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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 quickly change the way video
content is produced and delivered, and to ensure that a phone call placed
over the Internet will be delivered as reliably as calls made over today's
telephone network. 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.
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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" quality of service (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.
Current delays and delivery problems 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 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 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 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 "vaporizes" 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 compatability 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. The
advantages of TrueCircuit are most dramatic within IP networks that are
shared across a corporation, such as Ethernet LANs, where it can almost
entirely eliminate collisions for real-time traffic, thereby unlocking the
full potential of the existing IP/Ethernet computer network infrastructures.
Ethernet (the name commonly used for IEEE 802.3 CSMA/CD) 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-programmer-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 propose to further develop our current TrueCircuit Multimedia
Gateway (TMG) prototype and release this proof-of-concept design as TMGII, in
order to address the large target market for telephony, multimedia and data
transmission over the Internet. This product is aimed at the high-end
consumer or small to medium-size business that can benefit from the
convergence of low cost Internet telephone, videoconferencing and high-speed
data services. This product also will be redesigned to be affordable to the
target market. It is expected that this product can be sold in volume through
Computer Superstores and retailers.
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 business and high-end consumers with a limited amount of users on
the network. 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.
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.
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 of each dotCAM camera. We also plan to develop a
"spin-off" interface product that can be sold into a wider market, providing
the capability to connect any type of video camera to an Ethernet network.
dotCAM is expected to be marketed via original equipment manufacturers
(OEMs) and system integrators.
PMM1 PATH1 NETWORK MANAGER
The Path1 Network Manager would be an Internet web-compatible software
package that would enable users of TrueCircuit products such as the PG1
Multimedia Gateway and PS1 Gigabit Ethernet Switch to configure, operate and
monitor the equipment performance.
PMM1 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.
The PMM1 Network Manager 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.
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 potential 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.
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 building 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.
The key to effectively exploiting this market is to have very low
latency and jitter to enable real-time personal interaction. 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.
We would intend to seek 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.
WIDE AREA NETWORK (WAN) APPLICATIONS
All networks crossing interface boundaries require bridge devices.
Bridge devices are necessary to connect a LAN, including a TrueCircuit-enabled
LAN, to a WAN. Such bridges would convert TrueCircuit IP to and from such
interfaces as ATM/SONET, T1/E1, xDSL, cable modem, etc.
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 with some radio stations providing 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. 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
system, etc., over standard home phone wiring does not adequately address the
QoS issue. The existing HomePNA standard uses a shared network approach
wherein collisions are common. Furthermore, the effects of 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
maufacturers of products that incorporate our TrueCircuit technology would
be considered a natural extension of these companies' existing product
offerings in the Home PNA market.
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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.
2. SEEK RESEARCH AND DEVELOPMENT (R&D) FUNDING FROM KEY
CUSTOMERS-- We have the technology and intellectual resources
that make it plausible 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.
Not receiving this R&D funding increases 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 the company's 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.
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
development strictly conforms to current 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 many dozens of publications and
dozens of patents to their names. 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. Competition for using new networked technology in this market comes
from FibreChannel and SerialBus, both of which use alternative network
approaches. However, neither of our competitors' 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 as
an implementation of QoS over IP that is 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
can do this today 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 expensive 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. It would also concurrently upgrade a facility for digital
television, thereby eliminating the need to purchase a separate costly
upgrade. In addition, the U.S. Government has mandated a phase-in period for
digital television. We anticipate that the manufacturers of legacy video
equipment would wish to purchase TrueCircuit video network interface modules
to make their equipment digital television-compatible.
Integrated service access in hotels, multi-tenant apartments, and
the home is a new and expanding market. We are not aware of products that now
directly address this market to combine phone, video-on-demand, and Internet
access all via a HomePNA phone wire interface with "circuit-switched" QoS.
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.
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 is a relatively small company that
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 all
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. Each product is targeted
for a different type of customer, so each product requires a different
distribution channel and sales strategy to reach the intended customer. 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 focused on local, San Diego-based companies that we can easily
work with and who can provide essential early feedback on our products and
strategies. We have formed relationships with Console Inc. as our first
system integrator and American Digital Network as our first ISP partner.
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PROFESSIONAL VIDEO MARKET
A majority of sales of our intended PS1/PS100 Real-Time Ethernet
Switches, PG1 Broadcast Video Ethernet Interface and dotCAM LAN Digital Video
Camera and Interface products are expected to be to professional video
studios. We have identified experienced distributors and manufacturers of
professional video products and have commenced discussions to determine
market size and set up distribution channels.
LICENSING AND SOFTWARE SALES
We plan to seek 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,
provided we are able to successfully enter into arrangements with these
manufacturers to write a QoS-enabled driver for their products.
We may alternatively 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.
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. In a number of large cities within the United States, apartment
buildings now charge a premium of several hundred dollars per month if they
are already hooked up to high-bandwidth Internet connections. We would not
expect to receive any portion of such premiums, but the existence of such
premiums suggests the existence of a market for our intended products. With
TrueCircuit, apartment dwellers and hotel guests could access potentially
thousands of video channels as well as high-fidelity audio channels. They
could also have effective 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
systems integrator, CAIS Internet. Negotiations with CAIS Internet are at a
very early stage.
PRODUCT DEVELOPMENT MANAGEMENT
Central to each intended Path 1 product is the TrueCircuit core
technology. A single development team develops and enhances the TrueCircuit
core technology used across all Path 1 products. This team 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.
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.
We would proposed to monitor the operations of the contract
manufacturing via our own quality control team. This team's responsibilities
will include evaluating contract manufacturers as well as monitoring production
through statistical quality control metrics.
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 $500,000 for research and $1,000,000 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.) 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.
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 hope to have such beta-test agreements in the second or third
quarters of 2000 for our initial video products, the dotCAM and the PG1 Path1
TrueCircuit Gigabit Ethernet Broadcast Video Interface.
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. However, our plan to embed our
technology into a small set of integrated circuits by third quarter 2000 will
eliminate this requirement. 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 have trademarked 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 January 24, 2000, we employed eight 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 SUING CERTAIN PRESENT AND FORMER COMPANY INSIDERS. THIS LITIGATION MAY
BE PROTRACTED AND MAY DIVERT SIGNIFICANT COMPANY RESOURCES AWAY FROM THE
CONDUCT OF OUR BUSINESS.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court suing Michael Berns, his wife Rona Berns, James
Berns, Franklin Felber and the law firm of Berns & Berns 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 practices. Collectively, the four individuals named above own
1,910,640 shares of our Class A Common Stock. We are seeking damages and/or
cancellation of outstanding shares.
Some of the defendants have, in response, sued us for
indemnification and advancement of defense expenses in regard to this
complaint. In addition, Franklin Felber 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
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granted to Jyra Research, Inc. in January 1999. Felber's action, filed November
29, 1999, seeks unspecified compensatory and punitive damages.
Our complaint, the defendants' action requesting indemnification and
advancement of expenses and Felber's cross-complaint are all at early stages in
the litigation process. Effective February 3, 2000, we entered into a 45-day
standstill agreement, or truce, with Michael Berns, Rona Berns, James Berns and
Berns & Berns.
The litigation is causing and will continue to cause a substantial
expense for attorneys fees and a diversion of management attention,
regardless of the outcome of the litigation. In addition, internal disputes
such as this one can be harmful to companies, especially a company such as
ours which is in the early stage of development. The four named defendants
beneficially own 31.4% of our issued and outstanding Class A Common Stock,
while the individuals and the Company named as cross-defendants in Felber's
cross-complaint beneficially own 27.1% of our issued and outstanding Class A
Common Stock plus options to purchase an additional 552,000 shares of Class A
Common Stock. This concentration of ownership of our Class A Common Stock on
both sides of the litigation could adversely affect our ability to achieve
stockholder approval of significant corporate transactions, appointment of
directors and other such matters, and could result in a lack of cooperation
among our directors and between the directors and the senior management.
Please see "Legal Proceedings" for further discussion of this dispute.
OUR PROPOSED PRODUCTS ARE ONLY AT A DEVELOPMENTAL STAGE
At the present time, our proposed products have yet to receive the
requisite commercial and FCC certifications. 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. 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
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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. 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, Yendo Hu, Keith
Dunford and other senior managers yet to be identified and hired, and certain
other key personnel including John Hooker, Grady Taylor and John Beer. We
currently do not have key man life
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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.
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, 54% 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. Although persons holding a significant amount of
outstanding shares are currently on the respective opposite sides of
litigation (see the above risk factor related to litigation), it is possible
that in the future they will resolve their differences and tend to vote their
shares together. Until then, the existence of large holdings by subgroups
could have the same kind of effect as described in this paragraph. It is also
possible that, especially during the time of litigation, disagreements
between subgroups could result in stalemate and an inability to move forward
on favorable opportunities.
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.
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 January 24, 2000, there were 6,086,651 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
18
<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
common stock were subject to a lock-up agreement which expired on February 1,
2000. Public resales of these shares, 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. Franklin
Felber has expressed his intention immediately to commence orderly
incremental sales of his 255,640 shares of Class A Common Stock; he is able
to do so without waiting for the three month period to expire.
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 OTC
Bulletin Board as well as on the Third Segment of the Frankfurt Stock Exchange.
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 January 24, 2000, there were options outstanding to purchase 884,975
shares of our Class A Common Stock, and there were options outstanding under
our 1999 Stock Option/Stock Issuance Plan to purchase 368,513 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. 1,131,487 shares under our 1999
Stock Option/Stock Issuance Plan remain authorized but not yet subject to
options.
19
<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. In addition, this registration statement contains
forward-looking statements attributed to third party industry sources
relating to their estimates regarding the growth of Internet use.
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. You should not
place undue reliance on these forward-looking statements. To the extent
permitted by federal law, we disclaim any duty to update any of the
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 and the
twelve-month period ended December 31, 1999. 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. 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
January 30, 1998 Twelve Months
(Inception) To Ended
December 31, 1998 December 31, 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development.......................................... $ 600,035 $ (1,055,085)
Sales and marketing............................................... 291,698 (359,039)
General and administrative........................................ 298,529 (1,003,943)
Total operating expenses............................................. $(1,190,262) $(2,418,067)
Interest income, net................................................. 7,123
Net loss............................................................. $(1,183,139) $
Net loss per share (1):
Basic and diluted................................................. $ (0.25) $
Weighted average shares--basic and diluted........................ 4,712,194
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 119,394 $
Working capital...................................................... 74,177
Total assets......................................................... 311,594
Total stockholders' equity........................................... 256,252
</TABLE>
- - ----------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the 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,
including 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 (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 $600,035 for the period from inception through December 31, 1998,
compared to [$1,055,085] for the twelve months ended December 31, 1999, as the
receipt of additional invested funds enabled us to ramp up our research and
development effort.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$291,698 for the period from inception through December 31, 1998; of this
amount, $_____________ 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.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $298,529 for the period from inception through December 31,
1998, compared to [$1,003,943] for the twelve months ended December 31, 1999.
This increase 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], and (ii) extraordinary legal
costs ($251,667 as of December 31, 1999) associated with the ongoing
litigation. 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 aggregate cash proceeds
(before offering-related expenses) of $968,900. 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 aggregate
cash proceeds (before offering-related
21
<PAGE>
expenses) of $1,678,000. 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 February 18,
2000, we had sold 600,800 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 $4,806,400. Of these proceeds,
$3,800,000 have been received after December 31, 1999.
The ongoing litigation against Michael Berns, James Berns, Rona
Berns, Franklin Felber and Berns & Berns has cost us $251,666 through December
31, 1999. It is possible we will incur substantially more expenses in the
future related to our claims against these individuals and to our defense
against Felber's cross-complaint. Due to the inherently unpredictable nature
of the litigation process, it is difficult to estimate with any confidence
the amount of such future expenses. On February 3, 2000, we began a 45-day
litigation standstill, or truce, with Michael Berns, James Berns, Rona Berns
and Berns & Berns.
As of December 31, 1999 we had $453,950 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 will
need to continue to raise additional capital, in both the very near-term and
the mid-term, in order to successfully compete.
Should our actual expenses and revenues could vary materially from
the amounts we anticipate or budget, 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
Many computer systems and software products installed prior to
January 1, 2000 were coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these code fields needed to accept four
digit entries to distinguish 21st century dates from 20th century dates.
Computer systems and/or software products used by many companies were
upgraded to be Year 2000 compliant.
Prior to January 1, 2000, we completed a review of our internal
computer systems, operations and proposed products to determine the extent to
which our business could be vulnerable to potential errors and failures as a
result of the Year 2000 problem. The cost of this review to Path 1 was not
material.
To date, the Year 2000 problem has not have a material adverse affect
on our business, result of operations or financial condition, nor do we
anticipate that any material adverse effects will arise. The Year 2000 problem
has yet to cause substantial or complete shutdown of the Internet, nor does it
appear that such a substantial or complete shutdown is likely to occur as a
result of the Year 2000 problem.
However, our proposed products may contain as of yet undetected errors
or defects associated with Year 2000 date functions. Known or unknown errors or
defects in our proposed products could result in the following adverse affects
to our operations:
- delay or loss of revenue;
- diversion of development resources;
- damage to our reputation; or
- increased service or warranty costs.
22
<PAGE>
Although we believe our products to be fully Year 2000 compliant, we
face additional risks that suppliers of products, services and systems that we
purchase and others with whom we transact business may yet experience Year 2000
problems. If third parties cannot provide us with products, services or systems
that are Year 2000 compliant on a timely basis, our business, results of
operations and financial condition could be affected. That said, a very high
proportion of the technology incorporated into our proposed products was
developed internally, thus greatly decreasing our reliance on the products and
services of outside vendors.
Finally, as is the case with other companies, if our current or future
customers encounter Year 2000 problems, our business, results of operations, or
financial condition could be materially and adversely affected.
We have not been a party to any litigation or any proceedings to
date involving our proposed products related to Year 2000 compliance issues;
however, we cannot assure you that we will not in the future be required to
defend our proposed products in proceedings, or to negotiate the resolution
of claims based on Year 2000 issues.
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 $8,491 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 are adequate to meet our current business requirements and 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 January 24, 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 January 24, 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>
Rona Berns
231 Barnard Road
Larchmont, NY 10538 1,148,720(1)(2) 18.9%
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Michael Berns
231 Barnard Road
Larchmont, New York 10538 1,148,720(1)(2) 18.9%
Ronald Fellman
12989 Chaparral Ridge Road
San Diego, CA 92130 1,148,720 18.9%
James Berns
3 Orchard Hill Road
Westport, CT 06880 506,280(2) 8.3%
Douglas Palmer
1229 Trieste Drive
San Diego, CA 92107 502,000(3) 7.9%
Paul Robinson
22 Pond Place
London SW3 6QJ
England 372,018(4) 6.0%
Roderick Adams
211a Stephendale Road
London SW6 2PR
England 372,018(4) 6.0%
Jyra Research, Inc.
111 Marlowes
Hemel Hempstead HP1 1BB
England 467,018(5) 7.4%
All directors and executive officers
as a group (8 persons) 2,624,018 (6) 40.0%
</TABLE>
(1) These shares are held in the name of Rona Berns. Michael Berns is Rona
Berns' husband.
(2) We believe Rona Berns, Michael Berns and James Berns may be deemed to
constitute a "group". The total number of shares beneficially owned by
the "group" would be 1,655,000.
(3) Includes options to purchase 278,000 shares of Class A Common Stock.
(4) 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."
(5) Includes options to purchase 190,000 shares of Class A Common Stock
beneficially owned by Mr. Robinson and Mr. Adams. We believe Mr.
Robinson, Mr. Adams and Jyra Research, Inc. may be deemed to constitute
a "group".
(6) Includes options to purchase 468,000 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 President, Chief Executive Officer and
Chairman of the Board
Douglas A. Palmer 49 Director, Executive Vice President,
Treasurer and Chief Technology Officer
Yendo Hu 36 Vice President of Video Products
Keith Dunford 61 Vice President, Marketing
Paul Robinson 36 Director
Roderick Adams 36 Director
James Berns 47 Director
KEY EMPLOYEES:
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 has been our President since March 1998. He
also presently serves as Chief Executive Officer, a position he assumed in
January 1999, and Chairman of the Board of Directors, a position he assumed
upon Michael Berns' departure in May 1999. 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. His industrial experience includes senior engineering positions at
Hewlett-Packard Corporate Labs and Tektronics Labs. Dr. Fellman received his
B.S. (Summa Cum Laude), M.S., and Ph.D. degrees from the University of
California at Berkeley.
Dr. Douglas Palmer has served as Executive Vice President and a
director of Path 1 since March 1998. In addition, Dr. Palmer assumed the
position of Treasurer in November 1998 and became Chief Technology Officer in
May 1999. Prior to co-founding Path 1, Dr. Palmer served as the Director of
Networking for TrexCommunications Corp. from December 1996 to January 1998,
and as a Senior Scientist for ThermoElectron Corp. from 1988 to December
1996. Dr. Palmer brings extensive expertise in digital signal processing,
image processing, digital communications, and real-time computer software. He
has held senior research positions at M/A-Com Linkabit, Western Research
Corporation and ThermoTrex Corp. 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 ThermoElectron Corp. identifying
takeover candidates and performing technical due diligence. He has received
over 12 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.
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. 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
25
<PAGE>
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.
Keith Dunford, Vice President of Marketing, joined Path 1 in January
2000. Prior to joining us, Mr. Dunford served as Managing Partner of Exam
Associates, a business development consultant group, from 1987 to 1995, and
then again from July 1999 to January 2000. In the interim period from 1995
to July 1999, Mr. Dunford served as Vice President of Sales and Marketing at
Tiernan Communications, Inc. Mr. Dunford has held senior management and
technical positions in the telecommunications, broadcasting and computer
industries for over four decades. Mr. Dunford received his B.S. in Electrical
Engineering from Manchester University (UK) and a master's degree in Business
Economics from the London School of Economics.
Paul Robinson has served as a director of Path 1 since his
appointment to the board in 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 his
appointment to the board in 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.
James Berns has served as a director of Path 1 since his appointment
in March 1998. Mr. Berns was also Secretary of the Company from March 1998
until May 1999. Mr. Berns has been a partner in the New York City law firm of
Berns & Berns since 1981. James Berns' appointment as a director and officer
was related to the fact that he is the brother of Michael Berns, who served
as our Chief Executive Officer from November 1998 until January 1999 and
Chairman of the Board of Directors until May 1999. James Berns graduated from
the Wharton School of Finance and Commerce at the University of Pennsylvania
(B.S. Economics), the Columbia University Graduate School of Business
(M.B.A.), and Hofstra University School of Law (J.D.).
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 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 five (5)
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, Douglas
Palmer and James Berns. 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
</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. The
Executive Committee's decision on Michael Berns' compensation level was based
on his promises of individual performance which, we believe, he did not
fulfill.
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 $2,682,700 $810,600
</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
Two of the three 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. 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
The amount of compensation, if any, which each director is entitled to
receive for services rendered to us is decided by resolution of the Board of
Directors. We do not presently maintain any standard compensation arrangements
with our directors, and they receive no compensation for their service as
directors. 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. The
Plan is subject to approval by our stockholders, and until such stockholder
approval is obtained, no option granted under the Plan may be exercised nor
shall any shares be issued under the Plan. 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.
1,500,000 shares of Class B Common Stock have been reserved for
issuance under the Plan. This share reserve includes of 368,513 shares of Class
B Common Stock that are presently subject to outstanding options.
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 of (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. James Berns presently owns 506,280 shares of
our Class A Common Stock.
James Berns is a partner in the law firm of Berns & Berns. Berns &
Berns acted as general counsel to us from early 1998 through April 1999. We
believe that during this time Michael Berns was also a partner in Berns & Berns.
James Berns and Michael Berns deny that he was, and the matter is currently a
subject of the litigation brought by us. See "Legal Proceedings" below. Berns &
Berns charged us $42,339 in legal fees for 1998 and approximately $29,000 in
legal fees for 1999.
LEGAL PROCEEDINGS.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court against (i) Michael Berns, who at various times has held
the positions of Chairman of the Board, Executive Chairman and Chief Executive
Officer of Path 1, (ii) Franklin Felber, former Treasurer and a former director,
(iii) James Berns, a current director and former Secretary, (iv) Rona Berns,
wife of Michael Berns and holder of record of 1,148,720 shares of Class A Common
Stock, and (v) the law firm of Berns & Berns, former general counsel to Path 1.
Our complaint is 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 practices, primarily in connection
with the allocation of founders' stock of Path 1. We are seeking damages and/or
the return of stock.
On November 29, 1999, Felber filed a cross-complaint against us, Ronald
Fellman, Douglas Palmer, Roderick Adams and Jyra for 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.
The present and former officers and directors of Path 1 under this
complaint and cross-complaint are seeking indemnification and advancement of
defense expenses from us. Michael Berns, James Berns and Felber sued us in
Delaware Chancery Court on November 9, 1999 to seek to enforce their asserted
rights to indemnification and advancement.
On February 3, 2000, we entered into a 45-day litigation standstill
agreement, or truce, with all of the defendants except Franklin Felber.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Class A Common Stock is quoted on the OTC Bulletin Board 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 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>
1999 1998
-------------------------- --------------------------
high low high low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Quarter ended March 31 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>
As of January 24, 2000, there were approximately 107 shareholders of
record of our 6,086,651 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 January 24, 2000 to purchase 884,975 shares of Class A
Common Stock and 368,513 shares of Class B Common Stock. On February 17, 2000,
the last reported bid price of Path1's Class A Common Stock was $14.1875 per
share on the OTC Bulletin Board.
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". They can
be resold in the public market without registration; however, 3,304,738 of such
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 shares of Class A
Common Stock held by existing stockholders are "restricted securities" as that
term is defined by Rule 144. Restricted securities may be sold in the public
market only if they are registered or if they qualify for exemption from
registration under Rule 144 under the Securities Act or otherwise. 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
January 24, 2000, we have sold 125,800 shares to accredited institutional and
individual investors, primarily in Europe; 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.
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.
SERIES A PREFERRED STOCK
All ten (10) authorized shares of Series A Preferred Stock were issued
to Jyra Research, Inc. and were, in accordance with their terms, voluntarily
converted into a total of 277,018 shares of Class A Common Stock in December
1999. The shares of Series A Preferred Stock cannot be reissued. We intend to
seek stockholder approval for an amendment to the Certificate of Incorporation
to eliminate the Series A Preferred Stock authorization.
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 share ratably in the
proceeds in proportion to the total amounts to which the holders of all Class A
Common Stock are entitled upon such liquidation, dissolution or winding up.
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-fourth of the shares of Class A Common
Stock of the Company issued and outstanding and entitled to vote at such
meeting. The Class A Common Stock is not redeemable. All outstanding shares of
Class A Common Stock are fully paid and nonassessable.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights (except as expressly
required by law) and is non-assignable and non-transferable. The Class B Common
Stock is not redeemable and is not entitled to receive dividends. Upon
liquidation, dissolution or winding up of Path 1, the rights of the holders of
the Class B Common Stock to receive any distributions shall be subordinate to
holders of the Class A Common Stock.
In addition, the Class B Common Stock will be automatically converted
into Class A Common Stock on a 1-for-1 basis upon the occurrence of any of the
following events:
1. We are sold (including merger, consolidation or other change of
control) or we sell, lease or license all or substantially all of our assets;
2. We generate revenues from operations equal to $10 million and report
earnings of at least $2 million in any year before interest, taxes,
depreciation, amortization and extraordinary items; or
3. There is a $25 million underwritten offering of our Class A Common
Stock.
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-fourth of the shares of
Class A Common Stock issued and outstanding and entitled to vote at such
meeting. These limitations may defer the calling of a meeting at which a change
of control might be effected.
DELAWARE TAKEOVER STATUTE
We are 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.
We are currently engaged in litigation in which certain former and
present directors and officers seek indemnification under the Delaware
General Corporation Law and our charter documents for claims brought against
them 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
the twelve months ended December 31, 1999 (unaudited)
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 September 30, 1999 (unaudited)............................F-3
Statements of Operations for the period from January 30, 1998 (inception) to
December 31, 1998 and the twelve months ended December 31, 1999 (unaudited)..........................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 (unaudited)........................................................................F-5
Statements of Cash Flows for the period from January 30, 1998 (inception) to
December 31, 1998 and the twelve months ended December 31, 1999 (unaudited)..........................F-6
Notes to Financial Statements........................................................................F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
[TO COME]
F-2
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119,394 $
Deposits and prepaid expenses 10,125
----------- ----------
Total current assets 129,519
Property and equipment, net
Computer equipment 65,238
Furniture and office equipment 7,449
Accumulated depreciation (19,012)
----------- ----------
53,675
Investment in Jyra Research, Inc. 128,400
$ 311,594 $
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued liabilities $ 55,342 $
----------- ----------
Total current liabilities 55,342
Commitments
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; shares authorized -
10; shares issued and outstanding - 10
at December 31, 1998 and September 30, 1999 (unaudited) - -
Common stock, $0.001 par value; shares authorized -
20,000,000; shares issued and outstanding - 5,264,333
at December 31, 1998; shares issued and outstanding
- 5,771,133 at September 30, 1999 (unaudited) 5,264
Additional paid-in capital 1,452,447
Accumulated other comprehensive loss (18,320)
Deficit accumulated during the development stage (1,183,139)
----------- ----------
Total stockholders' equity 256,252
----------- ----------
$ 311,594 $
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
------------------------------------------------------
January 30, 1998 (inception) Twelve months ended
to December 31, 1998 December 31, 1999
---------------------------- ---------------------
(unaudited)
<S> <C> <C>
Operating expenses:
Research and development $ 600,035 $
Sales and marketing 291,698
General and administrative 298,529
------------ -------------
Total operating expenses (1,190,262)
Interest income, net 7,123
------------ -------------
Net loss $ (1,183,139) $
============ =============
Net loss per share
(Basic and Diluted) $ (0.25) $
============ =============
Weighted average shares used in
computing net loss per share
(Basic and Diluted) 4,712,194
============ =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Convertible Additional
Preferred Stock Common Stock 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 - - - - 11,651
Unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net loss from inception through December 31,
1998 - - - - -
-------- ------- --------- --------- ----------
Balance at December 31, 1998 10 $ - 5,264,333 $ 5,264 $1,452,447
Issuance of common stock at $4.00 per share for
cash from March to April 1999, net of issuance
costs of $82,492 (unaudited)
Issuance of common stock at $8.00 per share for
cash from July to Sept 1999, net
of issuance costs of $821 (unaudited)
Issuance of stock options to consultants for
services (unaudited)
Unrealized loss on investment
in Jyra Research, Inc. (unaudited)
Net loss for twelve months ended
December 31, 1999 (unaudited)
-------- ------- --------- --------- ----------
Balance at December 31, 1999 (unaudited) $ $ $
======== ======= ========= ========= ==========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Deficit
Other Accumulated
Comprehensive During The Total
Income Development Stockholders'
(Loss) Stage Equity
------------- ----------- ------------
<S> <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 - - 11,651
Unrealized loss on investment
in Jyra Research, Inc. (18,320) - (18,320)
Net loss from inception through December 31,
1998 - (1,183,139) (1,183,139)
------------- ----------- ------------
Balance at December 31, 1998 $ (18,320) $(1,183,139) $ 256,252
Issuance of common stock at $4.00 per share for
cash from March to April 1999, net of
issuance costs of $82,492 (unaudited)
Issuance of common stock at $8.00 per share for cash
from July to Dec 1999, net of issuance costs of $821
(unaudited)
Issuance of stock options to consultants for
services (unaudited)
Unrealized loss on investment
in Jyra Research, Inc. (unaudited)
Net loss for nine months ended December 31,
1999 (unaudited)
------------- ----------- ------------
Balance at December 31, 1999 (unaudited) $ $ $
============= =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
----------------------------------------------
January 30, 1998
(inception) Twelve Months Ended
to December 31, 1998 December 31, 1999
-------------------- -------------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,183,139) $
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 19,012
Common stock issued to employees by principal stockholders 330,400
Common stock options issued for services 11,651
Changes in operating assets and liabilities:
Deposits and prepaid expenses (10,125)
Accounts payable and accrued liabilities 55,342
----------- ----------
Net cash flows used for operating activities (776,859)
INVESTING ACTIVITIES
Purchases of property and equipment (72,687)
----------- ----------
Net cash flows used for investing activities (72,687)
FINANCING ACTIVITIES
Issuance of common stock for cash, net 968,940
----------- ----------
Net cash flows provided by financing activities 968,940
Net increase in cash and cash equivalents 119,394
----------- ----------
Cash and cash equivalents at inception - 119,394
----------- ----------
Cash and cash equivalents at end of period $ 119,394
=========== ==========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
Issuance of Series A convertible preferred stock in exchange
for investment
in Jyra Research, Inc. $ 146,720 $
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
PATH1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
[OMITTED]
F-8
<PAGE>
PATH1 NETWORK TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Exhibits
- - --------
<S> <C>
3.1 Certificate of Incorporation, as amended
3.2* 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
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
</TABLE>
* 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: February 21, 2000 By /s/ Ronald D. Fellman
---------------------
Ronald D. Fellman
President, Chief Executive Officer and
Chairman of the Board
F-9
<PAGE>
STATE OF DELAWARE Page 1
OFFICE OF THE SECRETARY OF STATE
- - --------------------------------------------------------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "PATH 1 NETWORK TECHNOLOGIES INC.", FILED IN THIS
OFFICE ON THE THIRTEENTH DAY OF APRIL, A.D. 1999, AT 9 O'CLOCK A.M.
[SEAL]
[SEAL]
/s/ EDWARD FREEL
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2853501 8100 AUTHENTICATION: 0265247
001082093 DATE: 02-17-00
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PATH 1 NETWORK TECHNOLOGIES INC.
The Undersigned, in order to amend its Certificate of Incorporation,
hereby certifies as follows:
FIRST: The name of the corporation is Path 1 Network
Technologies Inc.
SECOND: The Corporation hereby amends its Certificate of
Incorporation as follows:
Paragraph FOURTH of the Certificate of Incorporation, relating to the
authorized capital, is hereby amended to read in its entirely, as follows:
*FOURTH: (a) The Corporation shall be authorized to issue the following
shares:
<TABLE>
<CAPTION>
CLASS # OF PAR VALUE
SHARES
--------------------------------------------------------
<S> <C> <C>
Class A Common 20,000,000 .001
--------------------------------------------------------
Class B Common 10,000,000 .001
--------------------------------------------------------
Preferred 10 .001
--------------------------------------------------------
</TABLE>
(A) CLASS A COMMON STOCK.
The Corporation's existing Common Stock, par value, $.001 per share, is
hereby redesignated Class A Common Stock, par value $.001 per share.
(B) CLASS B COMMON STOCK.
(1) VOTING. The Class B Common stock shall have no voting rights.
(2) DIVIDENDS. The holders of the Class B Common Stock shall not be
entitled to receive any dividends.
(3) CONVERSION. The Class B Common Stock will convert into shares of
Class A Common Stock, on a one-for-one basis, upon the occurrence of any one of
the following events:
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/13/1999
991144006-2853501
- - --------------------------------------------------------------------------------
<PAGE>
(a) Either the Corporation is sold (including merger,
consolidation or other change of control) or it sells, leases,
or licenses all of substantially all of its assets;
(b) The Corporation generates revenues from operations equal to
$10,000,000 and reports earnings of $2,000,000 in any fiscal
year before interest, taxes, depreciation, amortization and
extraordinary items; and
(c) There is a underwritten public offering of the Corporation's
Class A Common Stock of at least $25,000,000.
(4) NON-VOTING, NON-ASSIGNABLE AND NON-TRANSFERABLE
The Class B Common Stock shall be (i) non-voting, (ii) non-assignable,
and (iii) non-transferable.
(5) LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the Corporation, the
right of the holders of the Class B Common Stock to receive any distributions
shall be subordinate to holders of the Class A Common Stock and the Series A
Preferred Stock.
(C) PREFERRED STOCK. The shares of the Corporation's preferred stock shall
be designated as Series A Preferred Stock (the "Series A Preferred Stock").
(1) VOTING. (a) Except as provided in paragraph (b), the Series A
Preferred Stock shall no voting rights.
(b) The Corporation shall not, without the affirmative consent of the
holders of a majority of the Series A Preferred Stock, (i) in any manner
authorize or create any class of capital stock ranking, as to distribution of
assets, prior to the Series A Preferred Stock or (ii) in any manner alter or
change the designations or the powers, preferences or rights, or the
qualifications, limitations or restrictions, or increase the number of
authorized shares of the Series A Preferred Stock in any material respect
prejudicial to the holders thereof.
(2) DIVIDENDS. The holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of funds legally available for that purpose, a dividend,
payable, on the same terms as dividends payable to
- 2 -
- - --------------------------------------------------------------------------------
<PAGE>
holders of the Corporation's common shares, in an amount equal to the percentage
interest in the Corporation's common shares the Series A Preferred Stock would
be convertible into.
(3) CONVERSION
Nine months after the date the Series A Preferred Shares are issued,
ten (10) Series A Preferred Shares shall be convertible into 277,018 Shares of
the Corporation's common stock.
(4) NON-VOTING, NON-ASSIGNABLE AND NON-TRANSFERABLE
The Series A Preferred Shares shall be (i) non-voting, (ii)
non-assignable, and (iii) non-transferable for the first two years after
issuance.
(5) REDEMPTION
At any time nine months after issuance, ten Series A Preferred Shares
may be redeemed by the Corporation into 277,018 Shares of the Common Stock of
the Corporation.
(6) REPRESENTATION ON BOARD OF DIRECTORS
Holders of all the outstanding Series A Preferred Shares shall be
entitled to appoint two representatives to the Corporation's Board of Directors.
(7) DEBT FINANCING; WARRANTS
For a period of two years after the issuance of the Series A Preferred
Shares, the Corporation shall not be entitled to (i) issue any debt securities,
or (ii) any warrants in connection with an equity financing, without the consent
of the holders of the Series A Preferred Shares, which consent shall not be
unreasonably withheld.
(8) LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the Corporation,
no distribution shall be made to the holders of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series
A Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
THIRD: The amendment effected herein was authorized by the
consent in writing, setting forth the action so taken, signed by the holders of
a majority of outstanding
- 3 -
- - --------------------------------------------------------------------------------
<PAGE>
shares entitled to vote thereon pursuant to Section 228 and 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the
statements made herein are true under the penalties of perjury, this 22nd
day of March 1999.
/s/ James Berns
---------------------------
James Berns, Secretary
- 4 -
- - --------------------------------------------------------------------------------
