<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 March 31, 2000
[ ] 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 No X
- -------------------------------------------------------
On May 5, 2000, 16,191,022 shares of the Registrant's Common Stock, $.001 par
value, were outstanding.
1
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RAVISENT Technologies Inc.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
Part I: Financial Information
Item 1: Financial Statements
<S> <C>
Consolidated Balance Sheets at March 31, 2000 (unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 (unaudited). 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (unaudited). 5
Notes to 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 17
Part II: Other Information
Item 1: Legal Proceedings 30
Item 2: Changes in Securities and Use of Proceeds 31
Item 3: Defaults upon Senior Securities 32
Item 4: Submission of matters to a vote of security holders 32
Item 5: Other matters 32
Item 6: Exhibits and Reports on Form 8-K 32
</TABLE>
2
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
MARCH 31, DECEMBER 31,
-------------------------------
2000 1999
-------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 40,502 $ 48,251
Short-term investments............................................................ 1,032 1,018
Accounts receivable, net of allowance for doubtful accounts of $ 319 in 2000 and
$ 265 in 1999..................................................................... 16,108 15,597
Inventory, net.................................................................... 2,347 1,323
Prepaid expenses.................................................................. 1,093 1,085
Loan receivable-officer........................................................... 348 340
Other current assets.............................................................. 220 216
-------- --------
Total current assets............................................................ 61,650 67,830
Furniture and equipment, net.............................................................. 1,762 1,598
Goodwill and other intangibles, net of accumulated amortization of $3,415 in 2000 and
$ 2,190 in 1999................................................................... 18,119 19,357
Loan receivable--officer.................................................................. 261 138
Restricted cash........................................................................... 525 525
Other assets.............................................................................. 312 300
-------- --------
Total assets.................................................................... $ 82,629 $ 89,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 3,989 $ 5,743
Deferred revenue.................................................................. 4,148 4,332
Accrued expenses and other........................................................ 3,407 3,672
Other current liabilities......................................................... 642 539
Current installments of obligations under capital leases.......................... 38 40
-------- --------
Total current liabilities....................................................... 12,224 14,326
Deferred revenue, less current portion.................................................... 327 327
Other long-term liabilities............................................................... 83 472
Obligations under capital leases, excluding current installments.......................... 29 38
-------- --------
Total liabilities............................................................... 12,663 15,163
-------- --------
Commitments and contingencies (note 10)
Stockholders' equity :
Preferred stock , $.001 par value; 5,000,000 shares authorized, none issued
or outstanding....................................................................
Common stock, $.001 par value; 50,000,000 shares authorized;
16,348,883 and 16,052,866
shares issued in 2000 and 1999 respectively....................................... 16 16
Additional paid-in capital........................................................ 110,257 109,460
Deferred stock compensation....................................................... (1,543) (1,678)
Accumulated deficit............................................................... (37,450) (31,913)
Accumulated other comprehensive income............................................ (94) (80)
Note receivable................................................................... (500) (500)
Treasury stock at cost, 200,000 shares in 2000 and 1999........................... (720) (720)
-------- --------
Total stockholders' equity...................................................... 69,966 74,585
-------- --------
Total liabilities and stockholders' equity...................................... $ 82,629 $ 89,748
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED MARCH 31,
-----------------------------
-------------- -------------
2000 1999
------------- -------------
(unaudited) (unaudited)
Revenues:
License and services ......................... $ 2,921 $ 2,290
Hardware ..................................... 2,789 8,522
----------- ----------
Total revenues ............................. 5,710 10,812
Cost of revenues:
License and services ......................... 1,129 135
Hardware ..................................... 2,514 7,264
----------- ----------
Total cost of revenues ..................... 3,643 7,399
----------- ----------
Gross profit ............................... 2,067 3,413
Research and development ............................. 2,143 1,394
Sales and marketing .................................. 1,882 1,062
General and administrative ........................... 2,343 837
Depreciation and amortization ........................ 1,356 314
Compensation related to stock options ................ 481 71
----------- ----------
Operating loss ............................. (6,138) (265)
Other (income) expense:
Interest (income) expense, net ............... (616) 45
----------- ----------
Net loss before income taxes ......................... (5,522) (310)
Provision for income taxes..................... 15 --
----------- ----------
Net loss............................................... (5,537) (310)
Accretion of discount on mandatory redeemable
preferred stock .................................... -- 283
----------- ----------
Net loss attributable to common stockholders ......... $ (5,537) $ (593)
=========== ==========
Basic and diluted net loss per common share .......... $(0.34) $(0.18)
=========== ==========
Weighted average shares outstanding used in per
common share calculation (basic and diluted) ......... 16,068,969 3,320,851
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Ended March 31,
------------------------------------
2000 1999
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss............................................................... $(5,537) $ (310)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization........................................ 1,356 314
Non-cash compensation and other expenses............................. 481 74
Changes in items affecting operations:
Accounts receivable............................................... (420) 6,225
Inventory......................................................... (1,024) (2,487)
Prepaid expenses and other assets................................. (24) (37)
Loan receivable-officer........................................... (131) --
Accounts payable.................................................. (1,754) (2,661)
Deferred revenue.................................................. (184) --
Other liabilities................................................. 103 --
Accrued expenses.................................................. 16 (253)
------- -------
Net cash (used in) provided by operating activities............................ (7,118) 865
------- -------
Cash flows from investing activities:
Capital expenditures................................................... (294) (78)
Proceeds from sale of furniture and equipment.......................... 12 86
Investment in short-term investment.................................... (14) --
------- -------
Net cash (used in) provided by investing activities............................ (296) 8
------- -------
Cash flows from financing activities:
Repayments under capital lease obligations............................. (11) (3)
Net proceeds from exercise of stock options and warrants............... 79 --
Net borrowings under bank line of credit............................... -- 1,252
Repayments under other liabilities..................................... (389) (950)
------- -------
Net cash provided by financing activities...................................... (321) 299
------- -------
Effect of exchange rate changes on cash and cash equivalents................... (14) (21)
------- -------
Net (decrease) increase in cash and cash equivalents........................... (7,749) 1,151
Cash and cash equivalents:
Beginning of period.................................................... 48,251 1,024
------- -------
End of period.......................................................... $40,502 $ 2,175
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the quarter for:
Interest............................................................. $ 10 $ 62
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations................... -- --
Amortization of deferred stock compensation.......................... 135 71
Compensation related to stock options................................ 346 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RAVISENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with repect to March 31, 2000 and 1999 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Description of Business
RAVISENT Technologies Inc., ("the Company") 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. In November of 1999,
the Company acquired Teknema Inc., which will expand its product offerings to
the Internet appliance market.
During 1999 and 1998 the Company's revenue was substantially generated from
selling hardware-based digital video solutions to personal computer and consumer
electronics original equipment manufacturers. The Company changed its strategic
focus during 1999 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. This licensing strategy will be continued in 2000 for
the Internet appliance market as well.
The Company was incorporated in Pennsylvania in April 1994 as Quadrant
International, Inc. In April 1999, the Company changed its name to Divicore
Inc. In July 1999, the Company reincorporated in Delaware as RAVISENT
Technologies Inc.
The Company has sustained significant net losses and negative cash flows
from operations since its inception. The Company plans on investing heavily in
product development, and sales and marketing, and to a lesser degree in
operations and administrative areas. There can be no assurances that the
Company will be able to generate sufficient revenues necessary to achieve or
sustain profitability in the short or long term. However, management believes
that the current cash and cash equivalent amounts will be adequate to meet our
cash needs for at least the next twelve months.
(b) 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.
(c) Unaudited Interim Financial Statements
The interim consolidated financial statements of the Company for the three
months ended March 31, 2000 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
6
<PAGE>
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company at March 31, 2000 and the
results of its operations for the three months ended March 31, 2000 and 1999,
and its cash flows for the three months ended March 31, 2000 and 1999. The
unaudited consolidated financial statements included in this Form 10-Q should be
read in conjunction with the audited consolidated financial statements and notes
thereto, included in the Company's Form 10-K for the year ended December 31,
1999.
(d) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(e) Cash and Cash Equivalents
For purposes of the statement of cash flows, the company considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents.
(2) COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
<S> <C> <C>
2000 1999
--------- ---------
Net loss...................................... $(5,537) $(310)
Foreign currency translation adjustment....... (14) (21)
---------------------------
Comprehensive loss......................... $(5,551) $(331)
========= ========
</TABLE>
(3) RESTRICTED CASH
On November 8, 1999 the Superior Court in the Commonwealth of Massachusetts
approved an attachment of funds for $525,000 to be held in trust pending the
settlement of a complaint by a former supplier. The Company has classified
these funds as restricted cash on March 31, 2000.
(4) ACQUISITIONS
7
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In November 1999, the Company acquired all of the outstanding capital stock
of Teknema, Inc. ("Teknema"), a company located in Palo Alto, California
involved in the development of products for the emerging market in information
appliances.
The Company paid $2.5 million in cash, issued 266,169 shares of the
Company's common stock and options to acquire 537,582 shares of common stock
with a combined value of $12.4 million and incurred transaction costs of $0.9
million. Prior to the acquisition, the Company loaned Teknema $1 million with
an annual interest rate of 10%. On the date of the closing of the transaction,
the Company paid certain employees of Teknema for joining the company sign-on
bonuses totaling $1,280,000. The bonuses are recorded in general and
administrative expense in the Company's December 31, 1999 financial statements.
The acquisition of Teknema was recorded under the purchase method of
accounting. The results of operations of Teknema have been included in the
Company's consolidated financial statements from November 8, 1999. A portion of
the purchase price was allocated to in-process research and development
technology, which resulted in a charge of approximately $1.9 million to the
Company's operations in November 1999. At the date of acquisition, Teknema had
three 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 20%-30% discount rate for
risks, probabilities and uncertainties, including the stage of development of
the technology, viability of target markets and other factors. The three
development projects ranged in percentage of completion at the date of
acquisition from 15% to 50%.
The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $16.2 million has been recorded as goodwill and other intangible assets and
is amortized on a straight-line basis over four years.
(5) LOAN RECEIVABLE--OFFICERS
On January 27, 2000 the Company loaned an officer of the Company $160,000.
The term of the loan is for seven months and bears an interest rate of 5%. The
note is secured by all options to purchase common stock granted to the officer.
The loan is due immediately upon the termination of the officer's employment
from the Company for any reason.
See the Company's Form 10-K filed on March 31, 2000 for additional
discussion on Officer's loans.
(6) COMMITMENTS AND CONTINGENCIES
On May 25, 1999, a complaint was filed against the Company in the Superior
Court of California, Santa Clara County, by a former supplier, alleging breach
of oral and written contract and other claims totaling approximately $1.2
million. The complaint was removed to federal court and, on September 23, 1999
the Company filed a counterclaim against the supplier for the damages we
incurred as a result of the supplier's failure to timely ship the Company non-
defective parts. The Company's counterclaim seeks damages of approximately $2.7
million.
On November 4, 1999, a complaint was filed against the Company in the
Commonwealth of Massachusetts, Norfolk Superior Court Department, alleging
breach of agreements to allow a former supplier to purchase an undetermined
number of shares of the Company's common stock at $1.00 per share. The
complaint was removed to federal court on December 3, 1999. The Company
disputes the claim as being wholly without merit. To that end, on December 14,
1999, the Company filed a Motion to Dismiss, which was denied on January 13,
2000. The Company plans to vigorously defend its position. Currently, the
litigation is proceeding through the discovery phase.
In the opinion of management, the amount of the ultimate liability with
respect to these claims will not materially affect the Company's financial
position, results of operations, or cash flows; however, this litigation may be
costly, may distract management's attention and may be significantly time
consuming.
8
<PAGE>
In February and March 2000, six (6) securities class action lawsuits,
captioned:
. Bruckner v. RAVISENT Technologies Inc., et al., Civil Action
No. 00-CV-1075, dated February 29, 2000, amended March 17, 2000,
purported class period: July 15, 1999 to February 18, 2000;
. Buchbinder v. RAVISENT Technologies Inc., et al., Civil Action No.
00-CV-1093, dated March 1, 2000, purported class period: July 15,
1999 to February 17, 2000;
. Burdue v. RAVISENT Technologies Inc., et al., Civil Action No.,
00-CV-1371, dated March 15, 2000, purported class period: July 15,
1999 to March 14, 2000;
. Fink v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-CV-
1014, dated February 25, 2000, purported class period: July 15, 1999
to February 17, 2000;
. Raley v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-CV-
1280, dated March 9, 2000, purported class period: July 15, 1999 to
February 17, 2000; and
. Schaefer v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-
CV-1189, dated March 6, 2000, purported class period: July 15, 1999
to February 17, 2000,
were filed against us and certain of our officers and directors in the
United States District Court for the Eastern District of Pennsylvania. The
complaints allege violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule
10b-5 promulgated thereunder, and seek unspecified damages on behalf of a
purported class of purchasers of our stock during the periods stated above.
There may be additional purported class action lawsuits filed against us based
upon similar alleged facts and claims. Certain of our employees and certain
holders of 5% or more of our common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits
or claims are without merit and that we have meritorious defenses to the
actions. We plan to vigorously defend the litigation. However, failure to
successfully defend these actions could substantially affect our results of
operations, liquidity and financial condition.
<PAGE>
ITEM 2:
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. The
information herein contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. A number of factors could cause actual results, performance,
or achievements expressed or implied by such forward-looking statements. These
factors, as discussed below, see Risk Factors, and in our Annual Report on Form
10K filed on March 31, 2000, include, but are not limited to, the competitive
environment in the personal computer, consumer electronics and Internet
appliance industries in general and our specific market areas; changes in
prevailing interest rates and the availability of terms of financing to fund the
anticipated growth of our business; inflation; changes in costs of goods and
services; our inability to protect our intellectual property; economic
conditions in general and in our specific market areas; demographic changes;
changes in or failure to comply with foreign, federal, state and/or local
government regulations; claims for damages asserted against us; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; changes in our acquisition and capital expenditure plans;
and other factors referenced herein. In addition, such forward looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks uncertainties
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward looking statements can be identified by, among other
things, the use of forward- looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," or "intends," or
the negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. We disclaim any obligations to update any
such factors or to publicly announce the results of any revisions to any of the
forward looking statements contained herein to reflect future events or
developments.
Overview
We design, develop, license and market innovative modular software solutions
that enable digital video and audio stream management in personal computer
systems, consumer electronics devices, and Internet appliances. We also license
supporting hardware designs to selected customers and provide customization
services and customer support. Our solution enables decoding and encoding
multimedia formats such as DVD, DBS/DVB and HDTV on existing personal computer
and consumer electronics platforms. Our digital solutions incorporate industry
standards for video and audio compression and are independent of operating
systems and silicon components.
Our customers consist primarily of personal computer, consumer electronics, and
Internet appliances manufacturers. In addition, we supply our software
solutions and hardware designs to selected peripherals providers and
semiconductor manufacturers. We anticipate that an increasing percentage of
revenues will be derived from consumer electronics, Internet appliances and
semiconductor manufacturers. Approximately $2.9 million or 51% of our first
quarter 2000 revenues were from license and services. Revenues from personal
computer and peripheral manufacturers were derived from Software CineMaster 98
and 99 products and Hardware CineMaster product. We 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 our OEM customers to offer competitive products. In March 2000, we
introduced CineMaster 2000, which included an encoder component. 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
our software solutions or software with supporting hardware designs. Services
revenue consist of engineering fees from consumer electronics, personal
computer, Internet appliances, 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.
By entering into manufacturing and license agreements with third parties under
which we will no longer manufacture Hardware CineMaster 98, we have begun to
transform our business model from a hardware revenue base to a license revenue
base. Once the transition to a licensing
10
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business model is completed, we 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, we expect that most of our revenues will be derived
from licenses of our software and hardware designs. As a result of this change,
we may recognize lower revenues in 2000 than in 1999, which we expect to be
accompanied by a decrease in our cost of revenues.
Currently, our 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 and
Internet appliances, have represented most of our total revenues in the past but
are expected to be nominal in the future. During the quarter ended March 31,
2000, hardware revenues included sales of Hardware CineMaster 98 products,
Internet appliances and hardware components sold to semiconductor manufacturers
for the production of consumer electronics products. In the quarter ended March
31, 2000, revenue generated by the sale of our CineMaster 98 products and
hardware components was approximately $2.8 million.
License revenues consist of fees paid on a per unit basis each time a
manufacturer ships a product that incorporates our 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 our technology. In a number of cases, this occurs in the quarter
following the sale of the licensee's product to its customers. Our 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 our 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 some fixed fees could cause our operating results to
vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated revenue.
In cases where a license fee is associated with the delivery of multiple
elements, and vendor-specific objective evidence of fair value cannot be
established for the individual elements, the entire fee from the arrangement is
deferred until the earlier of the establishment of vendor-specific objective
evidence of fair value or the delivery of all the elements of the arrangement.
In cases where a license grants a customer unspecified upgrade rights, the
license fee is deferred and recognized ratably over the term of the arrangement.
Billed amounts due from the customers in excess of revenue recognized are
recorded as deferred revenue. 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 1999, we 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.
In November 1999, we acquired Teknema, Inc. ("Teknema"), an Internet technology
company dedicated to developing software and hardware designs, for an aggregate
of approximately $16 million in cash, stock and stock options. The acquisition
was recorded under the purchase method of accounting. In connection with the
acquisition, we expensed $1.8 million of the purchase price as acquired in-
process research and development. Goodwill and other intangible assets of $16.2
million recorded in the acquisition are being amortized over a period of four
years. Teknema sells Internet appliance software and hardware technology
through intellectual property licenses and agreements with Internet service
providers. They recently entered into an agreement with Met@box under which
11
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this company will market Internet appliances containing our technology to its
customers
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999.
The following table sets forth, for the periods indicated, the amount and
percentage of total revenues represented by certain items reflected in our
consolidated statements of operations:
Ravisent Technologies
Consolidated Statement of Operations Data
(unaudited)
(in thousands)
Quarter Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
2000 1999
Percent Percent
Amount of Revenue Amount of Revenue
------- ---------- ------- ----------
Revenues:
License and services............................................................ $ 2,921 51.2% $ 2,290 21.2%
Hardware........................................................................ 2,789 48.8% 8,522 78.8%
------- ------- -----
Total revenues................................................................ 5,710 100.0% 10,812 100.0%
Cost of revenues................................................................. 3,643 63.8% 7,399 68.4%
------- ------ ------- -----
Gross profit.................................................................. 2,067 36.2% 3,413 31.6%
Research and
development..................................................................... 2,143 37.6% 1,394 13.6%
Sales and marketing.............................................................. 1,882 33.0% 1,062 9.8%
General and
administrative.................................................................. 2,343 41.0% 837 7.7%
Depreciation and amortization.................................................... 1,356 23.7% 314 2.9%
Amortization of deferred stock compensation...................................... 481 8.4% 71 --
------- ------ ------- -----
Total operating
expenses..................................................................... 8,205 143.7% 3,678 34.0%
------- ------ ------- -----
Operating loss.................................................................. (6,138) (107.5%) (265) (2.4%)
Interest (income) expense, net................................................. (616) 10.8% 45 .4%
------- ------ ------- -----
Net loss before income
taxes........................................................................... (5,522) (96.7%) (310) (2.8%)
Provision for income
taxes........................................................................... 15 0.3% -- --
------- ------ ------- -----
Net loss before
accretion....................................................................... (5,537) (97.0%) (310) (2.8%)
------- ------- -----
Accretion of mandatory
redeemable preferred
stock......................................................................... -- -- 283 2.6%
------- ------ ------- -----
Net loss
attributable to
common stockholders............................................................ $(5,537) (97.0%) $ (593) (5.5%)
======= ======= =====
</TABLE>
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Revenues. Total revenues decreased 47% from $10.8 million for the quarter
ended March 31, 1999 to $5.7 million for the quarter ended March 31, 2000 .
License and services revenue increased 28% to $2.9 million for the quarter
ended March 31, 2000 , due primarily to growth in license fees associated with
our Software CineMaster 98 and 99 and increased customization services related
to our consumer electronics business. Hardware revenues decreased 67% from $8.5
million for the quarter ended March 31, 1999 to $2.8 million for the quarter
ended March 31, 2000, the decrease was attributable to our continued movement
towards the change in business model in which we will license our software and
our hardware designs rather than selling finished goods and components and
recording hardware revenue.
Our revenues are concentrated among a few customers. In the quarter ended March
31, 2000 , two customers accounted for 27% and 15% of our revenues. While we
believe that the number of customers incorporating its technology into their
products will grow, we expect 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.
We sell our products directly to personal computer, consumer electronics, and
Internet appliances manufacturers in North America, Europe, South America and
the Pacific Rim. In the first quarter of 2000 companies based in the Pacific Rim
and North America accounted for a majority of our 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 our products, including Dolby Digital technology.
Cost of revenues decreased 51% from $7.4 million for the quarter ended March
31, 1999 to $3.6 million for the quarter ended March 31, 2000. The decrease
in cost of revenues was primarily due to lower hardware revenue.
Gross Profit. Gross profit decreased from $3.4 million for the quarter ended
March 31, 1999 to $2.1 million for the quarter ended March 31, 2000, primarily
due to lower hardware revenues. For the quarter ended March 31, 2000, 51% of
total revenue was derived from license and services revenues, in comparison to
21% for the comparable quarter in 1999. The gross profits percentage for
license and services revenues is much higher than that from hardware sales. As a
percentage of total revenues, gross profit increased from 32% for the quarter
ended March 31, 1999 to 36% for the quarter ended March 31, 2000, primarily as
a result of a higher proportion of license revenues associated with our
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 46%, from
$1.5 million for the quarter ended March 31, 1999, to $2.1 million for the
quarter ended March 31, 2000. As a percentage of total revenues, research and
development expenses increased from 14% to 38%. The increase in research and
development expenses in absolute dollars was due primarily to increased
headcount. The increase in research and development expenses as a percentage of
total revenues resulted primarily from our lower quarterly revenue. We expect
research and development expenses to continue to increase in absolute dollars
through 2000 compared to 1999 as we add additional engineering staff to expand
its product line.
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 77% from $1.1 million for the quarter ended March 31, 1999
to $1.9 million for the quarter ended March 31, 2000 As a percentage of total
revenues, sales and marketing expenses increased from 10% to 33% . 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 our lower quarterly
revenue, we expect sales and marketing expenses to increase in absolute dollars
through 2000 as compared to 1999.
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General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and support costs for our finance, human
resources, information systems and other management departments. General and
administrative expenses increased 180% from $0.8 million for the quarter
ended March 31, 1999 to $2.3 million for the quarter ended March 31, 2000. As
a percentage of total revenues, general and administrative expenses increased
from 8% to 41%. In absolute dollars, the general and administrative increase
was due to additional employees needed for added infrastructure since going
public. Additionally, higher legal and accounting expenses were incurred in
connection with work associated with a potential acquisition and additional
activities in connection with our year end audit. General and administrative
expenses increased as a percentage of total revenues primarily due to our lower
quarterly revenue. We expect general and administrative expenses to increase in
absolute dollars through 2000 compared to 1999 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. We recorded amortization and depreciation of $1.4
million for the quarter ended March 31, 2000 , compared to $0.3 million for the
quarter ended March 31, 1999.
The increase primarily relates to the goodwill recorded as part of the Teknema
acquisition. See"--Acquired In-Process Research and Development Expense."
Stock-based Compensation. In March 2000, we recorded $0.1 million of
amortization of deferred stock compensation in connection with stock options
granted in 1999. We have been amortizing these amounts as non-cash
compensation expense over the four-year vesting period of the options.
Additionally, we recorded a one-time charge for stock compensation of $0.3
million to a former employee.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In November 1999, RAVISENT completed the acquisition of Teknema, a company
located in Palo Alto, California and dedicated to developing software and
solutions for the emerging market for information appliances. The purchase price
included $2.5 million in cash, 266,169 shares of RAVISENT common stock and
537,582 options to acquire common stock with a combined value of $12.4 million
and incurred transaction costs of $0.9 million.
The acquisition of Teknema 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 $1.9 million to our
operations in December 1999. The in-process research and development technology
was valued using a combination of the Income Approach, Projected Earnings
Approach calculating EBIT as well as after-tax earnings from technology and 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% discount rate for risks, probabilities and uncertainties,
including the stage of development of the technology, viability of target
markets, and other factors.
The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $ 16.2 million has been recorded as goodwill and other intangible assets.
This amount is being amortized on a straight-line basis over four years.
As of the acquisition date, Teknema was conducting ongoing research and
development into new products in the form of three projects, including
enhancements to the existing products previously developed by Teknema. At the
date of acquisition, these projects had not reached technological feasibility
and there was no alternative future use for them. The three research and
development projects included:
Advance Set-Top Box/Technology. This product was a customized television
set-top box which incorporated an easy-to-use Web browser and electronic mail
("e-mail") consumer application. This product was enhanced with secure
transaction, smartcard application and JavaScript capabilities, as well as V.90
modem and broadband capabilities. Subsequent enhancements included an Internet
integration platform, scripting and graphic capabilities of an embedded Web
browser. At the time of acquisition, the primary development efforts were
focused on developing a full-featured advanced set-top box (and associated
technology that can be licensed to third parties) that will be a complete
redesign of an existing Teknema product using a new operating system, a new,
faster processor and adding multimedia capabilities. Some of the development
efforts include developing or utilizing:
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. Chat and messaging functions for its Internet Integration Platform;
. Network interfaces and LCD displays for its Internet Integration
Platform:
. Multimedia functions such as digital video and audio streaming and
decoding and bi-directional video communication capabilities;
. A faster processor, broadband network interface, video engine chip and
a POSIX-compliant operating system which provides native application
programming interfaces for the development of browser plug-ins; and
. A port for hardware expansion
At the time of acquisition, this development project was approximately 30%
complete.
Telephony. Teknema was developing an expansion of its Internet appliance
platform for the Internet telephony market. The product would leverage its
current set-top box platform into a multimedia platform capable of offering
video, data and voice over the Internet for video conferencing-over-the-
Internet. At the time of acquisition, this development project was
approximately 50% complete.
Home & Industrial. Teknema was developing various products for the home
automation and consumer products market. Teknema was in the early stages of
developing a graphical, interactive control system for home appliances such
as televisions. In addition, Teknema was developing a DVD player with
Internet capabilities. At the time of acquisition, this development project
was approximately 15% complete.
In April 1998, we completed the acquisition of Viona, a company specializing
in the development of digital video technology. We paid $6.1 million in cash, of
which $2.6 million was paid at closing, $2.1 million will be paid during 1999,
and $1.4 million will be paid in equal installments at the end of each of the
next three fiscal years, issued 1,204,820 shares of RAVISENT common stock valued
at $4.8 million and incurred transaction costs of $0.8 million. For accounting
purposes, payments due in future periods have been discounted.
The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of approximately $7.9
million to our 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 us. At the date of acquisition, these projects had not reached
technological feasibility and there was no alternative future use for them. The
five research and development projects included:
CineMaster LC Hardware DVD Decoder, a single circuit board or card that can
be added to a personal computer to allow the personal computer to process
digital video signals. At the time of the acquisition, Viona was conducting
research and development to integrate this product into a single chip-based
design in an effort to reduce manufacturing costs and to improve playback
performance quality. This research and development project had completed only
alpha testing and was approximately 80% complete at the date of acquisition.
Viona had incurred approximately $117,000 of research and development expense
and estimated that $35,000 would be required to complete the development of the
project. Development was completed during 1998.
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,
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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. We 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. The development effort has been split into customer
specific implementations that are expected to be completed within the next three
months. The first customer was in pilot production by the end of 1999 and the
remaining customer implementations are in the 75-90% completion range.
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. We
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 currently expected to be completed within the next three months
and is currently approximately 90% complete.
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. We 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. This effort was re-targeted to provide HDTV tuner support for the HDTV
Software Decoder development effort. This development effort was completed by
the end of 1999 and the technology integrated into the HDTV Software Decoder
project and our partner's HDTV tuner hardware and software driver
implementations.
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. We 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 nine months for the release of an Audio/Video
decoding solution and a separate following release that adds data decoding. This
project is currently approximately 75% 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.
We based our 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our 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 March 31, 2000
we had approximately $40.5 million in cash and cash equivalents.
Net cash used in operating activities for the quarter ended March 31, 2000
was $7.1 million, compared to cash provided by operating activities of $0.9
million for the quarter ended March 31,1999. Cash used in operating activities
was primarily the result of net losses, adjusted for non-cash items, including
non-cash compensation expense.
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Net cash used in investing activities for the quarter ended March 31, 2000
was $0.3 million, compared to cash provided by investing activities of $8
thousand for the quarter ended March 31,1999. Cash used in investing activities
for the quarter ended March 31, 2000 consisted primarily of net purchases of
furniture and equipment. Cash provided by investing activities for the quarter
ended March 31, 1999 consisted mainly of net sales of furniture and equipment to
a leasing agent.
Net cash used in financing activities for the quarter ended March 31, 2000
was $0.3 million, compared to cash provided by financing activities of $0.3
million for the quarter ended March 31, 1999. Cash used in financing activities
for the quarter ended March 31, 2000 was primarily attributable to payments to
the former principals of Viona. Cash provided by financing activities for the
quarter ended March 31, 1999 was primarily attributable to proceeds from
borrowings under a bank line of credit.
As of March 31, 2000, our 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 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 us to purchase the equipment at the end of
the term. Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures consistent with
anticipated growth in operations, infrastructure and personnel. In addition, we
have approximately $0.5 million at March 31, 2000 of payments due to the former
owners of Viona. This amount is payable during the fourth quarter of 2000.
As of March 31, 2000, we had a $5 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable and inventory, as defined in the
credit agreement, and bears interest at a rate of prime plus 1.5 % per annum
(10.5% at March 31, 2000).
At March 31, 2000 no borrowings against this line of credit were
outstanding and $2.8 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 our assets. We are required to comply with a tangible
net worth covenant, as defined in the loan and security agreement. On March 31,
2000 the Company was in compliance with it's debt covenants.
We believe that our current cash, cash equivalents balance and cash
anticipated to be provided by operations, if any, together with borrowings
available under our line of credit, will be adequate to meet our cash needs for
at least the next twelve months.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell such products in North
America, Asia and Europe. As a result, our 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 our products less competitive in
foreign markets. We do not use derivative instruments to hedge our foreign
exchange risk. Our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business and the value of our shares is subject to numerous risks. Some of
these risks are described above and certain additional risks are described
below:
RISKS RELATED TO RAVISENT
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WE HAVE A LIMITED OPERATING HISTORY 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, 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, fluctuations in our
operating results may cause us to perform below the expectations of public
market analysts and investors. If our results were to fall below market
expectations, the price of our common stock may fall significantly. Our limited
operating results have varied widely in the past, and we expect that they will
continue to vary significantly from quarter-to-quarter as we attempt to
establish our products in the market.
YOU SHOULD EXPECT OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE IN FUTURE PERIODS
AND THEY MAY FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE
Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:
. variations in demand for our products and services, which are relatively
few in number;
. the timing of sales of our products and services and the timing of new
releases of personal computer systems, consumer electronics devices and
semiconductors that incorporate our products;
. delays in introducing our products and services;
. changes in our pricing policies or the pricing policies of our
competitors;
. the timing and accuracy of royalty reports received from our customers,
which we have to date not audited;
. the timing of large contracts that materially affect our operating
results in a given quarter;
. changes in the usage of digital media;
. our ability to develop and attain market acceptance of enhancements to
our products;
. new product introductions by competitors;
. the mix of license, service and hardware revenues;
. unanticipated customer demands which impact on our ability to deliver
our products and ultimately recognize revenue;
. 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.
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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 NEVER BEEN PROFITABLE AND MAY NEVER ACHIEVE PROFITABLITIY IN THE FUTURE
We had a net operating loss of $5.5 million for the quarter ended March 31,
2000. To date, we have not achieved profitability on an annual basis, and
revenues from our software and hardware design solutions may not result in
sufficient revenues to sustain profitability in any future period. In addition,
we cannot be certain that we can increase profitability, particularly to the
extent that we face price competition. We expect to significantly increase our
sales and marketing, product development, engineering and administrative
expenses. As a result, we will need to generate significant revenues to sustain
profitability.
INCREASING COMPETITION MAY CAUSE OUR PRICES TO DECLINE, WHICH WOULD HARM OUR
OPERATING RESULTS
We expect our prices for our digital entertainment products to decline over
the next few years. We expect to face increased competition in markets where we
license our digital entertainment products, which will make it more difficult to
maintain our prices 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.
OUR BUSINESS SIGNIFICANTLY DEPENDS UPON OUR CINEMASTER PRODUCTS, AND IT IS
UNCERTAIN WHETHER THE MARKET WILL CONTINUE TO ACCEPT THESE PRODUCTS
In the quarter ended March 31, 2000, we derived approximately 87% of our
license revenues from sales of devices 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.
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
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. the failure of third parties to develop and introduce content for
digital entertainment applications in a timely fashion.
The inability of our customers or us 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 either party receives a written cancellation. As a result, many of our
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 MANY OF OUR PRODUCTS AND
OUR BUSINESS WILL BE SERIOUSLY HARMED
We license technology that is used in our 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 many of our digital entertainment products and our
business would be seriously harmed. For example, we have a license agreement
with Dolby Laboratories Licensing Corporation 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 ATI Technologies
Inc., Cirrus Logic, Dolby Laboratories, Intel Corporation and
STMicroelectronics, Inc. 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, consumer electronics and Internet appliance
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
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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, consumer electronics or Internet appliance devices
could be exploited by our competitors. If we were to lose market share as a
result of lapses in our product management, our business would be harmed.
OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL PROPERTY, AND IF WE
FAIL TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS COULD BE HARMED
Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable materials.
If we are not successful in protecting our intellectual property, our business
could be substantially harmed.
Our pending patents may never be issued, and even if issued, may provide us with
little protection.
We regard the protection of patentable inventions as important to our
future opportunities. We currently have six 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
three pending trademark applications for the marks ''RAVISENT,'' ''RAVISENT
Technologies'' and the RAVISENT logo. We also have an issued U.S. trademark for
the mark ''CineMaster.'' None of our trademarks are yet registered outside of
the United States. Moreover, despite any precautions which we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon state
or foreign law which precede our federal registration of such marks;
. current federal laws that prohibit software copying provide only limited
protection from software ''pirates,'' and effective trademark, copyright
and trade secret protection may be unavailable or limited in certain
foreign countries;
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we are unable to determine the extent
to which piracy of our products and trademarks may occur, particularly
overseas;
. we have provided our source code for our products to a few of our
customers as part of our licensing arrangements with them and the
procedures and practices implemented under the terms of these licenses
may not be sufficient to prevent them from exploiting the source code;
and
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. 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 others, or us 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
received notice from several of our largest customers which are personal
computer manufacturers, that a third party with a history of litigating
its proprietary rights and which has substantial financial resources has
alleged that aspects of MPEG-2 technology infringe upon patents held by
the third party. These customers may in the future seek compensation or
indemnification from us arising out of the third-party claims and may be
required to agree to indemnify them to secure future business or
otherwise. We do not have written agreements with these customers that
limit our liability to these customers should litigation ensue.
Moreover, we may be required to pay license fees in connection with the
use of the third party's technology in the future.
. A group of companies mostly comprised of consumer electronics
manufacturers has formed a consortium known as MPEG-LA to enforce the
proprietary rights of other holders of patents covering essential
aspects of MPEG-2 technology that are incorporated into our products.
MPEG-LA has notified a number of personal computer manufacturers,
including our customers, that patents owned by members of the consortium
are infringed by the personal computer manufacturers in their
distribution of products that incorporate the MPEG-2 technology. MPEG-LA
has requested that these personal computer manufacturers pay license
fees for use of the technology covered by MPEG-LA patents. These
personal computer manufacturers may in the future seek compensation or
indemnification from us arising out of the MPEG-LA claims, and we may be
required to pay license fees in connection with the use of MPEG-2
technology in the future.
. Another group of companies mostly comprised of consumer electronics
manufacturers has formed a consortium known as the DVD Patent Licensing
Program to enforce the proprietary rights of other holders of patents
covering essential aspects of DVD technology that are incorporated into
our products. The DVD Patent Licensing Program has notified us, as well
as a number of computer manufacturers and other companies manufacturing
or licensing DVD-related products, including our
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customers, that patents owned by members of the consortium are infringed
by the personal computer manufacturers in their distribution of products
that incorporate the DVD technology. The DVD Patent Licensing Program
has requested that these personal computer manufacturers pay license
fees for use of the technology covered by DVD Patent Licensing Program
patents. We may be required to pay license fees in connection with the
use of such DVD technology in the future as a result of such claims.
Further, a court could determine that we infringe any such patents and
we would be liable for resulting damages. In addition, our customers who
have been contacted by the DVD Patent Licensing Program may in the
future seek compensation or indemnification from us arising out of the
DVD Patent Licensing Program claims, and we may be required to pay
license fees on their behalf in connection with the use of such DVD
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 products and services in rapidly
evolving markets requires an effective planning and management process. We have
limited experience in managing rapid growth. In the last several months, we have
added engineering, sales, marketing, administrative and other management
personnel. Our business will suffer dramatically if we fail to manage our
growth. On March 31, 2000, we had a total of 157 employees compared to a total
of 106 employees on March 31, 1999. 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
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;
. adopt and staff an investor relations program; and
. continue to improve our 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 ARE IN THE PROCESS OF CHANGING THE INTERNET APPLIANCE PORTION OF OUR BUSINESS
FROM SELLING HARDWARE TO LICENSING SOFTWARE AND SUPPORTING HARDWARE DESIGNS, AND
OUR REVENUES ARE EXPECTED TO DECLINE AS A RESULT
In November 1999, we acquired all of the capital stock of Teknema, Inc.,
which forms the basis for our Internet appliance division. Teknema's business
model was focused on selling hardware-based solutions. Following the
acquisition, we have begun changing the business model for our Internet
appliance division from selling hardware-based digital solutions to licensing
software-based digital solutions. This change requires us to adjust our business
processes and make additions to our engineering and marketing teams. In
addition, we expect that revenues from this division will be lower in 2000 than
in 1999 in part because it will no longer be selling hardware solutions.
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You should consider the risks and challenges we may face in this area of our
business as a result of this change in business model, which include, among
others:
. increasing demand for Internet appliances and services;
. maintaining and increasing our base of Internet appliance manufacturers;
. competing effectively with existing and potential competitors; and
. developing further this relatively new and unproven business model.
We cannot be certain that this change in business strategy will be
successful or that we will successfully address these risks.
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. In the future, 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 that could make
management of our business very difficult.
WE ARE DEPENDENT UPON OUR KEY MANAGEMENT FOR OUR FUTURE SUCCESS, AND FEW OF OUR
MANAGERS ARE OBLIGATED TO STAY WITH US
Our success depends on the efforts and abilities of our senior management
and certain other key personnel, particularly technical personnel in our
engineering subsidiary in Germany. Many of our officers and key employees are
employed at will. In addition, Mr. Wilde and the principal engineers in our
German subsidiary, Messrs. Sigmund, Horak and Ringelberg, are the only employees
upon whom we have obtained key man life insurance and we do not expect to obtain
life insurance on any of our other senior managers. If any of these or other key
employees left or was seriously injured and unable to work and we were unable to
find a qualified replacement, then our business could be harmed. We have
recently hired new managers and intend to continue hiring key management
personnel. We may not be able to successfully assimilate our recently hired
managers or to hire qualified key management personnel to replace them.
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 2000 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 significant operations in
Palo Alto, California. We have in the past and expect in the future to face
difficulties locating qualified personnel in these locations. We have had, and
expect to continue having 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 SUBSIDIARIES
THAT COULD RESULT IN UNEXPECTED FUTURE EXPENSES AND DIFFICULTIES IN FINANCIAL
REPORTING
In November 1999, we completed the acquisition of Teknema, Inc. However, we
may not be able to successfully integrate the company. Combining our companies
requires, among other things, integrating our
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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 that 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 Teknema'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
Our products are very complex and frequently contain undetected errors. The
likelihood of errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as a result of
defects in the products into which our products are incorporated. Despite our
extensive quality assurance process, we have in the past shipped product
releases with some defects, and have discovered other errors in our products
after their commercial shipment. Despite our quality assurance process and that
of our customers, defects and errors may be found in new products or in new
versions or enhancements of existing products after commercial shipment has
begun. We may be required to devote significant financial resources and
personnel to correct any defects. Known or unknown errors or defects that affect
the operation of our products could result in the following, any of which could
harm our business:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. failure of our products to achieve market acceptance;
. increased service and warranty costs; and
. litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, 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, consumer
electronics device, Internet appliance or peripheral sold that contains our
products 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 their 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
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In the quarter ended March 31, 2000, we derived approximately 64% of our
revenues, from shipments to foreign subsidiaries of U.S. companies, and we
expect to derive an increasing amount of our revenue from sales outside North
America. We have limited experience in marketing and distributing our products
internationally. In addition, there are many risks inherent in doing business on
an international basis, including, among others:
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. problems in collecting accounts receivable;
. political and economic instability;
. changes in diplomatic and trade relationships;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. variance and unexpected changes in local laws and regulations.
Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We do
not use derivative instruments to hedge foreign exchange risk. In the future, we
may conduct sales in local currencies, in which case, changes in exchange rates
could adversely affect our operating results. In addition, if we conduct sales
in local currencies, we may engage in hedging activities, which may not be
successful and could expose us to additional risks.
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 2000. Our
capital requirements will depend on many factors, including:
. acceptance of and demand for our products;
. the number and timing of acquisitions;
. the costs of developing new products;
. the costs associated with our expansion; and
. the extent to which we invest in new technology and research and
development projects.
To the extent that the proceeds from our initial public offering are
exhausted, our existing sources of cash and cash flow from operations, if any,
are insufficient to fund our activities, we may need to raise additional funds.
If we issue additional stock to raise capital, your percentage ownership in
RAVISENT would be reduced. Additional financing may not be available when needed
and, if such financing is available, it may not be available on terms favorable
to us.
BECAUSE OF THEIR SIGNIFICANT STOCK OWNERSHIP, OUR OFFICERS AND DIRECTORS WILL BE
ABLE TO EXERT SIGNIFICANT CONTROL OVER OUR FUTURE DIRECTION
Executive officers, directors and entities affiliated with them will, in
the aggregate, beneficially own approximately twenty-five percent (25%) 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
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The board of directors has the authority without any further vote or action
on the part of the stockholders to issue up to 5,000,000 shares of preferred
stock and 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.
RISKS RELATED TO OUR INDUSTRY
Our revenues are dependent upon acceptance of products that incorporate our
digital entertainment technology in the personal computer, consumer electronics
and Internet appliance industries
We rely on the personal computer, consumer electronics and Internet appliance
industries, and these industries have risks and uncertainties that are beyond
our control.
The personal computer, consumer electronics and Internet appliance
industries are presently the only markets for our digital entertainment
solutions. As a result, our results of operations will depend almost entirely on
consumer acceptance of the products that incorporate our technology. Our
dependence on these industries involves several risks and uncertainties,
including:
. whether semiconductor manufacturers developing silicon devices for
personal computer, consumer electronics and Internet appliance
manufacturers will design our digital solutions into their devices and
successfully introduce these devices;
. changes in consumer requirements and preferences;
. the small number of product manufacturers in these industries and the
short product life cycles which can be six months or less;
. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications, such as handheld
personal computers and set-top boxes, which have only recently been
introduced to the market; and
. the current lack of open industry standards for software and hardware in
the consumer electronics and Internet appliance industries.
We currently depend upon demand for digital entertainment products, which may
not be sustained.
Our success currently depends upon continued demand for digital
entertainment products in the personal computer, consumer electronics and
Internet appliance markets. All of our revenues the quarter ended March 31, 2000
resulted from sales of digital entertainment products. In addition to the risks
inherent in the personal computer, consumer electronics and Internet appliance
industries, the market for digital entertainment 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 digital entertainment applications; and
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. the potential for declining demand for DVD solutions in lower price
personal computers.
Factors negatively affecting the personal computer, consumer electronics or
Internet appliance 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 and RealNetworks, Inc. Our principal
competitors in the hardware-based digital solution market are Sigma Designs,
Inc., Intervideo Inc. and we also compete against several smaller companies. We
also compete with the internal research and development departments of other
software companies as well as those of personal computer, peripherals, consumer
electronics and semiconductor manufacturers who are in the market for specific
digital video or audio software applications. Numerous other major personal
computer manufacturers, software developers and other companies are focusing
significant resources on developing and marketing products and services that
will compete with our CineMaster products. At least two semiconductor
manufacturers, including C-Cube Microsystems and Zoran, are positioning their
products as offering hardware-based digital video and audio management
capabilities and marketing such products as equal or superior to our CineMaster
products. In the future, operating system providers with a larger established
customer base, such as Microsoft, may enter the digital video or audio stream
management markets by building video or audio stream management applications
into their operating systems. For example, Microsoft currently markets a 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 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 personal computer,
consumer electronics and Internet appliance industries and the entrance of new
competitors into our markets, and 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
solutions is characterized by rapid technological change and evolving industry
standards, such as standards for DVD audio, DVD random access memory and DTV in
Europe as well as other digital entertainment applications. 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
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Our results of operations will depend on the extent to which our products
are incorporated into the products of leading personal computer, consumer
electronics, Internet appliance, 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 their markets and introducing these new
technologies to the marketplace in a timely manner. We must constantly modify or
improve our products to keep pace with changing consumer preferences. For
example, DVD drives became widespread on new personal computers in the last two
years. It is particularly difficult to keep pace with changing consumer
preferences in the personal computer and consumer electronics industries as a
result of a number of factors, including:
. the difficulty of anticipating and timely responding to the latest
consumer trends and requirements;
. the introduction by our competitors of new products embodying popular
new technologies or features that appeal to consumers; and
. the significant investment that is often required before commercial
viability is achieved to market a new feature or function.
Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition, we
may not have the financial and other resources necessary to develop any
enhancements or new generations of the technology that generate revenue in
excess of the costs of development.
YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS TO OUR BUSINESS AND COULD HARM
SALES
Neither our Hardware CineMaster nor our Software CineMaster products make
use of calendar clocks in any way; nor do the products of our newly acquired
subsidiary, Teknema, Inc. 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. Although, as of May 11, 2000, we
have not received notice of any Year 2000 failure, 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 performed operational tests on our products as incorporated into those of our
customers and these tests did not result 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 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
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;
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. 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.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In February and March 2000, six (6) securities class action lawsuits,
captioned:
. Bruckner v. RAVISENT Technologies Inc., et al., Civil Action No. 00-
CV-1075, dated February 29, 2000, amended March 17, 2000, purported
class period: July 15, 1999 to February 18, 2000;
. Buchbinder v. RAVISENT Technologies Inc., et al., Civil Action No.
00-CV-1093, dated March 1, 2000, purported class period: July 15,
1999 to February 17, 2000;
. Burdue v. RAVISENT Technologies Inc., et al., Civil Action No.,
00-CV-1371, dated March 15, 2000, purported class period: July 15,
1999 to March 14, 2000;
. Fink v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-CV-
1014, dated February 25, 2000, purported class period: July 15, 1999
to February 17, 2000;
. Raley v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-CV-
1280, dated March 9, 2000, purported class period: July 15, 1999 to
February 17, 2000; and
. Schaefer v. RAVISENT Technologies, Inc., et al., Civil Action No. 00-
CV-1189, dated March 6, 2000, purported class period: July 15, 1999
to February 17, 2000,
were filed against us and certain of our officers and directors in the
United States District Court for the Eastern District of Pennsylvania. The
complaints allege violations of the federal securities laws, specifically
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule
10b-5 promulgated thereunder, and seek unspecified damages on behalf of a
purported class of purchasers of our stock during the periods stated above.
There may be additional purported class action lawsuits filed against us based
upon similar alleged facts and claims. Certain of our employees and certain
holders of 5% or more of our common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits
or claims are without merit and that we have meritorious defenses to the
actions. We plan to vigorously defend the litigation. However, failure to
successfully defend these actions could substantially affect our results of
operations, liquidity and financial condition.
From time to time, we have received, and expect to continue to receive,
notices of claims of infringement of other parties' proprietary rights and other
claims in the ordinary course of our business.
30
<PAGE>
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) CHANGES IN SECURITIES: NONE
(b) DIVIDENDS:
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant.
(c) 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 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>
<CAPTION>
<S> <C>
Underwriting discounts and commissions $4,830,000
Finders Fees --
Expenses paid to or for underwriters --
Other expenses $2,748,000
----------
Total Expenses $7,578,000
==========
</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) were $61,422,000. From the effective date of the Registration
Statement to March 31, 2000, the net proceeds have been used for the following
purposes:
<TABLE>
<CAPTION>
<S> <C>
Construction of plant, building and facilities 15,000
Purchase and installation of furniture
and equipment 168,242
Acquisition of other business (including
transaction costs) 4,430,060
Working Capital 14,292,815
Temporary investments, including cash
and cash equivalents 40,502,000
Other purposes (for which at least $100,000
has been used), including:
Investments, including debt instruments
of the United States Government and its
agencies and in high quality corporate
Issuers.
2,013,883
---------
$61,422,000
===========
</TABLE>
31
<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 6A: EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
27.1 Financial data schedule
ITEM 6B: REPORTS ON FORM 8K
The following reports were filed on Form 8K during this period:
On January 24, 2000 the Company filed a Form 8K-A for the acquisition
of Teknema. This report contained audited financial statements for
Teknema for the period December 31, 1998 and September 30, 1999.
On February 8, 2000 the Company filed an amendment to the Form 8K-A
for the acquisition of Teknema. This report contained audited
financial statements for Teknema for the period December 31, 1998 and
September 30, 1999.
32
<PAGE>
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.
May 15, 2000 RAVISENT TECHNOLOGIES INC.
/s/ Jason C. Liu
--------------------------
Jason C. Liu
Chief Financial Officer
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 40,502
<SECURITIES> 1,032
<RECEIVABLES> 16,427
<ALLOWANCES> 319
<INVENTORY> 2,347
<CURRENT-ASSETS> 61,650
<PP&E> 2,458
<DEPRECIATION> 696
<TOTAL-ASSETS> 82,629
<CURRENT-LIABILITIES> 12,224
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 69,950
<TOTAL-LIABILITY-AND-EQUITY> 82,629
<SALES> 5,710
<TOTAL-REVENUES> 5,710
<CGS> 3,643
<TOTAL-COSTS> 8,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (616)
<INCOME-PRETAX> (5,522)
<INCOME-TAX> 15
<INCOME-CONTINUING> (5,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,537)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
