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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
PATH 1 NETWORK TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3636 NOBEL DRIVE, SUITE 275, SAN DIEGO, CA 92122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 450-4220
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.001 PAR VALUE PER SHARE
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(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
BUSINESS
OVERVIEW
We believe there will be, over the next several years, a significant
increase in the number of audio, video and telephony transmissions over the
Internet, and that there will be a market for products which can enable wired
data transmission networks to handle equally adeptly each of these kinds of
transmissions. It is our goal to position ourselves at the forefront of this
movement through the introduction of products based on our proprietary
TrueCircuit -TM- technology. Our TrueCircuit technology is capable of
enabling the efficient transmission of all communications over a single
network and bringing high-level quality of service (QoS) and real-time audio,
video and telephony capabilities to the Internet and to standard Internet
Protocol (IP) networks. Our intended real-time data delivery product line for
business and, ultimately, the home would have the potential to change the way
video content is produced and delivered. TrueCircuit would enable the
producer of the video to transmit the video digitally over an Ethernet
network to editors, who would receive it with negligible latency or jitter.
This allows for the replacement of the current method of using analog video
and facilitates a 100% digital approach to video production, distribution,
editing and broadcast. Businesses and ultimately, homes can then receive
digital video over the Internet. In addition, TrueCircuit will ensure that a
phone call placed over the Internet will be delivered as reliably as calls
made over today's telephone network by guaranteeing the same end-to-end
quality of service presently provided by existing telephone networks. Among
other benefits, our intended products would also enable improved interaction
of computers, telephone equipment, video equipment and network appliances.
As it operates today, IP (which is simply a common set of
procedures, conventions and rules to link together computers and information
across the world) fragments information into packets of data and
automatically routes these packets to their correct destination via
intermediate switching nodes called IP routers. This process, known as
"packet-switching", does not ensure that packets will arrive in the same
order in which they were sent, or that they will arrive at their destinations
in a timely manner.
Packet-switching works best for transmission of data, which is
tolerant of packet re-ordering and large variations in transmission time
(known as "jitter"). Jitter causes the recipient of an audio or video
transmission to experience a jerky or otherwise imperfect signal, or lengthy
download times as packets respectively arrive. In contrast, the transmission
of real-time signals, including audio and video, requires timely, predictable
and consistent delivery. Traditional telephone networks use
"circuit-switching" to meet the needs of real-time audio signals. Circuit-
switching ensures that a communications signal always has a consistent, fixed
point-to-point path, or "channel", from source to destination. Because
circuit-switching maintains a constant route, it minimizes end-to-end delays
and jitter. However, traditional circuit-switching is not practical for many
of today's Internet uses due to its relatively rigid and inflexible
structure.
Our technology addresses the inherent deficiencies of packet-switching
as applied to transmission of real-time signals by superimposing a
circuit-switched infrastructure on standard IP networking, while maintaining
full compatibility with existing IP networks.
Although we do not have products ready for sale in the marketplace,
we have developed our core software and hardware technology, TrueCircuit,
and completed production of a first generation of prototype equipment
containing this proprietary TrueCircuit technology. The TrueCircuit
Multimedia Gateway, our initial product, is currently in limited production
and undergoing beta-test field evaluation with several companies. As further
discussed in this section, we have several other proposed products at various
stages in the developmental process. We intend to continue to pursue
development and introduction of our proposed products into wide area networks
(WANs), local area networks (LANs), metropolitan area networks (MANs), and
the Home Networking Market, which includes television, telephone, personal
computers and home security systems.
INDUSTRY BACKGROUND
CONVERGENCE - AN INTERNET MARKET OPPORTUNITY
The ability to utilize intranets and the Internet to make clear,
high-quality telephone calls and transmit live, high-quality video is almost
a reality. Many companies around the world currently produce equipment that
interface standard telephone and video equipment with computer data networks,
including the Internet. However, without the QoS guarantees offered by
TrueCircuit, there is currently degradation in audio and video data
transported over computer networks. TrueCircuit can transport the audio,
video, telephony and other real-time data streams over computer networks
without the latency and jitter these networks currently experience. As such,
TrueCircuit can deliver the quality of real-time data over computer networks
that can facilitate the realization of the Internet as the transmission
network for the multimedia industry.
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There are strong incentives for companies to merge all of their
communication activities over a network of wires, including for data, voice,
video and control. Currently, companies employ several separate networks
throughout an enterprise -- telephone, computer, security and fire protection.
By combining these, an organization would incur the cost of installing and
maintaining only one network, rather than several separate networks, each of
which would require capital outlay and staffing.
Known as "convergence," a shift to a single network would allow these
companies to take full advantage of the significant cost savings and
increased throughput that computer networks provide. Network convergence
technology enables the merging of disparate digital information such as
full-motion video, still video images, audio, telephony and business data
over the same network infrastructure (as compared to the use of separate
networks for separate applications, e.g. using a telephone network to place a
telephone call). The emergence of this network convergence technology has
largely been made possible by the move from analog to digital technology in
all forms of media. Our TrueCircuit technology facilitates efficient
convergence, enabling disparate services to be carried without disruption,
and meets the specific technical requirements of each service in their
combined carriage over LANs, MANs, and WANs.
In addition to cost savings, we intend that "convergence" products
developed using our TrueCircuit technology could provide enhanced quality to
IP networks in businesses and at home by enabling real-time audio, video and
telephony to be delivered over a single IP network with the equivalent of
"circuit-switched" QoS. QoS, a recognized industry term, is simply a
statement of a technology's capabilities in transporting information across a
network. The term "QoS" can pertain to one or more factors (e.g. latency,
jitter or throughput) relating to quality of data transport across a network.
Our "circuit-switched" QoS specifications cover the following key factors:
(i) jitter, (ii) latency (which is the delay in transmission of an
information packet from source to destination across a network), (iii)
reliability (which is defined as the percentage of packets that are delivered
across the network), (iv) sequence (which is defined as delivery of packets
of information in the correct order), and (v) throughput (which is defined as
the consistent transport and delivery of a certain specified level of
information packets per second). Thus, when we state that TrueCircuit can
provide "circuit-switched" QoS, it means that our intended products will
minimize jitter and latency and assure sufficient sequence, reliability and
throughput capabilities so as to enable DVD-quality video, CD-quality radio,
telephony and other time-critical information to all be transported
simultaneously, alongside non-real-time data, over one IP network.
THE NEED FOR A SOLUTION
Computer data is tolerant of packet-switching jitter and other QoS
problems because computer data does not require real-time delivery; it does not
matter when or in what order the packets arrive. In contrast, real-time
services (e.g. voice, audio and live, interactive video) require timely,
predictable and consistent delivery. As a result of current network systems'
packet-switching jitter and other QoS problems, multimedia and other time
critical transmissions experience long delays and degradation. Therefore, IP
network systems cannot currently provide the convergence of real-time voice,
high-fidelity audio, and live, interactive video services with computer data
over a single network.
Delays and delivery problems currently associated with real-time
transmission result from the collision of packets carrying data when network
traffic volume is high. With existing IP computer networks, there is a lack
of an effective traffic management infrastructure to eliminate such
collisions. Despite this deficiency, IP has become the de facto standard for
computer networks. Within LANs, the vast majority of computers communicate
via IP networks, such as Ethernet, the most prevalent of local IP networks.
Within WANs, most computers communicate using IP switching over ATM/SONET
links, which are circuit-switched networks. Furthermore, major telecomm
vendors, such as Cisco, IBM, the Bell Companies and Enron have publicly
indicated that they plan to move to IP-only equipment -- entirely eliminating
ATM from their networks -- because IP systems are less costly.
Our TrueCircuit technology responds to the need to enable
packet-switched IP networks to provide high-quality, real-time transmissions by
coordinating the transport of packets across the network to eliminate or
minimize delays and unreliable delivery. In this regard, we believe our
TrueCircuit technology can make available the best of both worlds - the
reliability and speed of circuit-switched networks along with the data carrying
capability and low cost of IP networks.
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As the demand for real-time network services grows, the traffic
control of the transmitted information becomes increasingly important.
Congestion of information packets at points of contention (bottlenecks in a
network), results in QoS failures, as these information packets are forced to
"queue" at those points of contention rather than proceeding without delay to
their destinations. The greater the bandwidth demanded by a particular
traffic stream, the higher the potential for service degradation, with packet
collisions rising as the network utilization increases. This is evidenced by
delays and degradation of the images, sound and other real-time data that are
transmitted. In a simple analogy, the packets can be likened to cars
competing for space on a crowded freeway leading to their destination.
Collisions and delays are difficult to avoid in such circumstances; however,
timing and control systems such as express lanes, ramp meters which time the
car's access to the freeway and changeable message signs that coordinate more
expeditious routing can substantially reduce delays and collisions.
Similarly, our TrueCircuit technology provides the timing, channels and
coordination that eliminate or minimize the delays and collisions of packets
across the network from source to destination.
Thus, TrueCircuit's mechanism for a coordinated flow of real-time
packets to avoid points of network contention has the ability to help improve
QoS and permit multiple, simultaneous uses of the network (i.e., computer
traffic, voice and video).
The elimination or avoidance of bottlenecks in the network would also
reduce the need for queuing at network nodes because the time critical-data
would be transported over dedicated channels, leaving the remaining bandwidth
for non-time-critical data. This should enable businesses to reduce network
equipment costs, as a result of increased utilization of networks at any given
capacity level.
Bandwidth demands continue to grow due to technological innovations and
new applications. Unless bandwidth supply significantly exceeds bandwidth demand
(a scenario that no one foresees), there will always be bottlenecks if packet
traffic flow is not coordinated. Therefore, increases in bandwidth supply
notwithstanding, there will continue to be a need for solutions such as those
offered by TrueCircuit technology. As more and more high-speed corporate LANs
connect to slower external WANs, and as newer high-speed networks link to
existing, slower ones, bottlenecks will continue to rise at points of ingress
from the faster networks to the slower ones. These networks will saturate, again
resulting in increased congestion. And within LANs shared by many users across
different organizations, competing demands for the network's available bandwidth
supply causes packet collisions that degrade the quality of service provided
over the network. We believe our proposed products, based on our proprietary
TrueCircuit technology, will be able to effectively address the problem of
increased demand at a given level of bandwidth supply by coordinating the flow
of packets end-to-end.
Services that are dependent on time-critical data stand to benefit the
most from TrueCircuit -TM- technology's QoS solution. These include:
- IP telephony
- Video distribution
- Transaction processing
- Security systems
- Data acquisition and control
- Factory floor automation
We demonstrated a prototype of the TrueCircuit Multimedia Gateway
(TMG), a proof-of-concept product, at the Networld+Interop trade show held at
Las Vegas in May 1999. This show exposed us to potential customers, including
telecommunications services providers, systems integrators and other equipment
manufacturers that might incorporate TrueCircuit in future network products. No
direct business was generated from our appearance at this trade show. However,
the demonstration of our technology at this show provided us with positive
feedback from
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industry representatives such as Intel, Panasonic and the Department of the
Navy regarding TrueCircuit's ability to solve QoS problems which currently
inhibit the convergence of real-time audio, video and telephony and
non-real-time data over IP networks.
SERVICES
THE PATH 1 SOLUTION: TRUECIRCUIT-TM-
As networks integrate and become faster, we expect there will be an
increased demand for real-time services (e.g., telephone and video conferencing)
driven by new applications and ever-increasing expectations on the part of
business and consumers. Real-time services require predictability and minimal
delays from end-to-end. Our technology satisfies these requirements and because
it has been designed to industry standards and protocols, is compatible with
today's IP networks.
TrueCircuit, our core technology, is a software and hardware-based
solution for managing network traffic that is, at its essence, a method (or
algorithm) for the transmission of data on a real-time basis over IP
networks. TrueCircuit software is developed to interface with the specific
hardware and infrastructure systems on which it will be hosted. For example,
the software can be tailored to operate with a wireless infrastructure,
twisted pair telephone wiring or fiber optic cable. TrueCircuit addresses the
fundamental issue of network traffic management by creating a separate
dedicated channel for each real-time stream -- isolating each stream from
other real-time streams and the non-real-time data traffic. These dedicated,
end-to end channels, technically termed "isochronous" channels, provide a
means of carrying real-time data and ensuring the fast, regular and timely
delivery of packets end-to-end across the network. In addition, TrueCircuit
has a dynamic allocation system which sets up channels for the bandwidth
required for a specific stream of data and then "eliminates" the channel when
it is no longer needed. This allocation scheme maximizes the productivity of
a network, providing bandwidth only as required, as compared with systems
that allocate fixed bandwidth, which cannot adapt to continuously changing
requirements.
TrueCircuit works with the existing wiring of a standard Internet
Protocol (IP) network. This compatibility would benefit potential customers
such as, for example, Internet Service Providers (ISPs), who by using
TrueCircuit-based products will have the ability to provide their customers
with "circuit-switched" QoS for the transmission of real-time signals within
an IP network. Without such traffic management, there would be visible delays
and degradation of sound and images transmitted over a network.
TrueCircuit can be implemented cost effectively because it is
compatible with already-installed legacy equipment. As such, the end user
does not have to incur the cost of installing an entirely new network. When
IP networks that are shared across a corporation, such as Ethernet LANs, are
conditioned with TrueCircuit, collisions for real-time traffic can be
eliminated, thereby unlocking the full potential of the existing IP/Ethernet
computer network infrastructures.
Ethernet (the name commonly used for Institute for Electrical and
Electronic Engineering (IEEE) 802.3 CSMA/CD, which is a standard that defines
the implementation of an Ethernet network) is the dominant cabling and
low-level data delivery technology used in LANs and is also used for MANs and
WANs. First developed in the 1970s, it was published as an open standard by
DEC, Intel, and Xerox (or DIX) and later described as a formal standard by
the IEEE. TrueCircuit`s ability to provide "circuit-switched" QoS for
real-time multimedia over this most prevalent cabling in the industry
provides considerable market growth opportunity for Path 1.
Furthermore, our management is currently unaware of any other
technology that can deliver the "circuit-switched" QoS directly over IP
networks that is made possible by our patent pending technology. As a result,
we are well positioned to capitalize on emerging telecommunications
technology that are rapidly moving toward convergence of real-time multimedia
over IP, as the network of choice.
Some of our intended products based on our TrueCircuit technology
could also offer significant advantages for ISPs by making new billing
approaches possible, such as call-based and/or class-based billing, rather
than just packet-based or flat-rate billing systems that are currently in
use. The fast, automatic set-up and tear-down of dedicated end-to-end
communication channels allows ISPs to adopt a telephone company
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billing model based on actual usage, if desired. Furthermore, some of our
intended products based on our TrueCircuit technology could be able to
provide an immediate measurement of the true cost of an end-to-end channel as
the sum of the per-link utilization of a route. This metering capability of
TrueCircuit not only provides a mechanism for ISPs to offer new
toll services, but also provides the practical basis for economic rationing
of toll services.
PRODUCTS
In developing our intended products, we have focused our resources
on the most formidable QoS challenge: delivery of low-latency, high-quality
video over Ethernet/IP networks, with a special emphasis on Gigabit
Ethernet/IP networks, using Internet-compatible QoS protocols (these
protocols are in essence a message format for asking equipment on a network
to provide QoS at the level specified in the message). Those products
intended to meet this challenge include Gigabit Ethernet switches and
broadcast-quality video transport and interfaces. In addition, with an eye
toward packaging TrueCircuit for licensing and incorporation into third party
products, we have designed our TrueCircuit technology to consist of
easy-to-incorporate packages consisting of a reference design, a chip-set,
and firmware application-programming-interfaces (APIs).
To help in the initial marketing of TrueCircuit-based products, we have
also developed the TrueCircuit Multimedia Gateway to showcase the ease of
implementation and other advantages of our technology.
The following presents a number of Path 1 TrueCircuit-based
products planned for development and introduction to the market during the
second half of 2000 and the first half of 2001.
TMG -TRUECIRCUIT MULTIMEDIA GATEWAY
We are currently re-designing our TrueCircuit Multimedia Gateway (TMG)
prototype in order to build in video capabilities and to reduce its cost of
production. We plan to release this new version during the third quarter of
2000 as TMGII. The TMG has been successfully beta tested for delivery of high
fidelity telephony between different locations in the City of San Diego, and
is functional for video capabilities (when used in conjunction with an
external module that we have prototyped) and Internet access as well.
However, due to the TMG's high production cost, it will not be productized or
marketed; the TMGII, because of its expected lower production cost, will take
the TMG's place.
After we complete testing of the TMGII, we plan to send it to a
certification laboratory (such as Product Safety Engineering Incorporated in
Tampa, Florida) for FCC certification. The findings from this certification
testing process might require us to effect a design change in the TMGII;
however, we do not expect that the certification process and possible design
change will delay the final productization of the TMGII by more than one month.
This possible one month delay has been incorporated into the planned release
schedule for the TMGII in third quarter 2000.
We plan to target the TMGII to the communications and networking needs of
hotels and multi-tenant apartment buildings. The TMGII is designed to allow
Internet access, video-on-demand and telephone access, all through a single,
standard telephone wire. We plan to sell this product in volume through system
integrators that specialize in the installation of telephone and video-on-demand
services for this market. CAIS Internet, one such system integrator, has
expressed interest in reselling the TMGII into this target market. No agreement
yet exists between us and CAIS Internet; negotiations are presently in the
exploratory stages.
The TMGII would be housed in a box approximately 9" x 1 1/2" x 6 1/2." We
plan for it to have a serial port, one telephone jack, one Ethernet jack for a
local computer connection, a telephone jack for external Internet access, and a
video output jack.
PS1/PS100 - TRUECIRCUIT NETWORK SWITCHES
These network switches would be components of a LAN and would
provide the capability to operate computers, telephones, video and audio
equipment on high-speed and very-high-speed LANs, enabling multiple users to
operate in a shared network with access to common data bases and services.
The target market for the PS100 (100 megabit) switch would be small to
medium-size businesses and high-end consumers. The PS1(Gigabit) switch would
be intended for the professional environment such as large offices,
television stations, post-production companies and advertising agencies. It
is expected that this product will be sold through system integrators or
direct to large end-users. The higher capacity of the PS1 allows it to
support up to 400 simultaneous video streams.
The PS1 and PS100 TrueCircuit Network Switches are currently in the
development stage. We plan to have beta units of the PS100 for testing in the
later part of third quarter 2000. Because the PS1 would operate at higher
speeds and is more complex in its design than the PS100, we expect beta units
of the PS1 to be ready at the end of second quarter or beginning of third
quarter 2000.
PG1 - TRUECIRCUIT GIGABIT ETHERNET PROFESSIONAL VIDEO INTERFACE
PG1 is being designed for business networks and would provide an
efficient method of connecting different services such as video, audio,
telephony and data onto a single high speed Gigabit LAN. The product would be
aimed at professional, multi-user LANs that require fast access to common
real-time databases required by television networks for newsgathering,
commercial / feature editing, program contribution and distribution, distance
education and other professional network applications. PG1 would also allow
simultaneous access to related computer data and telephony or videoconferencing
between users on the network. PG1 would be a high-value, high-margin product
designed to be affordable in a less price sensitive market segment. PG1 would be
a complementary product to PS1. Both products would be used in professional
multimedia networks.
The PG1 is currently in early testing. Its functionality was
demonstrated at the National Association of Broadcasters conference in Las
Vegas on April 10, 2000. The True Circuit technology incorporated into the
PG1 is subject to an exclusive license (even as to us) in favor of Leitch for
sale into the professional broadcast video market. Leitch can either develop
its own version of the PG1 or can purchase the PG1 from us for sale into this
target market. We are currently in preliminary negotiations with Leitch to
enter into a distribution agreement pursuant to which we would develop and
produce the PG1 for sale and distribution by Leitch. We also retain the right
to sell the PG1 into markets other than the professional broadcast video
market. Additional development will be required before the PG1 is ready for
product shipment. We expect to be able to begin shipment of the PG1 during
third quarter 2000.
DOTCAM -TM- DIGITAL TV CAMERA WITH TRUECIRCUIT
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Development of this product is the result of cooperation with a
leading industrial television camera manufacturer, who recognized the need to
provide efficient direct access from its cameras to Ethernet LANs.
The addition of TrueCircuit technology to an industrial TV camera
would enable video, audio and control data to be accommodated on a single
circuit, which would lower the cost, improve performance and simplify the
operation of industrial applications such as surveillance at airports,
prisons and processing plants. There is also an identified need for dotCAM in
distance education.
We anticipate that we would derive revenue from the TrueCircuit card
or module fitted inside each dotCAM camera. We also plan to develop a
"spin-off" interface product that could be sold into a wider market. This
interface product would provide the capability to connect any type of video
camera to an Ethernet network.
The dotCAM is expected to be marketed via original equipment
manufacturers (OEMs) and system integrators.
The dotCam has been prototyped but further development work will be
required before it is productized. We intend to have the first units of the
dotCam product ready for shipment in third quarter 2000.
PMMI PATH 1 NETWORK MANAGER
PMMI would be an Internet web-compatible software package that would
enable users to configure, operate and monitor TrueCircuit products such as
the PG1 Multimedia Gateway and PS1 Gigabit Ethernet Switch.
PMMI would provide a graphical user interface (GUI) with computer-
generated screens that provide clear instructions on how to configure, control
and monitor each TrueCircuit component in the network.
PMMI would be licensed to customers on a site-by-site basis, with
software support and upgrade options providing added revenue. The Network
Manager would be supplied direct to large professional users, or through
system integrators and OEMs.
We plan to have the intended PMMI product function with our intended PG1
prototype. We expect the PMMI to be productized and ready to ship along with
the PG1 in third quarter 2000.
MARKET
Although the market for the intended TrueCircuit-based products and
technology is global, we will initially center our marketing efforts on the
rapid move toward IP networking in the US. Should we be successful in
marketing and selling our product in the US, we anticipate that we will
expand such marketing and sales efforts to include Europe, where there is the
same need for technology that facilitates convergence of disparate digital
information (e.g. full-motion video, audio and telephony).
In the United States, the market for network infrastructure
equipment is dominated by a few large competitors, including companies such
as Cisco Systems, Lucent Technologies, Nortel Networks, and 3Com Corporation,
which are the main players in the US market. These companies have announced
their intention to offer technology for network convergence. They will either
attempt to develop technology themselves or procure it from others.
Therefore, they are potentially powerful competitors to Path 1 as well as
potentially significant customers.
Our TrueCircuit technology can be provided as licensed intellectual
property, as a chip-set and reference design for integration, or as a
component of an overall system, or can be embedded in our own intended
TrueCircuit hardware products.
LOCAL AREA NETWORK (LAN) APPLICATIONS AND GATEWAYS
LANs, which share data across an organization, are the largest initial
market we expect to target with our technology. TrueCircuit can benefit LANs by
managing the flow of integrated real-time and data services (e.g., video, audio,
telephony and Internet access). We then plan to migrate our technology to
MANs and WANs.
Internet Service Providers (ISPs) can particularly benefit from our
technology as applied to the LAN market. In addition to the
"circuit-switched" QoS provided for real-time data, TrueCircuit provides ISPs
with a metering capability, as described in the Services section.
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Hotels, multi-tenant apartment buildings, businesses in the
publishing, broadcasting, entertainment, marketing and public relations
areas, and even aircraft have immediate demand for carrying real-time
services over their computer networks. Integrated service, multimedia gateway
devices, if built around TrueCircuit, would for the first time have the
ability to tie together all major communications services - video, telephone,
and Internet access - through the existing phone or cable wiring.
TrueCircuit technology has the ability to manage all such services
within a standard LAN with no degradation in signal quality because of its
ability to transport each real-time transmission over its own dedicated
channel from end-to-end, thereby almost entirely eliminating the collisions
inherent in a standard network, where real-time and non-real-time data
compete for transmission over the same network.
METROPOLITAN AREA NETWORK (MAN) APPLICATIONS
Beyond the corporate LAN, there is a demand for video conferencing
among corporate plants and within a metropolitan area.
Video conferencing in the past has not been particularly successful
because delay and degradation of speech and video images are not conducive to
effective interpersonal communication. The key to effectively exploiting this
video conferencing market is to have very low latency and jitter data
transmission to enable real-time personal interaction.
We intend to enter into strategic alliances with ISPs through which
we would deploy TrueCircuit technology within metropolitan areas to
distribute private video and/or audio programming, and implement video
conferencing and private telephone networks. Under such alliances, the ISPs
would condition their networks with TrueCircuit technology to enhance the
quality of real-time data that they provide to their customers. As of the
time of this filing, we have not yet entered into negotiation for any
specific strategic alliances for use in MAN applications.
WIDE AREA NETWORK (WAN) APPLICATIONS
All networks crossing interface boundaries require bridge devices.
TrueCircuit can be used a a bridge from an ATM WAN to a LAN in the business
enterprise. Such TrueCircuit bridges would convert transmissions between
business LANs and ATM/SONET, T1/E1, xDSL, and cable modem infractructures.
TrueCircuit would also be used as a bridge to bring real-time multimedia to
home users wishing to access real-time multimedia over their IP networks.
According to the Federal Communications Commission, the opportunity
exists in the US alone for some 12,000 radio stations, 1,600 television
stations and 10,000 cable Master System Operators (MSOs) to stream their
programming to national and international consumers via the Internet.
According to the FCC, this movement towards utilization of the Internet in
this manner has already started, as some radio stations now provide their
studio output directly to the Internet. Quality at the present time is
relatively poor compared with over-the-air FM and AM broadcasts. Path 1
technology has the potential to eliminate this QoS problem by installing
TrueCircuit technology at the program source and also at the ISP location
where the program is spooled out to subscribers. The final link could be
established by making TrueCircuit available to consumers as a computer card
or set-top box module. Internet broadcasting QoS can then equate to direct
over-the-air radio broadcasts. This can also apply to streaming of TV
programs from networks, cable MSOs and program content providers using the
same TrueCircuit technology.
We would intend to seek to license TrueCircuit technology to others
to create the appropriate bridge devices for network interfaces. We have not
yet initiated negotiations with specific companies to license TrueCircuit for
use in WAN applications. If we do not, or are unable to, work with others to
create the appropriate bridge devices, we may still use a combination of
intended Path 1 products (e.g. the PS100) in combination with off-the-shelf
third party hardware to provide the same functionality.
VIDEO/AUDIO NETWORK (VAN) APPLICATIONS
Video signals are most sensitive to jitter and latency. Even 200
nanoseconds of packet delivery deviation can severely degrade a live video
feed. The market consisting of broadcasters, audio and video production and
post-production studios is substantial. These fields are quickly moving from
analog film and tape to digital media, and we expect they will generate a
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demand for solutions such as those offered by TrueCircuit technology to
transport their video and audio feeds and distribute them to their computer
editing workstations.
HOME NETWORKING
Home Phone Network Alliance (HomePNA), the current standard for
computer networking of multiple PCs, multiple TVs, telephones, security
systems, etc., over standard home phone wiring does not adequately address
the QoS issue. The existing HomePNA standard uses a shared network approach
wherein packet collisions are common. Furthermore, the effects of such
collisions within HomePNA are much more severe than within Ethernet because
the quality of wiring and less stringent installation standards in the home
make it more difficult to attain higher bandwidths. TrueCircuit can eliminate
these collisions within HomePNA and guarantee compatibility with home
real-time services, such as multiple phone lines and audio/video
entertainment feeds shared with computer web browsing.
We are now in the early stages of exploring potential commercial
arrangements with semiconductor manufacturers that sell chips for HomePNA.
Such an arrangement would provide for embedding the TrueCircuit technology
during the manufacturing of these chips. The sale by these semiconductor
manufacturers of products that incorporate our TrueCircuit technology would
be considered a natural extension of these companies' existing product
offerings in the Home PNA market.
STRATEGY
There are five components to our strategic framework:
1. INITIALLY TARGET HIGH-MARGIN MARKETS OF "EARLY ADOPTERS." Some
market niches have a history of early adoption because of
extreme competition. Our initial product directions are being
targeted to markets that have an immediate need for
"circuit-switched" QoS. Our management has conducted
discussions with end users, equipment vendors and system
integrators to assist in selecting our optimal initial market
niche and defining our initial product offerings. The highest
visibility early adopters are the digital television
broadcasters and their related production companies. These
companies must satisfy an FCC mandate to convert to digital
television. They require the highest quality of signal
transport. We officially introduced and demonstrated our
video transport technology at a trade show, NetWorld+Interop`
99, in Las Vegas on May 10, 1999. The feedback on our
technology and range of product options from industry
attendees has helped to guide us in finalizing our marketing
decisions to target this market as well as other lower-end
video network interface markets. We have teamed with Leitch
Technology Corporation in order to move more quickly into
the professional broadcast video market.
2. SEEK RESEARCH AND DEVELOPMENT (R&D) FUNDING FROM KEY
CUSTOMERS-- We have the technology and intellectual resources
that make it justifiable to seek R&D funds from key customers
to develop products. The R&D area is of central importance to
our long-term plans. We will strive to ensure that any
arrangement for R&D funds is open-ended (e.g. we will retain
the right to use our technology in other markets and
products). To date, we have yet to receive R&D funds via this
route, but we will continue to seek such arrangements as the
opportunities arise. An inability to obtain R&D funding would
increase our reliance on our operational funds to support the
R&D necessary to remain at the forefront of communications
technology.
3. ESTABLISH STRATEGIC MARKETING RELATIONSHIPS-- The development
of strategic marketing relationships will largely be centered
upon Original Equipment Manufacturers (OEMs), system
integrators and network operators who are, like us, focused on
the convergence of digital media. Strategic marketing
relationships provide immediate access to early adopters and
increase the number and type of channels to market. Direct
sales of our products will be created through recruitment of
qualified sales staff, operating from strategically important
locations,
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augmented by headquarters support staff with the
Internet as a sales and technical support resource. In
April 2000, we entered into a Technology License Agreement
with Leitch Technology Corporation under which we provided
Leitch a non-exclusive, worldwide license (except as to
TrueCircuit technology designed for the professional
broadcast video market, which is subject to an exclusive
license in favor of Leitch) to utilize our intellectual
property to develop and sell products which incorporate our
TrueCircuit technology. This relationship with Leitch will
allow us to take advantage of Leitch's superior manufacturing
and distribution capabilities to bring TrueCircuit-enhanced
products to market on an expedited basis.
4. CONTINUE ADHERENCE TO INDUSTRY STANDARDS FOR QoS--We will
ensure that TrueCircuit will continue to adhere to industry
standards for specifying QoS. Operating on Internet Protocol
(IP), TrueCircuit offers substantial advantages over competing
approaches for effective traffic control management. It works
with such industry QoS over IP standards as RSVP, MPLS, and
IETF DiffServ. However, unlike existing implementations,
TrueCircuit provides negligible latency and jitter. If we did
not design to industry standards, we would not have the
compatibility with existing systems and equipment to have
acceptance in the marketplace. For this reason, all of our
TrueCircuit development efforts will strictly conform to
current applicable industry standards and protocols.
5. LEVERAGE IN-HOUSE EXPERTISE IN SIGNAL PROCESSING AND
NETWORKING--Our personnel have significant expertise in
digital signal processing, mixed-signal analog/digital circuit
design, and networking, with dozens of publications and
patents to their names. Dr. Ronald Fellman has published 35
papers in signal processing and networking and has 1 patent
issued. Dr. Douglas Palmer has published 20 papers and has
8 patents in signal processing and telecommunications. Dr.
Yendo Hu has three patents in the area of MPEG2
implementation. John Beer has received four patents for his
developments. We believe this expertise gives us the
capability to design products to quickly enter the high-end
video and audio markets with TrueCircuit networking
technology.
COMPETITION
We have developed a corporate strategy of seeking to enter markets
where our intellectual property gives us a competitive advantage. In the
professional video market, TrueCircuit is the only means of which we are
currently aware for meeting the low jitter requirements within IP/Ethernet
networks. In April 2000, we provided an exclusive license to our TrueCircuit
technology for the professional broadcast video market to Leitch Technology
Corporation. We anticipate that we will continue to develop our
TrueCircuit-based products for this market. Although Leitch maintains an
exclusive license to develop and sell TrueCircuit-based products into the
professional broadcast video market, it is possible that Leitch will instead
contract with us to purchase our PG1 or other related products for sale into
this space. Competition for using new networked technology in this market
comes from FibreChannel and SerialBus, both of which use alternative network
approaches. However, neither of these companies' approaches has yet become
dominant in this area. We believe that backward compatibility, a fully
developed routing capability and a large existing infrastructure of
IP/Ethernet gives our approach a competitive advantage technologically.
We must still co-exist with a number of major, entrenched network
equipment providers such as Cisco, Nortel Networks, 3Com and Lucent. Each of
these vendors has announced a strategy for convergence. All of these
companies can be seen either as potential partners in licensing or
distributing our technology, or as strong competition. Although we are
initially focusing on high-end applications and markets that require
proprietary technology not yet demonstrated by these companies, the risk
clearly exists that these companies, or new startups we are not yet aware of,
may develop their own competitive technology and enter our markets.
All the major network equipment manufacturers stress their adherence
to recognized international standards. We therefore designed TrueCircuit to
be compatible with all appropriate IP standards - RSVP/MPLS, IETF DiffServ,
and IEEE 802.1pq. A major advantage of TrueCircuit is in its ability to
provide ATM compatibility and "circuit-switched" QoS over a standard Ethernet
or IP network. However, a potential risk is that one of the major equipment
manufacturers may choose to develop its own proprietary standard that is
incompatible with the implementation of our technology.
Cisco has announced a strong push towards IP telephony. It has
announced IP telephones in the $300 range, along with the switching equipment
to go with it. However, Cisco has adopted a queue-based protocol that gives
priority-based preference to packets of data. The problem with queues is that
they introduce unpredictable delay. For telephone signals, this translates to
latency and jitter. For smaller numbers of simultaneous phone calls, such
latency and jitter may not be noticeable. However, the adverse effects of
queues become apparent when telephone or other real-time traffic becomes a
large fraction of the overall network capacity and in high-end applications
such as interactive CD-quality audio or high-quality video. Such applications
require either TrueCircuit or some other equally effective means for
transporting converged application traffic. In particular, interactive and
high-end video requires very low jitter, under 200 nanoseconds. TrueCircuit, as
incorporated in our intended products, will be able to provide this whereas
queue-based Weighted Fair Queuing QoS cannot. However, there remains the risk
that Cisco or others may reduce the price of bandwidth to the extent that a
customer could obtain competitive QoS by partitioning and upgrading their
networks to operate at much higher data rates and thereby reduce network
contention.
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The Grass Valley Group and Sony are both established manufacturers
of professional video equipment. Their current video products use older
analog cabling as well as specialized, single-feed serial links to form
point-to-point connections between video switch boxes and video sources. Our
intended video networking products would create a more cost-efficient and
practical solution by eliminating the large bundles of coaxial cables and
multiple switch boxes. Our solution would be less expensive because it would
replace a costly and inflexible infrastructure with a few strands of fiber
optic links connected to a centralized Path 1 video switch. In addition, the
U.S. Government has mandated a phase-in period for digital television. We
anticipate that manufacturers of legacy video equipment will wish to purchase
TrueCircuit video network interface modules to make their equipment operate
over IP networks. These modules would be sold subject to the Leitch license
agreement.
Integrated service access in hotels, multi-tenant apartments, and
the home is a new and expanding market. Scientific-Atlanta, General
Instrument, and others make set-top boxes, but these devices do not have all
the integrated capabilities offered by our TrueCircuit technology, nor can
multiple set-top boxes interconnect as a network with "circuit-switched" QoS.
The market with the closest apparent competition arises in
metropolitan-area multimedia services, such as video conferencing. Here, Lucent
and the telecom industry represent indirect competition through their
development of ATM/SONET and T1/T3/xDSL multiplexors that can create isolated
virtual channels for different services over the same SONET, T1, T3, or xDSL
line. In general, such equipment is pre-configured to create and set aside
separate channels for each service, regardless of whether that service may or
may not come into use. This approach is appropriate only for point-to-point
links. Our equipment would have the advantage of creating a private multi-point
network that dynamically allocates channels only while they are needed. The Path
1 system would allow more efficient utilization of the limited outgoing link
bandwidth in situations where the link is heavily utilized by a constantly
changing mix of applications.
Finally, we may find ourselves in competition with an alternative
technology for QoS over IP. We are aware of one such technology by Peak
Audio, Inc. of Colorado. Peak Audio currently has no products of its own.
Instead, it licenses its CobraNet audio distribution over Ethernet. However,
unlike Peak Audio, our technology is not confined to audio transmission.
Rather, TrueCircuit is designed to handle many forms of time sensitive data,
such as video and sensor data.
Competition, of course, is not based solely on technological
superiority. Customers may choose a technologically inferior product if the
product's provider can give better pricing, availability, manufacturing,
quality, service or reliability of continued supply. Our philosophy will be
to build positive customer relationships in which we are a truly valued-added
partner and problem solver for our customers. Our operations will be oriented
toward meeting the needs of our customers cost-effectively and in a timely
manner. We realize that customers have other choices and we will work with
customers to assist them in becoming more competitive in order to minimize
the risk that they will chose another technology supplier.
SALES
DISTRIBUTION CHANNELS
We intend to ship a variety of products into different markets. This
distribution plan requires tailored sales strategies for each target market.
Our initial distribution plans involve relationships with systems integrators
and ISPs in which our technology will be incorporated into their systems.
Depending on the specific requirements of our customers, these distribution
plans could call for us to provide hardware embedding our technology or a
chip-set with reference design, or licensing of our technology as
intellectual property. To date, we have been beta testing our aforementioned
TMG evaluation product, with American Digital Network, our first ISP partner,
and Console, Inc., our first system integrator. These are local, San
Diego-based companies that we can easily work with and who can provide
essential early feedback on our products and strategies. They may also become
future customers of our products.
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PROFESSIONAL VIDEO MARKET
We have identified Leitch Technologies Corporation as an experienced
distributor and manufacturer of professional video products and pursuant to
that certain Technology License Agreement with Leitch dated April 10, 2000,
we have provided Leitch exclusive rights (even as to us) to develop, market
and sell our TrueCircuit technology intended for the professional broadcast
video market.
LICENSING AND SOFTWARE SALES
We plan to derive revenue from licensing TrueCircuit for the dotCAM
and other potential TrueCircuit-enabled consumer appliances, from the
licensing of TrueCircuit network interface driver software, and from sales of
the TrueCircuit NetManager software. We intend to bundle the QoS Driver
Software with a TrueCircuit-capable network interface to enable video and
audio over the Internet Protocol using standard PCs. The distribution
channels for this software will be the network interface card manufacturers
or the distributors of the computer's operating system, provided we are able
to successfully enter into arrangements with these manufacturers and
distributors to write a QoS-enabled driver for their products.
In addition, we may sell our TrueCircuit QoS Driver Software
separately to enterprise clients as part of a full network system integration
package for introducing QoS real-time networking services.
In addition to its exclusive license to sell into the professional
broadcast video market, we have provided Leitch non-exclusive rights to
create, develop, market and sell commercial products which incorporate our
TrueCircuit technology.
APARTMENT/HOTEL/MOTEL USE OF TRUECIRCUIT-ENABLED PRODUCTS
We expect a variation on the TrueCircuit MultiMedia Gateway to be
used in hotels and multi-tenant apartment buildings. This product would
enable services beyond those currently available in today's multi-occupant
buildings. With TrueCircuit, apartment dwellers and hotel guests could
potentially access thousands of video channels as well as high-fidelity audio
channels. They could also integrate security systems and automated control
systems. To reach this market, we currently plan to use systems integrators
that specialize in this market segment. We have initiated talks with one such
system integrator. Negotiations with this system integrator are at an early
stage.
PRODUCT DEVELOPMENT MANAGEMENT
Central to each intended Path 1 product is the TrueCircuit core
technology. A single team develops and enhances the TrueCircuit core
technology used across all Path 1 products. This team currently consists of
two software engineers and two hardware engineers.
In addition to the core technology team, it is our intent that each
Path 1 product will have a program manager, a lead engineer and an assigned
sales/marketing manager. These teams are to define, design and implement
their assigned products. The size of each team will depend on scope of the
specific product and may be partially outsourced.
We anticipate that in the future, we will work closely with Leitch
Technologies Corporation to develop products for the professional broadcast
video market. The nature and extent of such collaboration is as yet
undetermined.
MANUFACTURING / PRODUCTION
Instead of developing our own manufacturing capabilities, we plan to
utilize the services of ISO 9000 certified component distributors and an ISO
9000 certified contract manufacturer. Path 1 has commenced preliminary
discussions with AVNET for manufacturing of prospective TrueCircuit hardware
products. In addition, we anticipate that we will collaborate with Leitch
Technology Corporation in the development of products that are intended for
the professional broadcast video market. Leitch shall manufacture such
intended products in accordance with any reasonable quality and performance
criteria with which we provide them.
RESEARCH AND DEVELOPMENT
We expend significant effort in developing our intended products,
designing enhancements to core technologies and addressing additional technical
challenges inherent in developing new product applications. We
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expect that we will continue to commit substantial resources to product
research and development in the future. Over the next six months, we
anticipate that we will spend approximately $1,000,000 for research and
$3,000,000 for development of our intended products.
We also have entered into a co-development agreement with San
Diego-based Integrated Systems Design Center, Inc. (doing business as Dr.
Design, Inc.), a subsidiary of Windriver Corp., to co-develop on our behalf a
range of professional video products that utilize Path 1's TrueCircuit
technology. Under this agreement, Dr. Design will perform architecture
studies of our existing technology and will recommend additional
enhancements, requirements and features to these intended products. This
co-development arrangement allows us to leverage Dr. Design's specific
expertise in commercialization of video technologies for use by production
studios and television broadcast facilities.
In addition, we have entered into a license agreement with Leitch
Technology Corporation. This agreement provides Leitch an extensive license
to make, market, sell and maintain products that incorporate our TrueCircuit
technology. We anticipate that we will work closely with Leitch in
development of products intended for the professional broadcast video market.
CUSTOMERS
We have yet to generate revenue from sales to customers. This lack of
sales revenue is due to the fact that we are still developing some of our
enabling technology and have only recently commenced production of prototypes
and evaluation units of some of our intended products.
We have entered into several beta test agreements with potential
customers for the use and evaluation of the TrueCircuit Multimedia Gateway.
We expect to enter into additional beta-test agreements with other potential
customers for both this initial product and our video products as they become
available. We plan to have such beta-test agreements for our initial video
products, the dotCAM and the PG1 in third quarter 2000.
LICENSING AGREEMENT WITH LEITCH
On April 10, 2000, we entered into a Technology License Agreement
with Leitch Technology Corporation, a Canadian company that provides
leading-edge solutions to store, switch, distribute, convert, and otherwise
process high-quality audio and video signals. This License Agreement will
continue for an initial term of five (5) years, unless earlier terminated by
either us or Leitch. Thereafter, the License Agreement will automatically
renew for consecutive additional periods of five (5) years unless earlier
terminated by us or Leitch. Under the License Agreement, we granted Leitch a
royalty-bearing, non-exclusive, world-wide license to copy, modify, enhance,
distribute, sell and otherwise use our TrueCircuit technology. This
non-exclusive license shall last for five years unless earlier terminated by
us or Leitch and then shall automatically renew for additional consecutive
five-year periods unless earlier terminated by us or Leitch.
We also granted Leitch a royalty-bearing, exclusive, world-wide
license, even as to us, to make, have made, sell, offer to sell, sublicense,
support, maintain and otherwise exploit TrueCircuit technology in connection
with commercial activities directed to the professional broadcast video
market. Leitch's exclusive license shall continue for one year and thereafter
shall be automatically renewed for additional consecutive one-year periods,
provided that the amount of monies or other consideration we receive from
Leitch (excluding consideration paid by Leitch in exchange for equity of Path
1) during each year of the exclusive license meets or exceeds the minimum
yearly threshold for that year. The minimum yearly thresholds applicable to
each of the first five (5) years of the License Agreement have been agreed
upon by us and Leitch and are set forth in the License Agreement. Thereafter,
provided the exclusive license in favor of Leitch is still in effect, the
minimum yearly thresholds will be negotiated on an annual basis by us and
Leitch; these minimum thresholds shall be no less than the minimum thresholds
for the preceding year and no greater than one and a half (1.5) times the
minimum threshold for the preceding year. Upon termination of this exclusive
license, Leitch will continue to have a non-exclusive license to make and
sell TrueCircuit-based products into the professional broadcast video market.
In return for these licenses, Leitch shall pay us royalties in
periodic installments for each TrueCircuit-based product sold by Leitch or
any Leitch sublicensee. These periodic payments shall commence, at the
earliest, sixty (60) months after satisfaction of certain conditions set
forth in the License Agreement, which conditions we anticipate will be
satisfied by fourth quarter 2000 or first quarter 2001.
Leitch also maintains a right of first offer in respect to our
TrueCircuit technology. Pursuant to this right of first offer, before we may
offer a third party an exclusive license to use our TrueCircuit technology to
manufacture and sell products in markets other than the professional
broadcast video market (as to which we have no right to grant exclusive
licenses to third parties), we must first provide Leitch with the option to
acquire that exclusive license under the same terms offered to the third
party. This right of first offer does not apply to the grant to third parties
of non-exclusive licenses to use our TrueCircuit technology to manufacture
and sell products in markets other than the professional broadcast video
market.
We are developing the PG1 TrueCircuit Gigabit Ethernet Professional
Video Interface product for sale and distribution into the professional
broadcast video market and other markets. To date, we have incurred all costs
associated with development of the PG1. We may enter into a separate
agreement with Leitch providing Leitch the right to distribute the PG1.
Leitch may also, at its own expense, use our TrueCircuit technology to
develop its own products for sale into the professional broadcast video
market. Negotiations between us and Leitch regarding the structure and
content of this proposed distribution agreement are still in the incipient
stages; no definitive terms have been agreed upon.
Except for Leitch's exclusive license as to the professional
broadcast video market, the License Agreement does not restrict our ability
to make, market, offer to sell, sell, maintain or service any of our proposed
products (or any future products). In addition, the exclusive license does
not prevent us from selling the PG1 into markets other than the professional
broadcast video market; we are continuing to develop the PGI for sale into
these other markets.
We anticipate that in the future, we will enter into additional
licensing agreements with strategic partners and customers for our
TrueCircuit technology. We intend to offer exclusive licenses (which are
subject to Leitch's right of first offer as discussed above) and
non-exclusive licenses to third parties for sale of TrueCircuit-based
products into markets other than the professional broadcast video market.
PROTECTING INTELLECTUAL PROPERTY
Our success will depend, in part, on our ability to obtain and
protect our patents, trademarks and trade secrets and operate without
infringing upon the proprietary rights of others in the United States and
other countries. If we were to become involved in a dispute regarding our
intellectual property, it could become necessary for us to participate in
interference proceedings before the United States Patent and Trademark Office
to determine whether we have a valid claim to the rights involved, or to
litigate the issues in court. Such proceedings could be costly and time
consuming, even if we were to eventually prevail. Should we not prevail, we
could be forced to pay significant damages, obtain a license to the
technology in question, stop marketing one or more of our products or lose
the ability to prevent others from using our technology in their own
products.
PATENTS
We filed three patent applications in late 1998 covering the core
aspects of our TrueCircuit technology. Two additional patent disclosures have
also been filed and applications covering these new inventions are in
preparation.
Among the areas covered by our patent applications and disclosures
are: end-to-end quality of service mechanisms; virtual channel creation and
management in an IP or CSMA/CD network and across multiple TrueCircuit
domains; TrueCircuit-enabled network switches; TrueCircuit-enabled
repeaters/hubs; network security, maintenance of QoS within a legacy
environment; and compatibility of TrueCircuit with legacy equipment.
We cannot guarantee that any patents will be granted to us or that any
patents that are granted to us will be sufficiently broad to protect our
interests.
TRADE SECRETS
In addition to the protection afforded by patent law, implementations
of TrueCircuit technology contain trade secrets which we keep confidential.
These trade secrets cover areas of fast context switching in embedded operating
systems, real-time embedded architectures, signal processing techniques for
artifact-free signals, and low-latency
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software drivers. We initially require each external party that obtains
access to our technology (including, but not limited to, manufacturers,
distributors, consultants and potential strategic partners) to sign
confidentiality/non-disclosure agreements. There are risks that these other
parties may not comply with the terms of their agreements with us, and that
we may not be able to adequately enforce our rights against such parties and
other persons.
TRADEMARKS
We are in the process of trademarking the name TrueCircuit for our
core technology to describe its fundamental functionality. TrueCircuit
technology establishes the equivalent of "true" hardwired "circuits" over the
traditionally packet-switched Internet Protocol. We expect also to trademark
the names we give to products which we develop and market.
CONFIDENTIALITY AGREEMENTS
We require our employees, potential strategic partners, potential
customers and other parties who become privy to our proprietary technology to
execute confidentiality agreements with us. These agreements generally
provide that all confidential information developed or made known to the
employees and outside parties during the course of their relationship with us
is to be kept confidential and not to be disclosed to third parties, except
under certain specific circumstances. In the case of employees and
consultants, the agreements also provide that all inventions and works of
authorship conceived by the employees in the course of their employment or
consultancy will be our exclusive property.
EMPLOYEES
As of May 19, 2000, we employed fifteen people full-time and one
person part-time. It is anticipated that additional employees will be hired
as needed to, among other things, strengthen management and help in the
commercial launch of our products.
We believe our relationship with our employees is good. None of our
employees is a member of a labor union.
CORPORATE HISTORY AND ADDRESS
We were incorporated in January 1998 in the State of Delaware under
the name Millennium Network Technologies, Inc. In March 1998, we changed our
name to Path 1 Network Technologies Inc. and we commenced operations in San
Diego, California in May 1998. Our headquarters are presently located at 3636
Nobel Drive, Suite 275, San Diego, California 92122. Interested persons may
visit our website at www.path1.net. Information on our web site is not a part
of this registration statement, and you should bear that in mind if you read
the information on this site.
REPORTS TO SECURITY HOLDERS
Following the effective date of this registration statement, we will
be required to comply with the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and will file annual, quarterly and
other reports with the Securities and Exchange Commission (the "SEC"). We
will also be subject to the proxy solicitation requirements of the Exchange
Act and, accordingly, will furnish an annual report with audited financial
statements to our stockholders.
AVAILABLE INFORMATION
Copies of this registration statement may be inspected, without
charge, at the SEC's Public Reference Room by calling the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Pacific Regional Offices of
the SEC located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The public may obtain
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information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. Copies of this material also are available through the Internet
by using the SEC's EDGAR Archive, the address of which is http://www.sec.gov.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. YOU SHOULD
ALSO REFER TO THE OTHER INFORMATION IN THIS REGISTRATION STATEMENT, INCLUDING
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. IF ANY OF THE FOLLOWING RISKS
ACTUALLY MATERIALIZE, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMMON STOCK.
MANY PARTS OF THIS REGISTRATION STATEMENT ALSO INCLUDE FORWARD-LOOKING
STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED
IN THESE FORWARD-LOOKING STATEMENTS. THIS DIFFERENCE COULD RESULT FROM THE RISK
FACTORS DESCRIBED HEREIN OR FROM OTHER UNANTICIPATED FACTORS.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE NOT YET LAUNCHED ANY
PRODUCTS COMMERCIALLY.
We have a relatively brief operating history. We were incorporated
in January 1998 and commenced operations in May 1998. We do not yet have any
products in commercial production. Accordingly, we are subject to all of the
risks associated with new business ventures including, without limitation,
those associated with raising capital, acquiring or developing products which
function as intended, arranging for suitable manufacturing facilities,
entering into strategic relationships with other companies, identifying and
retaining necessary personnel, establishing and penetrating markets for our
proposed products and achieving profitable operations.
WE NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN.
As we are a new business with no sales or revenues to date, we
anticipate that we will require additional financing to fund expansion, to
develop new or enhance existing services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. If
additional funds are raised through the issuance of equity or equity-linked
securities, the percentage ownership of our stockholders would be reduced. In
addition, these securities may have rights, preferences or privileges senior to
the rights of the securities held by our current stockholders. We cannot
guarantee that additional financing will be available in the future on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to continue our operations, fund our
expansion, take advantage of potential opportunities, develop or enhance
products, or otherwise respond to competitive pressures would be significantly
limited. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources" for a discussion of
working capital.
WE ARE RELYING ON LEITCH TECHNOLOGY CORPORATION FOR MARKETING INTO OUR FIRST
TARGET MARKET.
Pursuant to the Technology License Agreement between us and Leitch
Technology Corporation dated April 10, 2000, we have granted Leitch an
exclusive license, even as to us, for sale of TrueCircuit-based products into
the professional broadcast video market. This is the first agreement that we
have entered into for licensing and sale of TrueCircuit-based products. We
are precluded from selling our intended products directly into the
professional broadcast video market until the exclusive license expires. The
exclusive license will last for one year and, thereafter, shall automatically
renew for consecutive additional one-year periods provided we receive the
minimum aggregate monies and other consideration for that year as set forth
in the Technology License Agreement. Therefore, it is possible that Leitch's
exclusive license shall continue well past its initial one-year term, thus
lengthening the period of time during which we will be prohibited from
selling and marketing directly into this first target market. Although it is
possible that we may sell the PG1 (the TrueCircuit-based product that we have
developed for distribution into the professional broadcast video market) to
Leitch for re-sale into this target market, discussions regarding such a
distribution agreement are still in the early stages.
Our ability to profit from the professional broadcast video market,
whether it be through sale of the PG1 to Leitch or future direct sales into
this target market, will depend heavily upon the motivation and success of
Leitch in developing, manufacturing, launching and marketing
TrueCircuit-based products in this field. The more successful their efforts,
the more royalties we shall ultimately receive from Leitch (such royalties
shall not commence until termination of the five-year royalty-free period in
favor of Leitch). If Leitch's TrueCircuit-based products experience
difficulties (e.g. operational malfunctions or poor sales experience) upon
their introduction to the professional broadcast video market, TrueCircuit
may encounter difficulties in marketing TrueCircuit-based products in other
fields.
15
<PAGE>
OUR PROPOSED PRODUCTS ARE ONLY AT A DEVELOPMENTAL STAGE
Our proposed products are either at the conceptual stage, i.e.,
ideas for products, or have been reduced to beta units or prototypes that
must be tested and modified. Our product development and commercialization
process will incorporate the necessary steps to assure conformance to
industry standards and protocols. This conformance shall include FCC part 68
compliance, the North American Telecom Testing Standards, for the telephone
interface on the TMGII (none of our other products, as currently envisioned,
have a telephone interface and therefore do not have this requirement) and
Underwriter Laboratories certification for the PG1 (all of our other products
were designed so as not to require this certification). Our current marketing
plans and product designs do not require any other certifications. We must
continue our efforts to design these proposed products and arrange for
prototypes of each product to be manufactured, tested and de-bugged before we
can implement our marketing plan. There is no assurance that each of these
milestones can be achieved or that, if they are achieved, we will be able to
effectively market our products and achieve profitable operations.
WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR CORE TECHNOLOGY AND
PRODUCTS, AND THERE IS A RISK OF INFRINGEMENT
We intend to patent our core technology and our products. However,
there can be no assurance that patents will be issued to us, or, if patents are
issued, that they will be broad enough to prevent significant competition or
that third parties will not infringe upon or design around such patents to
develop a competing product. Furthermore, others may design and manufacture
superior products.
In addition to seeking patent protection for our products, we intend
to rely upon a combination of trade secret, copyright and trademark laws, and
contractual provisions to protect our proprietary rights in our products.
There can be no assurance that these protections will be adequate or that
competitors will not independently develop technologies that are
substantially equivalent or superior to our products.
There has been a trend toward litigation regarding patent and other
intellectual property rights in the telecommunications industry. Although
there are currently no lawsuits pending against us regarding possible
infringement claims, there can be no assurance such claims will not be
asserted in the future or that such assertions will not materially adversely
affect our business, financial conditions and results of operation. Any such
suit, whether or not it has merit, would be costly to us in terms of employee
time and defense costs and could materially adversely affect us. If an
infringement or misappropriation claim is successfully asserted against us,
we may need to obtain a license from the claimant to use the intellectual
property rights. There can be no assurance that such a license will be
available on reasonable terms or at all.
WE FACE COMPETITION IN OUR INDUSTRY FROM MUCH LARGER COMPANIES WITH
SIGNIFICANTLY GREATER RESOURCES THAN OUR OWN, AND SUCH COMPETITION IS LIKELY TO
INCREASE IN THE FUTURE.
Although our strategy is to seek to enter markets where our
intellectual property gives us a strong competitive advantage, we still
presently face indirect and direct competition in these markets. We anticipate
that
16
<PAGE>
the competitive pressures we currently face will increase significantly in
the future. A number of major network equipment providers such as Cisco
Systems, 3Com and Lucent have announced network convergence strategies. Other
competitors are developing alternative network approaches which, if
successful, could materially and adversely affect us. Many of our current and
potential competitors have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
substantially larger customer bases then we have. In addition, many of our
competitors may be able to respond more quickly than we can to new or
emerging technologies, as well as devote greater resources than we can to the
development, promotion and sale of their products. Increased competition
could force us to reduce prices, could lower our projected margins and could
hinder our ability to gain or hold market share. In addition, if we expand
internationally, we may face additional competition. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IN OUR BUSINESS IF WE ARE UNABLE TO
EFFECTIVELY MANAGE THE GROWTH
Our senior managers have limited or no experience in
management positions and in managing rapid growth. We anticipate (but by no
means do we guarantee) that we will grow rapidly in the near future and that
this growth will place significant strain on our managerial, financial and
personnel resources. The pace of our anticipated expansion, together with the
complexity of the technology involved in our proposed products, demands an
unusual amount of focus on the operational needs of our future customers for
quality and reliability, as well as timely delivery and post-installation
field support. In addition, relationships with new customers generally
require significant engineering support. Therefore, adoption of our products
by customers would increase the strain on our resources, especially our
engineers. To reach our goals, we will need to hire on a rapid basis, while,
at the same time, invest in our infrastructure. We expect that we will also
have to expand our facilities. 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; and
- establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that
growth would impose on our systems, procedures and structure. If we fail to
effectively manage our expansion, our business may suffer.
COMPETITION FOR EMPLOYEES IN OUR INDUSTRY IS INTENSE, AND WE MAY NOT BE ABLE TO
HIRE KEY EMPLOYEES.
Our future success will depend, in part, on our ability to attract
and retain highly skilled employees, particularly management (including
senior management), technical and sales personnel. We believe our current
roster of senior management is incomplete and that if we are to succeed we
must identify and hire several additional professional senior managers,
including a Vice President of Network Systems, Vice President of Marketing
and Sales and Vice President of Engineering. Competition for employees in
our industry and in our geographic region is intense due to the scarcity of
available people with the necessary professional technical skills. We may be
unable to identify and attract highly qualified employees in the future. In
addition, we may not be able to successfully assimilate these employees or
hire qualified key management personnel to replace them.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS, AND NONE OF THESE
KEY EMPLOYEES IS OBLIGATED TO STAY WITH US.
Our success depends on the efforts and abilities of our senior
management, specifically Ronald Fellman, Douglas Palmer, Michael Elliott,
Richard Slansky and other senior managers yet to be identified and hired, and
certain other key personnel including Yendo Hu, John Hooker, Grady Taylor and
John Beer. We currently do not have key man life
17
<PAGE>
insurance on any of these employees. If any of these key employees leaves or is
seriously injured and unable to work and we are unable to find a qualified
replacement, then our business could be harmed.
WE ARE IN LITIGATION WITH A FORMER COMPANY INSIDER. THIS LITIGATION MAY BE
PROTRACTED AND MAY DIVERT COMPANY RESOURCES AWAY FROM THE CONDUCT OF OUR
BUSINESS.
Franklin Felber, a former director and officer of ours, has sued us
and three of our directors for alleged wrongdoing in connection with an
option to purchase 255,640 shares of our Class A Common Stock which he
granted to Jyra Research, Inc. in January 1999. Felber's action, filed
November 29, 1999, seeks unspecified compensatory and punitive damages. Also,
we are suing him for breach of oral contract, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and unfair business
practices in connection with representations made to us to induce us to issue
stock to him. We are seeking damages.
The litigation may cause a substantial expense for attorneys fees
and a diversion of management attention, regardless of the outcome of the
litigation. In addition, disputes such as this one can be harmful to
companies, especially a company such as ours which is in the early stage of
development.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS CURRENTLY MAINTAIN
SUBSTANTIAL VOTING CONTROL OVER US, WHICH WILL ALLOW THEM TO CONTROL MOST
MATTERS SUBMITTED TO STOCKHOLDERS FOR APPROVAL.
Our executive officers, directors and 5% stockholders beneficially
own, in the aggregate, 58% of our outstanding Class A Common Stock. As a
result, these stockholders (or subgroups of them) retain substantial control
over matters requiring approval by our stockholders, such as the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing
a change in control.
UNANTICIPATED DELAYS OR PROBLEMS IN INTRODUCING OUR PROPOSED PRODUCTS OR
IMPROVEMENTS TO OUR PROPOSED PRODUCTS MAY CAUSE CUSTOMER DISSATISFACTION OR
DEPRIVE US OF THE "FIRST-TO-MARKET" ADVANTAGE.
Except for Michael Elliott and Richard Slansky, management has
limited or no experience in manufacturing and shipping products. In addition,
delays in the development of prototype products are not uncommon in high-tech
industries such as ours. If we experience problems related to the
introduction or modification of our proposed products or the reliability and
quality of such products, which problems delay the introduction of our
proposed products or product improvements by more than a few months, we could
experience reduced product sales and adverse publicity. We believe that
whichever company is first-to-market with viable products in the markets we
intend to address will gain a significant advantage with customers; delays
could prevent us from being the company which gains this advantage.
Our proposed products are complex and are likely to contain a number of
undetected errors and defects, especially when these proposed products are first
released. These errors or defects, if significant, could harm the performance of
these proposed products, result in ongoing redevelopment and maintenance costs
and/or cause dissatisfaction on the part of customers. These costs, delays or
dissatisfaction could harm our business.
MANAGEMENT MAY APPLY THE PROCEEDS RECEIVED FROM ANY ONGOING OR FUTURE SALE OF
OUR SECURITIES TO USES THAT DECREASE OUR PROFITS OR MARKET VALUE.
We have used, and will continue to use, the net proceeds from sale of
our securities for general corporate purposes, including working capital, and
for research and development, but also for matters such as legal fees for
litigation. We determine, based on our existing needs, how the proceeds will be
allocated among the anticipated uses. Accordingly, our management has
significant flexibility in applying the net proceeds from any sale of our
securities and operating income (if any). The money may be used for corporate
purposes that have the unintended effect of decreasing stockholder value.
TO DATE THERE HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND
THERE IS NO ASSURANCE THAT AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK WILL
EVER EXIST.
As of May 19, 2000, there were 7,812,651 shares of our Class A
Common Stock outstanding. Prior to this registration of our Class A Common
Stock under the Securities Exchange Act of 1934, there has been only a
limited public market for Path 1 securities. There can be no assurance that a
broad public market for our securities will arise once our Class A Common
Stock is registered. We may be unable to attract and maintain good-quality
market makers. In the event a liquid market for our Class A Common Stock does
develop, there can be no assurance that the market will be strong enough to
absorb all of the Class A Common Stock currently owned by our
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<PAGE>
stockholders. In addition, subsequent issuances of equity or equity-linked
securities may further saturate the market for our Class A Common Stock. The
resale of substantial amounts of our Class A Common Stock will have a depressive
effect on the market.
Principal stockholders with an aggregate of 3,339,360 shares of
Class A Common Stock were subject to a lock-up agreement which expired on
February 1, 2000. 1,655,000 of these shares were sold by two of these
principal stockholders to Leitch Technology Corporation in April 10, 2000.
Because these principal stockholders were "affiliates" for purposes of Rule
144, tacking was not permitted and Leitch was required to commence a new
holding period. These 1,655,000 shares may not be resold under Rule 144 until
April 2001, one year after they were purchased. Public resales of an
additional 1,428,720 of the shares previously subject to the lock-up
agreement, beginning three months after the effective date of this
registration statement, could result in an imbalance of supply and demand in
the market for our Class A Common Stock. These 1,428,720 shares cannot be
resold publicly before the three-month point because they are "control
securities" which could only be resold under Rule 144, and by its terms Rule
144 has not been available for resales for some time before February 1, 2000
and will also not be available for the first three months after our
Securities Exchange Act registration via this Form 10. Franklin Felber, the
former owner of the remaining 255,640 shares of Class A Common Stock subject
to the expired lock-up agreement, is not subject to Rule 144; he has sold all
but 1,000 of his shares of Class A Common Stock.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, IN
WHICH CASE STOCKHOLDERS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Our Class A Common Stock is presently quoted for trading on the Pink
Sheets, a static, paper-based quotation medium that typically includes thinly
traded, speculative companies with few market makers, and on the Third
Segment of the Frankfurt Stock Exchange. Once this registration statement has
been declared effective, we plan to be reinstated on the OTC Bulletin Board,
a regulated quotation service that displays real-time quotes and other
information about over-the-counter (OTC) equity securities. The market price
for our Class A Common Stock is susceptible to a number of internal and
external factors including:
- quarterly variations in operating results;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing
policies by us or our competitors;
- proprietary rights disputes or litigation; and
- changes in earnings estimates by analysts or other factors.
In addition, stock prices for many technology companies fluctuate
widely for reasons which may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions
such as interest rate increases, recessions or military conflicts, may
materially and adversely affect the market price of our Class A Common Stock.
WE OFFER STOCK OPTIONS TO OUR EMPLOYEES, WHICH COULD RESULT IN SUBSTANTIAL
DILUTION TO ALL STOCKHOLDERS.
In order to provide incentives to current employees and induce
prospective employees and consultants to work for us, we have offered and
issued options to purchase our Class A Common Stock and Class B Common Stock.
As of May 19, 2000, there were options outstanding to purchase 897,336
shares of our Class A Common Stock, and there were options outstanding under
our 1999 Stock Option/Stock Issuance Plan to purchase 1,399,653 shares of Class
B Common Stock. We will continue to issue options to purchase sizable numbers
of shares of stock to new and existing employees, directors, advisors,
consultants or other individuals as we deem appropriate and in our best
interests. The grant and subsequent exercise of such options could result in
substantial dilution to all stockholders. As of May 19, 2000, 1,100,347
shares of Class B Common Stock under our 1999 Stock Option/Stock Issuance
Plan remain authorized but not yet subject to options.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements.
These statements relate to future events or our future business performance.
In some cases, you can identify forward-looking statements by terminology
such as "anticipates," "believes," "continue," "could," "estimates,"
"expects," "intends," "may," "plans," "potential," "predicts," "should," or
"will," or the negative of such terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. To the extent
required by federal law, we shall update these forward-looking statements
after the date of this registration statement to conform such statements to
actual results.
FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL DATA
In the table below, we provide you with selected historical financial data.
We have prepared this information using financial statements for the period from
January 30, 1998 (inception) to December 31, 1998, the twelve-month period ended
December 31, 1999 and the three-month periods ended March 31, 1999 and 2000. The
financial statements for the period from January 30, 1998 (inception) to
December 31, 1998, and for the twelve-month period ended December 31, 1999, have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the three-month period ended March 31, 1999 and 2000 have not
been audited. When you read this selected historical financial data, it is
important that you read along with it the historical financial statements and
related notes as well as the section titled "Management's Discussion and
Analysis of Financial Condition and Operating Results" included elsewhere in
this registration statement. Historical results are not necessarily indicative
of future results.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 30, 1998 TWELVE MONTHS ENDED
(INCEPTION) TO ENDED MARCH 31,
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
------------------- ------------------ --------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Operating expenses:
Research and development.............. $ 661,735 $ 1,347,631 $ 541,371 $ 1,477,401
Sales and marketing................... 291,698 359,039 41,995 677,049
General and administrative............ 1,717,936 2,293,082 152,062 780,301
Total operating expenses................. $ (2,671,369) $ (3,999,752) $ (735,428) $ (2,934,751)
Interest income, net..................... 7,123 19,392 1,058 18,073
Recognized loss of investment in
Jyra Research, Inc.................... - (33,720) - (49,320)
Net loss................................. $ (2,664,246) $ (4,014,080) (734,370) $ (2,965,998)
Imputed dividend resulting from
sale of equity at discount
to market price....................... - (183,860) - (1,402,675)
Net loss attributable to common
stockholders.......................... $ (2,664,246) $ (4,197,940) $ (734,370) $ (4,368,673)
Net loss per share attributed to
common stock (1):
Basic and diluted..................... $ (0.57) $ (0.74) $ (0.14) $ (0.69)
Weighted average shares--basic and
diluted............................... 4,712,194 5,678,757 5,387,666 6,325,151
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------ ------------ -----------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 119,394 $ 453,951 2,178,425
Working capital.......................... 74,177 257,387 2,454,347
Total assets............................. 311,594 712,473 3,229,448
Total stockholders' equity............... 256,252 429,977 2,636,375
</TABLE>
------------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of basic and diluted net loss per share and the number of
shares used in the per share calculation.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and the accompanying notes.
Our only material financial transactions have been capital raising, paying
costs of forming our company and commencing limited operations, mainly research
and development. We are a corporation with a limited operating history; we were
incorporated on January 30, 1998. We are a development-stage company with no
revenues to date. We have insufficient operating history on which to base an
evaluation of our business and prospects. Any such evaluation must be made in
light of the risks frequently encountered by companies in their early stages of
development, particularly for companies in the rapidly evolving sector related
to the Internet. Among the risks we face are the absence of an established
customer base, lack of a significant presence in the marketplace, untested
operating capacity and the need for additional capital. There is no assurance
that we will be successful in addressing these risks.
We believe that our success depends, in large part, on our ability to
create market awareness and acceptance for our products, raise additional
operating capital to grow operations, build technology and non-technology
infrastructures and continue product research and development.
RESULTS OF OPERATIONS (FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000)
SALES. We had no revenue from product sales in the quarters ended March
31, 1999 or 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
were $541,371 for the quarter ended March 31, 1999, compared to $1,477,401
for the quarter ended March 31, 2000, as the receipt of additional invested
funds enabled us to ramp up our research and development effort. The company
has limited internal research and development personnel. We engaged several
third party engineering firms and individuals to assist in the development
effort during these periods. These third parties were paid development fees
included in our research and development expenses above in the amount of
$3,466 for the quarter ended March 31, 1999, compared to $371,450 for the
quarter ended March 31, 2000. We expect these development fees to decrease
in the future as additional engineering staffs are added to our company and
more of this development work is conducted in-house. We do envision
maintaining an advisory board and some third party development companies for
special projects and peak demand. In addition, we incurred $202,521 in
compensation expense for the quarter ended March 31, 1999 and $213,041 in
compensation expense in the quarter ended March 31, 2000 related to options
given to consultants for research and development services rendered to us.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$41,995 for the quarter ended March 31, 1999; of this amount, $21,058 is
compensation expense related to shares or options given to employees. Our
sales and marketing expenses were $677,049 for the three months ended March
31, 2000, as we continued our ongoing efforts to increase market awareness
and acceptance of our technology and our intended products; of this amount,
$203,293 is compensation expense related to shares or options given to
employees. The remaining increase in sales and marketing expenses from 1999
to 2000 is due primarily to additional sales and marketing efforts,
particularly trade show and advertising activities.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $152,062 for the quarter ended March 31, 1999, of which $7,121
was amortization of compensation expense related to options granted to
employees at less than fair market value, compared to $780,301 for the
quarter ended March 31, 2000, of which $10,768 was amortization of
compensation expense related to options granted to employees at less than
fair market value. The remaining increase in general and administrative
expenses from the first quarter of 1999 to the first quarter of 2000 is
primarily due to legal costs associated with the ongoing litigation, patents
and the SEC registration process. After this registration statement becomes
effective, we will have ongoing additional legal and accounting expenses as a
result of being a reporting "public company."
RESULTS OF OPERATIONS (FROM INCEPTION THROUGH DECEMBER 31, 1998 COMPARED WITH
THE TWELVE MONTHS ENDED DECEMBER 31, 1999)
SALES. We had no revenue from product sales in either 1998 or 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
were $661,735 for the period from inception through December 31, 1998,
compared to $1,347,631 for the twelve months ended December 31, 1999, as the
receipt of additional invested funds over this twelve month period (as
opposed to the nine month period in 1998) enabled us to ramp up our research
and development effort. The company has limited internal research and
development personnel. We engaged several third party engineering firms and
individuals to assist in the development effort during these periods. These
third parties were paid development fees included in our research and
development expenses above in the amount of $206,023 for the period from
inception through December 31, 1998, compared to $255,667 for the twelve
months ended December 31, 1999. We expect these development fees to decrease
in the future as additional engineering staffs are added to our company and
more of this development work is conducted in-house. We do envision
maintaining an advisory board and some third party development companies for
special projects and peak demand. In addition, we incurred $73,351 in
compensation expense in 1998 and $311,247 in compensation expense in 1999
related to options given to consultants for research and development services
rendered to us.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$291,698 for the period from inception through December 31, 1998; of this
amount, $196,000 is compensation expense related to shares given to a certain
employee. Our sales and marketing expenses were $359,039 for the twelve months
ended December 31, 1999, as we continued our ongoing efforts to increase market
awareness and acceptance of our technology and our intended products. The
increase in sales and marketing expenses from 1998 to 1999 is due primarily to
the increased costs of conducting sales and marketing efforts for a full twelve
months (as opposed to approximately nine months during 1998).
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $1,717,936 for the period from inception through December 31,
1998, of which $1,419,407 was amortization of compensation expense related to
options granted to employees at less than fair market value, compared to
$2,293,082 for the twelve months ended December 31, 1999, of which $1,299,938
was amortization of compensation expense related to options granted to employees
at less than fair market value. The increase in general and administrative
expenses from 1998 to 1999 is primarily due to (i) higher personnel costs, as we
filled two executive officer positions with new hires, and increased salaries
for our existing executive officers and employees, (ii) legal costs ($251,667 as
of December 31, 1999) associated with the ongoing litigation, (iii) increased
rent payment for our premises, (iv) the increase in compensation expenses
related to employee option grants at below fair market value and (v) the costs
of doing business for a full twelve months (as opposed to approximately nine
months during 1998). After this registration statement becomes effective, we
will have ongoing additional legal and accounting expenses as a result of being
a reporting "public company."
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our cash requirements through issuances
of our Class A Common Stock to accredited investors in Europe and the United
States. In the period from March to May 1998, we conducted a private offering to
accredited individual and institutional investors in the United States and
Europe in which we sold 1,614,833 shares of Class A Common Stock at a price of
$0.60 per share, resulting in net cash proceeds of $967,840. In the period from
February to April 1999, we conducted a private offering to accredited individual
and institutional investors in Europe in which we sold 419,500 shares of our
Class A Common Stock at a price of $4.00 per share, resulting in net cash
proceeds of $1,595,508. In May 1999, we authorized a private offering to
accredited individual and institutional investors of up to 1,250,000 shares of
our Class A Common Stock at a price of $8.00 per share. As of May 19, 2000, we
had sold 601,800 shares of our Class A Common Stock in this $8 offering,
resulting in aggregate cash proceeds (not including offering-related expenses
incurred to date) of $4,814,400. Proceeds totaling $3,800,000 have been received
after December 31, 1999 and of these proceeds received after December 31, 1999,
$800,000 were restricted and subject to possible refund. As of May 19, 2000,
releases have been received lifting the restrictions on $680,000 of the
restricted proceeds.
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<PAGE>
In April 2000, Leitch Technology Corporation ("Leitch") purchased
1,250,000 shares of our Class A Common Stock at a price of US$8 per share,
resulting in aggregate proceeds of $10,000,000. In addition, we received
200,000 shares of Leitch common stock, no par value. The share price of
Leitch common stock as of April 11, 2000 was CAN $22.80, or approximately US
$15.47. We also entered into a Technology License Agreement with Leitch
granting Leitch exclusive license rights to our TrueCircuit(TM) technology in
the professional broadcast video market. Pursuant to the terms of the
agreement, Leitch is not obligated to pay us anything in the first year of
the agreement but thereafter, provided certain conditions of the agreement
are satisfied, a minimum annual fee of US$2 million in the second year, US$3
million in the third year, US$5 million in the fourth year and US$5 million
in the fifth year must be paid to us in order to maintain the exclusive
license. After the fifth year, minimum annual fees will be mutually agreed
upon. If the minimum annual fee is not made in any year, the exclusive
license reverts to a non-exclusive license. Minimum annual fees may be in the
form of product revenue, research contract revenue or any form other than an
equity investment in the company. We anticipate that initial annual fees from
Leitch will be in the form of research contract revenue and that they will
evolve into a mix of research contract revenue and product revenue as we
develop our products and Leitch develops the market for those products. As a
result, we envision increasing our research and development resources and
expenses to support new product development for Leitch, other strategic
partners and for ourselves. In addition, Leitch is obligated to pay royalties
to us on True Circuit(TM) products for approximately five years. At that
time, Leitch shall pay us a royalty based on product sales. (See our
discussion of the Licensing Agreement with Leitch under the Business section.)
As of March 31, 2000 we had $2,978,425 in cash available to fund
operations. We operate in a very competitive industry in which large amounts
of capital are required in order to develop and promote products. We believe
our cash resources at March 31, 2000 and the net proceeds of $10 million from
our sale of 1,250,000 shares of Class A Common Stock to Leitch will be
sufficient to fund capital expenditures, working capital and cash
requirements for at least the next twelve months. We anticipate that we will
require additional funds to continue our research and development activities,
expand our marketing and sales capabilities, fund our capital expenditures
necessary to accommodate our anticipated customer base and expand certain
financial and administrative functions. If we are unable to obtain additional
financing, we may be required to delay, reduce the scope of or eliminate
research and development of one or more of our intended products and
significantly reduce expenditures on infrastructure.
Our actual revenues and expenses could vary materially from the amounts we
anticipate or budget, and such variations may affect the additional financing
needed for our operations. Accordingly, there can be no assurance that we will
be able to obtain the capital that we will require.
To the extent that we acquire the amounts necessary to fund our operations
through the issuance of equity securities, our then-current stockholders may
experience dilution in the value per share of their equity securities.
We have no material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
In 1998 and 1999, the Company established plans to become Year 2000 ready.
In late 1999, the Company completed its remediation and testing of systems. As a
result of those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company incurred minimal expenses
during 1999 in connection with remediating its systems. The Company is not aware
of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
22
<PAGE>
PROPERTIES
We do not own any real property. We currently lease 4,142 square feet of
office space at 3636 Nobel Drive, San Diego, California under a three-year lease
that expires on May 31, 2002. Base rent for the period June 1, 1999 through May
31, 2000 is $8,431 per month. Thereafter the rent shall be adjusted annually to
reflect a fixed four percent (4%) increase over the prior year's rent, resulting
in monthly base rent payments of $8,831 per month for the period June 1, 2000
through May 31, 2001, and $9,184 per month for the period June 1, 2001 through
May 31, 2002. We believe that our present facilities must be expanded to meet
our projected business requirements; however, we believe that suitable
facilities for expansion will be available when required.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information known to us with respect to
beneficial ownership of our Class A Common Stock as of May 19, 2000 by:
- each person, or group of affiliated persons, known by us to
own beneficially more than 5% of our outstanding Class A
Common Stock;
- each director;
- our Chief Executive Officer;
- each person who served as our Chief Executive Officer in 1999;
- each executive officer whose 1999 compensation from us was
over $100,000; and
- our directors and our executive officers as a group.
The following table gives effect to the shares of Class A Common Stock
issuable within 60 days of May 19, 2000 upon the exercise of all options
and other rights beneficially owned by the indicated stockholders on that
date. Except as indicated in the footnotes to the following table, the
persons named in the table have sole voting and investment power with respect
to all shares of our Class A Common Stock shown as beneficially owned by
them, subject to community property laws, where applicable. Percentage of
ownership in the following table is calculated under the SEC's Rule
13d-3(d)(1).
<TABLE>
<CAPTION>
Class A Common Stock Beneficially Owned
Name / Address of ----------------------------------------------------------
Beneficial Owners # of Shares of Class A Common Stock % of Class
----------------- ----------------------------------- -----------------
<S> <C> <C>
Leitch Technology Corporation 2,905,000 37.2%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
John MacDonald 2,905,000(1) 37.2%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
Reginald Tiessen 2,905,000(1) 37.2%
25 Dyas Road
North York, Ontario
Canada M3B 1V7
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Michael Berns
231 Barnard Road
Larchmont, New York 10538 ---(2) ---
Michael Elliott ---(3) ---
3636 Nobel Drive, Suite 275
San Diego, CA 92130
Ronald Fellman
12989 Chaparral Ridge Road
San Diego, CA 92130 1,148,720 14.7%
Douglas Palmer
1229 Trieste Drive
San Diego, CA 92107 502,000(4) 6.2%
Paul Robinson
22 Pond Place
London SW3 6QJ
England 372,018(5) 4.6%
Roderick Adams
211a Stephendale Road
London SW6 2PR
England 372,018(5) 4.6%
John Hooker 84,000(6) 1.1%
4548 Mercurio Street
San Diego, CA 92130
All directors and executive officers
as a group (8 persons) 5,134,738(7) 61.6%
</TABLE>
(1) Includes 2,905,000 shares of Class A Common Stock beneficially owned by
Leitch Technology Corporation, of which the indicated person is an
officer. The indicated person disclaims beneficial ownership in these
shares except to the extent of his pecuniary ownership in such shares.
(2) Michael Berns served as our Chief Executive Officer until January 1999
and as Chairman of our Board of Directors until May 1999. He was the
beneficial owner, through his wife Rona Berns, of 1,148,720 shares of
Class A Common Stock; these shares were sold in April 2000 to Leitch
Technology Corporation.
(3) Dr. Elliott has been granted options under our 1999 Stock Option/Stock
Issuance Plan (the "Plan") to purchase 415,000 shares of Class B Common
Stock, 65,000 shares of which are fully vested. At present, there are
no shares of Class B Common Stock outstanding, although options to
purchase 1,399,653 shares of Class B Common Stock have thus far been
granted under the Plan to various employees, consultants and advisors
(including Dr. Elliott). Dr. Elliott's beneficial ownership of Class B
Common Stock has been omitted from the table because inclusion of these
shares and the method of SEC Rule 13d-3(d)(1) would incorrectly imply
that Dr. Elliott beneficially owns 100% of the Class B Common Stock.
(4) Includes options to purchase 306,000 shares of Class A Common Stock.
(5) Includes options to purchase 95,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A Common Stock beneficially owned
by Jyra Research, Inc., of which the indicated person is an officer.
The indicated person disclaims beneficial ownership in these shares
except to the extent of his pecuniary ownership in such shares. We
believe Mr. Robinson, Mr. Adams, and Jyra Research, Inc. may be deemed
to constitute a "group."
(6) Includes options to purchase 28,000 shares of Class A Common Stock.
(7) Includes options to purchase 524,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A Common Stock owned by Jyra
Research, Inc., as to which beneficial ownership is disclaimed except
to the extent of Mr. Robinson's and Mr. Adams' pecuniary ownership in
such shares.
24
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS.
Our directors, executive officers and key employees, and their ages
and positions, are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Ronald D. Fellman 44 Chairman of the Board and
Chief Technology Officer
Michael T. Elliott 56 President, Chief Executive
Officer and Director
Douglas A. Palmer 49 Executive Vice President,
Treasurer, Chief Operating Officer
and Director
Richard B. Slansky 43 Chief Financial Officer and
Vice President of Finance
Paul Robinson 36 Director
Roderick Adams 36 Director
John A. MacDonald 46 Director
Reginald J. Tiessen 43 Director
KEY EMPLOYEES:
Yendo Hu 36 Vice President of Video Products
John Hooker 44 Director of Customer Support
John Beer 35 Director of Software Development
Grady Taylor 41 Director of Embedded Systems
</TABLE>
Messrs. Hooker, Beer and Taylor are not members of our Board of
Directors.
Dr. Ronald D. Fellman serves as our Chairman of the Board of
Directors, a position he assumed in May 1999, and as Chief Technology
Officer, a position he assumed in April 2000. Dr. Fellman had previously
served as our President from January 1998 until April 2000 and as Chief
Executive Officer from January 1999 until April 2000. From July 1996 to
December 1997, Dr. Fellman worked as an independent consultant and also
co-founded and served as Chief Technology Officer for Newsletter
Technologies, Inc., a pioneer in commerce over the Internet. From 1988 to
1996, Dr. Fellman served as a professor of Electrical and Computer
Engineering at the University of California at San Diego. He has extensive
expertise in high-speed, real-time computer networks, multiprocessing, mixed
analog/digital integrated circuits and systems, and signal processing, and
has published over 35 papers in these areas. Dr. Fellman's industrial
experience includes a senior engineering position at Hewlett-Packard
Corporate Labs where he served as principal architect for the design of the
first super-scalar digital signal processor integrated circuit from September
1984 to January 1988. Dr. Fellman received his B.S. (Summa Cum Laude), M.S.,
and Ph.D. degrees from the University of California at Berkeley.
Dr. Michael Elliott, our President and Chief Executive Officer,
joined Path 1 in April 2000. Prior to joining us, Dr. Elliott served as Vice
President and General Manager of Advanced Engineering for Compaq Computer
Corporation from October 1997 to November 1999. While at Compaq, Dr. Elliott
had responsibility for all new display products for both the consumer and
commercial markets. Prior to his tenure at Compaq, Dr. Elliott served as
Sector Vice President and President of SAI Technology for Science
Applications International Corporation (SAIC) from February 1995 to October
1997, where he was responsible for the successful growth of SAIC's mobile
computing and display system. Dr. Elliott has received over 10 patents in the
field of physics and has authored over 30 technical articles that were
published in leading physics journals. Dr. Elliott received his B.S. from the
University of California at Berkeley and his Ph.D. in Solid State Physics
from the University of Notre Dame.
Dr. Douglas Palmer has served as Executive Vice President since
January 1998, as a director since March 1998, as Treasurer since October
1998, and as Chief Operating Officer since April 2000. Dr. Palmer had
previously served as our Chief Technology Officer from May 1999 until April
2000. Prior to co-founding Path 1, Dr. Palmer served as the Director of
Networking for TrexCommunications Corp., a telecommunications equipment
manufacturer, from December 1996 to January 1998, and as a Senior Scientist
for ThermoTrex Corporation, a research and development company specializing
in optical and x-ray imaging, from 1988 to December 1996. Dr. Palmer brings
extensive expertise in digital signal processing, image processing, digital
communications, and real-time computer software. In the business area, he has
assisted in the startup and funding of HNC Software and Trex Communications
Corp. and worked in the area of corporate acquisitions for ThermoTrex
Corporation identifying takeover candidates and performing technical due
diligence. He has received over 8 patents in signal processing and
telecommunications. He is a former professor at the University of California
at San Diego. Dr. Palmer received his B.A. in Physics from the University of
California at San Diego (Magna Cum Laude), and his M.Phil. and Ph.D. degrees
from Yale University.
Richard B. Slansky, our Vice President of Finance and Chief
Financial Officer, joined Path 1 in May 2000. Prior to joining us, Mr.
Slansky served as President, Chief Financial Officer and a member of the
Board of Directors of Nautronix, Inc. from January 1999 to May 2000.
Nautronix, Inc. is a marine electronics/engineering services company and a
subsidiary of Nautronix Ltd. While at Nautronix, Mr. Slansky was responsible
for new product development, engineering, manufacturing, customer support and
finance. Prior to his tenure at Nautronix, Mr. Slansky served as Chief
Financial Officer of Alexis Corporation, an international high technology
company, from August 1995 to January 1999, where he was responsible for
developing control systems and financial discipline. Mr. Slansky received his
B.S. from the University of Pennsylvania's Wharton School and his M.B.A. in
Finance & Accounting from the University of Arizona.
25
<PAGE>
Paul Robinson has served as a director of Path 1 since March 1998.
Mr. Robinson has also served as Chairman of the Board of Directors,
President, and Chief Executive Officer of Jyra Research Inc., since June 3,
1996. Jyra Research Inc. is in the business of developing network monitoring
software. From August 1995 to October 1, 1996, Mr. Robinson was an Account
Manager for Cisco Systems, handling customers in the United Kingdom financial
sector. From 1992 to August 1995, Mr. Robinson was employed by Biss Ltd. as a
new business sales executive.
Roderick Adams has served as a director of Path 1 since March 1998.
Mr. Adams has served as a director and Vice President of Corporate Affairs of
Jyra Research Inc. since its inception in May 1996. Since 1991 Mr. Adams has
acted as a consultant to companies seeking financing. Mr. Adams provides
services and advice to these companies on corporate finance and investor and
media relations.
John A. MacDonald was elected to our Board of Directors in April
2000. Mr. MacDonald has served as the President and Chief Executive Officer
of Leitch Technology Corporation since 1999. Prior to joining Leitch, Mr.
MacDonald worked at Bell Canada where he served as Chief Technology Officer
from 1994 to 1997, Chief Operating Officer from 1997 to 1998 and President
and Chief Operating Officer from 1998 to 1999. Mr. MacDonald presently serves
as Chairman of the Science and Technology Advisory Committee to the
government of Canada. Mr. MacDonald serves on the board of directors of
Rogers Communications Inc., an integrated media company, and SaskTel a
telecommunications company. Mr. MacDonald received his B. Eng from Technical
University of Nova Scotia and his B.S. from Dalhousie University.
Reginald J. Tiessen was elected to our Board of Directors in April
2000. Mr. Tiessen has served as Leitch's Vice President of Finance and Chief
Financial Officer since January 1998. Prior to joining Leitch, Mr. Tiessen
served as the Director of Finance at Tee-Comm Electronics Inc., a
manufacturer and distributor of direct-to-home satellite TV receiving
systems, from November 1992 to September 1996, and served as Chief Financial
Officer for Sidus Systems, Inc., a manufacturer and distributor of systems
integration and computer network products, from October 1996 to August 1997.
Mr. Tiessen is a member of the Institute of Chartered Accountants of Ontario.
Mr. Tiessen received his B.S. in Mathematics from the University of Waterloo.
Dr. Yendo Hu, Vice President of Video Products, joined Path 1 in
September 1999. Prior to joining us, Dr. Hu served as Director of Systems
Engineering for Tiernan Communications, Inc., a company engaged in the
development of digital television compression and transmission solutions,
from June 1996 to September 1999. Dr. Hu also served as a member of the
technical staff at AT&T Bell Laboratories from 1987 until 1990. Dr. Hu left
AT&T Bell Laboratories in 1990 to attend the University of California at San
Diego, where he completed his Ph.D. in Electrical Engineering in June 1996.
Dr. Hu brings extensive experience in video technology and the professional
broadcast market. At Tiernan Communications, he developed MPEG2 video and
multiplexing compression technology, which lead to the first commercially
available MPEG2 4:2:2 level solution. He was also instrumental in
establishing Tiernan Communications as the sole HDTV corporate distribution
compression provider for both the ABC and NBC television networks. Dr. Hu
received his B.S. and M.S. in Electrical Engineering from Cornell University.
Dr. Hu holds three patents in the area of MPEG2 implementation.
John Hooker has served as the Director of Customer Support since
July 1998. Prior to joining Path 1, Mr. Hooker served as the Marketing
Support Engineer, Senior Consultant and Project Manager for the Professional
Services Group of TriTeal Corporation, a software and integrated applications
provider, from May 1995 to June 1998. From January 1995 to May 1995, Mr.
Hooker was employed as an outside consultant for TriTeal. Mr. Hooker brings
nearly 20 years of technical and sales experience in the field of computer
integration and software. He has received sales support awards and honors
such as the "Top Performer" and "Circle of Excellence" (twice) from Digital
Equipment Corporation. He has experience in software engineering,
hardware/software integration, and solution design. He received his B.A. in
Physics at the University of California at San Diego.
John Beer has served as the Director of Software Development since
July 1998. Prior to joining Path 1, Mr. Beer served as the Principal Research
Engineer for TriTeal Corporation from December 1995 to May 1998. While at
TriTeal, he researched, designed, and prototyped thin-client, a
network-centric desktop user interface using Java, XML, and HTML languages,
and httpd servers. From 1991 to December 1995, Mr. Beer performed consulting
work for IBM as a contract consultant through his official employer, Ralph
Kirkley Associates. He worked on many projects for IBM Corporation including
AIX Windows Visual System Management. Mr. Beer brings software expertise in
network and graphical user interface products using many languages and
operating systems. Mr. Beer has received four patents for his developments.
He received his B.S. in Computer Science from The University of Texas at
Austin.
Grady Taylor has served as the Director of Embedded Systems since
September 1998. Prior to joining Path 1, Mr. Taylor served as Program Manager
and Senior Software Engineer at ThermoTrex Corporation from April 1986 to
September 1998. While at ThermoTrex, he worked on adaptive optics systems,
microwave imaging systems
26
<PAGE>
and laser interferometry. He has expertise in embedded microprocessors and
operating systems utilized in the demanding environments. Mr. Taylor received
his B.S. in Mathematics with an emphasis in Computer Science from San Diego
State University.
BOARD OF DIRECTORS
The Board of Directors may consist of at least one and not more than
seven directors. Our Board of Directors is currently comprised of seven (7)
members. Directors are elected to serve until the next annual meeting of
stockholders.
BOARD COMMITTEES
In November, 1998, the Board of Directors authorized the formation
of an Executive Committee which currently consists of Ronald Fellman and
Douglas Palmer. The Executive Committee oversees the routine matters of Path
1, including the hiring and firing of employees and the retention of
consultants (to the extent these matters are not delegated to our senior
executive officers). The Executive Committee is also responsible for the
creation and administration of all stock option plans and grants thereunder
for the Company. The Executive Committee does not have the power to bind us
on other matters not in the ordinary course of business.
EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation earned by, or
which we paid to, the following persons (the "Named Executive Officers") with
respect to 1998 and 1999 for all services rendered to us in all capacities:
- each person who served as our Chief Executive Officer in 1999;
and
- each of our other executive officers whose total salary and
bonus in 1999 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -------------------------------
SALARY BONUS SECURITIES UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)
----------------------------- ------ -------- ------- -------------------------------
<S> <C> <C> <C> <C>
Ronald D. Fellman, 1999 175,833 -- --
Chief Executive Officer 1998 105,416 -- --
Michael Berns, 1999 60,000 -- --
Chief Executive Officer 1998 105,000 -- --
Douglas A. Palmer, 1999 137,083 -- --
Chief Technology Officer 1998 72,019 -- 362,000
John Hooker 1999 100,000 -- --
Director of Customer Support 1998 50,000 -- 168,000
</TABLE>
Based on Michael Berns' assertion to us that he was not a partner in
the Berns & Berns law firm, to which we paid $42,339 with respect to 1998 and
approximately $29,000 with respect to 1999 for legal services, we have not
included any of such amounts for him in this table.
The salaries of all of our officers are subject to the approval of
the Executive Committee of the Board of Directors. Due to our stage of
development, the Executive Committee attempted to pay our executive officers
at the market rate for persons with their credentials and expertise and did
not attempt to tie or relate their compensation to corporate performance.
OPTION GRANTS IN LAST YEAR
No options to acquire shares of our Class A and Class B Common Stock
were granted during the year ended December 31, 1999 to the Named Executive
Officers.
27
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the number and
value of unexercised options held by each of the Named Executive Officers at
December 31, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ---------------------------- -----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Fellman -- -- -- -- -- --
Michael Berns -- -- -- -- -- --
Douglas Palmer -- -- 278,000 84,000 $2,849,500 $861,000
John Hooker 28,000 56,000 $ 287,000 $574,000
</TABLE>
(1) The last reported bid price of our Class A Common Stock as of December 31,
1999 was $10.25 per share.
EXECUTIVE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The two current members of the Executive Committee, Ronald Fellman
and Douglas Palmer, are presently executive officers of Path 1 and were
officers of Path 1 during the year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Michael Elliott
dated April 7, 2000. This agreement provides for a base salary of $200,000
per year, subject to annual review by the Board of Directors. In addition to
this salary, Dr. Elliott shall be entitled to receive 1% of the cash proceeds
from any equity financing (excluding the $10,000,000 Leitch investment)
obtained from investment bankers, strategic partners or similar
organizations. This agreement also calls for Dr. Elliott to receive options
to purchase 300,000 shares of Class B Common Stock at $4.35 per share, 50,000
of which vested upon commencement of his employment and the remainder of
which shall vest in equal quarterly installments over two years. Dr. Elliott
shall receive options to purchase an additional 100,000 shares of Class B
Common Stock if, at some point in the next two years, our market
capitalization exceeds $400,000,000 for a continuous 90-day period or audited
revenues exceed $50,000,000 for one year. Upon a change of control of Path 1,
vesting shall be completed immediately.
We entered into an employment agreement with Dr. Yendo Hu dated
August 31, 1999. The agreement provides for a base salary of $112,000 per
annum and calls for Dr. Hu to receive options to purchase 225,000 shares of
Class B Common Stock at $2.00 per share, 25,000 shares of which vested upon
commencement of his employment with us and 200,000 shares of which will vest
over a four-year period in equal annual installments. In the event that Dr.
Hu's position with us is terminated as a direct result of a merger,
consolidation, buy-out, takeover, or other change in control of Path 1, he
will receive severance pay equal to three months' base salary.
We entered into an employment agreement with John Hooker dated June 10,
1998 and effective as of July 1, 1998. The agreement provides for a base salary
of $100,000 per annum and calls for Mr. Hooker to receive a grant of our Class A
Common Stock totaling 56,000 shares, par value $0.001 per share, plus options to
purchase an additional 112,000 shares of Class A Common Stock at an exercise
price of $0.60 per share. These options to purchase the 112,000 shares of Class
A Common Stock are scheduled to vest over a four-year period starting June 29,
1998 in equal annual installments.
We entered into an employment agreement with Grady Taylor dated
September 8, 1998. The agreement provides for a base salary of $77,500 per annum
and calls for Mr. Taylor to receive options to purchase 25,000 shares of our
Common Stock at an exercise price of $2.50 per share. These options are
scheduled to vest over a four-year period in equal annual installments. Mr.
Taylor's employment with us is governed in accordance with the rules and
regulations concerning at-will, exempt employees in the State of California.
DIRECTOR COMPENSATION
Each of our directors, and each member of any committee established
by the Board of Directors is reimbursed for all reasonable out-of-pocket
expenses incurred by such director or member in connection with the
attendance by such director or member at meetings of the Board of Directors
or at meetings of committees of the Board of Directors, in any case, held in
accordance with the Bylaws. In March 1998, in connection with their
appointments as directors on our Board, Paul Robinson and Roderick Adams each
received fully vested options to purchase 95,000 shares of our Class A Common
Stock.
28
<PAGE>
1999 STOCK OPTION/STOCK ISSUANCE PLAN
Our 1999 Stock Option/Stock Issuance Plan (the "Plan"), our equity
incentive plan, was adopted by the Board of Directors as of August 3, 1999
and by our stockholders as of April 25, 2000. It was amended by the Board and
the stockholders in May 2000. The Plan shall be administered by the Board;
however, the Board has delegated Plan administrative functions to the
Executive Committee. The Plan Administrator (either the Board or the
Executive Committee) shall have broad authority to administer the Plan as it
deems appropriate; decisions of the Plan Administrator shall be final and
binding.
2,500,000 shares of Class B Common Stock have been reserved for
issuance under the Plan. This share reserve includes 325,556 shares of
Class B Common Stock that were subject to outstanding options as of
December 31, 1999.
The Plan is divided into two separate equity programs:
(i) the discretionary option grant program, under which the
Plan Administrator may grant eligible persons options to purchase shares of
Class B Common Stock; and
(ii) the stock issuance program, under which the Plan
Administrator may issue shares of Class B Common Stock directly to eligible
persons, either through immediate purchase of such shares or as a bonus for
services rendered to us.
Persons eligible to participate in the Plan are as follows:
(i) Employees;
(ii) non-employee members of the Board of Directors; and
(iii) consultants and other independent advisors who provide
services to the us.
The Plan Administrator shall have full authority to determine, (i) with
respect to the grants made under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding, and (ii) with respect to stock issuances
made under the Stock Issuance Program, which eligible persons are to receive
such stock issuances, the time or times when those issuances are to be made, the
number of shares to be issued to each individual, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
individual for such shares.
The exercise price for the options shall be payable in cash or check to
Path1. Should the Class B Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid (i) in some circumstances in shares of Class B Common Stock valued at
fair market value on the date of exercise, or (ii) a same-day sale program
without any cash outlay by the option holder.
The Plan does not provide for automatic acceleration of unvested shares
in the event of (i) a merger or consolidation in which we are not the surviving
entity, or (ii) a sale, transfer or other disposition of all or substantially
all of our assets (each of which shall constitute a "Corporate Transaction"),
although the Plan Administrator has discretion to grant individual options which
so provide. In the event of a Corporate Transaction, all options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity). If such successor does not agree to assume the options or to
substitute equivalent options therefor, unless the Plan Administration shall
determine otherwise, such options will expire upon such event.
29
<PAGE>
The Plan shall terminate upon the earliest (i) the expiration of the
ten (10)-year period measured from the date the Plan is adopted by the Board,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at the time of a clause (i) termination event
shall continue to have full force and effect in accordance with the
provisions of the documents evidencing those options or issuances.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 15, 1998, our Board of Directors authorized the creation of
the Series A Convertible Preferred Stock ("Series A Preferred") which was issued
to Jyra Research, Inc. ("Jyra"), a publicly-held, United Kingdom-based company,
which is in the business of developing network monitoring software. The
agreement provided for Jyra to make a strategic investment in Path1 and for
Path1 to make a strategic investment in Jyra. Under this agreement, Path 1
exchanged ten shares of its Series A Preferred (convertible into 277,018 shares
of Class A Common Stock) for 16,000 restricted common shares of Jyra. There were
no other material terms to this agreement, although our Certificate of
Incorporation provided for the Series A Preferred to elect two directors to our
Board of Directors. These seats were occupied by Paul Robinson and Roderick
Adams. Mr. Robinson, also serves as a director and Chief Executive Officer of
Jyra, while Mr. Adams serves as a director and Vice President of Corporate
Affairs of Jyra. Mr. Robinson and Mr. Adams each have been given fully vested
options to purchase 95,000 shares of Path 1's Class A Common Stock at an
exercise price of $0.60 per share as consideration for their service as
directors on our Board.
In March 1998, in connection with services provided by Michael Berns as
promoter, legal counsel and as the de facto chief executive officer of Path 1,
we made available to him 1,245,600 shares of Class A Common Stock for an
aggregate consideration of $346. Mr. Berns arranged for these shares to be
purchased by his wife, Rona Berns. Some of these shares were transferred (on a
pro rata basis with the other founders) to Douglas Palmer and John Hooker upon
commencement of their employment with us, leaving Rona Berns with 1,148,720
shares of Path 1 Class A Common Stock. Also, in March 1998, Michael Berns'
brother, James Berns, was issued 554,400 shares of the Company's Class A Common
Stock for an aggregate purchase price of $154. Some of these shares were
transferred (on a pro rata basis with the other founders) to Douglas Palmer and
John Hooker, and 5,000 additional shares were transferred to a member of the
immediate family of James Berns, leaving him with 506,280 shares. Rona Berns
and James Berns subsequently sold all 1,655,000 shares of their Class A
Common Stock to Leitch Technology Corporation in April 2000.
The law firm of Berns & Berns acted as general counsel from early
1998 to April 1999. James Berns was a partner in this firm throughout this
time period. Berns & Berns charged us $42,339 in legal fees for 1998 and
approximately $29,000 in legal fees for 1999.
On April 10, 2000, we entered into an Agreement of Purchase and Sale
with Leitch Technology Corporation. Pursuant to this Agreement of Purchase
and Sale (the "Agreement"), Leitch purchased 1,250,000 shares of our Class A
Common Stock for $10,000,000 US and 200,000 common shares of Leitch. The
trading price of Leitch's common shares on the Toronto Stock Exchange as of
May 19, 2000 was $25.00 CDN per share. Leitch represented to us that its
shares are freely tradeable through an appropriately registered dealer in
Canada; however, in the event that Leitch's shares are not freely tradeable
(provided that it is through no fault or omission on our part), then Leitch
shall use its reasonable best efforts to qualify the shares for distribution
in Ontario, Canada.
In connection with the Agreement of Purchase and Sale, we entered
into a Stockholders Agreement dated April 10, 2000 with Leitch, Dr. Fellman,
Dr. Palmer and Dr. Elliott pursuant to which John MacDonald, the President
and Chief Executive Officer of Leitch, and Reginald Tiessen, the Chief
Financial Officer of Leitch, were nominated and elected to our Board of
Directors. Under the terms of this Stockholders Agreement, our executive
officers who are parties to the Stockholders Agreement covenant to vote their
equity securities in favor of a Board of Directors whose members shall
include designees of Leitch who constitute 2/7ths of the entire Board of
Directors, or more if Leitch acquires more shares. This voting requirement
expires when Leitch owns less than 20% of our fully diluted common stock. We
also agreed to use our best efforts to cause at least one director designee
of Leitch to be on each committee of our Board of Directors. This
Stockholders Agreement also provides Leitch (i) a right of first refusal to
purchase any stock (now or hereafter acquired) offered for sale in a private
transaction by Drs. Palmer, Fellman or Elliott, (ii) a pro rata right of
subscription for new securities offered by the Company, and (iii) beginning
on the first anniversary of the effective date of this Form 10, registration
rights for its shares of our Class A Common Stock. Leitch's right to
designate directors and its right of first refusal terminate if another
strategic partner invests $6,000,000 in our equity securities or we have
$30,000,000 of gross revenues in any 12-month period.
The Stockholders Agreement also requires Leitch to refrain from the
purchase of additional shares of our equity securities, from seeking to
acquire us or acquire control of us, or from selecting proxies or being in
any "group" with respect to our securities, all except with the approval of
our Board of Directors or as otherwise expressly provided for in the
Agreement of Purchase and Sale or the Stockholders Agreement.
If Leitch exercises its right of first refusal or otherwise buys
stock privately from Dr. Fellman or Dr. Palmer, then Dr. Elliott has a
tag-along right under the Stockholders Agreement to require Leitch to buy a
pro rata portion of his shares.
The Stockholders Agreement terminates on April 10, 2010 or when we
close an underwritten public offering with at least $25,000,000 of net
proceeds.
LEGAL PROCEEDINGS.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court against several persons, including Franklin Felber,
former Treasurer and a former director. This complaint, and all counterclaims
arising out of it, have since been resolved as to all parties other than Dr.
Felber.
Our complaint against Dr. Felber is for breach of oral contract,
breach of fiduciary duty, breach of the covenant of good faith and fair
dealing, and unfair business practices, primarily in connection with the
allocation of founders' stock of Path 1. We are seeking damages.
A cross-complaint filed on November 29, 1999 by Franklin Felber in
connection with the above mentioned litigation also remains outstanding. This
cross-complaint, filed against us, Ronald Fellman, Douglas Palmer, Roderick
Adams and Jyra alleges fraud, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, and misrepresentation in connection
with the grant in January 1999 by Felber and the exercise in July 1999 by
assignees of Jyra of a private option to purchase from Felber, for $4.00 per
share, 255,640 shares of Path 1 Class A Common Stock. This private,
irrevocable option was granted by Felber to Jyra pursuant to an option
agreement
30
<PAGE>
executed in January 1999 in connection with a lock-up agreement signed by our
major stockholders. This option granted Jyra the right to purchase 30,000 shares
of Class A Common Stock from Felber at any point during February 1999, and upon
purchase of these 30,000 shares of Class A Common Stock, Jyra was automatically
granted the right to purchase the additional 225,640 shares of Class A Common
Stock subject to the option. The cross-complaint seeks an unspecified amount of
compensatory and punitive damages.
Pursuant to a November 9, 1999 filing with the Delaware Chancery
Court, Dr. Felber is seeking to enforce his asserted rights to
indemnification and advancement of defense expenses from us.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Class A Common Stock is quoted on the Pink Sheets under the
symbol "PNWK". We do not know whether this meets the definition of an
"established public trading market" for our Class A Common Stock. We are also
listed on the Third Segment of the Frankfurt Stock Exchange.
The following table sets forth the high and low bid prices for our
Class A Common Stock on the OTC Bulletin Board or the Pink sheets, as the
case may be, for the periods indicated. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not
represent actual transactions.
<TABLE>
<CAPTION>
2000(1) 1999 1998
------------------------ ----------------------- -----------------------
high low high low high low
---------- ---------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended March 31 13.375 8.75 8.1250 3.5625 - -
Quarter ended June 30 - - 16.625 6.8750 - -
Quarter ended September 30 - - 12.500 8.1250 2.8750 2.2500
Quarter ended December 31 - - 14.500 9.0000 6.0000 2.6250
</TABLE>
(1) These figures represent the high and low bid prices for our Class A
Common Stock on the OTC Bulletin Board for the period from January 1,
2000 through February 10, 2000. Since February 10 our Class A Common
Stock has been quoted on the Pink Sheets; the high and low bid prices
on the Pink Sheets through March 31, 2000 were 12.75 and 8.3875
respectively.
As of May 19, 2000, there were approximately 110 shareholders of
record of our 7,812,651 issued and outstanding shares of Class A Common
Stock, and there were no outstanding shares of Class B Common Stock. There
were also options outstanding as of May 19, 2000 to purchase 897,336 shares
of Class A Common Stock and 1,399,653 shares of Class B Common Stock. On May
19, 2000, the last reported trading price of Path 1's Class A Common Stock on
the Pink Sheets was $11.00 per share.
We currently have outstanding 5,541,351 shares of Class A Common
Stock that were sold pursuant to Securities Act Rule 504 and, under the terms
of Rule 504 as then in effect, did not thereby become "restricted
securities". However, 1,655,000 of these shares were sold by affiliates of
Path 1 to Leitch Technology Corporation, and thus have once again become
"restricted securities" and cannot be resold by Leitch unless they are
registered or they qualify for exemption from registration under Rule 144 of
the Securities Act or otherwise. These 1,655,000 shares will not be eligible
for resale under Rule 144 until April 2001, one year after they were
purchased. 1,649,738 of the shares sold under Rule 504 as previously in
effect could be resold in the public market without restriction except that
these shares are held by persons who currently are affiliates of Path 1, so
such shares cannot be resold now without compliance with Rule 144's volume
limitation and current public information requirements. The remaining
2,236,613 shares of Class A Common Stock held by existing stockholders are
also "restricted securities" as that term is defined by Rule 144. None of
such restricted securities has yet been held for a full year, so none is yet
eligible for public resale under Rule 144; and because no exemption from
registration would be available for them other than Rule 144, they currently
cannot be sold unless they are registered. Of these shares, 419,500 will
become available for public resale under Rule 144 three months after the
effective date of this Form 10, and the remainder will become eligible at
various points beginning June 2000 one year after they were purchased.
We have not paid any cash dividends on our Class A Common Stock and do
not presently intend to do so. Future dividend policy will be determined by our
Board of Directors on the basis of earnings, capital requirements, financial
condition and other factors deemed relevant.
31
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES.
The following discussion describes all securities sold by us within the
past three years without registration.
From inception through March 1998, we issued 3,600,000 shares of Class
A Common Stock to founders for nominal consideration pursuant to Rule 504 under
the Securities Act.
In March 1998, the Board of Directors authorized a private placement
under which we sold 1,614,833 shares of Class A Common Stock at $0.60 per share
to accredited institutional and individual investors in the United States and
Europe. The offering was closed in May 1998. In connection with the offering, we
issued 49,500 shares of Class A Common Stock to LTR Consultancy as payment for
finders fees and incurred other offering-related expenses of $18,726. These
shares of Class A Common Stock were sold pursuant to Rule 504, promulgated under
the Securities Act. We relied on the fact that under $1,000,000 was raised in
the offering to make this exemption available.
In February 1999, the Board of Directors authorized a private placement
under which we sold 419,500 shares of Class A Common Stock at $4 per share to
accredited institutional and individual investors in Europe. This offering was
closed in April 1999. In connection with this offering, we paid commissions to
LTR Consultancy consisting of (i) cash payments equal to 5% of the subscription
funds received and (ii) options to purchase 20,975 shares of our Class A Common
Stock. The Class A Common Stock was sold pursuant to Rule 505, promulgated under
the Securities Act. We relied on the fact that under $5,000,000 was raised in
the offering and the number and nature of the purchasers, together with
compliance with the other requirements of the Rule, to make the exemption
available.
In May 1999, the Board of Directors authorized a private placement
of up to 1,250,000 shares of our Class A Common Stock at a price of $8 per
share to accredited European investors. This offering was expanded on July
23, 1999 to include accredited investors located in the United States. The
offering is authorized to continue for up to twenty-four months from its
inception. As of December 31, 1999, we have sold 126,800 shares of Class A
Common Stock to accredited institutional and individual investors, primarily
in Europe. Since December 31, 1999, we have sold an additional 475,000 shares
of Class A Common Stock under this offering, and sales continue. In
connection with this offering, we agreed to pay LTR Consultancy a cash
commission equal to five (5%) of the subscription funds received from the
sale of the Class A Common Stock to investors located by that firm, plus
options to purchase 625 shares of Class A Common Stock (at an exercise price
of $8 per share) for each $100,000 of such subscription funds received. The
Class A Common Stock is being sold pursuant to Rule 506, promulgated under
the Securities Act. We relied upon the number and nature of the purchasers,
together with compliance with the other requirements of the Rule, to make the
exemption available.
In April 2000, we sold 1,250,000 shares of our Class A Common Stock
in a private placement to Leitch Technology Corporation for $8 US per share,
resulting in net aggregate proceeds of $10,000,000. We also received 200,000
shares of Leitch common stock (Leitch's closing trading price on May 19, 2000
was $25.00 CDN per share). This sale was independently authorized by our
Board of Directors and was not conducted pursuant to the May 1999 private
offering of 1,250,000 shares of Class A Common Stock. The Class A Common
Stock was sold pursuant to Rule 506, promulgated under the Securities Act.
DESCRIPTION OF SECURITIES.
GENERAL
We are authorized to issue 30,000,000 shares of common stock, $0.001
par value per share, divided into two series designated "Class A Common Stock"
(20,000,000 shares) and "Class B Common Stock" (10,000,000 shares), and ten (10)
shares of preferred stock, designated "Series A Preferred Stock", $0.001 par
value per share. The following describes the Company's capital stock but does
not purport to be complete and is subject to and qualified in its entirety by
our certificate of incorporation and our bylaws, and by the provisions of
applicable Delaware law.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Our initial Certificate of Incorporation, filed January 30, 1998,
authorized 1,000 shares of an undivided class of common stock, par value $0.001,
all of which were issued to our founders. In March 1998, we amended the
Certificate of Incorporation to authorize 20,000,000 shares of an undivided
class of common stock, par value $0.001 per share. Simultaneously, we authorized
a 3,600-to-1 forward split of all of the outstanding shares of common stock as
of that date, thus increasing the number of shares of our outstanding common
stock from 1,000 shares to 3,600,000 shares of common stock.
32
<PAGE>
In April 1999, we amended the Certificate of Incorporation further to
authorize thirty million (30,000,000) shares of common stock, divided into two
series: Class A Common Stock and Class B Common Stock. The Class A Common Stock
maintained the same rights, preferences and privileges as the original common
stock; the amended Certificate of Incorporation simply renamed that original
security. The Class B Common Stock, a junior common stock, was designed to be
used principally in connection with recruitment of new employees and as a method
of providing incentives to existing employees. In April 2000, we further
amended the Certificate of Incorporation to clarify the respective rights of
the Class A and Class B stockholders.
SERIES A PREFERRED STOCK
In April 2000, we eliminated the Series A Preferred Stock
authorization pursuant to an amendment to our Certificate of Incorporation.
CLASS A COMMON STOCK
The holders of Class A Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, any dividend payable out of funds
legally available for that purpose. Upon liquidation, dissolution or winding up
of the Company, the holders of Class A Common Stock shall be entitled to
receive, prior and in preference to any distribution to holders of Class B
Common Stock, an amount per share equal to $100 per share and any undeclared
but unpaid dividends on the shares. If the assets and funds thus distributed
are insufficient to permit full payment of this preference to the holders of
Class A Common Stock, then our assets and funds will be distributed ratably
among the holders of the Class A Common Stock according to their
proportionate ownership of such shares.
The holders of Class A Common Stock will be entitled to one vote
for each share held of record on all matters to be voted on by the
stockholders, and shall be entitled to notice of any stockholders' meeting in
accordance with the Bylaws of the Company. Except when applicable law
requires a greater vote, matters brought before the stockholders at annual or
special meetings must be approved by a majority of the issued and outstanding
shares of Class A Common Stock present in person or by proxy and entitled to
vote at such meeting (provided a quorum is present). The consent of the
stockholders of the Company may be obtained in lieu of a meeting, provided
that the holders of a majority of all of the issued and outstanding shares of
Class A Common Stock entitled to vote on such matters consent in writing to
such corporate action being taken. Special meetings may be called by
one-fifth of the shares of Class A Common Stock of the Company issued and
outstanding (assuming the issuance of all Class A Common Stock issuable
pursuant to then outstanding warrants, options, convertible or exchangeable
securities and other rights to acquire Class A Common Stock from us, provided
such warrants option, convertible or exchangeable securities are at the time
convertible or exchangeable). The Class A Common Stock is not redeemable. All
outstanding shares of Class A Common Stock are fully paid and non-assessable.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights (except as expressly
required by law). The Class B Common Stock is not transferable except to the
extent that a proposed transfer is expressly consented to by vote of the
holders of the Class A Common Stock. This restriction on transfer is intended
to comply with Delaware General Corporation Law Section 202. The Corporation
shall be entitled to note conspicuously, on each stock certificate
representing shares of Class B Common Stock, this restriction on transfer.
The Class B Common Stock is not redeemable and is not entitled to receive
dividends unless and until an aggregate of $100,000,000 of dividends has been
declared and paid on the Class A Common Stock. Upon liquidation, dissolution
or winding up of Path 1, the holders of Class B Common Stock shall be
entitled, after the holders of Class A Common Stock have received their full
aforesaid preferential amounts, to share pro rata with the Class A Common
Stock in the distribution of the remaining assets.
In addition, the Class B Common Stock is not automatically
convertible and will be automatically converted into Class A Common Stock on
a 1-for-1 basis upon the occurrence of any of the following events:
(a) The Corporation (or 50% or more of its stock or assets) is
acquired by a person or an affiliated group by merger, reverse
triangular merger, private stock sale, direct stock issuance,
consolidation or otherwise;
(b) The Corporation sells, leases, or exclusively licenses all
or substantially all of its assets (excluding sales of inventory
in the ordinary course of business);
(c) The Corporation reports for any fiscal year revenues from
operations equal to $10,000,000 or more and reports for such
fiscal year EBITDA (earnings before interest, taxes depreciation,
amortization and extraordinary items) of $2,000,000 or more, as
determined in accordance with United States generally accepted
accounting principles; or
(d) The Corporation consummates the sale of its Class A Common
Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933, as
amended, the public offering price of which is not less than
$25,000,000 in the aggregate.
33
<PAGE>
POSSIBLE ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND STATUTES
BYLAWS
Our Bylaws state that special meetings of the stockholders may be
called by the President, the Board of Directors, or one-fifth of the shares
of Class A Common Stock issued and outstanding and entitled to vote at such
meeting. In addition, notwithstanding the fact that no vote of the Board of
Directors may be required, we are required to submit to the Board of
Directors for its review and prior approval (a) the proposed sale of all or
substantially all of our assets or any of our subsidiaries, (b) the transfer
or licensing of our technology other than in the ordinary course of business,
(c) the making, alteration, amendment or repeal of the Certificate of
Incorporation or the Bylaws, or any part thereof, (d) our consolidated annual
operating and capital budgets, (e) our consolidated business plan, (f) the
occurrence on our part of indebtedness in excess of $5,000,000 in the
aggregate, (g) investment in us by another person or entity (h) investments by
us in excess of $1,000,000 in the aggregate (i) Capital expenditures in excess
of $1,000,000, or (j) execution of any contract that has a total value, over
the term of the contract, in excess of $1,000,000. These limitations may defer
the calling of a meeting at which a change of control might be effected and
may serve to deter potential acquirors.
DELAWARE TAKEOVER STATUTE
If and when any class of our voting stock is listed on a national
securities exchange or The Nasdaq Stock Market or held of record by more than
2,000 stockholders, we will be subject to Section 203 of the Delaware General
Corporation Law which, subject to various exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder--defined as any person or entity that is the beneficial owner of
at least 15% of a corporation's voting stock--for a period of three years
following the time that such stockholder became an interested stockholder,
unless:
- prior to such time, the board of directors of the corporation
approved either the business combination or the transaction
that resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding, for purposes of determining the number of shares
outstanding, those shares owned by persons who are directors
and also officers and by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
- at or subsequent to such time, the business combination is
approved by the board and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or
more of the assets of the corporation;
- subject to exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
- any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the
interested stockholder; or
- the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
TRANSFER AGENT AND REGISTRAR
Our registrar and transfer agent for the Class A Common Stock is
Registrar and Transfer Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation and Bylaws contain provisions
authorizing indemnification of and advancement of expenses to officers and
directors. The indemnities provided by our charter documents (i) shall continue
as to a person who has ceased to be a director or officer, (ii) shall inure to
the benefit of his heirs, executors and administrators, and (iii) shall not be
deemed to limit or exclude any rights, indemnities or limitations of liability
34
<PAGE>
to which any person may be entitled, whether as a matter of law, under the
Bylaws, by agreement, vote of the stockholders or disinterested directors or
otherwise.
Section 145 of the Delaware General Corporation Law permits
indemnification of our officers and directors under certain conditions and
subject to certain limitations. Section 145 of the Delaware General
Corporation Law also provides that a corporation has the power to purchase
and maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liability under the provisions of Section 145 of the Delaware General
Corporation Law. We purchased and presently maintain insurance on behalf of
our officers and directors.
Franklin Felber is suing us for indemnification under the Delaware
General Corporation Law and our charter documents for claims brought against
him by us.
FINANCIAL DATA AND SUPPLEMENTARY DATA.
See attached financial statements beginning on page F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
35
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS FILED AS PART OF THE REGISTRATION STATEMENT.
Path 1 Network Technologies Inc.
(a development stage company)
Index to Financial Statements
Period from January 30, 1998 (inception) to December 31, 1998 and
December 31, 1999 and the twelve months ended December 31, 1999
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................F-2
Financial Statements
Balance Sheets as of December 31, 1998 and December 31, 1999 ........................................F-3
Statements of Operations for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999 ...............F-4
Statements of Stockholders' Equity for the period from January 30, 1998
(inception) to December 31, 1998 and the twelve months ended
December 31, 1999 ...................................................................................F-5
Statements of Cash Flows for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999................F-7
Notes to Financial Statements........................................................................F-8
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Path 1 Network Technologies Inc.
We have audited the accompanying balance sheets of Path 1 Network
Technologies Inc. (a development stage company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999 and for the period from
January 30, 1998 (inception) through December 31, 1998 and December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Path 1 Network Technologies
Inc. (a development stage company) at December 31, 1999 and 1998, and the
results of its operations and its cash flows for the year ended December 31,
1999 and for the period from January 30, 1998 (inception) through December
31, 1998 and December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 10, 2000
except for Note 6, as to which the date is
February 28, 2000 and except for Note 7 and
Note 8, as to which the date is April 27, 2000
F-2
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $453,951 $119,394
Deposits and prepaid expenses 85,932 10,125
---------- ----------
Total current assets 539,883 129,519
Property and equipment, net
Computer equipment 82,560 65,238
Furniture and office equipment 7,449 7,449
Accumulated depreciation (30,419) (19,012)
---------- ----------
59,590 53,675
Investment in Jyra Research, Inc. 113,000 128,400
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $282,496 $55,342
---------- ----------
Total current liabilities 282,496 55,342
Commitments and Contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value;
shares authorized - 10; none and 10 shares issued and
outstanding at December 31, 1999 and 1998, respectively - -
Common stock, $0.001 par value; issuable in series:
Class A - 20,000,000 shares authorized; 6,087,651
and 5,264,333 shares issued and outstanding at
December 31, 1999 and 1998, respectively 6,088 5,264
Class B - 10,000,000 shares authorized; no shares
issued or outstanding at December 31, 1999 and
1998, respectively - -
Additional paid-in capital 10,263,806 3,604,093
Deferred Compensation (3,161,591) (670,539)
Accumulated other comprehensive loss - (18,320)
Deficit accumulated during the development stage (6,678,326) (2,664,246)
---------- ----------
Total stockholders' equity 429,977 256,252
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating expenses:
Research and development $1,347,631 $ 661,735 $2,009,366
Sales and marketing 359,039 291,698 650,737
General and administrative 2,293,082 1,717,936 4,011,018
----------- ----------- -----------
Total operating expenses (3,999,752) (2,671,369) (6,671,121)
Interest income, net 19,392 7,123 26,515
Recognized loss on investment in
Jyra Research, Inc. (33,720) - (33,720)
----------- ----------- -----------
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share
(basic and diluted)
$ (0.71) $ (0.57)
----------- -----------
----------- -----------
Weighted average shares used in
computing net loss per share (basic and
diluted) 5,678,757 4,712,194
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity
For the period from January 30, 1998 (inception) through December 31, 1999
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance at inception on
January 30, 1998 - $- - $ - $ -
Issuance of common stock at
par to founders for cash in
February 1998 - - 3,600,000 3,600 (2,500)
Issuance of Series A convertible
preferred stock in exchange for
stock in Jyra Research, Inc. in
April 1998 10 - - - 146,720
Issuance of common stock at $0.60
per share for cash from March
through May 1998, net of issuance
costs of $48,426 - - 1,664,333 1,664 966,176
Transfer of common stock to employees
by principal stockholders - - - - 330,400
Issuance of stock options to
consultants for services - - - - 73,351
Deferred compensation related
to employee stock options - - - - 2,089,946
Amortization of deferred compensation - - - - -
Unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net loss from inception through
December 31, 1998 - - - - -
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at inception on
January 30, 1998 $ - $ - $ - $ -
Issuance of common stock at
par to founders for cash in
February 1998 - - - 1,100
Issuance of Series A convertible
preferred stock in exchange for
stock in Jyra Research, Inc. in
April 1998 - - - 146,720
Issuance of common stock at $0.60
per share for cash from March
through May 1998, net of issuance
costs of $48,426 - - - 967,840
Transfer of common stock to employees
by principal stockholders - - - 330,400
Issuance of stock options to
consultants for services - - - 73,351
Deferred compensation related
to employee stock options (2,089,946) - - -
Amortization of deferred compensation 1,419,407 - - 1,419,407
Unrealized loss on investment
in Jyra Research, Inc. - (18,320) - (18,320)
Net loss from inception through
December 31, 1998 - - (2,664,246) (2,664,246)
</TABLE>
F-5
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 10 - 5,264,333 5,264 3,604,093
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - 419,500 420 1,595,088
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - 126,800 127 962,665
Conversion of Series A preferred
stock into common stock in
December 1999 (10) - 277,018 277 (277)
Issuance of stock options to
consultants for services - - - - 311,247
Deferred compensation related
to employee stock options - - - - 3,790,990
Amortization of deferred compensation - - - - -
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - - - - -
Net loss for the year ended
December 31, 1999 - - - - -
------- ------ --------- ------ -----------
Balance at December 31, 1999 - $ - 6,087,651 $6,088 $10,263,806
------- ------ --------- ------ -----------
------- ------ --------- ------ -----------
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998 (670,539) (18,320) (2,664,246) 256,252
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - - 1,595,508
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - - 962,792
Conversion of Series A preferred
stock into common stock in
December 1999 - - - -
Issuance of stock options to
consultants for services - - - 311,247
Deferred compensation related
to employee stock options (3,790,990) - - -
Amortization of deferred compensation 1,299,938 - - 1,299,938
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - 18,320 - 18,320
Net loss for the year ended
December 31, 1999 - - (4,014,080) (4,014,080)
------------ ---------- ----------- -----------
Balance at December 31, 1999 $(3,161,591) - $(6,678,326) $ 429,977
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 11,407 19,012 30,419
Amortization of deferred compensation 1,299,938 1,419,407 2,719,345
Common stock issued to employees by principal
stockholders - 330,400 330,400
Common stock options issued for services 311,247 73,351 384,598
Recognized loss on investment in Jyra Research,
Inc. 33,720 - 33,720
Changes in operating assets and liabilities:
Deposits and prepaid expenses (75,807) (10,125) (85,932)
Accounts payable and accrued liabilities 227,154 55,342 282,496
------------- ------------ -------------
Net cash flows used in operating activities (2,206,421) (776,859) (2,983,280)
INVESTING ACTIVITIES
Purchases of property and equipment (17,322) (72,687) (90,009)
------------- ------------ -------------
Net cash flows used in investing activities (17,322) (72,687) (90,009)
FINANCING ACTIVITIES
Issuance of common stock for cash, net 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net cash flows provided by financing activities 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net increase in cash and cash equivalents 334,557 119,394 453,951
Cash and cash equivalents at beginning of period 119,394 - -
------------- ------------ -------------
Cash and cash equivalents at end of period $ 453,951 $119,394 $453,951
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES:
Issuance of Series A convertible preferred stock
in exchange for investment in Jyra Research, Inc. $ - $146,720 $146,720
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Path 1 Network Technologies Inc. (the "Company") was incorporated in Delaware
on January 30, 1998 under the name Millennium Network Technologies, Inc. On
March 16, 1998, the Company changed its name to Path 1 Network Technologies
Inc.
The Company is engaged in the development of proprietary, internet protocol
based, network technology which when developed, will manage and alleviate
network traffic, enabling simultaneous computer, telephone and video
transmissions over one line with improved quality of service. From inception
to date, management of the Company has devoted substantially all of its
efforts in organizing the Company and raising capital necessary to fund
planned operations and conducting product development. Accordingly, at
December 31, 1999, the Company is considered to be in the development stage.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of conducting business. In the period from
January 30, 1998 (inception) through December 31, 1999, the Company incurred
losses totaling $6,678,326. The Company's ability to transition from the
development stage and ultimately, to attain profitable operations, is
dependant upon obtaining sufficient working capital to complete the
successful development of its technology, achieving market acceptance of such
technology and achievement of sufficient levels of revenue to support the
Company's cost structure. Management believes that the funds necessary to
meet its planned capital and operating requirements for the next twelve
months will be raised either from equity or debt financing. However, there
can be no assurances that required equity or debt financing will be available
on terms acceptable to the Company, if at all. Without additional financing,
the Company will be required to delay, reduce the scope of and eliminate one
or more of its research and development projects and significantly reduce
its expenditures on infrastructure.
F-8
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents. As of December 31,
1999, cash and cash equivalents consist primarily of cash deposits in a money
market account.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and is stated
at cost. Depreciation is calculated using the straight-line method over an
estimated useful life of two years.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
The Company generally expenses amounts paid to obtain patents or acquire
licenses, as the ultimate recoverability of the amounts paid is uncertain.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
about the future that effect the amounts reported in the financial
statements. Actual results could differ from those estimates.
STOCK OPTIONS
The Company has elected to follow Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"),
and related Interpretations in accounting for its employee stock options
because, as discussed in Note 4, the alternative fair value accounting
provided under Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
requires the use of option valuation models that were not developed for use
in valuing employee stock options.
Deferred compensation is recognized for options granted to employees to the
extent the exercise price is less than the fair value at date of grant.
Deferred compensation is amortized as the underlying options vest.
Compensation charges for options granted to non-employees has been determined
in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of equity instruments issued,
whichever is more reliably measured. Charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
The Company has disclosed the pro forma effect of using the fair value based
method to account for its employee stock-based compensation.
NET LOSS PER SHARE
The Company computes net loss per share following SFAS No. 128, EARNINGS
PER SHARE and SEC Staff Accounting Bulletin No. 98("SAB 98"). SFAS 128
requires the presentation of basic and diluted income (loss) per share
amounts. Under the provisions of SFAS No. 128, basic net income (loss) per
share is computed by dividing the net income (loss) available to common
shareholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares, composed of incremental common shares
issuable upon the exercise of stock options and common shares issuable on
assumed conversion of Series A preferred stock, are included in diluted net
income (loss) per share to the extent these shares are dilutive. Common
equivalent shares are not included in the computation of dilutive net loss
per share for the year ended December 31, 1999 and the period January 30,
1998 (inception) to December 31, 1998 totaling 1,216,642 and 1,078,518,
respectively, because the effect would be anti-dilutive.
Under the provisions of SAB 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
F-9
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
2. INVESTMENT IN JYRA RESEARCH, INC.
On March 16, 1998, the Company entered into an agreement with Jyra Research,
Inc. ("Jyra"), a publicly-held, United Kingdom based company, which is in the
business of developing network monitoring software. The agreement provided
for Jyra to make a strategic investment in the Company and for the Company to
make a strategic investment in Jyra.
Under this agreement the Company exchanged ten shares of its Series A
Preferred stock for 16,000 restricted common shares of Jyra. The agreement
became effective on April 21, 1998. On December 7, 1999, Jyra converted its
Series A Preferred stock into 277,018 shares of the Company's Class A common
stock.
The common stock received from Jyra is restricted from sale by the Company
for one year from the date of issuance. The Company's management determined
that the fair value of the Jyra shares was more readily determinable than the
fair value of the Company's Series A Preferred stock on the date of the
agreement. Accordingly, the Company recorded the value of the Series A
Preferred stock issued in this non-monetary exchange based on the fair value
of the Jyra common shares on the date of the agreement. The fair value of the
Jyra shares was determined based on the closing market price as reported on
the NASD's OTC Bulletin Board on the date of the transaction.
At December 31, 1999, the Company determined that the decline in the fair
market value of its investment in Jyra was other than temporary and classifies
its investment as available for sale under SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. As a result, the Company
has recognized a loss on this investment of $33,720 during 1999.
3. COMMITMENTS
LEASES
The Company leases its office facility under an operating lease agreement
which expires in May 2002. The lease is payable in monthly installments of
$8,431, subject to annual rate increases. Rent expense totaled $125,751 for
the year ended December 31, 1999, $27,904 for the period from January 30,
1998 (inception) through December 31, 1998 and $153,655 for the period from
inception to December 31, 1999.
F-10
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
3. COMMITMENTS (CONTINUED)
Annual future minimum lease obligations for operating leases as of December
31, 1999 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000 $106,024
2001 106,024
2002 44,177
---------
Total $256,225
---------
---------
</TABLE>
4. STOCKHOLDERS' EQUITY
FOUNDERS STOCK
On January 31, 1998, the Company issued 3,600,000 shares of common stock to
the Company's founders for $1,100 in cash.
STOCK SPLIT
On March 15, 1998 the Board of Directors authorized a 3,600 to 1 stock split
of all outstanding common stock. All share and per share amounts and stock
option data within the financial statements have been restated to reflect the
stock split.
AUTHORIZED SHARES
On March 16, 1998, the Company amended its Certificate of Incorporation to
increase the Company's authorized shares of common stock to 20,000,000 and to
authorize ten shares of preferred stock. The common and preferred shares were
authorized with a par value of $0.001 per share.
On April 13, 1999, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of Class B Common Stock with a par value of
$0.001 per share, and classify the Company's existing common stock as Class A
common stock.
F-11
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
On December 7, 1999, Jyra converted ten shares of the Company's Series A
Preferred stock, that was authorized on March 15, 1998 by the Company's Board
of Directors, into 277,018 shares of the Company's Class A common stock. The
Series A Preferred stock was convertible nine months after issuance at the
option of the holder or the Company.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights and the holders are not
entitled to receive any dividends. Class B Common Stock will convert into
shares of Class A Common Stock, on a one-for-one basis, upon the occurrence
of certain events.
PRIVATE PLACEMENT OFFERINGS
In May 1998, the Company completed a Private Placement offering under which
it sold 1,614,833 shares of common stock at $0.60 per share to accredited
investors, resulting in net cash proceeds totaling $967,840. In connection
with the offering, the Company issued 49,500 Class A common shares to brokers
as payment for finders fees and incurred other offering related expenses of
$18,726.
In April 1999, the Company completed a Private Placement Offering under which
it sold 419,500 shares of common stock at $4.00 per share to accredited
investors, resulting in net cash proceeds totaling $1,595,508. In connection
with the offering, the Company granted options for the purchase of 20,975
shares of Class A common stock with an exercise price of $4.00 per share
through May 2009, to brokers as payment for finders fees and incurred other
offering related expenses of $82,492.
In December 1999, the Company completed a Private Placement Offering under
which it sold 126,800 shares of common stock at $8.00 per share to accredited
investors, resulting in net cash proceeds totaling $962,792. These shares
were purchased in an arms length transaction by private and institutional
investors, none of whom had a significant beneficial interest before the
placement. Further, none of these investors are affiliates of the Company.
These shares are also subject to resale restrictions for one year as they
were purchased in a private transaction. The cash proceeds of $8.00 per share
were the highest price the Company was able to negotiate and still attract
the funds. The resulting discount in price from the average price of
OTC-Bulletin Board transactions for the period represents the associated
discount for the resale restriction and the block of stock being offered. In
connection with the offering, the Company will grant options for the purchase
of 6,250 shares of Class A common stock with an exercise price of $8.00 per
share through December 2006, to brokers as payment for finders fees and
incurred other offering related expenses of $51,609.
F-12
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
On August 3, 1999, the Company adopted the 1999 Stock Option/Stock Issuance
Plan (the "Plan") which provides for the grant of incentive and nonstatutory
stock options of Class B common stock to employees, directors or consultants
of the Company. The Plan authorizes the Company to issue up to 1,500,000
shares of Class B common stock. The Plan provides that incentive stock
options will be granted at no less than the fair value of the Company's
common stock as determined by the Board of Directors at the date of the
grant. The options generally vest and become exercisable either immediately
or over one to four years. Generally, any unvested shares underlying
exercised options will be canceled in the event of termination of employment
or engagement. Options expire no more than ten years after the date of grant,
or earlier if the employment terminates.
Prior to the adoption of the 1999 Plan, the Company granted nonstatutory
stock options of Class A common stock to employees, directors or consultants
of the Company. The options generally vest and become exercisable either
immediately or over one to four years. Options expire no more than ten years
after the date of grant, or earlier if the employment terminates.
The following table summarizes stock option activity of which only the Class B
option activity was under the Plan.
<TABLE>
<CAPTION>
CLASS A WEIGHTED CLASS B WEIGHTED
STOCK AVERAGE STOCK AVERAGE
OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 (inception) - $ - - $ -
Granted 826,500 0.66 - -
Exercised - - - -
Cancelled (25,000) 0.60 - -
-------- -------- --------- --------
Balance at December 31, 1998 801,500 0.66 - -
Granted 128,475 1.70 495,000 2.33
Exercised - - - -
Cancelled (38,889) 2.00 (169,444) 2.00
-------- -------- --------- --------
Balance at December 31, 1999 891,086 $ 0.75 325,556 $ 2.51
-------- -------- --------- --------
-------- -------- --------- --------
Exercisable at December 31, 1999 631,859 $ 0.76 88,040 $ 2.50
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
As of December 31, 1999, 1,174,444 shares are available for future grant
under the Plan.
F-13
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices and weighted average remaining contractual life for the
options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Remaining Weighted Exercise Price of
Number Contractual Life Average Options Options
Exercise Price Outstanding (in years) Exercise Exercisable Exercisable
Price
-------------- ----------- ---------------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
CLASS A
$0.60 834,000 6.07 $0.60 591,457 $0.60
$2.00 11,111 9.28 $2.00 11,111 $2.00
$2.50 25,000 5.69 $2.50 8,316 $2.50
$4.00 20,975 9.33 $4.00 20,975 $4.00
CLASS B
$2.00 255,556 7.58 $2.00 69,445 $2.00
$4.35 70,000 6.76 $4.35 18,595 $4.35
--------- -------- ------- ------- ---------
1,216,642 6.59 $1.33 719,899 $0.97
--------- -------- ------- ------- ---------
--------- -------- ------- ------- ---------
</TABLE>
STOCK-BASED EMPLOYEE COMPENSATION
The Company has adopted the disclosure-only provision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation expense
has been recognized for the stock options issued to employees or directors in
accordance with SFAS No. 123. If compensation expense had been determined
consistent with SFAS No. 123, as compared to the intrinsic method in accordance
with APB 25, the Company's net loss would have been changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss, as reported $(4,014,080) $(2,664,246)
Net loss, pro forma (4,147,422) (2,773,926)
Net loss per share, as reported $ (0.71) $ (0.57)
Net loss per share, pro forma $ (0.73) $ (0.59)
</TABLE>
The effects are not likely to be representative of the effects on pro forma
net income or loss in future years.
F-14
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted in 1998 and 1999 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life of three to four years; expected
dividend yield of zero percent; expected volatility of 100 percent; and
risk-free interest rate of six percent. The weighted-average fair value of
the options granted to employees during 1999 and the period from January 30,
1998 to December 31, 1998 to employees were $10.82 and $3.19, respectively.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $311,247 and $73,351, respectively,
to research and development expense related to options granted under
consulting agreements. At December 31, 1999 and 1998 the Company had 55,145
and 22,392 options exercisable by non-employees, respectively. Compensation
expense for non-employees is recorded based on estimated vesting, remeasured
upon actual vesting date and period end, and fair market value of common
stock on the OTC Bulletin Board. Using the Black-Scholes option pricing model
and the following assumptions: expected life of three to four years, expected
dividend yield of zero percent, expected volatility of 100 percent, and
risk-free interest rate of six percent.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $1,299,938 and $1,419,407,
respectively, to general and administrative expense related to options granted
to employees below fair market value.
On June 18, 1998, the principal stockholders of the Company transferred on a
pro-rata basis 224,000 shares of their holdings of the Company's common stock
to an employee. The fair value of the Company's stock on the date of transfer
was $0.60 per share, resulting in compensation expense of $134,400 during the
period ended December 31, 1998.
On September 16, 1998, the principal stockholders of the Company transferred
on a pro-rata basis 56,000 shares of their holdings of the Company's common
stock to an employee. The fair market value of the Company's stock on the
date of transfer was $3.50 per share, resulting in compensation expense of
$196,000 during the period ended December 31, 1998.
5. INCOME TAXES
Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $1,570,000 has been recognized at December 31, 1999
to offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,369,000 $ 413,000
Research and development credits 133,000 37,000
Other, net 68,000 14,000
---------- ---------
Total deferred tax assets 1,570,000 464,000
Valuation allowance for deferred tax assets (1,570,000) (464,000)
---------- ---------
Net deferred tax assets $ - $ -
---------- ---------
---------- ---------
</TABLE>
F-15
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $3,435,000 and $2,894,000, respectively.
The federal and California tax loss carryforwards will begin expiring in 2018
and 2006, respectively unless previously utilized. The Company also had
federal and California research tax credit carryforwards of approximately
$98,000 and $54,000, respectively, which will begin to expire in 2013 unless
previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss carryforwards may be limited in the event of a
cumulative change in ownership of more than 50% which occurs within a three
year period. However, the Company does not believe such limitation will have
a material impact upon the utilization of these carryforwards.
6. RECENT EQUITY TRANSACTIONS
In connection with a Private Placement Offering of up to 1,250,000 shares of
Class A common stock between January 1, 2000 and February 21, 2000, the
Company sold 475,000 shares of Class A common stock at $8.00 per share to
investors, resulting in net cash proceeds totaling approximately $3,600,000.
Of the net proceeds, approximately $800,000 was restricted and subject to
refund due to the inclusion by several investors of additional terms not
agreed upon by the Company in their respective subscription agreements. After
negotiation, these investors withdrew their demands for inclusion of these
terms and voluntarily executed our form subscription agreements, thus lifting
the restriction on the funds. From April 20, 2000 through May 20, 2000, all
restrictions on the Class A common stock were waived. These shares were
purchased in an arms length transaction by private and institutional
investors, none of whom had a significant beneficial interest before the
placement. These shares are also subject to resale restrictions for one year
as they were purchased in a private transaction. The cash proceeds of $8.00
per share was the highest price the Company was able to negotiate and still
attract $3,600,000. The resulting discount in price from the average price of
pink-sheet transactions of $12.17 represents the associated discount for the
resale restriction and the large block of stock being offered. In Connection
with the offering through February 21, 2000, the Company will grant options
for the purchase of 23,750 shares of Class A common stock with and exercise
price of $8 per share through February 2007, as payment for finders fees and
incurred other offering expenses of $190,000.
In February 2000, a total of 376,500 Class B and 6,250 Class A common stock
options were granted to employees and consultants which will vest over terms
of up to four years. These options were granted at an exercise price of $4.35
and $8.00 per share, respectively. The Company will recognize deferred
compensation expense for grants to employees to the extent the exercise price
is less than the fair value of date of grant. The Company will recognize
compensation charges in accordance with EITF 96-18 related to options granted
to consultants as the underlying options vest.
7. TRANSACTIONS WITH LEITCH TECHNOLOGY CORPORATION
In April 2000, the Company sold 1,250,000 shares of its Class A common stock
in a private placement to Leitch Technology Corporation ("Leitch") for $8 per
share, resulting in gross proceeds of $10,000,000. The Company also received
200,000 shares of Leitch common stock with a fair value at the date of the
transaction of $3,096,623. Leitch's common stock is publicly traded on the
Toronto Stock Exchange under the symbol "LTV". In conjunction with the
private placement, the Company entered into a technology license agreement
with Leitch and provided Leitch a non-exclusive worldwide license (except as
to TrueCircuit technology designed for the professional video market, which
is subject to an exclusive license in favor of Leitch) to utilize the
Company's intellectual property to develop and sell products which
incorporate its TrueCircuit technology. These shares were purchased by Leitch
in an arms length transaction. The shares are subject to resale restrictions
for one year as they were purchased in a private transaction. The cash
proceeds of $8.00 per share along with the common stock received from Leitch
was the highest value the Company was able to negotiate and still attract
$10,000,000 in cash and stock valued at $3,096,623. The resulting discount in
price from the pink-sheet transaction price of $16.00 represents the
associated discount for the resale restriction and the large block of stock
being offered.
8. LEGAL PROCEEDINGS
On September 20, 1999, a complaint by the Company was filed against certain
stockholders and their affiliates for breach of oral contract, professional
negligence, breach of fiduciary duty, constructive trust, breach of the
covenant of good faith and fair dealing and unfair business practice,
primarily in connection with the allocation of founders stock of the Company.
On November 29, 1999, Dr. Felber, who was a defendant in the September 20,
1999 complaint, filed a cross-complaint against the Company, certain
directors of the Company and Jyra alleging fraud, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, and misrepresentation
in connection with the exercise in July 1999 by Jyra's assignees of Jyra's
arrangement to purchase from this stockholder for $4.00 per share, 255,640
shares of the Company's Class A common stock.
In April 2000, in conjunction with the Leitch transaction, this complaint and
all counterclaims arising out of it were resolved as to all parties other
than Dr. Felber. Leitch purchased 1,655,000 shares of Class A Common Stock
from Rona Berns and James Berns. The parties released the original complaint
and all counterclaims against each other and certain directors of Path 1.
Leitch's purchase of Berns' shares was at less than the US$8.00 per share
that was received by Path 1 for its newly issued shares. Thus, Path 1 has
not recorded any expense related to the settlement of this litigation, other
than legal fees incurred.
F-16
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
8. LEGAL PROCEEDINGS (CONTINUED)
This remaining litigation is in the early stages and the Company has not yet
determined the potential financial impact. However, there can be no assurance
that it may not have a material adverse impact on the Company's financial
position and results of operations.
F-17
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,178,425 $ 453,951
Restricted cash subject to refund to investors 800,000 -
Deposits and prepaid expenses 68,995 85,932
----------- -----------
Total current assets 3,047,420 539,883
Property and equipment, net 118,348 59,590
Investment in Jyra Research, Inc. 63,680 113,000
----------- -----------
$ 3,229,448 $ 712,473
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 593,073 $ 282,496
----------- -----------
Total current liabilities 593,073 282,496
Commitments and Contingencies
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value;
shares authorized - 10; no shares issued or
outstanding at March 31, 2000 and December 31, 1999,
respectively - -
Common stock, $0.001 par value; issuable in series:
Class A - 20,000,000 shares authorized; 6,562,651
and 6,087,651 shares issued and outstanding at
March 31, 2000 and December 31, 1999,
respectively 6,563 6,088
Class B - 10,000,000 shares authorized; no shares
issued or outstanding at March 31, 2000 and
December 31, 1999, respectively - -
Additional paid-in capital 16,873,701 10,263,806
Deferred Compensation (4,599,565) (3,161,591)
Accumulated other comprehensive loss - -
Deficit accumulated during the development stage (9,644,324) (6,678,326)
----------- -----------
Total stockholders' equity 2,636,375 429,977
----------- -----------
$ 3,229,448 $ 712,473
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-18
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE PERIOD FROM
MARCH 31, JANUARY 31, 1998 (INCEPTION)
2000 1999 THROUGH MARCH 31, 2000
----------- ----------- ----------------------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 1,477,401 $ 541,371 3,486,767
Sales and marketing 677,049 41,995 1,327,786
General and administrative 780,301 152,062 4,791,319
----------- ----------- ----------
Total operating expenses (2,934,751) (735,428) (9,605,872)
Interest income, net 18,073 1,058 41,588
Recognized loss on investment in
Jyra Research, Inc. (49,320) - (80,040)
----------- ----------- ----------
Net loss $(2,965,998) $ (734,370) (9,644,324)
----------- ----------- ----------
----------- ----------- ----------
Net loss per share
(basic and diluted) $ (0.47) $ (0.14)
----------- -----------
----------- -----------
Weighted average shares used in
computing net loss per share (basic and
diluted) 6,325,151 5,387,666
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-19
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Condensed Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 - $ - 6,087,651 $6,088 $10,263,806
Issuance of common stock at
$8.00 per share for cash from
January to February 2000, net of
issuance costs of $203,000 - - 475,000 475 3,596,525
Issuance of stock options to
consultants for services - - - - 1,148,294
Deferred compensation related
to employee stock options - - - - 1,865,076
Amortization of deferred compensation - - - - -
Net loss for the three months ended
March 31, 2000 - - - - -
------- ------ --------- ------ -----------
Balance at March 31, 2000 - $ - 6,562,651 $6,563 $16,873,701
------- ------ --------- ------ -----------
------- ------ --------- ------ -----------
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1999 $(3,161,591) $ - $(6,678,326) $ 429,977
Issuance of common stock at
$8.00 per share for cash from
January to February 2000, net of
issuance costs of $203,000 - - - 3,597,000
Issuance of stock options to
consultants for services - - - 1,148,294
Deferred compensation related
to employee stock options (1,865,076) - - -
Amortization of deferred compensation 427,102 - - 427,102
Net loss for the three months ended
March 31, 2000 - - (2,965,998) (2,965,998)
------------ ---------- ----------- -----------
Balance at March 31, 2000 $(4,599,565) $ - $(9,644,324) $ 2,636,375
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-20
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 31,
FOR THE THREE MONTHS ENDED 1998(INCEPTION)
MARCH 31, THROUGH MARCH 31,
2000 1999 2000
------------- -------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,965,998) $ (734,370) $ (9,644,324)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 7,379 2,851 37,798
Amortization of deferred compensation 427,102 296,000 3,146,447
Common stock issued to employees by principal -
stockholders 330,400
Common stock options issued for services 1,148,294 28,000 1,532,892
Recognized loss on investment in Jyra Research,
Inc. 49,320 - 83,040
Changes in operating assets and liabilities:
Cash restricted subject to refund to investors (800,000) - (800,000)
Deposits and prepaid expenses 16,937 3,495 (68,995)
Accounts payable and accrued liabilities 310,577 45,395 593,073
------------- -------------- ----------------
Net cash flows used in operating activities (1,806,389) (358,629) (4,789,669)
INVESTING ACTIVITIES
Purchases of property and equipment (66,137) - (156,146)
------------- -------------- ----------------
Net cash flows used in investing activities (66,137) - (156,146)
FINANCING ACTIVITIES
Issuance of common stock for cash, net (3,597,000) 1,405,504 7,124,240
------------- -------------- ----------------
Net cash flows provided by financing activities (3,597,000) 1,405,504 7,124,240
Net increase in cash and cash equivalents 1,724,474 1,046,875 2,178,425
Cash and cash equivalents at beginning of period 453,951 119,394 -
------------- -------------- ----------------
Cash and cash equivalents at end of period 2,178,425 1,166,269 2,178,425
============= ============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
Path 1 Network Technologies, Inc.
(a development stage company)
Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 - General
In management's opinion, the accompanying unaudited financial statements for
Path 1 Network Technologies, Inc. (the "Company") for the three month periods
ended March 31, 2000 and 1999 have been prepared in accordance with generally
accepted accounting principles for interim financial statements and include
all adjustments (consisting only of normal recurring accruals) that the
Company considers necessary for a fair presentation of its financial
position, results of operations, and cash flows for such periods. However,
the accompanying financial statements do not contain all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. All such financial statements are unaudited
except for the December 31, 1999 balance sheet. These quarterly financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto presented herein for the year ended December 31,
1999 and period ended December 31, 1998. Footnotes which would substantially
duplicate the disclosures in the Company's audited financial statements for
the year ended December 31, 1999 contained herein have been omitted. The
interim financial information contained in this filing is not necessarily
indicative of the results to be expected for any other interim period or for
the full year ending December 31, 2000.
NOTE 2 - Management Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 - Net Loss Per Share
Basic and diluted net loss per share has been computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," using the weighted-average number of shares of common stock
outstanding during the period including any dilutive common stock equivalents.
Common stock equivalents of 1,584,639 and 1,136,018 shares for the three months
ending March 31, 2000 and 1999 respectively were excluded from the calculation
because of their anti-dilutive effect.
NOTE 4 - Private Placement Offering
In connection with Private Placement Offering of up to 1,250,000 shares of
Class A common stock between January 1, 2000 and February 21, 2000, the
Company sold 475,000 shares of Class A common stock at $8.00 per share to
investors, resulting in net cash proceeds totaling approximately $3,600,000.
Of the net proceeds, approximately $800,000 was restricted and subject to
refund due to the inclusion by several investors of additional terms not
agreed upon by the Company in their respective subscription agreements. After
negotiation, these investors withdrew their demands for inclusion of these
terms and voluntarily executed our form subscription agreements, thus lifting
the restriction on the funds. The restricted cash subject to refund to
investors has been segregated in the balance sheet as of March 31, 2000 to
reflect the restrictions established in the subscription agreements. From
April 20, 2000 through May 20, 2000, all restriction on the Class A common
stock were waived. These shared were purchased in an arms length transaction
by private and institutional investors, none of whom had a significant
beneficial interest before the placement. These shares are also subject to
resale restrictions for one year as they were purchased in a private
transaction. The cash proceeds of $8.00 per share was the highest price the
Company was able to negotiate and still attract $3,600,000. The resulting
discount in price from the average price of pink-sheet transactions of $12.17
represents the associated discount for the resale restriction and the large
block of stock being offered. In connection with the offering through
February 21, 2000, the Company will grant options for the purchase of 23,750
shares of Class A common stock with an exercise price of $8 per share through
February 2007, as payment for finders fees and incurred other offering
expenses of $190,000.
STOCK OPTIONS
For the period from January 1, 2000 to March 31, 2000, the Company granted
140,289 options to employees at a weighted average exercise price of $4.35
per share. The exercise prices of the options granted were below the
estimated fair value, for financial statement purposes, of the underlying
common stock on the date of the grant. As a result, the Company recorded
deferred compensation of $27,656 during this period. The deferred
compensation is being amortized to expense over the vesting period of the
applicable options. Amortization of deferred totaled $262,522, for the three
months ended March 31, 1999.
For the period from January 1, 2000 to March 31, 2000 the Company granted
53,625 options to various consultants at a weighted average exercise price of
$4.35 per share. Compensation expense for non-employees is recorded based on
estimated vesting, remeasured upon actual vesting date and period end, and
fair market value of common stock on the OTC Bulletin Board using the
Black-Scholes option pricing model with the following weighted average
assumptions; expected life of three to four years; expected dividend yield of
zero percent; expected volatility of 100%; and risk-free interest rate of six
percent. As a result of the options granted to consultants the Company
recorded compensation expense associated with consultant options of $164,580
during the three months ended March 31, 2000.
F-21
<PAGE>
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
3.1** Certificate of Incorporation, as amended
3.2** Amended and Restated Bylaws
10.1** Option Agreement Between Franklin S. Felber and Jyra Research,
Inc. dated January 25, 1999.
10.2** Lock-Up Agreement dated January 25, 1999
10.3** Lease Agreement between us and Spieker Properties, L.P. dated
April 10, 1999
10.4** Employment Agreement between us and Yendo Hu dated August 31,
1999
10.5** 1999 Stock Option/Stock Issuance Plan, as amended
10.6** Form of Notice of Grant/Stock Option Agreement under the 1999
Stock Option/Stock Issuance Plan
10.7** Form of Notice of Grant/Stock Option Agreement other than
under the 1999 Stock Option/Stock Issuance Plan
10.8* Agreement with Doctor Design, Inc. dated June 4, 1999
10.9* Agreement of Purchase and Sale by and between us and Leitch
Technology Corporation, dated April 10, 2000.
10.10** Stockholders' Agreement by and among us, Leitch Technologies
Corporation, Ronald D. Fellman, Douglas A. Palmer and
Michael T. Elliott dated as of April 10, 2000.
10.11* Technology License Agreement between us and Leitch
Technology Corporation dated April 10, 2000.
10.12** Settlement Agreement and Mutual Release dated April 11, 2000.
10.13** Employment Agreement between us and Michael T. Elliott
dated April 7, 2000.
</TABLE>
* Confidential treatment requested.
** Previously Filed
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATH 1 NETWORK TECHNOLOGIES INC.
Date: June 8, 2000 By /s/ Michael T. Elliott
----------------------
Michael T. Elliott
President and Chief Executive Officer
