock in April 1998 (note 11).
F-14
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(7) Accrued Expenses
<TABLE>
<CAPTION>
December
31,
----------- March 31,
1997 1998 1999
---- ------ ---------
(in thousands)
<S> <C> <C> <C>
Accrued compensation and related costs................. $ 5 $ 439 $440
Accrued interest....................................... 80 127 141
Other.................................................. 194 548 281
---- ------ ----
$279 $1,114 $862
==== ====== ====
</TABLE>
(8) Loan Payable/Receivable--Officers
At December 31, 1997, approximately $4,000 was owed from an original amount
of approximately $111,000 to the former Chief Executive Officer of the company.
The amount was repaid in full during 1998.
At December 31, 1998, the company has a loan receivable in the amount of
$60,000 due from an officer of the company. The term of the loan receivable is
three years and is non-interest bearing. At the end of each year, if the
officer achieves his quarterly performance goals with the company, the company
will forgive one-third of the principal amount. If the officer voluntarily
leaves or is terminated for cause, the note will become immediately due and
payable. However, if the company completes an initial public offering of its
stock, is acquired by an unrelated third party or sells all or substantially
all of its assets to an unrelated third party, the company will completely
forgive the note.
(9) Other Liabilities
In October 1995 the company entered into an emerging company funding
agreement with the Ben Franklin Technology Center of Southeastern Pennsylvania
(the Center). The Center had agreed to provide up to $100,000 to the company
during the period November 1, 1995 to June 30, 1996. Any amounts funded by the
Center were to be used by the company for the development of certain laptop
computer video capture products. The total amount funded by the Center was
repayable quarterly. The total amount outstanding as of December 31, 1997 was
$90,000. The amount was repaid in full during 1998.
During 1997 the company entered into a factoring arrangement for which
approximately $278,000 of accounts receivables had been pledged as collateral
with recourse to the company. The effective interest rate on such secured
borrowings was approximately 30% at December 31, 1997. The company discontinued
the factoring arrangement during 1998.
In connection with the company's acquisition of Viona during 1998 (note 4),
$1.35 million of the purchase price, recorded at a present value of $1.1
million, is payable in equal annual installments over the next three years. As
such, $0.4 million of the amount is included in other current liabilities with
the remaining amount included in other long-term liabilities.
(10) Subordinated Notes Payable
Subordinated notes payable at December 31, 1997 and 1998 and March 31, 1999,
consist of $625,000 of various subordinated notes payable to NEPA Venture II,
L.P. (NEPA) due May 4, 2003 to November 29, 2003 with a 9% interest rate.
F-15
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The notes are part of two transactions entered into in May 1995 and March
1996 to provide financing to the company. Interest on the notes is payable
quarterly. In connection with the issuance of the notes, the company issued
warrants to acquire a total of 920,006 shares of the Company's Series A
mandatory redeemable convertible preferred stock at exercise prices of $0.60-
$0.75 per share (note 12). The estimated fair value of the warrants issued is
$30,010 and is amortized over the term of the related debt. In addition, NEPA
obtained board representation and certain other rights which include piggyback
and demand registration rights in certain circumstances following an initial
public offering.
(11) Equity Transactions and Capital Stock
Capital Stock and Stock Splits
The board of directors of the company amended the company's articles of
incorporation in April 1998 to increase the authorized common shares to
80,000,000, to increase the authorized Series A mandatory redeemable
convertible preferred shares to 6,523,684 and authorized 25,000,000 shares of
Series B mandatory redeemable convertible preferred shares.
In August and October 1996 the board of directors authorized a 1.929-to-1
and a 1.088-to-1 stock split, respectively, including common and preferred
shares. The splits coincided with the private placement transactions described
below.
All share and per share information included in the accompanying
consolidated financial statements and notes has been adjusted to give effect to
the stock splits noted above.
Common Stock
In August and October 1996 the company raised a total of $2 million through
a private placement of 347,936 shares of common stock. In connection with this
transaction, the company paid $200,000 as a placement fee, and issued options
to purchase 66,151 shares of common stock at an average exercise price of $4.26
per share to a former director of the company (note 16). The fair value of the
common stock on the date of grant was estimated to be $6.00. The options vested
immediately. The $200,000 of offering costs and the $150,450 value of the
options granted at below fair value have been recorded in additional paid-in
capital as costs of the equity transaction.
During April through July 1996 the company also sold 21,076 shares of common
stock for a total of $55,000, the estimated fair market value per share of the
company's common stock on the date of the transaction, to two employees of the
company. In January 1996, the company sold 7,347 shares of common stock for a
total of $30,000, the estimated fair market value per share of the Company's
common stock on the date of the transaction. In addition, in January 1996 an
employee was given 31,373 shares of the company's common stock as consideration
for previously accrued unpaid wages aggregating $18,750.
In March and April 1997 the company raised a total of $500,000 through a
private placement of 83,333 shares of the company's common stock. In connection
with this transaction, the company issued options to purchase 10,417 shares of
the company's common stock at an exercise price of $4.50 per share to a
director of the company that was actively involved in this fund raising
process. The options vested immediately. The $15,625 value of the options
granted at below fair value has been recorded in additional paid-in-capital as
costs of the equity transaction.
F-16
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
In September and October 1997 the company sold 30,000 shares of common stock
for $207,300 in a private transaction to unrelated third parties.
In April 1998 the company purchased 200,000 shares of common stock for $3.60
per share or $720,000 in the aggregate from the former CEO of the company.
Preferred Stock
In April 1998 the company sold 3,728,916 shares of Series B mandatory
redeemable convertible preferred stock for an aggregate amount of approximately
$18.6 million including the conversion of $4.82 million of bridge notes (note
6). In addition, the investors in the Series B received an aggregate
1,517,668 warrants (note 12) to acquire common stock at an exercise price of
$0.06. The estimated fair value of the warrants of $5.7 million has been
recorded as additional paid-in capital.
The preferred stock has a non-cumulative dividend rate equal to 8% of the
original purchase price which shall become due and payable when and if declared
by the board of directors of the Company. To date, no dividends have been
declared by the board of directors. The holders of the preferred stock have
demand and piggyback registration rights as defined.
Holders of preferred stock have the option to convert such shares into
shares of common stock on a 1:1 ratio. The conversion rate on a particular
class of preferred stock is subject to an adjustment in the event that any
additional common stock, or other shares convertible into common stock, are
issued for a per share price less than the particular class conversion price.
Mandatory conversion occurs upon the closing of an IPO of the company's common
stock, as defined. The Series B is senior to the company's Series A in
liquidation and the holders of Series A and B are entitled to receive an amount
equal to their respective redemption price prior to the distribution to the
common shareholders. At any time after May 4, 2003, each holder of shares of
preferred stock, may at their option, require the company to redeem all or part
of their preferred shares.
The preferred stock votes on an as if converted basis. The Series B
shareholders have the right to elect one member of the board of directors of
the company.
In April 1998, in connection with the company's sale of Series B, the
company paid $1.1 million in cash, issued 108,856 shares of the company's
Series B and issued 44,304 warrants (note 12) to acquire common stock at an
exercise price of $0.06 to the company's placement agent as consideration for
services provided in connection with the equity transaction. The shares and
warrants had an estimated fair value of $542,100. The above amounts as well as
$0.3 million of other transaction costs were recorded as costs of the equity
transaction and charged against additional paid-in capital.
Preferred stock consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
Per share ---- ---------
liquidation Issued and
value Authorized outstanding
----------- ---------- --------------
<S> <C> <C> <C> <C>
Preferred class
Series A............................. $0.678 6,523,684 -- --
Series B............................. $4.98 25,000,000 -- 3,913,072
---------- --- ---------
31,523,684 -- 3,913,072
========== === =========
</TABLE>
F-17
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
At December 31, 1998, 4,833,078 shares of common stock are reserved for the
conversion of preferred stock.
Preferred Stock Subscription
In March 1998, the company entered into a subscription and technology
license agreement. This agreement provides, among other things, for the company
to license certain technology to an unrelated third party (the licensee). In
connection with the agreement, the licensee is required to pay a minimum of
$750,000 at the end of each calendar quarter during the first year and a
minimum of $900,000 at the end of each calendar quarter during the second year.
Included in the first year quarterly payments is $125,000 per quarter that will
be applied towards the purchase of the company's Series B preferred stock at
$4.98 per share. The quarterly payment for the fourth quarter of the second
year includes $500,000 that will be applied towards the purchase of the
company's Series B preferred stock at $4.98 per share. The purchase of the
preferred stock under this agreement is on the same terms as the licensee's
purchase of Series B preferred stock in April 1998. The $625,000 minimum
quarterly royalty payments in year one will be recognized as revenue during
each respective quarter. The $900,000 minimum quarterly payments for each of
the first three quarters and the $400,000 for the fourth quarter of the second
year will be recognized as revenue during each of those respective quarters.
As of December 31, 1998, the company has issued 75,301 shares of Series B
preferred stock under this agreement.
In April 1999 the company issued 25,100 shares of Series B preferred stock
under this agreement. In addition, the company amended the above agreement and
issued 100,402 shares of Series B preferred stock and warrants for the purchase
of 40,863 shares of common stock in exchange for which it received a promissory
note with an aggregate value of $500,000 due in April 2000. The $500,000 note
reflects the payment due in the fourth quarter of the second year of the above
agreement.
(12) Stock Options and Warrants
(a) Stock Options
The company adopted the 1995 Stock Option Plan (the 1995 Plan) in May 1995.
The 1995 Plan provides for the grant of incentive stock options and non-
qualified stock options to employees, consultants, advisors to the company, and
members of the board of directors to purchase shares of common stock. Prior to
the adoption of the 1995 Plan, 43,258 options were granted to employees. Under
the terms of the 1995 Plan, authorized options are granted at estimated fair
value. The options generally vest over a period ranging from 2 to 5 years and
expire 5 to 10 years from the grant date.
In the months of November and December 1995, five company managers deferred
payment of their salaries, aggregating approximately $42,000, for a period of
four years which is recorded as accrued compensation payable and is non-
interest bearing. In connection with their deferral of salaries, these managers
received a total of 50,510 non-qualified stock options to acquire shares of
common stock of the company at an exercise price of $0.60, the estimated fair
value at the date of grant. These options were not issued in connection with
the 1995 Plan. The options become exercisable 20% per year commencing with the
grant date and on January 1 of each year thereafter.
In September 1997 the company granted 728,398 options, outside the 1995
Plan, to employees and certain vendors to purchase common stock at exercise
prices ranging from $1.50 to $6.00 per share. The options vest
F-18
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
over a range of periods from immediately to 4 years and expire in 5 years. Of
these options, 299,315 were issued to employees at below fair value or to
vendors which resulted in a noncash charge to operations for the year ended
December 31, 1997 of approximately $1,409,000.
In 1998 the board of directors approved an amendment to the company's 1995
Plan in which the total number of options available for grant was increased to
8,500,000.
In September 1998 the company granted 783,333 options, outside the 1995
Plan, to employees of Viona at an exercise price of $1.50 which was below the
estimated fair value of the company's common stock on the date of grant. The
company recorded deferred stock compensation of $799,000 in connection with
these options which will be amortized over the options' vesting period.
On September 23, 1998 the company, with the approval of the board of
directors, repriced all of the outstanding employee stock options that were in
excess of $2.52 to $2.52.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ------------------ -------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of beginning
of year................ 167,233 $0.54 223,040 $1.92 974,764 $ 3.60
Options granted....... 129,272 3.12 751,724 4.14 1,149,513 1.74
Options canceled...... (29,385) 0.72 -- -- (10,325) (0.90)
Options exercised..... (44,080) 0.72 -- -- -- --
------- ----- ------- ----- --------- ------
223,040 $1.92 974,764 $3.60 2,113,952 $ 1.80
======= ===== ======= ===== ========= ======
</TABLE>
At December 31, 1998, 1,055,630 options with a weighted-average exercise
price of $1.80, were fully vested and exercisable.
The following summarizes information about the company's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------------------
Weighted Weighted
average average
Number remaining Weighted Number remaining Weighted
outstanding at contractual average outstanding at contractual average
Range of December 31, life exercise December 31, life exercise
exercise prices 1998 (years) price 1998 (years) price
--------------- -------------- ----------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .03- .75.............. 216,810 4.2 $0.48 203,257 4.0 $0.48
$ .76-1.50.............. 1,087,338 4.6 1.50 351,088 4.9 1.50
$1.51-3.00.............. 792,951 4.1 2.52 484,618 4.0 2.52
$3.01-6.00.............. 16,853 3.8 6.00 16,667 3.8 6.00
--------- ----- --------- -----
Totals................ 2,113,952 $1.80 1,055,630 $1.80
========= ===== ========= =====
</TABLE>
F-19
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company applies APB 25 and related interpretations in accounting for its
stock option plan. Had compensation cost been recognized pursuant to SFAS No.
123, the company's loss would have been increased to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Loss attributable to common stockholders:
As reported................................... $(2,055) $(7,253) $(14,437)
Pro forma..................................... $(2,078) $(7,630) $(14,919)
Loss per common share:
As reported................................... $ (1.19) $ (3.52) $ (4.94)
Pro forma..................................... $ (1.21) $ (3.70) $ (5.11)
</TABLE>
The per share weighted-average fair value of stock options issued by the
company during 1997 and 1998 was $2.70 and $1.08, respectively, on the date of
grant.
The following range of assumptions were used by the company to determine the
fair value of stock options granted using a minimum value option-price model:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Dividend yield............................................... 0% 0%
Expected volatility.......................................... 0% 0%
Average expected option life................................. 4 years 4 years
Risk-free interest rate...................................... 5.73% 5.15%
</TABLE>
Pro forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma loss amounts presented above because
compensation cost is reflected over an option's vesting period and compensation
cost for options granted prior to January 1, 1996, is not considered.
F-20
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
(b) Warrants
The warrants issued by the company generally contain customary provisions
requiring proportionate adjustment of the exercise price in the event of a
stock split, stock dividend, or dilutive financing in the case of the warrants
for preferred stock.
A summary of warrant activity follows:
<TABLE>
<CAPTION>
Preferred Common
----------------------- -------------------------
Number Weighted Weighted
of average Number of average
warrants exercise price warrants exercise price
-------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Balance as of December
31, 1995............... 836,371 $0.60 34,970 $0.75
Warrants granted...... 83,635 0.75 20,982 0.75
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1996............... 920,006 $0.60 55,952 $0.75
Warrants granted...... -- -- 90,833 3.36
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- -- --
------- ----- --------- -----
Balance as of December
31, 1997............... 920,006 $0.60 146,785 $2.37
Warrants granted...... -- -- 1,660,802 0.24
Warrants canceled..... -- -- -- --
Warrants exercised.... -- -- (199,416) 0.92
------- ----- --------- -----
Balance as of December
31, 1998................ 920,006 $0.60 1,608,171 $0.35
======= ===== ========= =====
</TABLE>
(13) Commitments and Contingencies
(a) Leases
The company is obligated under certain equipment capital leases that expire
at various dates during the next two years. The company leases its office
facilities and various equipment under operating leases that expire during the
next five years. Future minimum lease payments relating to the noncancelable
capital and operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
Year ending December 31,
1999................................................... $15 $291
2000................................................... 5 269
2001................................................... -- 218
2002................................................... -- 161
2003................................................... -- 106
---
Total minimum lease payments......................... 20
Less: amount representing interest................... 2
---
Present value of net minimum capital lease payments...... 18
Less: current installments of obligations under capital
leases.................................................. 13
---
Obligations under capital leases excluding current
installments............................................ $ 5
===
</TABLE>
F-21
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
Total rent expense for the years ended December 31, 1996, 1997 and 1998, was
approximately $107,000, $150,000 and $328,000, respectively, and approximately
$44,000 and $125,000 for the three months ended March 31, 1998 and 1999,
respectively.
(b) Royalties
Under various licensing agreements, the company is required to pay
royalties, generally on a per unit basis, on the sales of certain products that
incorporate licensed technology. Royalty expense under such agreements was
approximately $188,000, $97,000 and $651,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and approximately $65,000 and $192,000 for
the three months ended March 31, 1998 and 1999, respectively.
(c) Contingencies
The company is party to certain legal actions arising in the normal course
of business. A former supplier of the company has filed a complaint alleging
breach of oral and written contract and other claims totaling approximately
$1.2 million. The company intends to defend the complaint vigorously. However,
at this time it is too early to estimate or predict the outcome of the
complaint. In addition, the company is aware that several entities have
asserted that technology which forms an essential part of the industry standard
for DVD and which is incorporated into the company's DVD solutions, infringes
patents held by such entities. If it is determined that the company has
infringed these patents, the company could be liable for damages and may be
required to pay license fees in connection with the use of the technology.
Management of the company, however, does not believe the resolution of these
potential contingencies will have a material impact on the financial position
or results of operations of the company.
(d) Employment Agreements
The company has entered into employment agreements with certain officers and
employees of the company. The agreements are generally for two to three year
periods, generally provide for annual bonuses and incentive stock options as
determined by the board of directors, and covenants not-to-compete during the
employment term and for two years thereafter. The employment agreements also
generally provide for six months severance in the event the individual is
terminated without cause.
The employment agreement with the company's President and Chief Executive
Officer signed in August 1997 also provides that to the extent the company is
sold for in excess of $80 million, he is entitled to a bonus of 2.5% of the
proceeds or $2 million.
(14) Business Risks and Credit Concentration
The company licenses and sells its products principally in the intensely
competitive personal computer and consumer electronics original equipment
manufacturers industry and for product sales prior to 1998 through a number of
wholesale distributors. This industry has been characterized by price erosion,
rapid technological change, short product life cycles, cyclical market patterns
and heightened foreign and domestic competition. Significant technological
changes in the industry would adversely affect operating results.
The company's customers, including its major customers disclosed in note 18,
have not executed long-term contracts and are not required to purchased minimum
quantities from the company. As such, the company's operating results could be
materially affected by a decrease in business with these customers.
F-22
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company performs ongoing credit evaluations of its customers' financial
condition, and generally no collateral is required. The company had three
customers representing, in the aggregate, 64%, 88% and 71% of accounts
receivable at December 31, 1997 and 1998 and March 31, 1999, respectively.
The company uses a contract manufacturer to make its hardware products. If
the company is unable to continue its relationship with this manufacturer, it
believes it could establish a similar relationship with another company in a
reasonable period of time. Because of the competitive nature of the technology
industry, the company believes it could ultimately obtain terms as beneficial
as those currently in effect.
(15) Income Taxes
The company elected "C" corporation status in September 1996. Prior to that
election, the company was an "S" corporation.
No federal, foreign, or state income taxes are due as of December 31, 1997
and 1998.
The table below reconciles the U.S. federal statutory income tax rate to the
recorded income tax provision (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. federal statutory
rate................................................ $(699) $(2,479) $(4,659)
State income taxes, net of federal tax benefit....... (83) (198) (1,256)
Change in valuation allowance........................ 788 2,669 5,848
Other................................................ (6) 8 67
----- ------- -------
$ 0 $ 0 $ 0
===== ======= =======
</TABLE>
The components of the net deferred tax assets as of December 31, 1997 and
1998, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating losses..................................... $ 3,104 $ 5,706
Reserves and accruals not currently deductible........... 270 188
Depreciation/Amortization................................ (3) 3,239
Deferred revenue and other............................... 65 151
------- -------
3,436 9,284
Valuation allowance........................................ (3,436) (9,284)
------- -------
Net deferred tax assets and (liabilities).................. $ -- $ --
======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1997 and 1998.
F-23
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
As of December 31, 1998, the company has approximately $14.1 million of net
operating loss carryforwards for federal tax purposes. These carryforwards will
begin expiring in 2011 if not utilized. In addition, the company has net
operating loss carryforwards in certain states with various expiration periods
beginning in 2006.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the company's prior and current equity transactions, the
company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carryforward period.
(16) Related-Party Transactions
During 1996, the company paid $10,000 to a director of the company for
consulting services. In 1997, the company paid this director a total of
$220,000 for additional consulting services. During 1998, this individual
resigned as a director of the company and received $220,000 for consulting
services.
In connection with certain equity transactions completed in 1996 (note 11),
this director received remuneration for his services in connection with these
equity transactions.
The former Chief Executive Officer of the company received $125,000 in
severance payments during 1998.
(17) Defined Contribution Plan
In 1997, the company established a defined contribution plan for qualified
employees as defined in the plan. Participants may contribute up to 20% of pre-
tax compensation, as defined. Under the plan, the company can make
discretionary contributions. To date, the company has not made any
contributions to the plan.
(18) Segment and Major Customer Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which established standards for reporting
information about operating segments in annual financial statements. The
company operates in a single industry segment, which is the development and
licensing of its technology.
The company had the following customers that combined represented in excess
of 31% and 91% of revenues for the years ended December 31, 1997 and 1998,
respectively, and 95% and 91% for the three months ended March 31, 1998 and
1999, respectively (in thousands):
<TABLE>
<CAPTION>
Three months
Years ended ended March
December 31, 31,
------------ -------------
Customer 1997 1998 1998 1999
-------- ---- ------- ------ ------
<S> <C> <C> <C> <C>
1............................................. $639 $25,624 $2,836 $8,041
2............................................. $632 -- $ -- --
3............................................. -- $ 1,900 -- $ 625
4............................................. $809 $ 151 $ 138 --
5............................................. -- -- -- $1,144
</TABLE>
F-24
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
The company sells and licenses its technology to customers primarily in
North America, Asia-Pacific and Europe. The loss for all periods presented is
derived primarily from the company's North American operations, which generates
revenues from the following geographic regions (in thousands):
<TABLE>
<CAPTION>
Years ended December Three months
31, ended March 31,
---------------------- ---------------
1996 1997 1998 1998 1999
------ ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
North America........................ $1,958 $4,278 $ 23,660 $ 2,444 $ 8,198
Asia-Pacific......................... 1,209 932 853 183 368
Europe............................... 521 1,117 5,775 516 2,186
Australia and New Zealand............ 507 494 -- -- 60
------ ------ -------- ------- -------
$4,195 $6,821 $ 30,288 $ 3,143 $10,812
====== ====== ======== ======= =======
</TABLE>
(19) Subsequent Events
(a) Options Granted (unaudited)
In February 1999, the company granted 144,688 options, with an exercise
price of $2.52 per share. The company has recorded $503,514 of deferred stock
compensation in connection with these options that will be amortized over the
option vesting period. In June 1999, 481,555 options were granted with an
exercise price of $10.20 per share.
(b) Stock Incentive Plan (unaudited)
In April 1999, the company, with the approval of the board of directors,
adopted the 1999 Stock Incentive Plan (1999 Plan) as a successor to the 1995
Plan. The 1999 Plan has reserved, subject to shareholder approval, 2,725,000
shares. The 1999 Plan has three separate programs which include; the
discretionary option grant program under which employees may be granted options
to purchase shares of common stock; the stock issuance program under which
eligible employees may be granted shares of common stock; and the automatic
grant program whereby eligible non-employee board members are granted options
to purchase shares of common stock.
(c) Employee Stock Purchase Plan (unaudited)
In April 1999, the company, with the approval of the board of directors,
adopted an Employee Stock Purchase Plan and reserved 500,000 shares of common
stock for issuance thereunder. The purchase plan permits eligible employees to
acquire shares of the company's common stock through periodic payroll
deductions of up to 15% of total compensation. Each offering period will have a
maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of the company's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period will commence on
the effectiveness of the IPO and will end on the last business day of July
2001.
(d) Sale of Preferred Stock and License of Technology (unaudited)
In April 1999 the company completed a financing in which it issued
convertible securities to an affiliate of Intel for $4.7 million and entered
into a license agreement covering certain Intel technology. The purchase price
received from Intel consisted of cash consideration of $3.0 million and, in
addition, the company was granted a license for Intel technology valued at $1.7
million. The Intel license permits the company to
F-25
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to March 31, 1998 and 1999 is unaudited)
incorporate the Intel digital content receiver technology into the company's
products on a royalty free basis as the company's products are subsequently
licensed to its customers. The company has capitalized the $1.7 million and
will amortize this cost as products are delivered over its estimated economic
life of four years. The convertible securities were converted into 549,650
shares of the company's Series C preferred stock in May 1999.
(e) Initial Public Offering and Reincorporation (unaudited)
In April 1999, the board of directors authorized the filing of a
registration statement with the SEC that would permit the company to sell
shares of the company's common stock in connection with a proposed IPO.
In addition the board of directors authorized the company to file amended
and restated articles of incorporation causing the company to reincorporate as
a Delaware Corporation. The amended and restated articles of incorporation are
to be effective upon shareholder approval which is anticipated to occur
immediately prior to the effective date of the IPO. Upon the reincorporation,
the company will be authorized to issue 50,000,000 shares of $.001 par value
common stock and 5,000,000 shares of $.001 par value undesignated preferred
stock. In connection therewith, the company authorized a 1 for 6 reverse stock
split which will become effective at the date of the IPO. All shares and per
share amounts in the consolidated financial statements have been restated to
reflect the reverse stock split.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Viona Development Hard & Software Engineering GmbH:
We have audited the accompanying balance sheet of Viona Development Hard &
Software Engineering GmbH as of December 31, 1997, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of Viona's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Viona Development Hard &
Software Engineering GmbH as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with United
States generally accepted accounting principles.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
April 6, 1999
F-27
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $248 $246
Accounts receivable.................................. 147 180
Prepaid expenses..................................... 15 8
---- ----
Total current assets............................... 410 434
---- ----
Furniture and equipment, net........................... 199 169
Other assets........................................... 16 14
---- ----
Total assets....................................... $625 $617
==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $153 $395
Accrued expenses..................................... 17 5
Loans payable--officers.............................. 69 69
Income taxes payable................................. 186 76
---- ----
Total current liabilities.......................... 425 545
---- ----
Deferred income taxes.................................. 16 6
---- ----
Total liabilities.................................. 441 551
---- ----
Stockholders' equity:
Capital stock........................................ 36 36
Accumulated other comprehensive loss................. (36) (35)
Retained earnings.................................... 184 65
---- ----
Total stockholders' equity......................... 184 66
---- ----
Total liabilities and stockholders' equity......... $625 $617
==== ====
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Revenues:
Development services................................. $1,001 $253
Net product sales.................................... 32 --
------ ----
Total revenues..................................... 1,033 253
------ ----
Research and development............................... 619 169
Sales and marketing.................................... 36 31
General and administrative............................. 209 37
------ ----
Operating income....................................... 169 16
Other income (expense):
Interest income...................................... 4 1
Interest expense..................................... (2) (1)
Other income......................................... 24 2
------ ----
Income before taxes.................................... 195 18
Income tax expense (benefit)........................... 80 (9)
------ ----
Net income............................................. $ 115 $ 27
====== ====
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated other
comprehensive loss
------------------
Cumulative Total
Capital translation Retained stockholders'
stock adjustment earnings equity
------- ------------------ -------- -------------
<S> <C> <C> <C> <C>
Balance as of January 1,
1997....................... $ 35 $ (4) $ 173 $ 204
Dividends................... -- -- (104) (104)
Net income.................. -- -- 115 115
Other comprehensive loss.... -- (32) -- (32)
-----
Total comprehensive
income................... 83
Capital increase............ 1 -- -- 1
---- ---- ----- -----
Balance as of December 31,
1997....................... 36 (36) 184 184
Dividends................... -- -- (146) (146)
Net income.................. -- -- 27 27
Other comprehensive income.. -- 1 -- 1
-----
Total comprehensive
income................... 28
---- ---- ----- -----
Balance as of March 31, 1998
(unaudited)................ $ 36 $(35) $ 65 $ 66
==== ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 115 $ 27
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation...................................... 103 18
(Gains) losses on sales of furniture and
equipment........................................ (9) 16
Deferred income taxes............................. (41) (9)
Changes in items affecting operations:
Accounts receivable............................. 90 (34)
Prepaid expenses................................ (2) 7
Other assets.................................... -- 2
Accounts payable................................ (11) 242
Accrued expenses................................ (42) (12)
Income taxes payable............................ 112 (111)
----- -----
Net cash provided by operating activities............. 315 146
----- -----
Cash flows from investing activities:
Payments for furniture and equipment................ (185) (11)
Proceeds from sales of furniture and equipment...... 15 3
----- -----
Net cash used in investing activities................. (170) (8)
----- -----
Cash flows from financing activities:
Net repayments on bank line of credit............... (13) --
Borrowings under other debt......................... 72 2
Proceeds from increase in capital stock............. 1 --
Dividends paid...................................... (104) (146)
----- -----
Net cash used in financing activities................. (44) (144)
----- -----
Effect of exchange rate changes on cash and cash
equivalents.......................................... (33) 4
----- -----
Net increase (decrease) in cash and cash equivalents.. 68 (2)
Cash and cash equivalents at beginning of year........ 180 248
----- -----
Cash and cash equivalents at end of year.............. $ 248 $ 246
===== =====
Supplemental disclosures of cash flow information:
Cash paid for interest.............................. $ -- $ --
Cash paid for income taxes.......................... 9 --
===== =====
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(1) Description of Operations
Viona Development Hard & Software Engineering GmbH ("Viona") is a limited
liability company, organized under the laws of the Federal Republic of Germany.
Viona conducts research and development in the field of convergence subsystem
products and desktop digital video products for use primarily in desktop
personal computers or other electronic devices.
(2) Summary of Significant Accounting Policies
(a) Foreign Currency Translation
The functional currency of Viona is the German mark and the reporting
currency is the U.S. dollar. Functional currency assets and liabilities are
translated into U.S. dollars using the period-end exchange rate while revenues
and expenses are translated using average exchange rates during the year.
Adjustments resulting from the translation of function currency assets and
liabilities into U.S. dollars are recorded as a separate component of
stockholders' equity.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Fair Value of Financial Instruments
The carrying amounts of Viona's financial instruments approximate fair value
due to the short maturity of those instruments.
(d) Cash and Cash Equivalents
Viona considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
(e) Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line or declining balance method based on the estimated useful
lives of the various classes of furniture and equipment as follows:
<TABLE>
<S> <C>
Software......................................................... 3 years
Computer equipment............................................... 3 years
Research and development equipment............................... 3 years
Furniture and fixtures........................................... 5 years
</TABLE>
(f) Long-Lived Assets
Viona reviews long-lived assets to be held and used by an entity for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-32
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Revenue Recognition
Revenue is recognized upon shipment of products to customers. Revenue
related to development contracts is recognized using the percentage-of-
completion method, based on performance milestones specified in the contract
where such milestones fairly reflect progress toward contract completion.
Revenue related to the agreement with RAVISENT Technologies Inc. (formerly
Quadrant International Inc.) (see Note 9) is recognized using a cost-plus
methodology, whereby expenses incurred plus a fixed premium are invoiced
monthly.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Unaudited Interim Financial Information
The accompanying unaudited interim financial statements of Viona reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim period presented. All such
adjustments are of a normal recurring nature.
These unaudited interim financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1997 included herein.
In the first quarter of 1998, Viona changed its legal structure from a
limited liability company to a partnership. As a result, Viona was only
required to pay German trade taxes as German federal income taxes are the
responsibility of Viona's shareholders. The income tax benefit for the three
months ended March 31, 1998 reflects $10,778 deferred tax benefit resulting
from the reduction in Viona's statutory tax rate from 56% to 18%. In
conjunction with this change in legal structure, Viona changed its name from
Viona Development Hard & Software Engineering GmbH to Viona Development Hard &
Software Engineering GmbH & Co. KG.
(3) Furniture and Equipment
At December 31, 1997, furniture and equipment consisted of the following (in
thousands)
<TABLE>
<S> <C>
Software............................................................ $ 11
Computer equipment.................................................. 118
Research and development equipment.................................. 77
Furniture and fixtures.............................................. 157
-----
363
Less accumulated depreciation....................................... (164)
-----
$ 199
=====
</TABLE>
Depreciation expense was approximately $103,000 for the year ended December
31, 1997.
F-33
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Commitments under Operating Leases
Viona leases its office facilities and certain equipment under operating
leases. Rent expense amounted to approximately $37,000 for the year ended
December 31, 1997. Future minimum lease payments under existing noncancelable
operating leases are as follows at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998................................................................. $30
1999................................................................. 29
2000................................................................. 29
---
$88
===
</TABLE>
(5) Credit and Business Concentration
Viona performs ongoing credit evaluations of its customers financial
condition, and generally no collateral is required.
Viona had one customer representing approximately 70% of accounts
receivable at December 31, 1997.
Viona had one customer which represented approximately 94% of revenues for
the year ended December 31, 1997.
(6) Income Taxes
Income tax expense for the year ended December 31, 1997 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current taxes...................................................... $121
Deferred taxes..................................................... (41)
----
$ 80
====
</TABLE>
German tax law applies a split-rate imputation with regard to the taxation
of the income of a company and its stockholders. In accordance with the tax
law in effect for fiscal 1997, retained income is initially subject to a
federal tax of 45% plus a solidarity surcharge of 7.5% on federal taxes
payable. Including the impact of the surcharge, the federal tax rate amounts
to 48.375%. Upon distribution of retained earnings to stockholders, the income
tax rate on the earnings is adjusted to 30%, plus a solidarity surcharge of
7.5% on the distribution tax, for a total of 32.25%, by means of a refund for
taxes previously paid. Upon distribution of retained earnings in the form of a
dividend, stockholders who are taxpayers in Germany are entitled to a tax
credit in the amount of federal income taxes previously paid by the company.
The deferred taxes for 1997 are calculated using an effective income tax
rate of 47.475% plus the after federal tax benefit rate for trade tax of
8.525%.
A reconciliation of income taxes determined using the German tax rate of
47.475% plus the after federal tax benefit rate for trade taxes of 8.525% for
a combined statutory rate of 56% in 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Expected tax expense............................................... $109
Credit for dividend distributions.................................. (31)
Other.............................................................. 2
----
Actual tax expense............................................... $ 80
====
</TABLE>
F-34
<PAGE>
VIONA DEVELOPMENT HARD & SOFTWARE ENGINEERING GmbH
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred tax assets--accrued expenses............................. $ 7
Deferred tax liabilities--furniture and equipment, principally due
to differences in depreciation................................... 23
---
Net deferred tax liabilities.................................... $16
===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible.
(7) Development Agreement
On February 6, 1997, Viona entered into an exclusive development agreement
with RAVISENT Technologies Inc., whereby Viona agreed to exclusively develop
personal computer-convergence products for RAVISENT. Under the agreement, Viona
will receive fees from RAVISENT monthly based on the greater of product
engineering costs incurred plus a premium or $80,000.
(8) Related-party Transactions
In 1997, each of Viona's three owners granted a loan to Viona for
approximately $22,000 (DM 40,000). The loans bear interest at 7% per year and
are payable on demand. At December 31, 1997, each of these loans plus accrued
interest amounted to approximately $23,000. The statement of operations for the
year ended December 31, 1997 includes approximately $2,400 of interest expense
related to these loans. Viona believes the interest expense incurred was
equivalent to the amounts that would be paid under arm's-length transactions.
(9) Subsequent Events
In January 1998, Viona's stockholders agreed to sell Viona to RAVISENT. In
April 1998 the acquisition was completed and was accounted for as a purchase
business combination. The purchase consideration consisted of 1,204,820 shares
of RAVISENT common stock and $6.1 million in cash.
F-35
<PAGE>
RAVISENT TECHNOLOGIES INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is filed herewith:
unaudited combined pro forma statement of operations for the year ended
December 31, 1998.
In April 1998 RAVISENT completed the acquisition of Viona a company located
in Germany specializing in the development of digital video technology. The
purchase price included $6.1 million in cash, 1,204,820 shares of RAVISENT's
common stock valued at $4.8 million and incurred transaction costs of
$0.8 million. The acquisition of Viona was recorded under the purchase method
of accounting. A portion of the purchase price was allocated to in-process
research and development technology, which resulted in a charge of $7.9 million
to RAVISENT's operations in April 1998. The excess of the purchase price over
the fair value of the net identifiable assets and in-process research and
development technology acquired of $3.5 million has been recorded as goodwill
and is amortized on a straight-line basis over four years.
The unaudited combined pro forma statement of operations reflects the
acquisition of Viona as if it occurred on January 1, 1998. Since the pro forma
financial statement which follows is based upon the operating results of Viona
during a period when it was not under the control or management of RAVISENT the
information presented may not be indicative of the results which would have
actually been obtained had the acquisition been completed as of January 1, 1998
nor are they indicative of future financial or operating results. The unaudited
pro forma financial information does not give effect to any synergies that may
occur due to the integration of RAVISENT and Viona. The condensed combined pro
forma financial statement should be read in conjunction with the historical
audited financial statements of RAVISENT and the notes thereto, as well as the
audited historical financial statements of Viona and the notes thereto included
elsewhere in this prospectus.
F-36
<PAGE>
RAVISENT TECHNOLOGIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
RAVISENT Pro Forma Pro Forma
Technologies Inc.(1) Viona(2) Adjustments Combined
-------------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................ $ 30,288 $253 $ (253)(a) $ 30,288
Cost of revenues........ 24,546 -- -- 24,546
---------- ---- ------- ----------
Gross profit........ 5,742 253 (253) 5,742
Research and
development............ 3,121 169 (253)(a) 3,037
Sales and marketing..... 1,964 31 -- 1,995
General and
administrative......... 4,673 19 -- 4,692
Depreciation and
amortization........... 906 18 222 (b) 1,146
Compensation related to
stock options.......... 139 -- -- 139
Acquired in-process
research and
development............ 7,900 -- (7,900)(c) --
---------- ---- ------- ----------
Operating income
(loss)................. (12,961) 16 (7,678) (5,267)
---------- ---- ------- ----------
Interest (income)
expense and other,
net.................... 722 (11) -- 711
---------- ---- ------- ----------
Net income (loss)....... (13,683) 27 (7,678) (5,978)
---------- ---- ------- ----------
Accretion of mandatory
redeemable preferred
stock.................. 754 -- -- 754
---------- ---- ------- ----------
Loss attributable to
common stockholders.... $ (14,437) $ 27 $(7,678) $ (6,732)
========== ==== ======= ==========
Pro forma net loss per
common share:
Basic and diluted..... $ (4.94) (d) $ (2.03)
========== ==========
Weighted average
shares outstanding... 2,920,677 3,316,782
========== ==========
</TABLE>
- ----------
(1) Actual for the year ended December 31, 1998
(2) Actual for the three months ended March 31, 1998
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-37
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited pro forma combined statements of operations for
the year ended December 31, 1998 give effect to the acquisition of Viona as if
it had occurred on January 1, 1998.
The effects of the acquisition have been presented using the purchase method
of accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best estimate of their
fair value.
The pro forma adjustments related to the purchase price allocation of the
acquisition represent management's best estimate of the effects of the
acquisition.
2. The pro forma statement of operations adjustments for the year ended
December 31, 1998 consist of:
(a) Pro forma revenue and research and development expense has been adjusted
to reflect the elimination of the amounts paid by RAVISENT to Viona for
development services.
(b) Pro forma depreciation and amortization expense has been adjusted to
reflect the amortization of goodwill and other intangible assets associated
with the acquisition which has an estimated useful life of four years. ($3.5
million divided by 48 months = $0.07 million per month; $0.2 million
amortization per quarter). No pro forma adjustment for depreciation expense for
fixed assets acquired has been recorded as the expense recorded by Viona
approximates the expense that would be recorded by RAVISENT.
(c) The charge for acquired in-process research and development has been
eliminated as this is a non-recurring charge that resulted directly from the
acquisition of Viona.
(d) Basic and diluted weighted average common shares outstanding and net
loss per share amounts have been adjusted to reflect the issuance of the
1,204,820 shares of the RAVISENT's common stock in connection with the
acquisition, as if the shares had been outstanding from January 1, 1998.
(e) No income tax provision is required due to the RAVISENT's current tax
loss and the inability of RAVISENT to currently use the benefits of the net
operating loss carryforward.
F-38
<PAGE>
(Inside Back Cover)
On the top of the page on the left three quarters of the page is the
RAVISENT logo, which appears on a shaded background and consists of the word
"RAVISEnT(TM)," in capital letters except for the letter "n," with a wave
running through the lower half of each of the letters and below and toward the
right of which appears the word "TECHNOLOGIES" in capital letters. Underneath
the logo are the words "What the digital world watches."
Below the logo centered on the page on a shaded background are three
concentric circles which overlap. The left circle contains the words "Consumer
Electronics" in large print. Below, in smaller print, are the words "Hardware
Vendors," "Component Vendors," and "Retailers." Off to the left side of this
circle is a white oval inside of which are the words "Hardware Design
Royalties" and "Software Licensing Revenue." The right circle contains the
words "Computers" in large print. Below, in smaller print, are the words "PC
OEMs," "Component Vendors," "Software Developers" and "End Users." Off to the
right side of this circle is a white oval inside of which are the words
"Hardware Sales," "Software Licensing Revenue" and "Hardware Design Royalties."
The middle circle is shaded and contains the word "RAVISENT(TM)" in large print
and below in smaller print, the words "Digital Video & Audio Technologies."
Below these circles, in bold, are the words "Applying a suite of technologies
to a variety of digital video & audio sources to create high performance
consumer electronics and PC products."
On the bottom the page is a line extending across the page, above which
appears the words "Our Customers" and below which appears the logos of the
following nine companies: Compaq, Sanyo, Packard Bell NEC, Hewlett-Packard,
Yamaha, Micron Electronics, Dell Gateway (below which is the tag line "Connect
with us") and Fujitsu.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any in-
formation or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any shares in any jurisdiction in which it is unlawful. The information in
this prospectus is current as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Corporate Information.................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 28
Selected Consolidated Financial Data..................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 46
Management............................................................... 58
Certain Transactions..................................................... 70
Principal Stockholders................................................... 73
Description of Capital Stock............................................. 76
Shares Eligible for Future Sale.......................................... 79
Underwriting............................................................. 81
Legal Matters............................................................ 83
Experts.................................................................. 83
Additional Information................................................... 83
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock offered hereby, whether or not par-
ticipating in this distribution, may be required to deliver a prospectus. This
is in addition to the obligations of dealers to deliver a prospectus when act-
ing as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
[RAVISENT TECHNOLOGIES INC. LOGO]
Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
SG Cowen
Volpe Brown Whelan & Company
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by RAVISENT in connection with
the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee............................................. 16,680
NASD Filing Fee.................................................. 6,500
Nasdaq National Market Listing Fee............................... 90,500
Printing and Engraving Expenses.................................. 200,000
Legal Fees and Expenses.......................................... 625,000
Accounting Fees and Expenses..................................... 350,000
Blue Sky Fees and Expenses....................................... 1,000
Transfer Agent Fees.............................................. 12,000
Miscellaneous.................................................... 198,320
---------
Total........................................................ 1,500,000
=========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of RAVISENT's bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. RAVISENT's
certificate of incorporation provides that, subject to Delaware law, its
directors shall not be personally liable for monetary damages for breach of
the directors' fiduciary duty as directors to RAVISENT and its stockholders.
This provision in the certificate of incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to RAVISENT or its
stockholders for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. RAVISENT has entered into indemnification agreements with its officers
and directors, a form of which was previously filed with the Securities and
Exchange Commission (the "Commission") as an exhibit to the registrant's
registration statement on Form S-1 (No. 333-77269). The indemnification
agreements provide RAVISENT's officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 7(b) of the underwriting
agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of RAVISENT against certain liabilities, and Section 1.10 of the registration
rights agreement contained in Exhibit 4.2 hereto, indemnifying certain of
RAVISENT's stockholders, including controlling stockholders, against certain
liabilities.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the registrant has issued unregistered
securities to a limited number of persons as described below:
(a) During 1996, the registrant issued and sold 96,529 shares of its
common stock to employees and consultants for an aggregate purchase price
of $103,750 pursuant to direct stock issuances.
II-1
<PAGE>
(b) In February 1996, the registrant issued and sold 44,080 shares of its
common stock to an employee for an aggregate purchase price of $30,000.
(c) In March 1996, the registrant issued and sold 7,347 shares of its
common stock to an employee of the registrant for an aggregate purchase
price of $5,000.
(d) In March and April 1996, the registrant issued and sold an aggregate
of 31,373 shares of its common stock for an aggregate purchase price of
$18,750 to an employee of the registrant.
(e) In March 1996, the registrant issued to NEPA Venture Fund II, L.P. a
subordinated note in the principal amount of $125,000 and warrants to
purchase up to 83,635 shares of Series A preferred stock at an exercise
price of $0.7473 per share (subject to adjustment).
(f) In June 1996, the registrant issued warrants to purchase up to 20,982
shares of its common stock at an exercise price of $0.7473 per share to a
bank.
(g) In August 1996, the registrant issued and sold an aggregate of
194,999 shares of its common stock to several investors for an aggregate
purchase price of $1,050,000.
(h) In November 1996, the registrant issued and sold 166,667 shares of
its common stock to an investor for an aggregate purchase price of
$1,000,000.
(i) In March 1997, the registrant issued and sold 83,333 shares of its
common stock to an investor for an aggregate purchase price of $500,000.
(j) In April 1997, the registrant issued to a lender a warrant to
purchase up to 12,500 shares of its common stock at an exercise price of
$3.558 per share.
(k) In August 1997, the registrant issued and sold 5,000 shares of its
common stock to an investor for an aggregate purchase price of $45,000.
(l) In September 1997, the registrant issued to a lender a warrant to
purchase up to 33,333 shares of its common stock at an exercise price of
$3.558 per share.
(m) In October 1997, the registrant issued and sold to an investor 25,000
shares of its common stock for an aggregate purchase price of $165,000.
(n) In December 1997, the registrant issued to an investor a subordinated
debenture in a principal amount of $1,500,000 convertible into shares of
Series B preferred stock or common stock and warrants to purchase up to
45,000 shares of its common stock at an exercise price of $3.18 per share.
(o) In January 1998, the registrant entered into an agreement to acquire
Viona Development Hard & Software Engineering GmbH, or Viona, whereby the
purchase price was payable in cash and in shares of the registrant's common
stock. In April 1998, the registrant completed the acquisition and paid an
aggregate of $2,550,000 and issued an aggregate of 1,204,820 shares of its
common stock to the principals of Viona in accordance with the terms of the
acquisition agreement.
(p) In February 1998, the registrant issued to an investor a subordinated
debenture in a principal amount of $250,000 which is convertible into
shares of Series B preferred stock or common stock and warrants to purchase
up to 7,500 shares of common stock at an exercise price of $4.98 per share.
(q) In March 1998, the registrant issued to several investors
subordinated debentures in an aggregate principal amount of $2,000,000
which is convertible into shares of Series B preferred stock or common
stock and warrants to purchase up to an aggregate of 20,080 shares of
common stock at an exercise price of $4.98 per share.
(r) In March 1998, the registrant issued to an investor a subordinated
debenture in a principal amount of $270,000 which is convertible into
shares of Series B preferred stock or common stock and a warrant to
purchase up to 9,759 shares of common stock at an exercise price of $3.18
per share.
II-2
<PAGE>
(s) In April 1998, the registrant issued to an investor warrants to
purchase up to 3,333 shares of common stock at an exercise price of $6.00
per share.
(t) In April 1998, the registrant issued to several investors
subordinated debentures in an aggregate principal amount of $300,000 which
is convertible into shares of Series B preferred stock or common stock and
warrants to purchase up to 10,843 shares of common stock at an exercise
price of $4.98.
(u) In April 1998, the registrant issued to an investor subordinated
debentures in an aggregate principal amount of $500,000 which is
convertible into 100,402 shares of Series B preferred stock or common stock
and warrants to purchase up to 40,864 shares of common stock at an exercise
price of $0.06 per share.
(v) In April 1998, the registrant issued to several investors an
aggregate of 12,962 shares of common stock as interest payments on its
outstanding subordinated debentures.
(w) In April 1998, the registrant issued an aggregate of 3,628,514 shares
of its Series B preferred stock and warrants to purchase an aggregate of
1,476,805 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to several investors for an aggregate purchase
price of $18,070,000.
(x) In April 1998, the registrant issued an aggregate of 108,856 shares
of its Series B preferred stock and warrants to purchase an aggregate of up
to 44,304 shares of common stock at an exercise price of $0.06 per share
(subject to adjustment) to Lehman Brothers, Inc. as compensation for
services rendered by Lehman Brothers in connection with the Series B
preferred stock financing.
(y) In April 1998, Atlantic Coastal Ventures, L.P. received interest on
its subordinated debentures in the form of common stock and exercised
warrants received with the debentures into 208,862 shares of common stock
for an aggregate purchase price of $182,813. In addition, Atlantic Coastal
Ventures, converted the debentures into 355,422 shares of Series B
preferred stock.
(z) In April 1998, the registrant issued to Progress Capital, Inc., a
warrant to purchase up to 16,667 shares of its common stock at an exercise
price of $3.558 per share.
(aa) In May 1998, an investor of the registrant converted the outstanding
$500,000 principal on a subordinated convertible debenture into 100,402
shares of Series B preferred stock.
(bb) In July, September and December 1998, the registrant issued to an
investor an aggregate of 75,301 shares of Series B preferred stock and
warrants to purchase up to 30,648 shares of common stock for an aggregate
purchase price of $375,000.
(cc) In April 1999 (prior to the filing of the registration statement for
this offering), the registrant issued an aggregate of 125,502 shares of
Series B preferred stock and warrants to purchase 40,863 shares of common
stock for a promissory note of $500,000 and in exchange for certain royalty
obligations.
(dd) In April 1999 (prior to the filing of the registration statement for
this offering), the registrant issued an aggregate of $4,700,000 of
subordinated convertible promissory notes to an investor, which notes were
converted in May 1999 into 549,650 shares of Series C preferred stock of
the registrant.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the registrant, to
information about the registrant.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the exhibit index are filed as part of this
registration statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement among the registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1* Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the registrant.
2.2* Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the registrant.
2.3* Agreement and Plan of Merger, by and between Divicore Inc., a Delaware
corporation, and the registrant.
3.1* Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2* Amended and Restated Bylaws, to be effective upon consummation of this
offering.
3.3* Certificate of Incorporation of RAVISENT Technologies Inc., a Delaware
corporation.
3.4* Bylaws of RAVISENT Technologies Inc., a Delaware corporation.
4.1** Form of registrant's Specimen Common Stock Certificate.
4.2* Registration Rights Agreement, dated April 30, 1998, by and among the
registrant and parties listed on Schedule A therein.
4.3* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the registrant and
Meridian Bank.
4.7* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the registrant and
Meridian Bank.
4.8* Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the registrant and NEPA Venture Fund II, L.P.
4.9* Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the registrant and Atlantic Coastal
Ventures, L.P.
4.10* Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the registrant and Donald Horton and Marty
Horton, as community property.
4.11* Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the registrant
and the parties who are signatories thereto.
4.12* Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the registrant and the parties who are signatories
thereto.
4.13* Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the registrant and NEPA Venture Fund II, L.P.
4.14* Convertible Promissory Note Purchase Agreement, dated as of April 26,
1999, among the registrant and the parties who are signatories
thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
4.15* Registration Rights Agreement, dated as of April 26, 1999, among the
registrant and the parties listed on Schedule A thereto.
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered, to be
given upon the closing of the offering.
10.1* Registrant's 1999 Stock Incentive Plan.
10.2* Registrant's 1999 Employee Stock Purchase Plan.
10.3* Form of Directors' and Officers' Indemnification Agreement.
10.4* Letter Agreement, dated October 28, 1997, by and between the
registrant and Dell Products, L.P.
10.5+* License Agreement, dated June 30, 1998, by and between the registrant
and ST Microelectronics, Inc.
10.6* Source and Object Code License Agreement, dated September 1, 1998, by
and between the registrant and Microsoft Corporation.
10.7+* Development and License Agreement, dated March 2, 1998, by and between
the registrant and ATI Technologies Inc.
10.8+* Sti5505 Development Contract, dated February 1, 1999, by and between
the registrant and ST Microelectronics, SA.
10.9+* Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the registrant and Dolby
Laboratories Licensing Corporation.
10.10* Agreement of Lease, dated June 5, 1998, by and between the registrant
and Liberty Property Limited Partnership.
10.11* Form of Software License Agreement.
10.12* Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the registrant and Silicon Valley Bank.
10.13* Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14* Letter Agreement, dated August 20, 1997, by and between the registrant
and Francis E.J. Wilde III.
10.15* Employment Agreement, dated November 12, 1997, by and between the
registrant and Michael Harris.
10.16* Employment Agreement, dated November 12, 1997, by and between the
registrant and Jason Liu.
10.17* Employment Agreement, dated December 11, 1997, by and between the
registrant and Leonard Sharp.
10.18* Employment Agreement, dated January 12, 1998, by and between the
registrant and Robert Russell.
10.19* Employment Agreement, dated December 15, 1997, by and between the
registrant and Gregg Garnick.
10.20* Amendment to Employment Agreement, dated March 19, 1998, by and
between the registrant and Gregg Garnick.
10.21+* Software License Agreement, dated as of April 23, 1999, by and between
the registrant and Intel Corporation.
10.22* Amended and Restated CSS Interim License Agreement, dated November 28,
1997, by and between the registrant and Mitsushita Electric
Industrial Co., Ltd.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
23.4* Consent of International Data Corporation.
23.5* Consent of the Yankee Group.
24.1* Power of Attorney. Reference is made to Page II-7 of the Amendment No.
1 to the registration statement on Form S-1 filed on June 9, 1999.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
II-5
<PAGE>
- --------
* Previously filed
** To be filed by subsequent amendment
+ Confidential treatment requested for portions of this agreement
(b) Financial Statement Schedule
<TABLE>
<CAPTION>
Balance Charged
at to Costs Charged Balance
Beginning and to Other at End
of Year Expenses Accounts Deductions(1) of Year
--------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Accounts Receivable--
Allowance for doubtful
accounts
For the year ended December
31, 1996.................. $ 35,000 $120,000 -- $ (16,000) $139,000
For the year ended December
31, 1997.................. 139,000 384,038 -- (56,438) 466,600
For the year ended December
31, 1998.................. 466,600 48,347 -- (250,097) 264,850
Inventory--Reserve for
obsolete inventory
For the year ended December
31, 1996.................. 25,000 75,000 -- -- 100,000
For the year ended December
31, 1997.................. 100,000 300,000 -- -- 400,000
For the year ended December
31, 1998.................. 400,000 70,000 -- (295,565) 174,435
</TABLE>
- --------
(1) Represents write-off of uncollectible accounts receivable and obsolete
inventory.
Item 17. Undertakings
RAVISENT hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of RAVISENT
pursuant to the Delaware General Corporation Law, the certificate of
incorporation or the bylaws of RAVISENT, indemnification agreements entered
into between RAVISENT and its officers and directors, the underwriting
agreement, or otherwise, RAVISENT has been advised that in the opinion of the
commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
RAVISENT of expenses incurred or paid by a director, officer, or controlling
person of RAVISENT in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, RAVISENT will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by RAVISENT pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Amendment No. 3 to
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Malvern, Commonwealth of
Pennsylvania, on this 18th day of June, 1999.
RAVISENT TECHNOLOGIES INC.
/s/ Francis E. J. Wilde III
By: _________________________________
Francis E. J. Wilde III
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to registration statement has been signed by the persons
whose signatures appear below, which persons have signed such registration
statement in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Francis E. J. Wilde III Chief Executive Officer, June 18, 1999
____________________________________ President and Director
Francis E. J. Wilde III (Principal Executive
Officer)
/s/ Jason C. Liu Chief Financial Officer, June 18, 1999
____________________________________ Vice President, Finance
Jason C. Liu and Secretary (Principal
Accounting Officer)
* Director
____________________________________
Frederick J. Beste III
* Director
____________________________________
Peter X. Blumenwitz
* Director
____________________________________
Walter L. Threadgill
* Director
____________________________________
Paul A. Vais
</TABLE>
/s/ Jason C. Liu June 18, 1999
*By: __________________________
Jason C. Liu
Attorney-in-fact
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement among the registrant, Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelan &
Company.
2.1* Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and the registrant.
2.2* Appendix to Sales Agreement Concerning Shares, dated January 16, 1998,
by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste
CINCO Vermogensverwaltungs GmbH and the registrant.
2.3* Agreement and Plan of Merger, by and between Divicore Inc., a Delaware
corporation, and the registrant.
3.1* Amended and Restated Certificate of Incorporation to be effective upon
consummation of the initial public offering.
3.2* Amended and Restated Bylaws to be effective upon consummation of this
offering.
3.3* Certificate of Incorporation of RAVISENT Technologies Inc., a Delaware
corporation.
3.4* Bylaws of RAVISENT Technologies Inc., a Delaware corporation.
4.1** Form of registrant's Specimen Common Stock Certificate.
4.2* Registration Rights Agreement, dated April 30, 1998, by and among the
registrant and parties listed on Schedule A therein.
4.3* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.
4.4* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.
4.5* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between the registrant and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.
4.6* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between the registrant and
Meridian Bank.
4.7* Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between the registrant and
Meridian Bank.
4.8* Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between the registrant and NEPA Venture Fund II, L.P.
4.9* Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between the registrant and Atlantic Coastal
Ventures, L.P.
4.10* Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between the registrant and Donald Horton and Marty
Horton, as community property.
4.11* Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and among the registrant
and the parties who are signatories thereto.
4.12* Convertible Debenture and Warrant Purchase Agreement, dated March 31,
1998, by and among the registrant and the parties who are signatories
thereto.
4.13* Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between the registrant and NEPA Venture Fund II, L.P.
4.14* Convertible Promissory Note Purchase Agreement, dated as of April 28,
1999, among the registrant and the parties who are signatories
thereto.
4.15* Registration Rights Agreement, dated as of April 28, 1999, among the
registrant and the parties listed on Schedule A thereto.
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
registrant, with respect to the common stock being registered, to be
given upon the closing of the offering.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.1* Registrant's 1999 Stock Incentive Plan.
10.2* Registrant's 1999 Employee Stock Purchase Plan.
10.3* Form of Directors' and Officers' Indemnification Agreement.
10.4* Letter Agreement, dated October 28, 1997, by and between the
registrant and Dell Products, L.P.
10.5+* License Agreement, dated June 30, 1998, by and between the registrant
and ST Microelectronics, Inc.
10.6* Source and Object Code License Agreement, dated September 1, 1998, by
and between the registrant and Microsoft Corporation.
10.7+ Development and License Agreement, dated March 2, 1998, by and between
the registrant and ATI Technologies Inc.
10.8+* Sti5505 Development Contract, dated February 1, 1999, by and between
the registrant and ST Microelectronics, SA.
10.9+* Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between the registrant and Dolby
Laboratories Licensing Corporation.
10.10* Agreement of Lease, dated June 5, 1998, by and between the registrant
and Liberty Property Limited Partnership.
10.11* Form of Software License Agreement.
10.12* Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998,
by and between the registrant and Silicon Valley Bank.
10.13* Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH and Deutsche-Bemanten-
Lebensversicherung AG.
10.14* Letter Agreement, dated August 20, 1997, by and between the registrant
and Francis E.J. Wilde III.
10.15* Employment Agreement, dated November 12, 1997, by and between the
registrant and Michael Harris.
10.16* Employment Agreement, dated November 12, 1997, by and between the
registrant and Jason Liu.
10.17* Employment Agreement, dated December 11, 1997, by and between the
registrant and Leonard Sharp.
10.18* Employment Agreement, dated January 12, 1998, by and between the
registrant and Robert Russell.
10.19* Employment Agreement, dated December 15, 1997, by and between the
registrant and Gregg Garnick.
10.20* Amendment to Employment Agreement, dated March 19, 1998, by and
between the registrant and Gregg Garnick.
10.21+* Software License Agreement, dated as of April 23, 1999, by and between
the registrant and Intel Corporation.
10.22* Amended and Restated CSS Interim License Agreement, dated November 28,
1997, by and between the registrant and Matsushita Electric
Industrial Co., Ltd.
21.1* Subsidiaries of the registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2 Consent of KPMG Deutsche Treuhand-Gesellschaft AG, Independent
Auditors
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion
filed as Exhibit 5.1).
23.4* Consent of International Data Corporation.
23.5* Consent of the Yankee Group.
24.1* Power of Attorney. Reference is made to Page II-7 of the Amendment No.
1 to the registration statement on Form S-1 filed on June 9, 1999.
27.1* Financial Data Schedule. (In EDGAR format only)
</TABLE>
- ----------
* Previously filed
** To be filed by subsequent amendment
+ Confidential treatment requested for portions of this agreement
<PAGE>
EXHIBIT 1.1
5,000,000 Shares of Common Stock
RAVISENT Technologies Inc.
UNDERWRITING AGREEMENT
----------------------
July , 1999
BEAR, STEARNS & CO. INC.
SG COWEN SECURITIES CORPORATION
VOLPE BROWN WHELAN & COMPANY
as "Representatives" of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
One Sansome Street
41st Floor
San Francisco, California 94104
Ladies and Gentlemen:
RAVISENT Technologies Inc., a corporation organized and existing under
the laws of Delaware (the "Company") proposes, subject to the terms and
conditions stated herein, to issue and sell to the underwriters named in
Schedule I hereto (the "Underwriters"), acting severally and not jointly, an
aggregate of 5,000,000 shares (the "Firm Shares") of its common stock, par value
$0.001 per share (the "Common Stock"), and, for the sole purpose of covering
over-allotments in connection with the sale of the Firm Shares, at the option of
the Underwriters, up to an additional 750,000 shares (the "Additional Shares")
of the Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares." The Shares are more fully
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to, and agrees with, the Underwriters that:
<PAGE>
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed an amendment or
amendments thereto, on Form S-1 (No. 333-77269), for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
Regulations is herein called the "462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The prospectus, in the form first filed with the
Commission pursuant to Rule 424(b) of the Regulations or filed as part of the
Registration Statement at the time of effectiveness if no Rule 424(b) or Rule
434 filing is required, is herein called the "Prospectus." The term
"preliminary prospectus" as used herein means a preliminary prospectus as
described in Rule 430 of the Regulations. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any amendment, supplement or term sheet with respect to any of the
foregoing shall be deemed to include the copy of such documents filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR"). Neither the Commission nor the Blue Sky or securities
authority of any state or other jurisdiction has issued a stop order suspending
the effectiveness of the Registration Statement, preventing or suspending the
use of any preliminary prospectus, the Prospectus, the Registration Statement or
any amendment or supplement or term sheet thereto, refusing to permit the
effectiveness of the Registration Statement or suspending the registration or
qualification of the Shares, nor has any of such authorities instituted or
threatened to institute nor, to the Company's knowledge, contemplated
instituting, any proceedings with respect to a stop order.
2
<PAGE>
(b) At the respective time of the effectiveness of the Registration
Statement or any 462(b) Registration Statement or the effectiveness of any post-
effective amendment to the Registration Statement, when the Prospectus is first
filed with the Commission pursuant to Rule 424(b) or Rule 434 of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments and supplements thereto complied or will comply in
all material respects with the applicable provisions of the Act and the
Regulations and do not or will not contain an untrue statement of a material
fact and do not or will not omit to state any material fact required to be
stated therein or necessary in order to make the statements therein (i) in the
case of the Registration Statement, not misleading and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made, not
misleading. When any related preliminary prospectus was first filed with the
Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment or supplement thereto was first filed
with the Commission, such preliminary prospectus and any amendments and
supplements thereto complied in all material respects with the applicable
provisions of the Act and the Regulations and did not contain an untrue
statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not mislead-
ing. In addition, each preliminary prospectus and the Prospectus delivered to
the Underwriters for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or the
Prospectus or any related preliminary prospectus or any amendment or supplement
thereto in reliance upon and in conformity with information furnished in writing
to the Company by
3
<PAGE>
or on behalf of any Underwriter through you as herein stated expressly for use
in connection with the preparation thereof. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectus shall not be
"materially different," as such term is used in Rule 434, from the Prospectus
included in the Registration Statement at the time it became effective.
(c) KPMG LLP and KPMG Deutsche Treuhand-Gesellschaft A.G., who have
certified the financial statements and supporting schedules included in the
Registration Statement, are independent public accountants as required by the
Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, (A) there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole (a "Material Adverse Effect"), including but not limited to
relationships with customers and suppliers of the Company; (B) there have been
no transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with respect
to the Company and its subsidiaries taken as a whole; (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock; and (D) since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by all necessary corporate action, and this
Agreement has been duly and validly executed and
4
<PAGE>
delivered by the Company. Assuming due authorization, execution and delivery by
the Representatives, this Agreement constitutes a valid and binding obligation
of the Company, enforceable in accordance with its terms.
(f) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any debenture, note, contract, indenture,
mortgage, deed of trust, lease, joint venture or other agreement, instrument,
franchise, license or permit to which the Company or any of its subsidiaries is
a party or by which any of their respective properties or assets may be bound,
other than any conflict, breach, default, lien, change or encumbrance which
would not have a Material Adverse Effect, or (ii) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company, or any
of its subsidiaries, or (iii) violate or conflict with any judgment, writ,
decree, order, law, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties, assets or
operations, other than any violation or conflict which would not have a Material
Adverse Effect. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or assets is
necessary or required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby, including
the issuance, sale and delivery of the Shares to be issued, sold and delivered
by the Company hereunder, except the registration under the Act of the Shares
and such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or
5
<PAGE>
Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
(g) All of the outstanding shares of capital stock of the Company are
duly and validly authorized and issued, fully paid and nonassessable, and none
of such shares was issued in violation of or is now subject to any preemptive
rights, co-sale rights, registration rights, rights of first refusal or similar
rights granted by the Company which have not otherwise been waived in writing.
All of the outstanding shares of capital stock and all other outstanding
securities of the Company have been issued in compliance in all material
respects with applicable Federal and state laws. The Shares have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued, delivered and sold in accordance with this Agreement, will be
duly and validly issued and outstanding, fully paid and nonassessable, free and
clear of all liens, encumbrances or claims, will not have been issued in
violation of or be subject to any preemptive rights, co-sale rights,
registration rights, rights of first refusal or similar rights and no holder of
Shares will be subject to personal liability by reason of being such a holder.
The authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus in the column entitled "Actual" under the caption
"Capitalization", and, after giving effect to the offering will be as set forth
in the column entitled "As Adjusted," and the number of authorized, issued and
outstanding options is set forth in the Prospectus under the caption
"Capitalization." Since that date, none of the Company or its subsidiaries have
issued any securities other than (i) Common Stock of the Company pursuant to the
exercise of previously outstanding and privately granted options pursuant to the
RAVISENT 1995 Stock Incentive Plan (the "Plan"), (ii) options granted in the
ordinary course of business pursuant to the Plan, and (iii) non-statutory
options for the purchase of an aggregate of 869,258 shares of Common Stock,
which were not granted pursuant to the Plan. The authorized capital stock of
the Company, including the Common Stock, the Firm Shares and the Additional
Shares, conforms in all material respects to the descriptions thereof contained
in the Registration Statement and the Prospectus and such descriptions conform
to the rights set forth in the instruments
6
<PAGE>
defining the same. Except as disclosed in the Registration Statement and the
Prospectus, there are no outstanding shares of capital stock, options, warrants
or other securities or other rights calling for the issuance of, and no
commitments, obligations, plans or arrangements to issue, any securities of the
Company or any of its subsidiaries. The outstanding stock options relating to
the Common Stock have been duly authorized and validly issued and each of the
Plan and stock options granted by the Company conform in all material respects
to the descriptions thereof contained in the Registration Statement and the
Prospectus.
(h) Each of the Company and each of its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary, except for those failures to be so qualified or in good
standing which could not in the aggregate have a Material Adverse Effect. All
of the outstanding capital stock of each of the Company's subsidiaries has been
duly authorized and validly issued, is fully paid and nonassessable and is owned
by the Company or a wholly-owned subsidiary of the Company free and clear of any
liens, mortgages, pledges, charges, security interests, claims, encumbrances or
other defects in title whatsoever and none of the outstanding shares of capital
stock of any of the Company's subsidiaries was issued in violation of the
preemptive rights, co-sale rights, registration rights, rights of first refusal
or similar rights, in each case granted by the Company and which have not
otherwise been waived in writing, of any security holder of any such subsidiary
or other party. Except as described in the Prospectus, the Company has no
agreements, commitments, or understandings with respect to acquiring or selling
the business, stock or material assets, except those assets acquired in the
ordinary course of business, of the Company, its subsidiaries or any other
person or entity. The only subsidiaries of the Company are the subsidiaries
listed on Exhibit 21.1 to the Registration Statement. None of the Company nor
any of its subsidiaries owns any capital
7
<PAGE>
stock or any other interest in any other corporation or entity (other than such
subsidiaries).
(i) Each of the Company and its subsidiaries has all requisite
corporate power and corporate authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
(collectively, "Governmental Licenses") of and from all appropriate Federal,
state, local or foreign public, regulatory or governmental agencies and bodies,
to own, lease and operate its properties and conduct its business as now being
conducted, or as presently proposed to be conducted, and as described in the
Registration Statement and the Prospectus, except for such Governmental
Licenses, the absence of which would not have a Material Adverse Effect. Each
such Governmental License is valid and in full force and effect, the Company and
its subsidiaries are in material compliance with the terms and conditions of all
such Governmental Licenses, and no such Governmental License contains a
materially burdensome restriction not disclosed in the Registration Statement
and the Prospectus, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such Governmental Licenses.
(j) Neither the Company nor any of its subsidiaries is (i) in
violation of any provision of its charter or by-laws, as the case may be, or in
breach of any of the terms or provisions of or in default (or would be in
default with notice or lapse of time, or both) under any debenture, note,
contract, indenture, mortgage, deed of trust, lease, joint venture or other
agreement, instrument, franchise, license or permit to which the Company or any
of its subsidiaries is a party or by which any of their respective properties,
assets or operations may be bound, which breach, violation, default or defaults
could have, individually or in the aggregate, a Material Adverse Effect, or (ii)
in violation of any judgment, writ, decree, order, law, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or operations, the violation of which could have,
8
<PAGE>
individually or in the aggregate, a Material Adverse Effect.
(k) Except as described in the Registration Statement and the
Prospectus, there is no litigation, action, suit, proceeding, inquiry or
governmental proceeding or investigation to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of its
subsidiaries is subject that would otherwise be required to be described therein
or which is pending or, to the knowledge of the Company, threatened or
contemplated against the Company or any of its subsidiaries.
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and the results of their operations,
stockholders' equity and cash flows for the periods specified; said financial
statements have been prepared in conformity in all material respects with
generally accepted accounting principles ("GAAP") applied on a consistent basis
through the periods involved (except, with respect to the quarterly and interim
financial statements included in the Registration Statement and the Prospectus,
to the extent such financial statements are subject to normal and recurring
year-end adjustments); the supporting schedules included in the Registration
Statement present fairly in all material respects the information required to be
stated therein; and the selected consolidated financial data, the summary
consolidated financial information, pro forma financial information, and the
capitalization information included in the Registration Statement and the
Prospectus present fairly in all material respects in accordance with GAAP and
the Regulations the information shown therein and have been compiled on a basis
consistent with that of the financial statements included in the Registration
Statement and the Prospectus. No financial statements are required to be
included in the Registration Statement that have not been so included.
(m) All material Federal, state and local tax returns required to be
filed by the Company and its subsidiaries have been filed and all such
9
<PAGE>
returns are true, complete, and correct in all material respects. All material
taxes that are due or claimed to be due from the Company and its subsidiaries
have been paid other than those (i) currently payable without penalty or
interest or (ii) being contested in good faith and by appropriate proceedings
and for which adequate reserves have been established in accordance with GAAP.
Except as disclosed in the Registration Statement and the Prospectus, there is
no tax deficiency that has been, or may reasonably be expected to be, asserted
against the Company or any of its subsidiaries, other than any tax deficiency
that would not have a Material Adverse Effect.
(n) Either the Company or its subsidiaries maintains insurance with
insurers of recognized financial responsibility of the types and in the amounts
purchased by similarly situated companies, including, without limitation,
insurance coverage for real and personal property owned or leased by them
against theft, damage, destruction, acts of vandalism, and all other material
risks customarily insured against by similarly situated companies, all of which
insurance is in full force and effect. Neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
respective business. The officers and directors of the Company are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary for officers and directors
liability insurance of a public company and as would cover claims which could be
made in connection with the issuance of the Shares; and the Company has no
reason to believe that it will not be able to renew its existing directors and
officers liability insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to cover its
officers and directors.
(o) Each of the Company and its subsid iaries has good and
marketable title to all personal property and assets owned by it, free and clear
of all mortgages, pledges, security interests, claims, restrictions, liens,
encumbrances and defects, except as
10
<PAGE>
do not, individually or in the aggregate, interfere in any material respect with
the use made or proposed to be made of such property by the Company or its sub
sidiaries, as the case may be. Any real property and buildings held under lease
by the Company or any of its subsidiaries are held under valid, existing and
enforce able leases in full force and effect with such excep tions as are not
material and which do not interfere in any material respect with the use made or
proposed to be made of such property and buildings by the Company or its
subsidiaries, as the case may be, and neither the Company or any of its
subsidiaries has any notice of any claims of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any such
leases.
(p) Except as described in the Registration Statement and the
Prospectus, either the Company or its subsidiaries owns or possesses legal and
valid rights to use all patents, inventions, copyrights, software, databases,
know-how, Internet domain names, trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures,
trademarks, service marks, trade names, rights of publicity pertaining to the
name, likeness, voice, signatures, and/or biographical information of real
persons and other intellectual property (collec tively, "Intellectual
Property") necessary to carry on the business of the Company and its
subsidiaries taken as a whole as currently conducted, and as presently proposed
to be conducted and described in the Prospectus, free and clear of all liens,
claims and encumbrances, subject to such exceptions as would not have a Material
Adverse Effect. Except as described in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has received any
notice or is otherwise aware of (i) any claim, action or demand of any person in
the United States or elsewhere or any proceeding in the United States or
elsewhere, pending or threatened, that (A) challenges the ownership of the
Company or any of its subsidiaries in or its right to use any Intellectual
Property, or (B) alleges that any product or service of the Company or any of
its subsidiaries infringes or misappropriates the Intellec tual Property rights
of others or constitutes unfair competition, or (ii) any facts or circumstances
that would render any Intellectual Property owned or used by
11
<PAGE>
the Company or any Intellectual Property license agreement to which the Company
or any of its subsidiaries is a party, invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein or thereunder,
subject to such exceptions as would not, individually or in the aggregate, have
a Material Adverse Effect. The Company has taken reasonable steps to protect,
maintain and safeguard its rights in all material Intellectual Property owned or
used by the Company or its subsidiaries and to maintain the secrecy of all such
Intellectual Property as to which improper or unauthorized disclosure would
impair its value or validity, including the execution of appropriate
nondisclosure and confidentiality agreements.
(q) No relationship, direct or indirect, exists between or among the
Company or any of its affiliates, on the one hand, and the directors, offi
cers, stockholders, customers or suppliers of the Compa ny or any of its
subsidiaries, on the other hand, that is required by the Act to be described in
the Registra tion Statement and the Prospectus that is not so described.
Except as disclosed in the Registration Statement and the Prospectus, there are
no outstanding loans, advances, or guarantees or indebtedness by the Company to
or for the benefit of any of the executive officers or directors of the Company
or any of the members of the families of any of them that are required to be
described in the Registration Statement.
(r) The Shares have been duly authorized for listing on the Nasdaq
National Market, subject to official notice of issuance.
(s) Except for rights that have been waived in writing, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby.
(t) The Company is not, and upon consummation of the transactions
contemplated hereby and the application of the net proceeds of the offering of
the Shares as described in the Prospectus will not be, subject to registration
as an "investment company" or an
12
<PAGE>
entity "controlled" by an "investment company" under the Investment Company Act
of 1940, as amended.
(u) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its or any subsidiary's principal suppliers, manufacturers,
customers or contractors that are likely, individually or in the aggregate, to
have a Material Adverse Effect.
(v) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required. The
descriptions of contracts in the Registration Statement and the Prospectus are
accurate and complete in all material respects to the extent they are so
described; except as described therein, all contracts described in the
Registration Statement and the Prospectus are valid, binding and enforceable and
are in full force and effect, and neither the Company nor any of its
subsidiaries or, to the Company's knowledge, any other party is in breach of or
default under any provisions of such contracts, except for any such breach or
default which would not have a Material Adverse Effect. Neither the Company nor
its subsidiaries has experienced a material adverse change in its business
relationships with its material suppliers.
(w) Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Securities Act of 1974, as amended ("ERISA"),
that is maintained, administered or contributed to by the Company or any of its
subsidiaries for employees or former employees of the Company or any of its
subsidiaries has been maintained in compliance in all material respects with its
respective terms and the requirements of any applicable statutes, order, rules
and regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"). To the Company's knowledge, no
prohibited transaction, within the meaning of Section 406 of ERISA or Section
4975 of the Code, has occurred with respect to any such plan, excluding
transactions effected
13
<PAGE>
pursuant to a statutory or administrative exemption. For each such plan that is
subject to the funding rules of Section 412 of the Code or Section 302 of ERISA,
no "accumulated funding deficiency", as defined in Section 412 of the Code, has
been incurred, whether or not waived, and the fair market value of the assets of
each such plan (excluding for these purposes accrued but unpaid contributions)
exceeded the present value of all benefits accrued under such plan determined
using reasonable actuarial assumptions. The description of the Company's Plan
and the options or other rights granted and exercised thereunder set forth in
the Registration Statement and the Prospectus accurately and fairly describe, in
all material respects, the information required to be shown with respect to such
Plan, options and rights.
(x) Either the Company or its subsidiaries maintains a system of
internal accounting controls that are sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) The statistical and market-related data included in the
Registration Statement and the Prospectus are derived from sources which the
Company reasonably and in good faith believes to be accurate, reasonable and
reliable, and such data agrees with the sources from which they were derived.
(z) The Company has not at any time during the last five (5) years in
any jurisdiction (i) made any unlawful contribution to any candidate for office,
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any governmental officer or official, or other person charged
with similar public or quasi-public duties,
14
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other than payments required or permitted by the laws of the United States.
Any certificate signed by any director or officer of the Company or
any of its subsidiaries addressed to the Representatives or addressed to the
Underwriters' Counsel (as herein defined), or which is specifically mentioned or
described in this Agreement, shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Shares.
------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $[ ], the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the offices of Brobeck, Phleger & Harrison
LLP ("Company Counsel"), Two Embarcadero Place, 2200 Geng Road, Palo Alto,
California 94303, or at such other place as shall be agreed upon by you and the
Company, at 7:00 A.M. on the third or fourth Business Day (as permitted under
Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the
provisions of Section 9 hereof) following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule 430A of
the Regulations, the third or fourth business day (as permitted under Rule 15c6-
1 under the Exchange Act) after the determination of the initial public offering
price of the Shares), or such other time not later than ten Business Days (as
hereinafter defined) after such date as shall be agreed upon by you and the
Company (such time and date of payment and delivery being herein called the
"Closing Date"). It is understood that each Underwriter has authorized you for
its account, to
15
<PAGE>
accept delivery of, receipt for, and make payment of the purchase price for, the
Firm Shares and the Additional Shares, if any, which it has agreed to purchase.
As used herein, the term "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks are authorized or required to be
closed in California. Payment shall be made to the Company by wire transfer in
same day funds, against delivery to you for the respective accounts of the
Underwriters of certificates for the Firm Shares to be purchased by them.
Certificates for the Firm Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two full
Business Days prior to the Closing Date. The Company will permit you to examine
and package such certificates for delivery at least one full Business Day prior
to the Closing Date.
(c) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants to the Underwriters the
option to purchase, severally and not jointly, up to 750,000 Additional Shares
at the same purchase price per share to be paid by the Underwriters to the
Company for the Firm Shares as set forth in this Section 2, for the purpose of
covering over-allotments, if any, in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, or from time to time,
in whole or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by you to the Company. Such notice shall set forth
the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
-------- -------
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full Business Day after the date on which the option shall have
been exercised nor later than the eighth full Business Day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
16
<PAGE>
authorized denominations as you may request in writing at least two full
Business Days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full Business
Day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total number of Firm Shares subject, however,
to such adjustments to eliminate any fractional shares as you in your sole
discretion shall make.
Payment of the purchase price for the Additional Shares shall be made
to the Company by wire transfer in same day funds to such account as specified
by the Company to the Representatives in writing at least two full Business Days
prior to the Additional Closing Date against delivery to you of the certificates
for the Additional Shares to you for the respective accounts of the
Underwriters.
3. Offering. Upon your delivery of the Firm Shares, the Underwriters
--------
propose to offer the Shares for sale to the public upon the terms set forth in
the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its reasonable best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to and in
compliance with Rule 424(b) or Rule 434 within the prescribed time period and
will provide evidence satisfactory to you of such timely filing. If, with your
consent, the Company elects to rely on Rule 434, the Company will prepare and
file a
17
<PAGE>
term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or any order preventing or suspending the use of any
preliminary prospectus, or of the initiation, or the threatening, of any
proceedings with respect to any of the foregoing, (v) of the receipt of any
comments from the Commission, and (vi) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the Shares
for sale in any jurisdiction or the initiation or threatening of any proceeding
for that purpose. If the Commission shall propose or enter a stop order at any
time, the Company will make every reasonable effort to prevent the issuance of
any such stop order and, if issued, to obtain the lifting of such order as soon
as possible. The Company will not file any amendment to the Registration
Statement, make any filing under Rule 462(b) of the Regulations, or file any
amendment of or supplement to the Prospectus (including the prospectus required
to be filed pursuant to Rule 424(b)or Rule 434 of the Regulations) before or
after the effective date of the Registration Statement to which you shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
(b) The Company will comply in all material respects with the Act and
the Regulations so as to permit the completion of the distribution of the Shares
as contemplated in this Agreement and the Prospectus. If at any time when a
prospectus relating to the Shares is required to be delivered under the Act any
event shall have occurred or a condition shall exist as a result of which the
Prospectus as then amended or supplemented would, in the judgment of the
Underwriters
18
<PAGE>
or the Company, include an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and substance
reasonably satisfactory to you) which will correct such statement or omission
and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible, and the Company will furnish
to the Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(c) The Company will promptly deliver to you four conformed copies of
the Registration Statement, including exhibits and all amendments thereto, and
conformed copies of all consents, and will maintain in the Company's files
signed copies of such documents for at least five years from the date of filing,
and the Company will promptly deliver to each of the Underwriters, without
charge, during the period when the Prospectus is required to be delivered under
the Act, such number of copies of any preliminary prospectus, the Prospectus,
the Registration Statement, and all amendments of and supplements to such
documents, if any, as you may reasonably request, and the Company hereby
consents to the use of such copies for purposes permitted by the Act. The
copies of the Registration Statement and Prospectus and each amendment thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions, domestic or foreign,
as you may designate and to maintain such qualification in effect for so long as
required for the distribution
19
<PAGE>
thereof; except that in no event shall the Company be obligated in connection
therewith to (i) qualify as a foreign corporation, (ii) take any action which
would result in its being subject to jurisdiction, or (iii) execute a general
consent to service of process, in each case in any jurisdiction where it is not
so qualified or subject.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus,
each of the Company and its subsidiaries will not directly or indirectly,
without the prior written consent of Bear, Stearns & Co. Inc., (which consent
may be withheld at the sole discretion of Bear, Stearns & Co. Inc.), directly or
indirectly (i) issue, offer to sell, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock, or any securities convertible
into or exchangeable or exercisable for such Common Stock or any other
securities of the Company or its subsidiaries, whether now owned or hereafter
acquired by such person or with respect to which such person has or hereafter
acquires the power of disposition; or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock or
convertible into or exchangeable for Common Stock whether any such swap
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise (other than as contemplated by this Agreement with respect to
the Shares); provided, however, that, notwithstanding the foregoing, the Company
-------- -------
may issue shares of its Common Stock or options to purchase its Common Stock
upon exercise of options pursuant to any stock option plan, warrants, stock
bonus or other stock plan or arrangement described in the Prospectus, in each
20
<PAGE>
case in the ordinary course of business; provided, that any such shares which
are issued or options which vest during the period of 180 days from the date of
the Prospectus shall be subject to the restrictions set forth above in this
Section 4(f), and, in connection therewith, the Company shall cause any holder
of such shares or vested options to execute an appropriate Lock-Up Agreement
containing such provisions.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission on a
non-confidential basis or any national securities exchange. The Company, during
the period when the Prospectuses are required to be delivered under the Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act (including any
extensions of time obtained thereunder) and the rules and regulations of the
Commission thereunder.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus and file with the
Commission such reports and report such use of proceeds as may be required
pursuant to Rule 463 of the Regulations.
(i) The Company will use its best efforts to cause the Shares to
be listed on the Nasdaq National Market.
(j) The Company will use its reasonable best efforts to do and
perform all things required or necessary to be done and performed under this
Agreement by the Company prior to or after the Closing Date or any Additional
Closing Date, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
Bear Stearns & Co. Inc., on behalf of the several Underwriters, may
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance; provided, however,
-------- -------
that any such waiver or
21
<PAGE>
extension shall be effective only in the specific instance and for the specific
purpose for which given, and shall not affect in any manner future compliance
with or timely performance of such covenants by the Company.
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
financial statements and exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel and
advisors), the underwriting documents (including this Agreement and the
Agreement Among Underwriters) all other documents related to the public offering
of the Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes or duties payable in
connection with the transfer and delivery of the Shares to the Underwriters,
(iii) the qualification of the Shares under state or foreign securities or Blue
Sky laws, including, if applicable, the costs of printing and mailing a
preliminary and final "Blue Sky Survey" and any supplements thereto and the
filing fees and reasonable fees of the Underwriters' Counsel, and such counsel's
reasonable disbursements in relation thereto, (iv) listing the Shares on the
Nasdaq National Market, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc. and the reasonable fees and
disbursements of the Underwriters' Counsel in connection with the review by the
NASD of the terms of the sale of the Shares, (vi) the cost of preparing,
printing, and delivering certificates representing the Shares, and (vii) the
fees and expenses of any transfer agent or registrar. Notwithstanding the
foregoing, the Company shall not be obligated to pay any of the following
expenses in connection with the transactions contemplated hereby (except as
provided in Section 11(d) or elsewhere herein): (A) any transfer or other taxes
or duties payable in connection with any
22
<PAGE>
subsequent transfers of the Shares from the Underwriters to third parties, (B)
except for fees of the Underwriters' Counsel in connection with Blue Sky and
NASD matters as ser forth in clauses (iii) and (v) above, the fees and expenses
of the Underwriters' Counsel, and (C) any advertising expenses of the
Underwriters in connection with the transactions contemplated hereby.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to (i) the accuracy in all material
respects of the representations and warranties of the Company herein contained,
as of the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), (ii) the
absence from any certificates, opinions, written statements or letters furnished
to you or to Underwriters' Counsel pursuant to this Section 6 of any material
misstatement or material omission, (iii) the material performance by the Company
of its covenants and other obligations hereunder, and (iv) the following
additional conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective and all necessary approvals
of the Nasdaq National Market shall have been received not later than 5:30 P.M.,
New York time, on the date of this Agreement, or at such later time and date as
shall have been consented to in writing by you; if the Company shall have
elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus
shall have been filed with the Commission in a timely fashion in accordance with
Section 4(a) hereof; and at or prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereof shall have been issued and no proceedings therefor shall have
been initiated or threatened by the Commission or any state securities authority
and any request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of the Underwriters.
23
<PAGE>
(b) At the Closing Date, you shall have received an opinion of Company
Counsel, and [ ], patent counsel to the Company dated the Closing Date,
addressed to the Underwriters and in form and substance reasonably satisfactory
to Underwriters' Counsel, substantially in the forms of Exhibit A and Exhibit B,
attached hereto respectively, subject to customary assumptions, qualifications,
limitations and exceptions.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date in customary form and covering such
matters as you may reasonably request, and the Company shall have furnished to
Underwriters' Counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters. In giving such opinion
Underwriters' Counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of California, the Federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Representative. Underwriters'
Counsel may also state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public officials.
(d) At the Closing Date you shall have received a certificate of each
of the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) the conditions set forth in subsection
(a) of this Section 6 have been satisfied, (ii) as of the date hereof and as of
the Closing Date, the representations and warranties of the Company set forth in
Section 1 hereof are accurate in all material respects, (iii) as of the Closing
Date, the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed in all material respects, and (iv) subsequent
to the respective dates as of which information is given in the Registration
Statement and the Prospectus, the Company and its subsidiaries have not
sustained any material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from
24
<PAGE>
any labor dispute or any legal or governmental proceeding, and there has not
been any material adverse change, or any development involving a material
adverse change, in the business prospects, properties, operations, condition
(financial or otherwise), or results of operations of the Company and its
subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter from KPMG LLP, independent public accountants
for the Company, dated, respectively, as of the date of this Agreement and as of
the Closing Date addressed to the Underwriters and in form and substance
reasonably satisfactory to you, stating that, among other things: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations and stating that the information provided
in response to Item 10 of the Registration Statement is correct insofar as it
relates to them; (ii) in their opinion, the consolidated financial statements
and schedule of the Company included in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable published rules and regulations of the Commission thereunder; (iii)
on the basis of procedures consisting of a reading of the latest available
unaudited interim consolidated financial statements of the Company and its
subsidiaries, a reading of the minutes of meetings and consents of the
stockholders and boards of directors of the Company and its subsidiaries and the
committees of such boards subsequent to December 31, 1998, inquiries of officers
and other employees of the Company and its subsidiaries who have responsibility
for financial and accounting matters of the Company and its subsidiaries with
respect to transactions and events subsequent to December 31, 1998, a review of
interim financial information for the three months ended March 31, 1999 in
accordance with the standards established by the American Institute of Certified
Public Accountants in Statement of Auditing Standards No. 71, Interim Financial
Information with respect to the three-month period ended March 31, 1999 and
other specified procedures and inquiries to a date not more than five days prior
to the
25
<PAGE>
date of such letter, nothing has come to their attention that would cause
them to believe that: (A) the unaudited consolidated financial statements and
schedule of the Company presented in the Registration Statement and the
Prospectus, including the quarterly information set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," do not comply as to form in all material respects with the
applicable accounting requirements of the Act and, if applicable, the Exchange
Act and the applicable published rules and regulations of the Commission
thereunder or that such unaudited consolidated financial statements are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
consolidated financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to March 31, 1999, there
were, as of the date of the most recently available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and as of a
specified date not more than five days prior to the date of such letter, any
changes in the capital stock or long-term indebtedness of the Company or any
decrease in the net current assets or stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for changes
or decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur or which are set forth in such letter, and except for any
option or warrant exercises in the ordinary course of business, or (C) that
during the period from April 1, 1999 to the date of the most recent available
monthly consolidated financial statements of the Company and its subsidiaries,
if any, and to a specified date not more than five days prior to the date of
such letter, there was any decrease, as compared with the corresponding period
in the prior fiscal year, in total revenues, or total or per share net income,
except for decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; and
(iv) they have compared specific dollar amounts, numbers of shares, percentages
of revenues and earnings, and other financial information pertaining to the
Company and its subsidiaries set forth in the Registration Statement and the
Prospectus, which have been specified by you prior to
26
<PAGE>
the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company and its subsidiaries or from schedules
furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries, and other appropriate procedures specified by
you set forth in such letter, and found them to be in agreement.
(f) Subject to the final paragraph contained in Section 1 of this
Agreement, prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you or Underwriters'
Counsel may reasonably request (not involving any additional representations,
warranties or covenants).
(g) At the Closing Date, the Shares shall have been duly authorized
for listing on the Nasdaq National Market, subject to official notice of
issuance.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date, and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, facsimile, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company hereby agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the
27
<PAGE>
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any
and all losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to reasonable attorneys' fees and any and all
reasonable expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim or inquiry
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act, the common law, state law or otherwise, insofar
as such losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of, relate to or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus or in any supplement thereto or amendment thereof or the omission
or alleged omission to state therein a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the Company will not be liable in
-------- -------
any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of, relates to or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission: (i) made in any preliminary prospectus or the Prospectus or in any
supplement thereto or amendment thereof in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any Underwriter
expressly for use therein, or (ii) made in any preliminary prospectus (which
untrue statement or alleged untrue statement or omission or alleged omission was
corrected in the Prospectus or in any supplement thereto or amendment thereof),
to the extent that (A) the Company previously furnished copies of the Prospectus
and any supplements thereto or amendments thereof on a timely basis to the
Underwriters, and (B) a prospectus relating to such Shares was required to be
delivered by the Underwriters to the purchaser of such Shares under the Act, and
any such loss, liability, claim, damage or expense resulted from the fact that
28
<PAGE>
there was not sent or given to the purchaser in question, at or prior to the
written confirmation of the sale of such Shares to such person, a copy of the
Prospectus and any supplements thereto or amendments thereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to reasonable attorneys' fees and any and all reasonable expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act,
the common law, state law or otherwise, insofar as such losses, liabilities,
claims, damages or expenses (or actions in respect thereof) arise out of, relate
to or are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading; or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus or in any supplement
thereto or amendment thereof or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; in each
case to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of, relates to or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter expressly for use
therein; provided, however, that in no
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29
<PAGE>
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and the third, fifth, sixth and eleventh paragraphs set forth under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for use in the
Registration Statement or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement of such action
(but the failure so to notify an indemnifying party shall not relieve it from
any liability which it may have under this Section 7). In case any such action
is brought against any indemnified party, and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or
30
<PAGE>
them which are different from or additional to those available to one or all of
the indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of counsel
shall be borne by the indemnifying parties; provided, that the indemnifying
--------
parties shall only be obligated to pay the fees and expenses of one such counsel
for the benefit of the indemnified party or parties. The indemnifying party
shall indemnify and hold harmless the indemnified party from and against any and
all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent, or (ii) effected
without its written consent if the settlement is entered into more than twenty
Business Days after the indemnifying party shall have received a request from
the indemnified party for reimbursement for the fees and expenses of counsel (in
any case where such fees and expenses are at the expense of the indemnifying
party) and, prior to the date of such settlement, the indemnifying party shall
have failed to comply with such reimbursement request. No indemnifying party
shall be liable to an indemnified party for any settlement of any action or
claim by the indemnified party without the written consent of the indemnifying
party, which consent shall not be unreasonably withheld.
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company, on
the one hand, and the Underwriters, on the other, shall contribute to the
aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
reasonable legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting in the case of losses, claims, damages, liabilities and
expenses suffered by the Company, any contribution received by the Company from
persons, other than the Underwriters, who may also be liable for contribution,
including persons who control
31
<PAGE>
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company and one or more of
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
Underwriters, on the other, from the offering of the Shares or, if such
allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as (x)
the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, on the one hand, and of the
Underwriters, on the other, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. Notwithstanding the
provisions of this Section 8, (i) in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of
32
<PAGE>
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding the provisions of this Section 8
and the preceding sentence, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties,
notify each party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, as the case may be, the Firm Shares or Additional Shares
to which the default
33
<PAGE>
relates shall be purchased by the non-defaulting Underwriters in proportion to
the respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of Firm
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
total number of Firm Shares or Additional Shares, as the case may be, you may in
your discretion arrange for yourself or for another party or parties (including
any non-defaulting Underwriter or Underwriters who so agree) to purchase such
Firm Shares or Additional Shares, as the case may be, to which such default
relates on the terms contained herein. In the event that within 5 calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company (except in each case as provided in Section
5, 7(a) and 8 hereof) or the Underwriters, but nothing in this Agreement shall
relieve a defaulting Underwriter or Underwriters of its or their liability, if
any, to the other Underwriters and the Company for damages occasioned by its or
their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
such default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period not exceeding five Business Days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with
34
<PAGE>
like effect as if it had originally been a party to this Agreement with respect
to such Firm Shares and Additional Shares, as the case may be.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5
hereof, the indemnity agreements contained in Section 7 hereof and the
contribution agreements contained in Section 8 hereof, and in certificates of
directors or officers of the Company provided pursuant hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company or any of its officers and directors or any controlling
person thereof and shall survive delivery of and payment for the Shares to and
by the Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 5, 7, 8, 10 and 11(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Section 9 or 11
hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective upon the later of: (i)
such time as you and the Company shall have received notification of the
effectiveness of the Registration Statement, and (ii) the execution of this
Agreement; provided, however, that if either the initial public offering or the
-------- -------
purchase price per Share has not been agreed upon prior to 5:00 P.M., New York
City time, on the fifth full business day after the Registration Statement shall
have been declared effective, this Agreement shall thereupon terminate without
liability to the Company or the Underwriters except as herein expressly
provided. Until this Agreement becomes effective as aforesaid, it may be
terminated by the Company by notifying you or by you notifying the Company.
Notwithstanding the foregoing, the provisions of this Section 11 and of Sections
1, 5, 7, 8 and 10 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or
35
<PAGE>
the obligations of the Underwriters to purchase the Additional Shares at any
time prior to the Additional Closing Date, as the case may be: (i) if any
domestic or international event or act or occurrence has materially disrupted,
or in your opinion will in the immediate future materially disrupt, the market
for the Company's securities or securities in general; (ii) if trading on the
New York or American Stock Exchanges or the Nasdaq National Market (collectively
the "Exchanges") shall have been suspended, or minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
have been required, on any of the Exchanges by the authorities of such Exchanges
or by order of the Commission or any other governmental authority having
jurisdiction; or (iii) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (iv)(A) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(B) if there shall have been such change in political, financial or economic
conditions, if the effect of any such event in (A) or (B) as in your judgment
makes it impracticable or inadvisable to proceed with the offering, sale and
delivery of the Firm Shares or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, facsimile, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied (other than the condition that the Underwriters receive a legal
opinion from the Underwriters' Counsel) or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or comply
with any provision hereof in any material respect,
36
<PAGE>
the Company will, subject to demand by you, reimburse the Underwriters for all
reasonable out-of-pocket expenses (including the reasonable fees and expenses of
their counsel), incurred by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, sent by facsimile, telex or telegraph
and confirmed in writing by letter, to such Underwriter c/o either Bear, Stearns
& Co. Inc., One Sansome Street, 41/st/ Floor, San Francisco, California 94104,
Attention: [ ], fax no. [ ] (with a copy to Gregory C. Smith, Esq.,
Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220, Palo
Alto, California, 94301, fax no. (650) 470-4570); if sent to the Company, shall
be mailed, delivered, or sent by facsimile, telex or telegraph and confirmed in
a letter to the Company, RAVISENT Technologies Inc., One Great Valley Parkway,
Malvern, Pennsylvania 19355, Attention: Francis E.J. Wilde III, fax no. (610)
695-8503, with a copy to Warren T. Lazarow, Esq. and David A. Makarechian, Esq.,
Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo
Alto, California 94303, fax no. (650)496-2885.
13. Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Sections 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision contained herein.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of any Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall
37
<PAGE>
be an original and all of which together shall constitute one and the same
instrument.
38
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
RAVISENT TECHNOLOGIES INC.
By:
Name:
-------------------------------
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
By:
---------------------------------------
Name:
Title:
On behalf of itself and the other
Underwriters named in Schedule I hereto.
39
<PAGE>
SCHEDULE I
Number of Firm
Name of Underwriter Shares to be Purchased
- ----------------------------------------------------------------
Bear, Stearns & Co. Inc.................
SG Cowen Securities Corporation.........
Volpe Brown Whelan & Company............
Total. . . . . . . . __________
40
<PAGE>
EXHIBIT A
---------
(1) The Company (i) is duly incorporated and is validly existing and
in good standing under the laws of the State of Delaware; (ii) has the
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement; and
(iii) is duly qualified to transact business and is in good standing in the
Commonwealth of Pennsylvania and the State of California;
(2) Each of the Subsidiaries (i) is duly incorporated and validly
existing and in good standing under the laws of their respective
jurisdiction of incorporation; (ii) has the corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement; and (iii) is duly qualified to
transact business and in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not reasonably
be expected to have a material adverse effect on the business, properties,
operations, financial condition or results of operations of the Company and
the Subsidiaries, taken as a whole;
(3) The authorized and outstanding capital stock of the Company as of
March 31, 1999 is as set forth under the heading "Actual" under the caption
"Capitalization" in the Prospectus, the authorized, issued and outstanding
capital stock of the Company as of the date hereof and prior to the
issuance of the Shares is ____________ and ____________, respectively, to
our knowledge, except as described in the Registration Statement and the
Prospectus, there are no outstanding securities of the Company convertible
or exchangeable into, or evidencing the right to purchase or subscribe for,
any shares of capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of a similar character obligating
the Company to issue any shares of its capital stock or any securities
convertible or exchangeable into, or evidencing the right to purchase or
subscribe for, any shares of such stock;
(4) To our knowledge, since March 31, 1999, the Company has not
issued any securities other than: (i) Common Stock of the Company issued
pursuant to the exercise of outstanding options for the purchase thereof
which are reflected in the notes set forth under the caption
"Capitalization" in the Prospectus; (ii) Common Stock of the Company issued
pursuant to previously outstanding warrants for the purchase thereof which
are reflected in the notes set forth under the caption "Capitalization" in
the Prospectus; (iii) Series A Preferred Stock of the Company issued
pursuant to the exercise of previously outstanding warrants in favor of
NEPA Venture Fund II, L.P. and any Common Stock of the Company issued
pursuant to the conversion of such shares; (iv) Series B Preferred Stock of
the Company issued pursuant to an agreement with ATI Technologies, Inc.
which is reflected under the heading "Agreement with ATI Technologies Inc."
under the caption "Certain Transactions" in the Prospectus and any Common
Stock of the Company issued pursuant to the conversion of such shares; (v)
Series C Preferred Stock of the Company issued pursuant to the conversion
of certain Convertible Promissory Notes sold to Intel Corporation pursuant
to a Convertible Promissory Note Purchase Agreement filed as Exhibit 4.14
to the Registration Statement and any Common Stock of the Company issued
pursuant to the conversion of such
<PAGE>
shares; and (vi) Common Stock of the Company issued pursuant to the
conversion of any previously outstanding preferred stock of the Company
which is reflected under the caption "Capitalization" in the Prospectus.
(5) All of the outstanding shares of capital stock of the
Subsidiaries of the Company have been duly authorized and validly issued,
are non-assessable, were not issued in violation of any preemptive rights,
co-sale rights, rights of first refusal or similar rights of any security
holder of the Company or any such Subsidiary or other party, except for
such violations that have been waived in writing, and, to our knowledge,
are fully paid and owned by the Company or another Subsidiary.
(6) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares have been duly authorized, validly issued,
are non-assessable and, to our knowledge, fully paid, and were not issued
in violation of any preemptive rights, co-sale rights, rights of first
refusal or similar rights or any security holder of the Company or other
party, except for such violations that have been waived.
(7) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid
and nonassessable and free of (A) all liens, encumbrances or claims created
or imposed by the Company; (B) any preemptive rights arising under the
Company Certificate or the Delaware General Corporation Law or (C) any
other co-sale rights, registration rights, rights of first refusal or other
similar rights that entitle or will entitle any person to acquire any
shares of capital stock of the Company upon the issuance and sale of the
Shares by the Company;
(8) The form of certificate for the Shares conforms in all material
respects to the requirements of the Delaware General Corporation Law, any
applicable requirements of the Company Certificate of Incorporation and the
Company Bylaws and the requirements of the Nasdaq National Market;
(9) The Registration Statement and all post-effective amendments, if
any, have become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose are pending before or contemplated by
the Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(10) The Shares have been approved for quotation on the Nasdaq National
Market, upon issuance as contemplated by the Underwriting Agreement;
(11) The Company has the corporate power and authority to enter into
the Underwriting Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided in the Underwriting Agreement; and the
Underwriting Agreement has been duly authorized, executed and delivered by
the Company;
(12) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance by the Company of the Underwriting Agreement,
compliance by the Company with the provisions of the Underwriting Agreement
nor consummation by
<PAGE>
the Company of the transactions contemplated by the Underwriting Agreement
(A) violates the Company Certificate or the Company Bylaws or (B)
constitutes a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries
is a party or by which the Company or the Subsidiaries or any of their
respective properties are bound that is an exhibit to the Registration
Statement, or (C) will result in any violation of any existing law,
statute, rule or regulation known to us and applicable to the Company or
the Subsidiaries or their respective properties (other than applicable
state securities and Blue Sky laws or NASD rules, as to which we express no
opinion), or any ruling, judgment, injunction, order or decree known to us
and applicable to the Company or the Subsidiaries or any of their
respective properties, which, in the case of clauses (A), (B) or (C) above,
violation, breach or default would reasonably be expected to have a
material adverse effect on the business, properties, operations, financial
condition or results of operations of the Company and the Subsidiaries,
individually or in the aggregate;
(13) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except (A) as have been obtained under the Securities
Act and the Exchange Act or (B) such as may be required under state
securities or Blue Sky laws or NASD rules governing the purchase and
distribution of the Shares, as to which we express no opinion) for the
execution, delivery and performance of the Underwriting Agreement or the
consummation of the transactions contemplated thereby, including the valid
issuance and sale of the Shares to the Underwriters as contemplated by the
Underwriting Agreement;
(14) To our knowledge, (A) there are no legal or governmental
proceedings pending or threatened in writing against the Company or any of
its Subsidiaries, or to which the Company, any of its Subsidiaries or any
of their respective properties is subject, which are required to be
described in the Registration Statement or the Prospectus (or any amendment
or supplement thereto) that are not so described, and (B) there are no
agreements, contracts, indentures, leases or other instruments that are
required to be described in the Registration Statement or the Prospectus
(or any amendment or supplement thereto) or to be filed as an exhibit to
the Registration Statement that are not so described or filed, as the case
may be;
(15) The statements set forth under the caption "Description of Capital
Stock" in the Prospectus, insofar as such statements purport to summarize
certain provisions of the capital stock of the Company, provide a fair
summary of such provisions; the statements set forth under the captions
"Risk Factors--Our stock price may be affected by shares eligible for
future sale" and "--We have adopted certain anti-takeover provisions;"
"Business --Intellectual Property and Proprietary Rights," "-- Legal
Matters," "Certain Transactions;" "Shares Eligible for Future Sale" in the
Prospectus and, solely to the extent of the discussion of the
classification and committee composition of the Board, "Management,"
insofar as such statements constitute a summary of the legal matters, legal
documents or legal proceedings referred to therein, provide a fair summary
of such legal matters, legal documents and legal proceedings in all
material respects, and all descriptions in the Registration Statement and
the Prospectus
<PAGE>
of contracts and other documents to which the Company or the Subsidiaries
are a party are accurate in all material respects to the extent so
described;
(16) To our knowledge, except as described in the Prospectus, no holder
of any securities of the Company or any other person has the right,
contractual or otherwise, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the Shares or
the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the
filing of the Registration Statement, to require the Company to register
under the Securities Act any shares of Common Stock or other securities of
the Company, and any registration rights in connection with the offering
contemplated hereby have been waived;
(17) Assuming without independent investigation the accuracy,
completeness and fairness of the information set forth in the Registration
Statement, the Registration Statement and the Prospectus (except for the
consolidated financial statements and the notes thereto and the schedules
and other financial and statistical data derived therefrom, as to which we
do not express any opinion) comply as to form in all material respects with
the requirements of the Securities Act and the regulations promulgated
thereunder; and
(18) The execution and delivery of the Delaware Reorganization
Agreement, which effected the reincorporation of Divicore Pennsylvania
under the laws of the State of Delaware, was duly authorized by all
necessary corporate action on the part of each of Divicore Pennsylvania and
the Company. Each of Divicore Pennsylvania and the Company had all
necessary corporate power and authority to execute and deliver the Delaware
Reorganization Agreement, to file the Delaware Reorganization Agreement
with the Secretaries of State of the Commonwealth of Pennsylvania and the
State of Delaware, and to consummate the reincorporation contemplated by
the Delaware Reorganization Agreement. At the time of execution and filing,
the Delaware Reorganization Agreement constituted a valid and binding
obligation of each of Divicore Pennsylvania and the Company, enforceable in
accordance with its terms, except as enforceability may be limited by
general equitable principles, bankruptcy, insolvency, reorganization,
moritorium or other laws affecting creditors' rights generally.
In addition, we participated in conferences with certain directors,
officers and other representatives of the Company, its patent counsel, its
independent public accountants, the Underwriters and the Underwriters' counsel
at which the contents of the Registration Statement, the Prospectus and related
matters were discussed. We are not, however, passing upon, and do not assume
any responsibility for, and we have not independently checked or verified, the
accuracy, completeness or fairness of the information contained in the
Registration Statement and the Prospectus.
We may state, however, that based upon our participation as described
in the preceding paragraph, (i) we confirm that we have no reason to believe
that (other than the consolidated financial statements, including the notes and
schedules thereto, and the other financial and statistical data derived
therefrom, as to which we express no belief), at the time the
<PAGE>
Registration Statement became effective and as of the date hereof, the
Registration Statement contained or contains any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and (ii) we confirm
that we have no reason to believe that (other than the consolidated financial
statements, including the notes and schedules thereto, and the other financial
and statistical data derived therefrom, as to which we express no belief) the
Prospectus, as of the date thereof and on the date hereof, contained or contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
<PAGE>
Exhibit B
1. Except as set forth in the Prospectus, to such counsel's knowledge,
neither the Company nor any of its Subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or proprietary or confidential
information, systems, or procedures), which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse effect on the business, properties, operations, financial
condition or results of operations of the Company and its Subsidiaries, taken as
a whole.
In addition, such counsel shall state that it has participated in
conferences with certain directors, officers and other representatives of the
Company and its counsel at which the contents of the Registration Statement and
Prospectus and related matters were discussed. Such counsel shall state that
they are not, however, passing upon, and do not assume any responsibility for,
and they have not independently checked or verified, the accuracy, completeness
or fairness of the information contained in the Registration Statement and the
Prospectus.
Such counsel shall state, however, that (i) they have no reason to believe
that (other than the consolidated financial statements, including the notes and
schedules thereto, and the other financial and statistical data derived
therefrom, as to which they express no belief) at the time the Registration
Statement became effective and as of the date hereof, the Registration Statement
contained or contains any untrue statement of material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; and (ii) they confirm that they have no
reason to believe that (other than the consolidated financial statements,
including the notes and schedules thereto, and the other financial and
statistical data derived therefrom, as to which they express no belief) the
Prospectus, as of the date thereof and on the date hereof, contained or contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
<PAGE>
EXHIBIT 23.1
When the reverse stock split referred to in Note 19 of the Notes to
Consolidated Financial Statements has been effected, we will be in a position to
render the following report.
KPMG LLP
Consent of Independent Auditors
The Board of Directors RAVISENT Technologies Inc.:
The audits referred to in our report dated April 27, 1999 except as to the
last paragraph of Note 19, which is as of June __, 1999, included the related
consolidated financial statement schedule for each of the years in the three
year period ended December 31, 1998, included in the registration statement.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basis consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
Philadelphia, Pennsylvania
June 15, 1999
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors RAVISENT Technologies Inc.:
We consent to the use of our report dated April 6, 1999, with respect to
the balance sheet of Viona Development Hard & Software Engineering GmbH as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended, which report is included herein
and to the reference to our firm under the heading "Experts" in the prospectus.
KPMG Deutsche Treuhand-Gesellschaft AG
Stuttgart, Germany
June 15, 1999
