<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File number 000-26287
RAVISENT Technologies Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2763854
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Great Valley Parkway
Malvern, Pennsylvania 19355
---------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 700-0362
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ -----
On November 8, 1999, 14,650,429 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
1
<PAGE>
RAVISENT Technologies Inc.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
-------------
<S> <C>
Part I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited)and
December 31, 1998. 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 (unaudited). 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited). 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk 42
Part II: Other Information
Item 1: Legal Proceedings 42
Item 2: Changes in Securities and Use of Proceeds 42
Item 6: Exhibits and Reports on Form 8-K 44
</TABLE>
2
<PAGE>
Item 1: Financial Statements
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $58,665 $ 1,024
Accounts receivable, net of allowance for
doubtful accounts of $353 in 1999 and $265
in 1998............................................ 9,247 11,111
Inventory........................................... 597 1,296
Prepaid expenses.................................... 787 72
Other assets........................................ 53 --
------- -------
Total current assets............................... 69,349 13,503
Furniture and equipment, net......................... 1,221 875
Goodwill and other intangibles, net of
accumulated amortization of $1,364 in 1999 and
$664 in 1998........................................ 3,953 2,881
Loan receivable--officer............................. -- 60
Loan receivable...................................... 1,014 --
Other assets......................................... 13 55
------- -------
Total assets....................................... $75,550 $17,374
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................... $ 2,108 $ 9,916
Accrued expenses and other.......................... 793 1,114
Other current liabilities........................... 1,457 2,560
Current installments of obligations under
capital leases..................................... 7 13
------- -------
Total current liabilities.......................... 4,365 13,603
Subordinated notes payable........................... -- 625
Other long-term liabilities.......................... 772 788
Obligations under capital leases, excluding
current installments................................ 2 5
------- -------
Total liabilities.................................. 5,139 15,021
------- -------
Mandatory redeemable convertible preferred
stock, $ .06 par value in 1998;
31,523,684 shares authorized in 1998
3,913,072 Series B outstanding in 1998;
liquidation preference of
approximately $19,487 at 1998;
net of subscription receivable of $625 for
125,502 shares at 1998.............................. -- 14,589
Stockholders' equity (deficiency)
Preferred stock, $.001 par value, 5,000,000
authorized, none issued or outstanding in 1999.
Common stock, $.001 par value, 50,000,000
shares authorized; 14,839,291 and 3,520,851 shares
issued in 1999 and 1998)............................ 15 3
Additional paid-in capital.......................... 96,781 13,097
Deferred stock compensation......................... (1,814) (749)
Accumulated deficit................................. (23,302) (23,842)
Accumulated other comprehensive income.............. (49) (25)
Treasury stock at cost, 200,000 shares.............. (720) (720)
Note receivable..................................... (500) --
-------- --------
Total stockholders' equity (deficiency)........... 70,411 (12,236)
-------- --------
Total liabilities and stockholders' equity
(deficiency)........................................ $ 75,550 $ 17,374
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
-------------- ---------- ---------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License and services......... $ 4,985 $1,717 $11,113 $ 2,714
Hardware..................... 1,003 8,091 17,288 15,091
------- ------ ------- --------
Total revenues............. 5,988 9,808 28,401 17,805
Cost of revenue............... 1,175 7,413 16,231 14,203
------- ------ ------- --------
Gross profit............... 4,813 2,395 12,170 3,602
Research and
development.................. 1,633 697 4,541 2,139
Sales and marketing........... 1,172 478 3,300 1,419
General and
administrative............... 1,050 1,346 3,189 3,087
Amortization of goodwill 225 269 685 530
Amortization of deferred
stock compensation 135 -- 305 --
Acquired in-process
research and
development.................. -- -- -- 7,900
Total operating ------- ----- ------- --------
expenses.................. 4,215 2,790 12,020 15,075
------- ------ ------- --------
Operating income (loss)...... 598 (395) 150 (11,473)
Interest expense (income),
net......................... (573) 95 (463) 572
------- ------ ------- --------
Income (loss) before income
taxes........................ 1,171 (490) 613 (12,045)
Provision for income
taxes........................ 74 -- 74 --
------- ------ ------- --------
Net income (loss) before
accretion.................... $ 1,097 $ (490) $ 539 $(12,045)
------- ------ ------- --------
Accretion of mandatory
redeemable preferred
stock...................... 94 283 660 471
------- ------ ------- --------
Net income (loss)
attributable to
common stockholders......... $ 1,003 $ (773) $ (121) $(12,516)
======= ====== ======= ========
Basic net income (loss) per
common share................. $ 0.08 $(0.23) $ (0.02) $ (4.50)
======= ====== ======= ========
Diluted net income (loss) per
common share................. $ 0.06 $(0.23) $ (0.02) $ (4.50)
======= ====== ======= ========
Pro forma basic net income
(loss) per share before
accretion..................... $ 0.09 $(0.15) $ 0.09 $ (4.33)
======= ====== ======= ========
Pro forma diluted net income
(loss) per share before
accretion..................... $ 0.07 $(0.15) $ 0.05 $ (4.33)
======= ====== ======= ========
Number of shares used in
calculation of basic net
income (loss) per common
share....................... 12,176 3,321 6,305 2,781
======= ====== ======= ========
Number of shares used in
calculation of diluted net
income (loss) per common
share....................... 15,832 3,321 6,305 2,781
======= ====== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1999 1998
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating
activities:
Net income(loss)................ $ 539 $(12,045)
Adjustments to reconcile
net income (loss) to net cash
used in operating activities:
Depreciation and
amortization................. 1,181 720
Non-cash compensation and
other expenses............... 348 --
Acquired in-process research
and development.............. -- 7,900
Changes in items affecting
operations:
Accounts receivable......... 1,864 (6,018)
Inventory................... 699 118
Loan Receivable............. 60 (60)
Prepaid expenses............ (768) 100
Accounts payable............ (7,808) 1,727
Accrued expenses and
other...................... (321) (114)
-------- --------
Net cash used in
operating activities............ (4,206) (7,672)
-------- --------
Cash flows from investing
activities:
Capital expenditures........... (575) (776)
Loan receivable................ (1,014) --
Acquisition, net of cash
acquired...................... -- (3,231)
-------- --------
Net cash used in investing
activities..................... (1,589) (4,007)
-------- --------
Cash flows from financing
activities:
Repayments under capital
lease obligations............. (9) (18)
Secured borrowings repayments... (625) (278)
Note receivable................. (500) --
Proceeds from bridge loans...... -- 3,320
Net proceeds from issuance of
common stock................... 62,052 183
Net proceeds from Series
B and C preferred stock........ 3,661 12,769
Repayments under other
liabilities.................... (1,119) (587)
Repurchase of common stock...... -- (720)
-------- --------
Net cash provided by financing
activities..................... 63,460 14,669
-------- --------
Effect of exchange rate changes
on cash and cash equivalents... (24) (29)
-------- --------
Net increase in cash and
cash equivalents............... 57,641 2,961
-------- --------
Cash and cash equivalents:
Beginning of period............ 1,024 607
-------- --------
End of period................. $ 58,665 $ 3,568
======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period for:
Interest....................... $ 173 $ 600
Noncash investing and
financing activities:
Issuance of warrants in
connection with bank line of
credit and bridge loans....... -- 68
Issuance of options in
connection with equity
transactions and grants
below fair value.............. -- 139
Issuance of common stock
and preferred stock for
consideration of private
placement fees................ -- 542
Amortization of deferred
stock compensation............ 306 --
Bridge loans converted to
Series B preferred stock...... -- 4,820
Issuance of common stock as
consideration for interest.... -- 50
Issuance of Series C preferred
stock as consideration for
intangible assets.............. 1,716 --
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 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.
Initial Public Offering
On July 16, 1999, the Company commenced the Offering and sold an aggregate of
5,750,000 shares (including 750,000 shares subject to the underwriters'
overallotment option) of the Company's Common Stock to the public. All of the
shares of Common Stock sold in the Offering were sold by the Company. Net
proceeds to the Company were $64,170,000, after deducting underwriting discounts
and commissions. The Company used a portion of the net proceeds from the
Offering to invest in short-term interest bearing, investment grade securities
and has used its existing cash balances to fund the general operations of the
Company. The remaining proceeds will be used for general corporate purposes,
including working capital, product development and repayment of certain
indebtedness. A portion of the net proceeds may also be used to acquire or
invest in complementary businesses, products or to obtain the right to use
complementary technologies.
Acquisition
The Company announced that it signed a definitive agreement to acquire all of
the outstanding capital stock of Teknema Inc. See footnote 9 Subsequent
Events - Acquisition.
(b) Unaudited Interim Financial Information
The interim consolidated financial statements of the company for the three and
nine months ended September 30, 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 September 30, 1999, and the results of its operations for the three
and nine months ended September 30, 1998 and 1999, and its cash flows for the
nine months ended September 30, 1998 and 1999. The unaudited condensed
consolidated financial statements included in this Form 10-Q should be read in
conjunction with the audited financial statements and notes thereto, included in
the Company's S-1 Registration Statement which was declared effective by the SEC
on July 15, 1999.
6
<PAGE>
(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.
(d) 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.
(e) Computation of Historical Net Income (Loss) Per Share and Pro Forma Net
Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Dilutive net income
(loss) per share is computed using the weighted average number of common shares
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.
Pro forma net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding including common stock equivalents
from convertible preferred stock (using the if-converted method), which
automatically converted into common stock upon the completion of the IPO as if
converted at the date of issuance, for both basic and diluted net income (loss)
per share, even though inclusion is antidilutive.
The following table sets forth the reconciliation between the weighted average
shares outstanding for basic, diluted and pro forma net income (loss) per share
computations:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
------- ------ ------- --------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding basic 12,176 3,321 6,305 2,781
Effect of dilutive securities 3,656 0 3,544 0
------- ------ ------- --------
Weighted-average shares outstanding diluted 15,832 3,321 9,849 2,781
Effect of convertible preferred stock 851 3,913 2,881 2,193
------- ------ ------- --------
Weighted-average shares outstanding pro forma 16,683 7,234 12,730 4,974
======= ====== ======= ========
The following table sets forth the computation of
the net loss per share:
Basic net income (loss) per share:
Numerator: Net income (loss) to common
Stockholders $ 1,003 $ (773) $ (121) $(12,516)
Denominator: Weighted-average shares
outstanding basic 12,176 3,321 6,305 2,781
------- ------- --------- --------
Basic income net income (loss) per common
share $ .08 $ (.23) $ (.02) $ (4.50)
------- ------- --------- --------
DILUTED NET INCOME (LOSS) PER SHARE:
Numerator: Net income (loss) to common
Stockholders $ 1,003 $ (773) $ (121) $(12,516)
Denominator: Weighted-average shares
outstanding diluted 15,832 3,321 6,305 2,781
------- ------- --------- --------
Diluted net income (loss) per common
share $ .06 $ (.23) $ (.02) $ (4.50)
------- ------- --------- --------
PRO FORMA NET LOSS PER SHARE:
Numerator: Net income (loss) to common
Stockholders $ 1,003 $ (773) $ (121) $(12,516)
Denominator: Weighted-average shares
outstanding diluted 16,683 7,234 12,730 4,974
------- ------- --------- --------
Diluted net income (loss) per common
share $ .06 $ (.11) $ (.01) $ (2.52)
------- ------- --------- --------
</TABLE>
7
<PAGE>
(2) Comprehensive Income
The components of comprehensive income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months Nine months
Ended Ended
September 30, September 30,
---------------- --------------------
1999 1998 1999 1998
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss)...................... $1,097 $(490) $ 539 $(12,045)
Foreign currency translation
adjustment............................ 18 (29) (49) (29)
------ ----- -------- --------
Comprehensive income(loss)........... $1,115 $(519) $ 490 $(12,074)
====== ===== ======== ========
</TABLE>
(3) 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.
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>
8
<PAGE>
(4) Other Liabilities
In connection with the company's acquisition of Viona during 1998 (note 3),
$1.35 million of the purchase price, was recorded at a present value of $1.1
million. The amount was payable in equal annual installments over the next three
years, with the first installment being made during the quarter ending March 31,
1999. As such, $0.4 million of the amount is included in other current
liabilities with the remaining amount included in other long-term liabilities.
(5) Equity Transactions and Capital Stock
Preferred Stock
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 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.
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 has been 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.
(6) Stock Options
In February 1999, the company granted 144,688 options, with an exercise
price of $2.52 per share. The company has recorded $504,000 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. The company has recorded $867,000 of
deferred stock compensation in connection with these options that will be
amortized over the option vesting period.
9
<PAGE>
(7) 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.
The company filed a counter claim to a complaint alleging breach of oral and
written contract from the former supplier, see Part II, legal proceedings for
further discussion.
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.
(8) Reincorporation; Approval of Public Company-Style Charter and Bylaws
In June 1999, the Board of Directors and the shareholders of the Company
authorized the company to reincorporate as a Delaware corporation through the
merger of the company into RAVISENT Technologies Inc., a wholly-owned Delaware
subsidiary. The reincorporation became effective as of June 29, 1999. The
provisions of the company's Delaware certificate of incorporation were identical
to the provisions of the company's Pennsylvania articles of incorporation,
except for certain changes resulting from differences in state law. In
addition, the Delaware corporation qualified to do business as a foreign
corporation in Pennsylvania. The reincorporation also had the effect of
changing the company's name from Divicore Inc. to RAVISENT Technologies Inc.
(9) Subsequent Event-Acquisition
On October 11, 1999 the Company announced that it signed a definitive
agreement to acquire all of the outstanding capital stock of Teknema Inc. for
$2.5 million in cash and approximately 804,000 shares of common stock. Prior
to finalizing the agreement the Company loaned Teknema $1 million at a rate of
10% for three years and has recorded the amount as a loan receivable on the
balance sheet. When including the associated acquisition expenses, the Teknema
acquisition is valued at approximately $16 million. Teknema is an Internet
technology company dedicated to developing software and solutions for the
emerging market for informational appliances. The company sells Internet
television set-top hardware and software technology through intellectual
property licenses and OEM agreements with telecommunication companies and
Internet service providers. Teknema serves the emerging market for information
appliances that connect users to the Internet. The acquisition will be
accounted for as a purchase and the estimated excess of the purchase price over
the fair value of the net assets acquired of approximately $14 million will be
recorded as goodwill and other intangible assets and will be amortized over the
estimated useful lives which are estimated to be approximately 48 months.
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 unaudited
condensed consolidated financial statements and notes thereto included elsewhere
in this report. 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 elsewhere in this report.
10
<PAGE>
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. RAVISENT anticipates that an increasing percentage of revenues,
will be derived from consumer electronics and semiconductor manufacturers.
Approximately $5.0 million or 83% of RAVISENT's third quarter 1999 revenues were
from license and services. Revenues from personal computer and peripheral
manufacturers were derived from Software CineMaster 98 and Hardware CineMaster
98, which were introduced in December 1997. In August 1998, RAVISENT launched
its first software-only solution, Software CineMaster 98, and began to
transition its business model from a direct product sales approach to a license
approach. RAVISENT released the successor product to Software CineMaster 98
during the third quarter of 1999, this product, Software CineMaster 99, has
enhanced features and functionality which enable RAVISENT'S OEM customers to
offer competitive products. As part of its license approach, RAVISENT began
entering into manufacturing and license agreements with third parties under
which RAVISENT will no longer manufacture Hardware CineMaster 98. Once the
transition to a licensing business model is completed, RAVISENT will receive a
per unit license fee on all future sales of Hardware CineMaster 98 and future
versions of the CineMaster product. 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 primarily 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. During the quarter ended September 30, 1999, hardware
revenues included sales of hardware components to semiconductor manufacturers
for the production of consumer electronic products. The amount of revenue
generated by the sale of hardware components during the third quarter of 1999
was approximately $1.0 million. License revenues consist of fees paid on a per
unit basis, or sometimes with new 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
11
<PAGE>
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.
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.
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.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in
RAVISENT's consolidated statements of operations:
12
<PAGE>
Ravisent Technologies
Consolidated Statement of Operations Data
(unaudited)
(in thousands, except per share amounts)
Quarter Ended September 30,
<TABLE>
<CAPTION>
1999 1998
Percent Percent
of of
Amount Revenues Amount Revenues
<S> <C> <C> <C> <C>
Revenues:
License and services........................ $ 4,985 83.3% $1,717 17.5%
Hardware.................................... 1,003 16.7% 8,091 82.5%
------- ------ ------- --------
Total revenues............................ 5,988 100.0% 9,808 100.0%
Cost of revenue.............................. 1,175 19.6% 7,413 75.6%
------- ------ ------- --------
Gross profit.............................. 4,813 80.4% 2,395 24.4%
Research and
development................................. 1,633 27.3% 697 7.1%
Sales and marketing.......................... 1,172 19.6% 478 4.9%
General and
administrative.............................. 1,050 17.5% 1,346 13.7%
Amortization of goodwill 225 3.8% 269 2.7%
Amortization of deferred stock compensation 135 2.2% -- --
Acquired in-process
research and
development................................. -- -- -- --
------- ------ ------- --------
Total operating
expenses................................. 4,215 70.4% 2,790 28.4%
------- ------ ------- --------
Operating income (loss)...................... 598 10.0% (395) (4.0%)
Interest expense (income),
net......................................... (573) 9.6% 95 1.0%
------- ------ ------- --------
Income(loss) before income
taxes....................................... 1,171 19.6% (490) (5.0%)
Provision for income
taxes....................................... 74 1.3% -- --
------- ------ ------- --------
Net income(loss) before
accretion................................... 1,097 18.3% (490) (5.0%)
------- ------ ------- --------
Accretion of mandatory
redeemable preferred
stock..................................... 94 1.6% 283 2.9%
------- ------ ------- --------
Net income(loss)
attributable to
common stockholders........................ $ 1,003 16.7% $ (773) (7.9%)
======= ====== ======= ========
Basic net income(loss)
per common share............................ $ 0.08 $(0.23)
======= ======
Diluted net income(loss)
per common share............................ $ 0.06 $(0.23)
======= ======
Pro forma basic net income
(loss)per common share before
accretion.................................. $ 0.09 $(0.15)
======= ======
Pro forma diluted net income
(loss)per common share before
accretion.................................. $ 0.07 $(0.15)
======= ======
Number of shares used in
calculation of basic
net income(loss)per
common share................................ 12,176 3,321
======= ======
Number of shares used in
calculation of diluted
net income(loss)per
common share................................ 15,832 3,321
======= ======
</TABLE>
13
<PAGE>
Revenues. Total revenues decreased 39% from $9.8 million for the quarter
ended September 30, 1998 to $6.0 million for the quarter ended September 30,
1999. License and services revenue increased 190% to $5.0 million for the
quarter ended September 30, 1999, due primarily to growth in license fees
associated with RAVISENT's Software CineMaster 98 product, introduction of the
CineMaster 99 and increased customization services related to RAVISENT's
consumer electronics business. Software CineMaster 99 was introduced during the
third quarter of 1999. Software CineMaster 98 was introduced during the quarter
ended June 30, 1998. Hardware revenues decreased 88% from $8.1 million for the
quarter ended September 30, 1998 to $1.0 million for the quarter ended September
30, 1999, the decrease was attributable to the company's continued movement
towards the change in business model in which it will license it's software and
its hardware designs rather than selling finished goods and components and
recording hardware revenue.
RAVISENT's revenues are concentrated among a few customers. In the quarter
ended September 30, 1999, Dell Computer and ATI Technologies accounted for 20.1%
and 15% of RAVISENT's revenues. 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 North America 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.
Cost of Revenues. Cost of revenues consist primarily of costs of hardware
components sold to manufacturing firms, costs associated with shipment of
Software CineMaster 98, CineMaster 99 and license fees paid to third parties for
technologies incorporated into RAVISENT's products, including Dolby Digital
technology. Cost of revenues decreased 84% from $7.4 million for the quarter
ended September 30, 1998 to $1.2 million for the quarter ended September 30,
1999. The decrease in cost of revenues was primarily due to the composition of
revenues being more concentrated in license and services where the Company has
lower costs of revenue.
Gross Profit. Gross profit increased from $2.4 million for the quarter
ended September 30, 1998 to $4.8 million for the quarter ended September 30,
1999, primarily due to a change in the composition of revenue. For the quarter
ended September 30, 1999, 83.3% of total revenue was derived from license and
services revenues, in comparison to 17.5% for the comparable quarter in 1998.
The gross margin percentage for license and services revenues is much higher
than that from hardware sales. As a percentage of total revenues, gross profit
increased from 24.4% for the quarter ended September 30, 1998 to 80.4% for the
quarter ended September 30, 1999, primarily as a result of a higher proportion
of license revenues associated with RAVISENT's transition to a business model
based on licensing its technology rather than direct sales of hardware products.
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 134%,
from $.7 million for the quarter ended September 30, 1998 to $1.6 million for
the quarter ended September 30, 1999. As a percentage of total revenues,
research and development expenses increased from 7.1% to 27.3%. The increase in
research and development expenses in absolute dollars was due primarily to
supporting an expanded customer base. The increase in research and development
expenses as a percentage of total revenues resulted primarily from RAVISENT's
lower quarterly revenue. RAVISENT expects research and development expenses to
continue to increase in absolute dollars through the remainder of 1999 compared
to 1998 as RAVISENT adds additional engineering staff and capabilities.
14
<PAGE>
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 145% from $0.5 million for the quarter
ended September 30, 1998 to $1.2 million for the quarter ended September 30,
1999. As a percentage of total revenues, sales and marketing expenses increased
from 4.9% to 19.6%. The increase in absolute dollars was primarily due to the
building of the sales and marketing teams in the United States. The increase in
sales and marketing expenses as a percentage of total revenues resulted
primarily from RAVISENT's lower quarterly revenue, RAVISENT expects sales and
marketing expenses to increase in absolute dollars through the remainder of 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 decreased 22% from $1.4 million for the quarter ended
September 30, 1998 to $1.1 million for the quarter ended September 30, 1999. As
a percentage of total revenues, general and administrative expenses increased
from 13.7% to 17.5%. The decrease in absolute dollars was primarily due to
comparison with the third quarter of 1998 in which expenses were abnormally
high. General and administrative expenses for the quarter ended September 30,
1999 were greater than for the equivalent quarter in 1999 primarily due to the
company incurring expenses related to creating an infrastructure to support its
growing business needs. Additionally, higher than normal legal and accounting
expenses were incurred in connection with work associated with the investigation
of a potential investment and legal work done in connection with protection of
the company's intellectual property. General and administrative expenses
increased as a percentage of total revenues primarily due to RAVISENT's lower
quarterly revenue. RAVISENT expects general and administrative expenses to
increase in absolute dollars through the remainder of 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.
Amortization of Goodwill.
RAVISENT recorded amortization of goodwill of $0.2 million for the
quarter ended September 30, 1999.
This expense is related to the goodwill recorded as part of the Viona
acquisition. See"--Acquired In-Process Research and Development Expense."
Stock-based Compensation. In September 1998, February 1999 and June 1999,
RAVISENT recorded $0.8 million ,$0.5 million and $0.9 million respectively, of
deferred stock compensation in connection with grants of stock options. RAVISENT
has been amortizing these amounts as non-cash compensation expense over the four
year vesting period of the options. For the quarter ended September 30, 1999,
stock-based compensation expense was approximately $0.1 million.
Income Taxes
As of September 30, 1999, the company has approximately $13.2 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.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in
RAVISENT's consolidated statements of operations:
15
<PAGE>
Ravisent Technologies
Consolidated Statement of Operations Data
(unaudited)
(in thousands, except per share amounts)
Nine Months Ended September 30,
<TABLE>
<CAPTION>
1999 1998
Percent Percent
of of
Amount Revenues Amount Revenues
<S> <C> <C> <C> <C>
Revenues:
License and services................................... $ 11,113 39.1% $ 2,714 15.2%
Hardware............................................... 17,288 60.9% 15,091 84.8%
---------- ------- -------- --------
Total revenues....................................... 28,401 100.0% 17,805 100.0%
Cost of revenue......................................... 16,231 57.1% 14,203 79.8%
---------- ------- -------- --------
Gross profit......................................... 12,170 42.9% 3,602 20.2%
Research and development................................ 4,541 16.0% 2,139 12.0%
Sales and marketing..................................... 3,300 11.6% 1,419 8.0%
General and administrative.............................. 3,189 11.2% 3,087 17.3%
Amortization of goodwill 685 2.4% 530 3.0%
Amortization of deferred stock compensation............. 305 1.1% -- --
Acquired in-process research and development............ -- -- 7,900 44.4%
---------- ------- -------- --------
Total operating expenses............................. 12,020 42.3% 15,075 84.7%
---------- ------- -------- --------
Operating income(loss).................................. 150 .6% (11,473) (64.5%)
Interest expense(income), net........................... (463) 1.6% 572 3.2%
---------- ------- -------- --------
Income(loss) before income taxes........................ 613 2.2% (12,045) (67.7%)
Provision for income taxes.............................. 74 .3% -- --
---------- ------- -------- --------
Net income(loss) before accretion....................... 539 1.9% (12,045) (67.7%)
Accretion of mandatory redeemable preferred stock....... 660 2.3% 471 2.6%
---------- ------- -------- --------
Net income(loss) attributable to common stockholders.... $ (121) (.4%) $(12,516) (70.3%)
========== ======= ======== ========
Basic net income(loss)per common share.................. $ (0.02) $ (4.50)
========== ========
Diluted net income(loss) per common share............... $ (0.02) $ (4.50)
========== ========
Pro forma basic net income(loss) per common share
before accretion....................................... $ 0.09 $ (4.33)
========== ========
Pro forma diluted net income(loss) per common share
before accretion....................................... $ 0.05 $ (4.33)
========== ========
Number of shares used in calculation of basic net
income(loss)per common share........................... 6,305 2,781
========== ========
Number of shares used in calculation of diluted net
income(loss)per common share........................... 6,305 2,781
========== ========
</TABLE>
16
<PAGE>
Revenues. Total revenues increased 60% from $17.8 million for the nine months
ended September 30, 1998 to $28.4 million for the nine months ended September
30, 1999. License and services revenue increased to $11.1 million for the nine
months ended September 30, 1999, due primarily to growth in license fees
associated with RAVISENT's Software CineMaster 98 product, introduction of
Software CineMaster 99 and increased customization services related to
RAVISENT's consumer electronics business. Software CineMaster 98 was introduced
during the nine months ended September 30, 1998. Software CineMaster 99 was
introduced during the third quarter of 1999. Hardware revenues increased 15%
from $15.1 million for the nine months ended September 30, 1998 to $17.3 million
for the nine months ended September 30, 1999, due primarily to increased market
acceptance of RAVISENT's Hardware Cinemaster 98 product. In the nine months
ended September 30, 1999, CineMaster release 1.2 was phased out of production,
in favor of a new release, CineMaster release 3.0.
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 14% from $14.2 million for the nine months ended September
30, 1998 to $16.2 million for the nine months ended September 30, 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
which were in line with a 15% increase in hardware sales.
Gross Profit. Gross profit increased from $3.6 million for the nine months
ended September 30, 1998 to $12.2 million for the nine months ended September
30, 1999, primarily due to a change in the composition of revenue. For the nine
months ended September 30, 1999, 39.1% of total revenue was derived from license
and services revenues, in comparison to 15.2% for the comparable period in the
previous year. The gross margin percentage for license and services is much
higher than that from hardware sales. For the nine months ended September 30,
1999, the primary cause of higher proportion of license revenues versus total
revenues is the result of RAVISENT's transition to a business model based on
licensing its technology rather than direct sales of hardware products. For the
nine months ended September 30, 1998, hardware revenue represented 84.8% of
total revenues compared to 60.9% of total revenues for the nine months ended
September 30, 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 112%, from
$2.1 million for the nine months ended September 30, 1998 to $4.5 million for
the nine months ended September 30, 1999. As a percentage of total revenues,
research and development expenses increased from 12% to 16%. The increase in
research and development expenses in absolute dollars and as a percentage of
revenues was due primarily to supporting an expanded customer 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 133% from $1.4 million for the nine months ended
September 30, 1998 to $3.3 million for the nine months ended September 30, 1999.
As a percentage of total revenues, sales and marketing expenses increased from
8.0% to 11.6%. The increase in absolute dollars and as a percentage of revenues,
was primarily due to the building of the sales and marketing teams in the United
States. RAVISENT expects sales and marketing expenses to increase in absolute
dollars in 1999 compared to 1998.
17
<PAGE>
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 remained relatively flat on a nine month 1999 to nine
month 1998 comparison. Total general and administrative expenses increased 3%
from $3.1 million for the nine months ended September 30, 1998 to $3.2 million
for the nine months ended September 30, 1999. As a percentage of total revenues,
general and administrative expenses decreased from 17.3 to 11.2%. 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.
Amortization of Goodwill. RAVISENT recorded amortization of goodwill of $0.7
million for the nine months ended September 30, 1999 related to the goodwill
recorded as part of the Viona acquisition.
See "--Acquired In-Process Research and Development Expense."
Stock-based Compensation. In September 1998, February 1999 and June 1999,
RAVISENT recorded $0.8 million, $0.5 million and $0.9 million respectively, of
deferred stock compensation in connection with grants of stock options. RAVISENT
has been amortizing these amounts as non-cash compensation expense over the four
year vesting period of the options. For the nine months ended September 30,1999,
stock-based compensation expense was $.3 million.
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 report. 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, recorded at a discounted value of $1.1
million, to be paid in equal installments at the end of each year, for 1998,
1999 and 2000, issued 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 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:
18
<PAGE>
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.
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.
Since the acquisition, the development effort has been split into customer
specific implementations that are expected to be completed within the next six
months. The first customer effort is approximately 90% complete and 60-85%
complete for the remaining customer implementations.
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 nine months.
Since the acquisition, development is now expected within the next six months.
This project is approximately 80% completed.
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 nine months.
Since the acquisition, development is now expected within the next six months.
The effort has been re-targeted to provide support for the HDTV Software Decoder
and is approximately 80% completed.
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.
Since the acquisition, development is now expected to be completed within the
next nine months. This project is approximately 60% complete.
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.
19
<PAGE>
Liquidity and Capital Resources
Since inception, RAVISENT has financed its operations primarily through the
issuance and sale of debt and equity securities to investors including its
initial public offering which was completed July 16, 1999. As of September 30,
1999 RAVISENT had approximately $58.7 million in cash and cash equivalents.
Net cash used in operating activities for the nine months ended September 30,
1999 was $4.2 million, and for the nine months ended September 30, 1998 was $7.7
million. Cash used in operating activities was primarily the result of net
losses, adjusted for non-cash items, including non-cash compensation expense; in
the nine months ended September 30, 1998, acquired in-process research and
development expense was included; and in the nine months ending September 30,
1999, depreciation and amortization expense primarily related to the goodwill
recorded with the acquisition of Viona impacted this amount.
Net cash used in investing activities for the nine months ended September 30,
1999 was $1.6 million. Net cash used in investing activities for the nine months
ended September 30, 1998 was $4 million. Cash used in investing activities in
each period consisted 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 nine months ended September
30, 1999 and 1998 was $63.5 and $14.7 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 September 30, 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 consistent with anticipated growth in operations,
infrastructure and personnel. In addition, RAVISENT has approximately $.9
million at September 30, 1999 of payments due to the former owners of Viona. Of
this amount, approximately $.5 million is payable in the quarter ending December
31, 1999 with the remainder payable during the same period a year later.
As of September 30, 1999, RAVISENT has 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 (9.25% at September 30, 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 September 30, 1999 no borrowings against this line of credit were
outstanding and $4.8 million was available under the line of credit. This line
of credit expires in July 2000. Silicon Valley Bank has senior security interest
in substantially all of the assets of RAVISENT.
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RAVISENT presently anticipates that the net proceeds from its initial public
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.
On July 16, 1999, the company commenced an initial public offering of its
common stock. The managing underwriters of the offering were Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation and Volpe Brown Whelen & Company, LLC.
The shares of common stock sold in the offering were registered under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-1 (Reg. No. 333-77269) that was declared effective by the Securities and
Exchange Commission on July 15, 1999. The company sold an aggregate of 5,750,000
shares of its common stock to the public in the offering, including 750,000
shares sold pursuant to the exercise of an over-allotment option granted to the
underwriters. All of the shares sold in the offering were sold by the company.
The price per share at which the shares were sold in the offering was $12 and
the net proceeds to the company from the offering, after deducting underwriting
discounts and commissions but before deducting any offering expenses, were
$64,170,000. In connection with the offering, the company paid an aggregate of
$4,830,000 in underwriting discounts and commissions to the underwriters. The
company used a portion of the net proceeds to repay all outstanding amounts owed
by the company on its bank line of credit and invested the remaining portion of
the proceeds in short-term interest bearing, investment grade securities. These
remaining proceeds will be used in the future for general corporate purposes,
including working capital, marketing, research and development, product
management and capital expenditures. In addition, the company may use a portion
of the net proceeds to acquire or invest in complimentary businesses or products
or to obtain the right to use complimentary technologies.
On October 11, 1999 the Company announced that it signed a definitive agreement
to acquire all of the outstanding capital stock of Teknema Inc. for $2.5 million
in cash and approximately 804,000 shares of common stock. Prior to finalizing
the agreement the Company loaned Teknema $1 million at a rate of 10% for three
years and has recorded the amount as a loan receivable on the balance sheet.
When including the associated acquisition expenses, the Teknema acquisition is
valued at approximately $16 million. Teknema is an Internet technology company
dedicated to developing software and solutions for the emerging market for
informational appliances. The company sells Internet television set-top hardware
and software technology through intellectual property licenses and OEM
agreements with telecommunication companies and Internet service providers.
Teknema serves the emerging market for information appliances that connect users
to the Internet. The acquisition will be accounted for as a purchase and the
estimated excess of the purchase price over the fair value of the net assets
acquired of approximately $14 million will be recorded as goodwill and other
intangible assets and will be amortized over the estimated useful lives which
are estimated to be approximately 48 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 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.
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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 Karlsruhe, 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
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 80% of its budget for Year
2000 compliance.
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 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's Year 2000 compliance program has to date revealed that its
telephone system was the only significant third party hardware system that was
not compliant. This system has been replaced. The cost of replacing the hardware
and software associated for this system was approximately $3,000.
Contingency Plan
As noted above, RAVISENT's Year 2000 compliance plan currently is expected to
be complete by December 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.
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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
Incorporated by reference from the registrant's registration statement on Form
S-1 (REG. NO. 333-77269)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, financial condition and results of operations may be impacted by a
number of factors including the risk factors listed below.
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
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
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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 one 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 the new business model, the customers will be directly
responsible for manufacturing the hardware, instead of the company. Under this
model the company will license hardware designs to its customers and/or to the
company's customers' third-party manufacturers. The customers will either
manufacture the hardware internally, or the customers will have the hardware
manufactured by such contract manufacturers. However, we have not yet concluded
a contract implementing this arrangement with Dell Computer to which we license
our hardware. For the nine months and three months ended September 30, 1999 and
1998, 61%, 17%, 85% and 83% 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. 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.
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;
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. 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 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. 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.
We have a history of losses and we may not be able to achieve sustained
profitability in the future
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We had net income of approximately $0.5 million for the nine months ended
September 30, 1999, and incurred a net loss of $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 September 30, 1999, we had
an accumulated deficit of approximately $23.3 million. We have not achieved
profitability on an 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. 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.
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 comes from our top three
customers. In 1998 these three customers accounted for approximately 91% of our
total revenues. For the nine months ended September 30, 1999 our top three
customers accounted for approximately 70%. 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
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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.
Since our customers have not executed long term contracts with us, our revenues
could decline significantly with little or no notice
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
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our business would be seriously harmed. In 1998 all of our revenue was derived
from DVD-related products. We have a 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.
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
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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 three 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;
. 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
pending trademark applications for marks that we consider pertinent to the
business and a registration for the mark "CineMaster" which has been approved by
the U.S. Patent and Trademark Office. 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;
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. 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.
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 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
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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.
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
September 30, 1999, we had a total of 119 employees compared to a total of 55
employees on September 30, 1998. Our growth so far has placed strains on our
managerial, 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
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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. 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.
33
<PAGE>
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.
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:
34
<PAGE>
. 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, 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.
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.
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;
35
<PAGE>
. 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.
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.
If 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, the percentage ownership of each
RAVISENT Stockholder 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.
We recently changed our name
In May 1999, we changed our name from Quadrant International, Inc. to Divicore
Inc. and in June 1999, upon our reincorporation in Delaware, we changed our name
again to RAVISENT Technologies Inc. It is likely that for a period of time after
our name change, 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
36
<PAGE>
Executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 26% of our outstanding common stock.
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.
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to shareholders
The board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Without any further vote or action on the part of the
stockholders, the board of directors has 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, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only 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 RAVISENT.
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
37
<PAGE>
. 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.
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 Corporation (which has sold its software subsidiary to MGI), Xing
Technology Corporation (which has agreed to be acquired by RealNetworks, Inc.)
and Intervideo, 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
38
<PAGE>
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.
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.
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;
39
<PAGE>
. 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 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.
We face risks from the uncertainties of any future governmental regulation
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<PAGE>
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.
Our stock price may be volatile
The market price of our stock has fluctuated significantly in the past and is
likely to continue to fluctuate in the future. For example, in the period
beginning with our initial public offering on July 16, 1999 and ending on
September 30, 1999, our closing stock price fluctuated from a low of $10.25 to a
high of $17.63. This market price fluctuation has occurred 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;
. new product introductions;
. developments or disputes concerning intellectual property rights; and
. general conditions in the computer industry.
In addition, in recent years the stock market has experienced significant
price and volume fluctuations and the market prices of the securities of
technology and computer software companies have been especially volatile, often
for reasons which are unrelated to the results of operations of these companies
and outside their control. These fluctuations, as well as general economic,
political and market conditions, may have an adverse affect on the market price
of our common stock.
41
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RAVISENT develops products in the United States and sells them in North
America, South 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'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.
PART II: OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The information required by this item is set forth in Note 7 to the Notes to
Consolidated Financial Statements and under "Business -- Legal Proceedings" of
the Company's Registration Statement on Form S-1 (Reg. No. 333-77269) and is
incorporated herein by reference.
In addition on September 23, 1999 the registrant filed an answer to a complaint
and filed a counterclaim to Zoran for $2.7 million, alleging breach of written
agreement and other claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Modification to Instruments Defining the Rights of Common Stockholders
On July 21, 1999, immediately prior to the closing of the company's initial
public offering, the company filed an amended and restated certificate of
incorporation with the state of Delaware and adopted amended and restated
bylaws. The amended and restated certificate of incorporation effected a
recapitalization of the company, authorizing it to issue up to 50,000,000 shares
of common stock, $.001 par value and 5,000,000 shares of undesignated preferred
stock, $.001 par value. The amended and restated bylaws substantially revised
certain corporate procedures applicable to the company, including the mechanisms
for effecting written consents of stockholders, nominating, electing and
removing directors, placing resolutions before a stockholder vote and calling
special meetings of stockholders.
(b) Material limitations or qualifications on rights of common stockholders
resulting from issuance or modifications of other securities -- none.
(c) Information required by Item 701 of Regulation S-K
(i) On July 15, 1999, each of the company's non-employee directors were
automatically granted non-statutory options to purchase 20,000 shares of the
company's common stock pursuant to the automatic option grant provisions of the
company's 1999 Stock Incentive Plan. The options each have a term of ten years
and are immediately exercisable, provided that the shares issuable upon exercise
are subject to repurchase by the company at their exercise price until the
shares have vested. The exercise price for each share is $12, which is the fair
market value on the date of grant as well as the initial public offering price.
The shares vest at a rate of 5,000 per year upon the grantee's completion of a
42
<PAGE>
year of board service measured from the grant date, except upon death or
disability of the grantee or, in certain circumstances, a change of control of
the company, in which events the shares immediately vest in full.
(ii) On July 16, 1999, the holder of warrants to purchase the company's
Series A Preferred Stock elected to exercise all of the warrants in exchange for
the forgiveness of indebtedness of the company to such holder and immediately
thereafter to convert all of the shares of Series A Preferred Stock issued upon
exercise of such warrants into 920,006 shares of common stock immediately prior
to the consummation of the company's initial public offering.
(iii) On July 16, 1999, a majority of the holders of the company's Series
B Preferred Stock elected to convert all of the company's Series B Preferred
Stock into 4,038,574 shares of common stock immediately prior to the
consummation of the company's initial public offering.
(iv) On July 16, 1999, all of the shares of the company's Series C
Preferred Stock automatically converted into 549,650 shares of common stock upon
consummation of the company's initial public offering, pursuant to the terms of
the company's certificate of incorporation as in effect at that time.
(b) Use of Proceeds
On July 15, 1999 the Company's Registration Statement on Form S-1 covering
the Offering of 5,750,000 shares of the Company's Common Stock, Commission file
number 333-77269 was declared effective.
From the effective date to September 30,1999 the amount of expenses
incurred for the issuer's account in connection with the issuance and
distribution of the securities registered was incurred as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions $4,830,000
Finders Fees --
Expenses paid to or for underwriters --
Other expenses $2,214,379
----------
Total Expenses $7,044,379
==========
</TABLE>
All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates:
(ii) persons owning ten percent (10%) or more of the Company's common stock; or
(iii) affiliates of the Company.
The net proceeds of the Offering to the Company (after deducting the
foregoing expenses) was $61,955,621. From the effective date of the
Registration Statement to September 30, 1999, the net proceeds have been used
for the following purposes:
<TABLE>
<S> <C>
Construction of plant, building and facilities $ --
Purchase and installation of machinery
and equipment --
Purchase of real estate --
Acquisition of other business (including
transaction costs) --
Repayment of indebtedness
Working Capital 3,885,621
Temporary investments, including cash
and cash equivalents 57,070,000
Other purposes (for which at least $100,000
has been used), including:
Investments, including debt instruments 1,000,000
Of the United States Government and its
Agencies and in high quality corporate
Issuers.
----------
$ 61,955,621
==========
</TABLE>
43
<PAGE>
All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates: (ii) persons owning ten
percent (10%) or more of the company's common stock; or (iii) affiliates of the
Company.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
44
<PAGE>
(a) Exhibits
3.1* Amended and Restated Certificate of Incorporation
3.2* Amended and Restated By-Laws
10.26 Employment Agreement dated March 1, 1999, by and between registrant and
Sharon K. Taylor.
10.27 Employment Agreement dated March 1, 1999, by and between registrant and
E. Joseph Vitetta, Jr.
10.28 Employment Agreement dated March 1, 1999, by and between registrant and
William H. Wagner.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
* Incorporated by Reference from the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-77269)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 11, 1999 RAVISENT TECHNOLOGIES INC.
/s/ Jason C. Liu
-------------------------------
Jason C. Liu
Chief Financial Officer
45
<PAGE>
EXHIBIT INDEX TO RAVISENT TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED September 30, 1999
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
10.26 Employment Agreement dated March 1, 1999, by and between
registrant and Sharon K. Taylor.
10.27 Employment Agreement dated March 1, 1999, by and between
registrant and E. Joseph Vitetta, Jr.
10.28 Employment Agreement dated March 1, 1999, by and between
registrant and William H. Wagner.
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.26
Employment Agreement
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 1st day of
March, 1999, and is by and between Quadrant International, Inc. a Pennsylvania
corporation with an office for purposes of this Agreement at 1 Great Valley
Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and Sharon K. Taylor
with an address at 1870 Terrace Drive, Malvern, PA 19002, (hereinafter "TAYLOR")
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of TAYLOR to render services for
and on behalf of QI, in accordance with the following terms, conditions and
provisions; and
(b) TAYLOR wishes to perform such services for and on behalf of QI, in
accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein
contained the parties hereto intending to be legally bound hereby agree as
follows:
1. EMPLOYMENT. QI hereby employs TAYLOR and TAYLOR accepts such
----------
employment and shall perform her duties and the responsibilities provided for
herein accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. TAYLOR shall at all times be QI's employee
-----------------
subject to the terms and conditions of this Agreement.
3. TITLE AND DUTIES. QI agrees to employ TAYLOR and TAYLOR accepts
----------------
such employment as a full time employee and agrees as per the terms and
conditions of
<PAGE>
this agreement to serve as and have the title of Vice President of Product
Management and perform diligently, faithfully, and to the best of her ability as
duties assigned and instructions given by the President of QI or other QI
officer as authorized by QI's Board of Directors.
4. TERM OF SERVICES. The initial term of this agreement is for a two
----------------
year period commencing on January 1, 1999, subject to the termination section of
this agreement, with the parties agreeing to confirm any subsequent extension of
this initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services
-----------------
for the initial term of this agreement shall be $125,000 an annual amount
payable in accordance with QI's payroll procedures and policies as implemented
during the term of this agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation
-----------------------
proposed by this section is subject to QI's receipt of further capital funds
required to finance the management compensation program. QI's Board of Directors
will also have to vote approval of these or any other specific additional
compensation packages proposed for payment or for vesting to TAYLOR during the
term of this agreement. The compensation program allocated for TAYLOR will be
comprised of the following elements:
a) An annual Cash Bonus of: - Significant Performance $25,000
- Exceptional Performance $12,500
b) Bonus payments as per the approved 1999 Executive Compensation Plan
c) Secondary Residence Allowance - $920 Monthly to be paid directly
Thomas Meeting Associates, Post Office Box 8538-609, Philadelphia, PA 19171.
<PAGE>
7. EXTENT OF SERVICES. TAYLOR shall devote her entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing TAYLOR from investing her assets in the future as a passive
investor in such form or manner as she sees fit as long as the investments will
not require any personal service from TAYLOR. However, TAYLOR agrees not to
knowingly invest in any entities that compete directly with QI or affiliated or
related companies.
8. TERMINATION. A. In the event that this agreement is terminated prior
-----------
to expiration for any reason other than: (1)TAYLOR's gross malfeasance or gross
nonfeasance or (2)TAYLOR'S resignation, TAYLOR will continue to be paid her
total compensation as of said termination date by QI for a period of six months
after such notice of termination is given. QI agrees to cooperate in helping
TAYLOR in the pursuit of any subsequent external position and QI agrees to
provide the requisite references. It is agreed that any stock options awarded to
TAYLOR will continue to vest and be exercisable during this six month period.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of TAYLOR.
C. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 30
days notice to TAYLOR, if appropriate, in the event of the disability or death
of TAYLOR which would otherwise prevent her from performing her duties. For
purpose of this provision, "disability" shall be defined in accordance with the
definition of "disability" as contained in QI's disability insurance policy, In
the event of TAYLOR's death, any guaranteed monies due under this agreement
would be paid directly to TAYLOR's estate as probated.
<PAGE>
9. NONDISCLOSURE. During the course of her employment with QI, TAYLOR
-------------
may have occasion to conceive, create, develop, review, or receive information
that is considered by QI to be confidential or proprietary, including
information relating to inventions, patent, trademark and copyright
applications, improvements, specifications, drawings, cost and pricing data,
process flow diagrams, customer and supplier lists, bills, and/or any other
written material referring to same Confidential or Proprietary Information. Both
during the term of employment and for two years thereafter:
1. TAYLOR, as an officer and employee, agrees to maintain in strict
confidence such Confidential Information.
2. TAYLOR further agrees to use her best efforts to ensure that all
such Confidential Information is properly protected and kept from
unauthorized persons or disclosure.
3. If requested by QI, TAYLOR agrees to promptly return to QI all
materials, writings, equipment, models, mechanisms, and the like
obtained from or through QI, including but not limited to, all
Confidential Information, all of which TAYLOR recognizes is the
sole and exclusive property of QI.
4. TAYLOR agrees that she will not, without first obtaining the
prior written permission of QI: (a) directly or indirectly
utilize such Confidential Information in her own business; (b)
manufacture and/or sell any product that is based in whole or in
part on such Confidential Information; or (c) disclose such
Confidential Information to any third party.
10. EMPLOYER PERQUISITES. TAYLOR shall be entitled to and shall
--------------------
receive all employer perquisites as would normally be granted to employees of
QI. Such perquisites to include the following:
<PAGE>
a) Health insurance under terms and conditions as provided to other
employees of QI.
b) Vacation pursuant to QI's stated policy
c) Paid holidays pursuant to QI's stated policy
11. REPRESENTATIONS AND WARRANTIES.
------------------------------
A. TAYLOR represents and warrants to Company that she is not a party
to or otherwise bound by any other employment or services that may,
in any way, restrict her right or ability to enter into this
agreement or otherwise be employed by QI.
B. TAYLOR agrees the she will not reveal to QI, or otherwise utilize
in her employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by
-------------------------
the State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state
or federal courts of Pennsylvania. The parties consent to the jurisdiction of
such courts, agree to accept service or process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
<PAGE>
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding
-------------------------------
on and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed
------
as a waiver of any prior or subsequent default of the same or other provisions
of this agreement.
16. SEVERABILITY. If any provision hereof is held invalid or
------------
unenforceable by court of competent jurisdiction, such invalidity shall not
affect the validity or operation of any other provision, and such invalid
provision shall be deemed to be severed from the agreement.
17. ASSIGNABILITY. This agreement and the rights and obligations
-------------
thereunder are personal with respect to TAYLOR and may not be assigned by any
action of TAYLOR or by operation of law. QI shall, however assign this agreement
to a successor in interest to QI or to the purchaser of QI but not to any other
third party.
18. INTEGRATION. This agreement constitutes the entire understanding
-----------
of the parties and is intended as a final expression of their agreement. It
shall not be modified or amended except in writing signed by the parties thereto
and specifically referring to this agreement. This agreement shall take
precedence over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and TAYLOR confirm the foregoing accurately
sets forth the parties respective rights and obligations and agrees to be bound
by having the evidenced signature affixed thereto.
Quadrant International, Inc. Sharon K. Taylor
By: /s/ Francis Wilde, CEO & President /s/ Sharon K. Taylor
___________________________________ _____________________________
Francis Wilde, CEO & President Signature
Date: March 1, 1999 Date: March 1, 1999
____________________________ ________________________
<PAGE>
Exhibit 10.27
Employment Agreement
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 1st day of
March, 1999 and is by and between Quadrant International, Inc. a Pennsylvania
corporation with an office for purposes of this Agreement at 1 Great Valley
Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and E. Joseph
Vitetta Jr. with an address at 3032 Zimmerman Place, Tustin Ranch, California
92782 (hereinafter " VITETTA")
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of VITETTA to render services
for and on behalf of QI, in accordance with the following terms, conditions and
provisions; and
(b) VITETTA wishes to perform such services for and on behalf of QI,
in accordance with the following terms, conditions and provisions. NOW,
THEREFORE, in consideration of the mutual convenants and conditions herein
contained the parties hereto intending to be legally bound hereby agree as
follows:
1. EMPLOYMENT. QI hereby employs VITETTA and VITETTA accepts such
----------
employment and shall perform his duties and the responsibilities provided for
herein accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. VITETTA shall at all times be QI's employee
-----------------
subject to the terms and conditions of this Agreement.
3. TITLE AND DUTIES. QI agrees to employ VITETTA and VITETTA accepts
----------------
such employment as a full time employee and agrees as per the terms and
conditions of
<PAGE>
this Agreement to serve as and have the tile of Vice President of
Worldwide Sales of QI with the authority and responsibility normally associated
with that position, it being agreed VITETTA will report directly to QI's
President and will be subject to the President's direction and will perform
diligently, faithfully, and to the best of his ability all duties assigned and
instructions given.
4. TERM OF SERVICES. The initial term of this agreement is for a two
----------------
year period commencing on January 1, 1999, subject to the termination section of
this agreement, with the parties agreeing to confirm any subsequent extension of
this initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services
-----------------
for the initial term of this agreement shall be $110,000 an annual amount
payable in accordance with QI's payroll procedures and policies as implemented
during the term of this agreement.
6. ADDITIONAL COMPENSATION. In addition you are eligible to receive
-----------------------
an incentive payment of $40,000 annually, calculated and paid quarterly, as well
as commission payments described in the 1999 Sales Commission Program. You are
also eligible for a car allowance in the amount of $600 per month.
7. EXTENT OF SERVICES. VITETTA shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing VITETTA from investing his assets in the future as a passive
investor in such form or manner as he sees fit as long as the investments will
not require any personal service from VITETTA. However, VITETTA agrees not to
knowingly invest in any entities that compete directly with QI or affiliated or
related companies.
<PAGE>
8. TERMINATION. A. In the event this agreement is terminated for any
-----------
reason other than a) VITETTA's gross malfeasance or gross nonfeasance, VITETTA
will continue to be paid his salary and bonus by QI for a period of six months
after such notice of termination is given b) if QI relocated to a non-
commutable location c) if Vitetta's role changed significantly d) Vitetta
resigns QI agrees to cooperate in helping VITETTA in the pursuit of any such
position and QI agrees to provide the requisite references and if such
employment is of a lesser salary than his then current salary at QI, QI agrees
to reimburse VITETTA for the difference between such salaries for the six month
period specified above. It is agreed that any stock options awarded VITETTA will
and be exercisable during this six month period.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of VITETTA.
C. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 30
days notice to VITETTA, if appropriate, in the event of the long term disability
or death of VITETTA which would otherwise prevent him from performing his or her
duties. For purpose of this provision, "disability" shall be defined in
accordance with the definition of "disability" as contained in QI's disability
insurance policy, In the event of VITETTA's death, any guaranteed monies due
under this agreement would be paid directly to VITETTA's estate as probated.
D. For purposes of this specific employment agreement, the
parties agree that any one of the following items shall be included as defining
a termination without cause.
1. Either QI moves its current headquarters out of the state
of Pennsylvania, or
2. VITETTA is transferred to a location outside of the state
of Pennsylvania. QI will relocate VITETTA and his immediate family, and
reimburse VITETTA for relocating in the amount of $40,000.
<PAGE>
9. NONDISCLOSURE. During the course of his employment with QI,
-------------
VITETTA may have occasion to conceive, create, develop, review, or receive
information that is considered by QI to be confidential or proprietary,
including information relating to inventions, patent, trademark and copyright
applications, improvements, specifications, drawings, cost and pricing date,
process flow diagrams, customer and supplier lists, bills, and/or any other
written material referring to same Confidential or Proprietary Information. Both
during the term of employment and for 12 months thereafter:
1. VITETTA, as an officer and employee agrees to maintain in
strict confidence such Confidential Information.
2. VITETTA further agrees to use his best efforts to ensure
that all such Confidential Information is properly protected and kept from
unauthorized persons or disclosure .
3. If requested by QI, VITETTA agrees to promptly return to
QI all materials, writings, equipment, models, mechanisms, and the like
obtained from or through QI, including but not limited to, all Confidential
Information, all of which VITETTA recognizes is the sole and exclusive
property of QI.
4. VITETTA agrees that he will not, without first obtaining
the prior written permission of QI: (a) directly or indirectly utilize such
Confidential Information in his own business; (b) manufacture and/or sell
any product that is based in whole or in part on such Confidential
Information; or (c) disclose such Confidential Information to any third
party.
10. EMPLOYER PERQUISITES. VITETTA shall be entitled to and shall
--------------------
receive all employee perquisites would normally be granted to employees of QI.
Such perquisites to include the following:
a) Health insurance under terms and conditions as provided
to other employees of QI.
b) Vacation pursuant to QI's stated policy
c) Paid holidays pursuant to QI's stated policy
<PAGE>
11. REPRESENTATIONS AND WARRANTIES. A. VITETTA represents and
------------------------------
warrants Company that he is not a party to or otherwise bound by any other
employment or services that may, in any way, restrict his right or ability to
enter into this agreement or otherwise be employed by QI.
B. VITETTA agrees the he/she will not reveal to QI, or otherwise
utilize in his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed
-------------------------
by the State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable
state or federal courts of Pennsylvania. The parties consent to the jurisdiction
of such courts, agree to accept service or process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding
-------------------------------
on and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed
------
as a waiver of any prior or subsequent default of the same or other provisions
of this agreement.
<PAGE>
16. SEVERABILITY. If any provision hereof is held invalid or
------------
unenforceable by court of competent jurisdiction, such invalidity shall not
affect the validity or operation of any other provision, and such invalid
provision shall be deemed to be severed from the agreement.
17. ASSIGNABILITY. This agreement and the rights and obligations
-------------
thereunder are personal with respect to VITETTA and may not be assigned by any
action of VITETTA or by operation of law.
18. INTEGRATION. This agreement constitutes the entire understanding
-----------
of the parties and is intended as a final expression of their agreement. It
shall not be modified or amended except in writing signed by the parties thereto
and specifically referring to this agreement. This agreement shall take
precedence over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and VITETTA confirm the foregoing accurately
sets forth the parties respective rights and obligations and agrees to be bound
by having the evidenced signature affixed thereto.
Quadrant International, Inc.
/s/ Francis Wilde, CEO & President /s/ E. Joseph Vitetta, Jr.
By:___________________________________ _____________________________
Francis Wilde, CEO & President Signature
Date: March 1, 1999 Date: March 1, 1999
_________________________________ ________________________
<PAGE>
Exhibit 10.28
Employment Agreement
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of the 1st day of
March, 1999, and is by and between Quadrant International, Inc. a Pennsylvania
corporation with an office for purposes of this Agreement at 1 Great Valley
Parkway, Malvern, Pennsylvania 19355 (hereinafter the "QI") and William H.
Wagner with an address at 39 Daniel Drive, Chester Springs, Pennsylvania 19425
(hereinafter "WAGNER")
W I T N E S S E T H
WHEREAS:
(a) QI wishes to retain the services of WAGNER to render services for
and on behalf of QI, in accordance with the following terms, conditions and
provisions; and
(b) WAGNER wishes to perform such services for and on behalf of QI, in
accordance with the following terms, conditions and provisions.
NOW, THEREFORE, in consideration of the mutual convenants and conditions herein
contained the parties hereto intending to be legally bound hereby agree as
follows:
1. EMPLOYMENT. QI hereby employs WAGNER and WAGNER accepts such
----------
employment and shall perform his duties and the responsibilities provided for
herein accordance with the terms and conditions of this Agreement.
2. EMPLOYMENT STATUS. WAGNER shall at all times be QI's employee
-----------------
subject to the terms and conditions of this Agreement.
3. TITLE AND DUTIES. QI agrees to employ WAGNER and WAGNER accepts
----------------
such employment as a full time employee and agrees as per the terms and
conditions of
<PAGE>
this agreement to serve as and have the title of Vice President of
Engineering and perform diligently, faithfully, and to the best of his ability
as duties assigned and instructions given by the President of QI or other QI
officer as authorized by QI's Board of Directors.
4. TERM OF SERVICES. The initial term of this agreement is for a two
----------------
year period commencing on January 1, 1999, subject to the termination section of
this agreement, with the parties agreeing to confirm any subsequent extension of
this initial term in a signed written agreement setting forth any amended or
supplemental conditions.
5. BASE COMPENSATION. The employees base salary for rendered services
-----------------
for the initial term of this agreement shall be $125,000 an annual amount
payable in accordance with QI's payroll procedures and policies as implemented
during the term of this agreement.
6. ADDITIONAL COMPENSATION. The additional package compensation
-----------------------
proposed by this section is subject to QI's receipt of further capital funds
required to finance the management compensation program. QI's Board of Directors
will also have to vote approval of these or any other specific additional
compensation packages proposed for payment or for vesting to WAGNER during the
term of this agreement. The compensation program allocated for WAGNER will be
comprised of the following elements:
a) An annual Cash Bonus of: - Significant Performance $25,000
- Exceptional Performance $12,500
b) Bonus payments as per the approved 1999 Executive Compensation Plan
<PAGE>
c) Car Allowance - $600 Net Monthly
7. EXTENT OF SERVICES. WAGNER shall devote his entire business time,
------------------
attention, and energies to the business of QI, but this shall not be construed
as preventing WAGNER from investing his assets in the future as a passive
investor in such form or manner as he sees fit as long as the investments will
not require any personal service from WAGNER. However, WAGNER agrees not to
knowingly invest in any entities that compete directly with QI or affiliated or
related companies.
8. TERMINATION. A. In the event this agreement is terminated prior to
-----------
expiration for any reason other than WAGNER's gross malfeasance or gross
nonfeasance, WAGNER will continue to receive his total compensation at the time
of termination from QI for a period of six months after such notice of
termination is given. QI agrees to cooperate in helping WAGNER in the pursuit of
any such position and QI agrees to provide the requisite references. It is
agreed that any stock options awarded WAGNER will continue to vest and be
exercisable during the twelve month period following termination.
B. QI shall have the absolute right to terminate this agreement
immediately in the event of gross malfeasance or gross nonfeasance on the part
of WAGNER.
C. It is understood and agreed that this is a personal services
contract, and that QI shall have the right to terminate this agreement on 30
days notice to WAGNER, if appropriate, in the event of the disability or death
of WAGNER which would otherwise prevent him from performing his or her duties.
For purpose of this provision, "disability" shall be defined in accordance with
the definition of "disability" as contained in QI's disability insurance policy,
In the event of WAGNER's death, any guaranteed monies due under this agreement
would be paid directly to WAGNER's estate as probated.
<PAGE>
9. NONDISCLOSURE. During the course of his employment with QI, WAGNER
-------------
may have occasion to conceive, create, develop, review, or receive information
that is considered by QI to be confidential or proprietary, including
information relating to inventions, patent, trademark and copyright
applications, improvements, specifications, drawings, cost and pricing data,
process flow diagrams, customer and supplier lists, bills, and/or any other
written material referring to same Confidential or Proprietary Information. Both
during the term of employment and for two years thereafter:
1. WAGNER, as an officer and employee, agrees to maintain in strict
confidence such Confidential Information.
2. WAGNER further agrees to use his best efforts to ensure that all
such Confidential Information is properly protected and kept from unauthorized
persons or disclosure.
3. If requested by QI, WAGNER agrees to promptly return to QI all
materials, writings, equipment, models, mechanisms, and the like obtained from
or through QI, including but not limited to, all Confidential Information, all
of which WAGNER recognizes is the sole and exclusive property of QI.
4. WAGNER agrees that he/she will not, without first obtaining the
prior written permission of QI: (a) directly or indirectly utilize such
Confidential Information in his own business; (b) manufacture and/or sell any
product that is based in whole or in part on such Confidential Information; or
(c) disclose such Confidential Information to any third party.
10. EMPLOYER PERQUISITES. WAGNER shall be entitled to and shall receive
--------------------
all employer perquisites as would normally be granted to employees of QI. Such
perquisites to include the following:
a) Health insurance under terms and conditions as provided to other
employees of QI.
b) Vacation pursuant to QI's stated policy
c) Paid holidays pursuant to QI's stated policy
<PAGE>
11. REPRESENTATIONS AND WARRANTIES. A. WAGNER represents and warrants to
------------------------------
Company that he is not a party to or otherwise bound by any other employment or
services that may, in any way, restrict his right or ability to enter into this
agreement or otherwise be employed by QI.
B. WAGNER agrees that he will not reveal to QI, or otherwise utilize
in his employment with QI, any proprietary trade secrets or confidential
information of any previous employer.
12. NOTICES. Any written notice required to be given pursuant to this
-------
agreement shall be hand delivered or sent via fax or E-mail, or delivered by a
national overnight express service such as Federal Express.
13. JURISDICTION AND DISPUTES. A. This agreement shall be governed by
-------------------------
the State of Pennsylvania.
B. All disputes hereunder shall be resolved in the applicable state
or federal courts of Pennsylvania. The parties consent to the jurisdiction of
such courts, agree to accept service or process by mail, and waive any
jurisdictional or venue defenses otherwise available. The parties reserve the
right to mutually agree to binding arbitration in accordance with the policies
of the American Arbitration Association.
14. AGREEMENT BINDING ON SUCCESSORS. This agreement shall be binding on
-------------------------------
and shall inure to the benefit of the parties hereto, and their heirs,
administrators, successors, and assigns.
15. WAIVER. No waiver by either party of any default shall be deemed as
------
a waiver of any prior or subsequent default of the same or other provisions of
this agreement.
<PAGE>
16. SEVERABILITY. If any provision hereof is held invalid or
------------
unenforceable by court of competent jurisdiction, such invalidity shall not
affect the validity or operation of any other provision, and such invalid
provision shall be deemed to be severed from the agreement.
17. ASSIGNABILITY. This agreement and the rights and obligations
-------------
thereunder are personal with respect to WAGNER and may not be assigned by any
action of WAGNER or by operation of law. QI shall, however, assign this
agreement to a successor in interest to QI or to the purchaser of any of the
assets of QI but not to any other third party.
18. INTEGRATION. This agreement constitutes the entire understanding of
-----------
the parties and is intended as a final expression of their agreement. It shall
not be modified or amended except in writing signed by the parties thereto and
specifically referring to this agreement. This agreement shall take precedence
over any other documents that may be in conflict therewith.
IN WITNESS WHEREOF, QI and WAGNER confirm the foregoing accurately sets
forth the parties respective rights and obligations and agrees to be bound by
having the evidenced signature affixed thereto.
Quadrant International, Inc. William H. Wagner
By: /s/ Francis Wilde, CEO & President /s/ William H. Wagner
___________________________________ _____________________________
Francis Wilde, CEO & President Signature
Date: March 1, 1999 Date: March 1, 1999
_________________________________ ________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 58,665 58,665
<SECURITIES> 0 0
<RECEIVABLES> 9,600 9,600
<ALLOWANCES> 353 353
<INVENTORY> 597 597
<CURRENT-ASSETS> 69,349 69,349
<PP&E> 1,952 1,952
<DEPRECIATION> 731 731
<TOTAL-ASSETS> 75,550 75,550
<CURRENT-LIABILITIES> 4,365 4,365
<BONDS> 0 0
0 0
0 0
<COMMON> 15 15
<OTHER-SE> 70,396 70,396
<TOTAL-LIABILITY-AND-EQUITY> 75,550 75,550
<SALES> 5,988 28,401
<TOTAL-REVENUES> 5,988 28,401
<CGS> 1,175 16,231
<TOTAL-COSTS> 1,175 16,231
<OTHER-EXPENSES> 4,215 11,939
<LOSS-PROVISION> 0 81
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,171 613
<INCOME-TAX> 74 74
<INCOME-CONTINUING> 1,097 539
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1003 (121)
<EPS-BASIC> .08 (.02)
<EPS-DILUTED> .06 (.02)
</TABLE>
