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ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
Commission file number____________________________________________________
Streamedia Communications, Inc.
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(Name of small business issuer in its charter)
Delaware 22-3622272
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
244 West 54th Street New York, New York 10019
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 445-1700
Securities registered under Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
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______________________________ _________________________________________
______________________________ _________________________________________
Securities registered under Section 12(g) of the Exchange Act:
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(Title of class)
Common Stock .001 Par Value
- ------------------------------------------------------------------------------
(Title of class)
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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X__. No____.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
State the issuer's revenues for the most recent fiscal year. None
State the aggregate market value of the voting and non-voting common
equity held by nonaffiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such common
equity, as of a specified date within 60 days (See definition of affiliate in
Rule 12b-2 of the Exchange Act.)
As of March 27, 2000, the aggregate market value of the registrant's
Common Stock held by non-affiliates of the registrant was $ 5,947,219 based on
the closing sales price of the registrant's Common Stock as reported on the
Nasdaq Small Cap on such date. For purposes of this calculation, shares owned by
officers, directors, and 5% shareholders known to the registrant are deemed to
be owned by affiliates.
State the number of shares outstanding of each of issuer's classes of
common equity, as of March 27, 2000: 4,536,750
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
Registrant Incorporates the following by reference:
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Exhibits No.:
3.1 The Company's Articles of Incorporation are incorporated by
reference from the Company's Registration Statement on Form SB-2, as amended,
SEC file No. 333-78591
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3.2 The Company's Amended and Restated By-laws are incorporated by
reference from the Company's Registration Statement on Form SB-2, as amended,
SEC file No. 333-78591.
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PART I.
ITEM 1. BUSINESS
A. Business Development
Streamedia Communications, Inc. ("Streamedia" or "the Company") is a Delaware
Corporation. Our principal business address is 244 West 54th Street, 12th Floor,
New York, New York, 10019. Our telephone number is (212) 445-1700.
We started in April 1998 as a partnership to develop broadcast oriented
websites. The partnership evolved into Streamedia Communications, L.L.C., a New
Jersey limited liability company, in September 1998, to continue the business
plan initiated by the partnership. Streamedia Communications, L.L.C., was
subsequently reorganized into a Delaware Corporation in December 1998.
We have never been a party to any bankruptcy, receivership, or similar
proceeding.
B. Business of the Registrant
General
We provide website owners and content publishers with cost-effective services
and tools for streaming, or broadcasting, live and on-demand video and audio
content over the Internet. We have also created and operate a series of websites
we call the "Streamedia Networks." Our business, therefore, has two primary
components: we act as an Internet content publisher and broadcaster, and as a
business-to-business service bureau, for hire, to assist other businesses to
publish and broadcast their content on the Web. Each area of activity is
expected to generate multiple sources of revenue.
Our content websites and the broadcast programming that they feature provide
examples of the services we are able to provide on a business-to-business basis.
As displayed in the Streamedia Networks, our streaming media services enable web
users to enjoy activities such as:
o Listening to radio broadcasts on the Internet
o Watching news, sports, and cultural events from around the world
o Experiencing interactive presentations
o Accessing unique work by artists who do not sell their work to
traditional broadcasters in television or
radio
o Hearing public company financial presentations as they happen, or on a
replay basis
o Watching classic and independent films not easily available from other
sources
o Watching music videos or listen to songs on demand
o Participating in live interactive webcasts or Internet conferences
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o Gathering important health information on a confidential basis
o Joining an Internet "community"
o Researching products for which they are shopping
The Streamedia Networks
The Streamedia Networks are our showcase for web design and broadcast
programming. Each Network is devoted to a specific category of programming, such
as women's issues, or sports. Visitors to the Streamedia Networks are able to
view live and on-demand video and audio programming in an environment similar to
that of cable broadcasts, offering a wide scope of programming choices,
interactive elements, convenient access to retail opportunities, and numerous
sources of news and information in topics of interest. Much like cable and
network television, we produce, aggregate and distribute content in various
categories. Currently, we offer programming news and information regarding
motion art, crime, sports, women, and entertainment. In the future, we plan to
offer programming in such areas as finance, lifestyles, entertainment, comedy,
movies, history, music, education, shopping, sports, news, and children's
programming. Each Network and any channel associated with it is capable of carry
advertising.
Much of the programming available on the Streamedia Networks represents
proprietary productions by our staff. Other aspects of our programming are
materials to which we have acquired the rights, or obtained a distribution
license from the owner. We anticipate that most of our content will continue to
be offered at no charge to end-users: our goal is to capture the maximum
possible consumer audience. To see and hear our programming, the public does not
require special hardware or software beyond that of standard media players, such
as those produced by Microsoft, Inc., and RealNetworks, Inc., and browsers
routinely supplied by computer manufacturers and Internet Service Providers.
Active Networks at www.streambroadcast.com:
Streamedia Motion Art-a network focused on the visual arts, particularly
animation, experimental cinema, and digital multimedia work of artists,
directors, and producers. It presents high-end graphics, and is primarily
intended for broadband users. Motion Art provides a forum for artists to display
their works, share ideas, and discuss the digital hardware and sophisticated
software they use to create it.
Streamedia Crime Broadcast-a network focused on promoting public awareness and
community action in the fight against crime. Its frameworks are primarily
educational, interactive, and informational. This network's focus is on crimes
against people and has segments on serial killers, kidnapping, and assault. It
also covers the latest technology available in the fight against crime.
Streamedia Sports Style-a network focused on the pursuit of personal athletic
participation and enjoyment of Extreme Sports. Frameworks are designed to inform
the aficionado and enthusiast and to facilitate learning about the sports and
participation in them. The balancing element of
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this network is in the lifestyle elements.
Streamedia Women on the Edge-a network focused on profiles of heroines of our
time. The network is segmented into user groups along the lines of "Women on the
Edge: Maturity," "Women on the Edge: Adrenaline," "Women on the Edge: Arts,"
etc. By providing a venue for profiles of heroines, the network provides
positive role models for women in any stage of life.
Streamedia Entertainment-a network focused on simple fun for all ages: classic
cartoons, music events, B-movies, popular genre works such as comedies, horror
movies, and westerns, and campy TV series, as well as some hard-to-find and
vintage and historical films.
We are also developing platforms and a specialized application by which our
Networks can aggregate third party audio and video content. These new features
are scheduled for implementation as part of a planned aesthetic and technical
upgrade to the Streamedia Networks during the second quarter of the year ending
December 31, 2000.
We intend to offer the following types of programming, some of which is already
available at our sites. The list is representative, not exhaustive:
Concerts Workout & Training films
Comedy Routines & movies US & International News
Cartoons Talk and call-in shows
High-end Graphic arts Extreme Sports
Video and Audio Press Releases Interviews
"How-to" shows Corporate Video Profiles
Investor Conferences Infomercials
Fashion Advice Trade Shows
Medical Symposia Celebrity interviews
Analyst and Broker Presentations Awards Ceremonies
Documentaries Educational Videos
Women's Interests Political Programming
True crime studies Independent Films and Shorts
Sales Training Seminars Travel Footage
Distance Learning Sessions Biographies
Full-length movies Religious Programs
FM radio stations Genre and independent films
Children's shows
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The Business Services
Business-to-Business Core Competencies
Business Services mission is to provide technology and consulting expertise and
services to conventional media companies, traditional businesses with media
assets, and online businesses and websites needing to coordinate and control
their media assets to increase profits, enhance branding, increase their
distribution, and raise their industry stature. We will emphasize the role of
Media Resource Planning, the digital counterpart to ERP, Enterprise Resource
Planning-in any company's future.
Streamedia Business Services has the following capacities:
o Capture and convert traditional non-digital media such as film and
videotape assets to digital format
o Store these converted media assets in a digital environment which may
be indexed so that the digital files can be searched for content.
o Provide a commerce-enabled web interface to that digital environment
o Furnish scalable and reliable distribution means to delivery for all
products including professional quality video
o Track the use of media assets throughout the broadcast, cable and
Internet marketplace
o Provide consulting expertise and technology to help companies build
similar, but non-competitive systems at the "company-wide" level.
The Streamedia Digital Solutions(TM)
The centerpiece of Streamedia's Business-to-Business Strategy is the Streamedia
Digital Solutions(TM). Streamedia's Digital Solutions(TM) allow owners of
traditional types of media, such as film, photographic, and video and audio
libraries, to display their content over the Internet. The digitization of
traditional media assets is recognized as a method to preserve and protect
fragile media assets such as film. Moreover, Streamedia Digital Solutions(TM)
process also allows media owners to:
o Enhance their video or audio asset through Streamedia's ability to
optimize the video or audio and in some cases to restore faded or
damaged media
o Index a video library, using third party software, rendering the
digitized content searchable by spoken words, by the recognition of the
names and faces of the speakers, or by identification of the topics
discussed during each segment of the video
o Transform the old-media asset into a compelling web experience and a
completely new broadcast platform capable of featuring personalized,
targeted advertising, community-building and e-commerce
o Distribute their assets to new markets
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We can capture media from all popular formats, whether digital or analog. We
process the captured media using several hardware and software based audio and
video optimization technologies. These upgraded versions of the media are
encoded for digital storage in one or more streaming formats, ready for
broadcast.
As part of the full process, we use software that divides video into segments by
indexing visual scene changes, spoken words, names and faces of recognized
speakers, and topics discussed within each segment. The software we use creates
a graphic and textual summary of the video. This index is synchronized during a
concurrent encoding process while preparing streaming video files. These
capabilities make it easier for both content owners and Internet users to search
for and use video content. Whether the users are looking for a particular
character or person, or topic, the ability to search by keyword allows them to
generate search results lists, and then, in some cases, go directly to the
section in the video that is of interest to them.
We store the media files and descriptive metadata generated as part of our
encoding process in a proprietary Oracle database. Our web development team
designs and builds a sophisticated graphic user interface to provide a web front
end to the data. This GUI can feature intuitive navigation schema, and advanced
personalization techniques, which enable targeted advertising and other commerce
opportunities. Lastly, we publish all of the data and graphics to the web. We
host our sites, and can host sites or partial sites, and media, for our clients.
The value added situation deriving from our hosting services is that the
Streamedia Networks can actually become a third party's additional broadcast
venue, thereby increasing a client's distribution footprint, opening them into
new markets, and generating additional branding and sales pathways.
The Streamedia Digital Solutions provide a comprehensive set of applications,
capacities, and services to third parties who need to deploy their media assets
to the web rapidly, powerfully, and in an aesthetically appealing manner. The
solutions provide improved access to video content, the opportunity to achieve
greater distribution, greater user interaction and community building tools,
improved capacity for personalization and targeted content delivery, and
increased commerce opportunities.
Business Strategy
Increasingly, the media we work with in the printing, publishing, and graphic
arts industry are digital, and for good reason. Digitization often enhances
quality; improves control; speeds and widens distribution; and reduces costs.
However, the migration into a digital world also poses several major challenges.
The media themselves are increasing in complexity: resolutions are increasing,
file structures are becoming more sophisticated and flat media is giving way to
multimedia, including video and audio. There may be many versions of a media
created during development, any one of which may have to be accessed and, due to
the range of media in which they appear, they may have to be saved in any of
multiple formats. The number of publications--paper and electronic--is
exploding, which increases the digital data requirements. This demand is
increasing the value of these digital resources, both to those who produce them
and to those who use them.
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Business Services' mission is to provide technology and consulting expertise and
services to conventional media companies, traditional businesses with media
assets, and online businesses -websites-needing to coordinate and control their
media assets to increase profits, enhance branding, increase their distribution,
and raise their industry stature. We will emphasize the role of Media Resource
Planning-the digital counterpart to ERP, Enterprise Resource Planning-in any
company's future.
The Internet marketplace is poised for a revolution in methodology, not just
technology. Known currently as a tool for finding news and entertainment
information, we believe that the next iteration of the web will reveal the wide
adoption of the narrative in an interactive environment. Our goal is to forge a
working bond between the best in interactive Internet technology and television
production allowing us to embrace and lead the next transformation of the web
and media marketplace.
Our story tellers, television producers and Internet technologists are working
to develop methodologies for using these tools to their greatest gain - the
telling of multiform stories with an active audience so engrossed in the tale
that the procedural and participatory nature of their involvement does not
interfere. Our Business Services unit will market these capacities and
technologies to third parties.
Marketing and Sales
We rely on a variety of marketing methods, including direct marketing, trade
show and conference participation, our corporate site, the Streamedia Networks,
and collateral sales materials. We will continue to raise our stature in the
Internet community and position the Streamedia brand as we develop our sales and
marketing activities.
We segment our target markets into a broad range of categories. Each of these
categories has qualities which allows our personnel to approach a potential
client with opportunities relating to both business to business services, as
well as for content arrangements taking one of many possible forms.
Streaming Markets
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Websites that already stream
Broadband Access Providers
Corporate Markets
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Corporate Intranets
Internet Service Providers
Portals
Online Retailers
Training and Education Institutions
Advertising Agencies
Libraries and Media Centers
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Media and Entertainment Publishing
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Cable Television Newspapers
Movie Studios & Collections Magazines
Entertainment Rights Internet Content Providers
Producers Websites that don't stream
Music Industry Corporations
Radio Stations
Television Stations
Description of Services
The Business Services
We are providing Internet media infrastructure services and applications.
Together, these form end-to-end solutions for the delivery of rich media over
the Internet. The Streamedia Digital Solutions include encoding, or processing
audio and video into a format that enables it to be broadcast as streaming
media. The Solutions also include media hosting and serving. Our services,
systems and applications can now scale to encompass jobs requiring high
performance and large quantities. We can assist customers to get their media to
market rapidly and effectively. Examples of the types of services we provide
that are included in the Streamedia Digital Solutions:
Encoding Services
To be distributed over the Web, all audio and video content must be encoded. We
are able to convert content from all major input formats, whether analog or
digital, and convert them to the common streaming media formats for distribution
at a full range of bit rates. We can capture source content via tapes, satellite
transfer, compact disks, FTP, and other methods. We offer encoding services to
our customers through our internal staff. In addition, we have understandings
with major vendors to process any high volume work we may need to complete. We
offer encoding in a number of digital formats, including MPEG, QuickTime, AVI,
Microsoft's Windows Media Player and RealNetworks' RealServer 7.0.
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Digital Security
After we have encoded, we can also generate watermarking, encryption, or other
digital rights and security technologies to protect and manage content.
Information can be embedded within digital audio or video to provide copyright
and intellectual property protection. Such processes have become particularly
important to rights holders wishing to protect their economic interest in
properties they have bought or created.
Metadata Collection and Analysis
Our encoding processes generate substantial metadata to augment the media file
proper. Such information includes fields indicating an artist, director, title,
style, keywords, or any other field appropriate to a given project. Metadata
files allow content owners and users to search, track, protect, and manage their
digital media content in a more robust manner. We increase the value of video to
content owners by enabling them to use their video in targeted applications such
as advertising and electronic commerce.
Broadcast Production
Our staff includes numerous broadcast industry professionals with cable and
network television broadcast production experience. Their skills have adapted to
working within the unique parameters of producing for a web experience. We
provide a full range of services, spanning from pre- to post production, live
events, the construction of studios and edit bays, treatments and scriptwriting.
Web Design
Our web design team can develop channels through which our customers can
distribute their programming. They can conceptualize and execute an entire
corporate presence. Our web developers have core competencies in such areas as:
o Conceptual development
o Graphic interface design
o 3-D design and animation
o Multimedia applications
o Interactive components
o Intranets / Extranets
o Database design
o CD-ROM development
o Network applications
o Connectivity tools
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o E-Commerce applications
o Interactive kiosks
Web and Media Distribution
We provide complete solutions for hosting and serving web pages and multimedia.
Our customers can store video and audio clips at our hosting facility or at
distributed networks, such as the Real Broadcast Network, for which we have a
reseller relationship. We have built and continue to build out an in-house data
center, and our technicians integrate servers and connectivity to other Networks
and service providers.
Advertising, Sponsorship, Subscription & E-commerce
Streamedia's Networks provide narrowcast models for advertisers. Our programming
will help focus like-minded users/viewers on specific categories of
entertainment, education and information programming.
Traditional broadcasters have limited capacity to measure or identify in real
time their listeners or viewers. In contrast, Internet broadcasters can target
advertising with a precision that television and cable broadcasters cannot. Use
of the latest personalization technologies will allow us to gather specific data
on users/viewers for advertisers.
In order to build enduring visitor relationships we plan to build our visitor
acquisition and support practices based on one-to-one marketing strategies. To
maintain a competitive edge, we plan to continuously learn from interactions
with individual visitors. Our strategy is to aggressively respond to the
information those interactions elicit, and engage our customers to ensure they
never want to leave.
We can make our visitors more loyal and more profitable to Streamedia by
establishing a "Learning Relationship" with each of them, starting with the most
valuable visitors. A Learning Relationship is a relationship that gets smarter
and smarter with every user interaction. The user tells us of some need, and we
customize our product and services to meet that need. Then with each interaction
our products get better and better at fitting themselves to that particular
visitor. Now, even if a competitor offers similar type of customization and
interaction, the visitor won't be able to get the same level of convenience from
the competitor until the visitor re-teaches the competitor what he or she has
already spent time and energy teaching us. In effect, our product becomes more
and more valuable to a visitor with each successful interaction and transaction.
Raw Materials
The use of raw materials is not now a material factor in our operations.
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Competition
We believe our approach to establish Streamedia as an emerging leader in its
fields reduces the threat of competition. Nevertheless, the market for Internet
broadcasting and news distribution services is highly competitive. We expect
that competition will continue to increase. We compete with:
o Other websites, Internet portals, dial-up software applications and
Internet broadcasters to acquire and provide content and act as a
gateway to attract users,
o Video-conferencing companies, audio conferencing companies and Internet
business services broadcasters,
o Online services, other website operators and advertising networks, as
well as traditional media such as television, radio and print, for a
share of advertising budgets,
o Other news aggregators and content generators, and
o Other press release distributors.
There can be no assurance that we will be able to compete successfully or that
the competitive pressures will not have a material adverse effect on our
business, results of operations and financial condition. Competition among
websites that provide compelling content, including streaming media content, is
intense, and we expect competition to increase significantly in the future.
Traditional media may expend resources to establish a more significant Internet
presence in the future. These companies have significantly greater brand
recognition and greater financial, technical, marketing and other resources than
us. We also compete with other content providers for the time and attention of
users and for advertising revenues.
Dependence on a Few Major Customers
Streamedia currently has no customers and we do not expect that we will be
dependent on any one customer for any material percentage of our revenues.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements, or
Labor Contracts, Including Duration
We regard some components of technology still in development stage as
proprietary and will attempt to protect those components with patents,
copyrights, trade secret laws, restrictions on disclosure and other methods.
We pursue registration of our trademarks and service marks. We have, for
example, undertaken to protect our right to use the names "Stream,"
"Streamedia," "Stream Wire," "Streamedia Webcasting," "StreamGuide,"
"StreamPlayer," "StreamTuner," and other names and logos unique to Streamedia by
filing for trademark registration with the United States Patent and Trademark
Office. Our applications are still open pending potential opposition from third
parties. If there is no opposition filed in the Office of Patent and Trademark,
we will be granted these marks. There has been no opposition filed to date.
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Need for Government Approval
The Company does not require approval of any government agency to produce or
market its services.
Effect of Existing or Probable Government Regulations on the Business
Certain existing laws or regulations specifically regulate communications or
commerce on the web. Moreover, laws and regulations that address issues such as
user privacy, pricing, online content regulations, taxation and the
characteristics and quality of online products and services are under
consideration by federal, state, local and foreign governments and agencies.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to the regulation of long distance telephone carriers and to
impose access fees on such companies. Such regulation, if imposed, could
increase the cost of transmitting data over the web. Moreover, it could take
years to determine the extent to which existing laws relating to issues such as
intellectual property ownership and infringement, libel, obscenity, and personal
privacy are applicable to the web. The Federal Trade Commission and government
agencies in certain states have been investigating certain Internet companies
regarding their use of personal information. Any new laws regulating and/or
relating to the web, or certain application or interpretation of existing laws,
could decrease the growth in the use of the web, decrease the demand for our
website or otherwise materially adversely affect our business.
Research and Development
Our research and development requirements primarily consist of keeping current
on developments relating to technology to support the objectives of our business
plan and other aspects of operating an Internet-based broadcasting venture. In
addition, we have developed several proprietary applications created
specifically for our Networks. As of the date of this report we have hired 15
employees who are responsible for developing and implementing our websites. In
addition, we have spent $461,717 on the development and upgrading of our
software and application maintenance.
Environmental Compliance
We do not face any environmental compliance issues or costs.
Employees
We employ 32 full time employees and have 3 part-time employees working for us.
Of the 32 full time employees, 6 are in administration, 21 in operations, and 5
are in sales and marketing. None of our employees are represented by a labor
union and we consider our relationship with our employees to be good.
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Risk Factors
You should be aware that there are various risks associated with our business,
and us including the ones discussed below. The following risk factors should be
carefully considered, together with other information contained in this Form
10-KSB, in evaluating us.
Our Limited Operating History Makes It Difficult To Determine Our Future
Success. Streamedia is currently just becoming operational. To date, we have not
generated any revenues. We have experienced losses of $3,784,911 through
December 31, 1999, and our accumulated deficit as of such date was $4,081,671.
In March 2000, we launched four network sites, but have not yet begun to
generate revenues. We anticipate upcoming launches of additional websites
currently in the development stage. You should consider Streamedia and our
prospects in light of the risks, difficulties and uncertainties frequently
encountered by companies in an early stage of development.
We May Not Be Able to Obtain the Financing and Capital Required to Maintain and
Grow Our Business. To date, we have incurred net losses, including net losses of
$3,784,911 and $296,760 for the years 1999 and 1998, respectively. As of
December 31, 1999, we had an accumulated deficit of $4,081,671. We expect to
incur substantial up-front capital expenditures and operating costs in
connection with the operation and expansion of our network sites, which will
result in significant losses for the foreseeable future. There can be no
assurance that we will generate significant revenues or achieve profitable
operations. Our independent certified public accountants' report on the
financial statements includes an explanatory paragraph stating that our ability
to continue our business is dependant upon our ability to obtain additional
capital, among other things, which raises doubts about our ability to continue
as a going concern.
We Are Dependent On Key Existing And Future Personnel For Our Success.
Streamedia's success depends on the efforts of certain members of senior
management, particularly James Rupp (President and Chief Executive Officer) and
Nicholas Malino (Executive Vice President, Chief Operating Officer and Chief
Financial Officer). The loss of one or both of these individuals could adversely
affect our business operations or prospects. These individuals have entered into
employment agreements, but we cannot guarantee that either of these individuals
will continue to serve in his current capacity or for what time period this
service might continue. We have not obtained key man life insurance policies
with respect to these individuals.
We Are Dependant On Continued Growth and Acceptance of the Internet. Our
business, results of operations and financial condition could be materially
adversely affected if widespread commercial use of the Internet does not
develop, or if the Internet does not develop as an effective and measurable
medium for advertising.
Rapid growth in use of and interest in the Internet is a recent phenomenon.
There can be no assurance that acceptance and use of the Internet will continue
to develop or that a sufficient base of users will emerge to support
Streamedia's business. Our future revenues will depend largely on the widespread
acceptance and use of the Internet as a source of multimedia information and
entertainment and as a
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vehicle for commerce in goods and services. Our business, results of operations
and financial condition could be materially adversely affected if use of the
Internet does not continue to grow or grows more slowly than expected, Internet
infrastructure does not effectively support the growth that may occur, and the
evolution of broadband connectivity is slower or less widespread than
anticipated.
In the event that the Internet does not continue to grow or grows more slowly
than expected, we may not have the ability to generate sufficient revenues. We
anticipate that advertising revenues will depend on, among other factors,
pricing of advertising on other websites; the amount of traffic that our
websites receive; and our ability to achieve and demonstrate user and member
demographic characteristics that are attractive to advertisers. All of these
factors are dependant on the growth and acceptance of the Internet.
To Remain Competitive We Must Adapt to Internet Technology Trends. The market
for Internet broadcast services experiences rapid technological developments,
frequent new product introductions and evolving industry standards. Therefore,
to remain competitive we must effectively use leading technologies, continue to
develop technological expertise, and enhance our current services and continue
to improve the performance, features and reliability of our network
infrastructure. In addition, the widespread adoption of new Internet
technologies or standards could require us to make substantial expenditures to
modify our websites and services. If we fail to rapidly respond to technological
developments, it could have a material adverse effect on our business, results
of operations and financial condition.
Our Principle Shareholders Own a Majority of the Shares Outstanding and May
Control Us. Our officers and directors own a majority of the outstanding shares
of common stock. These shareholders will be able to control the vote on election
of directors and to substantially impact the vote on other matters submitted to
shareholders. If these shareholders act together they will be able to
substantially impact any vote of the stockholders and exert considerable
influence over our affairs.
ITEM 2. PROPERTIES
Our principle administrative, sales, marketing and research development
facilities are located at 244 West 54th Street, New York, New York. The current
rent for the space is $19,600 per month and our lease expires in July 2002. We
believe that our current facilities will be adequate to meet our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We were not a party to any significant legal proceedings as of December
31, 1999, or as of the date of this filing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year 1999.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The principal market for our securities is the Nasdaq SmallCap Market,
where shares of our common stock and warrants trade under the symbols "SMIL" and
"SMILW," respectively. Our Common Stock and warrants have been quoted since
December 22, 1999, the date of our initial public offering. Prior to that time,
there was no public market for our securities. During fiscal year ending
December 31, 1999 our shares and warrants traded as a unit under the symbol
"SMILU."
The following table sets forth the range of high and low closing sales prices of
our Securities for the fourth quarter of 1999:
Fiscal Quarter Ended High Low
- -------------------- ---- ---
December 31 $9.06 $8.50
(commencing December 22, 1999)
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of the date hereof, a total of 4,536,750 shares of our common stock are
outstanding. Of these, 1,240,000 are free trading and 3,296,750 are investment
shares. We had approximately 60 holders of record of Common Stock. This does not
reflect persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.
DIVIDENDS
We have never paid a cash dividend. We intend to retain any future earnings for
the operations and the expansion of our business and do not anticipate paying
any cash dividends for the foreseeable future.
RECENT SALES OF UNREGISTED SECURITIES
On May 16, 1999, we sold 264,490 shares of common stock at $2.00 per share
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of
1933, as amended. The common stock was offered to a discreet group of accredited
investors without the benefit of general solicitation or advertising. We raised
$523,980 from this private placement in order to provide bridge financing for
our initial public offering.
On August 24, 1999, we issued $1,815,000 of debt securities in the form of
promissory notes which bear interest at a rate of 10% per annum. The notes were
offered pursuant to Rule 506 of Regulation D only to accredited investors, with
no general solicitation or advertising. The notes were offered as a unit, each
unit consisting of a promissory note in the principal amount of $15,000 and a
warrant entitling the holder
<PAGE>
to purchase 9,000 shares of our common stock at a $8.50 per share. The warrants
are exercisable beginning December 22, 2000, and ending on the date five years
following the date that the warrants were issued. The holders of the warrants
have certain "piggyback" registration rights with respect to the shares
underlying the warrants. Specifically, the holders are entitled to include their
shares if the Company files a registration statement with Commission during the
period beginning December 22, 2000, and ending on December 22, 2001.
We issued securities to officers, directors, and consultants as compensation for
services rendered to us. Also, in 1998, we issued 25,000 shares of common stock
to our legal counsel, Kogan & Taubman, L.L.C., as partial consideration for
legal services in connection with our initial public offering.
USE OF PROCEEDS
Our registration statement (Registration No.333-78591) under the Securities Act
for our initial public offering became effective on December 22, 1999. Pursuant
to which we registered 1,200,000 Units. The offering terminated on December 27,
1999 and our managing underwriters were Institutional Equities, Inc., and
Capital West Securities, Inc. The entire offering of 1,200,000 Units was sold at
the offering price of $8.50 per Unit, each Unit consisted of one share of common
stock and one redeemable warrant. Each redeemable warrant entitles the holder to
purchase one share of common stock at $12.75 per share, at any time from
issuance until December 21, 2004. Such warrants are redeemable by us, with prior
written consent of Institutional Equity, Inc., at a redemption price of $.05
commencing May 17, 2000, provided that the closing price of the common stock is
at least $12.75 per share for ten consecutive trading days. The aggregate amount
raised pursuant to the initial public offering was $10,200,000.
In addition, there was an overallotment option for 180,000 Units, of which
40,000 Units were exercised by the underwriters in January 2000, for net
proceeds of approximately $306,000.
From December 22, 1999, to December 31, 1999, we incurred the following expenses
with respect to the issuance and distribution of the initial public offering:
$1,020,000 for underwriting discounts and commissions; 204,000 expenses to
underwriters; $529,223 for legal, accounting, and other professional expenses.
As a result of the offering we received $8,446,777 in net total proceeds. We
have used $ 92,441 for construction of plant, building and facilities;
$1,878,125 repayment of indebtedness; $1371,525 for hardware, video equipment,
software, and associated licenses; 497,668 for burdened payroll; and $337,521
for technical and financial consultants.
ITEM 6. MANANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Financial
Statements and Notes thereto which appear elsewhere in this document. The
results shown herein are not necessarily indicative of the
<PAGE>
results to be expected in any future periods. This discussion contains
forward-looking statements based on current expectations, which involve risks
and uncertainties. Actual results and the timing of events could differ
materially from the forward-looking statements as a result of a number of
factors. For a discussion of the risk factors that could cause actual results to
differ materially from the forward-looking statements, you should read the "Risk
Factors" section of this document.
OVERVIEW
From our inception in 1998 through the present, we have considered ourselves a
development stage company. We started to actively develop and market our
websites in 1999. As such, comparisons from the prior fiscal year are not
considered meaningful. Our primary activities to date have consisted of the
following:
Securing financing to begin the operating phase
We completed our Initial Public Offering on December 27, 1999. Prior to this
date we completed only limited build-out and development of our technological
infrastructure and recruited only a select few technical and managerial
employees. Subsequent to the completion of the offering we began an extensive
effort to develop a state-of-the-art infrastructure for video and audio
streaming and to recruit and hire technical personnel to design, implement, and
maintain these systems. The initial phase of this build-out is expected to be
completed in the second quarter of 2000.
Building of streaming infrastructure and the websites
The streaming infrastructure consists of various local and wide area networks
capable of streaming and storing large amounts of audio and video files. We have
implemented networked environments for development, staging, and actual
broadcast to the public over the Internet. The system combines a sophisticated
network architecture to develop and deliver our content as well as an extensive
storage system to keep files to be streamed.
Recruiting technical and broadcast production talent
The area of streaming video and audio over the Internet is new and complex.
There is an extremely limited pool of talent available with expertise in this
field. We have spent a great deal of time recruiting and interviewing talent for
these positions. We have had success in attracting and retaining individuals
with the necessary talents and experience. We have approximately 30 employees
the majority of which are Network Producers, Video Editing Technicians, Digital
Asset Technicians, Web Designers, Web Developers, Programmers, and LAN and
Database Administrators.
<PAGE>
Developing and refining our business model
We have devoted time to refining our business model prior to commencing actual
operations. Our business model has been built around multiple lines of product
and services with multiple revenue sources. We originally contemplated four
business lines, which have since been consolidated into two main revenue
divisions built around the types of clients that each division services. The
Streamedia Networks target the Internet users and our Business Services division
is aimed at corporate clients.
Establishing a network of industry partners
The Internet industry has been built around establishing partnering arrangements
with competitors and collaborators alike. In furtherance of our plan and
objectives, we have established partnering arrangements with Real Networks,
Inc., Real Media, Inc., EMC2 , Inc., Virage, Inc., Vignette, Inc., Screaming
Media, Inc., Accrue Software, Inc., COMTEX Scientific Corp., Intraware, Inc.,
Video Corporation of America, Inc., and Waterfront Communications.
Planning and developing of the Streamedia Networks
The Streamedia Networks are the showcase of our abilities in webcasting,
streaming audio and video, and website design and development. We have
evaluated, acquired, and installed hardware and software associated with the
development of the Networks including ad servers, syndication servers, database
servers, multimedia delivery, Internet broadcasting, online content syndication,
media asset management, online advertising and customer management.
We have incurred net losses in each fiscal period since our inception and, as of
December 31, 1999, had an accumulated deficit of $4,081,671. To date, we have
not generated any revenues and have therefore been unable to absorb our
operating expenses, and, as a result of the significant expenditures we plan to
make as described above, we expect to continue to incur significant operating
losses and negative cash flows from operations for the foreseeable future.
PLAN OF OPERATIONS
We have developed numerous business strategies that we plan to implement during
the coming twelve months. These include adding substantially to our library of
broadcast content and data feeds; enhancing our ability to deliver audio and
video to large numbers of concurrent listeners and viewers, who may be attuned
to dozens or even hundreds of different programming clips; and continuing to
develop and incrementally launch our series of multimedia portals (the
Streamedia Networks and StreamWire), and strengthening a `syndication,' or
content distribution, program.
To accomplish these objectives, we need to:
o Make substantial investments in capital equipment, such as web servers,
storage devices, and other specialized computer and communications
equipment,
<PAGE>
o Contract for sufficient bandwidth,
o Devise a powerful internet infrastructure, and
o Hire or otherwise contract with highly specialized personnel to
develop, configure, administer, and operate our sites, broadcast
equipment and infrastructure.
To date, we have launched four Streamedia Networks. We have also launched our
StreamWire service as a compliment to our networks. We plan to launch, over
time, websites at as many as possible of the over 300 registered Internet
addresses we currently own, and additional domains we may purchase. We further
plan to expand StreamWire as a component of the Streamedia Networks, and
subsequently develop these print resources more fully. Should we fail to launch
additional sites, or to develop or acquire sufficient content for those we do
launch, we might not be successful in attracting viewers and listeners, without
which our business would be impaired. Should we encounter difficulty in hiring
appropriately skilled personnel, our site launches may be delayed, further
impairing our business.
While we are building and subsequently launching Network and Channel sites, we
will be purchasing, or otherwise producing or acquiring, audio and video
content. Such content needs to be prepared for delivery via a process known as
encoding. The encoding process is required to prepare the content for streaming,
or broadcasting, over the Internet.
We plan to acquire additional content in the foreseeable future. Current
industry conditions render it difficult to secure `exclusive' rights to numerous
classes of content suitable for broadcasting over the Internet. To the extent to
which we cannot capture exclusive broadcast rights, we will be in competition
with other websites attempting to attract audiences by offering some of the same
programming.
We also expect to initiate a broadcast enabling, or "StreamStation(TM)"
affiliate program. Like network television broadcasters, we plan to distribute
both proprietary and licensed programming from numerous sources. We plan to
supply other websites with programming we have the rights to distribute. We
expect to begin such syndication during the first half of 2000. We believe such
syndication could provide us with a substantial number of extra distribution
outlets, which may generate increased advertising revenues, and raise our
stature in the industry. Should we encounter difficulties in attracting further
distribution outlets for our programming, our business may be impaired.
We expect that any rise in our industry stature, such as by launching a series
of successful sites, selling business to business services, and supplying third
party sites with programming, will assist us to further market business to
business webcast services, and thereby proportionately increase our revenue. We
expect expenditures to rise in proportion to each phase of our build out. While
we anticipate increased revenues concurrent with the build out, delays in
product development or the institution of marketing programs could result in the
risk of prolonged absence of revenues, profits or working capital.
<PAGE>
Recent Developments
We are in the early stages of our transition to an operating Company. During
1999, we were engaged in developing the plans for our Network and Channel design
and structure; identifying staffing requirements and interviewing prospective
employees in sales, marketing, traditional broadcasting, editorial, design, and
technology; devising a media strategy and evaluating media relations firms;
reviewing potential acquisitions in such areas as multimedia production, web
hosting services, and original content generation; and establishing
relationships for studios, bandwidth and broadcast content, as well as
information, news and data feeds.
We leased office space in midtown Manhattan. During the second quarter of 1999,
we installed fiber optic cable linking us to the largest broadcast signal
switching hub in Manhattan. This hub serves all of the major cable and
television networks in the New York area as well as special venues such as local
sports arenas, convention centers, and the Stock Exchanges. Our facilities have
low-mileage, diverse digital fiber connectivity to multiple broadcast switching
hubs and major metropolitan New York broadcast teleports, connections we believe
will present us with unique broadcast marketing opportunities. This is due, in
part, to our proximity to these key infrastructure elements, as it simplifies
our ability to utilize them, and reduces the costs of doing so.
To assist us as we position to become a leader in the streaming content delivery
industry, and syndication via the internet as well as traditional broadcast
outlets, we recruited two key players in the advancement of the cable industry
to our Board of Directors. Both were elected during 1999. We believe these
Directors, their expertise, and industry contacts will give us an advantage over
our competitors in the acquisition of quality content, as well as in our ability
to distribute live broadcast signals from a variety of sources worldwide.
LIQUIDITY AND CAPITAL REQUIRMENTS
We have financed our operations primarily through sales of equity securities and
the private placement of debt instruments. Through December 31, 1999, we raised
approximately $12.5 million from the sale of common stock and the placement of
debt (before underwriting discounts and offering costs). Upon the completion of
our IPO, we repaid $1,878,125 in debt and interest. At December 31, 1999, our
principal source of liquidity was $6.7 million of cash and cash equivalents in
money market accounts.
Streamedia has had significant negative cash flows from operating activities
since inception. Cash used in operating activities was $1,186,180 for 1999, and
$2,473 for 1998.
Cash used in investing activities was $944,664 for 1999, primarily representing
capital expenditures for equipment, software and furniture and fixtures. Cash
used in the purchase of fixed assets for 1998 was $1,802.
Cash provided by financing activities was $8,814,257 for 1999 and $5,500 for
1998. In 1999, the cash provided by financing activities was primarily from the
$8,446,777 million received in net proceeds from the
<PAGE>
sale of Units in a public offering completed on December 27, 1999, and
$1,583,500 in net proceeds from issuance of debt in August 1999, and $523,980 in
proceeds from the issuance of common stock in May 1999. We repaid the debt of
$1,815,000 in December 1999 from the proceeds of the Offering. In 1998, cash
provided by financing activities was $5,500 from the issuance of common stock of
the Company.
We believe that to accomplish our business objectives we will have to continue
to expand our operations. In order to accomplish such expansion additional
funding will be required. However, in the absence of this additional funding, we
believe that by scaling back our planned expansion and reducing costs, through
reduction of our planned sales, marketing and advertising budgets, and if
necessary, reduction of payroll expenses our existing cash and cash equivalents
will be sufficient to meet our working capital and capital expenditure
requirements through at least the end of 2000. Thereafter, if cash generated by
operations is insufficient to satisfy our liquidity requirements, we may need to
sell additional equity or debt securities to continue as a going concern.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Index of Financial Statements which appears on page F-1
of this report. The Report of Independent Certified Public Accountants,
Financial Statements and Notes to Financial Statements which are listed in the
Index to Financial Statements and which appear beginning on page F-1 of this
report are incorporated into this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have not had any disagreements on accounting and financial disclosures with
our accounting firm during the reporting period or during the preparation of our
audited financial statements for the year ending December 31, 1999.
PART III
ITEM 9. DIRECTORS AND EXECTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLAINCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our current directors and executive officers, who will serve until the next
annual meeting, or until their successors are elected or appointed and
qualified.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NAME AGE DIRECTOR SINCE POSITION
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gayle Essary 59 1998 Chairman of the Board, Vice President
- ------------------------------------------------------------------------------------------------------------
James Rupp 38 1998 Director, President, Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------
Nicholas Malino 49 1998 Director, Executive Vice President, Chief Operating
Officer, Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------
Henry Siegel 56 1999 Director
- ------------------------------------------------------------------------------------------------------------
Robert Wussler 60 1999 Director
- ------------------------------------------------------------------------------------------------------------
David Simonetti 30 1999 Director
- ------------------------------------------------------------------------------------------------------------
Robert A. Shuey, III 45 2000 Director
- ------------------------------------------------------------------------------------------------------------
James Schroeder 50 2000 Director
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Gayle Essary is one of the founders of Streamedia and has served as Chairman of
the Board of Directors and Vice President-Strategic Development since its
inception. From September 1996 to the present, Mr. Essary has served as Chairman
of the Board of Directors of IRI, Inc. a publicly held company in the investment
data and information industry. He has also served as IRI's Chief Executive
Officer from July 1997 to the present. From 1995 to 1997, Mr. Essary was founder
and publisher of StreetLevel, the Waaco Kid's Forum newsletters, and other
electronic products which have since merged into Capital Markets Communications
Corporation. From 1988 to 1997, Mr. Essary was a Principal of New York
Management Group, which provided consulting and support services to various
firms and organizations, including The Thomson Corporation. From 1981 to 1988,
Mr. Essary was Managing Director of the Media Financial Group and The Media
Center, both companies engaged in consulting for media properties. From 1973 to
1980, Mr. Essary was President of ESCO Publishing Co., Inc., and Huthig-ESCO
Publishing, Inc., which published two international dental business magazines,
one of which led its field in distribution and advertising revenues. Mr. Essary
studied journalism at The University of Texas.
James D. Rupp is one of the founders of Streamedia and has served as Chief
Executive Officer, President and Director since Streamedia's inception. From
July 1997 to September 1998, Mr. Rupp served as President, Chairman and Chief
Executive Officer of Capital Markets Communications Corporation, an editor and
publisher of a series of electronic newsletters, including StreetSignals(TM),
TradeSignals(TM), PowerSignals(TM), AmexWire(TM), and the Waaco Kid's Forum(TM).
Mr. Rupp continues as Capital Markets' Chairman. Mr. Rupp organized
Web2Ventures, L.L.C., a company formed in February, 1998 to incubate,
capitalize, and invest in emerging Internet firms. Since its inception, Mr. Rupp
has served as the Manager of Web2Ventures. From 1990 to 1996, Mr. Rupp served as
General Manager of a restaurant management concern in New York City. Mr. Rupp
holds a Bachelor of Arts degree from the State University of New York at
Binghamton and has pursued graduate studies in information sciences and
literature at the Universities of Delaware and Maryland.
<PAGE>
Nicholas Malino has served on the Board of Directors since 1998 and as
Streamedia's Chief Financial Officer since November of 1998 and as Executive
Vice President and Chief Operating Officer since August of 1999. Previously, he
served as President and Chief Executive Officer of ATC Group Services, Inc., a
$160 million national business services firm, providing specialized technical
and project management services to Fortune 500 companies and federal, state, and
local government agencies. During his tenure, he completed 16 acquisitions,
ranging in size from $1 million to $85 million in gross revenues, during which
time the company achieved the second highest price/earnings ratio in its sector.
ATC Group Services also led its sector in profitability for twelve consecutive
quarters. Mr. Malino has both a Masters of Business Administration degree in
Finance, and Master and Bachelor of Science degree in Biology from the
University of Bridgeport.
Henry Siegel has served as a Director of Streamedia since February of 1999. From
1995 to the present, Mr. Siegel has been the Chairman and Chief Executive
Officer of Kaleidoscope Media Group, a publicly held company. Kaleidoscope is a
worldwide distributor of television and home video programming including the
ESPY Awards Show. Mr. Siegel began his career at Grey Advertising and in 1974 he
was placed in charge of its media operation, managing all areas of media
planning, research and execution. In 1976, Mr. Siegel founded Lexington
Broadcasting Services (LBS), where he pioneered the concept of barter
syndication (advertiser-supported television). As Chairman and Chief Executive
Officer of LBS, Mr. Siegel developed numerous successful television series,
including Fame and Baywatch. Mr. Siegel has been named by Advertising Age
Magazine as one of the pioneers of the first 50 years of television.
Robert J. Wussler has served as a Director of Streamedia since February of 1999.
Mr. Wussler is the Chairman of the Board of Directors of US Digital
Communications, Inc., a publicly held company. From 1992 to the present, he has
served as the President and Chief Executive Officer of the Wussler Group, a
media-consulting firm. From 1994 to the present, Mr. Wussler has served as the
President and Chief Executive Officer of Affiliate Enterprises, Inc., a company
formed by ABC Television affiliates to pursue new business opportunities,
including emerging technology applications. From 1989 to 1992, Mr. Wussler was
the President and CEO of COMSAT Video Enterprises, a major supplier of satellite
entertainment to the nation's lodging industry. Between 1980 and 1989, Mr.
Wussler served as Senior Vice President, Corporate Executive Vice President, and
President of Turner Broadcasting's Superstation, WTBS. During his 10 years at
Turner, Mr. Wussler co-founded and organized CNN Headline News, and became a key
player in the development of WTBS and the formation of TNT. Prior to joining
Turner, Mr. Wussler served as President of CBS Sports and the CBS Television
Network. Mr. Wussler is a past Chairman of the National Academy of Television
Arts and Sciences, and recipient of five Emmy Awards. Mr. Wussler also serves on
the Board of Directors of Ednet, Inc., a publicly held company which develops
and markets integrated digital communications systems for the entertainment
industry, and the Board of Directors of The Cousteau Society.
David J. Simonetti has served as a Director of Streamedia since September of
1998. Since October of 1998, Mr. Simonetti has served as Co-Chairman and Chief
Executive Officer of VentureNow, Inc., a private venture capital concern. From
August 1997 to December 1998, Mr. Simonetti was Chief
<PAGE>
Executive Officer of Invoke Distribution, L.L.C., a marketing and advertising
company. From February 1997 to October 1998, Mr. Simonetti was Chief Executive
Officer of Projix Corporation, an Internet software company. From October 1994
through February 1997, Mr. Simonetti served as Vice President and Chief
Operating Officer of Edmar, Inc., a construction management company. Mr.
Simonetti also serves on the Board of Directors of NuOncology Labs, Inc., a
publicly-held company. Mr. Simonetti holds a Bachelor of Arts degree from
Marlboro College, in Marlboro, Vermont.
Robert A. Shuey, III has served as a director of Streamedia since January 2000.
Mr. Shuey is the Chief Executive Officer and a Managing Director of Investment
Banking for Institutional Equity. In September 1997, he founded Tejas Securities
Group, a securities broker/dealer headquartered in Dallas, Texas, and served as
a managing director and CEO until August 1998. From June 1996 to September 1997,
Mr. Shuey was a vice president of investment banking at National Securities (a
broker/dealer), and prior to that he was associated with various securities
broker/dealers. He is a member of the Board of Director of Institutional Equity
Corporation, Autobond Acceptance Corporation, Westower Corporation, and
Transnational Finance Corporation. Mr. Shuey is a graduate of Babson College
with a Degree in Economics and Finance.
James W. Schroeder has served as a member of the Board since January 2000 and
prior to that as Advisor to the Board of Directors of Streamedia since March
1999. Since 1984, Mr. Schroeder has been Vice President-Tax, Thomson U.S.
Holdings Inc. - the U.S. subsidiary of the Thomson Corporation, an E-commerce
and solutions company. Prior to joining The Thomson Corporation, he was Vice
President-Tax for BBDO, Inc., now Omnicom, Inc., where he started the company's
worldwide tax department and was Tax Supervisor for the Celanese Corp., now
Hoescht-Celanese, and Tax Analyst for Chase Manhattan Bank, NA. Mr. Schroeder is
a member of the New York Chapter of the Tax Executives Institute, Chair of the
Electronic Publishing subcommittee of the Media Tax Group, Chair of its
delegation to the NTA Electronic Commerce and Telecommunications Project and a
member of the International Tax Foundation, International Fiscal Association,
Foreign Owned Group, Stamford Tax Association and the Newspaper Association of
America. Mr. Schroeder obtained his MBA from Pace University and his Bachelor's
Degree from the State University of New York at Albany.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are aware that certain of our officers and directors are delinquent in their
filing of reports required by section 16(a) of the Exchange Act during the most
recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this Item is included is included in the in the section
entitled "Executive Compensation" contained in our Proxy Statement which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the 1999 fiscal year and is incorporated by reference into this
Item 10.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Information required by this Item is included is included in the in the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in our Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
1999 fiscal year and is incorporated by reference into this Item 11.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is included is included in the section
entitled "Certain Relationships and Related Transactions" contained in our Proxy
Statement which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the 1999 fiscal year and is incorporated
by reference into this Item 12.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
*3.1 Articles of Incorporation
*3.2 Amended and Restated by-laws
27 Financial Data Schedule
* Incorporated by reference to our Registration Statement on Form SB-2,
Registration No. 333-78591, as amended, on file with the Commission on
December 20, 1999.
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the last quarter of 1999.
(c) Index to Financial Statements
Page
Report of Independent Certified Public Accountants
Financial Statements F-1
Balance Sheet as of December 31, 1999 and 1998 F-2
Statement of Operations For years ended December 31, 1999
The period from Inception (April 29, 1998) through
December 31, 1998 and Cumulative from Inception (April
29, 1998) through December 31, 1999 F-3
<PAGE>
Statement of Shareholder's Equity (Deficit) For the
Period from Inception (April 29, 1998) through
December 31, 1998 and the Year ended December 31, 1999 F-4
Statement of Operations-For years ended December 31, 1999
The period from Inception (April 29, 1998) through
December 31, 1998 and Cumulative from Inception
(April 29, 1998) through December 31, 1999
Statement of Cash Flows for the Year ended December 31,
1999 The period from Inception (April 29, 1998) through
December 31, 1998 and Cumulative from Inception (April
29, 1998) through December 31, 1999 F-5
Notes to Financial Statements F-6
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has caused this Report to be signed on behalf
by the undersigned, thereunto duly authorized.
Streamedia Communications, Inc.
Date: March 29, 2000 By: /s/ James Rupp
--------------
James Rupp
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
is signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
MUST BE SIGNED BY EACH BY EACH MEMBER OF THE BOARD AND ITS PRINCIPAL EXECUTIVE
OFFICER, ITS CONTROLLER OR PRINCIPAL ACCOUNTING OFFICER IF ANY AND ITS PRINCIPAL
FINANCIAL OFFICER.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ James Rupp President and March 29, 2000
- ------------------------ CEO
James Rupp
/s/ Gayle Essary Chairman of the Board, VP March 29, 2000
- ------------------------
Gayle Essary
/s/ Nicholas Malino COO, CFO, Director March 29, 2000
- ------------------------
Nicholas Malino
/s/ Henry Siegel Director March 29, 2000
- ------------------------
Henry Siegel
/s/ Robert Wussler Director March 29, 2000
- ------------------------
Robert Wussler
/s/ David Simonetti Director March 29, 2000
- ------------------------
David Simonetti
/s/ Robert A. Shuey, III Director March 29, 2000
- ------------------------
Robert A. Shuey, III
/s/ James Schroeder Director March 29, 2000
- ------------------------
James Schroeder
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheets as of December 31, 1999 and 1998 F-2
Statements of Operations for the Year ended December 31, 1999, the period
from Inception (April 29, 1998) through December 31, 1998
and Cumulative from Inception (April 29, 1998) through December 31, 1999 F-3
Statement of Stockholders' Equity (Deficit) for the Period from Inception
(April 29, 1998) through December 31, 1998 and the Year ended
December 31, 1999 F-4
Statements of Cash Flows for the Year ended December 31, 1999, the period
from Inception (April 29, 1998) through December 31, 1998
and Cumulative from Inception (April 29, 1998) through December 31, 1999 F-5
Notes to Financial Statements F-6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Streamedia Communications, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheets of Streamedia Communications,
Inc. (the "Company") (a development stage company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the year ended December 31, 1999, the period from inception
(April 29, 1998) through December 31, 1998 and the cumulative period from
inception (April 29, 1998) through December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Streamedia Communications, Inc.
(a development stage company) as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for the year ended December 31, 1999, the
period from inception (April 29, 1998) through December 31, 1998 and the
cumulative period from inception (April 29, 1998) through December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in providing Internet-based media programming and content on
the Web. To date, the Company has engaged in organizational and pre-operating
activities and needs to secure additional capital and customers to continue
operations. As discussed in Notes A and B to the financial statements, the
Company's existence is dependent upon its ability to obtain additional capital,
among other things, which raises substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note A. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
GRANT THORNTON LLP
Melville, New York
March 24, 2000
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,684,638 $ 1,225
Licenses, net of accumulated amortization of $79,000 368,863
Prepaid expenses 138,250
----------
Total current assets 7,191,751 1,225
PROPERTY AND EQUIPMENT
Computer equipment and software 706,817 1,802
Software development costs 150,513
Leasehold improvements 127,352
Furniture and fixtures 17,758
----------
1,002,440 1,802
Less accumulated depreciation and amortization (157,986) (602)
----------- ----------
844,454 1,200
DEFERRED OFFERING COSTS 75,000
----------- ----------
$ 8,036,205 $ 77,425
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of capital lease obligations $ 31,740
Accounts payable and accrued expenses 411,021 $ 4,185
Accrued license fees 436,941
Accrued software costs 304,519
Accrued payroll and bonus 137,747 59,000
Accrued offering costs 64,500 25,000
Accrued professional fees 43,623 12,000
Accrued consulting fees 132,144 38,500
----------- ----------
Total current liabilities 1,562,235 138,685
CAPITALIZED LEASE OBLIGATIONS, less current maturities 24,234
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized - 100,000
shares; none issued and outstanding - -
Common stock, $.001 par value; authorized - 20,000,000 shares;
issued and outstanding - 4,495,490 and 3,025,000 shares at
December 31, 1999 and 1998, respectively 4,496 3,025
Additional paid-in capital 10,526,911 232,475
Deficit accumulated during development stage (4,081,671) (296,760)
----------- ----------
Total stockholders' equity (deficit) 6,449,736 (61,260)
----------- ----------
$ 8,036,205 $ 77,425
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Cumulative
April 29, 1998 from April 29,
Year ended (date of inception) 1998 (date of
December 31, to December 31, inception) to
1999 1998 December 31, 1999
------------------ ------------------ -----------------
<S> <C> <C> <C>
Revenue $ - $ - $ -
----------- ---------- -----------
Operating expenses
Payroll and related expenses 1,096,336 239,000 1,335,336
Product development 461,717 461,717
General and administrative 1,639,485 57,760 1,697,245
----------- ---------- -----------
Total operating expenses 3,197,538 296,760 3,494,298
----------- ---------- -----------
Operating loss (3,197,538) (296,760) (3,494,298)
Other income (expense)
Interest expense (591,991) (591,991)
Interest income 4,618 - 4,618
----------- ---------- -----------
Total other expense (587,373) - (587,373)
----------- ---------- ------------
Net loss $(3,784,911) $ (296,760) $(4,081,671)
=========== ========== ===========
Basic and diluted loss per common share $(1.15) $(.10) $(1.30)
====== ==== =====
Weighted average shares outstanding, basic and
diluted 3,303,632 2,922,409 3,150,295
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred stock Common stock
Shares Amount Shares Amount
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Issuance of common stock $ - 2,910,000 $2,910
Issuance of common stock for services 115,000 115
Net loss for the period
--------- -------- --------- -------
Balance at December 31, 1998 - - 3,025,000 3,025
Issuance of common stock, net of
associated costs 264,490 265
Issuance of common stock for services 6,000 6
Grant of common stock options for
services
Compensatory stock option expense
Issuance of common stock warrants
Issuance of common stock in initial public offering,
net of underwriting discount and offering
expenses of $1,753,500 1,200,000 1,200
Net loss for the year
--------- -------- --------- -------
Balance at December 31, 1999 - $ - 4,495,490 $4,496
========= ======== ========= =======
</TABLE>
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during
paid-in development
capital stage Total
---------- ------------ ----------
<S> <C> <C> <C>
Issuance of common stock $ 2,590 $ 5,500
Issuance of common stock for services 229,885 230,000
Net loss for the period $ (296,760) (296,760)
----------- ----------- -----------
Balance at December 31, 1998 232,475 (296,760) (61,260)
Issuance of common stock, net of
associated costs 523,715 523,980
Issuance of common stock for services 11,994 12,000
Grant of common stock options for
services 834,650 834,650
Compensatory stock option expense 206,250 206,250
Issuance of common stock warrants 272,250 272,250
Issuance of common stock in initial public offering,
net of underwriting discount and offering
expenses of $1,753,500 8,445,577 8,446,777
Net loss for the year (3,784,911) (3,784,911)
----------- ----------- ----------
Balance at December 31, 1999 $10,526,911 $(4,081,671) $(6,449,736)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Cumulative
April 29, 1998 from April 29,
Year ended (date of inception) 1998 (date of
December 31, to December 31, inception) to
1999 1998 December 31, 1999
----------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(3,784,911) $(296,760) $(4,081,671)
Adjustments to reconcile net loss to net cash used in
operating activities
Common stock issued for services 12,000 180,000 192,000
Stock option granted for services 834,650 834,650
Compensatory stock option expense 206,250 206,250
Amortization of debt discount 272,250 272,250
Amortization and write-off of deferred financing costs 231,500 231,500
Depreciation and amortization 236,446 602 237,048
Changes in operating assets and liabilities
Other current assets (586,175) (586,175)
Accounts payable and accrued expenses 406,836 4,185 411,021
Accrued license fees 436,941 436,941
Accrued software costs 304,519 304,519
Accrued payroll and bonus 78,747 59,000 137,747
Accrued offering costs 39,500 39,500
Accrued professional fees 31,623 12,000 43,623
Accrued consulting fees 93,644 38,500 132,144
----------- --------- -----------
Net cash used in operating activities (1,186,180) (2,473) (1,188,653)
----------- --------- -----------
Cash flows from investing activities
Purchase of property and equipment (944,664) (1,802) (946,466)
----------- --------- -----------
Net cash used in investing activities (944,664) (1,802) (946,466)
----------- --------- -----------
Cash flows from financing activities
Issuance of common stock, net of associated costs 523,980 5,500 529,480
Issuance of common stock in Offering, net of associated
costs 8,446,777 8,446,777
Proceeds of notes payable and common stock warrants, net of
associated costs 1,583,500 1,583,500
Repayments of notes payable (1,815,000) (1,815,000)
Deferred offering costs 75,000 75,000
----------- --------- -----------
Net cash provided by financing activities 8,814,257 5,500 8,819,757
----------- ---------- -----------
Net increase in cash 6,683,413 1,225 6,684,638
Cash at beginning of period 1,225 - 1,225
----------- --------- -----------
Cash at end of period $ 6,684,638 $ 1,225 $ 6,685,863
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Streamedia Communications, Inc. (the "Company") was incorporated in the
State of Delaware and is positioning itself as a vertically-integrated New
Media content generator, enabler and aggregator. The Company's two
divisions are The Streamedia Networks and Business Services. In December
1999, the Company completed its initial public offering (the "Offering").
The net proceeds from the Offering were approximately $8,447,000.
The Company is in the development stage. The Streamedia Networks consist of
a suite of topical broadcast networks to deliver or "stream" live and
on-demand audio and video programming. The Streamedia Networks sites intend
to offer programming in areas such as, but not limited to, business,
sports, women's issues, parenting, travel, education, religion, politics,
health, teen and children's interests, shopping, real estate, music,
technology, personal fitness, movies, entertainment and lifestyles. The
Company has chosen "Crime Broadcast", "Sports Style", "Motion Arts" and
"Women on the Edge" as its initial network launches. The Streamedia
Networks will include StreamWire(TM), which will consist of a series of
focused, subject-oriented, edited news and information products, such as
wires devoted to NASDAQ or Amex-listed companies.
The Streamedia Business Services division will market Internet and intranet
broadcasting services to a wide spectrum of enterprises, such as, but not
limited to, businesses, associations, electronic publishers and "off-line"
media generators, who are attempting to obtain an Internet broadcast
presence. The division will attempt to deliver multimedia and text through
a variety of push, poll and proprietary electronic mail mechanisms.
The Company's operations are subject to certain risks and uncertainties,
including actual and potential competition by entities with greater
financial resources, experience and market presence, risks associated with
the development of the Internet market, risks associated with consolidation
in the industry, the need to manage growth and expansion, certain
technology and regulatory risks and dependence upon sole and limited
suppliers.
F-6
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE A (continued)
Basis of Presentation
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern which assumes the realization
of assets and settlement of liabilities in the normal course of business.
Since its inception, the Company has been engaged in organizational and
pre-operating activities. Further, the Company has generated no revenues
and incurred losses. Continuation of the Company's existence is dependent
upon its ability to obtain additional capital, secure and execute strategic
alliances to develop news and information content and sustain profitable
operations. The uncertainty related to these conditions raises substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting
policies:
Revenue Recognition
Revenue generated from video encoding services will be recognized as the
service is provided and revenue from video distribution services will be
recognized at the time of delivery. Revenue generated from broadcast
hosting services and the sale of customer support services will be
recognized as the services are provided. Revenues collected in advance will
be deferred and recognized as earned. To date, the Company has not
generated any revenues.
Licenses
Costs associated with software licensed from vendors are capitalized and
amortized over the term of the licenses, generally one to two years.
F-7
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE B (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the underlying lease. Estimated useful lives by
class of assets are as follows:
Computer equipment and software 3 years
Software development costs 3 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of useful life or lease term
The Company assesses the recoverability of long-lived assets periodically.
If there is an indication of impairment of such assets, the amount of
impairment, if any, is charged to operations in the period in which
impairment is determined.
Software Development Costs
Software developed for internal use is capitalized or expensed in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This standard
requires companies to capitalize qualifying computer software costs
incurred during the application development stage and amortize them over
the software's useful life (three years). Costs incurred in the preliminary
project stage and for application maintenance are expensed. As of December
31, 1999, the Company capitalized $150,513 of development costs related to
internal use software. Accumulated amortization aggregates approximately
$12,500 at December 31, 1999.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash,
accounts payable and accrued expenses, approximate their fair value due to
their relatively short maturities.
F-8
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE B (continued)
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provision of APB No. 25 "Accounting for Stock Issued to
Employees," and its related Interpretations and complies with disclosure
provision of SFAS No. 123, "Accounting for Stock-Based Compensation". The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123.
Income Taxes
The Company records income taxes using the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial reporting basis and tax basis of assets and liabilities. A
valuation allowance is recognized to the extent a portion or all of a
deferred tax asset may not be considered realizable.
Deferred Offering Costs
Costs incurred in connection with the Offering were deferred until the
transaction was consummated in December 1999.
Loss Per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under SFAS No. 128 and SAB 98, basic net loss per share is
computed by dividing net income (loss) by the weighted-average number of
common shares outstanding for the period. It also requires a reconciliation
of the numerator and denominator of the basic net loss per share to the
numerator and denominator of the diluted net loss per share. As of December
31, 1999, the calculation of diluted net loss per share excludes an
aggregate of 1,800,000 shares of common stock issuable upon exercise of
warrants and employee stock options, as the effect of such shares would be
anti-dilutive for all periods presented.
F-9
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE B (continued)
Statements of Cash Flows
The Company considers all investment instruments with an original maturity
of three months or less to be the equivalent of cash for purposes of
balance sheet presentation and for the statements of cash flows. The
Company paid interest and income taxes of $63,125 and $680 respectively
during the year ended December 31, 1999. During 1999, the Company acquired
approximately $56,000 of computer equipment under a capital lease.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the revenues and expenses during the reporting
period. Actual results may differ from those estimates.
Risks and Uncertainties
The Company is in the development stage. Since its inception, the Company
has been engaged in organizational and pre-operating activities. Further,
the Company has generated no revenues and incurred losses. The Company
continues to be subject to various risks, including the need for additional
financing, dependence on key personnel and the establishment of its
operations as a viable business model. Furthermore, the Company is subject
to the risks and uncertainties associated with Internet commerce.
If the Company does not receive additional funding during the year ending
December 31, 2000, it believes that scaling back on planned expansion and
reducing costs will be sufficient to meet working capital and capital
expenditure requirements through such date. Thereafter, if cash generated
by operations is insufficient to satisfy the Company's liquidity
requirements, it may need to sell additional equity or debt securities to
continue as a going concern.
F-10
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C - STOCKHOLDERS' EQUITY (DEFICIT)
Initial Public Offering
On December 27, 1999, the Company completed its Offering, which consisted
of 1,200,000 units, each unit consisting of one share of common stock and
one redeemable warrant, at an offering price of $8.50 per unit. Each
redeemable warrant entitles the holder to purchase one share of common
stock at $12.75 per share, at any time from issuance until December 21,
2004. Such warrants are redeemable by the Company, with the prior written
consent of the underwriter, at a redemption price of $.05 commencing May
17, 2000 provided that the closing price of the common stock is at least
$12.75 per share for 10 (ten) consecutive trading days. In addition, there
was an overallotment option for 180,000 units, of which 40,000 units were
exercised by the underwriter in January 2000, for net aggregate proceeds of
approximately $306,000.
Private Placement
In connection with the Company's Private Placement, the Company sold during
the year ended December 31, 1999, 264,490 shares of its common stock for
net proceeds of $523,980.
Stock Option Plan
In June 1999, the Board of Directors approved the 1999 Incentive and
Nonstatutory Option Plan (the "1999 Plan") for officers, directors,
employees and consultants of the Company, for which the Company has
reserved an aggregate of 500,000 shares of common stock. In January 2000,
the Company's Board of Directors increased the aggregate number of common
shares available under the 1999 Plan to 1,000,000 shares which increase was
retroactive to December 22, 1999. Options granted under the 1999 Plan
(which includes option grants prior to the Plan's adoption) may be either
incentive stock options or non-qualified stock options. The term of any
option may be fixed by the Board of Directors but in no event shall exceed
ten years from the date of grant. Options granted to an employee of the
Company shall become exercisable over a period of no longer than five
years. The term for which options may be granted under the 1999 Plan
expires June 29, 2009.
F-11
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
In November 1999, the Company's Board of Directors granted stock options to
two employees to purchase 110,000 and 75,000 shares of common stock,
respectively, at an exercise price of $2.00 (a price below the estimated
fair market value of the Company's common stock of $7.50 on the date of
issuance) and $7.50 per share, respectively. The options issued at an
exercise price of $2.00 are contingent upon meeting certain performance
criteria, which is expected to commence during the year ending December 31,
2000. The Company will record compensation expense of $605,000 in the
periods in which the performance criteria are achieved. Accordingly, the
Company has not recorded any compensation charge to operations during the
year ended December 31, 1999 pertaining to such options.
In October 1999, the Company granted a consultant options to acquire
150,000 shares of common stock at an exercise price equal to the Offering
price. Pursuant to the consulting agreement, 132,500 options vest
immediately and the remaining 18,500 options vest ratably over one year
commencing November 14, 1999. On November 23, 1999, the Company modified
the consulting agreement to provide for (i) the cancellation of the options
to acquire 150,000 shares of the Company's common stock and (ii) the
reissuance of an equal number of options to be granted on December 22,
1999, the effective date of the Offering (which 130,000 options vested
immediately and the balance vested ratably over the next thirty days
following the effective date of the Offering), at an exercise price equal
to the Offering price. These options were valued at $763,500, based on the
Offering price of $8.50, which was recognized as a charge to operations
during the year ended December 31, 1999.
In August 1999, the Company's Board of Directors granted stock options to
an executive officer, directors and a consultant to purchase an aggregate
of 63,000 shares, 30,000 shares and 10,000 shares of common stock,
respectively, at an exercise price of $7.50 per share. For the year ended
December 31, 1999, the Company recorded a charge to operations of $50,900,
representing the estimated fair market value of the option granted to the
consultant using the Black-Scholes option pricing model.
F-12
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
In June 1999, the Company entered into an employment agreement with an
employee, which provides for an annual base salary of approximately $90,000
and is cancelable by either party upon written notice. In connection with
this agreement, the Company granted such employee an option to purchase
150,000 shares of common stock at an exercise price of $2.00 per share. The
option was granted at an exercise price below the fair market value of the
Company's common stock, resulting in aggregate total compensation of
$825,000, of which non-cash compensation of $206,250 was recorded for the
year ended December 31, 1999. In December 1999, this employment agreement
was terminated and no further compensation charge pertaining to his
unvested options will be recognized from the contract as the unvested
options were forfeited.
In March 1999, the Company issued an option to a consultant to purchase
15,000 shares of common stock, which vests immediately, at an exercise
price of $2.00 (the estimated fair market value of the Company's common
stock on the date of grant determined by reference to cash sales of common
stock to third parties through the Private Placement). For the year ended
December 31, 1999, the Company recorded a charge to operations of $20,250
representing the estimated fair market value of the option granted to the
consultant using the Black-Scholes option pricing model.
In February 1999, the Company issued options to directors to purchase
60,000 shares of common stock, which vest immediately, at an exercise price
of $2.00 (the estimated fair market value of the Company's common stock on
the date of grant determined by reference to cash sales of common stock to
third parties through the Private Placement).
F-13
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
Activity under the 1999 plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding options
---------------------------------------------------------
Weighted
Exercise Weighted average
Number price average remaining
Of per exercise contractual
shares share price life (years)
------ ----- ----- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 - - - -
Options granted 712,500 $2.00 - 7.50 $5.25 9.53
Options forfeited (112,500) $2.00 $2.00
--------
Balance at December 31, 1999 600,000 $2.00 - 7.50 $5.25 9.53
========
</TABLE>
Of the 600,000 outstanding options, 215,500 options were exercisable with a
weighted average exercise price of $4.63 per share and a weighted average
remaining contractual life of 8.85 years at December 31, 1999.
The Company accounts for its stock-based awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related Interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements granted at fair value. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share
for the year ended December 31, 1999 would have been increased to the pro
forma amounts indicated below:
Net loss
As reported (3,784,911)
Pro forma (4,581,681)
Basic and diluted loss per share
As reported (1.15)
Pro forma (1.39)
F-14
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE C (continued)
The fair value of the Company's stock-based awards was estimated using the
Black-Scholes option pricing model assuming no expected dividends and the
following weighted average assumptions for the year ended December 31,
1999: expected life of five years, expected volatility of 80% and a
risk-free interest rates ranging from 4.70% to 6.26%. The weighted average
fair value of options granted for the year ended December 31, 1999 was
$5.12.
Notes Payable
In August 1999, the Company issued a series of promissory notes to
investors bearing interest at the stated rate of 10% per annum for an
aggregate principal amount of $1,815,000. Each note was part of a unit
which consisted of (i) a $15,000 promissory note and (ii) a warrant to
purchase up to 9,000 shares of the Company's common stock. The Company
issued an aggregate of 121 warrants to these investors to purchase
1,089,000 shares in total of the Company's common stock at an exercise
price equal to the Offering price of $8.50. Each warrant may be exercised
twelve months after the closing date of the Offering or before July 31,
2004. Each note was payable in full the earlier of (i) July 31, 2002 or
(ii) on the effective date of the Offering. On December 27, 1999, the
Company repaid the aggregate principal of these notes plus accrued interest
from the net proceeds of the Offering. Financing costs incurred amounted to
$231,500 and was being amortized on a straight-line basis over the
three-year term of the notes. However, as a result of the Offering and
repayment of the notes, the Company recognized an interest charge in 1999
of approximately $206,000 for the write-off of the remaining unamortized
deferred costs.
In determining the fair value of the notes and warrants, the Company used
an effective interest rate of 15% based on the Company's estimated
borrowing rate. The resulting fair values of the notes and warrants at
issuance were $1,542,750 and $272,250, respectively. The carrying value of
the notes was being accreted to the face value of $1,815,000 using the
interest method over the three-year term of the notes. However, as a result
of the Offering and repayment of the notes, the Company recognized an
interest charge in 1999 of approximately $225,000 for the write-off of the
remaining unamortized deferred discount.
F-15
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE D - INCOME TAXES
No income tax benefit has been recognized for the periods ended December
31, 1999 and 1998 for pre-tax losses due to the uncertainty of realization
in future periods. A full valuation allowance has been provided as
management believes that it is more likely than not that the deferred tax
assets will not be realized. The provision for income taxes differed from
the amount computed using the Federal statutory rate as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Federal statutory rate $(1,286,870) (34.0) $(100,048) (34.0)
State income tax benefit, net of
Federal expense (448,758) (11.9) (35,311) (12.0)
Permanent differences 15,391 0.4 - -
Current year loss, for which no tax
benefit is available 1,720,237 45.5 135,359 46.0
----------- ------- --------- ------
$ - -% $ - -%
=========== ======= ========= ======
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss $738,905 $7,151
Start-up and organizational costs 460,000 -
Stock based compensation 561,614 82,800
Other 95,076 45,408
----------- ---------
1,855,595 135,359
Valuation allowance (1,855,595) (135,359)
----------- ---------
Net deferred tax assets - -
=========== =========
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $1,600,000, which expire from 2018 through 2019.
F-16
<PAGE>
Streamedia Communications, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1999 and 1998
NOTE E - RELATED PARTY TRANSACTION
In August 1999, the Company entered into a $40,000 one-year consulting
agreement with an entity in which the entity's chief executive officer is a
director of the Company.
NOTE F - COMMITMENTS AND CONTINGENCIES
Office Lease
In August 1999, the Company entered into a three-year, noncancelable office
lease agreement with monthly minimum payments of $7,000 and terminated its
then existing office lease agreement without any financial consequences to
the Company. A security deposit of $7,000 was required as a condition of
such lease. The minimum lease payments under the noncancelable lease is
summarized as follows:
2000 $ 84,000
2001 84,000
2002 49,000
---------
$ 217,000
=========
Employment Agreements
The Company maintains employment agreements with certain executive
officers. These agreements provide for monthly base salaries and benefits
(when annualized, aggregating $272,000 in executive compensation) and are
cancelable by either party upon written notice. In addition, the Company's
employment contracts contemplate the issuance of common stock and common
stock options to the executives based upon achievements to be established.
In connection with the successful completion of the Offering on December
27, 1999, the Company compensated its chief financial officer with a
$100,000 bonus which was charged to operations in 1999.
In June 1999, the Company's Board of Directors approved the amendment of
certain executive officer employment agreements. The amendments principally
increased aggregate annual compensation to $500,000.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 APR-29-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 6,684,638 1,225
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 507,113 1,225
<PP&E> 1,002,440 1,802
<DEPRECIATION> 157,986 602
<TOTAL-ASSETS> 8,036,205 77,425
<CURRENT-LIABILITIES> 1,562,235 139,685
<BONDS> 0 0
0 0
0 0
<COMMON> 4,496 3,025
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 8,036,205 77,425
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 3,197,538 296,760
<OTHER-EXPENSES> (4,618) 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 591,991 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,784,911) (296,760)
<EPS-BASIC> (1.15) (0.10)
<EPS-DILUTED> (1.15) (0.10)
</TABLE>
