<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-95833
PROSPECTUS
11,000,000 Shares
[LOGO OF IBEAM BROADCASTING]
COMMON STOCK
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iBEAM Broadcasting Corporation is offering 11,000,000 shares of its common
stock. This is our initial public offering and no public market currently
exists for our shares.
-----------
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "IBEM."
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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 7.
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PRICE $10 A SHARE
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions iBEAM
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................. $10.00 $.70 $9.30
Total................................. $110,000,000 $7,700,000 $102,300,000
</TABLE>
We have granted the underwriters the right to purchase up to an additional
1,650,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on May 23, 2000.
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MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
ROBERTSON STEPHENS
May 17, 2000.
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TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Financial Data............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business............................ 37
</TABLE>
<TABLE>
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Page
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<S> <C>
Management......................... 54
Certain Relationships and Related
Transactions...................... 68
Principal Stockholders............. 72
Description of Capital Stock....... 74
Shares Eligible for Future Sale.... 77
Underwriters....................... 79
Legal Matters...................... 82
Experts............................ 82
Where You Can Find More
Information....................... 82
Index to Financial Statements...... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus
is correct only as of the date of this prospectus, regardless of the time of
the delivery of this prospectus or any sale of these securities.
Until June 11, 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriter with respect to
their unsold allotments or subscriptions.
Our logo and certain titles and logos of our services are our trademarks.
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder. The terms iBEAM Broadcasting and iBEAM
are our service marks or trademarks that are registered or otherwise protected
under the laws of various jurisdictions.
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We were incorporated in Delaware in March 1998. Our principal executive
offices are located at 645 Almanor Avenue, Suite 100, Sunnyvale, CA 94086 and
our telephone number is (408) 523-1600. Our website is ibeam.com. The
information on the website is not a part of this prospectus.
<PAGE>
[GATEFOLD ARTWORK]
[Narrative description of graphic material that is omitted in electronically
filed document]
The following text is at the top of the page and spans the front cover foldout:
The HIGH-FIDELITY Internet Broadcast Network
The following text appears on the upper right side of the inside front cover:
Key Benefits of Our Network
. Clear Audio-Visual Broadcast
. Ability to Serve Large Audiences
. Low Cost Distribution
. Designed for Global Expansion
The middle of the inside front cover contains a graphic that depicts three
concentric circles superimposed over a map of the United States. Behind the map
looms a partially obscured globe.
The three circles have images superimposed on them which represent Hosting
Servers. The inside circle is labeled "Two Master Hosting Centers", the middle
circle is labeled "Four Regional Hosting Centers" and the outer circle is
labeled "Hosting Services at 65 End-User Access Points." There are five arrows
extending from the Hosting Services on the outer circle to computers which are
labeled "End-User".
The following text appears in the lower left side of the inside front cover:
Our approach of using a combination of land-line networks and satellite
broadcasting to deliver content to the edge of the Internet bypasses much of the
web congestion and improves the delivery of streaming audio-visual media and the
quality of the viewing and listening experience.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read this
entire prospectus, including the more detailed information and the financial
statements and related notes appearing elsewhere in this prospectus.
iBEAM BROADCASTING
We provide an Internet broadcast network that delivers streaming media to
large audiences of simultaneous users with viewing and listening quality that
can approach that of television and radio. Streaming is a media distribution
process that allows simultaneous broadcasting and playback of video and audio
content. Our network uses a combination of land-line networks and point-to-
multipoint satellite broadcasting, which is the use of satellite technology to
broadcast streaming content simultaneously to large, geographically dispersed
audiences. Our network is designed to broadcast directly to iBEAM servers
located at the edge of Internet, the Internet access point closest to the end
user. This improves the quality of the broadcast stream by avoiding Internet
congestion. Our network broadcasts to iBEAM servers located in the facilities
of Internet service providers, or ISPs, and other companies that host Internet
applications and services.
We provide a wide range of services to our content provider customers to
facilitate their use of streaming media on the Internet, including event
production and broadcasting services. To expand our service offerings to our
customers, we have acquired and developed software and interface tools that
enable us to broadcast high-fidelity video and audio streams integrated with e-
commerce links and functions. Our investment in servers at the edge of the
Internet will also allow for the development of new value-added services in the
future, such as pay-per-view event programming, advertising to targeted end
users and interactive Internet-based training.
The Internet was not designed to support the traffic load created by
broadcasting full-motion video or high-fidelity audio simultaneously to large
audiences. Users, however, are investing in high-speed Internet connections to
their homes and businesses, such as digital subscriber lines, or DSL, and cable
modems, to improve their viewing and listening quality and are increasing the
traffic load on the Internet causing web congestion and degradation of viewing
and listening quality. Despite these limitations, existing websites,
traditional media companies, new media companies and creators of new
applications, such as online education, are aggressively trying to attract and
retain Internet users by using greater amounts of streaming audio-visual
content. The Gartner Group projects that approximately 50% of websites will
include some streaming media by 2001, a five-fold increase from 1998. Our
approach of using a combination of land-line networks and satellite
broadcasting to deliver content directly to the edge of the Internet bypasses
much of the web congestion and improves the delivery of streaming audio-visual
media and the quality of the viewing and listening experience.
In April 2000, we acquired webcasts.com to add business-to-business
communications capabilities, such as online training and interactive trade
shows. Our combined technology allows users to view streaming content,
interactively obtain related data and transact online purchases. Our technology
runs with a variety of streaming media players, which are software applications
designed to run streaming media. Most Internet users can access our streamed
content regardless of their multimedia and browsing software so they do not
need to purchase special equipment. As of March 31, 2000, our network, which we
will continue to develop, is sufficient to support up to 300,000 simultaneous
Internet users accessing streams of data from the Internet at 20 kilobits
(20,000 bits) per second. We plan to expand our network to support 1,000,000
simultaneous Internet users at this rate by the end of 2000.
We commercially introduced our service in October 1999. We currently have
contracts to provide our services to over 100 content providers. We generate
revenue from our broadcasting services based on the volume of content stored or
delivered to end users and from our other services such as encoding and event
production
3
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based on hourly or fixed price billing. We derived 74% of our revenue from our
event-based on-stage services during 1999 and 25% of our revenue from these
services for the three months ended March 31, 2000.
As part of the build-out of our broadcasting network, we have agreements to
locate servers with over 90 ISPs, including America Online, the largest U.S.
Internet access provider, Excite@Home, an Internet cable access provider, and
Covad Communications and Northpoint, high-speed Internet access providers that
have developed networks with national reach. Our ability to provide content
providers with high quality, low-cost distribution of streaming video and audio
content is dependent on deployment of our servers in the facilities of ISPs. To
realize the benefits of these access agreements with ISPs we will need to
invest at least $15.0 million in capital equipment located at ISPs during 2000
and pay some ISPs fees ranging from 15 to 20% of the revenue we derive from
content delivered through their networks. We have agreed to make non-refundable
prepayments to ISPs in the amount of $5.5 million, of which $3.0 million has
been paid as of March 31, 2000. We do not generate any revenue from our
agreements with ISPs.
Business Strategy
Our goal is to become the leading provider of high-fidelity Internet
broadcast services by developing the world's largest, premier quality and most
cost efficient distributed streaming network. To this end, we are capitalizing
upon our innovative network architecture, proprietary technology and early
entry into the field of streaming media broadcasting to position ourselves as
the network of choice for reliable, high-fidelity Internet broadcasting. Our
strategy comprises the following initiatives:
. Expand our customer base by increasing our direct sales force and
engaging in business-to-business advertising;
. Offer cost savings to our customers based on the economic benefit of
broadcasting to large audiences;
. Introduce new services such as integrating streaming media with online
chat and purchasing capabilities which we will obtain through our
acquisition of webcasts.com;
. Pursue joint ventures that expand our global presence, such as iBEAM
Asia, and add new capabilities to our network; and
. Offer our streaming distribution technology to other network vendors to
create an industry standard.
Risk Factors
We are in an early stage of development, have a limited operating history
and have generated limited revenue to date. In addition, investors in our
common stock should consider the following:
. We had operating losses of $4.4 million in 1998, $30.2 million in 1999
and $21.7 million for the first quarter of 2000.
. We anticipate incurring substantial operating losses and negative cash
flow in the foreseeable future.
. Management and affiliates will beneficially own 37.8% of our outstanding
common stock after this offering.
. We had an accumulated deficit of $66.3 million as of March 31, 2000.
. We operate in a highly competitive industry.
. We will need to serve an increasing percentage of Internet users from
the edge of our network for our business strategy to succeed.
4
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THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ 11,000,000 shares
Common stock to be outstanding after this offering.. 106,216,408 shares
Use of proceeds..................................... For general corporate
purposes, including
working capital and
capital expenditures
Nasdaq National Market symbol....................... IBEM
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on 95,216,408 shares of common stock outstanding or deemed outstanding as
of March 31, 2000. This includes:
. 8,301,747 shares of common stock issuable upon the conversion of shares
of our series F preferred stock which were issued in exchange for
outstanding shares of webcasts.com capital stock in connection with the
webcasts.com acquisition;
. 1,000,000 shares of common stock issuable upon the conversion of our
series G preferred stock which will be issued to The Walt Disney Company
for $10.0 million at a per share price equal to the price to the public
in this offering; and
. 537,634 shares of common stock issuable upon the conversion of our
series H preferred stock which will be issued to Excite@Home for $5.0
million at a price equal to the price per share to the public in this
offering, less underwriting commissions and discounts.
This number excludes:
. 11,816,815 shares of common stock issuable upon the exercise of options
at a weighted average exercise price of $3.38 per share and 4,069,804
shares available for future grant under our 1998 stock option plan as of
March 31, 2000;
. 9,639,000 shares available for future grant under our 2000 stock option
plan and 688,500 shares available for future grant under our 2000
director option plan, each of which was adopted in April 2000;
. 671,932 shares of common stock issuable upon the exercise of
webcasts.com stock options assumed by us in connection with our
acquisition of webcasts.com at a weighted average exercise price of
$3.32 per share and up to an additional 1,253,205 shares of common stock
issuable if our webcasts.com division meets revenue targets in the
twelve months after the closing of the acquisition; and
. 1,949,987 shares of common stock issuable upon exercise and conversion
of outstanding preferred stock warrants as of March 31, 2000 at a
weighted average exercise price of $3.42 per share.
Unless otherwise indicated, all of the information in this prospectus:
. reflects the conversion of all outstanding and deemed outstanding shares
of preferred stock into 76,328,908 shares of common stock upon
completion of this offering;
. reflects a 3-for-1 stock split of our common stock effected in January
2000 and a 1.377-for-1 stock split of our common stock effected in April
2000; and
. assumes no exercise of the underwriters' over-allotment option.
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SUMMARY FINANCIAL DATA
The pro forma column in the statements of operations data below gives effect
to the acquisition of webcasts.com, Inc. as if the transaction had occurred on
January 1, 1999. As a result of this acquisition, our historical statements of
operations are not representative of the financial results to be expected for
future periods. See Unaudited Pro Forma Combined Financial Information included
elsewhere in this prospectus.
Weighted average shares used in computing the pro forma basic and diluted
net loss per share have been calculated assuming the conversion of all
outstanding shares of convertible preferred stock outstanding into common stock
as if the shares had converted immediately upon issuance.
The pro forma column in the balance sheet data below gives effect to (i) the
conversion of all outstanding shares of our redeemable convertible preferred
stock outstanding as of March 31, 2000 into 66,489,527 shares of common stock
upon the closing of this offering; (ii) the acquisition of webcasts.com as if
it had occurred on March 31, 2000 and the conversion of the related issuance of
8,301,747 shares of series F redeemable convertible preferred stock into the
same number of shares of common stock; (iii) the issuance of 1,000,000 shares
of our series G redeemable convertible preferred stock to The Walt Disney
Company prior to the completion of this offering for $10.0 million at a per
share price equal to the price to the public in this offering and the
conversion of those shares into the same number of shares of common stock; and
(iv) the issuance of 537,634 shares of series H redeemable convertible
preferred stock to Excite@Home prior to the completion of this offering for
$5.0 million at a per share price equal to the price to the public in the
offering, less underwriting discounts and commissions, and the conversion of
those shares into the same number of shares of common stock. The pro forma as
adjusted column gives effect to the application of the estimated net proceeds
from the sale of 11,000,000 shares of common stock in this offering, after
deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
Period from Year Ended Three Months Ended
March 20, 1998 December 31, 1999 March 31, 2000
(Inception) to --------------------- -------------------
December 31, 1998 Actual Pro Forma Actual Pro Forma
----------------- -------- ----------- -------- ---------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ 149 $ 5,054 $ 532 $ 2,083
Total operating costs
and expenses........... 4,352 30,317 71,777 22,204 34,740
Loss from operations.... (4,352) (30,168) (66,723) (21,672) (32,657)
Net loss attributable to
common stock........... (4,227) (29,968) (68,410) (32,151) (44,629)
Net loss per share
attributable to common
stock--basic and
diluted................ $ (0.56) $ (3.43) $ (4.02) $ (3.04) $ (2.36)
Weighted average common
shares outstanding..... 7,488 8,726 17,028 10,589 18,891
Pro forma net loss per
share attributable to
common stock--basic and
diluted (unaudited).... $ (0.63) $ (1.23) $ (0.43) $ (0.54)
Pro forma weighted
average common shares
outstanding
(unaudited)............ 47,435 55,737 74,860 83,162
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
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(unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and investments........ $ 21,829 $46,124 $146,674
Working capital......... 14,782 32,806 133,356
Total assets............ 80,426 192,166 292,716
Long term obligations,
net of current
portion................ 6,601 7,638 7,638
Redeemable convertible
preferred stock........ 96,114 -- --
Total stockholders'
equity (deficit)....... (36,410) 163,214 263,764
</TABLE>
6
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RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. If any of the following risks actually materializes, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could fall, and you could
lose all or part of the money paid to buy our common stock.
Risks Related to Our Business
Because we are a development stage company that has generated limited
revenues and only recently began offering our services in October 1999, our
business and prospects are unproven and difficult to evaluate.
We were founded in March 1998 and began offering our Internet broadcasting
services for streaming video and audio in October 1999. The revenue and income
potential of our services and business and the size of our market are
unproven. We have limited meaningful historical financial data upon which to
base planned operating expenses and upon which investors may evaluate us and
our prospects. In addition, our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are and will
continue to be fixed for the foreseeable future. Accordingly, we are subject
to all of the risks that are associated with companies in an emerging industry
and in an early stage of development, particularly companies in the rapidly
evolving Internet infrastructure market, including:
. Undercapitalization;
. Cash shortages;
. The unproven nature of our business plan;
. The new and unproven nature of the market for our services;
. The need to make significant expenditures and incur significant expenses
as we develop our business and network;
. The lack of sufficient clients and revenues to sustain our operations
and growth without additional financing;
. Difficulties in managing growth including integration of the
webcasts.com business into our business; and
. Limited experience in providing some of the services that we offer or
plan to offer.
If we are unsuccessful in addressing these risks, our business may be
seriously harmed.
We are entirely dependent on our Internet broadcasting services and our
future revenue depends on their commercial success.
Our future revenue growth depends on the commercial success of our Internet
broadcasting services. We have recently begun to commercially introduce our
services for the delivery of streaming video and audio, and our future revenue
growth will depend upon customer demand for these services. Failure of our
current and planned services to operate as expected or the occurrence of any
service interruptions or technical problems with our network could delay or
prevent customer acceptance of our services. If our target customers do not
adopt and purchase our current and planned services, our revenue will not grow
significantly and we may not become profitable as a result.
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Our business strategy is based on our ability to build our broadcast
network to the edge of the Internet, which is dependent on our relationship
with Internet service providers.
Our business strategy is dependent on our ability to build our broadcast
network to the edge of the Internet, which is the access point closest to the
end user. Our ability to provide content providers with high quality, low-cost
distribution of streaming video and audio content is dependent on the
development of an edge network. The development of our edge network requires
that we locate our servers in the facilities of ISPs, which control the
Internet access points closest to the end user. As of March 31, 2000, we had
servers at 65 locations on the edge of the Internet and we estimate that as of
this date we were serving less than 5% of traffic delivered through our
network from the edge of the Internet. By the end of 2000, we expect we will
be able to serve up to 40% of the traffic on our network through our servers
located at the edge of the Internet. In order to achieve this deployment we
estimate that we will need to make at least $15.0 million in capital
expenditures for edge servers in 2000. We may choose to accelerate the
deployment of our network or increase expenditures relating to our network.
To accomplish our business strategy, we will need to deploy our edge
servers in the facilities of Internet service providers. Although we provide
Internet service providers with our servers at no cost, Internet service
providers may nevertheless refuse to allow us to install our equipment in
their facilities. If we are unable to further develop our edge network, our
costs may increase and our services may not eliminate packet loss and jitter,
resulting in poor quality service. If the quality of our services suffers we
may lose or fail to obtain customers, which would harm our revenues.
Therefore, our failure to deploy our edge servers close to the end user will
cause our business and results of operations to suffer greatly. The
development of our edge network will require that we not only enter into
additional agreements with ISPs to locate our servers in their facilities, but
also that we successfully move content from our hosting centers to our edge
servers such that we serve end users from the edge.
Our agreements with larger ISPs are critical to the success of our business
plan because through these agreements we gain access to large numbers of end
users that we can reach through our satellite distribution network rather than
through land-lines. Our agreements with high speed Internet access providers
are important because through these agreements we can reach Internet users
with high-speed or "broadband" connections from the edge of the Internet.
These users tend to access greater volumes of streaming content. Unless we can
reach large numbers of Internet users through our edge network, our services
will not be attractive to content providers. In order to secure agreements
with large ISPs and high speed Internet access providers, in some instances we
have agreed to share between 15% and 20% of the revenue we derive from content
delivered through their networks. We have also agreed to make non-refundable
prepayments to ISPs in the amount of $5.5 million, of which $3.0 million has
been paid as of March 31, 2000.
Our agreement with America Online provides that we will deploy our servers
in America Online's facilities in North America. Considering the reach of
America Online's network and market position as the leading provider of
Internet access in the United States, our agreement with America Online is
critical to our strategy of delivering more content to the edge of the
Internet. The agreement will increase the availability of content delivered
through our network on the edge of the Internet. The agreement with America
Online has an initial two year term, but may be terminated by either party for
material breach by the other upon 30 days notice. In addition, in the first
year of the agreement America Online has the right to terminate the agreement
if we do not deliver a required level of Internet content through their
network. A termination of, or adverse change in, our relationship with America
Online would seriously impair our efforts to establish and maintain an
Internet broadcast network that can reach most U.S. Internet users.
Our agreement with Excite@Home provides that we will deploy our servers in
Excite@Home national data centers upon Excite@Home's completion of their
centers. Considering Excite@Home's position as a provider of high-speed
Internet access though cable access, our agreement is important to the
development of our network on the edge of the Internet. The agreement has a
three year term. Either party may terminate the agreement with 30 days notice
upon a material default by the other. Excite@Home may terminate the agreement
upon 30 days notice upon a change of control of iBEAM. In addition,
Excite@Home may terminate the agreement without cause after two years. A
termination of, or adverse change in, our relationship with Excite@Home would
8
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seriously impair our efforts to establish an Internet broadcast network that
can broadcast to the edge of the Internet.
Our agreement with Covad provides that we will deploy our servers in
Covad's network, which is in North America. Considering the size of Covad's
network and market position as a provider of broadband access using digital
subscriber line, or DSL, technology, our agreement is important to the
deployment of our edge servers. Within the first year of our agreement with
Covad, either party may terminate the agreement upon 60 days notice. During
the second and third years of the agreement, either party may terminate the
agreement upon a material breach by the other. A termination of, or adverse
change in, our relationship with Covad could harm our efforts to deploy our
edge servers and our ability to develop new technologies that complement our
existing service offerings.
Our agreement with Northpoint provides that we will deploy our services in
Northpoint's network, which is in North America. Considering the size of
Northpoint's network and market position as a provider of broadband access,
our agreement is important to the deployment of our edge servers. The
agreement has a three year term and is terminable by either party upon 60 days
notice in the first year of the agreement. In the second and third years of
the agreement, either party may terminate the agreement due to a material
breach by the other. A termination of, or adverse change in, our relationship
with Northpoint could harm our efforts to deploy our edge servers.
Because our Internet broadcasting network is complex and is deployed in
complex environments, it may have errors or defects that could seriously harm
our business.
Our Internet broadcasting network is highly complex and is deployed in
complex environments. Because of the nature of our services, we can only fully
test it when it is fully deployed in very large networks with high traffic
volumes. Given the current early stage of deployment of our network, we cannot
test it for all possible defects. However, as a result of testing conducted to
date, we and our customers have from time to time discovered errors and
defects in our software. Since we commenced offering our services in October
1999, we have experienced three network outages, one of which was due to
failure of our network software. We may continue to experience problems with
our software. Outages that have occurred to date have resulted in between one
and nine hours of network downtime during which time we were prevented from
delivering our services to our customers. These downtimes resulted in lost
revenues for usage not billed during down periods.
In the future, there may be additional errors and defects in our software
and servers that may adversely affect our service. If we are unable to
efficiently fix errors or other problems that may be identified, we could
experience:
. Loss of or delay in sales and loss of market share;
. Loss of customers;
. Failure to attract new customers or achieve market acceptance;
. Diversion of development resources;
. Loss of credibility;
. Increased service costs; or
. Legal action by our customers.
Any failure of our network infrastructure or the satellite or land-line
communication services provided to us could lead to significant costs and
disruptions which could harm our reputation and cause us to lose customers,
which would have a negative impact on our revenues.
Our business and reputation are dependent on providing our customers with
high-fidelity and low-cost Internet broadcasting services through our network.
To meet these customer requirements, we must protect our network
infrastructure against damage from:
. Human error;
. Network software errors;
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. Physical or electronic security breaches;
. Fire, earthquake, flood and other natural disasters;
. Power loss; and
. Sabotage and vandalism.
Our costs are generally higher and quality of service is generally lower
when we deliver content to end users from our hosting centers rather than our
edge servers. As a result, the occurrence of any of the unanticipated problems
listed above at one or more of our edge servers could result in service
interruptions or significant damage to equipment, increase our costs and cause
a degradation in the quality of our services. Further, if we are unable to
provide our network services to our customers, we could face legal action by
our customers, which would be costly and divert management's attention from
important business activities. Because our servers are located in the
facilities of others, such as Internet service providers and Internet hosting
companies, we must rely on others to protect our equipment.
Our network architecture uses satellite transmission to bypass the
congestion of the Internet backbone by broadcasting directly to our edge
servers. We have entered into a three-year agreement with a satellite service
provider for transmission capacity over a specified satellite. While the
agreement provides for a back-up satellite if difficulties arise with our
designated satellite, if we are required to change the designated satellite we
would be required to readjust our equipment. This adjustment could take
several weeks and would result in a decrease in the quality of our service and
an increase in our cost relating to the more expensive transmission costs of
distributing content from our hosting centers over our land-line network. The
ongoing failure of the satellite service we use could prevent us from
broadcasting content directly to the edge of the Internet. This would
significantly increase our costs and reduce our ability to cost-effectively
broadcast high-fidelity streaming video and audio content.
Since we commenced offering our services in October 1999 we have
experienced three network outages. One was caused by a failure of one of our
servers and the other two were caused by a failure in the land-line
communication services provided to us by third parties. Outages that have
occurred to date have resulted in between one and nine hours of network
downtime during which time we were prevented from delivering our services to
our customers. These downtimes resulted in lost revenues for usage not billed
during down periods.
We may have inaccurately predicted our satellite capacity needs and may
find it difficult to add capacity when needed on reasonable terms.
We may need to add additional satellite capacity as we take on additional
content provider customers that distribute their content over our network.
Increases in the amount of content that is broadcast through our network
decreases our remaining satellite capacity. We are currently using only a
small fraction of our contracted for capacity. Nevertheless, we cannot assure
you that we have contracted for sufficient satellite capacity under our
current three-year satellite capacity contract, that we will be able to renew
this contract or that we would be able to increase satellite capacity through
our current or a potential additional provider. Additional capacity may not be
available to us on reasonable terms or at all. Failure to obtain necessary
capacity would limit revenue growth.
The market for Internet broadcasting services is new and our business will
suffer if it does not develop as we expect.
The market for Internet broadcasting services is new and rapidly evolving.
Content providers, such as existing web-based companies and traditional media
and entertainment companies, may not increasingly seek to broadcast streaming
video and audio over the Internet. Therefore, we cannot be certain that a
viable market for our services will emerge or be sustainable. If this market
does not develop, or develops more slowly than we expect, our revenues will
suffer and we may not become profitable.
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The markets in which we operate are highly competitive and we may be unable
to compete successfully against new entrants and established companies with
greater resources.
We compete in a market that is new, intensely competitive, highly
fragmented and rapidly changing. We have experienced and expect to continue to
experience increased competition. Many of our current competitors, as well as
a number of our potential competitors, have longer operating histories,
greater name recognition and substantially greater financial, technical and
marketing resources than we do. Some of our current and potential competitors
have the financial resources to withstand substantial price competition.
Moreover, many of our competitors have more extensive customer bases, broader
customer relationships and broader industry alliances that they could use to
their advantage in competitive situations, including relationships with many
of our current and potential customers. We do not have exclusive contracts
with Internet service providers for the deployment of our servers within their
networks and we expect that many Internet service providers will allow our
competitors to install equipment at their sites. In addition, our competitors
may be able to respond more quickly than we can to new or emerging
technologies and changes in customer requirements.
Some of our current or potential competitors may bundle their services with
other software or hardware to offer a full range of Internet broadcasting
products and services to meet all of the content distribution needs of content
providers. We currently do not offer a full range of products and services.
This may discourage content providers from purchasing services we offer or
Internet service providers from installing our servers in their facilities.
As competition in the Internet broadcasting market continues to intensify,
new solutions will come to market. We are aware of other companies that are
focusing or may in the future focus significant resources on developing and
marketing products and services that will compete with ours. We believe our
competitors primarily come from five market segments:
. Internet content distribution networks which accelerate delivery of web
pages, such as Akamai, Enron Communications and Digital Island;
. Internet webcasting companies that deliver streaming media through land-
line networks, such as InterVu which was acquired by Akamai;
. Internet software vendors that reduce the cost of content distribution
by storing content near the end user, such as Inktomi;
. Internet production and event services companies, such as Broadcast.com
and Network24 Communications which was acquired by Akamai; and
. Satellite companies that deliver streaming video through satellite
networks, such as PanAmSat and Cidera.
Increased competition could result in:
. Price and revenue reductions and lower profit margins;
. Increased cost of service from telecommunications providers and revenue
sharing demands by ISPs;
. Loss of customers; and
. Loss of market share.
Any one of these results would harm our financial results.
We believe that the Internet broadcasting and content delivery industry is
likely to encounter consolidation, such as the recent acquisition of InterVu
by Akamai, both of which compete with us. This consolidation could lead to the
formation of more formidable competitors and could result in increased
pressure on us to decrease our prices. In addition, consolidation among
Internet content providers could reduce the number of potential customers for
our services and may increase the bargaining power of these organizations,
which could force us to lower prices.
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Because our Internet content provider customers may terminate the use of
our services at any time without penalty, revenues from these customers may
decrease significantly without notice.
We do not have exclusive contracts with our Internet content provider
customers. These customers may refrain from using our services or shift to use
the services of our competitors at any time without penalty. There is a risk
that some content providers will determine that it is more cost effective for
them to develop and deploy their own Internet broadcasting or content delivery
systems than it is to outsource these services to companies such as iBEAM.
This competitive threat is particularly acute from content providers that own
content distribution networks. If any of our existing or future content
provider customers make this determination and refrain from using our
services, our revenues will be harmed. A vertically integrated competitor is
more likely to use their internal resources rather than outsourcing these
services to us.
If our commercial relationship with Microsoft terminates, then our business
could be harmed.
We entered into an agreement with Microsoft Corporation in September 1999.
Our agreement with Microsoft provides that Microsoft will recommend us as a
service provider for the delivery of broadband streaming media over the
Internet. Considering the widespread acceptance of Microsoft's Windows
technology, we believe Microsoft's recommendation in this regard will be an
important source of customers for us. This agreement may be terminated by
either Microsoft or us if the other party materially breaches the agreement. A
termination of, or significant adverse change in, our relationship with
Microsoft could harm our ability to obtain customers and develop new
technologies that complement our existing service offerings.
We have agreed to provide an aggregate of $200,000 of free services to
Internet content providers chosen by Microsoft.
We have entered into an agreement with Microsoft to provide content
providers chosen by Microsoft with six months of free service provided that
the value of the services to all these participants does not in the aggregate
exceed $200,000. We cannot currently quantify the number of content providers
to whom we expect to provide free services under this arrangement. Microsoft
has not yet requested that we provide these free services. If they do so, our
revenues would be harmed.
Our business will suffer if our network is not able to serve an increasing
number of users as demand increases.
To date, we have deployed a limited number of our edge servers. As of March
31, 2000, we estimate that our network was sufficient to support up to 300,000
simultaneous end users. We estimate that as of that date less than 5% of
traffic delivered through our network was served by our edge servers. We
expect that we will be able to serve up to 40% of the traffic on our network
from the edge of the Internet by the end of 2000 due to our agreements with
ISPs, particularly America Online. However, we cannot be certain that our
network can connect and manage a substantially larger number of end users at
high transmission speeds while maintaining desired performance. In addition,
for a portion of our network, as usage of high-speed Internet access by end
users increases, we will need to make additional investments in our
infrastructure to maintain adequate transmission speed for delivery of content
to the end user. We cannot assure you that we will be able to make these
investments successfully or at a reasonable cost. Upgrading our infrastructure
may cause delays or failures in our network. As a result, in the future our
network may be unable to achieve or maintain a sufficiently high transmission
capacity. Our failure to achieve or maintain high capacity data transmission
could significantly reduce demand for our service, which would reduce our
revenue and cause our business and financial results to suffer.
If more simultaneous users tried to access content off our network than we
have capacity for on the edge, the users representing excess capacity would be
served by our regional or master hosting centers. Supporting end users from
our regional and master hosting centers results in greater cost of services
than serving from the edge of our network but should not reduce the revenue
that we would otherwise generate.
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Our business will suffer if we do not respond rapidly to technological
changes or if new technological developments make our services non-competitive
or obsolete.
The market for Internet broadcasting services is characterized by rapid
technological change, frequent new product and service introductions and
changes in customer requirements. We may be unable to respond quickly or
effectively to these developments. If competitors introduce products, services
or technologies that are better than ours or that gain greater market
acceptance, or if new industry standards emerge, our services may become non-
competitive or obsolete, which would harm our revenues and cause our business
and financial results to suffer. In addition, technological developments could
eventually make Internet infrastructure much faster and more reliable such
that performance enhancing services like those we provide would be less
relevant to content providers.
In developing our service, we have made, and will continue to make,
assumptions about the standards that our customers and competitors may adopt.
If the standards adopted are different from those which we may now or in the
future promote or support, market acceptance of our service may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the emergence of new industry standards could render our existing
services non-competitive or obsolete.
We had operating losses of $30.2 million for the year ended December 31,
1999 and $21.7 million for the three months ended March 31, 2000 and our
accumulated deficit was $66.3 million as of March 31, 2000. Considering that
operating expenses are expected to increase in future periods we will need to
increase our revenues significantly to achieve profitability.
We have never been profitable. We have incurred significant losses since
inception, including operating losses of $30.2 million for the year ended
December 31, 1999 and $21.7 million for the three months ended March 31, 2000.
Our operating losses as a percentage of revenue was 20,247% in 1999 and 4,074%
in the first quarter of 2000. As of March 31, 2000, we had an accumulated
deficit of $66.3 million. In fiscal 2000, based on the planned deployment of
our network, we expect to have capital expenditures of at least $40.0 million,
of which approximately $26.0 million was incurred in the first quarter. We
expect to continue to incur increasing operating losses in the future. We will
apply the proceeds from this offering to pay for our capital expenditures and
to fund these losses.
We cannot be certain that our revenue will grow or that we will achieve
sufficient revenue to achieve profitability. Our failure to significantly
increase our revenue would seriously harm our business and operating results.
We have large fixed expenses, and we expect to continue to incur significant
and increasing sales and marketing, product development, administrative and
other expenses, including fees to obtain access to bandwidth transport of data
over our network, while we build out our network to the edge of the Internet.
As a result, we will need to generate significantly higher revenues to achieve
and maintain profitability. If our revenue grows more slowly than we
anticipate or if our operating expenses increase more than we expect or cannot
be reduced in the event of lower revenue, we may not become profitable.
The uncertainty in the sales and installation cycles for our service
resulting from our limited operating history may cause revenue and operating
results to vary significantly and unexpectedly from quarter to quarter, which
could adversely affect our stock price.
Because of our limited operating history and the nature of our business, we
cannot predict our sales and installation cycles. The uncertain sales and
installation cycles may cause our revenue and results of operations to vary
significantly and unexpectedly from quarter to quarter. If this occurs and our
quarterly operating results fall below the expectations of our investors or
securities analysts, if any are covering our common stock, then the market
price of our common stock could decline.
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We expect the rates we can charge for our services to decline over time,
which could reduce our revenue and could cause our business and financial
results to suffer.
We expect the prices we can charge for our Internet broadcasting services
will decline over time as a result of, among other things, the increasing
availability of bandwidth at reduced costs and existing and new competition in
the markets we address. If we fail to accurately predict the decline in costs
of bandwidth or, in any event, if we are unable to sell our service at
acceptable prices relative to our costs, or if we fail to offer additional
services from which we can derive additional revenue, our revenue will
decrease and our business and financial results will suffer.
We are currently pricing our services at levels that exceed our direct
variable costs but are insufficient to cover indirect costs such as our
network operations center and billing system. There is no assurance that our
revenues will increase to cover our increasing indirect costs, or that we have
accurately estimated indirect costs. If we fail to increase revenues, we may
not be able to achieve or maintain profitability.
Our business will suffer if we do not anticipate and meet specific customer
requirements.
Our current and prospective customers may require features and capabilities
that our current service offering does not have. To achieve market acceptance
for our service, we must effectively and timely anticipate and adapt to
customer requirements and offer services that meet these customer demands. The
development of new or enhanced services is a complex and uncertain process
that requires the accurate anticipation of technological and market trends. We
may experience design, manufacturing, marketing and other difficulties that
could delay or prevent the development, introduction or marketing of these new
or enhanced services. In addition, the introduction of new or enhanced
services also requires that we manage the transition from older services to
minimize disruption in customer service and ensure that we can deliver
services to meet anticipated customer demand. Our failure to offer services
that satisfy customer requirements would decrease demand for our products and
seriously harm our revenues and financial results.
Our business will suffer if we do not expand our direct and indirect sales
organizations and our customer service and support operations.
We currently have limited sales and marketing experience and limited
trained sales personnel. Our limited experience may restrict our success in
commercializing our services. Our services require a sophisticated sales
effort targeted at a limited number of key people within our prospective
customers' organizations. This sales effort requires the efforts of trained
sales personnel. We need to expand our marketing and sales organization in
order to increase market awareness of our service and generate increased
revenue. We are in the process of building our direct sales force and plan to
hire additional qualified sales personnel. Competition for these individuals
is intense, and we might not be able to hire the kind and number of sales
personnel we need. In addition, we believe that our future success is
dependent upon our ability to establish successful relationships for indirect
sales with a variety of distribution partners. If we are unable to expand our
direct and indirect sales operations, we may not be able to increase market
awareness or sales of our service, which may prevent us from increasing our
revenue and achieving and maintaining profitability.
Hiring customer service and support personnel is very competitive in our
industry because there is a limited number of people available with the
necessary technical skills and understanding of our market. Once we hire these
personnel, they require extensive training. If we are unable to expand our
customer service and support organization or train these personnel as rapidly
as necessary, we may not be able to maintain satisfied existing customers of
our service, which would harm our revenues and our ability to achieve or
maintain profitability.
We will incur significant costs relating to the planned expansion of our
marketing, sales and customer support organization. We are unable to quantify
the expenses associated with expanding our sales organization and customer
service and support operations because these expenses depend on a number of
factors relating to our operations, including the rate of hiring personnel and
the timing and amount of marketing and advertising
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expenses. We expect that over the next two years these costs will
significantly exceed any revenues that we receive for our services. We expect
to apply the proceeds from this offering to the payment of these expenses. If
our revenues do not grow in the future, these costs may never be recuperated
and we may not become profitable.
We face a number of risks related to our acquisition of webcasts.com, and
we may face similar risks in the future if we acquire other businesses or
technologies.
In April 2000, we acquired webcasts.com. If we are unable to effectively
integrate webcasts.com's products, personnel and systems, our business and
operating results are likely to suffer. This integration will be made more
difficult because webcasts.com operations are located in Oklahoma City,
Oklahoma, where we currently have no operations. We are just beginning to
integrate webcasts.com with our operations. We expect this integration to
place a significant burden on our management team by diverting management's
attention from the day-to-day operations of iBEAM.
As part of our business strategy, we frequently review acquisition and
strategic investment prospects that would complement our current service
offerings, augment our market coverage or enhance our technical capabilities,
or that may otherwise offer growth opportunities. If we make any future
acquisitions, we could:
. Issue equity securities, which would dilute current stockholders'
percentage ownership;
. Incur substantial debt, the holders of which would have claims to our
assets in preference to the holders of our common stock; or
. Assume contingent liabilities, which could materialize and involve
significant cost.
These actions could materially and adversely affect our operating results
and/or the price of our common stock. Acquisitions and investments may require
us to incur significant amortization and depreciation charges and acquisition
related costs that adversely affect our financial results. Acquisitions and
investment activities also entail numerous risks, including:
. Difficulties in the assimilation of acquired operations, technologies or
services;
. Unanticipated costs associated with the acquisition or investment
transaction;
. Adverse effects on existing business relationships with suppliers and
customers;
. Risks associated with entering markets in which we have no or limited
prior experience; and
. Potential loss of key employees of acquired organizations.
We may not be able to successfully integrate webcasts.com or any business,
products, technologies or personnel that we might acquire in the future, and
our failure to do so could harm our business.
We continue to look for acquisitions and investments. Although we do not
have any other commitments or agreements regarding any material acquisitions
or investments, we may use a portion of the net proceeds of this offering for
future acquisitions or investments.
As a result of the webcasts.com acquisition, we will record $93.8 million
of goodwill and acquired intangibles, the amortization of which will increase
our net loss.
As a result of the webcasts.com acquisition we will record $93.8 million of
goodwill and acquired intangibles which will be amortized over a three year
period. This will increase our net loss by approximately $20.8 million in
2000, $31.3 million in 2001 and 2002 and $10.4 million in 2003. To the extent
we do not generate sufficient cash flow to recover the amount of the
investment recorded, the investment could be considered impaired and could be
subject to earlier write-off. In such event, our net loss in any given period
could be greater than anticipated and the market price of our stock could
decline.
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We will require additional capital in the future and may not be able to
secure adequate funds on terms acceptable to us.
The expansion and development of our business will require significant
capital, which we may be unable to obtain, to fund our capital expenditures
and operating expenses, including working capital needs. In fiscal 2000 we
expect to make $40.0 million in capital expenditures, of which $26.0 million
was incurred in the first quarter, including investments in edge servers,
hosting centers and our network operations center, and we expect to incur
significant and increasing losses.
During the next 12 months, we expect to meet our cash requirements with
existing cash, cash equivalents and short-term investments, the net proceeds
from this offering and cash flow from sales of our services. The proceeds of
this offering are necessary in order to build out our network as planned. In
the absence of a public offering, to continue to execute on our current
business plan, we would attempt to raise capital in the private equity market.
To the extent such capital is not available, or until available, we would
exercise control of our discretionary expenses such as by reducing network
costs, capital expenditures and other discretionary expenses.
We may fail to generate sufficient cash flow from the sales of our services
to meet our cash requirements. Further, our capital requirements may vary
materially from those currently planned if, for example, our revenues do not
reach expected levels or we have to incur unforseen capital expenditures and
make investments to maintain our competitive position. If this is the case, we
may require additional financing sooner than anticipated or we may have to
delay or abandon some or all of our development and expansion plans or
otherwise forego market opportunities. If we seek to raise additional capital
through the issuance of equity or equity-related securities, the percentage
ownership of existing stockholders will be diluted.
After mid-2001 and possibly sooner we will need to raise additional
capital. We may not be able to obtain future equity or debt financing on
favorable terms, if at all. Future borrowing instruments such as credit
facilities and lease agreements are likely to contain restrictive covenants
and may require us to pledge assets as security for borrowings thereunder. Our
inability to obtain additional capital on satisfactory terms may delay or
prevent the expansion of our business.
We may decide to raise additional equity capital in the next 12 months
through a follow-on public offering. The decision to do a follow-on public
offering will depend on market conditions, including whether our stock price
has increased and whether there is additional demand for our stock, and our
need for additional funds at the time.
Our business will suffer if we fail to manage the expansion of our
operations properly.
We have grown rapidly by hiring new employees and by expanding our offering
of services. Our total number of employees grew from approximately 40 on March
31, 1999 to 265 on March 31, 2000 and several members of our senior management
team have only recently joined us. The acquisition of webcasts.com will add
approximately 95 employees. This growth has placed, and our growth in future
operations, if any, will continue to place, a significant strain on our
management systems and resources. Our ability to offer our services and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. If we fail to:
. Improve our financial and managerial controls, reporting systems and
procedures,
. Hire, train, manage and retain additional qualified personnel, including
additional senior management level personnel to fulfill our current or
future needs,
. Integrate the operations of webcasts.com, and
. Effectively manage and multiply relationships with our customers,
suppliers, and other third parties,
we may be unable to execute our business plan, which would curtail our growth
and harm our results of operations.
In addition, we have recently hired and plan to hire in the near future a
number of key employees and officers. To become integrated into our company,
these individuals must spend a significant amount of time learning our
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business model and management system, in addition to performing their regular
duties. Accordingly, the integration of new personnel has resulted and will
continue to result in some disruption to our ongoing operations. If we fail to
integrate new employees in an efficient manner, our business and financial
results will suffer.
The unpredictability of our quarterly results may adversely affect the
trading price of our common stock.
Our revenue and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. The primary factors
that may affect our quarterly results include the following:
. Fluctuations in the demand for our Internet broadcasting services;
. The timing and size of sales of our services;
. The timing of recognizing revenue and deferred revenue;
. New product and service introductions and enhancements by our
competitors and ourselves;
. Changes in our pricing policies or the pricing policies of our
competitors;
. Increases in the prices of, and availability of, the products, services
or components we purchase, including bandwidth;
. Our ability to attain and maintain quality levels for our services;
. Expenses related to testing our services;
. Costs related to acquisitions of technology or businesses; and
. General economic conditions as well as those specific to the Internet
and related industries.
We plan to increase significantly our operating expenses to fund the build-
out of our broadcast network, accelerate engineering and development, expand
our sales and marketing operations, broaden our customer support capabilities
and continue to develop new distribution channels. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business. Our operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are, and will
continue to be, fixed in the short term. As a result, a delay in generating or
recognizing revenue for the reasons set forth above, or for any other reason,
could cause significant variations in our operating results from quarter to
quarter and could result in substantially operating losses.
Due to the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It
is likely that in some future quarters our operating results may be below the
expectations of investors and security analysts, if any follow our stock. In
this event, the price of our common stock will probably fall.
Our On-Stage service currently represents a substantial portion of our
revenues and if we are unsuccessful in commercially selling our On-Air and On-
Demand services, our revenues will not grow significantly.
We currently offer three primary services: iBEAM On-Stage, iBEAM On-Air and
iBEAM On-Demand. Sales of our On-Stage service accounted for 74% of our
revenue in 1999. Sales of our On-Air services accounted for 6% of our revenue
in 1999. Sales of our On-Demand services accounted for 3% of our revenue in
1999. We expect that sales of our On-Stage services will decline as a
percentage of total revenue in the future. However, we substantially depend on
this service for our near-term revenue. Any decline in the price of, or demand
for, our On-Stage service, or its failure to achieve broad market acceptance,
would seriously harm our business. In addition, we believe that our future
growth and a significant portion of our future revenue will depend on the
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commercial success of our On-Air and On-Demand services. If our customers do
not widely adopt, purchase and successfully deploy our services, our revenues
will not grow significantly and our business will be seriously harmed.
We rely on a limited number of customers, and any decrease in revenues
from, or loss of, these customers, without a corresponding increase in
revenues from other customers, would harm our operating results.
Our customer base is limited and highly concentrated. We began recognizing
revenues from sales of our products in the quarter ended December 31, 1999.
Three customers accounted for an aggregate of 68% of our revenue in the
quarter ended December 31, 1999: ProWebCast accounted for 40%, MusicNow, Inc.
accounted for 15% and Pixelworld accounted for 13% of our revenue. In the
three months ended March 31, 2000 NetRadio.com accounted for 12% of revenues.
We expect that the majority of our revenues will continue to depend on sales
of our products to a small number of customers. If current customers do not
continue to place significant orders, we may not be able to replace these
orders. In addition, any downturn in the business of existing customers could
result in significantly decreased sales to these customers, which could
seriously harm our revenues and results of operations. Sales to any single
customer may vary significantly from quarter to quarter.
America Online accounted for an aggregate of 20% of webcasts.com's revenue
in 1999. The loss of this customer or a significant reduction in the level of
webcasts.com's services used by this customer, could seriously harm our
results of operations.
We expect to amortize stock-based compensation expense of $12.2 million in
the remainder of 2000, $9.3 million in 2001, $4.8 million in 2002, and $2.1
million in 2003, which will decrease our net earnings during these periods.
In connection with the grant of stock options to employees and consultants
for the period from March 20, 1998 (inception) to March 31, 2000, we recorded
unearned stock-based compensation of $37.9 million, of which $5.4 million was
amortized during 1999 and $4.1 million was amortized in the first quarter of
2000. If our stock price increases, the amount of stock-based compensation
related to stock option grants to consultants would increase as the fair value
of these grants is re-measured at each reporting date using a Black-Scholes
option pricing model. These expenses will increase our losses during each of
these periods and delay our ability to achieve profitability.
We depend on our executive officers to manage our business effectively in a
rapidly changing market and, if we are unable to retain our executive
officers, our ability to compete could be harmed.
Our future success depends upon the continued services of our executive
officers who have critical industry experience and relationships that we rely
on in implementing our business plan. We do not have "key person" life
insurance covering any of our executive officers. The loss of services of any
of our executive officers could delay the development and introduction of and
negatively impact our ability to sell our services.
We face risks associated with international operations that could harm our
business.
To be successful, we believe we must expand our international operations.
Therefore, we expect to commit significant resources to expand our
international sales and marketing activities. We are currently targeting the
United Kingdom, Germany, France, Hong Kong, Singapore, Indonesia, Malaysia and
India for expansion. The expenses we will incur in expanding our international
operations will depend on the arrangements into which we will enter to provide
our services in such markets. These factors have yet to be determined. We
recently entered into a letter of intent with Pacific Century CyberWorks to
establish a joint venture, named iBeam Asia, to introduce our services to the
Pacific Rim, the Indian subcontinent and the Middle East. In order to bring
our services to these regions, the joint venture will need to deploy a network
of servers which will involve large capital expenditures and operating
expenses. While the details of the joint venture have yet to be determined, we
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initially expect to incur approximately 49% of the operating losses of the
joint venture. We expect our ownership interest, and therefore our share of
the operating losses of the joint venture, to decline below 49% in the future
as the joint venture raises additional funding through sales of equity
interests to third parties, which would dilute our interest. We expect the
joint venture to begin delivering content to end users by the end of 2000. In
connection with the formation of the joint venture, we expect to contribute
$5.0 million to iBEAM Asia. We expect that iBEAM Asia will be funded
thereafter from independent third party sources. We may decide to provide
additional financing to iBEAM Asia in the future if iBEAM Asia is unable to
raise additional funding from third parties on favorable terms. In addition,
in connection with our expansion into Asia, Europe, Latin America, Africa and
the Middle East pursuant to our agreement with InterPacket, we will incur
capital expenditures in connection with our deployment of servers in
InterPacket's network. InterPacket's network serves developing countries and
there can be no assurance that these markets will develop sufficiently to
justify our investments. We are establishing a test center for our systems in
Hong Kong. We currently plan to begin placing servers in up to 20 locations in
InterPacket's network in the second half of 2000. We expect that our capital
expenditures in 2000 in connection with deployment in InterPacket's network
will be less than $1.0 million.
We may be unable to maintain or increase market demand for our service
internationally, which may harm our business. As we expand internationally, we
will be increasingly subject to a number of risks associated with
international business activities that could increase our costs, lengthen our
sales cycle and require significant management attention. These risks include:
. Potential difficulty in enforcing intellectual property rights in
foreign countries;
. Compliance with and unexpected changes in regulatory requirements
resulting in unanticipated costs and delays;
. Lack of availability of trained personnel in international locations;
. Tariffs, export controls and other trade barriers;
. Longer accounts receivable payment cycles than in the United States;
. Potential difficulty in obtaining access to additional satellite and
telecommunication transmission capacity;
. Potential difficulty of enforcing agreements and collecting receivables
in some foreign legal systems;
. Potentially adverse tax consequences, including restrictions on the
repatriation and earnings;
. General economic conditions in international markets; and
. Currency exchange rate fluctuations.
Risks Related to Legal Uncertainty
Any inability to adequately protect our intellectual property could harm
our competitive position.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. Our future growth, if any, will depend on our ability to continue to
seek patents and otherwise protect the intellectual property rights in our
network technology. However, these legal protections afford only limited
protection; competitors may gain access to our network technology, including
our software and server technology, which may result in the loss of our
customers. Other companies, including our competitors, may obtain patents or
other proprietary rights that would prevent, limit or interfere with our
ability to make, use or sell our service. This would cause our revenues to
decline and seriously harm our results of operations.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
19
<PAGE>
We could incur substantial costs defending our intellectual property from
infringement or a claim of infringement.
Any litigation or claims, whether or not valid, could result in substantial
costs and diversion of resources. Companies in the Internet industry are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. Our patent applications to date cover our
streaming platform standard, content management, distribution capabilities and
subscriber management. If a company brings a claim against us, we may be found
to infringe their proprietary rights. In the event of a successful claim of
infringement against us and our failure or inability to license the infringed
technology, our business and operating results would be significantly harmed.
In January 2000, we received a letter from a competitor, which suggested
that we review patents to which this competitor claims rights. These patents
purport to cover "a system and method for delivery of video and data over a
computer network." We believe that we do not infringe any claims of these
patents. However, there can be no assurance that this competitor will agree
with our conclusion or not pursue a claim or litigation against us. To date,
no complaint has been filed or served.
Intellectual property litigation or claims could force us to do one or more
of the following:
. Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
. Obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms if at all;
and
. Redesign products or services that incorporate the disputed technology.
If we are forced to take any of the foregoing actions, we could face
substantial costs and our business may be seriously harmed. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or be adequate to indemnify us for all liability that may be
imposed.
Internet-related laws could cause us to change the manner in which we
operate our network, which could be disruptive, time consuming and expensive.
Our Internet broadcast network is designed to deliver streaming media to
large audiences of simultaneous users. Currently our network and the media we
broadcast is largely unregulated, even though traditional television and radio
are highly regulated by the Federal Communications Commission. If laws and
regulations that apply to communications over the Internet are enacted that
require us to change the manner in which we operate our network, our business
could be disrupted with time consuming and expensive modifications of our
technology. In addition, our business could be harmed to the extent that our
content provider customers are adversely affected. Laws and regulations that
apply to communications over the Internet are becoming more prevalent. Several
bills are currently being considered by the U.S. Congress. Recently the U.S.
Congress enacted Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European
Union recently enacted its own privacy regulations, and is currently
considering copyright legislation that may extend the right of reproduction
held by copyright holders to include the right to make temporary copies for
any reason. The adoption or modification of laws or regulations relating to
the Internet, or interpretations of existing law, could harm our business
directly or indirectly due to effects on our customers.
Risks Related To The Securities Markets And This Offering
Our stock price may be volatile which could result in litigation against us
and substantial losses for investors purchasing shares in this offering.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. The market for technology stocks has been
20
<PAGE>
extremely volatile. The following factors could cause the market price of our
common stock in the public market to fluctuate significantly from the price
paid by investors in this offering:
. Announcements by us or our competitors of significant contracts, new
products or services offerings or enhancements, acquisitions,
distribution partnerships, joint ventures or capital commitments;
. Variations in our quarter-to-quarter operating results including our
failure to meet estimates of financial analysts;
. Changes in financial estimates by securities analysts, if any analysts
elect to follow our stock;
. Our sales of common stock or other securities in the future or
substantial sales by current stockholders after the 180-day lock-up
expires;
. Changes in market valuations of networking, Internet and
telecommunications companies;
. The addition or departure of our personnel; and
. Fluctuations in stock market prices and volumes.
Volatility in the market price of our common stock may prevent investors
from being able to sell their common stock at or above our initial public
offering price.
In the past, class action litigation has often been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention
and resources, which could materially and adversely affect our business and
results of operations.
Insiders will beneficially own approximately 37.8% of our outstanding
common stock after this offering and could limit investors' ability to
influence the outcome of key transactions, including changes of control.
We anticipate that our executive officers and directors, together with
Accel Partners and Crosspoint Venture Partners, each of which is an entity
affiliated with one of our directors, will in the aggregate, own approximately
37.8% of our outstanding common stock following the completion of this
offering. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by our stockholders, including
the election of directors and the approval of mergers or other business
combination transactions.
Provisions of our charter documents and agreements with some of our large
stockholders may have anti-takeover effects that could prevent a change in
control even if the change in control would be beneficial to our stockholders.
Our board of directors will be divided into three classes, with each class
serving staggered three-year terms. This may discourage a third party from
making a tender offer or otherwise attempting to obtain control of us because
it generally makes it more difficult for stockholders to replace a majority of
the directors. We have in place procedures which prevent stockholders from
acting without holding a meeting and which limit the ease with which a
stockholder meeting can be called. We are subject to the "interested
stockholder" provisions of Delaware law which impose restrictions on mergers
and other business combinations between us and any holder of 15% or more of
our outstanding common stock. These provisions of our amended and restated
certificate of incorporation, by-laws, and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
In addition, each of Microsoft, Sony, Pacific Century CyberWorks, America
Online, Covad and Liberty Media, which in the aggregate will own 15.9% of our
common stock upon the closing of this offering, have agreed to vote their
securities as directed by our board of directors in any merger in which more
than 50% of our voting power is transferred or in a sale of substantially all
of our assets. This obligation lapses for each of these companies if and when
it owns less than 5% of our voting power. Microsoft, Sony, Pacific Century
CyberWorks, America Online, Excite@Home and Covad have each also agreed not to
acquire more than 15.0% of our voting stock at any time before the end of
April 2005 without our permission. Our agreement with these stockholders could
make it more difficult for a third party or one of these entities to acquire
us, even if doing so would be beneficial to our stockholders.
21
<PAGE>
The sale of a substantial number of shares of common stock could cause the
market price of our common stock to decline.
After this offering, we will have a total of 106,216,408 shares of common
stock outstanding, or 107,866,408 shares if the underwriters exercise their
entire over-allotment option. The sale by us or the resale by stockholders of
shares of our common stock in the public market after the offering could cause
the market price of the common stock to decline. The federal securities laws
impose restrictions on the ability of substantially all stockholders to resell
their shares of common stock. In addition, we, our executive officers,
directors and certain other stockholders have agreed with Morgan Stanley & Co.
Incorporated, one of the representatives of the underwriters, not to sell
their shares for a period ending 180 days from the date of the prospectus for
the offering. Accordingly, the 106,216,408 shares of common stock outstanding
after this offering will be available for resale in the public market as
follows:
<TABLE>
<CAPTION>
Number of Shares Date Available for Resale
---------------- -------------------------
<S> <C>
9,937,150 Immediately
180 days from the date of the prospectus
82,934,788 for the offering
13,344,470 Various dates thereafter
</TABLE>
In addition, 1,949,987 shares of our common stock issuable upon exercise of
warrants will become eligible for sale on various dates upon expiration or
release of the lock-up agreements.
After this offering and expiration or release of the lock-up agreements,
holders of 76,328,908 shares of the common stock and the holders of warrants
to purchase approximately 1,438,687 shares of common stock may require us to
register their shares for resale under the federal securities laws.
We intend to file a registration statement following this offering to
permit the sale of shares of common stock under our stock plans. As of March
31, 2000, options to purchase 11,816,815 shares of common stock with a
weighted average exercise price per share of $3.38 were outstanding,
substantially all of which are subject to agreements with Morgan Stanley & Co.
Incorporated not to sell such shares for 180 days from the date of the
prospectus for the offering. Registration of such shares would result in these
stockholders being able to immediately resell their shares in the public
market after expiration or release of the lock-up agreements. Any such sales
or anticipation thereof could cause the market price of the common stock to
decline.
We have no agreement or understanding with Morgan Stanley & Co.
Incorporated for a waiver of these lock-up restrictions. However, Morgan
Stanley & Co. Incorporated may, in its discretion, release us or any of our
stockholders at any time, without notice, prior to the expiration of the lock-
up period. In some cases underwriters have agreed to waive lock-up
restrictions when a company's stock has performed well for a sustained period
of time, in order to allow a follow-on offering of common stock. Any decision
by Morgan Stanley & Co. Incorporated to waive the lock-up restrictions would
depend on a number of factors, including market conditions, the performance of
our common stock in the market and our financial condition at that time. If
Morgan Stanley & Co. Incorporated were to waive the lock-up restrictions prior
to the expiration of the lock-up period, and our stockholders were to sell
additional shares of common stock to the public, the market price of our
common stock could decline.
You will experience immediate and significant dilution of book value per
share.
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, if you purchase our common
stock in this offering, you will incur immediate dilution of $8.40 per share.
If additional shares are sold by the underwriters following exercise of their
over-allotment option there will be further dilution.
In addition, as of March 31, 2000, we had outstanding options to purchase
11,816,815 shares of common stock at a weighted average exercise price of
$3.38 per share and, on an as converted basis, warrants to purchase 1,949,987
shares of common stock at a weighted average exercise price of $3.42 per
share. If these outstanding options or warrants are exercised there will be
further dilution.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of 11,000,000 shares of common stock
in this offering are estimated to be approximately $100.6 million, or
approximately $115.9 million if the underwriters' over-allotment option is
exercised in full, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
The principal purposes of this offering are to obtain additional working
capital, to establish a public market for our common stock, to increase our
visibility in the marketplace and to facilitate future access to public
capital markets.
We expect to use the net proceeds for general corporate purposes, including
working capital and capital expenditures, and to fund operating losses. We
anticipate spending at least $15.0 million of the proceeds of this offering on
capital expenditures primarily for the purpose of expanding our network
operations. In addition, we intend to use $5.0 million of the proceeds of the
offering as a capital contribution to iBEAM Asia upon formation of the joint
venture and up to $1.0 million of the proceeds of the offering for capital
expenditures in connection with deployment of our servers in InterPacket's
network. Our management will retain broad discretion in the allocation of the
remaining net proceeds of this offering. Although we may use a portion of the
proceeds to acquire other businesses, products or technologies that are
complementary to our business, we have no specific acquisitions planned.
Pending such uses, we intend to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain all of our future earnings to finance the growth and development of
our business. We do not intend to pay cash dividends on our common stock in
the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth our cash, cash equivalents and investments
and capitalization at March 31, 2000:
. on an actual basis;
. on a pro forma basis to reflect (i) the conversion of all outstanding
shares of our redeemable convertible preferred stock outstanding as of
March 31, 2000 into 66,489,527 shares of common stock upon the closing
of this offering; (ii) the acquisition of webcasts.com as if it had
occurred on March 31, 2000 and the conversion of the related issuance of
8,301,747 shares of series F redeemable convertible preferred stock into
the same number of shares of common stock; (iii) the issuance of
1,000,000 shares of our series G redeemable convertible preferred stock
to The Walt Disney Company prior to the completion of the offering for
$10.0 million at a price equal to the per share price to the public in
the offering and the conversion of those shares into the same number of
shares of common stock; and (iv) the issuance of 537,634 shares of our
series H redeemable convertible preferred stock to Excite@Home prior to
the completion of the offering for $5.0 million at a price equal to the
per share price to the public in the offering, less underwriting
discounts and commissions, and the conversion of those shares into the
same number of shares of common stock; and
. on a pro forma basis as adjusted for the sale by us of 11,000,000 shares
of common stock in this offering and the receipt of the estimated net
proceeds therefrom, after deducting the underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except per
share data)
<S> <C> <C> <C>
Cash, cash equivalents, and investments........ $ 21,829 $ 46,124 $146,674
======== ======== ========
Long term obligations, net of current portion.. $ 6,601 $ 7,638 $ 7,638
-------- -------- --------
Redeemable convertible preferred stock, $0.0001
par value; actual--20,000 shares authorized;
17,792 shares issued and outstanding; pro
forma--30,000 shares authorized, no shares
issued and outstanding; pro forma as
adjusted--10,000 shares authorized; no shares
issued or outstanding......................... 96,114 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.0001 par value; actual--
120,000 shares authorized; 18,887 shares
issued and outstanding; pro forma--120,000
shares authorized; 95,216 shares issued and
outstanding; pro forma as adjusted--413,100
shares authorized; 106,216 shares issued and
outstanding.................................. 2 10 11
Additional paid-in capital.................... 60,320 259,936 360,485
Stockholders' note receivable................. (2,000) (2,000) (2,000)
Unearned stock-based compensation............. (28,386) (28,386) (28,386)
Deficit accumulated during development stage.. (66,346) (66,346) (66,346)
-------- -------- --------
Total stockholders' equity (deficit)....... (36,410) 163,214 263,764
-------- -------- --------
Total capitalization....................... $ 66,305 $170,852 $271,402
======== ======== ========
</TABLE>
This capitalization table excludes the following shares as of March 31,
2000:
. 11,816,815 shares at a weighted average exercise price of $3.38 per
share that were subject to outstanding options as of March 31, 2000;
. 671,932 shares of common stock issuable upon the exercise of
webcasts.com stock options assumed by us in connection with our
acquisition of webcasts.com at a weighted average exercise price of
$3.32 per share and up to additional 1,253,205 shares of common stock
issuable if our webcasts.com division meets revenue targets in the next
twelve months after the closing of the acquisition; and
. 1,949,987 shares of common stock issuable upon exercise and conversion
of outstanding convertible preferred stock warrants as of March 31, 2000
at a weighted average exercise price of $3.42 per share.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000, was $69.4
million or $0.73 per share of common stock. Our pro forma net tangible book
value per share as of March 31, 2000 represents the amount of our total
tangible assets reduced by the amount of our total liabilities and divided by
the total number of shares of our common stock outstanding assuming (i) the
conversion of all outstanding shares of our redeemable convertible preferred
stock as of March 31, 2000 into 66,489,527 shares of common stock upon the
closing of this offering; (ii) the acquisition of webcasts.com as if it
occurred on March 31, 2000 and the conversion of the related issuance of
8,301,747 shares of series F redeemable convertible preferred stock into the
same number of shares of common stock; (iii) the issuance of 1,000,000 shares
of our series G redeemable convertible preferred stock to The Walt Disney
Company prior to the completion of the offering for $10.0 million at a price
equal to the per share price to the public in the offering and the conversion
of those shares into the same number of shares of common stock; and (iv) the
issuance of 537,634 shares of our series H redeemable convertible preferred
stock to Excite@Home prior to the completion of the offering for $5.0 million
at a price equal to the per share price to the public in the offering, less
underwriting discounts and commissions, and the conversion of those shares
into the same number of shares of common stock. After giving effect to the
sale by us of the 11,000,000 shares of common stock offered hereby, after
deduction of underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value at March 31, 2000
would have been $169.9 million or $1.60 per share. This represents an
immediate increase in net tangible book value to existing stockholders of
$0.87 per share and an immediate dilution to new investors of $8.40 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $10.00
Pro forma net tangible book value per share as of March 31,
2000........................................................ $0.73
Increase in pro forma net tangible book value per share
attributable to new investors............................... 0.87
-----
Pro forma as adjusted net tangible book value per share after
the offering................................................. 1.60
------
Dilution per share to new investors........................... $ 8.40
======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by (i) the
existing stockholders; (ii) the investors in the private placements of
preferred stock that will convert into common stock at the public offering,
which includes 8,301,747 shares of series F redeemable convertible preferred
stock issued in the acquisition of webcasts.com, the issuance of 1,000,000
shares of our series G redeemable convertible preferred stock to The Walt
Disney Company for $10.0 million at a price equal to the per share price to
the public in the offering and the issuance of 537,634 shares of our series H
redeemable convertible preferred stock to Excite@Home for $5.0 million at a
price equal to the per share price to the public in the offering, less
underwriting discounts and commissions; and (iii) the new investors in this
offering (before deduction of underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- -------------------- Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 85,377,027 81% $101,468,602 33% $ 1.19
Private investors.......... 9,839,381 9 98,017,466 32 9.96
New investors in this
offering.................. 11,000,000 10 110,000,000 35 10.00
----------- --- ------------ ---
Total.................... 106,216,408 100% $309,486,068 100%
=========== === ============ ===
</TABLE>
The table assumes no exercise of the underwriters over-allotment option and
no exercise of stock options or warrants outstanding at March 31, 2000. As of
March 31, 2000, there were options outstanding to purchase a total of
11,816,815 shares at a weighted average exercise price of $3.38 per share,
while 4,069,804 shares were reserved
25
<PAGE>
for future grants under our 1998 Stock Plan. As of March 31, 2000, there were
warrants outstanding to purchase 1,949,987 shares of common stock issuable
upon exercise and conversion of outstanding convertible preferred stock
warrants at a weighted average exercise price of $3.42 per share. We will
assume all outstanding options granted under webcasts.com's 1999 Stock Option
Plan, which will convert into options to purchase 671,932 shares of series F
redeemable convertible preferred stock at a weighted average exercise price of
$3.32 per share. To the extent there are exercises of any of these options,
there will be further dilution to new investors. There will be additional
dilution if our webcasts.com division meets revenue targets in the twelve
month period following the closing of the webcasts.com acquisition, which
would require us to issue up to 1,253,205 shares of common stock to the former
webcasts.com shareholders. See "Capitalization," "Management--Compensation of
Directors" and "--Executive Compensation."
26
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, our audited financial statements and notes
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing elsewhere in this prospectus. The statements of
operations data for the period from March 20, 1998 (Inception) to December 31,
1998 and for the year ended December 31, 1999, and the balance sheet data as
of December 31, 1998 and 1999 are derived from, and are qualified by reference
to, our audited financial statements.
The unaudited pro forma statement of operations gives effect to the
webcasts.com acquisition as if it had occurred on January 1, 1999 and presents
the results of operations of iBEAM for the year ended December 31, 1999 and
for the three months ended March 31, 2000 combined with the unaudited pro
forma statement of operations of webcasts.com for the year ended December 31,
1999 and for the three months ended March 31, 2000, respectively. The
unaudited pro forma statement of operations of webcasts.com includes the
results of operations of webcasts.com for the year ended December 31, 1999
combined with the results of operations of The Rock Island Group, Inc., or
RIG, for the period from January 1, 1999 to October 14, 1999 as if the RIG
acquisition occurred on January 1, 1999. The unaudited pro forma combined
balance sheet gives effect to the acquisition of webcasts.com as if it
occurred on March 31, 2000 and combines the balance sheet of iBEAM as of
March 31, 2000 and the consolidated balance sheet of webcasts.com as of March
31, 2000. On October 15, 1999, webcasts.com completed its acquisition of all
the outstanding capital stock of RIG. The RIG acquisition was accounted for
using the purchase method of accounting and, accordingly, the net assets and
results of operations of RIG have been included in the consolidated financial
statements of webcasts.com since the acquisition date.
The pro forma financial information should also be read in conjunction with
the historical financial statements and notes to webcasts.com, which are
included elsewhere in this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The unaudited pro
forma combined information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the transactions had been consummated at the dates
indicated, nor is it necessarily indicative of the future operating results or
the financial position of the combined companies.
<TABLE>
<CAPTION>
Three Months Ended
Period from March 31,
March 20, 1998 Year Ended ----------------------------
(Inception) to December 31, 1999 2000
December 31, --------------------- 1999 -------------------
1998 Actual Pro Forma Actual Actual Pro Forma
-------------- -------- ----------- ------- -------- ---------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ 149 $ 5,054 $ -- $ 532 $ 2,083
------- -------- -------- ------- -------- --------
Operating costs and
expenses:
Cost of services
(direct and
indirect)............. -- 8,249 11,788 855 8,119 9,794
Engineering and
development........... 1,468 4,531 4,801 554 4,584 5,061
Sales and marketing.... 1,788 10,363 11,438 1,268 5,768 6,966
General and
administrative........ 1,096 7,174 12,468 767 3,733 5,098
Amortization of
goodwill and acquired
intangibles........... -- -- 31,282 -- -- 7,821
------- -------- -------- ------- -------- --------
Total operating costs
and expenses.......... 4,352 30,317 71,777 3,444 22,204 34,740
------- -------- -------- ------- -------- --------
Loss from operations.... (4,352) (30,168) (66,723) (3,444) (21,672) (32,657)
Other income and
expense, net........... 125 200 110 30 317 84
------- -------- -------- ------- -------- --------
Net loss................ (4,227) (29,968) (66,613) (3,414) (21,355) (32,573)
Dividends and accretion
related to preferred
stock and warrants..... -- -- (1,797) -- (10,796) (12,056)
------- -------- -------- ------- -------- --------
Net loss attributable to
common stock........... $(4,227) $(29,968) $(68,410) $(3,414) $(32,151) $(44,629)
======= ======== ======== ======= ======== ========
Net loss per share
attributable to common
stock--basic and
diluted................ $ (0.56) $ (3.43) $ (4.02) $ (0.40) $ (3.04) $ (2.36)
======= ======== ======== ======= ======== ========
Weighted average common
shares outstanding..... 7,488 8,726 17,028 8,462 10,589 18,891
======= ======== ======== ======= ======== ========
Pro forma net loss per
share attributable to
common stock--basic and
diluted (unaudited).... $ (0.63) $ (1.23) $ (0.43) $ (0.54)
======== ======== ======== ========
Pro forma weighted
average common shares
outstanding (unaudited)
....................... 47,435 55,737 74,860 83,162
======== ======== ======== ========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
----------------- 2000
1998 1999 -------------------
Actual Actual Actual Pro Forma
------- -------- -------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
investments........................... $ 2,198 $ 29,840 $ 21,829 $ 31,124
Working capital........................ 1,071 24,751 14,782 17,806
Total assets........................... 4,207 44,741 80,426 177,166
Long term obligations, net of current
portion............................... -- 3,627 6,601 7,638
Redeemable convertible preferred
stock................................. 6,905 61,192 96,114 184,624
Total stockholders' deficit............ (3,950) (26,033) (36,410) (36,410)
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
notes included elsewhere in this prospectus. This prospectus contains forward-
looking statements that involve risks and uncertainties. Our actual results
could differ significantly from those discussed in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this prospectus.
Overview
We provide a global Internet broadcast network that delivers streaming
media to large audiences of simultaneous users with viewing and listening
quality that approaches that of television and radio. We offer our services to
content providers seeking to enhance the quality of their delivery and reach
larger audiences at lower costs. In order to offer our customers a broader set
of services, in April 2000 we acquired webcasts.com, Inc., a provider of
production consulting services and tools. Webcasts.com services assist content
providers with integrating streaming media and e-commerce functions such as
chat, e-commerce data base links and pay-per-view.
iBEAM commenced operations in March 1998 and began offering streaming media
delivery service in October 1999. Since our inception, we have incurred
significant losses and as of March 31, 2000, we had an accumulated deficit of
$66.3 million. We have not achieved profitability on a quarterly basis, and
anticipate that we will continue to incur substantial and increasing net
losses. We expect to incur significant and increasing engineering and
development and sales, general and administrative expenses and, as a result,
we will need to generate significant revenues to achieve profitability.
Acquisition of webcasts.com
We entered into a definitive merger agreement to acquire privately-held
webcasts.com, a provider of interactive broadcasting services and proprietary
Internet tools on March 21, 2000. We intend to account for the transaction as
a purchase business combination. The acquisition is intended to qualify as a
tax-free reorganization.
On April 28, 2000 we consummated the transaction and issued 8,301,747
shares of our series F preferred stock to webcasts.com's security holders and
assumed webcasts.com's outstanding options which converted into 671,932 shares
of our series F preferred stock. We also issued a $3.0 million note to
webcasts.com's redeemable preferred shareholders. In addition, the former
security holders of webcasts.com may receive an additional 1,253,205 shares of
stock if our webcasts.com division meets certain revenue targets in the twelve
months after the closing of the acquisition. The purchase price was
approximately $93.2 million.
As result of the acquisition, we expect to expect to incur merger-related
costs of up to $1.7 million and to record approximately $93.8 million of
intangible assets and goodwill on our balance sheet, which will result in
amortization expense of approximately $20.8 million in 2000, $31.3 million in
2001 and 2002 and $10.4 million in 2003. These charges will increase our
expenses and losses during each of these periods and delay our ability to
achieve profitability.
Revenue
We derive our revenue from charging content providers for broadcasting
services that include On-Air, On-Stage and On-Demand distribution services. We
also derive revenue from other services, including targeted advertising,
production, event management, encoding and acquisition services. We expect
broadcasting services to provide the largest and fastest growing revenue
element of our services.
Our broadcasting services are typically charged based on the volume of
content delivered to end-users as measured in megabytes or megabits consumed
and therefore varies with the number of viewers, the access speeds
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of the viewers and time viewers spend viewing content broadcast by us.
Currently, On-Air and On-Demand services are typically priced based on actual
usage, which is measured by the volume of megabits transferred during the
month, for which we typically charge $.005 to $.01 per megabyte per month.
Most of our contracts with our On-Air and On-Demand customers contain monthly
minimum payment obligations, generally ranging from $500 to $1000 per month.
In addition, for On-Demand customers, there is a monthly fee for content
stored on our network, which is measured in gigabytes. In April 2000, the
monthly fee we charged our On-Demand customers for content storage ranged from
$40 to $11,000 per customer. On-Stage services can be priced under a fixed-fee
arrangement or on actual usage in terms of megabits transferred. To date,
content providers have typically elected to enter into fixed-fee arrangements
in order to fix the price of a broadcasting event. We price our fixed-fee
arrangements using an estimate of the amount of content delivered, which
includes a forecast of the expected number of viewers, the access speeds of
the viewers and the duration of the event. We typically charge $.005 to $.01
per megabyte transferred for our On-Stage services. For example, a content
provider could use our network to broadcast a two hour audio-only concert to
10,000 typical Internet users. This would result in the transfer of
approximately 270,000 megabytes in the aggregate to these users. At a fee of
$.01 per megabyte transferred, our total fee to the content provider would be
$2,700. A typical Internet user for purposes of this example would stream
audio at 30 kilobits per second. Other services such as production, event
management, encoding and acquisition services, are generally provided on a
consulting basis on either an hourly or fixed price billing.
Cost of Services (Direct and Indirect)
Cost of broadcasting Internet content includes both direct costs that vary
with the volume of content delivered and relatively fixed indirect costs, such
as staffing for a 24 hour network operations center. The cost of other
services, such as production, event management, encoding and acquisition
services, are primarily related to manpower costs for delivery of those
services.
Direct broadcasting costs include depreciation of network servers,
satellite transmission charges and charges for using land-line networks. In
proportion, the largest direct cost is the cost of using land-line networks.
For ISPs to which we deliver content into their end-user distribution system
via satellite broadcast, that is the "edge" of the Internet, we avoid the
land-line costs. Therefore it is our goal to increase the amount of content we
deliver to the edge of the Internet from less than 5% of traffic delivered
through our network as of March 31, 2000 to 40% by the end of 2000. Because of
our broadcast economics, we deliver content to ISPs at no charge, thereby
relieving them of charges they ordinarily would be required to pay to receive
content. As of March 31, 2000, we have agreements with over 90 ISPs that will
allow us to deliver content through their networks to the edge of the
Internet. Although four of the ISPs to which we deliver content have
negotiated access fees, these fees have represented lower costs to iBEAM than
paying for land-lines. The fees we pay to these ISPs are based on a percentage
of the revenue we derive from content delivered through their network, ranging
from 15 to 20%. As of March 31, 2000, less than 2% of revenue was subject to
access fees. Because the ISPs that we pay fees to tend to be the ISPs with
larger networks, we believe that as we expand our network, we will pay fees
with respect to more than 50% of the Internet traffic delivered through our
network. In addition, we expect the aggregate number of ISPs that receive
access fees will increase.
Indirect broadcasting costs are primarily the cost of equipment, operations
management software and personnel related to operating a 24 hour network
operations center. As such these costs are relatively fixed and independent of
volume of content delivered. We expect these indirect costs to be
approximately $23.0 million in fiscal 2000.
Engineering and Development
Engineering and development expenses consist primarily of salaries and
personnel costs related to the design, development and enhancement of our
service and the development of new applications that may be added to our
network. We believe that engineering and development is critical to our
strategic business development objectives and intend to enhance our technology
to meet the changing requirements of market demand. We expect our engineering
and development expenses to increase significantly in the future. The amount
that we
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will actually spend on engineering and development expenses is highly
uncertain and will depend on various factors that are difficult to predict
including the rate at which we believe it is in our business interests to
introduce new services and the availability for hire of qualified personnel.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, advertising,
promotions and related costs of sales and marketing personnel. We expect that
sales and marketing expenses will increase in the future as we hire additional
personnel, expand our operations domestically and internationally, initiate
additional marketing programs and establish sales offices in new locations.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs, operations and finance personnel, recruiting expenses,
professional fees and legal and accounting services. We expect that general
and administrative expenses will increase in the future as we hire additional
personnel, expand our operations domestically and internationally and incur
additional costs related to the growth of our operations as a public company.
Amortization of Stock-based Compensation
In connection with the grant of stock options to employees and consultants
since inception, we recorded unearned stock-based compensation of $37.9
million, representing the difference between the deemed fair value of our
common stock at the date of grant and the exercise price of such options. Such
an amount, net of amortization, is presented as a reduction of stockholders'
equity and amortized over the vesting period of the applicable option. Stock-
based compensation expense related to stock options granted to consultants is
recognized as the stock options are earned. At each reporting date, we re-
value the stock-based compensation using the Black-Scholes option pricing
model. As a result, the stock-based compensation expense will fluctuate as the
fair market value of our common stock fluctuates. We believe that the fair
value of the stock options are more reliably measurable than the fair value of
the services received due to the facts that we do not have records of time
spent by each consultant on matters related to iBEAM and that we do not have
the ability to ascertain what the fair market billing rates are for the
consultant's work. As of March 31, 2000, we expect to amortize unearned stock-
based compensation of $12.2 million in the remainder of 2000, $9.3 million in
2001, $4.8 million in 2002 and $2.1 million 2003.
The following table summarizes operating costs and expenses, excluding the
non-cash amortization of stock-based compensation:
<TABLE>
<CAPTION>
Period from
March 20,
1998 Three Months
(Inception) to Year Ended Ended
December 31, December 31, March 31,
1998 1999 1999 2000
-------------- ------------ ------ -------
(in thousands)
<S> <C> <C> <C> <C>
Operating costs and expenses:
Cost of services (direct and
indirect) (exclusive of stock-
based compensation of $0, $761,
$21 and $989, respectively)....... $ -- $ 7,488 $ 834 $ 7,130
Engineering and development
(exclusive of stock-based
compensation of $19, $329, $21 and
$680, respectively)............... 1,449 4,202 533 3,904
Sales and marketing (exclusive of
stock-based compensation of $8,
$604, $40, and $845,
respectively)..................... 1,780 9,759 1,228 4,923
General and administrative
(exclusive of stock-based
compensation of $12, $3,699, $149
and $1,580, respectively)......... 1,084 3,475 618 2,153
Stock-based compensation............ 39 5,393 231 4,094
------ ------- ------ -------
Total operating costs and
expenses....................... $4,352 $30,317 $3,444 $22,204
====== ======= ====== =======
</TABLE>
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iBEAM's Results of Operations for the Three Months Ended March 31, 1999 and
2000
Revenue. We recognized $532,000 of revenue in the first quarter of 2000. We
did not generate revenues in the first quarter of 1999. Fees for On-Stage, On-
Air and On-Demand services accounted for 25%, 27% and 36%, respectively, of
total revenue for the first quarter of 2000. As we continue to expand our
network and as more companies distribute content over our network, we expect
our revenue will increase in future periods. We also expect our On-Air and On-
Demand services will increase as a percentage of total revenue.
Cost of Services (Direct and Indirect). Cost of services increased by $6.3
million, or 755%, from $0.8 million in the first quarter of 1999 to $7.1
million in the first quarter of 2000. This increase was primarily due to
network bandwidth, satellite transmission, co-location and content acquisition
expenses of $2.0 million, network server and software depreciation of $1.4
million and salaries, bonuses and related taxes of $1.1 million as we expanded
our network and added capacity in late 1999. Headcount included in cost of
services increased from 12 at March 31, 1999 to 56 at March 31, 2000.
Engineering and Development. Engineering and development expenses increased
by $3.4 million, or 632%, from $0.5 million in the first quarter of 1999 to
$3.9 million in the first quarter of 2000. This increase was primarily due to
an increase in consultant expenses of $0.7 million and in salaries, bonuses
and related taxes of $1.5 million as additional engineers were hired
throughout 1999. Headcount included in engineering and development increased
from 16 at March 31, 1999 to 103 at March 31, 2000.
Sales and Marketing. Sales and marketing expenses increased by $3.7
million, or 301%, from $1.2 million in the first quarter of 1999 to $4.9
million in the first quarter of 2000. This increase was primarily due to an
increase in salaries, commissions, bonuses and related taxes of $1.6 million,
travel and entertainment expenses of $0.4 million and advertising and
promotional expenses of $0.9 million as we expanded our sales and marketing
organization and promoted our network. Headcount included in sales and
marketing increased from 15 at March 31, 1999 to 78 at March 31, 2000.
General and administrative. General and administrative expenses increased
by $1.6 million, or 248%, from $0.6 million in the first quarter of 1999 to
$2.2 million in the first quarter of 2000. This increase was primarily due to
an increase in salaries and related taxes of $0.6 million and professional
services of $0.2 million as we began to provide infrastructure to support our
growing operations. Headcount included in general and administrative increased
from ten at March 31, 1999 to 40 at March 31, 2000.
Amortization of Stock-based Compensation. Amortization of employee stock-
based compensation increased by $3.9 million from $0.2 million in the first
quarter of 1999 to $4.1 million in the first quarter of 2000 primarily due to
the grant of stock options to newly hired employees and consultants. In
connection with the grant of stock options to consultants, we recorded stock-
based compensation expense of $12,000 in the first quarter of 1999 and $1.2
million in the first quarter of 2000.
Other Income and Expense, Net. Other income and expense, net increased from
$30,000 in the first quarter of 1999 to $317,000 in the first quarter of 2000
primarily due to an increase in interest income based on larger cash balances.
Net Loss. Net loss increased by $18.0 million, or 526%, from $3.4 million
in the first quarter of 1999 to $21.4 million in the first quarter of 2000.
The increase in the net loss is primarily attributable to increases in
operating costs and expenses of $18.8 million, including an increase in
amortization of stock-based compensation of $3.9 million.
Webcasts.com Results of Operations for the Three Months Ended March 31, 1999
and 2000
Webcasts.com was incorporated in 1995 and commenced its current web
production services business in 1997. Webcasts.com revenues increased from
$0.7 million in the first quarter of 1999 to $1.6 million in the first quarter
of 2000 primarily as a result of its acquisition of The Rock Island Group,
Inc., or RIG, and higher production services revenue. Webcasts.com cost of
revenues increased from $0.3 million in the first quarter of
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1999 to $1.7 million in the first quarter of 2000, and its operating expenses
increased from $0.5 million in the first quarter of 1999 to $3.2 million in
the first quarter of 2000 primarily due to the RIG acquisition, additional
employees, increased selling expenses and stock-based compensation. As of
March 31, 2000, webcasts.com had an accumulated deficit of $8.0 million.
iBEAM's Results of Operations for the Period from March 20, 1998 (Inception)
to December 31, 1998 and the Year Ended December 31, 1999
Revenue. We began generating revenue in August 1999 after we commercially
introduced our content delivery service and have recognized $149,000 through
December 1999. Fees for On-Stage, On-Air and On-Demand services accounted for
74%, 6% and 3%, respectively, of total revenue for the year ended December 31,
1999. As we continue to expand our network and as more companies distribute
content over our network, we expect our revenue will increase in future
periods. We also expect our On-Air and On-Demand services will increase as a
percentage of total revenue, while On-Stage and other services will decrease
as a percentage of total revenue.
Cost of Services (Direct and Indirect). Cost of services increased from
zero in 1998 to $7.5 million in 1999. This increase was primarily due to
network bandwidth, satellite transmission, co-location and content acquisition
expenses of $1.4 million, network server and software depreciation of $0.8
million, consulting expenses of $0.7 million and salaries, bonuses and related
taxes of $2.4 million as we began to deploy and manage our network in 1999.
Headcount included in cost of services rose from zero at December 31, 1998 to
73 at December 31, 1999.
Engineering and Development. Engineering and development expenses increased
by $2.8 million, or 190%, from $1.4 million in 1998 to $4.2 million in 1999.
This increase was primarily due to an increase in salaries and related taxes
of $1.0 million as additional engineers were hired in 1999. Headcount included
in engineering and development rose from 23 at December 31, 1998 to 45 at
December 31, 1999.
Sales and Marketing. Sales and marketing expenses increased by $8.0
million, or 448%, from $1.8 million in 1998 to $9.8 million in 1999. This
increase was primarily due to salaries, bonuses and related taxes of
$2.9 million and advertising and promotional expenses of $4.5 million,
resulting from the development of a sales and marketing organization and the
marketing of our network and corporate brand, which was publicly launched in
October 1999. Headcount included in sales and marketing rose from 13 at
December 31, 1998 to 36 at December 31, 1999.
General and Administrative. General and administrative expenses increased
by $2.4 million, or 221%, from $1.1 million in 1998 to $3.5 million in 1999.
This increase was primarily due to salaries and related taxes of $1.0 million
as we began to provide infrastructure to support our growing operations.
Headcount included in general and administrative rose from six at December 31,
1998 to 21 at December 31, 1999.
Amortization of Stock-based Compensation. Amortization of employee stock-
based compensation increased by $4.9 million from $31,000 in 1998 to $5.0
million in 1999 due primarily to the grant of stock options to newly hired
employees. In connection with the grant of stock options to consultants, we
recorded stock-based compensation expense of $8,000 in 1998 and $0.4 million
in 1999.
Other Income and Expense, Net. Other income and expense, net increased from
$125,000 in 1998 to $200,000 primarily due to an increase in interest income
based on larger cash balances.
Income Taxes. We have incurred operating losses for all periods. As of
December 31, 1999, we had net operating loss carryforwards for federal and
state tax purposes of approximately $25.8 million. These federal and state tax
loss carryforwards are available to reduce future taxable income and expire in
varying amounts beginning in 2004. Under the provisions of the Internal
Revenue Code, some substantial changes in our
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ownership may limit the amount of net operating loss carryforwards that could
be utilized annually in the future to offset taxable income.
Net Loss. Net loss increased by $25.8 million from $4.2 million in 1998 to
$30.0 million in 1999. The increase in net loss is primarily attributable to
increases in operating costs and expenses of $26.0 million, which includes an
increase in amortization of stock-based compensation of $5.4 million.
Webcasts.com Results of Operations for Years Ended December 31, 1998 and
December 31, 1999
Webcasts.com had total revenue of $2.0 million in 1998 and $2.4 million in
1999. Webcasts.com costs of revenues increased from $1.3 million in 1998 to
$1.8 million in 1999, and its operating expenses increased from $0.9 million
to $4.8 million primarily due to increased selling expenses partially as a
result of its acquisition of the RIG and stock-based compensation. As of
December 31, 1999, webcasts.com had an accumulated deficit of $4.4 million.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through capital
lease obligations and the sale of our capital stock. We have raised an
aggregate of $96.1 million from the sale of our preferred stock through
March 31, 2000.
Net cash used in operating activities was $3.5 million in the first quarter
of 1999 and $15.0 million in the first quarter of 2000, resulting primarily
from our net loss and an increase in prepaid expenses and other assets of $6.8
million, offset in part by amortization of stock-based compensation of $4.1
million, depreciation and amortization of $2.1 million and an increase in
accounts payable and accrued liabilities of $7.3 million.
Net cash used in investing activities was $0.3 million in the first quarter
of 1999, for the purchase of property and equipment. Net cash used in
investing activities was $38.8 million in the first quarter of 2000 and
consisted of purchases of property and equipment and investments of $21.8
million and $7.0 million respectively and a loan of $10.0 million to
webcasts.com.
Net cash flow provided by financing in the first quarter of 1999 was $13.5
million, consisting of $12.5 million in proceeds from issuances of preferred
and common stock and $1.0 million in net proceeds from lease financing.
Net cash used in operating activities was $3.2 million in 1998 and $19.2
million in 1999, resulting primarily from our net loss partially offset by an
increase in accounts payable and accrued liabilities of $2.7 million,
amortization of stock-based composition of $5.4 million, depreciation and
amortization of $1.7 million and the issuance of a warrant for $1.0 million.
Net cash used in investing activities was $1.5 million in 1998, resulting
from the purchase of property and equipment. Net cash used in investing
activities was $12.5 million in 1999 and consisted of $7.5 million in
purchases of computers, equipment for network infrastructure and software and
$5.0 million of investments of surplus funds received from the issuance of our
preferred stock.
Net cash provided by financing activities was $6.9 million in 1998 and
$54.3 million in 1999. Cash provided by financing activities was the result of
net proceeds from the sales of our preferred stock and, to a lesser extent,
our common stock, partially offset by payments on our capital lease
obligations in 1999.
As of March 31, 2000, we had approximately $21.8 million in cash, cash
equivalents, and investments. We expect the build-out of a global network and
the funding of operations to develop and to market our services will require
substantial investment. As of March 2000 we had raised $96.1 million from the
sale of preferred stock and $10.1 million from equipment lease lines that are
repayable over periods of up to four years. We expect
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<PAGE>
to make at least $40.0 million in capital investments in 2000, of which $26.0
million was incurred in the first quarter to date, and will require
significant capital to fund other operating expenses. We expect to raise
enough proceeds from our initial public offering to fund our operations for at
least 12 to 18 months. In the absence of a public offering, to continue to
execute our current business plan, we would attempt to raise capital in the
private equity market. To the extent such capital is not available, or until
available, we would exercise control of our discretionary expenses by reducing
network costs, capital expenditures and other discretionary expenses.
Thereafter, we will need to raise additional capital in 2001 and we may seek
to raise additional capital sooner. Since our expenditure levels will depend
on discretionary factors within our control and competitive factors outside
our control we are not able to determine the amount of future capital we will
need to raise with a high degree of certainty.
Qualitative and Quantitative Disclosures About Market Risk
We offer our services in the United States and anticipate distributing
U.S.-based content in Asia and Europe in 2000. As a result, our financial
results could be affected by factors including weak economic conditions in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates. Due to the short-term nature of our investments,
we believe that there is no material risk exposure; therefore, no quantitative
tabular disclosures are required.
Year 2000 Readiness Disclosure
The year 2000 issue is the potential for system and processing failures of
date-related data and is the result of the computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
We have designed our network and our service for use in the year 2000 and
beyond. To date, our service and our networks have not revealed any
significant year 2000 problems. Our network generally integrates sophisticated
hardware and software products incorporating the latest technologies at the
time of purchase.
As of March 31, 2000 we have not experienced any significant costs as a
result of year 2000 problems and do not anticipate incurring material
incremental costs in future periods due to such issues.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. To date, we have not engaged in derivative and
hedging activities, and accordingly, do not believe that the adoption of SFAS
No. 133 will have a material impact on our financial statements and related
disclosures. We will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral
of the Effective Date of the FASB Statement No. 133," in our fiscal quarter
beginning July 1, 2000.
In December 1999, the Securities and Exchange Commission issued SAB No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. We have complied with the guidance in SAB No.
101 for all periods presented.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25". This
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interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. We believe that FIN 44 will not have a material
effect on the financial position or results of operation.
You Should Not Rely On Forward-Looking Statements
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to certain third parties relating to their estimates
regarding the growth of certain markets. You should not rely on forward-
looking statements in this prospectus. Forward-looking statements are subject
to known and unknown risks, uncertainties and other factors that may cause our
actual results to differ materially from expectations. These risks,
uncertainties and other factors include, among others, those identified under
"Risk Factors" and elsewhere in this prospectus.
Some of the forward-looking statements included in this prospectus involve
our indirect broadcasting costs, our unearned stock-based compensation and our
capital expenditures over the next twelve months. As to our revenue, we have
made forward-looking statements as to changes in the amount of our revenues
and the percentages of revenue attributable to each of our On-Air, On-Demand
and On-Stage services. In addition, we have made forward-looking statements
regarding the build-out and reach of our network.
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BUSINESS
Overview
We provide an Internet broadcast network that delivers streaming media to
large audiences of simultaneous users with viewing and listening quality that
can approach that of television and radio. Our network uses a combination of
land-line networks and point-to-multipoint satellite broadcasting of Internet
content to iBEAM servers located at the edge of the Internet, which is the
Internet access point closest to the end user. Our network broadcasts to iBEAM
servers located in the facilities of Internet service providers, or ISPs, and
other companies that host Internet applications and services. Our approach of
using a combination of land-line networks and satellite broadcasting to
deliver content directly to the edge of the Internet bypasses much of the web
congestion and improves the delivery of streaming audio-visual media and the
quality of the viewing and listening experience.
We provide a wide range of services to our customers to facilitate their
use of streaming media on the Internet, including event production and
broadcasting services. To expand our service offerings to our customers, we
have acquired and developed software and interface tools that enable us to
broadcast high-fidelity video and audio streams integrated with e-commerce
links and functions. Our investment in servers at the edge of the Internet
also allow for the development of new value-added services in the future such
as pay-per-view event programming, advertising to targeted end users and
interactive Internet-based training.
In April 2000, we acquired webcasts.com to add business-to-business
communications capabilities, such as online training and interactive trade
shows. Our combined technology allows users to view streaming content,
interactively obtain related data and transact online purchases. Our
technology runs with a variety of streaming media players. Most Internet users
can access our streamed content regardless of the users' multimedia and
browsing software and end users do not need to purchase special equipment. As
of March 31, 2000, our network, which we will continue to develop, is
sufficient to support up to 300,000 simultaneous Internet users accessing
streams of data from the Internet at 20 kilobits (20,000 bits) per second. We
plan to expand our network to support 1,000,000 simultaneous Internet users at
this rate by the end of 2000.
We commercially introduced our service in October 1999. We currently have
contracts to provide our services to over 100 content providers. We generate
revenue from our broadcasting services based on the volume of content stored
or delivered to end-users and from our other services such as event production
based on hourly or fixed price billing. As part of the build-out of our
broadcasting network, we have agreements to locate our servers with over 90
ISPs including America Online, the largest U.S. Internet access provider,
Excite@Home, an Internet cable access provider, and Covad Communications and
Northpoint, high-speed Internet access providers that have developed networks
with national reach. To realize the benefits of these access agreements we
will need to make substantial investments in capital equipment located at ISPs
and pay some of those ISPs fees based on revenue derived from their networks.
In January 2000, we entered into a letter of intent with Pacific Century
CyberWorks, or PCCW, to establish a joint venture, named iBEAM Asia, to expand
our international presence and to access PCCW's network of cable subscribers.
Industry Background
The Internet has evolved from a static information source to a dynamic
medium for commerce, communications and, most recently, media. However, the
Internet was not designed to support the delivery of full motion video and
high-fidelity audio simultaneously to large audiences. To date, Internet
broadcasts have been inferior to television and radio broadcasts due to high
Internet transmission costs, the low quality of the viewing and listening
experience and the inability to serve large audiences of simultaneous users.
Despite these limitations, existing and new website owners, traditional media
and entertainment companies and creators of new applications, such as online
education, are trying to attract and retain Internet users by using greater
amounts of visual and audio content on their websites. Streaming has become
the preferred method of distributing video and audio content because it allows
simultaneous broadcasting and playback of content, thereby eliminating the
requirement that an Internet user download an entire video or audio file
before viewing or listening.
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Burgeoning Demand for Streaming Media
Owners of Existing Websites
Owners of existing websites are trying to attract and retain users with
rich content. Richer content, such as an audio sample of a compact disc music
recording or a video demonstration of a product, combined with the interactive
and user-controlled capability of the Internet, are factors that increase
consumer interest and purchases. This enriched content is made possible
through streaming media. New media companies have emerged to address the
growing audience of Internet users with news and entertainment content. RHK
Research recently reported in a press release that streaming media now
comprises 10% of total Internet traffic.
Traditional Media and Entertainment Companies
Traditional media and entertainment companies are emerging as another
factor driving the demand for Internet distribution of streaming content. This
demand is in part to provide new content and to retain existing audiences
which are increasingly finding the Internet an attractive alternative to
television. Forrester Research recently reported that consumers between the
ages of 16 and 24 believe they watch 47% less television because of the
Internet.
Platform for New Applications
The demand for streaming media, at both the enterprise and consumer level,
will be driven by a host of new applications that currently are under
development or are not yet commercially available for sustained online usage.
At the enterprise level, corporate broadcasts, sales calls and product
launches are increasingly incorporating sophisticated web pages and streaming
media to reduce the number of face-to-face meetings, with the goal of
generating significant savings in planning and travel costs. Other enterprise-
wide processes being migrated onto the Internet include business-to-business
transactions such as ordering, purchasing, auctions, supply chain management
and large file distribution. Enterprises and educational institutions are also
offering streaming training videos on the web to facilitate Internet-based
distance learning. We believe that the ability to view and hear streaming
media on-demand will also drive consumer demand for other online products and
services such as advanced video games, interactive television and pay-per-view
events.
Internet Design Limitations for Streaming Media
The Internet was originally designed to ensure delivery of static data,
such as text and data files, and was not designed to ensure the continuous
flow of streaming media. The Internet's design goal of ensuring bulk data
delivery is accomplished by breaking transmissions into small packets of data
that can be routed through different delivery points at different times and,
subsequently, be interwoven with other data transmissions. Should an Internet
connection point, such as a server or router, receive traffic that exceeds its
capacity, packets are dropped temporarily. These "lost" packets are either
lost permanently or are eventually requested and re-sent, but the sequence of
receipt may be out of order and irregularities may occur in intervals of
receipt. Due to limited capacity on the Internet, today most streaming content
is transmitted in the UDP, or user datagram protocol, format where lost
packets are not recovered.
While static web pages can experience lost packets or delays without a
noticeable deterioration in quality, streaming media is much more sensitive to
these problems. The impact of packet loss and irregular latency causes a
"jitter" in viewing and listening to streaming media as streams stop and
restart waiting for packets to arrive. In addition, lost packets may include
"key frames" in the content that contain information needed to ensure the
proper decoding and playback of subsequent frames.
The rate of packet loss is significant on the Internet. In a 1998 Bell Labs
Study, packet loss rates of approximately 25% occurred during peak periods. We
believe packet loss will increase if traffic growth exceeds the addition of
server and router capacity. In addition, rapid deployment of high-speed
connections, such as DSL and cable modems, which are intended to improve the
viewing and listening experience of the end user, are
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increasing the traffic load on the Internet causing further congestion and
quality degradation. We believe that increasing packet loss and more high-
speed Internet connections are combining to significantly degrade the end
user's streaming media experience.
Cost and Scale Factors Limiting Streaming Media
To date, Internet broadcasts have been inferior to television and radio
broadcasts due to high Internet transmission costs, the low quality of the
viewing and listening experience, and the inability to serve large audiences
of simultaneous users. This is largely due to the current single point-to-
point land-line network model for Internet content delivery. In a point-to-
point network, each end user establishes a connection between his personal
computer and the computer originating the content delivery. Because of the
need for connectivity to each individual end user, content providers must make
large investments to support the bursts in demand that may sit idle during
non-peak periods. Often the amount of investment required is either difficult
to estimate or uneconomical to make. As a result, during periods of peak
demand for content, insufficient Internet user connections may prevent access
by many users to popular events. For example, many users trying to access the
Victoria's Secret fashion show and the John Glenn space shuttle launch over
the Internet experienced these problems.
The Internet requires users to pay multiple tiers of communication
providers for long distance and local access which results in multiple charges
and higher costs. Communication providers charge based on bandwidth, which is
the capacity of the communications line required to transmit a given amount of
data. Both the party sending data on the Internet and the ISP receiving
content into its network pay these charges. Streaming media, which is
inherently data rich and typically consumes multiple times the bandwidth of
static web pages, increases costs for content providers and ISPs. As an
example, we believe the cost of a transmission to a content provider of
streaming media that approaches the quality of a VCR video (a 300 kilobit
stream) would typically exceed advertising revenue derived by the content
provider from such transmission. Our belief is based on discussions with
Internet advertising specialists, which indicate that content providers will
receive approximately $40 in advertising revenue for each 30 seconds of
advertising in a three minute broadcast segment to 1,000 users, and our own
experience in purchasing capacity in the communications bandwidth market,
which indicates that the average cost of transmitting content to these 1,000
users for each three minute broadcast segment is approximately $70. In
addition, ISPs that are typically bound to fixed monthly revenues under their
contracts with end users may see their costs increase as their customers
access increasing amounts of streaming media. While we believe that land-line
data transmission cost will decline significantly over time, we also believe
the land-line networks are unlikely to approach the economies of scale
achieved by alternatives, such as point-to-multipoint broadcasting by
satellite, where there is no direct transmission cost of adding an additional
broadcast viewer.
Limitations of Current Approaches to Delivering Streaming Content
While various products and delivery services have been developed to address
the challenges of delivering streaming content, we believe they do not
adequately resolve the issues of quality, cost and scalability. Some content
hosting companies store and locate streaming content on servers located at
multiple points on the Internet closer to end users. This typically increases
the speed of connection to a user. However, it does not eliminate the
potential for packet loss as content is delivered from these servers to the
end user through the remaining Internet connections. In addition, both product
companies and hosting companies offer caching software or services that store
content most frequently requested by users closer to the user in order to
reduce the transmission costs across the Internet. This usually requires a
large investment in caching software, offers only limited improvements for
live streaming content and lacks other capabilities such as forward error
correction, which is the ability to detect and correct errors in data
transmissions before such data reaches the end users. Furthermore, it does not
generate reporting and network management data for content providers.
Many traditional communications or Internet backbone providers have been
trying to increase their network capacity. However, these fiber-optic networks
do not offer a complete managed service and rely on network connections that
are subject to packet loss and quality degradation. In addition, some of the
webcasting companies have proposed to lower transmission cost by having ISPs
agree to retransmit content in a daisy chain approach. This
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approach does lower cost, but propagates packet loss and errors as data is
transmitted to the next ISP. Also, while these approaches offer some benefits
for data which can be stored and retransmitted, neither the traditional web
hosting providers, the caching technologies nor the new fiber-optic based
networks are currently capable of large scale, high fidelity Internet
broadcasting. Our Internet broadcast network leverages the best attributes of
many of these approaches and combines them with our proprietary streaming
software to deliver cost effective streaming media broadcasting that offers
high fidelity content distribution to large numbers of simultaneous users.
The iBEAM Solution
We provide an Internet broadcast network that delivers streaming media with
viewing and listening quality that can approach that of television and radio.
Our broadcast network offers content providers the ability to serve large
audiences of simultaneous users. Our network uses a combination of land-line
networks and satellite broadcasting to deliver Internet content to iBEAM
servers located at the edge of the Internet, which is the Internet access
point closest to the end user. This improves the quality of the broadcast
stream by avoiding Internet congestion. Our satellite broadcast approach and
streaming management software bypasses the congestion of the Internet
backbone. We provide a wide range of services to our content provider
customers to facilitate their use of streaming media on the Internet. Our
investment in servers at the edge of Internet enables the delivery of new
value-added services, such as advertisement insertion, to both the content
providers and ISPs. We also provide production, event management, encoding and
acquisition services to facilitate use of our broadcasting services by content
providers.
The key benefits of our streaming media services to our customers include:
. High-Fidelity Video and Audio Streams--Our satellite broadcasting
capability and our software enable smooth, continuous content delivery
to our servers before being transmitted to the end user. By delivering
content to the edge of the Internet, our network eliminates packet loss
and jitter, thereby delivering a superior broadcast-quality stream.
. Low Cost Distribution--Using satellite technology to broadcast on a
point-to-multipoint basis at a fixed cost allows us to broadcast to each
additional user at little or no incremental cost. This economy of scale
lets us charge content providers less to distribute streaming media than
traditional Internet bandwidth providers that rely on land-line point-
to-point connectivity and may enable content providers to improve their
profitability.
. Ability to Serve Large Audiences Simultaneously--Our network of servers
and our use of satellite technology to transmit a single stream to an
unlimited number of servers are designed to allow us to serve large
audiences of simultaneous users. As we add streaming capacity through
additional investments in servers and hosting center equipment, we will
be able to serve increasingly larger audiences with the quality and
reliability that both end users and content providers demand.
. No End User Special Equipment Needed--Since we broadcast to the ISPs,
end users do not need to purchase receiver dishes, special software or
change their procedures to view content. This makes our services
transparent to the end user and we believe facilitates the rapid
deployment of our network.
. Broad Range of Service Offerings to Facilitate Use of Streaming Media--
Our streaming media services for content providers consist of, among
other things, production, event planning, encoding and production
services. The acquisition of webcasts.com will supplement our service
offerings by giving us the capability to integrate chat and e-commerce
databases with streaming media content and by adding to our other
services. Our customers do not need to utilize multiple vendors to
enable their websites to offer streaming media.
. Usage Reporting Capabilities--We have developed a web-based network
dashboard that allows content providers to determine, by individual
stream, who is watching or listening to their content, how long they
have been watching or listening and where the user is geographically
located. This dashboard gives content providers on our network the
insight they need to make intelligent programming and
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advertising decisions, which is a great advantage compared to the
traditional rating services relied on by media companies.
. Network Supports a Variety of Technologies and Applications--Our network
is designed to support all streaming media applications. We support the
major streaming media players including Windows Media Player and
RealPlayer and we intend to support new players as they gain widespread
market acceptance. Our servers deployed throughout the Internet can
execute a variety of value-added applications. Our server platform is
designed to be highly flexible, allowing for new services and
applications such as streaming advertising insertion, pay-per-view
administration and other e-commerce related services. These new
applications will create the potential for new revenue sources for our
customers.
Strategy
Our goal is to become the leading provider of high-fidelity Internet
broadcast services by developing the world's largest, premier quality, and
most cost efficient distributed streaming network. To this end, we are
capitalizing upon our innovative network architecture, proprietary technology
and early entry into streaming media broadcasting to position us as the
broadcast network of choice for reliable, high-fidelity Internet broadcasting.
Our strategy comprises the following initiatives:
Expand Our Customer Base. We currently have contracts to provide our
services to over 100 media, entertainment and technology companies. We intend
to increase our customer base by targeting existing new media, entertainment,
and e-commerce companies, as these companies begin to more fully use streaming
technology. We also intend to target traditional media and entertainment
companies, including motion picture, television, sports, newspapers and radio
companies, as customers, which we believe will increasingly seek to broadcast
video and audio over the Internet. To accomplish these goals, we intend to
expand our sales force and to further invest in marketing activities and
services and building the iBEAM brand. The acquisition of webcasts.com expands
our customer base by adding customers that use webcasts.com's business-to-
business e-commerce services including America Online, which was its largest
customer by revenue in 1999.
Globally Build Out Our High-Fidelity Internet Broadcast Network. We plan to
build out our network internationally through joint ventures, partnerships and
other commercial arrangements with global technology and media companies that
have the local resources and expertise to extend our broadcast network to
international customers. This will serve to increase the worldwide number of
users that can be reached by our edge servers, yielding high quality
transmission at low cost. We believe our satellite-based business model will
be particularly successful in markets with less developed, land-line
infrastructure. We believe that the recent growth in Internet and data related
transmission in the United States will be repeated in numerous regions across
the globe, including Europe, Asia and Latin America. In January 2000, we
signed a letter of intent with Pacific Century CyberWorks, or PCCW, to
establish a joint venture company called iBEAM Asia. iBEAM Asia, which
initially will be 51% owned by PCCW and 49% owned by iBEAM, will focus on
distributing streaming video and audio content in over 50 countries in the
Pacific Rim, Indian subcontinent and Middle East. We expect our ownership
interest in iBeam Asia to decline below 49% in the future as iBEAM Asia raises
additional funding through sales of equity interests to third parties, which
would dilute our interest. PCCW plans to begin offering broadband Internet
access services to cable operators in Asia in 2000. These services are
designed to enable cable operators to offer broadband Internet services to
their end-users. We expect that iBEAM Asia's deployment of its edge network
will initially parallel the build-out of PCCW's Internet services to cable
operators that subscribe to PCCW's broadband ISP platform and related Internet
services. iBEAM Asia intends to predominantly use satellite distribution
rather than land-lines because of the relatively high cost of land-line
bandwidth in Asia. We expect that iBEAM Asia will begin delivering content to
end users in Asia by the end of 2000. In addition, we recently entered into an
agreement with InterPacket, a satellite-based IP network serving ISPs in 80
countries, to deliver our customers' streaming content via InterPacket points
of presence in Asia, Europe, Latin America, Africa and the Middle East.
Further Leverage Our Broadcast Network to Drive Economies of Scale. We have
developed a proprietary software platform that enables a number of standard
Internet applications to be run across a global
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network of distributed edge servers. The inherent advantage of our network and
its associated satellite broadcast software platform is its ability to allow
standard Internet applications to reach large audiences. As we continue to
deploy and increasingly operate through our point-to-multipoint network
architecture, we will be able to broadcast increasing amounts of content to
our highly distributed network of servers with minimal, incremental satellite
transmission cost.
Moreover, we can add additional points of presence, which are server
locations at an Internet users' access point within an ISP network, with low
capital expenditures and minimal increase in bandwidth costs. By leveraging
the existing infrastructure of local and regional Internet service providers
to carry our network traffic, we further reduce the expenditures we incur in
deploying our network infrastructure. Our broadcast network offers several
advantages to ISPs. By partnering with us, ISPs can avoid incoming bandwidth
charges and provide significantly improved end user experiences through our
broadcast network. This quality and cost advantage will enable us to continue
penetrating the streaming media content distribution market.
Introduce New Value Added Features and Services. In addition to offering
high-fidelity streaming at competitive prices, we believe we can attract new
streaming media customers through the introduction of advanced features such
as real-time traffic reporting and advanced data management that simplify the
task of streaming content on the Internet. We intend to aggressively pursue
these new applications and new markets. An example of a new application we
recently introduced is the ability to enable content providers to insert
targeted and non-targeted streaming advertising into our broadcasts. Our
servers now have the capability to insert directed local advertisements into
each copy of the broadcast stream they serve. We believe that this capability
will allow content providers to enhance their revenue by charging advertisers
a premium for advertising targeted directly to the end user. We expect to
generate revenue from targeted advertising during the second quarter of 2000.
In addition, we intend to serve enterprise customers with needs for new
applications such as Internet enabled distance learning, virtual roadshows,
digital downloads and video conferencing.
Pursue Additional Commercial Relationships and Joint Ventures. We currently
have commercial relationships with various media, entertainment and technology
companies and ISPs, including America Online, Covad Communications, Microsoft,
Pacific Century CyberWorks and Sony. These relationships provide us with
insights as to future customer requirements, Internet access trends and
emerging technologies and facilitate our network expansion. For example,
through our agreement with America Online, we will be able to deploy our
servers throughout the largest U.S. Internet access network, thus expanding
the reach of our broadcast platform. This will, in turn, make our services
more attractive to content providers, which will be able to reach more end
users through our network. We intend to pursue additional commercial
relationships to accelerate market acceptance of our services and expand our
global network. We believe that these benefits, combined with what we believe
will be the ISP's unwillingness to accommodate multiple distributed networks,
will strengthen our competitive position.
Create Open Platform for New Applications. A network of distributed
computers located at the edge of the Internet can run a wide range of
applications more efficiently than a traditional approach of running these
applications on a cluster of servers located in one or a few data centers
located on the Internet backbone. We are developing a series of application
programming interfaces that allow other applications from other providers to
take advantage of our network. We believe the open architecture of our network
will encourage other application service providers to partner with us.
iBEAM's Streaming Media Services
Distribution Services
We currently offer three primary services: iBEAM On-Air, iBEAM On-Stage and
iBEAM On-Demand. These services are typically charged based on the volume of
content delivered to end users as measured in
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megabytes or megabits consumed and therefore varies with the number of
viewers, the access speeds of the viewers and time viewers spend viewing
content broadcast by us. Currently, On-Air and On-Demand services are
typically priced based on actual usage, which is measured by the volume of
megabits transferred during the month, for which we typically charge $.005 to
$.01 per megabyte per month. Most of our contracts with our On-Air and On-
Demand customers contain monthly minimum payment obligations, generally
ranging from $500 to $1,000 per month. In addition, for On-Demand customers,
there is a monthly fee for content stored on our network, which is measured in
gigabytes. In April 2000, the monthly fee we charged our On-Demand customers
for content storage ranged from $40 to $11,000 per customer. On-Stage can be
priced under a fixed-fee arrangement or on actual usage in terms of megabits
transferred. To date, content providers have typically elected to enter into
fixed-fee arrangements in order to fix the price of a broadcasting event. We
price our fixed-fee arrangements using an estimate of the amount of content
delivered, which includes a forecast of the expected number of viewers, the
access speeds of the viewers and the duration of the event. We typically
charge $.005 to $.01 per megabyte transferred for our On-Stage services. For
example, a content provider could use our network to broadcast a two hour
audio-only concert to 10,000 typical Internet users. This would result in the
transfer of approximately 270,000 megabytes in the aggregate to these users.
At a fee of $.01 per megabyte transferred, our total fee to the content
provider would be $2,700. A typical Internet user for purposes of this example
would stream audio at 30 kilobits per second. Other services such as
production, event management, encoding and acquisition services, are generally
provided on a consulting basis on either an hourly or fixed price billing.
iBEAM On-Air. iBEAM On-Air is the service offered for delivery of live,
continuous content streaming, such as music video channels, Internet or
traditional radio stations or news shows and sports channels. iBEAM On-Air
service is highly differentiated since it is very difficult to deliver live
content across the Internet using existing Internet delivery or caching
technologies. Video and audio streams are typically delivered by satellite to
our servers, which we call MaxCasters, bypassing the congestion of the
Internet backbone. The satellite link and our private acquisition network
allow us to offer an end-to-end connection from content source to the ISP
ensuring high fidelity video and audio streams. We derived 6% of our revenue
in 1999 from our On-Air services.
iBEAM On-Stage. iBEAM On-Stage is the same live delivery of iBEAM On-Air,
but packaged to meet the needs of the event-based customer. Target customers
for iBEAM On-Stage include concerts, trade shows and other events. Our network
is particularly important for high profile live events, such as the Metallica
1999 concert, since the large number of simultaneous users attracted by these
events often causes wide-spread congestion in the Internet backbone. Our
satellite broadcast capability allows us to bypass this congestion and deliver
a high-fidelity stream, even during periods of peak usage. We derived 74% of
our revenue in 1999 from our On-Stage services.
iBEAM On-Demand. iBEAM On-Demand is our service for on-demand media
hosting, such as music video clips, news highlights, product displays or any
type of streaming media included on a website. iBEAM On-Demand service is
based upon our network agent iDirector that manages the replication of stored
on-demand content across the array of iBEAM MaxCaster servers. Our network has
been designed with large-scale storage capabilities to accommodate the very
large content libraries of the media companies we serve. We derived 3% of our
1999 revenue from our On-Demand services.
Other Services
To supplement our core distribution services, we offer a series of other
services aimed at facilitating a complete Internet broadcasting solution for
content providers. Our services include targeted advertising, production,
event management, encoding and acquisition services. These services are
typically billed on a consulting or usage basis.
Targeted Advertising Services. We recently introduced our iBEAM On-Target
services through which we enable content providers to insert streaming
advertisements targeted toward the end user in our broadcast streams.
Production Services. We have a team of service consultants and tools that
enable the creation and management of user interfaces that enable the
integrated presentation of streaming media, chat boxes, e-commerce links and
access management controls.
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Event Management Services. We have a team of event managers that will
travel to the site of broadcast events. These event managers will supervise
the interface with the content production crew, as well as provide on-site
encoding and signal acquisition.
Encoding Services. Encoding is the process of converting a raw digital
audio or video stream into a format optimized for delivery over the Internet.
Proper encoding is critical to ensure the highest fidelity streaming content.
Optimizing the encoding process requires a combination of quantitative and
subjective assessments of the content being encoded. We provide these services
directly and indirectly through qualified third-party vendors such as Loudeye
and Entertainment Blvd.
Acquisition Services. Our acquisition services collect content from content
providers for distribution through our network. We offer a variety of signal
acquisition methods. In some instances, we will procure the acquisition
circuits on behalf of our customers.
Customers
We commenced commercial operations in October 1999. We currently have
contracts to provide our services to over 100 content providers. The following
is a partial list of our customers and webcasts.com's customers by category in
order of amount of revenue generated in 2000 through March 31, 2000:
Internet Media Film
National Association of Chain Drug Stores
Atom Films
Republican National Committee iFilm Corporation
Jumpcut - Here and Now Cinema Now
MacWorld Always Independent Films
Decorative Arts
Music--Video/Radio News
NetRadio MSNBC
Launch Media PTV News
Entertainment Blvd. BBC World
ChoiceRadio Hollywood Stars TV
Ministry of Sound ZD Net
Sports Business to Business
University Netcasting/Fans Only America Online
ProWebCast Prepaid Legal
Max Broadcasting Cybernet Software Systems
Phillip Morris
The following case studies illustrate how some of our largest customers, in
terms of the amount of content distributed through our network, are using our
service offerings.
Microsoft
When Microsoft launched its Windows Media Technologies version 4, they
promoted the launch event by hosting a live concert with Buddy Guy, a popular
blues guitarist which highlighted our capability to broadcast live events that
require high fidelity streaming video. We provided iBEAM On-Stage service to
Microsoft to broadcast a broadband video feed from the concert at the House of
Blues in Los Angeles to our network of MaxCasters deployed around the country.
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Launch Media
We were chosen by Launch Media to provide iBEAM On-Demand hosting services
to deliver stored music through our network for the recently introduced
Launchcast personalized music service. This service allows users to specify
what genre of music they prefer and identify individual titles they want
included in their personal playlist. Hosting the Launchcast music service
makes extensive use of the intelligent data management of iBEAM On-Demand. The
Launchcast service supports a very large library of digitized music,
intelligently stored across our distributed network.
MSNBC
MSNBC utilizes the high bandwidth capabilities of iBEAM On-Air to broadcast
news coverage through our network. MSNBC's continuous live video news feed is
streamed over our network. We also deploy and update news highlights that are
available on-demand to MSNBC users. In December 1999, a single 100 kilobit per
second (kbps) video stream served by us generated nearly one terabyte of
streaming media data to MSNBC users.
Internet Broadcast Network
The architecture of our network is conceptually similar to the architecture
of traditional broadcast television and cable networks but incorporates
several layers of redundancy. Traditional television is collected over a
private acquisition network, then broadcast by satellite to television
affiliates or cable facilities geographically dispersed around the country. We
collect streaming Internet content from providers, then broadcast it via
satellite and traditional land-line networks to our network of MaxCasters,
located in the facilities of ISPs. We then deliver these high-fidelity video
and audio streams to the end-user. Our services require no special end user
hardware or software. In addition to the efficient distribution of streaming
content, our MaxCasters can perform a wide range of value-added applications,
such as targeted advertising and integrating e-commerce links with streaming
content, which we will seek to introduce in the future.
As we expand our network of MaxCaster edge servers, we will increase the
number of users served, thereby reducing transmission costs to ISPs. We have
currently deployed servers in more than 90 networks. These service providers
include ISPs such as America Online, DSL providers such as Covad
Communications and Northpoint, cable modem service providers such as High
Speed Access and backbone providers such as Apex Global Internet Services.
Under agreements with ISPs, we have agreed to deliver content into their
networks at no charge, unlike network bandwidth providers that charge ISPs for
delivery of content. Furthermore, in some cases, we share a portion of our
revenue derived from content providers with the ISP. As of March 31, 2000, we
pay fees to less than 50% of the ISPs with which we have contracts. These fees
range from 15% to 20% of the revenue we derive from content delivered through
their network. Because the ISPs to which we pay fees tend to be the ISPs with
larger networks, we believe that as we expand our network we will pay fees
with respect to more than 50% of the Internet traffic delivered through our
network.
In addition to our network of MaxCaster edge servers, we have deployed a
series of regional hosting centers. The regional hosting centers are deployed
at strategic locations around the Internet backbone. They are designed to
reach users not served by a MaxCaster edge server. In addition, these hosting
centers provide a second tier of redundancy--if the MaxCaster is unavailable
for any reason, users are automatically routed to our nearest regional hosting
center.
The third layer of redundancy in our network is achieved by the deployment
of master hosting centers, which are located in co-location facilities of
companies such as Abovenet and Exodus Communications. The master hosting
centers provide a third layer of redundancy, filling in for any regional
hosting centers that may be unavailable for any reason. In addition, they have
large scale storage systems to host the complete content libraries of our
media customers.
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As of March 31, 2000, our network was sufficient to support up to 300,000
simultaneous end users. As of that date we estimate that less than 5% of
traffic delivered through our network was served by our edge servers. The
remaining content delivered to end users through our land-line network is
served from our regional or master hosting centers. We expect that this
percentage will decline significantly as we install additional servers on the
edge of the Internet. We expect that we will be able to serve up to 40% of end
users on our network through our edge servers by the end of 2000.
Our geographically dispersed network of servers is monitored continuously
by our network operations center. We have developed a series of proprietary
network management tools that allow our network operations center personnel to
have complete visibility into any of our remote servers and to remotely manage
the servers. Our network operations center personnel can diagnose problems,
restart servers, and update or re-load software using either land-line or
satellite communications with the remote server. Our network operations center
is located in a hardened facility with back-up power supplies and redundant
systems.
Our Technology
Since our inception in March 1998 through March 31, 2000, we have invested
$10.6 million on engineering and development activities, which has led to the
development of a series of software technologies that constitute the iBEAM
broadcast platform. An attribute of our broadcast platform is that it allows
any server in the network to deliver streams to any user on the network,
thereby avoiding the inefficiencies of dedicated servers only for specific
users.
Some of the key components of our broadcast platform include:
MaxCaster--the intelligent video and audio server at the network edge
The primary technical component of the broadcast platform is the iBEAM
MaxCaster. The MaxCaster is the remote server that sits at the edge of the
Internet. The MaxCaster receives the 1-way satellite broadcast, and performs
functions that integrate the satellite broadcast with the 2-way traffic of the
Internet. The MaxCaster contains software that allows it to receive, store and
manage data, as well as report back to our network operations center on the
state of the server and the content being served. Finally, the MaxCaster can
process the content to perform functions, such as inserting streaming
advertising that is targeted to each individual end user.
iRelay--the reliable transport layer
The second element of our broadcast platform is the iRelay transport layer.
The iRelay transport layer allows us to accept an input from several types of
sources, including live audio or video feed and FTP file delivery, and deliver
it to all of our servers without the potential for packet loss or the
atmospheric disturbances of satellite transmission. If a packet should be lost
or scrambled during transmission, the iRelay software will re-transmit the
missing packet to any downlink that did not receive the original data. iRelay
is a key component in enabling us to harness the full broadcast power of
satellites to deliver uninterrupted Internet streams to large numbers of our
servers located close to the end user.
iDirector--the intelligent network controller
The third element of our broadcast platform is a proprietary technology
called iDirector. The iDirector technology is an intelligent agent that
receives the end user request for content. For example, if an end user goes to
msnbc.com to look at an MSNBC news feed, iDirector identifies where the end
user is located, then makes an assessment of network conditions, satellite
link availability, and server availability to connect the end user to the
optimal server. If any component of our network is down, the iDirector system
automatically routes the end user to a different part of the network to ensure
continued service.
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Acquisition of webcasts.com
In April 2000 we acquired webcasts.com, a provider of interactive
broadcasting services and proprietary tools that give businesses the ability
to conduct live and on-demand Internet broadcasts for use in distance
learning, corporate communications, sales presentations, online trade shows
and interactive television.
Webcasts.com's service and tools offerings include:
. Vuser, a tool that allows a content provider to deliver an
interactive presentation that combines streaming media, animation,
graphics, banner advertising, e-commerce text and live Internet
links in one interface;
. Audience management services, which include audience registration,
pay-per-view and restricted access control; and
. Broadcast management services, which include event production
assistance, provision of Internet connections and encoding for
Internet transmission and event monitoring services.
We believe the combination of our broadcasting services and webcasts.com
event production services will allow us to offer a broader range of services
to customers, intended to make it easier to initiate and continue broadcasting
on the Internet.
Webcasts.com's customers include America Online, which was its largest
customer in 1999. Webcasts.com had 95 employees as of March 31, 2000.
Commercial Relationships
We have commercial relationships with America Online, Covad Communications,
Excite@Home, InterPacket, Microsoft Corporation, Pacific Century CyberWorks
and Sony Corporation, and intend to enter into additional relationships with
other media, entertainment and technology companies to accelerate market
acceptance of our services and to expand and enhance our global network. We
believe relationships with technology and media companies can accelerate
market acceptance of our technology and services, increase our brand
recognition and improve access to our target customer base. Among our more
important commercial relationships are those we have entered with large ISPs
and ISPs which provide high speed Internet access. The agreements are critical
to the success of our business model which is dependent on the deployment of
our servers to the edge of the Internet. In order to secure agreements with
large ISPs and high speed Internet access providers, in four instances we have
agreed to share with ISPs between 15% and 20% of the revenue we derive from
content delivered through their networks.
America Online
In February 2000, we entered into an agreement with America Online to
deploy our streaming media distribution network within America Online's data
centers. The agreement will increase the availability of content delivered
through our network on the edge of the Internet. We will deploy our Internet
broadcast platform to deliver live streams into the America Online network,
providing America Online's members with direct access to streaming content
through our network. America Online has agreed to allow us to serve Internet
end users who do not subscribe to America Online from our servers located
within America Online's facilities. We have agreed to share with America
Online a portion of the revenue generated from delivery of content from our
servers in their network to end users, including America Online subscribers
and non-subscribers. In addition, if we exceed maximum allowable bandwidth
amounts with respect to content delivered to our servers located within the
America Online network and from such servers to non-subscribers, we have
agreed to make additional payments to America Online. We do not expect to make
any payments to America Online for excess bandwidth usage. We made non-
refundable prepayments of an aggregate of $3.0 million to America Online as an
advance against payments due to them under the agreement.
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In addition, in February 2000, we sold $5.0 million of our series E
preferred stock to America Online which will convert into 500,726 shares of
common stock upon the closing of the offering. America Online also received a
warrant exercisable for 537,634 shares of our common stock at $9.30 per share.
Covad Communications
In October 1999, we entered into an agreement with Covad Communications, a
leading national broadband services provider utilizing digital subscriber line
(DSL) technology, to provide Covad with high-fidelity streaming video and
audio content at lower cost than communication providers that operate only
land-line networks. Under the terms of the agreement, we will deploy our
MaxCaster servers in Covad's network, which is in North America, thereby
enlarging the edge of our network. As part of this deployment initiative, we
have collaborated with Covad on technical efforts aimed at enabling new
services including quality of service management, subscriber management and
pay-per-view. We have agreed to share with Covad a portion of the revenue
derived from content delivered through their network.
We sold 335,570 shares of our series D preferred stock to Covad for an
aggregate purchase price of approximately $2.0 million in October 1999 which
will convert into 1,386,239 shares of our common stock upon the closing of
this offering.
Excite@Home
In April 2000, we entered into an agreement with Excite@Home to deploy our
streaming media distribution network within the Excite@Home network as
Excite@Home completes its national data centers. The agreement also provides
for Excite@Home to deliver network connectivity services to iBEAM. We believe
the agreement will increase the availability of content delivered through our
network on the edge of the Internet. We have agreed to pay Excite@Home $2.5
million as a non-refundable prepayment for any services that are provided to
us under the agreement and the revenue we are obligated to share with
Excite@Home for content distributed through their network.
In addition, in April 2000, Excite@Home agreed to purchase $5.0 million of
our series H preferred stock at a price equal to the price to the public in
this offering, less underwriting discounts and commissions. The series H
preferred stock will convert into 537,634 shares of common stock at the
closing of this offering.
InterPacket
In January 2000, we entered into an agreement with InterPacket, a
satellite-based IP network serving ISPs in over 80 countries worldwide. Under
the agreement, InterPacket will deliver our customers' streaming content via
their global satellite broadcast network to MaxCasters at InterPacket points
of presence in Asia, Europe, Latin America, Africa and the Middle East. We
believe this relationship will enhance our service offerings and revenue
potential and InterPacket's revenue potential. We will benefit from this
relationship by accelerating international deployment of our network to the
edge of the Internet.
Microsoft Corporation
We entered into an agreement with Microsoft, effective as of September 20,
1999, to improve the delivery of streaming media over the Internet. Under the
agreement, Microsoft recommends us as a service provider for the delivery of
broadband streaming media and we will engage in cooperative sales efforts to
promote Windows Media Technology (WMT). Additionally, for the term of the
agreement, we have agreed to provide six months of our services to content
providers chosen by Microsoft, provided that the value of these services to
all such
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content providers does not exceed $200,000 in the aggregate. We cannot
currently quantify the number of content providers to which we expect to
provide free services under this arrangement. In addition to our direct sales
efforts, we are collaborating on feature development, including technical
exchanges regarding the identification and development of new functions to be
included in either our NT based network platform or WMT. We are provided early
adopter access to new WMT products and agree to incorporate and promote new
competitive WMT features. We do not have an exclusive arrangement under which
Microsoft will not recommend any other service providers for the delivery of
broadband streaming media.
Our agreement with Microsoft will extend through September 2002. Microsoft
has agreed to pay us $500,000 through April 15, 2000, all of which Microsoft
may use to purchase our services either for itself or on behalf of other
Internet content providers.
We sold 1,677,852 shares of our series D preferred stock to Microsoft for
an aggregate purchase price of approximately $10.0 million in October 1999
which will convert into 6,931,206 shares of our common stock upon the closing
of this offering. In addition, we granted Microsoft a warrant to purchase
218,120 shares of series D preferred stock at an exercise price of $5.96 per
share which will convert into 901,053 shares of common stock.
Pacific Century CyberWorks
In January 2000, we signed a letter of intent with Pacific Century
CyberWorks Limited, a Hong Kong based Internet services and investment
company, to establish a joint venture company named iBEAM Asia. iBEAM Asia,
which initially will be 51% owned by PCCW and 49% owned by iBEAM, will deploy
a network of edge servers in Asia for the purpose of distributing streaming
video and audio content in over 50 countries in the Pacific Rim, Indian
subcontinent and Middle East. We expect our ownership interest in iBEAM Asia
to decline below 49% in the future as iBEAM Asia raises additional funding
through sales of equity interests to third parties, which would dilute our
interest. We expect that iBEAM Asia will begin delivering content to end users
in Asia by the end of 2000.
In addition, in February 2000, we sold $30.0 million of our series E
preferred stock to PCCW which will convert into 3,004,363 shares of our common
stock upon the closing of this offering.
Sony Corporation
We entered into an investment relationship with Sony Corporation of America
in October 1999. Sony's Vice President of Interactive Services has joined our
advisory board and has assisted in sales introductions and promoting technical
discussion with Sony regarding industry issues such as digital rights
management support, encryption, distribution and hosting methodologies.
We sold 335,570 shares of our series D preferred stock to Sony for an
aggregate purchase price of approximately $2.0 million in October 1999 which
will convert into 1,386,239 shares of our common stock upon the closing of
this offering.
Sales and Marketing
We primarily sell our services through our direct sales force. We are
currently focusing our sales efforts on the world's leading media and
entertainment companies which have launched or which we believe will launch
broadband multimedia initiatives. As of March 31, 2000, we had 30 employees in
our sales force devoted to developing relationships with content providers as
well as ISPs. We compensate our sales force with salary and commissions based
primarily on increasing traffic from existing customers as well as adding new
customers. Over the next few years we intend to significantly increase the
size of our sales force and expect to increase our expenditures on sales and
marketing efforts in the next twelve months. Our expenditures on sales and
marketing over the next 12 months are highly uncertain and will depend upon
various factors that are difficult to predict, including the number of sales
and marketing people that we are able to attract and the level of investment
that we determine we will need to market our brand over the next 12 months.
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In addition to our direct sales efforts, we are developing a network of
partners which include hosting companies, streaming services companies and
Internet service providers. Our partners will resell our full range of
services beyond our immediate target market.
Our technical consulting group, composed of ten systems engineers and six
program managers, supports our sales efforts by providing implementation
services for On-Stage streaming events as well as On-Air and Internet radio
and media on-demand services.
Our marketing strategy is to build a brand associated with high-fidelity
streaming media delivery. To support this objective, we have been engaged in a
direct marketing campaign that includes a presence at key trade shows,
speaking engagements at industry forums and iBEAM sponsored events and
seminars. We have also undertaken an advertising campaign aimed at our target
content provider customers. The advertising campaign consists of a mixture of
traditional media as well as Internet based advertising.
Patents and Proprietary Rights
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and contractual
restrictions to protect the proprietary aspects of our technology. These legal
protections afford only limited protection for our technology. We have filed
eight patent applications and intend to file an additional ten patent
applications in the near future. These patent applications relate to our
streaming platform standard, content management, distribution capabilities and
subscriber management.
We seek to limit disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting access to our
source code. Due to rapid technological change, we believe that factors such
as the technological and creative skills of our personnel, new product
developments and enhancements to existing products are more important than the
various legal protections of our technology to establishing and maintaining a
technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. The laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement
or invalidity. Any such resulting litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar technology. Any failure
by us to meaningfully protect our property could have a material adverse
effect on our business, operating results and financial condition.
From time to time, third parties might claim infringement by us with
respect to our current or future products. These claims and any resulting
lawsuit, if successful, could subject us to significant liability for damages
and invalidate our proprietary rights. Any litigation or claims, whether or
not valid, could result in substantial costs and diversion of resources. In
January 2000, we received a letter from a competitor which suggested that we
review patents to which this company claims rights. These patents purport to
cover "a system and method for delivery of video and data over a computer
network." We have conducted an investigation with respect to such patents.
Based on our investigation, we believe that we do not infringe any claims of
these patents. However, there can be no assurance that the competitor will
agree with our conclusion or not pursue a claim or litigation against us. If
this competitor does pursue a claim against us, we intend to vigorously defend
against any such claim. However, a claim, if successful, could subject us to
significant liability for damages and invalidate our proprietary rights.
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Any potential intellectual property litigation also could force us to do
one or more of the following:
. cease selling, incorporating or using products or services that
incorporate the infringed intellectual property;
. obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all; or
. redesign those products or services that incorporate the disputed
technology.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
Competition
The market for Internet broadcasting services is new, highly competitive,
and rapidly evolving. We expect competition to increase both from existing
competitors and new market entrants for various components of our service.
Unlike many of our competitors, we regard ourselves as the only Internet
broadcast network that combines satellite and land-line broadcasting of
streaming media as our primary business mission.
Our competitors primarily come from five market segments:
. Internet content distribution networks that accelerate delivery of web
pages, such as Akamai, Enron Communications and Digital Island;
. Internet webcasting companies that deliver streaming media through land-
line networks, such as InterVu, which was recently acquired by Akamai;
. Internet software vendors that reduce that cost of delivery of content
to users by storing content closer to the end user, such as Inktomi;
. Internet production and event services companies, such as Broadcast.com
and Network24 Communications, which was acquired by Akamai; and
. Satellite companies that deliver streaming video through satellite
networks, such PanAmSat and Cidera.
We compete on price and quality of delivery, customer service, and network
features. We believe we currently have several primary competitive advantages,
including the quality of our network architecture, our proprietary technology
and our early entrance into the market for Internet broadcast services.
However, our competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. Some of our
competitors may bundle their services with Internet related products or
services from Internet device vendors or Internet service providers. These
bundling relationships may inhibit our ability to sell service to Internet
content providers or to deploy servers at Internet service providers.
Increased competition could result in price reductions, fewer customer
orders, reduced gross margins or loss of market share. Any of these conditions
could materially and adversely affect our business, financial condition, and
operational results.
Facilities
Our headquarters are currently located in approximately 58,000 square feet
of leased office space in Sunnyvale, California. We recently obtained an
additional 22,000 square feet of office space near our headquarters.
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We are building a network operations center in our headquarters which began
operations in April 2000.
Webcasts.com's principal offices are in Oklahama City, Oklahoma and Phoenix,
Arizona with sales offices in various U.S. cities.
Employees
As of March 31, 2000, we had a total of 265 employees. We have never had a
work stoppage and no personnel are represented under collective bargaining
agreements. We consider our employee relations to be good.
We have rapidly increased our employee base and need to continue to hire
additional personnel. We believe that our future success will depend upon our
continued ability to attract, integrate, retain, train and motivate highly
qualified personnel and upon the continued service of our senior management and
key personnel. Competition for qualified personnel is intense, particularly in
the Silicon Valley area, where our headquarters is located. There can be no
assurance that we will successfully attract, integrate, retain, train and
motivate a sufficient number of qualified personnel to conduct our business in
the future.
Development of our Business
We believe that the net proceeds of this offering, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures for the next 12 to 18 months. We expect to
spend at least $40.0 million in 2000 for capital expenditures, $26.0 million of
which was incurred in the first quarter. The purpose of these capital
expenditures is to increase the number of users the network can support at the
edge of the Internet and relates primarily to our investment in edge servers,
hosting centers and our network operations center. In addition, we expect to
make additional expenditures to fund our sales and marketing and engineering
and development efforts in 2000. Our sales and marketing expenses are related
to our efforts to build up our sales force and build our brand name in order to
increase our customer base. Engineering and development expenses will be
related to developing value added services such as advertisement insertion
capabilities. The amount we spend for these purposes will depend on various
factors that are difficult to predict, including the level of competition we
will experience and the availability for hire of qualified sales, marketing and
engineering personnel.
Legal Proceedings
On February 3, 2000, Gerald F. Chew filed a lawsuit in California state
court, County of Santa Clara, against us and one of our founders alleging
breach of contract and other claims entitled Gerald F. Chew v. iBEAM
Broadcasting, Inc. et al., No. CV 787599. Mr. Chew claims that he was one of
our founders and that we and one of our founders breached their promise to him
to issue founder's stock in exchange for his services. Mr. Chew alleges damages
of at least $10.0 million and seeks a determination from the Court that he is
entitled to an unspecified number of shares of our capital stock. Mr. Chew's
complaint is not clear whether his claims for such relief are cumulative or in
the alternative. In subsequent filings with the Court, Mr. Chew has claimed
entitlement to the same number of founders shares as received by Mr. Wilmot. We
intend to defend this action vigorously, however, litigation is inherently
uncertain and we may not prevail against Mr. Chew. Should Mr. Chew prevail on
his lawsuit, we could be required to issue stock to Mr. Chew on the same terms
as those granted to our founders and recognize an expense in connection with
such issuance, which could have a material adverse effect on our results of
operations. In addition, any such issuance would be dilutive to existing
stockholders.
On April 20, 2000, InterVu, Inc. filed a lawsuit in California state court,
County of Santa Clara, against us and three of our employees entitled InterVu,
Inc. v. iBEAM Broadcasting et al., No. CV 89308. The complaint alleges claims
for misappropriation of trade secrets and inevitable disclosure and breach of
contract and seeks a temporary restraining order, a preliminary injunction and
damages. The complaint is based on the hiring of three former InterVu employees
by iBEAM. On April 25, 2000, the Court denied InterVu's application for a
temporary restraining order and set a hearing for InterVu's motion for a
permanent injunction for May 23, 2000. We intend to defend this action
vigorously, however, litigation is inherently uncertain and we may not prevail
against
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InterVu. Should InterVu prevail in its lawsuit, the three employees who are
the subject of this action would not be permitted to continue their employment
at iBEAM. InterVu also seeks damages of an unspecified amount, as well as
punitive damages.
On April 20, 2000, Akamai Technologies, Inc. filed a lawsuit against us in
the Commonwealth of Massachusetts, Middlesex, Superior Court entitled Akamai
Technologies, Inc. v. iBEAM Broadcasting Corporation, 00-1944 alleging claims
for breach of contract and unauthorized acquisition of Akamai's confidential
information and trade secrets, among other claims. Akamai seeks injunctive
relief enjoining us from continuing the employment of one of its former
employees who is also the subject of the InterVu v. iBEAM case described
above. Akamai also seeks unspecified damages, as well as punitive damages. On
May 2, 2000, the court denied Akamai's request for injunctive relief
preventing us from continuing the employment of the employee in question and
from recruiting or soliciting any employee of Akamai. However, the court did
enjoin us for disclosing or using any of Akamai's trade secrets and directed
iBEAM to return to Akamai any confidential information or trade secrets. We
will continue to vigorously defend our company in this action, however,
litigation is inherently uncertain and we may not prevail against Akamai.
Should Akamai prevail in its lawsuit, the employee who is the subject of this
action would not be permitted to continue employment with us.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our directors and
executive officers and their ages as of March 31, 2000:
<TABLE>
<CAPTION>
Executive Officers: Age Position
------------------- --- --------
<C> <C> <S>
Peter Desnoes.................... 57 President, Chief Executive Officer and
Chairman of the Board
Chris Dier....................... 47 Vice President and Chief Financial
Officer
Nils Lahr........................ 26 Chief Architect
Jeremy Zullo..................... 28 Vice President, Engineering
Dave Brewer...................... 31 Vice President, Operations
Robert Davis..................... 41 Vice President, Sales
David Strehlow................... 45 Vice President, Business Development
Tom Gillis....................... 34 Vice President, Marketing
Andrew Henry..................... 38 Vice President, Product Marketing
Daniel Sroka..................... 37 Vice President and General Counsel
Joe Shepela...................... 55 Vice President, Human Resources
James McDermott.................. 45 Vice President, Customer Care
Directors:
----------
Barry Baker(2)................... 47 Director
Frederic Seegal.................. 52 Director
Richard Shapero(1)(2)............ 52 Director
Peter Wagner(1)(2)............... 34 Director
Robert Wilmot.................... 55 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Peter Desnoes joined our board of directors in June 1998. He has served as
our President and Chief Executive Officer since January 1999 and as Chairman
of the Board since April 2000. Prior to joining us, Mr. Desnoes was the
founder, Managing General Partner and Chief Executive Officer of Burnham
Broadcasting Company, a partnership which owned network affiliated television
stations in several major U.S. markets in addition to operating a major
commercial production and post-production company. Mr. Desnoes started Burnham
Broadcasting Company in 1983 after a 16-year career with the American
Broadcasting Company (ABC). At ABC, Mr. Desnoes served as President and
General Manager of WLS-TV in Chicago from 1979 until 1983. Prior to that time,
he served as Vice President of Sales and Marketing for the ABC television
stations division, and was also elected Chairman of the ABC Affiliates Board
of Governors. Mr. Desnoes holds a B.A. in Philosophy from the University of
Arizona.
Chris Dier has been our Vice President and Chief Financial Officer since
joining us in November 1998. From August 1996 to February 1998, Mr. Dier
served as Vice President Administration and Chief Financial Officer of Aurum
Software Incorporated, a sales force automation software company. From January
1990 to July 1996, he served as Vice President of Administration and Chief
Financial Officer of VERITAS Software Corporation, a publicly traded company
focused on the storage management software market. Previous employment
includes Tolerant Systems and Intel Corporation where he held a variety of
operating finance positions. He holds a B.A. in Humanities and an M.B.A. from
Santa Clara University.
Nils Lahr joined us in April 1998 and has been our Chief Architect since
July 1999. From April 1998 to May 1999, he served as our Director of Server
Engineering and, from May 1999 to July 1999, he served as our Executive
Director of Technology. From May 1997 to June 1998, Mr. Lahr was an
independent contractor serving as a Senior Software Developer for Microsoft
Corporation where he helped clients deploy digital video applications and was
a key developer for Microsoft's digital video services. From April 1996 to May
1997, he served as a Senior Technical Programmer for CNN America where he
designed the technologies and
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infrastructure supporting the CNNfn.com website. From February 1995 to April
1996, Mr. Lahr worked as super-computer programmer for the United States Air
Force.
Jeremy Zullo joined us in May 1998 and has been our Vice President,
Engineering since December 1999. From May 1998 to July 1999, he served as our
Director of Development and, from July 1999 to December 1999, he served as our
Executive Director of Development. Prior to joining us, Mr. Zullo was the
Manager of Internet Products for Bloomberg Television and Internet Divisions
from February 1996 to April 1998. From 1992 to 1996, Mr. Zullo served as Chief
Executive Officer at Dominion Systems Technologies Inc., a company he founded
to create distributed real time engines. From 1993 to 1996, Mr. Zullo was also
a senior consultant for various United States military branches. Mr. Zullo
holds a B.S. in Physics from Rensselaer Polytechnic Institute.
Dave Brewer has been our Vice President, Operations since he joined us in
November 1999. From May 1991 to November 1999, Mr. Brewer was Chief Executive
Officer of Brewer Consulting Networks, a company that he founded which focuses
on designing, installing and maintaining local and wide area computer
networking systems for a variety of Fortune 1000 companies and educational
organizations. From 1986 to 1991, Mr. Brewer was a Network Engineer and
Systems Technician with Landis & Gyr Systems, Inc. a supplier of electronic
payment solutions.
Robert Davis joined us as Vice President, Sales in August 1999. From July
1996 to November 1998, Mr. Davis served in several capacities, including as
President, Chief Executive Officer and a member of the board of directors of
Formida Software Corporation, a publicly traded Australian software company.
From September 1993 to July 1996, Mr. Davis was a Senior Vice President of
Worldwide Sales and Support for Premenos Technology Corporation, a software
company. His earlier experiences include senior sales management positions
with Sprint Corporation and Southern Bell. Mr. Davis holds a B.S. Degree from
the University of Akron.
David Strehlow has served as our Vice President, Business Development since
joining us in August 1999. From September 1998 to July 1999, Mr. Strehlow
served as acting Vice President of Business Development for two startup
companies, SoftVideo, Inc. and Live Picture, Inc. From September 1996 to
September 1998, Mr. Strehlow served as Senior Director of Business Development
at RealNetworks, Inc., a provider of media delivery and digital distribution
solutions. From October 1995 to June 1996, he served as Senior Director of
Business Development at VDOnet Corporation, a provider of video applications
and online communities for use over the Internet. Prior to this time,
Mr. Strehlow served in various capacities at Oracle Corporation, a supplier of
software for information management, in both product management and product
marketing roles. Mr. Strehlow holds an M.B.A. from Carnegie Mellon University,
an M.S. in Oceanography from Oregon State University and a B.S. in
Oceanography from University of Washington.
Tom Gillis joined us in July 1998 and has served as our Vice President,
Marketing since December 1999. From July 1998 to May 1999, he served as our
Director of Product Management and, from May 1999 to December 1999, he served
as our Assistant Vice President, Marketing. Prior to joining us, from 1995 to
June 1998 Mr. Gillis served in several capacities at Silicon Graphics,
including Product Line Manager for Desktop Workstations and Product Manager
for Silicon Graphics' digital media streaming and compression hardware
products. From 1987 to 1993, Mr. Gillis was a Senior Hardware Engineer
responsible for wireless communications and radar systems design at Raytheon
Company. Mr. Gillis has an M.B.A. from Harvard University, an M.S. in
Electrical Engineering from Northwestern University and a B.S. in Electrical
Engineering from Tufts University.
Andrew Henry has been our Vice President, Product Marketing since joining
us in January 2000. Prior to joining us, from January 1994 to December 1999,
Mr. Henry held a variety of positions with Silicon Graphics, most recently
serving as Vice President and General Manager of the Visual Solutions Business
Unit. From September 1990 to January 1994, Mr. Henry served as Manager, Visual
Engineering with Failure Analysis Associates. Prior to this time, Mr. Henry
co-founded a graphics technology company called Animated Technologies and was
an engineering manager with TRW Space and Technology Group. He earned a B.S.
degree in Engineering Physics from the University of the Pacific and an
M.S.E.E. in Electro-optics from the University of Southern California.
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Daniel Sroka joined us in January 2000 as our General Counsel and has
served as our Vice President and General Counsel since February 2000. Prior to
joining us, Mr. Sroka was a partner at the law firm of Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P. Prior to becoming partner in August 1995
and since joining the firm in 1989, Mr. Sroka was an associate with Brooks,
Pierce, McLendon, Humphrey & Leonard. Mr. Sroka's practice has specialized in
mergers and acquisitions, commercial transactions, corporate finance,
formation and capitalization of business entities, commercial real estate and
taxation. He graduated from the University of Wisconsin, Madison with a degree
in Business Administration Accounting and received his law degree from Wake
Forest School of Law.
Joe Shepela joined us in April 2000 as our Vice President, Human Resources.
From July 1999 to April 2000, Mr. Shepela served as Senior Vice President of
S3 Incorporated, an Internet appliance company. From December 1997 to February
1999, Mr. Shepela served as Vice President, Worldwide Human Resources of
Adaptec Corporation, a manufacturer of hard drive SCSI controllers. From
October 1995 to December 1997, he served as Vice President, Worldwide Human
Resources of Symantec Corporation, a software company. Mr. Shepela has held
senior human resources positions with Quantum Corporation, Apple Computer and
Hewlett Packard over his career. In these capacities, Mr. Shepela managed
these companies' human resources operations, established the human resources
integration process utilized during acquisitions and mergers and assisted in
corporate restructuring strategy and implementation. Mr. Shepela holds a B.S.
from Drexel University and an M.B.A. from Santa Clara University.
James McDermott joined us in April 2000 as our Vice President, Customer
Care. From September 1995 to April 2000, Mr. McDermott served in various
capacities with Pacific Bell, a telecommunications company. Most recently, Mr.
McDermott was Regional Vice President--Public Safety Solutions, supporting
Pacific Bell's 9-1-1 and Emergency Services. Previously, he served as
Executive Director, Customer Care, where he created and led a customer support
team consisting of approximately 385 managers and associates for Pacific
Bell's business customers until he was promoted in April 1998. Prior to
Pacific Bell, he held positions in sales, operations and customer care at AT&T
between 1982 and 1995. Mr. McDermott holds a B.A. from University of
California, San Diego and an Executive M.B.A. from St. Mary's College of
California.
Barry Baker has served as a member of our board of directors since January
2000. Since March 1999, Mr. Baker has been with USA Networks, Inc., a media
and electronic commerce company, most recently serving as its President and
Chief Operating Officer. Before joining USA Networks, from June 1996 to
February 1999, Mr. Baker served as Chief Executive Officer/Designate of
Sinclair Communications, a broadcasting company, where he oversaw a business
of 64 television and 54 radio stations in 28 states. From August 1989 to May
1996, Mr. Baker served in various capacities at River City Broadcasting, a
broadcasting company he founded which was later sold to Sinclair Broadcast
Group. Prior to these experiences, Mr. Baker served in management positions in
cable and radio broadcasting and managed radio startups. Mr. Baker has served
on numerous industry boards. Mr. Baker was recently appointed to the Board of
Directors of the National Association of Television Program Executives, the Ad
Council and The Production Resource Group.
Frederic Seegal has served as a member of our board of directors since
August 1999. Mr. Seegal has served as President of Wasserstein Perella Group,
Inc. and Managing Director of Wasserstein Perella & Co., Inc. since March
1994. These Wasserstein entities form part of Wasserstein Perella & Co., an
international investment banking and financial services firm. Prior to joining
the Wasserstein entities, Mr. Seegal was Managing Director/Co-Head of Domestic
Corporate Finance at Salomon Brothers, an investment bank, during the period
of 1990 through 1994. From 1982 to 1990, Mr. Seegal was in charge of Lehman
Brothers investment banking activities in the Media & Communications
Industries, where he served as Managing Director of Lehman Brothers. Mr.
Seegal holds a Bachelors Degree from Cornell University and graduated from
Harvard Law School and Harvard Business School in 1974.
Rich Shapero has served as a member of our board of directors since
April 1998. Mr. Shapero has been a general partner of Crosspoint Venture
Partners, L.P., a venture capital investment firm, since April 1993. From
January 1991 to June 1992, he served as Chief Operating Officer of Shiva
Corporation, a computer network company. Previously, he was a Vice President
of Sun Microsystems, Senior Director of Marketing at AST, and
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<PAGE>
held marketing and sales positions at Informatics General Corporation and
UNIVAC's Communications Division. Mr. Shapero serves as a member of the board
of directors of Covad Communications Group, Inc., Sagent Technology, Inc. and
several privately held companies. Mr. Shapero received a B.A. in English
literature from the University of California at Berkeley.
Peter Wagner has served as a member of the board of directors since
June 1998. Mr. Wagner joined Accel Partners, a Palo Alto-based private equity
investing firm, in July 1996, and has been a General Partner since January
1998, where he specializes in investing in companies in the communications
sector, including networking, telecommunications and wireless technology. From
September 1992 to July 1996, Mr. Wagner was a Product Line Manager for Silicon
Graphics. Mr. Wagner serves on the board of directors of NorthPoint
Communications Group, Inc. and several privately held companies. Mr. Wagner
holds a B.S. in Physics and an M.B.A. from Harvard.
Robert Wilmot is one of our founders and has served as a member of our
board of directors since our inception in March 1998. Dr. Wilmot has been
Chairman at Wilmot Consulting Inc., which provides strategic consulting
services to large and small businesses in the United States and Europe, since
May 1995. From April 1994 to May 1995, Dr. Wilmot was an independent
consultant and investor. From May 1985 through April 1994, he was Chairman at
Wilmot Enterprises Ltd., which provides strategic consulting services to large
and small businesses in the United States and Europe. In these capacities, Dr.
Wilmot has advised several Fortune 100 technology companies on their Internet
transformation. His other prior positions include Vice President and Managing
Director of Texas Instruments and Chief Executive Officer of International
Computers PLC. Dr. Wilmot is an active angel investor and Chairman of the
Supervisory Board of Euro Ventures BV, a venture fund operating in nine
European countries. He is also a Director of COM21, FVC.COM and @POS.COM and
several private companies. Dr. Wilmot received a B.S. in Electrical
Engineering from Nottingham University.
Technical Advisory Board
The technical advisory board members are available to our executive
officers for periodic consultations relating to the development of our
technologies. The following individuals are members of our Technical Advisory
Board:
Navin Chaddha is one of our founders. He is currently Chairman of the Board
and Chief Executive Officer of Biztro, a privately held web-based company
serving small businesses. Prior to becoming Chairman and CEO of Biztro, he
held several management positions at Microsoft, the most recent of which was
Director, Broadband and Infrastructure, Streaming Media Division. While with
Microsoft, Mr. Chaddha also served as Chief Architect and Director, Commercial
Network Solutions, Microsoft's Network Solutions Group. Prior to joining
Microsoft Corporation, Mr. Chaddha founded Vxtreme (acquired by Microsoft
Corporation), an Internet media streaming software company, in December 1995.
Mr. Chaddha is an investor and serves on the advisory board of several
Internet startups. Mr. Chaddha holds a B.S. in electrical engineering from
Indian Institute of Technology, Delhi and an M.S. in electrical engineering
from Stanford University.
Llewellyn Chang is Vice President, Interactive Services for Sony
Corporation of America. In this position, he is involved in developing and
managing a range of technology-enabled products while providing technical
leadership in assessing and exploiting Sony's many digital opportunities.
Prior to joining Sony, Mr. Chang spent eleven years at Salomon Smith Barney
where he served as First Vice President and Area Manager responsible for
Enterprise Applications Engineering. This includes extensive experience in
distributed systems architecture and design, software engineering, large-scale
systems, network integration and applications development as well as the
management of strategic partner and vendor relationships. Previous to Salomon
Smith Barney, Mr. Chang held Information Technology positions at Goldman Sachs
and Company, AT&T Bell Laboratories, and Exxon Research and Engineering. Mr.
Chang holds a B.S. from the University of the West Indies and an M.S. from
Polytechnic Institute of New York, both in Electrical Engineering.
Robert Hawk is President of Hawk Communications. He previously served as
President and Chief Executive Officer of US WEST Multimedia Communications,
Inc., where he headed the cable, data and telephony communications business
from May 1996 to April 1997. He was president of the Carrier Division of
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US West Communications, a regional telecommunications service provider, from
September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of
Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC
Corporation, Mr. Hawk was director of Advanced Systems Development for
AT&T/American Bell. He currently serves on the boards of PairGain
Technologies, COM21, Concord Communications, Covad Communications Group,
Radcom, Efficient Networks and several privately held companies. Mr. Hawk
received an M.B.A. from the University of San Francisco and a B.B.A. from the
University of Iowa.
Jon Kannegaard is Senior Vice President of Sun Labs. Mr. Kannegaard has
held several positions at Sun during his 12-year tenure, including Acting
President for Software Products and Platforms, Vice President and General
Manager, Java Platform, and President of SunSoft. Prior to Sun, Mr. Kannegaard
worked with Motorola for over 10 years and previously held positions at
Information Systems and Boeing Aerospace.
Rod Perth is President of Jim Henson Television Group Worldwide. Mr. Perth
has full responsibility for managing prime time and children's programming
network development and production at Henson Television. He also supervises
global television entertainment. In his previous term as President of
Entertainment at USA Networks, Mr. Perth led all programming efforts for both
the USA Network and the Sci-Fi Channel.
Philip Rosedale is an Entrepreneur-in-Residence at Accel Partners. Prior to
joining Accel in August 1999, Mr. Rosedale spent three and one-half years at
RealNetworks, most recently serving as Vice President and Chief Technology
Officer. His extensive work there included the creation of RealVideo,
development and deployment of the RealSystem 5.0 and G2 products, and
management of audio and video compression research. Before joining
RealNetworks, Mr. Rosedale ran his own software company, Automated Management
Systems, which in 1995 developed FreeVue, a low-bitrate videoconferencing
product for Internet users. Mr. Rosedale holds a B.S. degree in Physics from
the University of California at San Diego.
Tony Werner is Vice President of Engineering and Technical Operations and
Chief Technology Officer for AT&T Broadband & Internet Services. Mr. Werner is
currently responsible for managing AT&T's broadband rollout and new service
implementation, including interactive TV, high-speed data and residential
telephone service. Prior to AT&T, Mr. Werner was the Vice President of
Operations Engineering for Rogers Communications, Inc. He also served the top
engineering role for Hong Kong Cable Communications, a joint venture between
US West, Shaw, Coditel, Sung Hun Kai and Wharf.
Board of Directors
Our board of directors currently consists of six members. Upon completion
of this offering, our board of directors will be divided into three classes,
each serving staggered three year terms. The term of office and directors
consisting of each class is as follows:
<TABLE>
<CAPTION>
Class Directors Term of Office
----- --------------------------------- ---------------------------------
<C> <C> <S>
Class I Frederic Seegal and Robert Wilmot . expires at the annual meeting
of stockholders in 2001 and at
each third succeeding annual
meeting thereafter
Class II Richard Shapero and Peter Wagner . expires at the annual meeting
of stockholders in 2002 and at
each third succeeding annual
meeting thereafter
Class III Peter Desnoes and Barry Baker . expires at the annual meeting
of stockholders in 2003 and at
each third succeeding annual
meeting thereafter
</TABLE>
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors. See "Description of
Capital Stock--Delaware Law and Certain Provisions of Our Certificate of
Incorporation and Bylaws."
Our board of directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our directors or officers.
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Voting Agreement for Directors
Under the terms of a voting agreement between us and the stockholders that
purchased shares of our preferred stock prior to the completion of this
offering, holders of our series A preferred and series B preferred had an
agreement to vote their shares at the election of directors in favor of a
director nominated by Crosspoint Venture Partners and Accel Partners. Mr.
Shapero is the nominee of Crosspoint Venture Partners and was elected to our
board of Directors as a result. Mr. Wagner is a nominee of Accel Partners and
was elected to our board of Directors as a result. This agreement terminates
with respect to these provisions upon the closing of our initial public
offering.
Board Committees
Our Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee of the Board of Directors consists of Messrs. Shapero,
Wagner and Baker. The Audit Committee reviews our financial statements and
accounting practices and makes recommendations to our Board of Directors
regarding the selection of independent auditors.
The Compensation Committee of the Board of Directors consists of Messrs.
Shapero and Wagner. The Compensation Committee makes recommendations to the
Board of Directors concerning salaries and incentive compensation for our
officers and employees and administers our employee benefit plans.
Director Compensation
We do not currently compensate our directors in cash for their service as
members of the board of directors, although directors are reimbursed for
reasonable expenses incurred in attending board or committee meetings. Our
officers are appointed by the board of directors and serve at its discretion.
We have granted options to purchase shares of our common stock to some of our
non-employee directors. In September 1999, we granted Mr. Seegal an option to
purchase 247,860 shares of common stock at an exercise price of $0.145 per
share. This option was granted under our 1998 Stock Plan. Of these shares,
214,812 shares of common stock subject to options vest over a four year period
with 25% of the shares subject to option vesting 12 months from the date of
grant and the remaining shares vesting ratably each month after that date so
long as Mr. Seegal continues to serve as our director. The remaining 33,048
shares subject to option vest over one year with 25% of the shares vesting at
the end each four month period from the date of grant so long as Mr. Seegal
continues to serve as our director.
In July 1998, we granted Mr. Desnoes an option to purchase 111,537 shares
of common stock at an exercise price of $0.040 per share. This option was
granted under our 1998 Stock Plan. The shares underlying this option were
immediately vested.
In January 2000, we granted Mr. Baker an option to purchase 82,620 shares
of common stock at an exercise price of $4.84 per share. These options were
granted under our 1998 Stock Plan. The shares underlying the option vests in
equal monthly installments over four years.
Our 2000 Director Option Plan provides for the automatic grant of non-
statutory stock options to purchase 82,620 shares of common stock to non-
employee directors who join us after this offering. For further information
regarding the provisions of the 2000 Director Option Plan, see "--Employee and
Director Benefit Plans."
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. Any breach of their duty of loyalty to the corporation or its
stockholders;
. Acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
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. Unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. Any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities law and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
their capacity as an officer, director, employee or other agent, regardless of
whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements provide, among other things, for indemnification for judgments,
fines, settlement amounts and expenses, including attorneys' fees incurred by
director, or executive officer in any action or proceeding, including any
action by or in our right, arising out of the person's services as a director
or executive officer, any of our subsidiaries or any other company or
enterprise to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
The limitation on liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty
and may reduce the likelihood of derivative litigation against our directors
and officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage
awards against our directors and officers under these indemnification
provisions.
Compensation Committee Interlocks and Insider Participation
Our compensation committee currently consists of Messrs. Wagner and
Shapero. In January 1999, Mr. Desnoes, our President and Chief Executive
Officer, resigned from the compensation committee upon being appointed an
executive officer. Other than Mr. Desnoes, none of the members of our
compensation committee is currently or has been, at any time since the time of
our formation, one of our officers or employees. None of our executive
officers currently serves, or in the past has served, as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving on our board or compensation committee. Mr. Wagner
is a general partner of Accel Partners, a holder of approximately 15.0% of our
outstanding stock that has purchased shares of our series B preferred stock,
series C preferred stock and series D preferred stock. Mr. Shapero is a
general partner of Crosspoint Venture Partners, a holder of approximately
15.9% of our outstanding stock that has purchased shares of our series A
preferred stock, series B preferred stock, series C preferred stock and
series D preferred stock. See "Certain Relationships and Related
Transactions."
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation paid by us for services
rendered to us in all capacities during our fiscal year ended December 31,
1999, by (i) our chief executive officer and (ii) our four most highly
compensated executive officers who earned more than $100,000 in salary and
bonus during the fiscal year ended December 31, 1999, whom we refer to as the
"named executive officers."
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Number of
1999 Annual Compensation Shares
------------------------------ Underlying
Name and Principal Other Annual Options All Other
Position (1) Salary Bonus Compensation Granted (#) Compensation (4)
- ------------------ -------- -------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Peter Desnoes (2)....... $255,769 $157,000 $83,262(3) 1,982,880 $1,103
President and Chief
Executive Officer
Chris Dier.............. 182,500 13,500 -- 151,194 1,434
Vice President and
Chief Financial Officer
Tom Gillis.............. 126,137 -- -- 227,205 1,258
Vice President,
Marketing
Nils Lahr............... 137,311 30,000 -- 305,694 1,244
Chief Architect
Jeremy Zullo............ 142,083 7,500 -- 227,205 1,267
Vice President,
Engineering
</TABLE>
- --------
(1) This table does not include Michael Bowles who served as our Chief
Executive Officer until January 1999 and as Chairman of our Board of
Directors until September 1999. During our fiscal year ended December 31,
1999, Mr. Bowles was paid a salary of $126,769 based on an annualized
salary of $160,000. During fiscal 1999, we paid premiums for life
insurance in the amount of $1,007 on Mr. Bowles' behalf. Mr. Bowles did
not receive a bonus during fiscal 1999.
(2) Mr. Desnoes commenced full-time employment with us in February 1999. Mr.
Desnoes' salary on an annualized basis was $300,000 during fiscal 1999.
(3) Mr. Desnoes was reimbursed this amount for relocation expenses.
(4) Consists of premiums paid by us for term life insurance.
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<PAGE>
Option Grants During Year Ended December 31, 1999
The following table sets forth certain information for the year ended
December 31, 1999 with respect to grants of stock options to each of the named
executive officers. All options granted by us in 1999 were granted under our
1998 Stock Plan. These options have a term of 10 years. These options are
immediately exercisable in full at the date of grant, but shares purchased on
exercise of unvested options are subject to a repurchase right in our favor
that entitles us to repurchase unvested shares at their original exercise
price on termination of the employee's service with us. Unless otherwise
indicated, the repurchase right lapses as to 25% of the shares on the first
anniversary of the grant date and the balance over the next three years. See
"--Employee and Director Benefit Plans" for a description of the material
terms of these options.
We granted options to purchase common stock and issued shares of common
stock pursuant to restricted stock purchase agreements equal to a total of
15,061,982 shares during 1999. Potential realizable values are net of exercise
price before taxes, and are based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on SEC requirements and do not reflect our projection or estimate of
future stock price growth.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------- Potential Realizable Value at
Number of Percentage of Assumed Annual Rates of Stock
Securities Total Options Reassessed Price Appreciation For Option
Underlying Granted to Exercise Fair Term
Options Employees in Price Market Expiration ------------------------------
Name(1) Granted 1999 Per Share(4) Value(5) Date 0% 5% 10%
- ------- ---------- ------------- ------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Desnoes(2) 1,982,880 13.2% $0.040 $0.497 1/11/09 $905,760 $1,525,196 $2,475,533
Chris Dier.............. 151,194 1.0 0.083 0.580 2/24/09 75,103 130,207 214,748
Tom Gillis.............. 61,965 0.4 0.083 1.017 4/1/09 57,870 97,490 158,276
165,240 1.1 3.631 5.810 12/31/09 360,000 963,739 1,889,993
Nils Lahr............... 140,454(3) 0.9 0.083 0.580 2/25/09 69,768 120,958 199,492
82,620 0.6 0.145 1.235 8/12/09 90,000 154,147 252,562
82,620 0.6 3.631 5.810 12/31/09 180,000 481,869 944,996
Jeremy Zullo............ 61,965 0.4 0.083 0.580 2/25/09 30,780 53,364 88,011
61,965 0.4 0.145 1.235 8/12/09 67,500 115,610 189,421
103,275 0.7 3.631 5.810 12/31/09 225,000 602,337 1,181,245
</TABLE>
- --------
(1) Michael Bowles was not granted any options during fiscal 1999.
(2) This table does not include options to purchase 1,050,000 shares of common
stock that were granted to Mr. Desnoes in April 2000. These options vest
in equal monthly installments and are exercisable at a price of $10.00 per
share.
(3) The repurchase right lapses as to 66,096 of the shares according to the
following schedule: 34% of the shares on the first anniversary of the
grant date and the balance over the next two years.
(4) Exercises prices reflect our board of directors good faith determination
of the fair market value of our common stock on the date of grant.
(5) Based on recent developments, we reassessed the fair market value of our
common stock underlying options at the time of grant.
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<PAGE>
Aggregated Option Exercises In 1999 And Year-End Values
The following table sets forth certain information regarding exercised
stock options during the fiscal year ended December 31, 1999 and unexercised
options held as of December 31, 1999 by each of the named executive officers.
The value realized is based on the reassessed fair market value of the
underlying securities as of the date of exercise, minus the per share exercise
price, multiplied by the number of shares underlying the option. The value of
unexercised in-the-money options are based on a value of $5.81 per share, the
reassessed fair market value of our common stock on December 31, 1999. Amounts
reflected are based on the value of $5.81 per share, minus the per share
exercise price, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Year-End at Year-End
Acquired on Value ------------------------- -------------------------
Name(1) Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter Desnoes........... 2,094,417 $965,943 -- -- -- --
Chris Dier.............. 516,375 307,650 171,849 -- $ 989,483 --
Tom Gillis.............. 218,943 152,256 165,240 -- 360,000 --
Nils Lahr............... 96,252 106,091 230,096 -- 946,141 --
Jeremy Zullo............ -- -- 417,231 -- 2,027,280 --
</TABLE>
- --------
(1) Michael Bowles did not exercise any options during fiscal 1999.
Employment and Severance Agreements
Peter Desnoes. In January 1999, we entered into a written employment
agreement with Mr. Desnoes. The agreement provides that Mr. Desnoes is
entitled to receive an annual salary of $300,000 and a bonus of $200,000, to
be paid based on the achievement of performance-based milestones. We also
agreed to provide Mr. Desnoes with compensation in the form of a grant of an
option to purchase 1,982,880 shares of common stock at an exercise price of
$0.040 per share, which vests over a four year period. The agreement also
provides that Mr. Desnoes is entitled to purchase up to 80,000 shares of our
Series C preferred stock on the same terms as the other investors. Mr. Desnoes
purchased these shares on February 3, 1999. In addition, we agreed to pay
expenses related to his relocation to California. See "Executive Compensation"
and "Certain Relationships and Related Transactions."
The agreement provides that either we or Mr. Desnoes can terminate the
employment relationship for any reason with 14 days notice. The agreement
further provides that if Mr. Desnoes is terminated other than for cause, he
shall be entitled to receive up to 12 months of annual salary until the
earliest of (i) 12 months from the date of his termination, (ii) the
expiration of his continuation coverage under COBRA and (iii) the date Mr.
Desnoes receives health insurance coverage in connection with new employment.
In the event of a change of control, Mr. Desnoes will agree to continue
service with us or our successor corporation for a period not to exceed six
months if he is requested to do so. Upon the completion of this period, or if
Mr. Desnoes is not requested to remain with us or our successor, Mr. Desnoes
is entitled to receive six months salary and bonus and the options he has been
granted will vest as if he had performed an additional six months of service.
In the event that Mr. Desnoes is requested to remain with us or our successor
upon a change a control and he declines such request then Mr. Desnoes will not
be entitled to receive any additional compensation or vesting, unless his
refusal to continue service is in effect an involuntary termination, in which
case he will receive the benefits described in the preceding paragraph.
Chris Dier. In November 1998, Chris Dier accepted our offer of employment.
The offer letter provides that Mr. Dier will receive an annual salary of
$180,000 and up to an additional $20,000 bonus each year based upon the
successful attainment of mutually agreed upon performance goals. The offer
letter provides that options granted to Mr. Dier in connection with his
employment will provide for accelerated vesting in the event of a
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change of control where Mr. Dier is not designated as Chief Financial Officer
reporting to the Chief Executive Officer equal to an amount of 50% of Mr.
Dier's unvested shares. In addition, Mr. Dier will receive a termination
payment equal to six months full compensation payable on the earlier of six
months after a change of control or termination of employment by the acquiring
company.
Nils Lahr. In July 1999, Nils Lahr accepted our offer of employment. The
offer letter provides that Mr. Lahr is entitled to receive an annual salary of
$150,000 and a bonus of $30,000 based on achievement of performance
milestones. Mr. Lahr has agreed to be employed by us through June 30, 2000, at
which time he will become an at-will employee. We may terminate his employment
with us at any time.
Jeremy Zullo. In July 1999, Jeremy Zullo accepted our offer of employment.
The offer letter provides that Mr. Zullo is entitled to receive an annual
salary of $155,000 and a bonus of $20,000 based on the achievement of
performance milestones. Mr. Zullo has agreed to be employed by us through June
30, 2000, at which time he will become an at-will employee. We may terminate
his employment with us at any time.
In September 1999, we entered into a Settlement Agreement and Mutual
Release with Michael Bowles in connection with his departure from our company.
We paid Mr. Bowles all salary and unused vacation through his employment end
date. In connection with Mr. Bowles' departure, the repurchase right with
respect to his shares of common stock lapsed. In addition, we and Mr. Bowles
agreed to a mutual release.
Employee and Director Benefit Plans
1998 Stock Plan
Our 1998 Stock Plan was adopted by our board of directors in March 1998,
and our stockholders initially approved the plan in April 1998. Our 1998 Stock
Plan provides for the grant of incentive stock options to our employees, and
for the grant of nonstatutory stock options and stock purchase rights to our
employees, directors and consultants.
As of March 31, 2000, there were outstanding options to purchase 11,816,815
shares of common stock and 4,069,804 shares were available for future grant.
As of the date of this prospectus, we will not grant any additional stock
options under our 1998 stock plan. Instead we will grant options under our
2000 Stock Plan.
The 1998 Stock Plan provides that in the event of a change in control, each
outstanding option shall be accelerated and become fully vested and
exercisable if such option is not assumed or substituted for by the successor
corporation.
2000 Stock Plan
Our 2000 Stock Plan was adopted by our board of directors in January 2000,
and approved by our stockholders in April 2000. An amendment to the plan was
approved by the board of directors and our stockholders in May 2000. This plan
provides for the grant of incentive stock options to employees and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants.
As of March 2000, a total of 9,639,000 shares of common stock were reserved
for issuance pursuant to the 2000 Stock Plan. No options have yet been issued
pursuant to the 2000 Stock Plan. The number of shares reserved for issuance
under our 2000 Stock Plan will increase annually on January 1st of each
calendar year, effective beginning in 2001, equal to the lesser of:
. 5% of the outstanding shares of common stock on the first day of the
year,
. 10,000,000 shares, or
. such lesser amount as our board of directors may determine.
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Our board of directors or a committee of our board administers the 2000
Stock Plan. The committee may consist of two or more "outside directors" to
satisfy certain tax and securities requirements. The administrator has the
power to determine the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the exercisability of the options, the vesting schedule
of the options and the form of consideration payable upon exercise. The
administrator determines the exercise price of options granted under our stock
option plan, but with respect to incentive stock options, the exercise price
must at least be equal to the fair market value of our common stock on the
date of grant. Additionally, the term of an incentive stock option may not
exceed ten years. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 1,377,000 shares in
any fiscal year. In connection with his or her initial service, an optionee
may be granted an additional option to purchase up to 2,754,000 shares of our
common stock.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement to the extent that shares have vested. If termination is due to
death or disability, the option will generally remain exercisable for 12
months following such termination. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term. The administrator determines
the exercise price of stock purchase rights granted under our 2000 Stock Plan.
Unless the administrator determines otherwise, the restricted stock purchase
agreement will grant us a repurchase option that we may exercise upon the
voluntary or involuntary termination of the purchaser's service with us for
any reason (including death or disability). The purchase price for shares we
repurchase will generally be the original price paid by the purchaser. The
administrator determines the rate at which our repurchase option will lapse.
Our stock option plan generally does not allow for the transfer of options or
stock purchase rights and only the optionee may exercise an option and stock
purchase right during his or her lifetime.
Our 2000 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the
successor corporation will assume or substitute for each option or stock
purchase right. If the outstanding options or stock purchase rights are not
assumed or substituted for, all outstanding options and stock purchase rights
will become fully vested and exercisable prior to the merger or sale of
assets.
Our 2000 Stock Plan will automatically terminate in 2010, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the stock option plan provided it does not
adversely affect any option previously granted under our stock option plan.
2000 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an employee stock
purchase plan. A total of 1,500,000 shares of our common stock will be made
available for sale. In addition, our plan provides for annual increases in the
number of shares available for issuance under the purchase plan on January 1st
of each year, beginning in 2001, equal to the lesser of 2% of the outstanding
shares of our common stock on the first day of the calendar year, 3,000,000
shares, or such other lesser amount as may be determined by our board of
directors. Our board of directors or a committee of our board administers the
plan. Our board of directors or its committee has full and exclusive authority
to interpret the terms of the plan and determine eligibility. All of our
employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the plan if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
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Our plan is intended to qualify for preferential tax treatment and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four six-month purchase periods. The offering periods generally start
on the first trading day on or after February 1 and August 1 of each year,
except for the first such offering period which will commence on the first
trading day on or after the effective date of this offering and will end on
the last trading day on or before January 31, 2001.
The plan permits participants to purchase common stock through payroll
deductions of up to 15% of their eligible compensation which includes a
participant's base straight time gross earnings, commissions and bonuses but
excluding all other compensation paid to our employees. A participant may
purchase no more than 10,000 shares during any six-month purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period ends. If the fair
market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, participants will be withdrawn
from the current offering period following their purchase of shares on the
purchase date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering
period, and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
A participant may not transfer rights granted under our employee stock
purchase plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
2000 Director Option Plan
Our board of directors adopted the 2000 Director Option Plan in January
2000 and the plan was approved by our stockholders in April 2000. As of April
2000, a total of 688,500 shares were reserved for issuance under the Director
Plan, none of which were subject to outstanding options as of this date. The
number of shares reserved for issuance under our Director Plan will increase
annually on January 1st of each calendar year, effective beginning in 2001, by
an increase equal to that number of shares granted pursuant to options under
the Director Plan in the prior fiscal year or a lesser amount determined by
the board of directors.
All grants of options to our non-employee directors under the Director Plan
are automatic. We will grant each non-employee director an option to purchase
82,620 shares upon the date when such person first becomes a non-employee
director (except for those directors who became non-employee directors by
ceasing to be employee directors).
All options granted under our Director Plan have a term of ten years and an
exercise price equal to fair market value on the date of grant. Each option
vests and becomes exercisable as to 1/48th of the shares subject to the option
on each monthly anniversary of the date of grant, provided the non-employee
director remains a director on such dates. If a non-employee director's status
as a director terminates due to death or disability, the option will remain
exercisable for 12 months. In all other cases where a director's status is
terminated, the option will remain exercisable for a period of six months.
However, an option may never be exercised later than the expiration of its
term. A non-employee director may not transfer options granted under our
Director Plan other than by will or the laws of descent and distribution. Only
the non-employee director may exercise the option during his or her lifetime.
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In the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute each option. If such assumption or substitution occurs, the options
will continue to be exercisable according to the same terms as before the
merger or sale of assets. Following such assumption or substitution, if a non-
employee director is terminated other than by voluntary resignation, the
option will become fully exercisable and generally will remain exercisable for
a period of six months. If the outstanding options are not assumed or
substituted for, our board of directors will notify each non-employee director
that he or she has the right to exercise the option as to all shares subject
to the option for a period of 180 days following the date of the notice. The
option will terminate upon the expiration of the 180-day period.
Unless terminated sooner, our Director Plan will automatically terminate in
2010. Our board of directors has the authority to amend, alter, suspend, or
discontinue the Director Plan, but no such action may adversely affect any
grant made under the Director Plan.
401(k) Plan
Our employee savings and retirement plan is qualified under Section 401 of
the Internal Revenue Code. Our employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit and have the
amount of such reduction contributed to the 401(k) plan. We may make matching
or additional contributions to the 401(k) plan in amounts to be determined
annually by our board of directors.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions since inception in March
1998, to which we have been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of our capital stock had or will have a direct or
indirect material interest other than compensation arrangements which are
otherwise required to be described under "Management."
Series A Preferred Stock. On April 16, 1998, we sold 1,333,333 shares of
series A preferred stock at a per share price of $1.20. The sale of the series
A preferred stock included, among others, the sale of 1,250,000 shares of
series A preferred stock to Crosspoint Venture Partners 1997, a holder of more
than 5% of our common stock, for an aggregate consideration of $1,500,000.
Upon the closing of this offering, each share of series A preferred stock will
automatically convert into 4.131 shares of common stock. As a result,
Crosspoint Venture Partners 1997 will receive 5,163,750 shares of common stock
upon conversion of their shares of series A preferred at the completion of
this offering. These shares will have a value of $51,637,500 at the time of
the offering.
Series B Preferred Stock. On June 8, 1998 and July 21, 1998, we sold an
aggregate of 3,248,904 shares of series B preferred stock at a per share price
of $1.65. Upon the closing of this offering, each share of series B preferred
stock will automatically convert into 4.131 shares of common stock. The
purchasers of the series B preferred stock, included, among others:
<TABLE>
<CAPTION>
Shares of Value of
Series B As Converted Aggregate Stock at
Preferred Shares of Purchase Time of
Purchaser Stock Common Stock Price Paid Offering
--------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Accel Partners............. 1,787,943 7,385,992 $2,950,106 $73,859,920
Crosspoint Venture Partners
1997...................... 696,995 2,879,286 1,150,042 28,792,860
Media Technology Ventures.. 666,690 2,754,096 1,100,039 27,540,960
</TABLE>
Series C Preferred Stock. On February 3, 1999, we sold 3,591,816 shares of
series C preferred stock at a per share price of $3.42. Upon the closing of
this offering, each share of series C preferred stock will automatically
convert into 4.131 shares of common stock. The purchasers of the series C
preferred stock, included, among others:
<TABLE>
<CAPTION>
Shares of Value of
Series C As Converted Aggregate Stock at
Preferred Shares of Purchase Time of
Purchaser Stock Common Stock Price Paid Offering
--------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Intel Corporation.......... 877,194 3,623,688 $3,000,003 $36,236,880
Crosspoint Venture Partners
1997...................... 621,200 2,566,177 2,124,504 25,661,770
Accel Partners............. 570,454 2,356,545 1,950,953 23,565,450
Media Technology Ventures.. 212,712 878,713 727,475 8,787,130
Peter Desnoes.............. 80,000 330,480 273,600 3,304,800
Michael Bowles............. 29,240 120,790 100,000 1,207,900
Chris Dier................. 8,772 36,237 30,000 362,370
</TABLE>
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<PAGE>
Series D Preferred Stock. On October 14, 1999, we sold 7,072,732 shares of
series D preferred stock at a per share price of $5.96. Upon the closing of
this offering, each share of series D preferred stock will automatically
convert into 4.131 shares of common stock. The purchasers of the series D
preferred stock, included, among others:
<TABLE>
<CAPTION>
Shares of Value of
Series D As Converted Aggregate Stock at
Preferred Shares of Purchase Time of
Purchaser Stock Common Stock Price Paid Offering
--------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Intel Corporation............ 1,639,584 6,773,121 $9,771,921 $67,731,210
Microsoft Corporation........ 1,677,852 6,931,206 9,999,998 69,312,060
Accel Partners............... 1,090,604 4,505,285 6,500,000 45,052,850
Crosspoint Venture Partners
1997........................ 1,090,604 4,505,285 6,500,000 45,052,850
Media Technology Ventures.... 385,906 1,594,177 2,300,000 15,941,770
Peter Desnoes IRA............ 10,906 45,052 65,000 450,520
Leonard Grossi............... 8,400 34,700 50,064 347,000
Frederic Seegal.............. 8,389 34,654 49,998 346,540
Chris Dier................... 2,000 8,262 11,920 82,620
Tom Gillis................... 2,000 8,262 11,920 82,620
David Strehlow............... 2,000 8,262 11,920 82,620
Robert Davis................. 2,000 8,262 11,920 82,620
</TABLE>
Series D Warrant. On October 14, 1999, we granted a warrant to Microsoft to
purchase 218,120 shares of our series D preferred stock at an exercise price
of $5.96 per share. By virtue of the fact that at the completion of this
offering each share of series D preferred stock will convert into 4.131 shares
of common stock, at the completion of this offering, the Microsoft warrant
will be exercisable for 901,053 shares of common stock at $1.44 per share.
Common Stock. On March 23, 1998, we sold 7,636,669 shares of common stock
at a per share price of $.00024 to our three founders. Robert Wilmot, one of
our founders, is currently serving as one of our directors. The Wilmot Living
Trust, for which Mr. Wilmott and his spouse serve as trustees, purchased
2,743,190 shares of common stock. Of these shares, 75% are subject to our
right of repurchase which lapses as to 1.5625% of the shares after each month
Mr. Wilmot continues to serve as our employee or consultant. In connection
with the formation of our company, Mr. Wilmot entered into a consulting
agreement pursuant to which he agreed to spend at least one day a week
providing certain business development services as requested from time to time
by us.
Michael Bowles, another of our founders and our former Chief Executive
Officer and director, purchased 4,114,785 shares of common stock. Of these
shares, 75% were subject to our right of repurchase which lapsed as to 1.5625%
of the shares after each month. Mr. Bowles continued to serve as our employee
or consultant. In connection with Mr. Bowles' departure from our company in
September 1999, our repurchase right lapsed with respect to Mr. Bowles' shares
of common stock. See "--Employment Agreements."
Option Grants to Certain Directors. In September 1999, we granted Mr.
Seegal options to purchase 247,860 shares of common stock at an exercise price
of $0.145 per share. These options were granted under our 1998 Stock Plan. Of
these, 214,812 shares of common stock subject to options vest over a four year
period with 25% of the shares subject to option vesting 12 months from the
date of grant and the remaining shares vesting ratably each month after that
date so long as Mr. Seegal continues to serve as our director. The remaining
33,048 shares subject to option vest over one year with 25% of the shares
vesting at the end of each four month period from the date of grant so long as
Mr. Seegal continues to serve as our director.
In July 1998, we granted Mr. Desnoes an option to purchase 111,537 shares
of common stock at an exercise price of $0.040 per share. This option was
granted under our 1998 Stock Plan. The shares underlying this option were
immediately vested.
In January 2000, we granted Mr. Baker an option to purchase 82,620 shares
of common stock at an exercise price of $4.84 per share. These options were
granted under our 1998 Stock Plan. The shares underlying the option vests in
equal monthly installments over four years.
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<PAGE>
Consulting Agreement with Director. In January 2000, we entered into a
consulting agreement with Mr. Seegal, one of our directors, wherein Mr. Seegal
agreed to assist us in financing plans and strategies and perform such other
business and marketing services as may from time to time be reasonably
requested by us. To date, Mr. Seegal has been in regular contact with our
Chief Executive Officer and other of our officers advising on financing plans
and other strategic matters. In connection with this agreement, Mr. Seegal
purchased 908,820 shares of our common stock at a per share price of $4.84 for
an aggregate purchase price of $4,395,600, all of which are subject to our
right of repurchase which lapses with respect to 12.5% of the shares six
months from the date of the purchase and which lapses ratably with respect to
1/48 of the remaining shares each month thereafter. We loaned Mr. Seegal
$1,999,998 to apply to the purchase price for these shares. As of April 12,
2000, we and Mr. Seegal mutually agreed to terminate the consulting
arrangement. The parties terminated the arrangement effective May 8, 2000. We
have the right to repurchase the shares purchased by Mr. Seegal pursuant to
the consulting arrangement at cost until June 7, 2000. We intend to repurchase
the 908,820 shares of our common stock held by Mr. Seegal for $2,395,602 and
cancel the $1,999,998 of indebtedness owed to us by Mr. Seegal by June 7,
2000.
Microsoft Relationship. We entered into a collaboration agreement with
Microsoft, effective as of September 20, 1999, to improve the delivery of
streaming media over the Internet. Under the agreement, Microsoft recommends
us as a service provider for the delivery of broadband streaming media and we
will engage in cooperative sales efforts to promote Windows Media Technology.
Additionally, for the term of the agreement we have agreed to provide six
months of our services to content providers chosen by Microsoft, provided that
the value of these services to all such content providers does not exceed
$200,000 in the aggregate. Our agreement with Microsoft will extend through
September 2002. Microsoft has agreed to pay us $500,000 through April 15,
2000, all of which Microsoft may use to purchase our services either for
itself or on behalf of other Internet content providers. Microsoft's
obligations under the agreement are conditioned upon the performance of our
obligations under the agreement and our meeting certain performance criteria
for our services. On June 21, 1999, we also entered into an agreement with
Microsoft providing that Microsoft pay us $200,000. In consideration for this
payment we agreed to provide up to an aggregate of $200,000 in services to
content providers designated by Microsoft. This agreement extends through June
30, 2000 unless terminated by either party. This agreement may be terminated
by either party upon material breach of the other.
Agreement with Brewer Consulting. In connection with the hiring of David
Brewer, our Vice President of Operations, we agreed to purchase at least $2.0
million of services from Brewer Consulting Networks, a company controlled by
Mr. Brewer, beginning January 1, 2000 and ending December 31, 2001. Brewer
Consulting Networks provides us with consulting services related to the
installation of our network servers. Our obligation to purchase these services
from Brewer Consulting Networks is contingent on Mr. Brewer relinquishing
operational or ownership control of Brewer Consulting Networks. We paid Brewer
Consulting Networks an aggregate of $702,395 for services provided in 1999.
Directed Share Program. At our request, the underwriters reserved for sale,
at the initial public offering price, 16,000 shares of common stock for sale
to persons associated with Crosspoint Venture Partners 1997, 25,000 shares of
common stock for sale to Accel Partners, 7,500 shares of common stock for sale
to Peter Desnoes, 6,000 shares of common stock for sale to Chris Dier, 6,000
shares of common stock for sale to Robert Davis and 6,000 shares of common
stock for sale to David Strehlow.
Indemnification
We have entered into indemnification agreements with each of our directors
and officers. These indemnification agreements and our certificate of
incorporation and bylaws require us to indemnify our directors and officers to
the fullest extent permitted by Delaware law. See "Management--Limitations on
Directors' Liability and Indemnification."
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Conflict of Interest Policy
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from
unaffiliated third parties. Our policy is to require that a majority of the
independent and disinterested outside directors on our board of directors
approve all future transactions between us and our officers, directors,
principal stockholders and their affiliates. These transactions will continue
to be on terms no less favorable to us than we could obtain from unaffiliated
third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of March 31, 2000 (assuming conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering and as
adjusted to reflect the sale of the shares offered by this prospectus) by:
. each person who is known by us to beneficially own more than 5% of our
common stock;
. each of the named executives and each of our directors; and
. all of our officers and directors as a group.
Percentage of ownership is based on 95,216,408 shares outstanding as of
March 31, 2000, assuming conversion of the preferred stock, and 106,216,408
shares outstanding after this offering and no exercise of the underwriters'
over-allotment options. Beneficial ownership is calculated based on SEC
requirements. All shares of the common stock subject to options currently
exercisable or exercisable within 60 days after March 31, 2000 are deemed to
be outstanding for the purpose of computing the percentage of ownership of the
person holding such options, but are not deemed to be outstanding for
computing the percentage of ownership of any other person. Unless otherwise
indicated below, each stockholder named in the table has sole voting and
investment power with respect to all shares beneficially owned, subject to
applicable community property laws. Unless otherwise indicated in the table,
the address of each individual listed in the table is iBEAM Broadcasting
Corporation, 645 Almanor Avenue, Suite 100, Sunnyvale, CA 94086.
<TABLE>
<CAPTION>
Number of Percentage of Shares
Shares of Beneficially Owned
Beneficially ------------------------------
Name of Beneficial Owner Owned Before Offering After Offering
------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Crosspoint Venture Partners 1997.. 15,114,498 15.9% 14.2%
2925 Woodside Road
Woodside, CA 94062
Accel Partners (1)................ 14,247,817 15.0 13.4
428 University Avenue
Palo Alto, CA 94301
Intel Corporation................. 10,396,809 11.0 9.8
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Microsoft Corporation (2)......... 7,832,259 8.2 7.3
One Microsoft Way
Redmond, WA 98052-6399
Media Technology Ventures, L.P.
(3).............................. 5,226,985 5.5 4.9
One First Street
Los Altos, CA 94022
Executive Officers and Directors:
Peter Desnoes (4)................. 3,519,949 3.7 3.3
Chris Dier (5).................... 732,724 * *
Tom Gillis (6).................... 392,445 * *
Nils Lahr (7)..................... 439,952 * *
Jeremy Zullo (8).................. 417,231 * *
Barry Baker (9)................... 82,620 * *
Frederic Seegal(10)............... 1,191,334 1.3 1.1
Robert Wilmot (11)................ 2,743,190 2.9 2.6
Richard Shapero (12).............. 15,114,498 15.9 14.2
Peter Wagner (13)................. 14,247,817 15.0 13.4
All executive officers and
directors as a group (17 persons)
(14)............................. 41,601,287 42.0 37.8
</TABLE>
- --------
* Represents less than 1% of our outstanding common stock.
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<PAGE>
(1) Includes 1,481,771 shares held by Accel Internet Fund II L.P., 983,099
shares held by Accel Investors '98 L.P., 185,216 shares held by Accel
Keiretsu VI L.P. and 11,597,731 shares held by Accel VI L.P.
(2) Includes 901,053 shares issuable upon exercise of a warrant, which was
exercisable within 60 days of March 31, 2000.
(3) Includes 314,943 shares held by Media Technology Entrepreneurs Fund,
L.P., 282,787 shares held by Media Technology Ventures Entrepreneurs
Fund, L.P. and 4,629,255 shares held by Media Technology Ventures L.P.
(4) Includes 45,052 shares held by Peter Desnoes, IRA for which the Guarantee
& Trust Company is trustee. Also includes 1,050,000 shares subject to
options that were granted to Mr. Desnoes on April 11, 2000, all of which
are exercisable within 60 days of March 31, 2000.
(5) Includes 171,850 shares subject to options, all of which were exercisable
within 60 days of March 31, 2000. Includes 4,131 shares held by a member
of Mr. Dier's immediate family.
(6) Includes 165,240 shares subject to options, all of which were exercisable
within 60 days of March 31, 2000.
(7) Includes 209,442 shares subject to options, all of which were exercisable
within 60 days of March 31, 2000.
(8) All of these shares are subject to options and immediately exercisable.
(9) All of these shares are subject to options, all of which were exercisable
within 60 days of March 31, 2000.
(10) Includes 908,820 shares of common stock that we intend to repurchase from
Mr. Seegal in connection with the termination of our consulting
arrangement with Mr. Seegal.
(11) All of these shares are held in the name of the Wilmot Living Trust, of
which Mr. Wilmot and his spouse are trustees.
(12) All of these shares are held by Crosspoint Venture Partners 1997. Mr.
Shapero is a general partner of Crosspoint Venture Partners 1997 and is
one of our directors. Mr. Shapero disclaims beneficial ownership of
shares held by this entity, except to the extent of his proportional
partnership interest in Crosspoint Venture Partners 1997.
(13) All of these shares are held by entities affiliated with Accel Partners
(as described in footnote 1). Mr. Wagner is a general partner of Accel
Partners and is one of our directors. Mr. Wagner disclaims beneficial
ownership of shares held by these entities, except to the extent of his
proportional interest arising from his partnership interest in Accel
Partners.
(14) Includes 3,509,577 shares subject to options, all of which were
exercisable within 60 days of March 31, 2000. Also includes 300,000
shares subject to options granted to two executive officers who were
hired after March 31, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
413,100,000 shares of common stock, $.0001 par value per share, and 10,000,000
shares of undesignated preferred stock, $.0001 par value per share. The
following description of our capital stock does not purport to be complete and
is subject to and qualified by our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of March 31, 2000, there were 95,216,408 shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into common stock, which were held of record by approximately 260
stockholders. This number includes:
. 66,489,527 shares of common stock to be issued upon automatic conversion
of all outstanding shares of our series A, B, C, D and E preferred stock
upon completion of this offering;
. 8,301,747 shares of our series F preferred stock issued in connection with
the acquisition of webcasts.com and the conversion of those shares into
the same number of shares of common stock;
. 1,000,000 shares of our series G preferred stock to be issued to The Walt
Disney Corporation for $10.0 million at a per share price equal to the
price to the public in this offering and the conversion of these shares
into the same number shares of common stock; and
. 537,634 shares of our series H preferred stock to be issued to Excite@Home
for $5.0 million at a per share price equal to the price to the public in
this offering, less underwriting commissions and discounts, and the
conversion of these shares into the same number of shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution
or winding up, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. The effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change in
control of iBEAM without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
Warrants
On an as converted basis, as of March 31, 2000, there were warrants
outstanding to purchase a total of 1,949,987 shares of common stock. All of
these warrants will remain outstanding after the completion of this offering.
Of these, warrants to purchase 511,300 shares of common stock will expire
three years from the date of this prospectus unless earlier exercised, of
which 112,664 shares are exercisable at an exercise price of $0.40 per share,
268,246 shares are exercisable at an exercise price of $0.56 per share, 26,421
shares are exercisable at an exercise price of $1.14 per share and 103,969
shares are exercisable at an exercise price of $1.44 per share.
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<PAGE>
Another warrant to purchase 901,053 shares of common stock expires four years
from the completion of this offering unless earlier exercised and has an
exercise price of $1.44 per share. Another warrant to purchase 537,634 shares
of common stock expires four years from the closing of this offering unless
earlier exercised and has an exercise price of equal to the price to the
public in the offering, less estimated underwriting discounts and commissions.
Registration Rights
After this offering, the holders of approximately 76,328,908 shares of
common stock and the holders of warrants to purchase approximately 1,438,687
shares of common stock will be entitled to rights with respect to the
registration of these shares under the Securities Act. These holders are
entitled to demand registration rights pursuant to which they may require us
on up to two occasions to file a registration statement under the Securities
Act at our expense. We are required to use all reasonable efforts to effect
this registration. These registration rights are subject to the right of the
underwriters of an offering to limit the number of shares included in such
registration. They are also subject to our right not to effect a requested
registration within 180 days following an offering of our securities pursuant
to a registration statement in connection with an underwritten public
offering, including this offering, or if we believe that a registration at
that time would be seriously detrimental to us. Additionally, if we propose to
register any of our securities under the Securities Act, either for our
account or the account of other security holders exercising registration
rights, these holders are entitled to notice of such registration and are
entitled to include some or all of their shares of common stock in the
registration. These registration rights are also subject to the right of the
underwriters of an offering to limit the number of shares included in the
registration. Further, holders may require us to file registration statements
on Form S-3 at our expense. These registration rights are subject to our right
not to effect a requested registration if it would be seriously detrimental to
us to file an S-3 registration statement at that time.
Delaware Law and Certain Provisions of Our Certificate of Incorporation and
Bylaws
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer,
a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of us to first negotiate with
us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of
discouraging takeover or acquisition proposals because, among other things,
negotiation of these proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless, with exceptions, the business combination
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested stockholder is
a person who, together with affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status, did own,
15% or more of a corporation's voting stock. The existence of this provision
would be expected to have an anti-takeover effect with respect to transactions
not approved in advance by the board of directors, including the
discouragement of attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of our
stockholders may be called only by the board of directors or certain of our
officers. Our certificate of incorporation and bylaws also provide that,
beginning upon the closing of this offering, our board of directors will be
divided into three classes, with each
75
<PAGE>
class serving staggered three-year terms. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
iBEAM.
Agreement with Investors
America Online, Pacific Century CyberWorks, Microsoft, Sony, Covad and
Excite@Home have each agreed not to acquire more than 15% of our voting stock
at any time before October 2004 without our permission. This standstill
agreement terminates under the following circumstances:
. we sell equity securities to another company with whom we have a strategic
relationship, and such company does not enter into a similar standstill
agreement;
. with respect to one of these investors, if another investor breaches the
standstill agreement and the breach is not cured within ten days; or
. another company or group initiates a tender offer for 15% or more of our
capital stock, acquires 15% of our capital stock, acquires all or
substantially all of our assets, enters an agreement to acquire 15% or
more of our capital stock, or solicits proxies in opposition to a proxy
solicitation of iBEAM.
In addition, these investors have agreed not to transfer shares of our
capital stock owned by them for a period of one year after the closing date of
this offering.
Voting Agreement
Each of Pacific Century CyberWorks, America Online, Microsoft, Sony, Covad
and Liberty Media, which in the aggregate will own 15.9% of our common stock
upon the closing of this offering, have agreed to vote their securities as
directed by our board of directors, in any merger in which more than 50% of
our voting power is transferred or in a sale of substantially all of our
assets. This obligation lapses for each of these companies if and when it owns
less than 5% of our voting power.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Equiserve Trust
Company. The transfer agent's address is P.O. Box 2533, mail stop 4691, Jersey
City, NJ 07303, and its telephone number is (201) 222-5610.
76
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding 106,216,408
shares of common stock, including the issuance of 11,000,000 shares of common
stock offered by us and no exercise of options outstanding after March 31,
2000. Of the 11,000,000 shares sold in this offering, 9,937,150 shares will be
freely tradable without restriction or further registration under the
Securities Act, except for shares purchased by our affiliates, as defined
under the Securities Act. The Securities Act defines affiliates to be persons
that directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, iBEAM. These persons
typically include our executive officers and directors. Shares purchased by
affiliates would be subject to the limitations and restrictions that are
described below.
Of the remaining 96,279,258 shares of common stock, 95,216,408 shares were
issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act and 1,062,850 shares were reserved for
issuance in this offering as part of our directed share program. All these
shares will be subject to lock-up agreements, described below, on the date of
this prospectus. Upon expiration of the lock-up agreements, 82,934,788 shares
will become eligible for sale pursuant to Rule 144(k), Rule 144, and Rule 701.
Thereafter, 13,344,470 shares will become eligible for sale pursuant to Rule
144.
<TABLE>
<CAPTION>
Approximate
Number of
Shares Eligible
Relevant Dates for Future Sale Comment
- -------------- --------------- --------------------------------------
<S> <C> <C>
On the date of this 9,937,150 Freely tradable shares sold in
prospectus.............. this offering
180 days after the date 82,934,788 All shares subject to lock-up
of this prospectus...... agreements released; shares saleable
under Rules 144, 144(k) and 701
Thereafter............... 13,344,470 Shares saleable under Rule 144
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,062,164 shares immediately after this offering, or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public
information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants, or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
77
<PAGE>
effective date of this offering is entitled to resell such shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with the holding period requirements or other restrictions
contained in Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Securities Exchange Act, along with the
shares acquired upon exercise of such options, including exercises after the
date of this prospectus. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than "affiliates," as defined in Rule 144, subject only to the
manner of sale provisions of Rule 144 and by "affiliates" under Rule 144
without compliance with its one-year minimum holding period requirement.
Registration Rights
Beginning six months after the date of this offering, the holders of
approximately 76,328,908 shares of common stock and the holders of warrants to
purchase approximately 1,438,687 shares of common stock will be entitled to
certain rights with respect to the registration of these shares for sale in
the public market. See "Description of Capital Stock--Registration Rights."
Registration of these shares under the Securities Act would result in these
shares becoming freely tradeable in the public market without restriction.
Warrants
As of March 31, 2000, there were a total of 1,949,987 shares of common
stock subject to outstanding warrants, all of which are subject to lock-up
agreements similar to those described below. These shares will become eligible
for sale on various date upon expiration or release of the 180-day lock-up
agreements.
Stock Options
As of March 31, 2000, there were a total of 11,816,815 shares of common
stock subject to outstanding options under our 1998 Stock Plan, all of which
are subject to lock-up agreements similar to those described below.
Immediately after the completion of the offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all
of the shares of common stock issued or reserved for future issuance under our
1998 Stock Plan, 2000 Stock Plan, 2000 Director Stock Option Plan, and 2000
Employee Stock Purchase Plan. After the effective dates of these registration
statements, shares purchased upon exercise of options granted under the 1998
Stock Plan, 2000 Stock Plan, 2000 Director Stock Plan and 2000 Employee Stock
Purchase Plan will be available for resale in the public market.
Lock-up Agreements
All of our officers and directors and substantially all of our
stockholders, have agreed, subject to limited exceptions, not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, or
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock for a period ending 180 days after the date of this
prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated. In addition, the participants in the directed share program, as
described in the section entitled "Underwriters," will be subject to similar
lock-up restrictions.
We have no agreement or understanding with Morgan Stanley & Co.
Incorporated for a waiver of these lock-up restrictions. However, Morgan
Stanley & Co. Incorporated may, in its discretion, release us or any of our
stockholders at any time, without notice, prior to the expiration of the lock-
up period. In some cases underwriters have agreed to waive lock-up
restrictions when a company's stock has performed well for a sustained period
of time in order to allow a follow-on offering of common stock. Any decision
by Morgan Stanley & Co. Incorporated to waive the lock-up restrictions would
depend on a number of factors, including market conditions, the performance of
our common stock in the market and our financial condition at that time. If
Morgan Stanley & Co. Incorporated were to waive the lock-up restrictions prior
to the expiration of the 180-day period, and our stockholders were to sell
additional shares of common stock to the public, the market price of our
common stock could decline.
78
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., FleetBoston
Robertson Stephens Inc., and J.P. Morgan Securities Inc. are acting as
representatives, have severally agreed to purchase, and iBEAM has agreed to
sell to them, severally, the number of shares indicated below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated................................. 2,262,500
Bear, Stearns & Co. Inc. ......................................... 2,262,500
FleetBoston Robertson Stephens Inc. .............................. 2,262,500
J.P. Morgan Securities Inc. ...................................... 2,262,500
Blaylock & Partners, L.P.......................................... 150,000
Dain Rauscher Wessels............................................. 150,000
A Division of Dain Rauscher
First Albany Corporation.......................................... 150,000
First Union Securities, Inc....................................... 150,000
Janney Montgomery Scott LLC....................................... 150,000
Edward D. Jones & Co., L.P........................................ 150,000
Kaufman Bros., L.P................................................ 150,000
Pacific Crest Securities, Inc..................................... 150,000
Brad Peery Inc.................................................... 150,000
Raymond James & Associates Inc.................................... 150,000
SG Cowen Securities Corporation................................... 150,000
Wedbush Morgan Securities......................................... 150,000
Wit SoundView Corporation......................................... 150,000
----------
Total........................................................... 11,000,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from iBEAM and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by
this prospectus if any such shares are taken. However, the underwriters are
not required to take or pay for the shares covered by the underwriters' over-
allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents
a concession not in excess of $.42 a share under the public offering price. No
underwriter will allow, and no dealer will reallow, a concession to other
underwriters or to dealers. After the initial offering of the shares of common
stock, the offering price and other selling terms may from time to time be
varied by the representatives.
iBEAM has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of 1,650,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public would
be $126,500,000, the total underwriters' discounts and commissions would be
$8,855,000 and total proceeds to iBEAM would be $117,645,000.
79
<PAGE>
The underwriting discounts and commissions were determined by negotiations
between iBEAM and the representatives and are a percentage of the offering
price to the public. The primary factors considered in determining the
discounts and commissions were the size of the offering, the nature of the
securities offered and the discounts and commissions charged in comparable
transactions. The estimated offering expenses payable by iBEAM, in addition to
the underwriting discounts and commissions, are approximately $1,750,000,
which includes legal, accounting and printing costs and various other fees
associated with registering and listing the common stock.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters of iBEAM. These amounts are
shown assuming both no exercise and full exercise of the underwriters' over-
allotment option.
<TABLE>
<CAPTION>
Per Share Total
----------------- ---------------------
No Full No Full
Exercise Exercise Exercise Exercise
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Underwriting discounts and commission
paid by iBEAM........................ $.70 $.70 $7,700,000 $8,855,000
Expenses payable by iBEAM............. .16 .14 1,750,000 1,750,000
</TABLE>
The underwriters have informed iBEAM that they do not intend sales to
discretionary accounts to exceed 5% of the total number of shares of common
stock offered by them.
We have been approved for quotation on the Nasdaq National Market under the
symbol "IBEM."
Each of iBEAM and the directors, executive officers and certain other
stockholders of iBEAM has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by iBEAM of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
. transactions by any person other than iBEAM relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
80
<PAGE>
iBEAM and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
At the request of iBEAM, the underwriters have reserved for sale, at the
initial offering price, up to 1,062,850 shares offered hereby for directors,
officers, employees and business associates and related persons, such as
consultants and suppliers, of iBEAM. The shares of common stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the
other shares offered hereby. Purchasers of these shares that are not otherwise
subject to the restrictions described above must represent that they will not
sell, transfer, assign, pledge or hypothecate these shares for the period
ending 180 days after the date of this prospectus.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley &
Co. Incorporated, will distribute shares of common stock over the Internet to
its eligible account holders. E*TRADE Securities, Inc. will also distribute
shares of common stock over the Internet to its customers. In connection with
these Internet distributions, each of these underwriters will provide for
offers and acceptances of offers to be made through e-mail and over the
Internet. A prospectus in electronic format is being made available on an
Internet website maintained by Wit SoundView Corporation's affiliate, Wit
Capital Corporation. All dealers purchasing common stock from Wit SoundView in
this offering have agreed to make a prospectus in electronic format available
on a website maintained by each of them.
iBEAM sold an aggregate of 83,893 shares of Series D preferred stock to
J.P. Morgan Direct Venture Capital Institutional Investors LLC and J.P. Morgan
Direct Venture Capital Private Investors LLC in October 1999, each of which is
a fund of investors associated with J.P. Morgan Securities Inc., one of the
representatives in this offering.
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price has been determined by negotiations
between iBEAM and the representatives. The primary factors considered in
determining the initial public offering price were the future prospects of
iBEAM and its industry in general, revenues, operating results and certain
other financial operating information of iBEAM in recent periods, and the
price-earnings ratios, price-revenues ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of iBEAM.
81
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for iBEAM by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. An investment partnership composed of current and
former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially owns series D preferred stock
convertible into 34,654 shares of our common stock upon completion of this
offering. Davis Polk & Wardwell, Menlo Park, California, is representing the
underwriters in connection with this offering.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the
period from March 20, 1998 (inception) to December 31, 1998 and 1999 and for
the year ended December 31, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of webcasts.com as of December 31,
1998 and 1999, and for the years then ended have been included herein in
reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act in connection with this
offering. This prospectus does not contain all of the information in the
registration statement and the accompanying exhibits and schedules. For
further information with respect to our company and our common stock, we refer
you to the registration statement and the accompanying exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete. In each instance,
we refer you to the copy of such contract or document filed as an exhibit to
the registration statement, and each such statement is qualified in all
respects by such reference. The registration statement, including the
accompanying exhibits and schedules, may be inspected without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of these materials may be obtained from the public
reference section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's website is sec.gov. The information on the Commission's website
is not incorporated into this prospectus.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the regional offices, public
reference facilities and website of the Commission referred to above.
82
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
iBEAM Broadcasting Corporation
Report of Independent Accountants....................................... F-2
Balance Sheets.......................................................... F-3
Statements of Operations................................................ F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................ F-5
Statements of Cash Flows................................................ F-6
Notes to Financial Statements........................................... F-7
Unaudited Pro Forma Combined Financial Information...................... F-22
webcasts.com, Inc. and Subsidiary
Independent Auditors' Report............................................ F-28
Consolidated Balance Sheets............................................. F-29
Consolidated Statements of Operations................................... F-30
Consolidated Statements of Stockholders' Equity (Deficit)............... F-31
Consolidated Statements of Cash Flows................................... F-32
Notes to Consolidated Financial Statements.............................. F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
iBEAM Broadcasting Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of redeemable convertible preferred stock and stockholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of iBEAM Broadcasting Corporation (a development stage
company) as of December 31, 1998 and 1999 and the results of its operations
and its cash flows for the period from March 20, 1998 (inception) to December
31, 1998, and for the year ended December 31, 1999, and for the period from
March 20, 1998 (inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000, except as to the third
paragraph of Note 2, which is as of April 11, 2000
F-2
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
----------------- March 31, March 31,
1998 1999 2000 2000
------- -------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 2,198 $ 24,863 $ 9,849
Short-term investments............. -- 4,977 11,980
Accounts receivable ............... -- 70 217
Prepaid expenses and other current
assets............................ 125 796 6,857
------- -------- --------
Total current assets.............. 2,323 30,706 28,903
Property and equipment, net......... 1,477 12,912 36,886
Note receivable due from
webcasts.com....................... -- -- 10,000
Other assets........................ 407 1,123 4,637
------- -------- --------
$ 4,207 $ 44,741 $ 80,426
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................... $ 815 $ 3,055 $ 8,012
Accrued liabilities................ 437 879 3,187
Deferred revenue................... -- 448 331
Current portion of capital lease
obligations....................... -- 1,573 2,591
------- -------- --------
Total current liabilities......... 1,252 5,955 14,121
Capital lease obligations, net of
current portion.................... -- 3,627 6,601
------- -------- --------
Total liabilities................. 1,252 9,582 20,722
------- -------- --------
Commitments and contingencies (Note
6)
Redeemable convertible preferred
stock, $0.0001 par value; 20,000
shares authorized; 4,582, 15,247,
17,792 (unaudited) and no
(unaudited) shares issued and
outstanding (aggregate liquidation
value at December 31, 1999 and
March 31, 2000 of $61,398 and
$96,398, respectively)............. 6,905 61,192 96,114 $ --
------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.0001 par value;
40,000 shares authorized; 9,827,
17,132, 18,887 (unaudited) and
85,377 (unaudited) shares issued
and outstanding................... 1 2 2 9
Additional paid-in capital......... 853 21,773 60,320 156,427
Stockholders' note receivable...... -- -- (2,000) (2,000)
Unearned stock-based compensation.. (577) (13,613) (28,386) (28,386)
Deficit accumulated during
development stage................. (4,227) (34,195) (66,346) (66,346)
------- -------- -------- --------
Total stockholders' equity
(deficit)........................ (3,950) (26,033) (36,410) $ 59,704
------- -------- -------- ========
$ 4,207 $ 44,741 $ 80,426
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from Period from
March 20, 1998 March 20, 1998 Three Months
(Inception) to Year Ended (Inception) to Ended March 31,
December 31, December 31, December 31, -----------------
1998 1999 1999 1999 2000
-------------- ------------ -------------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 149 $ 149 $ -- $ 532
------- -------- -------- ------- --------
Operating costs and
expenses:
Cost of services....... -- 8,249 8,249 855 8,119
Engineering and
development........... 1,468 4,531 5,999 554 4,584
Sales and marketing.... 1,788 10,363 12,151 1,268 5,768
General and
administrative........ 1,096 7,174 8,270 767 3,733
------- -------- -------- ------- --------
Total operating costs
and expenses......... 4,352 30,317 34,669 3,444 22,204
------- -------- -------- ------- --------
Loss from operations.... (4,352) (30,168) (34,520) (3,444) (21,672)
Interest income......... 125 579 704 73 473
Loss on disposal of
assets................. -- (199) (199) -- --
Interest and other
expense................ -- (180) (180) (43) (156)
------- -------- -------- ------- --------
Net loss................ (4,227) (29,968) (34,195) (3,414) (21,355)
Deemed dividend related
to preferred stock..... -- -- -- -- (10,796)
------- -------- -------- ------- --------
Net loss attributable to
common stock........... $(4,227) $(29,968) $(34,195) $(3,414) $(32,151)
======= ======== ======== ======= ========
Net loss per share
attributable to common
stock--basic and
diluted................ $ (0.56) $ (3.43) $ (0.40) $ (3.04)
======= ======== ======= ========
Weighted average common
shares outstanding..... 7,488 8,726 8,462 10,589
======= ======== ======= ========
Pro forma net loss per
share--basic and
diluted (unaudited).... $ (0.63) $ (0.43)
======== ========
Pro forma weighted
average common shares
outstanding
(unaudited)............ 47,435 74,860
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible Deficit
Preferred Accumulated
Stock Common Stock Additional Stockholders' Unearned During Total
-------------- -------------- Paid-in Note Stock-based Development Stockholders'
Shares Amount Shares Amount Capital Receivable Compensation Stage Deficit
------ ------- ------ ------ ---------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 20,
1998 (Inception)
Issuance of common stock
in March 1998........... -- $ -- 7,636 $ 1 $ 1 $ -- $ -- $ -- $ 2
Issuance of series A
redeemable convertible
preferred stock at $1.20
per share, less issuance
costs of $33, in April
1998.................... 1,333 1,567 -- -- -- -- -- -- --
Issuance of series B
redeemable convertible
preferred stock at $1.65
per share, less issuance
costs of $22, in June
and July 1998........... 3,249 5,338 -- -- -- -- -- -- --
Exercise of employee
stock options........... -- -- 2,191 -- 17 -- -- -- 17
Issuance of warrants in
connection with capital
leases (Note 7)......... -- -- -- -- 219 -- -- -- 219
Unearned stock-based
compensation, net....... -- -- -- -- 616 -- (577) -- 39
Net loss................ -- -- -- -- -- -- -- (4,227) (4,227)
------ ------- ------ --- ------- ------- -------- -------- --------
Balance at December 31,
1998 4,582 6,905 9,827 1 853 -- (577) (4,227) (3,950)
Issuance of series C
redeemable convertible
preferred stock at $3.42
per share, less issuance
costs of $83, in
February 1999........... 3,592 12,201 -- -- -- -- -- -- --
Issuance of series D
redeemable convertible
preferred stock at $5.96
per share, less issuance
costs of $67, in October
1999.................... 7,073 42,086 -- -- -- -- -- -- --
Exercise of employee
stock options, net...... -- -- 6,987 1 685 -- -- -- 686
Issuance of common stock
for services rendered... -- -- 318 -- 232 -- -- -- 232
Issuance of warrants in
connection with capital
leases (Note 7)......... -- -- -- -- 574 -- -- -- 574
Issuance of warrant to
an investor in October
1999 (Note 7)........... -- -- -- -- 1,000 -- -- -- 1,000
Unearned stock-based
compensation, net....... -- -- -- -- 18,429 -- (13,036) -- 5,393
Net loss................ -- -- -- -- -- -- -- (29,968) (29,968)
------ ------- ------ --- ------- ------- -------- -------- --------
Balance at December 31,
1999 15,247 61,192 17,132 2 21,773 -- (13,613) (34,195) (26,033)
Issuance of series E
redeemable convertible
preferred stock at
$13.75 per share, less
issuance cost of $78, in
February 2000
(unaudited)............. 2,545 34,922 -- -- -- -- -- -- --
Deemed dividend related
to issuance of series E
redeemable convertible
preferred stock
(unaudited)............. -- -- -- -- 10,796 -- -- (10,796) --
Issuance of common stock
(unaudited)............. -- -- 909 -- 4,396 (2,000) -- -- 2,396
Issuance of common stock
for services rendered
(unaudited)............. -- -- 4 -- 50 -- -- -- 50
Repurchase of common
stock (unaudited)....... -- -- (518) -- (21) -- -- -- (21)
Exercise of employee
stock options
(unaudited)............. -- -- 1,360 -- 1,709 -- -- -- 1,709
Issuance of warrant in
February 2000 (Note
10)(unaudited).......... -- -- -- -- 2,750 -- -- -- 2,750
Unearned stock-based
compensation, net
(unaudited)............. -- -- -- -- 18,867 -- (14,773) -- 4,094
Net loss (unaudited).... -- -- -- -- -- -- -- (21,355) (21,355)
------ ------- ------ --- ------- ------- -------- -------- --------
Balance at March 31,
2000 (unaudited)........ 17,792 $96,114 18,887 $ 2 $60,320 $(2,000) $(28,386) $(66,346) $(36,410)
====== ======= ====== === ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
March 20, 1998 March 20, 1998 Three Months
(Inception) to Year Ended (Inception) to Ended March 31,
December 31, December 31, December 31, -----------------
1998 1999 1999 1999 2000
-------------- ------------ -------------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(4,227) $(29,968) $(34,195) $(3,414) $(21,355)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 65 1,707 1,772 117 2,067
Loss on disposal of
assets............... -- 199 199 -- --
Amortization of stock-
based compensation... 39 5,393 5,432 231 4,094
Issuance of common
stock for services... -- 232 232 -- 50
Issuance of warrant
(see Note 7)......... -- 1,000 1,000 -- --
Changes in assets and
liabilities:
Accounts receivable.. -- (70) (70) -- (147)
Prepaid expenses and
other assets........ (313) (813) (1,126) (214) (6,825)
Accounts payable..... 815 2,240 3,055 (259) 4,957
Accrued liabilities.. 437 442 879 42 2,308
Deferred revenue..... -- 448 448 -- (117)
------- -------- -------- ------- --------
Net cash used in
operating
activities......... (3,184) (19,190) (22,374) (3,497) (14,968)
------- -------- -------- ------- --------
Cash flows from
investing activities:
Purchase of property
and equipment......... (1,542) (7,491) (9,033) (320) (21,768)
Purchase of
investments........... -- (4,977) (4,977) -- (7,003)
Note receivable due
from webcasts.com..... -- -- -- -- (10,000)
------- -------- -------- ------- --------
Net cash used in
investing
activities......... (1,542) (12,468) (14,010) (320) (38,771)
------- -------- -------- ------- --------
Cash flows from
financing activities:
Issuance of convertible
preferred stock....... 6,905 54,287 61,192 12,201 34,922
Issuance of common
stock................. 19 686 705 318 4,084
Proceeds from lease
financing............. -- -- -- 1,001 --
Payment of capital
lease obligations..... -- (650) (650) (73) (281)
------- -------- -------- ------- --------
Net cash provided by
financing
activities......... 6,924 54,323 61,247 13,447 38,725
------- -------- -------- ------- --------
Net increase in cash and
cash equivalents....... 2,198 22,665 24,863 9,630 (15,014)
Cash and cash
equivalents at
beginning of period.... -- 2,198 -- 2,198 24,863
------- -------- -------- ------- --------
Cash and cash
equivalents at end of
period................. $ 2,198 $ 24,863 $ 24,863 $11,828 $ 9,849
======= ======== ======== ======= ========
Supplemental non-cash
investing and financing
activities:
Property and equipment
purchased under
capital lease
obligations........... $ -- $ 5,850 $ 5,850 $ 872 $ 4,273
Issuance of warrants... 219 574 793 -- 2,750
Deemed dividend related
to preferred stock.... -- -- -- -- 10,796
Supplemental cash flows
disclosures:
Cash paid for
interest.............. -- 140 140 28 100
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. The Company
iBEAM Broadcasting Corporation (the "Company"), formerly Bowles, Inc., was
incorporated on March 20, 1998 in Delaware. iBEAM provides an Internet
broadcast network that enables content providers to broadcast content over the
Internet. The network uses point-to-multipoint satellite broadcasting of
Internet content to intelligent iBEAM servers located at the edge of the
Internet, which is the Internet access point closest to the end user.
Prior to March 31, 2000 the Company was in the development stage, devoting
substantially all of its efforts to product development and raising capital
financing. The Company has funded its operating losses since inception through
capital lease obligations and the sale of equity securities. Management's
plans for funding operations include generating revenue while controlling
costs, the sale of equity securities and the utilization of equipment lease
lines (see Note 5). The Company's failure to sell its services or to raise
sufficient capital would unfavorably impact the Company.
2. Significant Accounting Policies
Unaudited interim results
The accompanying interim financial statements as of March 31, 2000 and for
the three-months ended March 31, 1999 and 2000 are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and
cash flows as of March 31, 2000 and for the three months ended March 31, 1999
and 2000. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the year ending December 31, 2000.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock split
The Company's Board of Directors authorized a 3-for-1 stock split of the
Company's common stock in January 2000. In March 2000, the Company's Board of
Directors authorized a 1.377-for-1 stock split of the Company's common stock.
All common and per share information in these financial statements has been
retroactively adjusted to reflect these stock splits. As a result of these
splits, the conversion rate of Series A, B, C, and D redeemable convertible
preferred stock into common stock automatically adjusts from 1:1 to 1:4.131
and has been retroactively adjusted in these financial statements (see note
7). The Company issued Series E redeemable convertible preferred stock in
February 2000. The conversion rate of Series E redeemable convertible
preferred stock into common stock automatically adjusts from 1:1 to 1:1.377.
Risks and uncertainties
The Company is subject to all of the risks inherent in an early stage
company conducting electronic services over the Internet. These risks include,
but are not limited to, a limited operating history, limited management
F-7
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
resources, dependence upon consumer acceptance of the Internet and the
changing nature of the electronic broadcasting industry. The Company's
operating results may be materially affected by the foregoing factors.
Cash, cash equivalents, restricted cash and investments
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less at the date of purchase to be
cash equivalents. Restricted cash of $107,000 consists of a certificate of
deposit held as collateral against the Company's corporate credit cards and is
included in other assets.
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's short-term investments are invested in high-grade corporate
securities and government bonds maturing approximately twelve months or less
from the date of purchase. At December 31, 1999, these investments are carried
at cost, which approximates fair value. Material unrealized gains or losses,
if any, are reported in stockholders' equity and included in other
comprehensive income. The cost of securities sold is based on the specific
identification method. For the year ended December 31, 1999, realized gains
and losses on available-for-sale securities were immaterial.
Fair value of financial instruments
The reported amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued liabilities approximate fair value
due to their short maturities.
Concentration of credit risk
Cash and cash equivalents are deposited in large domestic financial
institutions that management believes are creditworthy. With respect to
accounts receivable, the Company's customer base is dispersed across many
geographic areas primarily within the United States. The Company performs
ongoing credit evaluations of its customers financial condition, generally
requires no collateral from its customers, and establishes allowances for bad
debt as warranted.
Property and equipment
Property and equipment are stated at cost. Depreciation is generally
computed using the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Network equipment, computers, software and 3 years
other equipment.............................
Furniture and fixtures....................... 5-7 years
Leasehold improvements....................... Shorter of the lease term or
the estimated useful life
</TABLE>
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets.
F-8
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition
On-Air is a service that provides the customer the ability to transfer live
content 24 hours a day, 7 days a week. On-Air services are provided under
contracts that typically last for a period of three to twelve months. These
services are billed based upon either the peak capacity purchased, which is
expressed as the maximum volume that can be delivered per second, or upon
actual usage, which is the total amount of megabytes transferred in the month.
These contracts may also provide for minimum monthly fees. Revenue for these
services is recognized as the service is provided.
On-Stage services are provided under contracts that typically relate to a
single event. These services are billed based upon the peak capacity purchased
which is the maximum megabits delivered per second per event, or upon actual
usage, which is the total amount of megabits transferred. These contracts may
also provide for minimum fees. Revenue for these services is recognized as the
service is provided.
On-Demand is a service that allows the customer to store content on the
Company's network, which can then be accessed by end users at any time. This
service is provided under contracts that typically last for a period of three
to twelve months. There are two streams of revenue associated with this
service. Firstly, there is a fee for the amount of content stored, measured in
gigabytes per month. Secondly, there is a charge for the amount of content
delivered to end users which is billed based upon either the peak capacity
purchased, which is the maximum megabits delivered per second, or upon actual
usage, which is the total amount of megabytes transferred in the month. These
contracts may also provide for minimum monthly fees. Revenue for these
services is recognized as the service is provided.
The Company has the ability to insert advertisements into the content
delivered in connection with the On-Air, On-Stage and On-Demand services.
Revenue from advertising is recognized over the period the advertisements are
delivered.
Other services such as encoding, production, event management, acquisition
services, custom web integration with chat and e-commerce tools are generally
provided on a consulting basis on either hourly or fixed price billing over a
period of 30 days or less. Revenue for these services is recognized upon
completion of the services.
The Company is required to share 15%-20% of the revenue generated from the
delivery of content from the On-Air, On-Stage and On-Demand services with
certain internet service providers. The Company records the revenue from On-
Air, On-Stage and On-Demand services gross because they act as the principal
in the transactions and are wholly responsible for the delivery of the
services. In addition, the Company bears the risk of loss for collection from
the customer. The Company records the revenue sharing amount as cost of
services.
Cash payments received in advance of services provided are recorded as
deferred revenue.
Engineering and development expense
Engineering and development costs are expensed as incurred, except for
certain software development costs. In January 1999, the Company adopted
Statement of Position ("SOP") 98-1, which requires software development costs
associated with internal use software to be charged to operations until
certain capitalization criteria are met. For the year ended December 31, 1999,
software development costs of approximately $600,000 were capitalized and
included in property and equipment.
F-9
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising expense
Expenses related to advertising and promotion of products is charged to
sales and marketing expense as incurred. Advertising expense for the period
from March 20, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999 was $23,000 and $2,621,000, respectively.
Stock-based compensation expense
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value of the
Company's shares and the exercise price of the option. Equity instruments
issued to nonemployees are accounted for in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18.
Comprehensive income (loss)
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a
period from non-owner sources. There is no difference between net loss and
comprehensive loss.
Net loss per share
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. Potential
common shares are comprised of common stock subject to repurchase rights and
incremental shares of common and preferred stock issuable upon the exercise of
stock options or warrants and upon conversion of Series A, Series B, Series C
and Series D convertible preferred stock (collectively, "Preferred Stock").
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Period from
March 20, 1998 Three Months
(Inception) to Year Ended Ended March 31,
December 31, December 31, -----------------
1998 1999 1999 2000
-------------- ------------ ------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net loss attributable to common
stock.......................... $(4,227) $(29,968) $(3,414) $(32,151)
======= ======== ======= ========
Basic and diluted:
Weighted average common shares
outstanding................... 9,610 14,678 13,937 18,132
Weighted average unvested
common shares subject to
repurchase.................... (2,122) (5,952) (5,475) (7,543)
------- -------- ------- --------
Weighted average shares used to
compute basic and diluted net
loss per share attributable to
common stock.................. 7,488 8,726 8,462 10,589
======= ======== ======= ========
Net loss per share attributable
to common stock--basic and
diluted........................ $ (0.56) $ (3.43) $ (0.40) $ (3.04)
======= ======== ======= ========
</TABLE>
F-10
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential common shares that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Convertible preferred stock upon conversion to
common stock....................................... 18,930 62,984 66,489
Convertible preferred stock warrants upon conversion
to common stock.................................... 381 1,413 1,950
Unvested common shares subject to repurchase........ 2,191 7,101 7,785
Options to purchase common stock.................... 4,513 9,437 11,817
------ ------ ------
26,015 80,935 88,041
====== ====== ======
</TABLE>
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 and the
three months ended March 31, 2000 is computed using the weighted average
number of common shares outstanding, including the pro forma effects of the
automatic conversion of the Company's Preferred Stock into shares of common
stock effective upon the closing of the offering, as if such conversion
occurred on January 1, 1999 or at the date of original issuance, if later. The
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute basic and diluted net loss per share of 38,709,000
shares for the year ended December 31, 1999 and 64,271,000 shares for the
three months ended March 31, 2000.
Pro forma stockholders' equity (unaudited)
Immediately prior to the effective date of the offering, the Preferred
Stock outstanding will automatically convert into common stock at a one-to-one
ratio. The pro forma effects of this transaction is unaudited and has been
reflected in the accompanying Pro Forma Stockholders' Equity as of March 31,
2000.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. The Company, to date, has not engaged in derivative
and hedging activities, and accordingly does not believe that the adoption of
SFAS No. 133 will have a material impact on the financial reporting and
related disclosures of the Company. The Company will adopted SFAS No. 133 as
required by SFAS No. 137, "Deferral of the Effective Date of the FASB
Statement No.133," beginning with the third quarter of fiscal 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The Company has complied with the guidance in SAB 101 for all periods
presented.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25'), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications to
the terms of
F-11
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
a previously fixed stock option or award, and the accounting for an exchange
of stock compensation awards in a business combination. This Interpretation is
effective July 1, 2000, but certain conclusions is this Interpretation cover
specific events that occur after either December 15, 1998, or January 12,
2000. Management believes that FIN 44 will not have a material effect on the
financial position or results of operations of the Company.
3. Balance Sheet Components (in thousands)
<TABLE>
<CAPTION>
December 31,
---------------
March 31,
1998 1999 2000
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Network software and equipment............... $ 366 $ 8,224 $30,629
Computers, software and equipment............ 705 5,494 8,330
Furniture and fixtures....................... 456 631 1,177
Leasehold improvements....................... 15 180 434
------ ------- -------
1,542 14,529 40,570
Less: Accumulated depreciation and
amortization................................ (65) (1,617) (3,684)
------ ------- -------
$1,477 $12,912 $36,886
====== ======= =======
Accrued liabilities:
Accrued payroll and related liabilities...... $ 54 $ 489 $ 1,301
Other accrued liabilities.................... 236 390 1,886
Deferred rent................................ 147 -- --
------ ------- -------
$ 437 $ 879 $ 3,187
====== ======= =======
</TABLE>
4. Income Taxes
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses since inception. The components of
the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 1,343 $10,552
Nondeductible expenses..................................... 333 588
Research and development credit carryovers................. 58 477
Other...................................................... -- 187
------- -------
1,734 11,804
Less: Valuation allowance.................................. (1,734) (11,804)
------- -------
$ -- $ --
======= =======
</TABLE>
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be utilized; and accordingly, a
full valuation allowance has been recorded. The change in the valuation
allowance was $1,734,000 and $10,070,000 for the period from March 20, 1998
(inception) to December 31, 1998 and for the year ended December 31, 1999,
respectively.
At December 31, 1999, the Company had approximately $25.8 million of
federal and state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2004.
F-12
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a
three year period.
5. Capital Lease Obligations
The Company entered into a master lease agreement with Comdisco, Inc. in
November 1998 with aggregate lines of credit totaling $4.5 million, which
expired in January 2000. The Company received additional lines totaling $1.0
million in September 1999, which expired in September 2000, and an extension
to existing lines for an additional $3.0 million in December 1999, which
expired in January 2000. Advances under the lines are to be repaid over
periods ranging from 30 months to 48 months, bear interest at rates ranging
from 7% to 8%, and are collateralized by the purchased equipment. As of
December 31, 1999, the Company had $2.9 million available under its lease
lines, of which $0.9 million could be used for software, tenant improvements
and tooling specifically approved by Comdisco, Inc. and $2.0 million could be
used for equipment specifically approved by Comdisco, Inc. Warrants were
issued to Comdisco, Inc. in conjunction with the master lease agreement and
each additional increase in credit (see Note 7).
The advances under the lines have been classified as capital leases. As of
December 31, 1999, the cost of such leased equipment was approximately
$5,850,000 with accumulated amortization of $842,000. As of December 31, 1999,
future minimum lease payments under these agreements are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000................................................................ $ 1,947
2001................................................................ 1,976
2002................................................................ 1,597
2003................................................................ 244
-------
Total minimum lease payments........................................ 5,764
Less: Amount representing interest (7% to 8%)....................... (564)
-------
Present value of minimum lease payments............................. 5,200
Less: Current portion of capital lease obligations.................. (1,573)
-------
Long-term portion of capital lease obligations...................... $ 3,627
=======
</TABLE>
6. Commitments and contingencies
The Company leases office space and equipment under non-cancelable
operating leases with various expiration dates through February 2002. Rent
expense for the period from March 31, 1998 (inception) to December 31, 1998
and for the year ended December 31, 1999 was approximately $107,000 and
$803,000, respectively. The Company also leases bandwidth from a satellite
service provider under a non-cancelable lease agreement, which expires on
December 2002.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000................................................................. $ 2,744
2001................................................................. 4,029
2002................................................................. 4,457
-------
$11,230
=======
</TABLE>
F-13
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September and October 1999, the Company entered into three-year service
agreements with Northpoint Communications, Inc. ("NorthPoint") and Covad
Communications Group, Inc. ("Covad"), respectively, to provide streaming video
and audio. Under the terms of the agreements, the Company will deploy its
servers in NorthPoint and Covad hubs in North America and pay up to twenty
percent of all revenues created from the transport of content through their
networks. No amounts have been incurred under these arrangements as of
December 31, 1999.
In connection with the hiring of David Brewer, Vice President of
Operations, the Company agreed to purchase at least $2.0 million of services
from Brewer Consulting Networks, a company controlled by Mr. Brewer, beginning
January 1, 2000. The obligation to purchase these services from Brewer
Consulting Networks is contingent on Mr. Brewer relinquishing operational or
ownership control of Brewer Consulting Networks.
The Company is subject to legal proceedings, claims and litigation arising
in the ordinary course of business. The Company's management does not expect
that the ultimate costs to resolve these matters will have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
7. Redeemable Convertible Preferred Stock
The following table summarizes convertible preferred stock at December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Net
Designated Outstanding Amount Proceeds
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Series A......................... 1,350 1,333 $ 1,600 $ 1,567
Series B......................... 3,380 3,249 5,361 5,338
Series C......................... 3,650 3,592 12,284 12,201
Series D......................... 7,500 7,073 42,153 42,086
------ ------ ------- -------
15,880 15,247 $61,398 $61,192
====== ====== ======= =======
</TABLE>
iBEAM's Certificate of Incorporation, as amended, authorizes iBEAM to issue
20 million shares of $0.0001 par value preferred stock in the aggregate.
The rights, privileges and restrictions of holders of series A, B, C and D
convertible preferred stock ("Series A," "Series B," Series C" and "Series D,"
respectively) are set forth in iBEAM's amended and restated Certificate of
Incorporation, and are summarized as follows:
Voting
Each share of Preferred Stock has voting rights equal to an equivalent
number of shares of common stock into which it is convertible and votes
together as one class with the common stock.
As long as at least any shares of Preferred Stock remain outstanding, the
Company must obtain approval from a majority of the holders of Preferred Stock
in order to alter the Certificate of Incorporation as related to Preferred
Stock, change the authorized number of shares of Preferred Stock, repurchase
any shares of common stock other than shares subject to the right of
repurchase by the Company, change the authorized number of Directors,
authorize a dividend for any class or series other than Preferred Stock,
create a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the voting
stock of the surviving entity.
F-14
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
Holders of Series A, B, C and D are entitled to receive noncumulative
dividends at the per annum rate of $0.096, $0.132, $0.274 and $0.477 per
share, respectively, when and if declared by the Board of Directors. The
holders of Preferred Stock will also be entitled to participate in dividends
on common stock, when and if declared by the Board of Directors, based on the
number of shares of common stock held on an as-if converted basis. No
dividends on the Preferred Stock or common stock have been declared by the
Board from inception through December 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's common stock and Preferred Stock own less than 51% of the
resulting voting power of the surviving entity, the holders of Series A, B, C
and D are entitled to receive an amount of $1.20, $1.65, $3.42 and $5.96 per
share, respectively, plus any declared but unpaid dividends prior to and in
preference to any distribution to the holders of common stock. Should the
Company's legally available assets be insufficient to satisfy the liquidation
preferences, the funds will be distributed ratably among the holders of Series
A, B, C and D in proportion to the amount of such stock owed by each holder.
The remaining assets, if any, shall be distributed among the holders of Series
A, B, C and D and common stock pro-rated based on the number of shares of
common stock held by each (assuming full conversion of all such shares Series
A, B, C and D) until the value of the assets distributed to or the
consideration received aggregate $180 million.
Conversion
Each share of Preferred Stock is convertible, at the option of the holder,
according to a conversion ratio of 4.131 shares of common stock for one share
of Preferred Stock, subject to adjustment for dilution and common stock
splits, and Preferred Stock automatically converts into the number of shares
of common stock into which such shares are convertible at the then effective
conversion ratio upon: (1) the closing of a public offering of common stock at
a per share price of at least $2.89 per share with gross proceeds of at least
$20 million or (2) the consent of the holders of the majority of Preferred
Stock.
Warrants for Preferred Stock
The Company issued warrants to purchase 27,273 and 64,935 shares of Series
B at $1.65 per share and $2.31 per share, respectively, in October 1998, 6,396
shares of Series C at $4.69 per share in September 1999, and 25,168 shares of
Series D at $5.96 per share in December 1999 to Comdisco, Inc. upon signing
various equipment lease lines as described in Note 5. These warrants expire
the earlier of five years from the date of grant or three years from the
effective date of the Company's initial public offering. The Company valued
the warrants using the Black-Scholes option pricing model applying expected
lives of five years, a weighted average risk free rate of 6%, a dividend yield
of zero percent and volatility of 80%. The fair value of approximately
$793,000 represents additional interest on the equipment lease lines and is
being expensed over the lease term using the effective interest rate method.
No amounts were amortized in 1998, and $40,000 was amortized during the year
ended December 31, 1999.
In October 1999, the Company also issued a warrant to purchase 218,120
shares of Series D at $5.96 per share to a new investor. In September 1999,
the Company entered into sales and marketing cooperative agreement with this
investor. These warrants expire the earlier of seven years from the date of
grant or four years from the effective date of the Company's initial public
offering and were valued using the Black-Scholes option
F-15
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
pricing model applying an expected life of seven years, a weighted average
risk free rate of 6%, a dividend yield of zero percent and volatility of 80%.
The fair value of approximately $1,000,000 represents a non-cash inducement to
enter into future commercial agreements and was included in sales and
marketing expense during the quarter ended December 31, 1999.
8. Benefit Plans
Stock Option Plan
On March 23, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or non-qualified stock options. Incentive stock
options ("ISO") may be granted only to Company employees (including officers
and directors who are also employees). Non-qualified stock options ("NSO") may
be granted to Company employees and consultants. As of December 31, 1999, the
Company had reserved approximately 22,038,000 shares of common stock for
issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO and NSO shall not be less than 100% and 85% of
the estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall
not be less than 110% of the estimated fair value of the shares on the date of
grant. Options are exercisable immediately subject to repurchase options held
by the Company which lapse with the options vesting schedule. Options may have
a maximum term of up to 10 years as determined by the Board of Directors. To
date, options granted generally vest over four years.
The following table summarizes activity under the Plan since inception (in
thousands, except per share data):
<TABLE>
<CAPTION>
Period from
March 20, 1998
(Inception) to Year Ended Three Months Ended
December 31, 1998 December 31, 1999 March 31, 2000
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 4,513 $ 0.04 9,437 $ 0.87
Granted................ 6,704 0.03 15,062 0.59 4,022 8.79
Exercised.............. (2,191) 0.01 (8,900) 0.09 (1,360) 1.26
Cancelled.............. -- -- (1,238) 0.06 (282) 6.77
--------- --------- ---------
Outstanding at end of
period................. 4,513 0.04 9,437 0.87 11,817 3.38
========= ========= =========
Options vested at end of
period................. 17 0.04 2,488 0.07 3,885 0.09
========= ========= =========
</TABLE>
At December 31, 1998 and 1999, shares of common stock subject to a
repurchase option held by the Company totaled approximately 2,191,000 and
7,101,000 shares at a weighted average price of $0.02 and $0.24 per share,
respectively.
F-16
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information regarding stock options
outstanding as of December 31, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------------------------------------------
Weighted
Average Weighted
Range of Number Remaining Average
Exercise of Options Contractual Exercise
Prices Outstanding Life Price
---------- ----------- ----------- --------
<S> <C> <C> <C>
$0.04 1,270 8.7 years $0.04
$0.08 666 8.8 years 0.08
$0.15 902 9.0 years 0.15
$0.29 4,028 9.0 years 0.29
$1.45 1,156 9.9 years 1.45
$3.63 1,415 10.0 years 3.63
-----
$0.04-$3.63 9,437 9.2 years 0.87
=====
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Period from
March 20, 1998
(Inception) to Year Ended
December 31, December 31,
1998 1999
-------------- ------------
<S> <C> <C>
Net loss:
As reported.................................... $(4,227) $(29,968)
Pro forma...................................... (4,265) (30,731)
Net loss per share--basic and diluted:
As reported.................................... $ (0.56) $ (3.43)
Pro forma...................................... (0.56) (3.52)
</TABLE>
The Company calculated the value of each option grant on the date of grant
using the Black-Scholes option pricing model with the following assumptions
for all periods: dividend yield expected and volatility of 0%; expected lives
of four years and risk free interest rate of 5.75%. These pro forma amounts
may not be representative of the effects on reported net loss for future years
as options vest over several years and additional awards are generally made
each year. The weighted average fair value of options granted was $0.19 and
$1.71 for the period from March 20, 1998 (inception) to December 31, 1998 and
for the year ended December 31, 1999, respectively.
Stock-based compensation
In connection with certain stock option grants to employees and board
members, the Company recognized approximately $608,000, $17,290,000 and
$10,577,000 (unaudited) of unearned stock-based compensation for the excess of
the deemed fair market value over the exercise price at the date of grant for
the period from March 10, 1998 (inception) to December 31, 1998, for the year
ended December 31, 1999 and for the three months ended March 31, 2000,
respectively. The compensation expense is being recognized, using the multiple
option method as prescribed by FASB Interpretation No. 28, over the option's
vesting period of generally four
F-17
<PAGE>
iBEAM BROADCASTING CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
years. As a result, the Company recorded stock-based compensation expense of
$31,000, $4,974,000 and $2,920,000 (unaudited) for the period from March 20,
1998 (inception) to December 31, 1998, for the year ended December 31, 1999
and for the three months ended March 1, 2000, respectively.
Stock-based compensation expense related to stock options granted to
consultants is recognized as the stock options are earned. The fair value of
the stock options granted is calculated at each reporting date using the
Black-Scholes option pricing model. As a result, the stock-based compensation
expense will fluctuate as the fair market value of our common stock
fluctuates. The Company believes that the fair value of the stock options are
more reliably measurable than the fair value of the services received. In
connection with the grant of stock options to consultants, the Company
recorded stock-based compensation expense of $8,000, $419,000 and $1,174,000
for the period from March 20, 1998 (inception) to December 31, 1998, for the
year ended December 31, 1999, and for the three month ended March 31, 2000,
respectively.
As of March 31, 2000, the Company expects to amortize stock-based
compensation expense of $12,227,000 in the remainder of fiscal 2000,
$9,262,000 in 2001, $4,843,000 in 2002, and $2,054,000 in 2003.
401(k) Plan
The Company's employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit and have
the amount of such reduction contributed to the 401(k) Plan. The Company
currently does not make matching or additional contributions to the 401(k)
Plan on its employees' behalf.
9. Segment Information
The Company currently operates in a single business segment as there is
only one measurement of profitability for its operations. Through December 31,
1999, foreign operations have not been significant in either revenues or
investments in long-lived assets.
A summary of the Company's revenues by service offering is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
(unaudited)
<S> <C> <C>
iBEAM On-Stage.......................... $110 $132
iBEAM On-Air............................ 9 144
iBEAM On-Demand......................... 5 191
Other services.......................... 25 65
---- ----
$149 $532
==== ====
</TABLE>
For the year ended December 31, 1999, the Company's significant customers
were ProWebCast, MusicNow, Inc. and Pixelworld, which represented 40%, 15% and
13% of total revenue, respectively. At December 31, 1999, Pacific Century
Group and Pixelworld represented 43% and 28%, respectively, of the accounts
receivable balance. For the three months ended March 31, 2000 one customer,
NetRadio, represented 12% of the Company's revenue.
10. Subsequent Events (Unaudited):
Series E Financing
In February 2000, the Company issued 2,545,454 shares of series E
redeemable convertible preferred stock ("Series E") at a price of $13.75 per
share, for aggregate proceeds of $35.0 million. These convertible preferred
F-18
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
shares will automatically convert into 3,505,089 shares of common stock upon
the closing of this offering. The difference between the mid-point of the
estimated price range for shares in the Company's initial public offering
("IPO") and the conversion price resulted in a beneficial conversion feature
of approximately $10.8 million. Under Emerging Issues Task Force No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features, the
beneficial conversion feature resulted in a "deemed" preferred dividend of
$10.8 million for the three months ended March 31, 2000.
Acquisition of webcasts.com, Inc.
In March 2000, the Company entered into an agreement to acquire with
webcasts.com, Inc. ("webcasts.com"), a provider of interactive broadcasting
services and proprietary tools that give businesses the ability to conduct
live and on-demand Internet broadcasts for use in distance learning, corporate
communications, sales presentations, on-line trade shows and interactive
television. The acquisition was consummated on April 28, 2000 and was
accounted for as a purchase business combination with a purchase price of
$93.2 million.
Under the terms of the agreement, all issued and outstanding shares and
warrants of webcasts.com were exchanged for 8,301,747 shares of the Company's
series F redeemable convertible preferred stock ("Series F") equal to 8% of
the as adjusted capitalization of the combined companies immediately following
the acquisition. Such shares had a value of approximately $83.0 million. In
addition, based on an exchange ratio of 0.34883 shares of iBEAM for every
share of webcasts.com, all of the outstanding options granted under the
webcasts.com 1999 Stock Option Plan converted into options to purchase 671,932
shares of the Company's Series F. The fair value of these options of
approximately $5.5 million was determined using the Black-Scholes option
pricing model and is included as a component of the purchase price. The
Company also issued a $3.0 million note to the webcasts.com's redeemable
preferred stockholders, which is payable on September 20, 2000 and bears
interest at 10% per annum. The Company anticipates incurring approximately
$1.7 million in acquisition related expenses, which consist primarily of
financial advisory, accounting and legal fees. See Unaudited Pro Forma
Combined Financial Information.
America Online, Inc.
In February 2000, the Company entered into a two year commercial agreement
with America Online, Inc. to deploy the Company's streaming media distribution
network within America Online's network. Under the agreement, the Company
agreed to pay an advance of $3.0 million against future revenue sharing
obligations derived from content delivered through their network. In the event
the Company does not deliver a minimum amount of traffic to America Online,
they can terminate this agreement, at which time, a portion of the advance
will be refunded to the Company. In addition, America Online may purchase
services pursuant to the Company's standard service terms and conditions.
In February 2000, America Online purchased $5 million of Series E for
$13.75 per share, which converts into 500,726 shares of common stock at the
closing of this offering, and received a warrant to purchase 537,634 shares of
our common stock at an exercise price equal to the price to public in this
offering, less underwriting discounts and commissions. The warrant was a
condition to the commercial agreement and was valued using the Black-Scholes
option pricing model. The fair value of $2.8 million represents an expense for
receiving equipment rack space at each of America Online's data centers and
will be recognized ratably over the term of the agreement.
F-19
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pacific Century CyberWorks (PCCW)
The Company has entered into an agreement with Pacific Century CyberWorks
Limited (PCCW) to establish a joint venture company that will bring high-
fidelity streaming audio and video to Asia. The new company, to be called
iBEAM Asia, will be responsible for extending the Company's current business
and services to Asia. This will include deployment and operation of MaxCaster
servers into ISPs and Internet access providers and distributing video and
audio content from media companies to end users in over 50 countries in the
Pacific Rim, Indian subcontinent, and Middle East. The joint venture will be
51% owned by PCCW and 49% owned by iBEAM and is expected to be operational by
the end of 2000. The joint venture will be accounted for under the equity
method of accounting. In addition, in February 2000, PCCW purchased $30
million of Series E for $13.75 per share.
RealNetworks, Inc.
In February 2000, the Company entered into a seven-year Infrastructure
Software License Agreement with RealNetworks, Inc. for an initial payment of
$10.0 million for the G2 streaming software platform. Additionally, the
Company has agreed to pay RealNetworks a quarterly royalty, subject to certain
annual minimum and maximum payments. The aggregate future minimum payments
under the agreement are $15 million.
The Walt Disney Company
In March 2000, the Company agreed to issue shares of series G redeemable
convertible preferred stock ("Series G") to The Walt Disney Company for $10.0
million at a price per share equal to the price to the public in the initial
public offering. Series G will convert into common stock on a one-for-one
basis at the closing of this offering. Walt Disney will purchase 1,000,000
shares of Series G.
Excite@Home
In April 2000, the Company agreed to issue shares of series H redeemable
convertible preferred stock ("Series H") to Excite@Home for $5.0 million at a
price per share equal to the price to the public in the initial public
offering, less underwriting commissions and discounts. Series H will convert
into common stock on a one-for-one basis at the closing of this offering.
Excite@Home will purchase 537,634 shares of Series H.
Stock Option Plans
The Company's 2000 Stock Plan (the "2000 Plan") was adopted by the Board of
Directors in January 2000, as amended in May 2000, subject to stockholder
approval. The 2000 Plan provides for the grant of incentive stock options to
employees and non-statutory stock options and stock purchase rights to
employees, directors and consultants.
A total of 9,639,000 shares of common stock were reserved for issuance
pursuant to the 2000 Plan. No options have yet been issued. The number of
shares reserved for issuance under the 2000 Plan will increase annually on
January 1st of each calendar year, effective beginning in 2001, equal to the
lesser of:
. 5% of the outstanding shares of common stock on the first day of the
year,
. 10,000,000 shares or
. such lesser amount as determined by the Board of Directors.
F-20
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 2000, the Board of Directors adopted, subject to stockholder
approval, the 2000 Director Option Plan (the "Director Plan"). The Director
Plan provides for the periodic grant of nonstatutory stock options to non-
employee directors. A total of 500,000 shares were reserved for issuance under
the Director Plan.
In January 2000, the Board of Directors adopted, subject to stockholder
approval, the 2000 Employee Stock Purchase Plan (the "Purchase Plan"), which
was subsequently amended in May 2000. A total of 1,500,000 shares of common
stock will be made available under the Purchase Plan. The Purchase Plan
provides for annual increases in the number of shares available for issuance
on January 1st of each year, beginning in 2001, equal to the lesser of (i) 2%
of the outstanding shares of common stock on the first day of the calendar
year, (ii) 3,000,000 shares, or (iii) such other lesser amount as determined
by the Board of Directors. The Purchase Plan is intended to qualify for
preferential tax treatment and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after
February 1 and August 1 of each year, except for the first such offering
period which will commence on the first trading day on or after the effective
date of this offering and will end on the last trading day on or before
January 31, 2001. The Purchase Plan permits participants to purchase common
stock through payroll deductions of up to 15% of their eligible compensation.
A participant may purchase no more than 10,000 shares during any 6-month
purchase period. Amounts deducted and accumulated by the participant are used
to purchase shares of our common stock at the end of each 6-month purchase
period. The price is 85% of the lower of the fair market value of our common
stock at the beginning of an offering period or after a purchase period ends.
F-21
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
On March 21, 2000, iBEAM Broadcasting Corporation ("iBEAM" or the
"Company") entered into a definitive agreement to acquire webcasts.com, Inc.
("webcasts.com") in a transaction to be accounted for as a purchase business
combination. Webcasts.com provides interactive broadcasting services and
proprietary tools that give businesses the ability to conduct live and on-
demand Internet broadcasts for use in distance learning, corporate
communications, sales presentations, on-line trade shows and interactive
television.
On April 28, 2000, the Company consummated this acquisition. All issued and
outstanding shares and warrants of webcasts.com were exchanged for shares of
the Company's series F redeemable convertible preferred stock ("Series F")
equal to 8% of the as adjusted capitalization of the combined companies
immediately following the acquisition. Using the capitalization of the
companies as of April 28, 2000 as adjusted for the planned issuance of
1,537,634 shares of preferred stock to The Walt Disney Company and Excite@Home
and the repurchase of 908,820 shares of common stock in May 2000, the Company
issued 8,301,747 shares, at $10.00 per share, for a value of approximately
$83.0 million. In addition, based on an exchange ratio of 0.34883 shares of
iBEAM for every share of webcasts.com, all of the outstanding options granted
under the webcasts.com 1999 Stock Option Plan were converted into options to
purchase 671,932 shares of the Company's Series F. The fair value of these
options of approximately $5.5 million was determined using the Black-Scholes
option pricing model and is included as a component of the purchase price. The
Company also issued a $3.0 million note to the webcasts.com's redeemable
preferred stockholders, which is payable on September 20, 2000 and bears
interest at 10% per annum. The Company anticipates incurring approximately
$1.7 million in acquisition related expenses, which consist primarily of
financial advisory, accounting and legal fees. In addition, the former
securityholders of webcasts.com may receive an additional 1,253,205 shares of
common stock if the webcasts.com subsidiary meets revenue targets in the
twelve months after the closing of the acquisition.
The total purchase price of $93.2 million will be allocated to the assets
acquired, including tangible and intangible assets, and liabilities assumed
based upon the fair value of such assets and liabilities on the date of
acquisition. The total estimated purchase price of the acquisition has been
allocated based on a preliminary basis to assets and liabilities based on
management estimates of their fair value and an independent appraisal of
certain intangible assets with the excess cost over the net assets acquired
allocated to goodwill. This allocation is subject to change pending a final
analysis of the total purchase price and fair value of the assets acquired and
liabilities assumed. The aggregate purchase price has been allocated as
follows (in thousands):
<TABLE>
<S> <C>
Tangible assets received......................................... $12,896
Purchased technology............................................. 2,000
Assembled workforce.............................................. 2,150
Non-competition agreements....................................... 4,700
Goodwill......................................................... 84,994
Liabilities assumed.............................................. (13,530)
-------
$93,210
=======
</TABLE>
The tangible assets consist primarily of cash and cash equivalents,
accounts receivable and property and equipment. The liabilities assumed
consist primarily of accounts and notes payable and a revolving line of
credit. Webcasts.com's tangible assets received and liabilities assumed as of
March 31, 2000 were used for purposes of calculating the pro forma adjustments
as they approximate fair value at such date. The amounts allocated to
purchased technology, assembled workforce, and non-competition agreements are
being amortized over their estimated useful lives of three years. The purchase
price in excess of net identified tangible and intangible assets is allocated
as goodwill, which is being amortized over three years.
The acquisition is expected to be structured as a tax-free exchange of
stock, therefore, the differences between the recognized fair values of
acquired assets, including tangible and intangible assets and their historical
tax bases, are not deductible for tax purposes.
F-22
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Historical -----------------------
iBEAM webcasts.com Adjustments Combined
ASSETS ---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 9,849 $9,295 $ -- $ 19,144
Short-term investments...... 11,980 -- -- 11,980
Accounts receivable, net.... 217 831 -- 1,048
Prepaid expenses and other
current assets............. 6,857 91 -- 6,948
-------- ------- -------- --------
Total current assets....... 28,903 10,217 -- 39,120
Property and equipment, net.. 36,886 2,581 -- 39,467
Note receivable due from
webcasts.com................ 10,000 -- (10,000)(A) --
Goodwill and acquired
intangible assets........... -- 3,796 90,048 (B) 93,844
Other assets................. 4,637 98 -- 4,735
-------- ------- -------- --------
$ 80,426 $16,692 $ 80,048 $177,166
======== ======= ======== ========
<CAPTION>
LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable............ $ 8,012 $ 1,567 $ -- $ 9,579
Accrued liabilities......... 3,187 581 1,700 (B) 5,468
Deferred revenue............ 331 116 -- 447
Current portion of capital
lease obligations.......... 2,591 107 -- 2,698
Revolving line of credit,
current portion............ -- 122 -- 122
Note payable due to iBEAM... -- 10,000 (10,000)(A) --
Notes payable to
webcasts.com's redeemable
preferred stockholders..... -- -- 3,000 (B) 3,000
-------- ------- -------- --------
Total current liabilities.. 14,121 12,493 (5,300) 21,314
Revolving line of credit..... -- 969 -- 969
Capital lease obligations,
net of current portion...... 6,601 68 -- 6,669
-------- ------- -------- --------
Total liabilities.......... 20,722 13,530 (5,300) 28,952
-------- ------- -------- --------
Redeemable convertible
preferred stock............. 96,114 -- 88,510 (B) 184,624
-------- ------- -------- --------
Redeemable preferred stock... -- 2,639 (2,639)(B) --
-------- ------- -------- --------
Stockholders' equity
(deficit):
Common stock................ 2 -- -- 2
Additional paid-in capital.. 60,320 8,497 (8,497)(B) 60,320
Stockholders' note
receiveable................ (2,000) -- -- (2,000)
Unearned stock-based
compensation............... (28,386) -- -- (28,386)
Deficit accumulated during
development stage.......... (66,346) (7,974) 7,974 (B) (66,346)
-------- ------- -------- --------
Total stockholders' equity
(deficit)................. (36,410) 523 (523) (36,410)
-------- ------- -------- --------
$ 80,426 $16,692 $ 80,048 $177,166
======== ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
F-23
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Historical ----------------------
iBEAM webcasts.com Adjustments Combined
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Revenue....................... $ 532 $ 1,551 $ -- $ 2,083
-------- ------- ------- --------
Operating costs and expenses:
Cost of services............. 8,119 1,675 -- 9,794
Engineering and development.. 4,584 477 -- 5,061
Sales and marketing.......... 5,768 1,198 -- 6,966
General and administrative... 3,733 1,365 -- 5,098
Goodwill amortization........ -- 143 7,678 (C) 7,821
-------- ------- ------- --------
Total costs and operating
expenses.................. 22,204 4,858 7,678 34,740
-------- ------- ------- --------
Loss from operations.......... (21,672) (3,307) (7,678) (32,657)
Other income (expense), net... 317 (233) -- 84
-------- ------- ------- --------
Net loss...................... (21,355) (3,540) (7,678) (32,573)
Dividends and accretion
related to preferred stock
and redeemable warrants...... (10,796) (1,260) -- (12,056)
-------- ------- ------- --------
Net loss attributable to
common stock................. $(32,151) $(4,800) $(7,678) $(44,629)
======== ======= ======= ========
Net loss per share
attributable to common stock:
Basic and diluted............ $ (3.04) $ (2.36)
======== ========
Weighted average common
shares outstanding.......... 10,589 18,891
======== ========
Pro forma net loss per share
attributable to common
stock: (D)
Basic and diluted............ $ (0.43) $ (0.54)
======== ========
Weighted average common
shares outstanding.......... 74,860 83,162
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
F-24
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
webcasts.com Pro Forma
------------------------------------------------ ---------------------
Historical Historical Historical Adjust- Pro Forma Adjust-
iBEAM webcasts.com RIG ments webcasts.com ments Combined
---------- ------------ ---------- ------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 149 $ 2,431 $ 2,648 $(174)(E) $ 4,905 $ -- $ 5,054
-------- ------- ------- ----- ------- -------- --------
Operating costs and
expenses:
Cost of services....... 8,249 1,800 1,913 (174)(E) 3,539 -- 11,788
Engineering and
development........... 4,531 235 35 -- 270 -- 4,801
Sales and marketing.... 10,363 768 307 -- 1,075 -- 11,438
General and
administrative 7,174 3,681 1,585 28 (F) 5,294 -- 12,468
Amortization of
goodwill and acquired
intangibles........... -- 97 -- 476 (G) 573 30,709 (C) 31,282
-------- ------- ------- ----- ------- -------- --------
Total operating costs
and expenses......... 30,317 6,581 3,840 330 10,751 30,709 71,777
-------- ------- ------- ----- ------- -------- --------
Loss from operations.... (30,168) (4,150) (1,192) (504) (5,846) (30,709) (66,723)
Other income (expense),
net.................... 200 (86) (472) 468 (H) (90) -- 110
-------- ------- ------- ----- ------- -------- --------
Net loss................ (29,968) (4,236) (1,664) (36) (5,936) (30,709) (66,613)
Dividends and accretion
related to preferred
stock and redeemable
warrants............... -- (1,797) -- -- (1,797) -- (1,797)
-------- ------- ------- ----- ------- -------- --------
Net loss attributable to
common stock........... $(29,968) $(6,033) $(1,664) $ (36) $(7,733) $(30,709) $(68,410)
======== ======= ======= ===== ======= ======== ========
Net loss per share
attributable to common
stock:
Basic and diluted...... $ (3.43) $ (4.02)
======== ========
Weighted average common
shares outstanding.... 8,726 17,028
======== ========
Pro forma net loss per
share attributable to
common
stock: (D)
Basic and diluted...... $ (0.63) $ (1.23)
======== ========
Pro forma weighted
average common shares
outstanding........... 47,435 55,737
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
F-25
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
1. Basis of presentation
The unaudited pro forma combined balance sheet gives effect to this
acquisition as if it occurred on March 31, 2000 and combines the balance sheet
of iBEAM as of March 31, 2000 and the consolidated balance sheet of
webcasts.com as of March 31, 2000.
On October 15, 1999, webcasts.com completed its acquisition of all the
outstanding capital stock of The Rock Island Group, Inc. ("RIG"). The RIG
acquisition was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of RIG have been
included in the consolidated financial statements of webcasts.com since the
acquisition date.
The unaudited pro forma statement of operations gives effect to the
webcasts.com acquisition as if it had occurred on January 1, 1999 and presents
the results of operations of iBEAM for the year ended December 31, 1999
combined with the unaudited pro forma statement of operations of webcasts.com
for the year ended December 31, 1999. The unaudited pro forma statement of
operations of webcasts.com includes the results of operations of webcasts.com
for the year ended December 31, 1999 combined with the results of operations
of RIG for the period from January 1, 1999 to October 14, 1999 as if the RIG
acquisition occurred on January 1, 1999.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the transactions had been
consummated at the dates indicated, nor is it necessarily indicative of the
future operating results or the financial position of the combined companies.
2. Pro forma adjustments
The following adjustments were applied to iBEAM's historical financial
statements and those of webcasts.com to arrive at the pro forma combined
financial information:
A To eliminate the intercompany promissory note.
B To reflect the issuance of Series F preferred stock and the assumption
of options to purchase Series F preferred stock in connection with the
acquisition of webcasts.com and to record the issuance of a $3.0 million
note payable by iBEAM to webcasts.com's redeemable preferred
stockholders, estimated transaction costs of $1.7 million and other
assets and liabilities at their fair value.
C To reflect the amortization of goodwill and other intangibles over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
Amortization Expenses
------------------------------------
Amortization Year Ended Three Months Ended
Amount Period December 31, 1999 March 31, 2000
------- ------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Goodwill.......... $84,994 3 years $28,331 $7,083
Purchased
technology....... 2,000 3 years 667 167
Assembled
workforce........ 2,150 3 years 717 179
Non-compete
agreements....... 4,700 3 years 1,567 392
</TABLE>
The estimated useful life related to the assembled workforce was based
on the remaining vesting schedule of the employees' stock options and
the historical experience of employee turnover. The estimated useful
life related to the non-compete agreement was based on the term of the
non-compete provisions.
D Pro forma basic and diluted net loss per share attributable to common
stock is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion
of the Company's outstanding redeemable convertible preferred stock
effective upon the closing of the Company's initial public offering as
if such conversion occurred on January 1, 1999, or at the date of
original issuance, if later. The shares of Series F, issued as
consideration for the
F-26
<PAGE>
iBEAM BROADCASTING CORPORATION
(a development stage company)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
acquisition, are assumed to be converted into the Company's common stock
under the automatic conversion feature and outstanding as of January 1,
1999. Common stock subject to repurchase rights and incremental shares
of common and preferred stock issuable upon the exercise of stock
options and warrants, aggregating 22,258,000 shares at March 31, 2000
and 18,657,000 shares at December 31, 1999, have been excluded from the
diluted net loss per share calculation because to do so would be
antidilutive.
E To eliminate revenue related to product sales to webcasts.com by RIG
prior to webcasts.com's acquisition of RIG. Additionally, the related
cost of revenue recognized by RIG has been eliminated.
F To reflect additional depreciation expense on the fair value of tangible
assets acquired.
G To record the additional amortization of goodwill related to the
acquisition of RIG as if the transaction occurred on January 1, 1999.
H To reduce interest expense, resulting from the settlement of notes
payable in connection with the acquisition of RIG as if the settlement
occurred on January 1, 1999.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
webcasts.com, Inc.
We have audited the accompanying consolidated balance sheets of
webcasts.com, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
webcasts.com, Inc. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Oklahoma City, Oklahoma
February 21, 2000
F-28
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
--------------- -----------
1998 1999 2000
------ ------- -----------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash............................................. $ 23 $ 1,780 $ 9,295
Trade accounts receivable, net of allowance for
doubtful accounts of $22, $31 and $36 in
1998, 1999 and 2000, respectively............... 411 902 831
Prepaid expenses and other current assets........ 6 132 53
Costs of uncompleted contracts................... 57 27 38
------ ------- -------
Total current assets............................ 497 2,841 10,217
------ ------- -------
Equipment......................................... 138 2,200 2,912
Less accumulated depreciation and amortization... (41) (181) (331)
------ ------- -------
Net equipment..................................... 97 2,019 2,581
Goodwill, net of accumulated amortization of $98
and $241, respectively........................... -- 3,939 3,796
Other assets...................................... -- 71 98
------ ------- -------
$ 594 $ 8,870 $16,692
====== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................. $ 242 $ 1,178 $ 1,567
Deferred revenues................................ 139 134 116
Accrued liabilities.............................. 67 378 581
Notes payable, current portion................... 203 64 10,000
Revolving line of credit, current portion........ -- -- 122
Notes payable to common stockholders............. 419 -- --
Notes payable to preferred stockholders.......... -- 2,720 --
Current portion of capital lease obligations..... 23 99 107
------ ------- -------
Total current liabilities....................... 1,093 4,573 12,493
Revolving line of credit.......................... -- 978 969
Notes payable, net of current portion............. -- 52 --
Capital lease obligations, net of current
portion.......................................... 18 102 68
------ ------- -------
Total liabilities............................... 1,111 5,705 13,530
------ ------- -------
Redeemable Preferred Stock:
Series A Senior Preferred Stock, $.0001 par value
with a redemption and liquidation value of $200
per share; 30 shares authorized, 23 shares
issued and outstanding.......................... -- 1,878 1,997
Series B Senior Preferred Stock, $.0001 par value
with a redemption and liquidation value of $200
per share; 4 shares authorized, 3 shares issued
and outstanding................................. -- 244 259
Series C Senior Preferred Stock, $.0001 par value
with a redemption and liquidation value of $200
per share; 5 shares authorized, 4 shares issued
and outstanding................................. -- 361 383
------ ------- -------
Total redeemable preferred stock................ -- 2,483 2,639
------ ------- -------
Stockholders' equity (deficit):
Series D Senior Convertible Preferred Stock,
$.0001 par value with a liquidation value of
$17.39 per share, 230 shares authorized and 210
shares issued and outstanding in 1999; and 361
shares authorized and 345 shares issued and
outstanding in 2000............................. -- -- --
Common stock, $.00001 par value, 50,000 shares
authorized, 12,875 shares issued and 10,787
shares outstanding in 1998, 12,150 shares issued
and outstanding in 1999 and 20,105 shares issued
and outstanding in 2000......................... -- -- --
Warrants to purchase common stock................ -- 2,292 --
Additional paid in capital....................... 73 2,824 8,497
Accumulated deficit.............................. (198) (4,434) (7,974)
Treasury stock, 2,087 shares at cost in 1998..... (392) -- --
------ ------- -------
Total stockholders' equity (deficit)............ (517) 682 523
------ ------- -------
Commitments and contingencies (Notes 3, 4, 8 and
10).............................................. -- -- --
------ ------- -------
$ 594 $ 8,870 $16,692
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
---------------- ---------------
1998 1999 1999 2000
------- ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C>
Revenues.................................... $ 1,997 $ 2,431 $ 734 $ 1,551
Cost of revenues............................ 1,300 1,800 296 1,675
------- ------- ------ -------
Gross profit (loss)....................... 697 631 438 (124)
Operating expenses.......................... 896 4,781 497 3,183
------- ------- ------ -------
Loss from operations........................ (199) (4,150) (59) (3,307)
Interest income............................. -- 33 -- 58
Interest expense............................ (48) (119) (18) (291)
------- ------- ------ -------
Net loss.................................. (247) (4,236) (77) (3,540)
Preferred stock dividends in arrears and
accretion of discount on preferred stock
and redeemable warrants.................... -- (1,797) -- (1,260)
------- ------- ------ -------
Net loss applicable to common stock....... $ (247) $(6,033) $ (77) $(4,800)
======= ======= ====== =======
Net loss per average common share
outstanding--basic and diluted............. $ (0.02) $ (0.51) $(0.01) $ (0.39)
======= ======= ====== =======
Weighted average common shares--basic and
diluted.................................... 12,226 11,758 10,931 12,240
======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Series D
Preferred Retained Total
Stock Common Stock Warrants Additional Earnings Stockholders'
------------- -------------- to Purchase Paid-in (Accumulated Treasury Equity
Shares Amount Shares Amount Common Stock Capital Deficit) Stock (Deficit)
------ ------ ------ ------ ------------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... -- $-- 12,875 $ -- $ -- $ -- $ 77 $ -- $ 77
Distributions to
stockholders........... -- -- -- -- -- -- (28) -- (28)
Purchase of 2,392 shares
of treasury stock, at
cost................... -- -- -- -- -- -- -- (450) (450)
Sale of 304 shares of
treasury stock......... -- -- -- -- -- 73 -- 58 131
Net loss................ -- -- -- -- -- -- (247) -- (247)
--- --- ------ ---- ------- ------- ------- ----- -------
Balance, December 31,
1998................... -- -- 12,875 -- -- 73 (198) (392) (517)
Common stock issued to
employees.............. -- -- 2,031 -- -- 516 -- -- 516
Sale of common stock.... -- -- 859 -- -- 126 -- -- 126
Exercise of stock
options................ -- -- 4 -- -- 1 -- -- 1
Issuance of preferred
stock for acquisition.. 210 -- -- -- -- 4,000 -- -- 4,000
Retirement of treasury
stock.................. -- -- (3,619) -- -- (392) -- 392 --
Sale of Bridge Loan
Warrants............... -- -- -- -- 311 -- -- -- 311
Sale of preferred stock
warrants............... -- -- -- -- 633 -- -- -- 633
Issuance of options and
warrants for services.. -- -- -- -- -- 91 -- -- 91
Accretion of redeemable
preferred stock........ -- -- -- -- -- (276) -- -- (276)
Accretion of warrants to
purchase common stock.. -- -- -- -- 1,348 (1,348) -- -- --
Stock-based
compensation........... -- -- -- -- -- 33 -- -- 33
Net loss................ -- -- -- -- -- -- (4,236) -- (4,236)
--- --- ------ ---- ------- ------- ------- ----- -------
Balance, December 31,
1999................... 210 -- 12,150 -- 2,292 2,824 (4,434) -- 682
Exercise of stock
options (unaudited).... 4 -- 31 -- -- 34 -- -- 34
Issuance of preferred
stock (unaudited)...... 11 -- -- -- -- 275 -- -- 275
Conversion of debt to
preferred stock
(unaudited)............ 120 -- -- -- -- 2,782 -- -- 2,782
Exercise of warrants
(unaudited)............ -- -- 7,924 -- (3,259) 3,281 -- -- 22
Accretion of redeemable
preferred stock
(unaudited)............ -- -- -- -- -- (156) -- -- (156)
Accretion of warrants to
purchase common stock
(unaudited) -- -- -- -- 967 (967) -- -- --
Stock-based compensation
(unaudited)............ -- -- -- -- -- 424 -- -- 424
Net loss (unaudited).... -- -- -- -- -- -- (3,540) -- (3,540)
--- --- ------ ---- ------- ------- ------- ----- -------
Balance, March 31, 2000
(unaudited)............ 345 $-- 20,105 $ -- $ -- $ 8,497 $(7,974) $ -- $ 523
=== === ====== ==== ======= ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
December 31, March 31,
-------------- -------------
1998 1999 1999 2000
----- ------- ---- -------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(247) $(4,236) $(77) $(3,540)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 33 238 9 293
Accretion of debt discount.................. -- 31 -- 62
Issuance of warrants and options for
services................................... -- 91 -- --
Stock-based compensation.................... -- 549 -- 424
Net change in:
Accounts receivable........................ (85) (79) (74) 71
Prepaid expenses and other current assets.. (2) (103) (7) 79
Costs of uncompleted contracts............. (57) 30 33 (11)
Other assets............................... -- -- -- (27)
Accounts payable........................... 3 466 321 389
Deferred revenues.......................... 97 (5) (82) (18)
Accrued liabilities........................ 55 142 16 203
----- ------- ---- -------
Net cash used in operating activities..... (203) (2,876) 139 (2,075)
----- ------- ---- -------
Cash flows used in investing activities:
Purchase of equipment......................... (36) (1,598) (57) (712)
Legal fees paid for acquisition............... -- (85) -- --
----- ------- ---- -------
Net cash used in investing activities..... (36) (1,683) (57) (712)
----- ------- ---- -------
Cash flows from financing activities:
Proceeds from sale of preferred stock......... -- 2,841 -- 275
Proceeds from sale of common stock............ -- 77 -- 56
Proceeds from notes payable................... 203 264 -- 10,000
Payments on notes payable..................... -- (420) (60) (116)
Proceeds from notes payable to preferred
stockholders................................. -- 3,000 -- --
Net proceeds from revolving line of credit.... -- 978 -- 113
Payments on notes payable to stockholders..... (4) (419) (19) --
Cash paid for treasury stock.................. (40) -- -- --
Proceeds from sale of treasury stock.......... 130 -- -- --
Distributions to stockholders................. (28) -- -- --
Payments on capital lease obligations......... (23) (24) (4) (26)
Cash received through acquisition............. -- 19 -- --
----- ------- ---- -------
Net cash provided by financing
activities............................... 238 6,316 (83) 10,302
----- ------- ---- -------
Net change in cash.............................. (1) 1,757 (1) 7,515
Cash at beginning of period..................... 24 23 23 1,780
----- ------- ---- -------
Cash at end of period........................... $ 23 $ 1,780 $ 22 $ 9,295
===== ======= ==== =======
Supplemental cash flow information:
Cash paid for interest........................ $ 38 $ 88 $ 12 $ 32
Debt exchanged for common stock............... -- 50 -- --
Acquisition consummated through issuance of
preferred stock.............................. -- 4,000 -- --
Accretion of redeemable preferred stock....... -- 276 -- 156
Purchase of treasury stock, at cost, through
issuance of notes payable.................... 410 -- -- --
Purchase of equipment through capital leases.. 13 -- -- --
Bridge loan conversion to Series D Preferred
Stock........................................ -- -- -- 2,782
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
(Information insofar as it relates to March 31, 2000 and the
three months ended March 31, 1999 and 2000 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Organization, Nature of Business and Basis of Presentation
webcasts.com, Inc. (the Company) was founded in 1995 as an interactive
digital marketing agency that also develops proprietary technologies. These
tools include Internet/Web development and CD-Roms which accounted for
approximately 52% of revenues in 1999. The Company also provides custom
programming, consulting, and other digital products and services as well as
network design, implementation and management based upon specific needs of
clients which accounted for approximately 23% of revenues in 1999. During
1997, the Company launched a business to become a web-based interactive
broadcasting provider that enables web site and content owners to provide high
quality streaming of live and on-demand audio and video content over the
Internet which accounted for approximately 13% of revenues in 1999. The
Company provides all of the infrastructure to facilitate end-to-end
broadcasting which includes production capabilities, sponsorship revenue
generation, a network for the delivery of rich media including video, audio,
text, graphics and animations, and an integrated, e-commerce enabled
interface.
In the opinion of management, the accompanying unaudited financial
statements as of March 31, 2000 and for the three months ended March 31, 1999
and 2000, reflect adjustments (all of which are normal and recurring) which,
in the opinion of management, are necessary for a fair presentation of the
financial position and results of operations of the interim periods presented.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of webcasts.com,
Inc. and its wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.
(c) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Revenue and Cost Recognition
Revenue is recognized on the completed contract method for all revenue
streams due to the short-term nature of the contracts, generally one to three
months in duration. The Company's revenue streams consist generally of four
types: Internet/Web development and CD-ROMs; custom programming and consulting
for digital products and services; network design, implementation and
management; and web-based interactive broadcasting of high quality streaming
of live and on-demand audio and video content over the Internet.
Revenue is recognized upon completion of the contract. Indirect costs and
general and administrative expenses are expensed as incurred. Contract costs,
consisting primarily of direct labor and material costs, and related revenues
are deferred in the balance sheet until completion. A contract is considered
complete when all costs have been incurred and the product is performing
according to specifications or has been accepted by the customer. The Company
also records deferred revenues for advance payment on customer projects. The
deferred revenues are recorded as income in the period the services are
provided.
F-33
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Costs of revenues include all direct labor and material costs and those
indirect costs related to contract performance. Operating expenses are charged
to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
(e) Allowance for Doubtful Trade Accounts Receivable
The Company extends credit to customers in accordance with normal industry
standards and terms. The Company has established an allowance for doubtful
accounts based on known factors surrounding the credit risk of specific
customers, historical trends and other information. The Company may require
that a portion of the estimated billings be paid prior to delivering products
or performing services. In addition, the Company may terminate customer
contracts if outstanding amounts are not paid.
(f) Warrants to Purchase Common Stock
The Company has issued debt and preferred stock with detachable common
stock purchase warrants. The stock purchase warrants are initially recorded
based on their fair value with the balance of the proceeds allocated to the
debt or preferred stock. The debt is accreted to its face value over its term
and the accretion is recorded as interest expense in the accompanying
statements of operations. Preferred stock which is redeemable for cash at the
option of the holder is accreted to its redemption value and the accretion is
recorded as a decrease to additional paid in capital in the accompanying
statement of stockholders' equity (deficit). Warrants are initially recorded
in stockholders' equity (deficit) and warrants which may be put back to the
Company for cash at the option of the holder are accreted to the put value
over the period from the date of issuance to the earliest put date of the
warrants.
(g) Equipment
Equipment, stated at cost or the present value of minimum lease payments
for assets under capital leases, is depreciated over the estimated useful
lives of the assets using the straight-line method. Estimated useful lives
range from 3 to 7 years. Significant improvements and betterments are
capitalized if they extend the useful life of the asset. Routine repairs and
maintenance are expensed when incurred.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(h) Research and Software Development Costs
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility until general market availability
of the product are capitalized, if material. To date, all software development
costs incurred subsequent to the establishment of technological feasibility
have been expensed as incurred due to their immateriality.
(i) Income Taxes
During 1998 the Company was taxed as an S-Corporation under the Internal
Revenue Code. As such, income taxes were the responsibility of the
shareholders and were not accounted for in the consolidated financial
F-34
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
statements of the Company. In 1999, the Company received permission from the
Internal Revenue Service to change its election from an S-Corporation and,
effective January 1, 1999, is taxed as a C-Corporation. As a result, income
taxes are accounted for using the asset and liability method under which
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities and tax operating loss carryforwards. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. The effect of recognizing deferred tax assets and
liabilities due to the change in tax status is included in income tax expense
and is fully offset by the income tax benefit generated in 1999.
(j) Stock Options
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," (APB No. 25), and related interpretations.
Compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price of the stock
options, and the expense is recognized over the vesting period.
Stock options and warrants issued to non-employees for services rendered
are recorded as expense upon issuance based on their estimated fair value.
(k) Loss per Share
Loss per share is computed by dividing net loss applicable to common stock
by the weighted average number of common shares outstanding for the period.
The effect of warrants to purchase common stock, convertible preferred stock,
and stock options has been excluded since the effect would be anti-dilutive.
(l) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(m) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. The Company, to date, has not engaged in derivative
and hedging activities, and accordingly does not believe that the adoption of
SFAS No. 133 will have a material impact on the financial reporting and
related disclosures of the Company. The Company will adopt SFAS No. 133 as
required by SFAS No. 137, "Deferral of the Effective Date of the FASB
Statement No. 133," beginning with the first quarter of 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue
F-35
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
recognition policies. Management believes that the impact of SAB 101 will not
have a material effect on the financial position or results of operations of
the Company.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25" ("FIN 44"). Among other issues, this interpretation clarifies
the definition of employee for purposes of applying APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that FIN 44 will not have a material effect on the financial position
or results of operations of the Company.
(2) Acquisition of The Rock Island Group, Inc.
On October 15, 1999, the Company acquired The Rock Island Group, Inc.
(RIG), a network design, implementation and management company for
approximately $5,000,000. The Company issued 210,000 shares of Series D Senior
Convertible Preferred Stock, granted 20,000 options to purchase Series D
Senior Convertible Preferred Stock at an option price of $.01, and assumed
liabilities of approximately $1,000,000 in exchange for all of the outstanding
common and preferred shares of RIG. The purchase price was allocated to the
assets acquired based on their estimated fair values, and approximately
$450,000 was allocated to current assets. The excess of the purchase price
over the fair value of the net assets acquired was approximately $4 million
and is being amortized on a straight-line basis over 7 years. In determining
the purchase price allocation, the Company identified intangible assets
consisting of customer base and assembled workforce. The allocation of the
purchase price to these identifiable assets would not materially impact the
financial position or the results of operations for 1999 or future results.
The acquisition was accounted for by the purchase method of accounting for
business combinations. Accordingly, the accompanying consolidated statements
of operations do not include any revenues or expenses related to the
acquisition prior to the closing date.
(3) Notes Payable and Revolving Line of Credit
In February 1998, the Company entered into an agreement to transfer up to
$450,000 of trade receivables with full recourse. The agreement allowed the
Company to remit receivables with an aggregate face value of $450,000 to a
bank; however, the bank had no obligation to purchase the receivables. For a
receivable accepted in accordance with the agreement, the bank would remit 80%
of the face value to the Company. The remaining 20% was remitted to the
Company after collection of the receivable by the bank. Proceeds from the
transfers contemplated by this agreement, which totaled $153,083 at December
31, 1998, are reported as borrowings in accordance with Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and are included in notes
payable in the accompanying 1998 balance sheet. The bank received monthly
interest of 2.75% of the average daily balance of the receivables purchased
and an administrative fee of 1% of all receivables purchased. The
administrative fees are included in operating expenses in the accompanying
statement of operations. The borrowings were secured by all assets of the
Company and a personal guaranty of the president of the Company.
The receivable transfer agreement was terminated in May 1999, and replaced
with a revolving line of credit with a separate financial institution in the
amount of $2,000,000 in September 1999. The revolving line of credit is
comprised of a working capital loan not to exceed $1,000,000 and an equipment
loan not to exceed $1,000,000. The working capital loan expires September 15,
2000, and there were no borrowings against the loan at
F-36
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and approximately $113,000 borrowed at March 31, 2000. The
equipment loan expires September 15, 2002, and there was $978,480 borrowed
against the loan at December 31, 1999 and March 31, 2000. The loans are
secured by equipment and trade accounts receivable and bear interest at the
prime rate plus 1% (approximately 9.5% and 9.75% at December 31, 1999 and
March 31, 2000, respectively).
In August 1998, the Company borrowed $50,000 from two individuals which was
included in notes payable at December 31, 1998. The promissory notes accrued
interest at 8% and were convertible to common shares of the Company at
maturity of the notes. The notes were converted to common stock in May 1999.
The Company has three promissory notes to a financial institution
outstanding which bear interest at rates ranging from 8.75% to 10.5% at
December 31, 1999. The notes are secured by equipment, fixtures and accounts
receivable. The notes are due as follows: $63,777 in 2000; $17,306 in 2001;
$20,670 in 2002; and $13,596 in 2003.
During 1998, the Company entered into an agreement to purchase 2,392,006
shares of the Company's common stock from two significant stockholders for
$450,000. Each stockholder received $20,000 upon execution of the agreement; a
promissory note in the amount of $180,000, due November 30, 1998, bearing
interest at 8%, secured by all assets of the Company; and an unsecured
promissory note in the amount of $25,000 to be paid in monthly installments of
$1,000, plus accrued interest at 8%. Each stockholder received payments of
$2,000 on the unsecured notes during 1998. The stockholders extended the
payment terms of the secured promissory notes and during May 1999 the
agreement was restructured and the stockholders transferred approximately
1,500,000 additional shares to the Company. The Company then paid the
promissory notes in full.
The Company had a note payable to the President of the Company in the
amount of $13,000 at December 31, 1998. The note accumulated interest at 8%
and was included in notes payable to common stockholders in the accompanying
1998 balance sheet. The note was repaid in 1999.
During November 1999, the Company issued unsecured bridge promissory notes
to preferred stockholders in the aggregate amount of $3,000,000. The notes
bear interest at 10% with interest and principal due on September 30, 2000.
The notes were issued with detachable common stock purchase warrants (the
Bridge Warrants) and the recorded value is net of amounts allocated to the
Bridge Warrants. The debt increased approximately $31,000 and $62,000 for the
accretion of the debt to its face value during 1999 and the three months ended
March 31, 2000, respectively. The promissory notes were converted to 120,000
shares of Series D Preferred Stock on February 29, 2000.
In March 2000, the Company entered into a $10,000,000 promissory note with
iBEAM Broadcasting Corporation (iBEAM). The note bears interest at prime rate
+1%, with principal and interest due at maturity on March 1, 2001.
(4) Redeemable Preferred Stock
During May and June 1999, the Company issued 23,093 shares of Series A
Senior Preferred Stock (Series A Stock), 3,000 shares of Series B Senior
Preferred Stock (Series B Stock), and 4,000 shares of Series C Senior
Preferred Stock (Series C Stock) (collectively the Preferred Stock), together
with detachable warrants to purchase an aggregate of 7,756,243 shares of
common stock (Preferred Warrants), for approximately $3,000,000. The Preferred
Stock is not convertible, ranks senior to the common stock and Series D
Preferred Stock of the Company and has a liquidation preference of $200 per
share plus all accrued, accumulated and unpaid dividends. Dividends on the
Preferred Stock are cumulative and accrue at an annual rate of $8 per share,
payable quarterly when and if declared by the Company. As of December 31, 1999
and March 31, 2000, cumulative dividends in arrears for the Preferred Stock
were approximately $120,000 and $180,000, respectively. The Company may elect
to pay all or part of dividends declared before June 30, 2002 by issuing
additional Preferred Stock and Preferred Warrants. All dividends not declared
before the earlier of a Qualified Public Offering, as defined in the Preferred
F-37
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock purchase agreements, or June 30, 2004 will be deemed to have not
accumulated and will not be required to be paid or declared.
The holders of the Series A and B Stock have voting rights equivalent to
23.10 common shares and holders of Series C Stock have voting rights
equivalent to 14.684 common shares. The holders of the Preferred Stock, voting
together as a class, are entitled to elect two directors of the Company,
including Chairman of the Board, and certain actions of the Company require
approval by the holders of the Preferred Stock. These rights terminate upon
redemption of all of the Preferred Stock.
The Preferred Warrants have an exercise price of less than $.01 and may be
exercised at any time prior to expiration. Approximately 6,255,000 of the
Preferred Warrants expire in May 2009 and approximately 1,501,000 Preferred
Warrants expire in June 2009.
The Company may redeem the Preferred Stock for cash at any time for $200
per share plus all accrued, accumulated and unpaid dividends. The owners of
the Preferred Stock have the option any time after May 14, 2003, to require
the Company to redeem one or more shares of their Preferred Stock at the
liquidation preference of $200 per share. In addition, each owner of the
Preferred Stock, the related Preferred Warrants, and shares obtained through
exercise of the Preferred Warrants, have the option any time after May 14,
2004 but before May 14, 2006 to require the Company to purchase all or part of
their Preferred Stock, Preferred Warrants or shares obtained through exercise
of the Preferred Warrants at the fair value of the securities. The estimated
fair value of the Preferred Warrants is approximately $14,100,000 at December
31, 1999. The Preferred Warrants were exercised on March 31, 2000 for
7,756,000 shares of common stock.
(5) Stockholders' Equity (Deficit)
Common Stock
During 1999, the board of directors and shareholders of the Company
approved amended and restated certificates of incorporation which ultimately
authorized 50,000,000 shares of common stock ($.00001 par value) and 2,000,000
shares of preferred stock ($.0001 par value). In addition, the Company
increased its outstanding shares through two splits of the common stock
aggregating 21,458-for-1. The Company's common stockholders have entered into
an agreement which provides for restrictions on transfers of stock and certain
rights of first refusal of shares of stock offered for sale by stockholders.
All share information has been restated for the stock splits.
Preferred Stock and Preferred Stock Options
As discussed in note 2, 210,000 shares of the Series D Senior Convertible
Preferred Stock (Series D Stock) and options to purchase 20,000 shares of
Series D Stock were issued in 1999 in connection with the acquisition of RIG.
The Series D Stock ranks senior to the common stock of the Company and has a
liquidation preference of $17.39 per share plus all accrued, accumulated and
unpaid dividends. Dividends on the Series D Stock are cumulative and accrue at
an annual rate of $1.22 per share, payable quarterly when and if declared by
the Company. As of December 31, 1999 and March 31, 2000, cumulative dividends
in arrears for the Series D Stock were approximately $53,000 and $120,000,
respectively. The holders of the Series D Stock have voting rights equivalent
to those of common stockholders. The options to purchase additional Series D
Stock have an exercise price of $.01 per share, a term of 10 years and fully
vested on March 31, 2000. No options to purchase the Series D Stock have been
exercised as of December 31, 1999.
The Series D Stock and related options are convertible to an aggregate of
2,300,000 shares of the Company's common stock at any time, however, if not
converted prior to the Company's next private placement of equity securities
and the fair value of the Company is determined to be less than $40,000,000 at
the time of the private placement, the Series D Stock and related options are
convertible into 2,400,000 shares of the Company's common stock. In addition,
the Series D Stock and related options are automatically converted upon
F-38
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
a Qualified Public Offering, as defined in the acquisition agreement. Options
to purchase 4,500 shares of Series D Stock were exercised in the three months
ended March 31, 2000, and 15,500 options remain outstanding at March 31, 2000.
Warrants to Purchase Common Stock
As discussed in note 3, the Company issued unsecured bridge promissory
notes with detachable Bridge Warrants during 1999. The amount of Bridge
Warrants to be issued to each holder is equal to 10% of the unsecured bridge
promissory notes (total of $300,000) divided by (a) the implied value of one
share of common stock in a Qualified Transaction or (b) $1.75 in the event a
private placement does not occur prior to the maturity of the Bridge Warrants
on November 30, 2009. The Bridge Warrants are exercisable any time after a
Qualified Transaction and before maturity at an exercise price of $.01. The
Bridge Warrants were exercised in the three months ended March 31, 2000 for
120,000 shares of common stock.
The Company also issued warrants to purchase 47,406 shares of common stock
at an exercise price of $.01 to a third party in exchange for services
provided to the Company. These warrants are exercisable any time prior to
expiration in May 2004. The warrants were exercised in full in the three
months ended March 31, 2000.
(6) Equipment
Equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December
31, March 31,
----------- -----------
1998 1999 2000
---- ------ -----------
(unaudited)
<S> <C> <C> <C>
Office equipment..................................... $ 16 $ 67 $ 97
Computer equipment................................... 122 2,133 2,815
---- ------ ------
$138 $2,200 $2,912
==== ====== ======
</TABLE>
(7) Capital Leases
The Company leases certain equipment under agreements which are classified
as capital leases. The leases have original terms ranging from 2 to 7 years.
Leased capital assets included in property and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
-------------- -----------
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Furniture and fixtures........................... $ 63 $ 40 $ 40
Computer equipment............................... -- 230 230
------ ------ ----
63 270 270
Less: Accumulated amortization................... (23) (59) (80)
------ ------ ----
$ 40 $ 211 $190
====== ====== ====
</TABLE>
F-39
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule by year of future minimum lease payments for
all capital leases together with the present value of the net minimum lease
payments as of December 31, 1999 ( in thousands):
<TABLE>
<S> <C>
2000................................................................... $108
2001................................................................... 52
2002................................................................... 42
2003................................................................... 19
----
Total minimum lease payments........................................... 221
Less: Imputed interest................................................. (20)
----
Present value of minimum lease payments................................ 201
Less: Current maturities............................................... (99)
----
Long-term obligations.................................................. $102
====
</TABLE>
(8) Operating Leases
The Company leases office space and equipment under noncancellable
operating leases. Rental expense for the office space and equipment was
approximately $33,000 and $154,000 in 1998 and 1999, respectively. The future
minimum payments by year as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<S> <C>
2000................................................................... $ 232
2001................................................................... 200
2002................................................................... 187
2003................................................................... 100
-----
$ 719
=====
</TABLE>
(9) Income Taxes
As discussed in note 1, the Company was taxed as an S-Corporation during
1998. As such, income taxes were the responsibility of the shareholders and
were not accounted for in the accompanying 1998 financial statements. Income
tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to loss before income taxes in 1999 as a result of the
following (in thousands):
<TABLE>
<S> <C>
Computed expected tax benefit...................................... $(1,440)
State income taxes benefit......................................... (207)
Increase in the valuation allowance................................ 1,432
Other, net......................................................... 215
-------
$ --
=======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 are
as follows (in thousands):
<TABLE>
<S> <C>
Net operating loss carryforwards................................... $2,998
Other, primarily accrued liabilities and stock awards.............. 98
------
Deferred tax assets................................................ 3,096
Deferred tax liability-- property and equipment temporary
differences....................................................... (167)
------
2,929
Less valuation allowance........................................... (2,929)
------
Net deferred tax asset............................................. $ --
======
</TABLE>
F-40
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
A valuation allowance has been provided for the deferred tax assets because
the Company's management has determined it is more likely than not that the
net deferred tax asset will not be realized.
At December 31, 1999 the Company has net operating loss carryforwards of
approximately $7,900,000 for federal and state income tax purposes and the
carryforwards expire in 2011 to 2015. Approximately $4,200,000 of the net
operating loss carryforwards were generated by RIG prior to the acquisition
(see note 2) and begin to expire in 2011. Utilization of these carryforwards
is limited by section 382 of the Internal Revenue Code (section 382). In
addition, changes in ownership, as defined by section 382, during 1999 and in
future periods could limit the amount of net operating loss carryforwards used
in any one year. Any tax benefit recognized as a result of utilization of RIG
pre-acquisition tax operating losses will reduce goodwill recorded in
connection with the RIG acquisition and will not reduce future financial
income tax expense.
(10) Employment Agreements
The Company has employment agreements with four key executive officers
which expire in May 2002. In addition to a base salary, the agreements provide
for an annual performance bonus of up to $50,000 and six months severance if
terminated without cause. Two of the officers owned approximately 7,100,000
shares of common stock upon execution of the employment agreements, and two of
the officers were granted approximately 2,000,000 shares of common stock.
Approximately 29% of the 2,000,000 shares granted is subject to repurchase if
specific web-based broadcasting revenue targets are not achieved. If the
employees resign or are terminated with cause, 75% of the stock not
repurchased based on the specific revenue targets is subject to further
repurchase.
(11) Stock Option Plan
During 1999, the Company adopted a stock option plan (the Plan) and
authorized the issuance of incentive and non-qualified options to purchase
2,200,000 shares of the Company's common stock. All employees have the ability
to earn stock options through a performance option program and all options
granted in 1999 were non-qualified and issued at a discount of approximately
15% from the fair value of the Company's common stock. Each option allows the
applicable employee to purchase one share of common stock at the exercise
price determined by the board of directors. Options become exercisable at a
rate of no less than 20% per year over five years from the grant date. The
exercise price for an employee who owns stock representing more than ten
percent of all voting power of all classes of common stock shall be no less
than 110% of the fair value of the common stock on the date of grant. The
exercise price for all other employees shall be no less than 85% of the fair
value of the common stock on the grant date. The term of each option can be no
more than ten years from the date of grant. If a participant owns stock
representing more than ten percent of the voting power of all classes of stock
of the Company, the term of the option will be five years from the date of
grant.
Stock option activity is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
1999 2000
---------------- ----------------
(unaudited)
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Balance at beginning of period............. -- $ -- 1,366 $1.07
Granted.................................... 1,396 1.06 653 1.55
Exercised.................................. (4) 0.32 (31) 0.88
Forfeited.................................. (26) 0.32 -- 0.32
----- -----
Balance at end of period................... 1,366 1.07 1,988 1.23
===== =====
</TABLE>
F-41
<PAGE>
WEBCASTS.COM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Information about stock options outstanding at December 31, 1999, is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Weighted Options
Range of Outstanding at Average Exercisable at Fair Value
Option December 31, Remaining December 31, at
Prices 1999 Contract Life 1999 Grant Date
-------- -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
$0.32 308 9.75 years -- $0.19
0.50 259 9.65 years 94 0.30
1.55 799 9.89 years 55 0.92
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its Plan. The amount of expense recognized in 1999 related to
employee stock options was $33,000. No expense was recognized in 1998, since
no options were granted until 1999. Had the Company applied SFAS 123 in
accounting for the plans, the additional compensation costs would have been
approximately $64,000. The fair value of each option grant was estimated using
an option-pricing model with the following weighted-average assumptions:
dividend yield of 0%; expected volatility of 0%; risk-free interest rate of
5.5% and expected lives of approximately five years.
(12) 401(k) Plan
During 1999, the Company established a 401(k) plan in which substantially
all employees of the Company are eligible to participate. Company
contributions to the 401(k) plan are at the Company's discretion and there
were no contributions in 1999.
(13) Business and Credit Concentrations
In 1998, two customers accounted for 45% of the Company's total revenue,
and 47% of trade accounts receivable at December 31, 1998. In 1999, two
customers accounted for 24% of the Company's total revenue, and 13% of trade
accounts receivable at December 31, 1999. For the three months ended March 31,
2000, two customers accounted for 50% of the Company's total revenue, and 58%
of trade accounts receivable.
(14) Related Party Transactions
The Company leased certain equipment from a corporation controlled by an
officer of the Company in 1998 and 1999. The leases expire from December 1999
to October 2000. Aggregate lease payments of approximately $29,000 were made
in 1998 and 1999. An aggregate payment of approximately $8,000 will be made in
2000.
(15) Subsequent Event-Proposed Business Combination (Unaudited)
In April 2000, the Company merged with iBEAM Broadcasting Corporation
(iBEAM) in a transaction to be accounted for as a purchase of the Company by
iBEAM. Under the terms of the merger, all issued and outstanding shares of
common and preferred stock and warrants to purchase shares of the Company were
exchanged for approximately 8.2 million shares of series F redeemable
convertible preferred stock of iBEAM which are convertible into common stock
of iBEAM on a share for share basis upon the closing of iBEAM's initial public
offering. In addition, holders of the Company's securities may receive
approximately an additional 1.1 million shares of iBEAM common stock if the
Company meets revenue targets in the twelve months following the acquisition.
Options granted under the Company's 1999 stock option plan were converted into
options to purchase shares of iBEAM's series F redeemable convertible
preferred stock.
F-42
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[LOGO OF IBEAM BROADCASTING]
