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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS UNDER SECTION 12(b) OR 12(g) OF THE
SECURITIES ACT OF 1934
OZ.COM
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-4560875
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
SNORRABROUT 54, REYKJAVIK, ICELAND IS-105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
011 (354) 535-0000
(ISSUER'S TELEPHONE NUMBER)
</TABLE>
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK
(TITLE OF CLASS)
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NOTE ON FORWARD-LOOKING STATEMENTS
This Registration Statement on Form 10-SB ("Registration Statement")
contains various forward-looking statements with respect to our financial
condition, results of operations and business. The words "believe," "expect,"
"anticipate," "intend," "may," "will," "should," "could," "potential,"
"continue," "estimate," "predict," and "plan" and similar expressions or the
negative of such expressions, identify forward-looking statements. These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties and a number of factors could cause actual results to differ
materially from those projected or implied in such forward-looking statements.
These factors include, but are not limited to, the risk factors disclosed in
this Registration Statement.
Further, certain forward-looking statements are based upon assumptions of
future events which may not prove to be accurate. Due to such uncertainties and
risks, you should not place undue reliance on such forward-looking statements
which speak only as of the date of this Registration Statement. We do not
undertake to publicly update, review or revise any forward-looking statements to
reflect any change in our expectations with regard thereto or to reflect events
or circumstances occurring after the date hereof.
We use market data and industry forecasts and projections throughout this
Registration Statement that were obtained from internal surveys, market
research, publicly available information and industry publications. Industry
publications generally state that the information they provide has been obtained
from sources believed to be reliable, but that the accuracy and completeness of
such information is not guaranteed. The forecasts and projections are based on
industry surveys and the preparers' experience in the industry, and there is no
assurance that any of the projected amounts will be achieved. Similarly, we
believe that the surveys and market research it or others have performed are
reliable, but we have not independently verified this information. We do not
represent that any such information is accurate.
EXPLANATORY NOTE
Our Board of Directors and shareholders have recently approved amendments
to our Amended and Restated Articles of Incorporation ("Articles") which would,
among other things, increase the authorized number of shares of our Common Stock
from 75,000,000 to 275,000,000 and effect a 2-for-1 stock split of our
outstanding shares of Common Stock. The amendments effecting the stock split
became effective on May 26, 2000. The share and per share information set forth
in this Registration Statement reflects this 2-for-1 stock split.
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PART I
ITEM 1. BUSINESS
RISK FACTORS
See also "Note on Forward-Looking Statements" regarding the uncertainties
and risks inherent in our forward-looking statements presented under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere herein.
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY; HISTORY OF NET LOSSES AND NO ASSURANCE OF
FUTURE PROFITABILITY
We were incorporated in California in 1995. Although communications and the
Internet were central to our operations since our incorporation, we did not
begin developing our core products until 1996. In February 2000, we announced
the commercial availability of mPresence(TM). The first commercial sale of
iPulse(TM) was made by Ericsson Telecom AB and/or its affiliates ("Ericsson") in
November 1999. Accordingly, we have only a limited operating history upon which
you can base an evaluation of our business. We have incurred significant net
losses since inception, including losses of $4,852,943, $1,811,387, $2,242,815
and $1,294,260, for the fiscal years 1997, 1998 and 1999, and the three months
ended March 31, 2000, respectively and have received no revenue from our core
products to date. We intend to increase expenditures in order to fund the
continued expansion of our operations in North America and Europe and to
initiate operations in Asia through an increased sales and marketing force and a
higher number of technically skilled professional staff. To the extent such
expenditures are incurred and revenues do not correspondingly increase, our
operating results would be materially and adversely affected. In addition,
future operating results will depend on many other factors, including the growth
of the market for wireless Internet-based services, competition, and our success
in expanding our direct sales and marketing organizations and in attracting and
retaining additional skilled professional staff, as well as general economic
conditions and other factors. Accordingly, we cannot be sure that we will be
profitable in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Overview."
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL NEEDED CAPITAL.
We have experienced negative cash flow from operations since our inception
and we expect to continue to experience significant negative cash flow from
operations for the foreseeable future. We believe that our existing capital
resources will be sufficient to meet our presently anticipated cash requirements
for the next two years. In addition, we expect that it will be necessary to
obtain additional capital to meet adequately management's growth objectives and
to implement fully our business plan. We may seek additional debt or equity
financing through public or private placements of our securities or through
banks, financial institutions or companies. We cannot be sure that any such
financing will be obtained or, if obtained, will be adequate to meet our needs.
If we are not able to obtain additional financing on satisfactory terms when
needed, our business, operating results and financial condition may be
materially and adversely affected.
WE HAVE A CONCENTRATION OF REVENUES FROM A SINGLE CUSTOMER AND MAY BE DEPENDENT
ON A LIMITED NUMBER OF CUSTOMERS
We derive a significant portion of our revenues from a single customer.
During 1999, Ericsson accounted for approximately 88% of our total revenues. In
addition, we believe that a major part of our revenues in the foreseeable future
will be derived from a limited number of customers. The termination of business
relations with Ericsson or any future agreement with a significant customer
could have a material adverse effect on our business, operating results and
financial condition. Furthermore, a decision by any large customer not to
proceed with a project to the stage we anticipate could have a material adverse
effect on our business, operating results and financial condition.
WE RELY ON A STRATEGIC RELATIONSHIP
We have established a strategic relationship with a business partner,
Ericsson, that we believe is important to the development of our business and
may establish more strategic business relationships with
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other business partners in the future. We signed a General Co-Operation and
Development Agreement with Ericsson in February 1999. Between June and October
1999 Ericsson acquired 10,052,431 shares of our Series A Preferred stock, which
upon conversion would equal approximately a 20% ownership interest (assuming
conversion by all holders of Series A Preferred stock). At the same time, we
entered into an agreement with Ericsson to jointly develop the iPulse(TM)
product based on our server technology. The iPulse(TM) application is a part of
Ericsson's product offering to telecommunications operators. The iPulse(TM)
product and the iPulse(TM) trademark are wholly owned by Ericsson. We receive a
net amount of 11.81% royalties of gross worldwide iPulse(TM) sales as a result
of the Specific Co-Operation and Development Agreement entered into with
Ericsson in February 1999 and, pursuant to a value-added reseller agreement
entered into with Ericsson on February 25, 2000, we may offer iPulse(TM) to our
customers as an integral part of the mPresence(TM) solution and other
value-added services in exchange for royalties payable to Ericsson. Pursuant to
the General Co-Operation and Development Agreement we can also directly offer an
OZ.COM branded version of iPulse(TM) if we so choose. The General Co-Operation
and Development Agreement and the Specific Co-Operation and Development
Agreement terminate on December 31, 2001, but will be automatically renewed on a
yearly basis unless terminated by written notice of either party. The value
added reseller agreement terminates in February 2002 but will be automatically
renewed on a yearly basis unless terminated by written notice of either party.
We believe that our strategic relationship with Ericsson represents an
advantage to our business and has been a significant factor in our success to
date. The failure to maintain our existing strategic relationship or the
inability to develop new relationships, particularly in the new markets we are
seeking to enter, could have a material adverse effect on our business,
operating results and financial condition.
Although regarded by us as an advantage, the current ties with Ericsson
may, at the same time, deter certain potential customers or categories of
customers, in particular current and future competitors of Ericsson, from
entering into or extending business relations with us. Under the terms of the
General Co-operation and Development Agreement, as long as Ericsson owns shares
representing 5% or more of our capital stock we must inform Ericsson of any
proposal to license or sell any of the technology covered in the agreement or to
enter into any transaction with any principal competitor of Ericsson. Ericsson
may opt to enter into the proposed transaction on the same terms and conditions.
WE MAY HAVE TO REPURCHASE SHARES
We may be obligated to purchase the shares of any stock owned by Ericsson
pursuant to a shareholder rights agreement between us, Ericsson, Skuli Mogensen,
Guojon Mar Guojonsson and OZ Holdings LLC that we entered into in connection
with Ericsson's purchase of shares of Series A Preferred stock in 1999. Under
this agreement, Ericsson has the right until an initial public offering of our
securities and following certain trigger events for a period of 120 days after
such trigger event to require us, to the extent permitted by law, to purchase
any or all shares of Series A Preferred stock or Common Stock owned by Ericsson
at the original purchase price paid by Ericsson for those shares. The trigger
events are the discovery by Ericsson of any breach or nonfulfillment by us of
any covenant in the agreement pursuant to which Ericsson acquired shares of
Series A Preferred stock or the breach or nonfulfillment by us or another party
to the shareholder rights agreement (other than Ericsson) of any covenant or
agreement in the shareholder rights agreement; provided, however, that the
breach or nonfulfillment must continue for 30 days after written notice and
result in a material adverse effect on our assets, condition, affairs, or
prospects, financially or otherwise. A repurchase by us of the shares owned by
Ericsson could have a material, adverse effect on our business, operating
results, and financial condition.
OUR REVENUES AND OPERATING RESULTS ARE EXPECTED TO VARY FROM QUARTER TO QUARTER
Our revenues and operating results are expected to vary, sometimes
substantially, from quarter to quarter. These fluctuations may result in
volatility in the price at which shares of our stock may trade. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including:
- the timing of large transactions;
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- our estimated initial sales cycle of three to six months;
- the proportion of revenues attributable to revenue-sharing or fixed per
end-user fees versus revenues from software sales;
- changes in the level of operating expenses;
- the utilization rate of our professional services employees;
- demand for our products and services;
- the introduction of new products and product enhancements by us or our
competitors;
- changes in customer budgets;
- competitive conditions in the industry; and
- general economic conditions.
Further, the purchase of our products and services often involves a
significant commitment of capital by our customers with the attendant delays
frequently associated with large capital expenditures and authorization
procedures within an organization. Accordingly, we expect that the sales cycles
for our products and services will be lengthy, with an estimated initial sales
cycle of three to six months, and subject to a number of significant risks over
which we have little or no control, including customers' budgetary constraints
and internal authorization reviews.
In addition, our quarterly operating results are also subject to certain
seasonal fluctuations. Like many information technology companies with large
average customer arrangements, our revenues and operating results are typically
lower in the first fiscal quarter than the remainder of the year. In addition,
our third fiscal quarter includes the months of July and August, when billable
service activity by professional staff, as well as engagement decisions by
customers, are reduced due to summer vacation schedules.
WE MAY NOT BE ABLE TO MANAGE GROWTH
We are currently experiencing a period of rapid growth that is expected to
continue to place a strain on our administrative, financial and operational
resources. We intend to continue to expand on a selected basis in North America
and Europe, to initiate operations in Asia and to continue to increase the
number of our professional staff significantly in the fiscal years 2000 to 2002.
Such expansion, if achieved, would place a further strain on our resources and
increase operating costs. Our ability to manage our growth effectively will
require us to continue to improve our operations, financial and management
controls, reporting systems and procedures, and to train, motivate and manage
our employees and consultants and, as required, to install new management
information and control systems. We cannot be certain that we will be able to
implement improvements to our management information and control systems in an
efficient and timely manner or that, if implemented, these improvements will be
adequate or sufficient to support our operations. Any inability to manage
successfully future expansion could have a material adverse effect on our
business, operating results or financial condition. We cannot be certain that
our contemplated growth rate will be achieved, or if achieved, be maintained or
that we will be successful in managing our growth.
OUR FUTURE GROWTH DEPENDS, IN PART, ON ACQUISITIONS
We believe that our future growth depends, in part, on continuing to
identify and acquire complementary information technology service businesses. We
cannot be certain that we will be successful in identifying, acquiring and
profitably managing complementary information technology service businesses
without substantial delays, expenses or other operational or financial problems.
Expansion will require the commitment of significant capital, managerial and
other resources. Acquisitions may also expose us to particular risks, including
diversion of management's attention, failure to retain key acquired personnel,
assumption of legal liabilities, and amortization of goodwill and other acquired
intangible assets, some or all of which could have a material adverse effect on
our business, operating results and financial condition. Moreover, customer
dissatisfaction with, or problems caused by, the performance of any such
acquired business could have a
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material adverse impact on our reputation as a whole. In addition, we cannot be
certain that the acquired businesses, if any, will achieve anticipated revenues
and earnings. Depending on the value and nature of the consideration to be paid
by us for future acquisitions, such acquisitions may have a dilutive effect on
our earnings per share or an adverse effect on our financial condition. Failure
to implement our acquisition strategy successfully could have a material adverse
effect on our business, operating results and financial condition.
WE MAY NOT SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES AND MAY INCUR INCREASED
COSTS AND OPERATING INEFFICIENCIES
Given our acquisition strategy, management may be challenged to manage the
integration of acquired employees to eliminate redundancy and achieve operating
efficiencies. Workforce reductions must be made in compliance with all
applicable laws and resulting severance and retraining costs can be significant.
Frequently, the acquired company's management information systems, accounting
systems and operational systems are different from those of the acquiring
company, and the efficient integration of such systems may impose severe strains
on our own accounting, operational and control systems. Also, the acquisition of
a new company often requires that operations be consolidated, excess office
space subleased or existing leases renegotiated. We cannot be certain that the
failure to integrate effectively the operations of an acquired business in the
future will not adversely affect our business, operating results or financial
condition.
POSSIBLE FUTURE ACQUISITIONS COULD CREATE CHARGES TO EARNINGS THAT COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Any future acquisitions could result in amortization expense related to
goodwill and other intangible assets. If this should occur, our results of
operations would be adversely affected.
WE ARE EXPOSED TO THE RISKS ASSOCIATED WITH MULTINATIONAL OPERATIONS
We intend to expand our business in North America and Europe and to
initiate operations in Asia. The expansion of our business to different
geographical areas is subject to risks inherent in traditional multinational
business activities, including, in particular, foreign currency exchange rate
fluctuations, overlap of different tax structures, management of an organization
spread over various countries, different regulatory regimens and unexpected
changes in regulatory requirements, compliance with a variety of foreign laws
and regulations, including employment law and practices, and longer accounts
receivables payment cycles in certain countries. Any of the foregoing as well as
other risks inherent in traditional multinational business activities could have
a material adverse effect on our business, operating results and financial
condition.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO ATTRACT AND RETAIN TECHNICALLY
SKILLED PROFESSIONAL STAFF WHO ARE IN GREAT DEMAND
Our business involves the development of highly technical products and
services and relies on the ability to respond to rapid technological changes.
Accordingly, our success and future growth depend in part upon our ability to
attract, develop, motivate, integrate and retain highly skilled professional
staff, such as engineers, technical support persons, and sales and human
resources staff. We intend to expand significantly our sales and marketing force
and the number of our technically skilled professional staff to support our
expansion. Although we believe that these expenditures will benefit our business
in the long term, we expect that such expenditures could materially and
adversely affect our operating results in the short term.
Technically qualified professional staff are in great demand in Europe and
North America and are likely to remain a limited resource for the foreseeable
future. Competition for qualified personnel in the wireless software industry is
particularly fierce and competitors may in the future seek to recruit our
employees. We cannot be certain that we will be able to attract and retain
sufficient numbers of highly skilled professional staff in the future. The
inability to expand our organization and increase the size of our professional
staff at reasonable costs on a timely basis or the loss of highly skilled
professional staff could have a material adverse effect on our business,
operating results and financial condition.
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OUR SUCCESS DEPENDS ON OUR KEY EXECUTIVES
Our success is highly dependent upon the efforts and abilities of our
executive officers, in particular: Messrs. Skuli Mogensen, co-founder and Chief
Executive Officer; Guojon Mar Guojonsson, co-founder and Chief Visionary; Skuli
Valberg Olafsson, Chief Operating Officer; and Robert Quinn, Chief Financial
Officer. Although these executives have entered into employment agreements,
these contracts may not be enforceable in their entirety, and in any event do
not guarantee that these individuals will continue their employment with us. We
do not maintain "key man" insurance with respect to any of our executive
officers. The loss of the services of any of these key executives, for any
reason, could have a material adverse effect upon our business, operating
results and financial condition.
WE MAY BE ADVERSELY AFFECTED BY POTENTIAL SOFTWARE DEFECTS OR ERRORS
Our software is complex and must meet the stringent technical requirements
of our customers. We must develop our products quickly to keep pace with the
rapidly changing industry in which we operate. Software products that are as
complex as those that we produce generally contain undetected errors or defects,
particularly when first introduced or when new versions are released. In
addition, our software may not properly operate when integrated with the systems
of our customers, or when used to deliver services to a large number of a
customer's subscribers.
While we continually test our products for errors and work with our
customers through our customer support services to identify and correct bugs,
errors in our products may be found in the future. Testing for errors is
complicated in part because it is difficult to simulate or anticipate the
computing environments in which our customers use our products. Our software may
not be free from errors or defects even after it has been tested, which could
result in the rejection of our products and damage to our reputation, as well as
lost revenue, diverted development resources, and increased support costs.
WE MAY INCUR RISK OF PRODUCT LIABILITY CLAIMS
We may be subject to claims for damages related to any errors in our
software products. A major product liability claim could have a material adverse
effect on our business because of the costs of defending against these types of
lawsuits, diversion of key employees' time and attention from the business and
potential damage to our reputation. In the past, we have negotiated provisions
in our license agreements with our customers that were designed to limit
exposure to certain potential product liability claims. However, there is no
assurance that similar provisions will be included in any future agreements.
Furthermore, limitation of liability provisions contained in our license
agreements may not be effective under the laws of some jurisdictions if local
laws treat them as unenforceable. As a result, we could be required to pay
substantial amounts of damages in settlement or otherwise upon resolution of any
of these types of claims.
ENCRYPTION TECHNOLOGY RESTRICTIONS
The United States government generally limits the export of encryption
technology that originates from the United States, and a variety of
cryptographic products generally require export approvals from certain United
States government agencies. Currently, our products and solutions do not
incorporate encryption technology that is subject to United States export
restrictions nor do we require export approvals from United States agencies. We
may in the future, however, incorporate technology requiring export approval
into our products and solutions. If any export approval that is required is
refused, if our software is unlawfully exported or if the United States adopts
new legislation or regulations restricting exports of software and encryption
technology, we may not be able to distribute our solutions to potential
customers, which will cause a decline in our sales. We may need to incur
significant costs and divert resources to develop replacement technologies or
may need to adopt inferior substitute technologies to satisfy these export
restrictions. These replacement or substitute technologies may not be the
preferred security technologies of customers. This could lead to a lack of
growth for our business. In addition, we may suffer similar consequences if the
laws of any other country limit the ability of third parties to sell encryption
technologies to us.
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WE MAY NOT BE ABLE TO OBTAIN THIRD-PARTY SOFTWARE, TECHNOLOGY AND CONTENT
We license or otherwise obtain access to the intellectual property of third
parties. We have also entered into two license agreements with third-party
content providers and intend to enter into more such agreements. In addition, we
use and will use in the future, certain third-party software that may not be
available to us in the future on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain, any required intellectual property
could require us to use substitute technology, which could be more expensive or
of lower quality or performance, or force us to cease offering our products.
Moreover, we expect that some of our license agreements in the future may be
non-exclusive and, therefore, competitors may have access to the same
technology.
OUR SUCCESS DEPENDS ON INTELLECTUAL PROPERTY RIGHTS
Our success depends upon the use of certain patents, trademarks and other
proprietary intellectual property rights. Although we have applied for trademark
registration of certain of our marks and for patents on certain of our
technologies, no trademark registrations or patents have yet been issued.
Further, we cannot be certain that any such trademark registrations or patents
will be issued or if issued will not be challenged or invalidated. We rely upon
a combination of nondisclosure and other contractual arrangements together with
trade secret, copyright and trademark laws to protect our proprietary rights and
the propriety rights of third parties from whom we license intellectual
property. We enter into confidentiality agreements with our employees and limit
distribution of proprietary information. We cannot be certain that the steps
taken by us in this regard will be adequate to deter misappropriation of
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights or that our
competitors will not independently develop superior technologies. In addition,
the laws of certain countries do not protect our proprietary rights to the same
extent as do the laws of the United States or the Scandinavian countries.
Although we believe that our services do not infringe on the intellectual
property rights of others and that we will have all rights necessary to utilize
the intellectual property employed in our business, we are subject to the risk
of litigation alleging infringement of third-party intellectual property rights.
Any such claim could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of asserted infringement.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND MAY NOT COMPETE SUCCESSFULLY
The wireless Internet software and application service market includes a
large number of participants, is subject to rapid changes and is highly
competitive. Although no competitor offers exactly the same type of wireless
Internet solution as we do, our competitors currently offer or have the
potential to offer either a total end-user solution to operators and service
providers or to compete with various components of our mPresence(TM) solution.
Our major competitors are, among others, Phone.com and America Online ("AOL").
Many of our competitors have substantially greater financial, technical and
marketing resources than we have. Several of these competitors also have greater
name recognition and more established relationships with the same companies that
we are targeting. Our competitors may be able to respond more quickly than we
can to new or emerging technologies and changes in customers' requirements or
devote greater resources than we can to the development, promotion and sale of
new service offerings. We cannot be certain that we will be able to compete
successfully with these competitors or that competition may not have a material
adverse effect on our business, operating results and financial condition.
We also expect to face additional competition as other established and
emerging companies enter the wireless Internet software and application service
markets and new service offerings and technologies are introduced. Our current
and potential competitors include:
- infrastructure service providers, such as Phone.com and i3mobile;
- telecommunications operators, such as Sonera Zed and Vodafone;
- wireless service providers, such as InfoSpace.com, Wireless Knowledge and
@mobile;
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- wireless equipment manufacturers, such as Nokia;
- instant messaging providers, such as AOL and Microsoft MSN;
- Internet portals, such as Yahoo! and Excite@Home;
- systems integrators, such as CMGI; and
- software providers, such as Oracle Corporation.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their service offerings to address the needs
of our current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Increased competition could result in
lower utilization rates, billing rate reductions, fewer customer engagements,
reduced gross margins and loss of market share, any one of which could
materially and adversely affect our business, operating results and financial
condition. We cannot be certain that we will be able to compete successfully
with existing or new competitors and competition could have a material adverse
effect on our business, operating results and financial condition.
WE MAY NOT RESPOND TO RAPID TECHNOLOGICAL CHANGE
The wireless Internet software and application service market is rapidly
evolving and is characterized by an increasing number of market entrants that
have introduced or developed, or are in the process of introducing or
developing, products and services that facilitate the delivery of Internet-based
services through wireless devices. As a result, the life cycle of our products
is difficult to estimate. We may not be able to develop and introduce new
products, services and enhancements that respond to technological changes or
evolving industry standards on a timely basis, which could have a material
adverse effect on our business operating results and financial condition.
OUR SUCCESS DEPENDS ON CONTINUED GROWTH OF INTERNET USE
Our future success depends to a large extent on the continued growth in the
use of the Internet. We believe that a significant portion of our future
revenues will derive from sales of the mPresence(TM) solution, the iPulse(TM)
platform and related services to Internet communities. Our business may be
adversely affected if the number of Internet users does not increase or if
business over the Internet, particularly Internet-based business transactions
and applications involving business conducted through a mobile communications
device ("m-business") including Internet-based commerce conducted through a
mobile communications device ("m-commerce"), does not become more accepted and
widespread. In particular, we will be adversely affected if the number of
Internet communities or the number of members of existing Internet communities
does not increase. Rapid growth in the use of and interest in the Internet has
occurred only recently. As a result, acceptance and use of the Internet may not
continue to develop at historical rates and a sufficiently broad base of
consumers may not adopt, and continue to use, the Internet and other online
sources. The use and acceptance of the Internet, and Internet communities in
particular, may not increase for a number of reasons, including the cost and
availability of Internet access.
OUR SUCCESS DEPENDS ON THE SUCCESS OF WIRELESS NETWORK OPERATORS AND INTERNET
BUSINESSES
We believe that a major part of our future revenues will derive from sales
of the mPresence(TM) solution, the iPulse(TM) service platform and related
services to existing and new wireless network operators and Internet businesses.
Therefore, our future success depends on the acceptance by wireless network
operators and Internet businesses of these new products and services which we
may not be able to achieve. This dependence is compounded by the relatively
small number of wireless network operators and Internet businesses worldwide. To
date, we currently have only one wireless network operator customer that has
agreed to implement the mPresence(TM) solution. We cannot be certain that
wireless network operators or Internet businesses will widely use our products.
In addition, wireless network operators have historically been relatively slow
in implementing new complex services such as Internet-based services, and
Internet businesses
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may be slow in implementing the use of wireless services as a means of expanding
Internet-based services. We have limited or no control over the pace at which
wireless network operators or Internet businesses implement these new services.
The failure of wireless network operators and Internet businesses to introduce
and support services utilizing our products on a timely and effective manner
could have a material adverse effect on our business, operating results and
financial condition.
In addition, once implemented by wireless network operators and Internet
businesses, the success of our products will depend in significant part on our
continuing ability to develop and introduce new and improved versions of
existing products and service offerings. There can be no assurance that we will
be successful in developing, introducing on a timely basis and marketing such
products and service offerings. In addition, there can be no assurance that
wireless network operators and Internet businesses will not cease to buy our
products and to subscribe to our services, on account of technologies or service
offerings developed by others or the wireless network operators or Internet
businesses themselves that render our products and services uncompetitive or
obsolete. The failure of wireless network operators or Internet businesses to
continue to purchase our products and subscribe to our services could have a
material adverse effect on our business, operating results and financial
condition.
Our pricing model for mPresence(TM) will in many cases be based on a
revenue sharing model in which we take a certain percentage of revenues
resulting from each end-user who uses the services or is exposed to
advertisements. Our future revenues are therefore largely dependent on the
number of subscribers to the wireless network operators or the number of
Internet businesses members that utilize our products and services. In addition,
no estimates can be made as to the rate of adoption by the subscribers of the
particular services offered through our products. It is therefore difficult to
predict the size of our future revenues, and such future revenues will be
largely dependent on the number of subscribers to the wireless network operators
or Internet businesses members, in general, and the subscription to the services
offered through our products, in particular. In addition, the price that
subscribers will be willing to pay for these services is difficult to estimate.
As a result, it is difficult to estimate the pricing of these services and
consequently the future size of our revenues.
OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE OF WIRELESS TELEPHONES FOR WIRELESS
DELIVERY OF INTERNET-BASED SERVICES
We have focused our efforts on wireless Internet-related communication. Our
technological solutions, in particular mPresence(TM), are not necessarily
dependent on wireless devices for the conveyance of the communication. However,
we believe that the success of mPresence(TM) is interlinked with the acceptance
by the market of wireless devices as a viable means for Internet-based services
giving more wireless network operators and Internet businesses incentive to
adopt technological solutions supporting such services. We cannot be sure of
such market acceptance. In any event, acceptance may be delayed for a number of
reasons. These reasons could include:
- inadequate supply of the required hardware and software;
- limitations to the performance and functionality of wireless devices;
- conflicting technical standards and lack of interoperability;
- lack of adequate Internet-based applications and content for such
Internet-based services;
- costs; and
- inadequate security arrangements.
The lack of or delay in market acceptance for wireless devices as means for
wireless delivery of Internet-based services could have a material adverse
effect on our business, operating results and financial condition.
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RISKS RELATING TO OUR SECURITIES
THERE IS NO PUBLIC MARKET FOR OUR COMMON STOCK IN THE UNITED STATES
Currently, there is no public trading market for our Common Stock in the
United States, and we cannot be certain that an active trading market will ever
develop or be sustained. Even if a market should develop there can be no
assurance that all market making activity may not cease at any time. If a market
for our Common Stock does develop, the market price of the Common Stock may be
highly volatile. Any securities broker-dealer that makes a market in our
securities may have significant influence over the market, and if any market
develops, the price and liquidity of the Common Stock may be affected by the
degree of participation of any person in the market. Therefore, purchasers of
our Common Stock may be unable to liquidate their investment readily or at all.
THE STOCK PRICE FOR OUR SHARES MAY BE VOLATILE
Should a market for our Common Stock develop, it will be affected by a
number of factors, including:
- the announcement of new products or service offerings by us or our
competitors;
- quarterly variations in our results of operations or the results of
operations of our competitors or companies in related industries;
- changes in earnings or revenue estimates or recommendations by securities
analysts;
- developments in our industry;
- general market conditions;
- future sales of substantial amounts of shares by our shareholders; and
- other factors, including factors unrelated to our operating performance
or the performance of our competitors.
In addition, stock prices for many companies in the technology field have
experienced, and continue to experience, wide fluctuations that have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations, as well as general economic, political and market conditions in
markets where we conduct business, such as recessions, may materially and
adversely affect the market price of our securities.
OUR OUTSTANDING OBLIGATIONS TO ISSUE ADDITIONAL SHARES OF COMMON STOCK MAY
ADVERSELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL EQUITY CAPITAL
We are obligated to issue 31,148,528 shares of Common Stock upon the
conversion of the shares of our Series A Preferred stock outstanding as of March
31, 2000. As of March 31, 2000, 3,114,250 shares of Common Stock were available
for issuance pursuant to options which may be granted under our 1995 Stock
Option Plan and 842,076 shares of Common Stock were available for issuance
pursuant to grants under our 1998 Incentive Stock Option Plan. As of the same
date, options to purchase a total of 5,944,266 shares of Common Stock were
outstanding under the 1995 Stock Option Plan. Our Board of Directors, with
shareholder approval, has reserved an additional 5,000,000 shares of Common
Stock for issuance upon exercise of options which may be granted under our 1995
Stock Option Plan and 5,000,000 shares of Common Stock for issuance pursuant to
our 2000 Employee Stock Purchase Plan. Warrants to purchase an aggregate of
428,000 shares of Common Stock are also outstanding. To the extent that options,
warrants or other obligations for the issuance of Common Stock are granted or
exercised, dilution to the interests of the existing holders of Common Stock may
occur. Moreover, the terms upon which we will be able to obtain additional
equity capital may be adversely affected because holders of outstanding options,
warrants or other obligations can be expected to exercise them at a time when we
in all likelihood will be able to obtain any needed capital on terms more
favorable to us than those provided by such outstanding obligations.
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WE MAY ISSUE ADDITIONAL STOCK AND THIS MAY HAVE A DILUTIVE EFFECT
We are currently authorized to issue two classes of stock, which are
designated "Common Stock" and "Preferred Stock." The authorized number of shares
of Preferred Stock is presently 25,000,000 shares. 20,000,000 shares of the
Preferred Stock are currently designated as "Series A Preferred." Our Board of
Directors and shareholders have approved an amendment to our Articles to
increase the authorized number of shares of Common Stock from 75,000,000 to
275,000,00 and to effect a 2-for-1 stock split of our Common Stock. The
amendment was effective on May 26, 2000. The effect of the stock split has
already been incorporated into the share and per share information in this
Registration Statement. Accordingly, we may in the future authorize without
further shareholder approval the issuance of additional shares of Common Stock
or Preferred Stock. Any such future issuance of our capital stock could have a
dilutive effect on the holders of our stock.
CURRENT DIRECTORS AND OFFICERS MAY EFFECTIVELY CONTROL THE COMPANY
Our directors and officers as a group beneficially own approximately 77% of
our Common Stock (prior to any conversion of the Series A Preferred stock). As a
result, these shareholders, if acting together, would be able to control
effectively matters requiring approval by our shareholders, including election
of at least a majority of our Board of Directors and approval of significant
corporate transactions, except for certain matters as to which the holders of
the Series A Preferred stock vote as a separate class.
OVERVIEW OF BUSINESS
We are a developer and vendor of software and services that enable the
delivery of certain Internet-based services over wireless telecommunications
networks. We were incorporated in California on December 14, 1995. As wireless
network operators and Internet businesses vie for market leadership in the new
mobile economy created by the convergence of the Internet and wireless
telecommunications, we offer mPresence(TM) and iPulse(TM) to help them compete
in a rapidly evolving landscape.
MPRESENCE
mPresence(TM) is designed to quickly establish our customers' presence in
the mobile economy. It is a service and application that allows wireless network
operators and Internet businesses to claim a presence in the mobile Internet
market with a minimum investment of capital, time and resources.
mPresence(TM) is based on two essential functions:
- Presence management. Centralizing dynamic status information about
end-user customers on different communication networks and devices,
especially the wireless and Internet Protocol ("IP") network and allowing
these users to manage this dynamic information.
- Services. Making intelligent use of this presence information to deliver
value-added services to these users over the same networks.
We intend to aggregate and integrate specific value-added services into
mPresence(TM) that will allow our customers to generate additional revenues from
their users. These services include solutions in the area of personal
information management, lifestyle applications and communication. In addition,
we offer our customers the option to host the mPresence(TM) service on a network
that we will operate for them.
IPULSE
The mPresence(TM) solution is built upon the iPulse(TM) platform, a
carrier-class services platform that we developed jointly with Ericsson.
iPulse(TM), which is a product and a trademark owned by Ericsson, provides a
communications and intelligent routing environment that effectively bridges the
worlds of telephony and the Internet, offering end-users a simple and secure way
to establish communication sessions and access value-added services. These
services can be accessed either over IP networks or other networks, such as the
PSTN ("Public Switched Telephone Network") or wireless networks. iPulse(TM)
instantly and easily connects
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end-users to each other by computer, phone, pager, mobile phone or other
communication device through a simple point-and-click contact menu.
The iPulse(TM) platform consists of a back-end server system and client
applications, which reside on each user's computers, phones and other
communications devices. End-users may customize their communications by setting
up individual profiles that indicate when, by whom and how they want to be
reached. A special routing mechanism residing on the back-end server can then
forward incoming messages or data transfers to a device selected by the user.
INDUSTRY BACKGROUND
GROWTH OF INTERNET BUSINESSES
The increased use of the Internet, intranets and extranets has fostered the
growth of a variety of Internet businesses, such as Internet service providers,
Internet content providers, portals and search engines and Internet communities.
In addition, a growing number of businesses, including retailers, auction houses
and financial institutions are creating or exploring the possibilities of
establishing a presence on the Internet as a means of attracting and retaining
customers and generating new revenue streams.
GROWTH OF WIRELESS COMMUNICATIONS
Worldwide use of wireless communications has grown rapidly as cellular and
other emerging wireless communications services have become more widely
available and affordable for businesses and consumers. Advances in technology,
changes in telecommunications regulations and the allocation and licensing of
additional radio spectrum have contributed to this growth. As a result, the
competitive environment among wireless network operators in major markets
worldwide has intensified.
CONVERGENCE OF THE INTERNET AND WIRELESS COMMUNICATIONS
We believe that wireless Internet-access devices have become increasingly
popular tools as a result of the accelerating use of e-mail services, remote
access to corporate intranets and other Internet-based services. The convergence
of wireless communications with the Internet and the launch of General Packet
Radio Service ("GPRS") in markets that currently use the Global System for
Mobile communications ("GSM") are expected by some industry analysts to be the
main drivers behind an anticipated surge in the growth of wireless Internet
access in 2001 and in subsequent years.
GROWTH OF WIRELESS DATA SERVICES AND APPLICATIONS
We believe that the growth of the Internet, coupled with the proliferation
of wireless Internet-access devices has in turn fueled the demand for wireless
data services. We believe that this demand may grow with increasingly
inexpensive wireless communications, increased bandwidth and increased security.
Wireless data services not only include simple functions like e-mail and
messaging, but also enable "anytime, anywhere" m-commerce transactions, gaming,
information updates, online trading, and location-based services, such as
electronic maps and directions and personalized service delivery.
MARKET OPPORTUNITY
Wireless network operators now face potential competition from Internet
portals and media companies such as AOL and Yahoo! that have announced
strategies to bring their brands to all devices "anytime, anywhere." Wireless
network operators risk seeing their brands subsumed under their content
partner's or portal partner's superior consumer brand, which we believe might
force the wireless network operator lower in the value chain. We believe that
the emerging wireless data services market represents a new competitive arena
for wireless network operators, for whom wireless data is a rapid and
cost-effective way to provide their services to subscribers. We believe that
wireless network operators are seeking to deliver Internet-based services to
their mobile subscribers in order to generate revenues from new sources,
differentiate their service offerings and reduce subscriber turnover and
operating costs. We believe that to accomplish this, wireless
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network operators require an innovative, high-quality software and services
solution to deliver Internet-based services and content to their mobile
subscribers.
Internet businesses are also tailoring their strategies to enter the
wireless data market, which is viewed by some industry analysts as the next
Internet frontier. We believe that Internet businesses are seeking to retain and
increase customers, and generate brand awareness and loyalty by providing
selected services to customers by means of wireless access in addition to
traditional PC-based access. Also, we believe that the convergence of the
Internet with wireless telecommunications provides Internet businesses with new
opportunities to obtain additional revenues from m-commerce transactions and
advertising. As a result, we believe that Internet businesses require a software
and services solution that links them to the wireless telecommunications
networks.
OUR PRODUCTS AND SERVICES
MPRESENCE 1.0
mPresence(TM) is designed to give wireless network operators the
opportunity to generate new revenue streams and increase customer loyalty by
providing their customers with an innovative suite of services and by charging
for the increased data and voice airtime that these applications encourage. The
revenue streams that might become available include access revenues, increased
SMS ("Short Message Service") usage with intelligent instant messaging,
advertising, m-commerce revenues, value-added services, and fixed end-user fees
for advanced functionality. Internet businesses can increase customer loyalty
and brand awareness with fully branded Internet services that would extend their
brand names into the mobile Internet. The first version of mPresence(TM) is
intended to lay the foundation for full mPresence(TM) service, by providing a
secure framework and core communication services. mPresence(TM) is built on top
of the iPulse(TM) framework, which provides the scalability and security of the
system, as well as uniform access to various devices on different networks. It
also provides basic user management functions and a communication model for
these users across different networks.
The following services are available to end-users as part of mPresence(TM)
1.0:
- Mobile/IP instant messaging. Using SMS in the GSM system, instant
messages can both be received on a PC connected to the Internet or on a
GSM handset. This has the potential to increase SMS traffic for the
carrier, which we believe can increase carrier revenues.
- Intelligent routing. Users can specify how and who is able to reach them,
depending on devices and user activity. This works for text, voice and
arbitrary data communications. Allowing users to personalize their
preferences is likely to make them more loyal to the service provider and
increase the use of services offered by the provider.
- Routing of voice to wireless phones. Internet-based (Voice over IP) calls
can be routed to a user's mobile phone if the carrier has enabled this
service. We believe that increased call completion can lead to increased
voice revenues for network operators.
For wireless network operators and Internet businesses, the following
mPresence(TM) features are of interest:
- Integration with billing. All user-related events or actions are
registered and can be exported to a service provider's billing system.
This allows service providers to charge for use of their services.
- Branding. All the mPresence(TM) services can be branded with the service
provider's brand names.
- Advertising. When a user connects to the mPresence(TM) service, a direct
channel is created between the user and the service provider. Functions
are provided to allow service providers to take advantage of this channel
as a targeted advertising channel.
- Other integration services. The mPresence(TM) solution is flexible, and
we believe that it can readily be adapted to specific customer needs.
This integration would be done on a case-by-case basis, and might involve
the creation of specific communication/application plug-ins.
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The mPresence(TM) solution and iPulse(TM) platform are designed to
facilitate the addition of new services with no inherent architectural limits to
the types of services that can eventually be added. mPresence(TM) already
supports and is currently being demonstrated on GPRS and Wideband Code Division
Multiple Access ("WCDMA") networks. mPresence(TM) permits our customers to
provide their end-users with a secure, unified access to a wide range of
innovative Wireless Application Protocol ("WAP"), SMS and other wireless and
fixed-line Internet services, which our customers can overlay onto their own
services.
HOSTING SERVICES
We offer mPresence(TM) to wireless network operators and Internet
businesses as a software solution that they can operate themselves or as a
hosted solution that we will operate for them. As a hosted solution,
mPresence(TM) is provided as a fully branded solution running on top of our
network. We believe that the key advantage of our hosting service is that the
operator is relieved from investing time and resources in bringing these
services to their end-users, thus reducing time to market. In some cases,
integration with the operator's infrastructure, such as their billing system or
switches, might be necessary.
We believe that further advantages of the hosting offering are that we will
continue to work at integrating new revenue generating services into the
mPresence(TM) solution, and these services will thus become immediately
available to the service providers.
Our network infrastructure enables scalability and can be adapted to high
subscriber growth. Servers will be hosted with third-party infrastructure
providers. We have already acquired the services of established infrastructure
companies in Scandinavia and North America and we intend to expand our network
of infrastructure providers worldwide. The following services are offered as
part of the hosting:
- Full-scale hosting. We offer plug-and-play hosting of the mPresence(TM)
service that enables wireless network operators and Internet businesses
to readily deploy value-added services to their end-users without
constructing their own infrastructure.
- Initial hosting. Wireless network operators may use the mPresence(TM)
hosting service on a temporary basis while they work on establishing
their own infrastructure.
- Administration and monitoring. Wireless network operators and Internet
businesses may obtain real-time monitoring of a full range of network
statistics and have access to all basic user administration functionality
and billing information.
We are developing additional services that we hope to add to the
mPresence(TM) solution. See "-- Research and Product Development -- New Services
and Products under Development."
IPULSE
The mPresence(TM) suite of services is built upon the iPulse(TM) platform,
a carrier-class services platform that we jointly developed with Ericsson.
iPulse(TM) was developed on top of our proprietary technology, which we have
licensed to Ericsson. The iPulse(TM) product and the iPulse trademark are wholly
owned by Ericsson. iPulse(TM) is a communications and intelligent routing
environment that effectively bridges the worlds of telephony and the Internet,
providing end-users with a simple and secure way to establish communications
sessions and access value-added services running either over IP networks or
other networks, such as the PSTN. iPulse(TM) instantly and easily connects
end-users to each other by computer, phone, pager, mobile phone or other
communication device through a simple point-and-click contact menu. We receive
11.81% royalties of gross worldwide iPulse(TM) sales by Ericsson as a result of
the Specific Co-Operation and Development Agreement ("SCDA") we entered into
with Ericsson in February 1999. In addition, pursuant to a value added reseller
agreement concluded with Ericsson in February 2000, we have the right to offer
iPulse(TM) to our customers as an integral part of the mPresence(TM) solution
and other value-added services.
We believe that iPulse(TM) allows wireless network operators to leverage
their existing communications networks while tapping into the power of the
Internet and new forms of voice and data communications. Internet businesses can
leverage their existing Internet expertise and infrastructure while extending
their reach
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to wireless devices and telecommunications networks. iPulse(TM) offers a secure
connection to a host of communications services that provide greater convenience
for end-users and increased revenues for wireless network operators and Internet
businesses. The iPulse(TM) framework essentially acts as a broker that allocates
communication services between two or more people, as well as brokering access
to value-added services, whether communications-based or otherwise. End-users
may customize their communications by setting up individual profiles that
indicate when, by whom and how they want to be reached.
OUR STRATEGY
Our objective is to be a leading developer and vendor of software and
services that enable wireless network operators and Internet businesses to
deliver the familiar benefits of the Internet to the wireless world. We intend
to accomplish this by capitalizing on our experience, expertise and strategic
relationships, our mPresence(TM) solution, the iPulse(TM) platform and its other
resources. The key elements of our strategy include expansion of our platform,
leveraging our strategic relationship with Ericsson, building additional
strategic partnerships, strengthening our mPresence(TM) brand through enhanced
sales and marketing efforts, and strategic acquisitions and global expansion.
EXPANSION OF PLATFORM
mPresence(TM) is designed to be extensible in order to offer additional
on-line services across a variety of protocols, applications, operating systems,
networks and devices that have developed rapidly in recent years as a result of
the convergence of wireless communications with the Internet. mPresence(TM)
already supports SMS, WAP services and WCDMA. We expect to further expand our
reach by supporting additional devices and broadening our functionality by
introducing new services, such as increased m-commerce capability and
location-based services. We believe that the convergence of the Internet and
wireless telecommunications will ultimately result in the "disappearance of the
Internet," by which we mean that the term "Internet" will no longer be used to
categorize services that now are Internet-based. We expect that the Internet as
a communications platform will ultimately be taken for granted, much as
electricity is today. We believe that a rapidly increasing number of devices and
consumer electronics equipment will have Internet or IP addresses and will be
integrated seamlessly to each other over wireless and fixed networks. We intend
to capitalize on this growing trend in order to be a frontrunner in the new
integrated mobile economy.
LEVERAGING OF STRATEGIC RELATIONSHIP WITH ERICSSON
In February 1999, we entered into a General Co-Operation and Development
Agreement with Ericsson ("GCDA"). Pursuant to this agreement, the companies
agreed to cooperate in the area of Internet-based technologies, applications and
services, including, but not limited to, development, testing, integration,
marketing, sales, distribution, support and maintenance of solutions based on
the technologies and services of each company. The parties' cooperation pursuant
to the GCDA is non-exclusive and each party's participation is based on its
individual evaluation of the commercial viability and expected benefits of the
relationship. The initial term of the agreement expires on December 31, 2001,
but will be automatically renewed on a yearly basis unless terminated by written
notice of either party.
Pursuant to the SCDA entered into in February 1999, we and Ericsson formed
a "virtual" company for the purpose of creating an organized structure in which
to conduct our development activities. Both companies contribute personnel to
the joint venture, both at the management and board level and in the day-to-day
development work. However, we perform the development work on assignment from
Ericsson and Ericsson's decisions prevail in cases of differences of opinion.
Currently, approximately 40 of our employees are dedicated to the virtual
company. Pursuant to the SCDA, Ericsson is responsible for 95% of the expenses
relating to sales and marketing and general and administrative costs, as well as
66% of customer support expenses, whereas we are responsible for 5% of any
expenses relating to sales and marketing and general and administrative costs
and 34% of customer support expenses. In addition, we are responsible for 100%
of any expenses relating to the development of the application platform. Under
the agreement, Ericsson and we share 85% and 15% of revenues from sales,
respectively. The net effect of this agreement is that we receive 11.81%
royalties of gross worldwide iPulse sales by Ericsson. The SCDA is effective
until December 31, 2001. The
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agreement will then be automatically renewed for additional one year periods,
unless terminated by either party.
Pursuant to a value-added reseller agreement also concluded with Ericsson
in February 2000, we have obtained a nonexclusive license to market, sublicense
and distribute the iPulse(TM) software code to our customers, to use the code to
develop further our products, and to provide services to our customers. We have
agreed to pay royalties based on a pricing model to be established by the two
companies. The agreement has a two-year term and will be automatically renewed
for additional one year periods, unless either party gives notice of
non-renewal.
Pursuant to a stock purchase agreement entered into in February 1999,
Ericsson acquired 10,052,431 shares of Series A Preferred stock. Under the terms
of the GCDA, as long as Ericsson owns shares representing 5% or more of our
capital stock we must inform Ericsson of any proposal to license or sell any of
the technology covered in the agreement or to enter into any transaction with
any principal competitor of Ericsson. Ericsson may opt to enter into the
proposed transaction on the same terms and conditions.
Joint marketing efforts for iPulse(TM) have been initiated and we intend to
maintain these efforts in the future. We believe that our active participation
in the distribution of iPulse(TM) will enable us to build up the base of
end-users more rapidly. We intend to be recognized as the co-developers of
iPulse(TM) and to ensure that our brand is strongly associated with Ericsson in
the marketplace.
BUILDING ADDITIONAL STRATEGIC PARTNERSHIPS
We are currently seeking to enter into strategic relationships with large
participants in the Internet and wireless telecommunications markets, as well as
with smaller, emerging participants and third-party developers. We intend to
concentrate on the communications and commerce technology components of
mPresence(TM) and to use strategic relationships or licensing arrangements to
access the best of end-user solutions from leading Internet software developers.
STRENGTHENING THE MPRESENCE BRAND THROUGH ENHANCED SALES AND MARKETING EFFORTS
We intend to target emerging wireless network operators and Internet
businesses, and intend to increase our sales and marketing expenditures
significantly to promote the mPresence(TM) brand. Our enhanced sales and
marketing efforts will include advertising, public relations, tradeshows,
participation in major conferences, and online marketing. We will also target
enterprise customers indirectly through partnerships with application service
providers and other service providers. See "Sales and Marketing." Our branding
program focuses on ensuring integrity and recognition for our vision of
mobilizing customers, partners and technology contemporaries to "walk on the
wireless side," a slogan largely associated with our name and logo.
STRATEGIC ACQUISITIONS AND GLOBAL EXPANSION
Through acquisitions, we aim to reduce time-to-market when either
introducing new services or entering a new market. Our strategy is to leverage
our experience to identify companies that have complementary technology,
resources, products or service offerings. We cannot be certain, however, that we
will be able to acquire these companies or to integrate them successfully into
our business. When evaluating new technologies and services to build into our
own products and services offering, we plan not only to license third-party
technology, but also to pursue opportunities for strategic investments. We also
intend to expand globally by opening additional sales offices in strategic
geographic areas in North America, Europe and Asia. We have increased our sales
staff in recent years and we intend to continue to increase the number of our
sales and technical personnel significantly during the next twelve months.
SALES AND MARKETING
As of April 30, 2000, we had 2 persons in sales and 1 person in marketing
based in the United States, and 10 persons in sales and 6 persons in marketing
based in Europe. We intend to expand this group significantly
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over the next twelve months. In addition, we have a joint marketing and
distribution relationship with Ericsson.
SALES
We have adopted a global sales strategy and intend to open international
offices according to customer location. Each sales office will be responsible
for mPresence(TM) sales in certain geographic areas and will work alongside
Ericsson in selling iPulse(TM) when applicable. We presently have established
sales offices in Boston, Stockholm and Reykjavik.
We believe that our success depends in large part on our ability to
increase sales of our products and services through value-added resellers and
other indirect distribution channels. We will approach potential customers as
partners, introducing them to a business concept with new revenue streams,
increased customer loyalty and increased brand recognition.
We offer the mPresence(TM) suite of services to our customers primarily on
a revenue-sharing basis. The revenue-sharing structure includes a fixed
component along with a certain percentage of the revenues derived from various
end-user services, such as increased SMS and airtime usage and advertising.
MARKETING
Our corporate marketing objectives will initially span both European and
North American markets, with plans for Asia and Latin America to follow. Our
future success in marketing requires that certain objectives be prioritized in
corporate communication, including achieving industry and market recognition for
our company as a leading expert and pioneer of m-business, making mPresence(TM)
a highly regarded mobile Internet service offering among wireless network
operators and Internet businesses, ensuring that we are recognized as a co-
developer for the iPulse(TM) platform, supporting our ability to attract and
retain highly skilled and experienced professionals, and expressing our dynamic
and culturally diverse character.
Our branding program focuses on ensuring integrity and recognition for our
vision of mobilizing customers, consumers, partners and technology
contemporaries to "walk on the wireless side." Public relations and advertising
form the key components of our marketing strategy to build awareness and
recognition as a leading m-business enabler and expert in the wireless Internet
marketplace. We also intend to participate in co-marketing efforts with our
customers to promote mPresence(TM) services in the marketplace.
We participate in selected industry and technology related events and
conferences in order to increase our visibility and our technology, addressing
topics such as wireless Internet, WAP, intelligence of IP networks and security.
Branding OZ.COM and mPresence(TM) on the Internet is also part of our overall
marketing strategy.
CUSTOMERS
Our primary target customers are emerging wireless network operators and
Internet businesses. Our services can be sold either to pure wireless network
operators or to integrated wireless and fixed-line operators that may also have
their own internet service provider ("ISP"). In addition, we plan to target
Internet businesses, including Internet communities and ISPs that operate as
"virtual" operators that either lease capacity from an operator or provide
competitive services as a wireless ISP or mobile portal. These new market
entrants require an instant competitive advantage and we believe that they may
be eager to move quickly in order to gain a foothold in the marketplace.
A secondary target market for our services are enterprise customers that
wish to offer their employees a unified and instant messaging suite with strong
integration of wireless data and applications. We intend to target this market
indirectly through strategic sales partnerships and other indirect sales
channels in order to maintain our focus on the core wireless network operators
and Internet business markets.
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As part of our strategy to increase our customer base, we have tailored our
solutions to meet the needs of the fastest-growing segments of wireless and
Internet business end-users, including business professionals, university
students and teenagers.
The first commercial customer release of iPulse was in November 1999. We
announced the commercial availability of mPresence(TM) in February 2000.
COMPETITION
The market for our products and services includes a large number of
participants, is subject to rapid changes and is highly competitive. Although no
competitor offers exactly the same type of wireless Internet solution as ours,
our competitors currently offer or have the potential to offer either a total
end-user solution to wireless network operators and Internet businesses or
compete with various components of the mPresence(TM) solution. In addition, our
clients and strategic partners may eventually offer products or services that
directly compete with those we offer. We expect to compete primarily on the
basis of time-to-market, functionality, quality, price and breadth of product
and service offerings. Our current and potential competitors include the
following:
- Infrastructure and service providers. Companies that provide browsers
for digital mobile phones and the infrastructure to link devices to
network service providers and the Internet, such as Phone.com and
i3Mobile, are positioning themselves for the growth of wireless data
services.
- Instant messaging providers and Internet portals. Instant messaging
providers such as AOL offer a total solution for messaging and
information services with its ICQ and AOL Instant Messenger Services.
Microsoft's Mobile Explorer platform is expected to offer an integrated
mobile MSN messenger in the future and Yahoo! and Exite@Home also intend
to offer their users total solutions for mobile instant messaging and
information services.
- Wireless service providers. Companies offering wireless data services
such as e-mail, calendar access, aggregation of content and a mobile
e-commerce platform include InfoSpace.com and Wireless Knowledge (a joint
venture between Qualcomm and Microsoft) and @mobile. With its acquisition
of Saraide, InfoSpace.com is able to offer a range of wireless Internet
services.
- Telecommunications operators. Companies such as Sonera, through its
affiliate Sonera Zed, and Vodafone are developing mobile portal solutions
with functionality that, in part, resembles that of mPresence(TM).
- Mobile equipment manufacturers. Ericsson, Nokia and others are
developing and marketing server, browser and application software
products that may compete with our product and service offering. These
companies already sell billions of dollars worth of mobile handsets and
other telecommunications products to wireless service providers, which
are our existing and potential customers.
- Systems integrators and software companies. Companies such as CMGI and
Oracle Corporation are developing and marketing solutions and server
software that is compliant with the specifications promulgated by the WAP
Forum.
In contrast to the services offered by many of our competitors,
mPresence(TM) services are fully owned and branded by the wireless network
operators and Internet businesses, which gives them total control over their
subscriber base and customers. Many of our competitors, however, claim end-user
ownership to various extents. We believe that this distinguishes us from these
competitors.
RESEARCH AND DEVELOPMENT
Our future success depends on a number of factors, including our ability to
identify and respond to emerging technological trends in the target markets, to
develop and maintain competitive products, to enhance existing products by
adding features and functionality that differentiate them from those of our
competitors, and to bring products to market on a timely basis and at
competitive prices. As a result, we intend to continue
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<PAGE> 20
to invest significantly in research and product development. We are actively
recruiting additional skilled engineers for research and product development.
PRODUCT DEVELOPMENT
Following the strategic approval of research projects concerning software
development, and appropriate preparations by product marketing and product
management, projects are finalized by the engineering unit. The engineering unit
undertakes system management, configuration management and testing. System
management is responsible for keeping total system design both sound and
complete. Configuration management is responsible for identification of software
items, controlling changes to them throughout the software life cycle and
managing releases of the items. Configuration management is also responsible for
defining and implementing company-wide configuration processes according to
international standards and best practices. Testing is performed in our
extensive test lab. The testing group verifies all requirements against the
deliverable product.
Project teams are formed for each software development project, with a team
leader responsible for resource allocation, deadlines and the overall progress
of each project. We make an effort to outsource well-defined projects to
qualified and pre-approved partners. In such cases, we also appoint a dedicated
team leader responsible for relations to the partner and project progress. The
delivery of finished products involves systems integration that consists of
customer-oriented project teams performing the consulting and custom software
development required by individual customers deploying our solutions. As such,
each project is typically shorter than a core technology development and makes
use of our rapid development processes. Systems operations concern the
administration of the hosted services, installations and customer support.
NEW SERVICES AND PRODUCTS UNDER DEVELOPMENT
mPresence aims to provide to wireless network operators and Internet
businesses attractive revenue generating services for their end-users on a
revenue-sharing basis. We have identified two market segments that we believe
are the most interesting in the current wireless/Internet convergence market:
the lifestyle and entertainment segment, which is primarily made up of teens,
and the mobile professional segment. The choice of services to be integrated or
developed for the further enrichment of mPresence(TM) is thus heavily influenced
by these two segments. We divide the types of services in three categories:
personal information management, lifestyle applications and communication. We
are currently developing or integrating the following services:
COMMUNICATION
- Advanced SMS functionality. These features are intended to extend the
current SMS functionality to cover more types of communications between
users.
- Integration with Unified Messaging. This would allow users to access
voice mail and faxes through the mPresence(TM) service.
- Video and audio conferencing. This would allow multiple users to
communicate simultaneously using voice and video.
PERSONAL INFORMATION MANAGEMENT
- E-mail integration. This would allow users to access their web-based
e-mail on their wireless device.
- Calendar integration. This would allow users to manage their web-based
calendar in a centralized manner, and receive notifications on their
wireless device.
- Wireless banking. This would allow users to manage their bank accounts
and perform transactions, either through the Internet or on their
wireless device.
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<PAGE> 21
LIFESTYLE APPLICATIONS
- Social calendar. This would allow friends to manage common trivial
decisions and keep in constant touch, both on the Internet and on their
wireless devices.
- Wireless games. These would include multi-user strategy games that
require communication among players, which could be played on the
Internet or on wireless devices.
- People matching. This application would group users with common
interests into communities and allow them to communicate with each other.
We cannot be certain that any of the foregoing services will be successfully
developed or integrated or that these services will achieve market acceptance.
RECRUITING AND RETENTION
As of April 1, 2000, we had approximately 97 full time employees, of whom
10 were located in the United States, 79 were located in Iceland and 8 were
located in Sweden. Twelve of the employees located in Iceland are members of
trade unions, including the Iceland Commerce Union, the Union of Electricians,
the Graphic Designer Union and the Iceland Naturalists Union. The number of
employees grew by 20 in the first quarter of 2000. An additional 15 employees
are scheduled to commence work in the second quarter of 2000.
Our success will largely depend on our ability to attract, identify,
recruit, hire, professionally develop and retain highly qualified employees.
Competition for such personnel is intense, and we may not be able to retain our
senior management or other key personnel in the future. Consequently, we
dedicate significant resources to our recruiting efforts.
We work to ensure that recruiting efforts do not negatively impact the
nurturing of current employees and their working environment. The Chief
Operating Officer is responsible for developing recruitment strategies and
retention programs, while departmental directors are responsible for filling
open positions in their local departments. Local administration directors are
responsible for surveying job satisfaction levels, employee development and
employee-related services in each office.
Since March 2000 we have offered our employees a "finder's fee" for
suggesting or initiating the hiring of new employees. This incentive program
encourages current employees to identify potential new employees and generates a
sense of solidarity by involving employees in our growth. We also employ the
services of a number of recruiting agencies in the United States, Scandinavia
and Iceland. In addition, we have established various relationships with
universities in order to attract graduates. In 1999, we awarded six students
grants and provided facilities for each to complete their thesis. We intend to
implement this grant program internationally on an annual basis. Student groups,
especially those with computer science and engineering training, are frequent
guests in our development center in Reykjavik, and interns are regularly hired
for specific projects.
We have established a stock option program and a competitive compensation
program to attract new personnel. See "Management -- Employee Stock Option Plan
and Stock-based Compensation."
INTELLECTUAL PROPERTY RIGHTS
Our success depends significantly upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright and
trademark laws, patents, trade secrets, confidentiality agreements with
employees and third parties and protective contractual provisions. All of our
employees are subject, either by contract or statute, to confidentiality and
non-use restrictions that transfer certain rights they may have in copyrightable
works or patentable technologies to us. In addition, prior to entering into
discussions with potential affiliates regarding our business and technologies,
we generally require that such parties enter into a nondisclosure agreement with
us. If these discussions result in a license or other business relationship, we
also generally require that a written agreement be made setting forth the
parties' respective rights and obligations include provisions for the protection
of our intellectual property rights.
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<PAGE> 22
We own the technology underlying iPulse(TM), while the iPulse trademark and
the rights to the iPulse(TM) solution are the property of Ericsson. We have
applied for registration of the mPresence trademark as well as various other
trademarks in the United States and Europe and we own several domain name
registrations including the Company name and related products. Suites of mobile
concepts relating to mPresence(TM), such as m-commerce and m-business, are the
subjects of pending trademark registration. We will seek to register additional
service marks and trademarks, as appropriate. However, we may not be successful
in obtaining the service marks and trademarks for which we have applied.
We have filed several patent applications that are pending and relate to
innovative solutions including server, audio and agent technology relating to
the Internet and multi-user technologies. Additional patent applications are in
preparation on other features of our technology. We have instituted an employee
incentive program for patent filing and anticipate increased patent application
activity in the future. However, patents with respect to our technology may not
be granted, and, if granted, patents may be challenged or invalidated. In
addition, issued patents may not provide us with any competitive advantages and
may be challenged by third parties.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy aspects of our products or services or obtain and use information that
we regard as proprietary. The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the Company's financial condition and results
of operations in respect of the years ended December 31, 1997, 1998 and 1999 and
the three months ended March 31, 2000 should be read in conjunction with the
Audited Consolidated Financial Statements and the Unaudited Consolidated Interim
Financial Statements.
OVERVIEW
Since beginning operations in December 1995, we have devoted substantially
all of our resources to developing our multi-user communications platform, first
in the context of three-dimensional ("3D") online environments, and since 1997,
primarily in the context of wireless telecommunications networks. From inception
through December 31, 1999 we raised total equity capital of $27.9 million and
had an accumulated deficit of $12.3 million. We began to receive revenues from
sales of services in September 1996 and are continuing to operate at a deficit.
We expect the operating deficit to continue and to increase over at least the
next twelve months as we incur increasing levels of expense to support growth.
We believe that our historical operating results are not indicative of future
performance for the following reasons, among others:
- Our historical revenues have come from development contracts for 3D
environments in earlier years and more recently for the development of
iPulse(TM) under an agreement with Ericsson, but this will change as we
begin selling iPulse(TM) and mPresence(TM) services directly to
customers; and
- We have recently emerged from the development stage and anticipate
substantial increases in the number and size of customer orders and
revenues from operations.
Although we expect substantial growth in both revenues and expenses, we
anticipate that increases in expenses will occur more rapidly than corresponding
increases in revenues. Also, while we are committed, at least in the short term,
to substantial increases in expenses, we cannot be certain that revenues will
increase correspondingly. Like many companies attempting to build an
Internet-based business, we expect over at least the next year and for an
indeterminate period of time thereafter to follow a strategy of establishing
market share by making expenditures for marketing and infrastructure development
that exceed current revenues.
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<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain consolidated income statement data,
expressed as a percentage of revenues, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------- -------------------
1998 1999 1999 2000
----- ----- -------- -------
(% OF REVENUES)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................................... 100.0 100.0 100.0 100.0
Operating expenses:
Cost of sales.................................... 50.0 64.0 82.4 55.8
Sales and marketing expenses..................... 30.0 37.2 28.8 37.0
General and administrative expenses.............. 50.1 43.6 77.6 68.6
Research and development......................... 10.8 9.4 8.8 13.3
Total operating expenses........................... 141.0 154.2 197.6 174.6
Operating loss..................................... (41.0) (54.2) (97.6) (74.6)
Loss before income taxes........................... (44.0) (43.3) (103.3) (74.1)
Net loss........................................... (44.0) (43.3) (103.3) (74.1)
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Our revenues increased 25.6% to $5,174,398 in 1999 from
$4,119,815 in 1998. The increase is primarily the result of an increase in
development revenues from Ericsson. Revenues from Ericsson increased 27.6% to
$4,565,693 in 1999 from $3,577,348 in 1998.
COST OF SALES. Our cost of sales increased 60.7% to $3,309,870 in 1999 from
$2,059,389 in 1998. The increase is the result of an increase in costs related
to development work for Ericsson. Costs related to development work for Ericsson
increased primarily as a result of additional resources employed in the
development work.
COST OF RESEARCH AND DEVELOPMENT. Our cost of research and development
increased 9.2% from $446,212 in 1998 to $487,388 in 1999. The increase is
primarily the result of research and development expenses related to the
Ericsson development work as well as research and development in the area of
on-line training, that led to the establishment of the subsidiary SmartVR Inc.
in November 1999.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased
55.7% to $1,924,807 in 1999 from $1,236,314 in 1998. The increase is primarily
the result of the establishment of sales offices in Boston, Massachusetts and
Stockholm, Sweden, the hiring of additional sales people in all offices, and the
initiation of a focused sales and marketing campaign in connection with
iPulse(TM). Expenses related to sales and marketing for iPulse were $278,467 in
1999. No sales and marketing expense for iPulse(TM) was recognized in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased 9.2% to $2,256,542 in 1999 from $2,065,788 in 1998. The
increase is primarily the result of the relocation of our United States
headquarters from San Francisco to Boston.
OPERATING LOSS. Our operating loss increased 66.1% to $2,804,209 in 1999
from $1,687,888 in 1998. The increase is primarily the result of an increase in
all operating expense categories, which were not offset by a proportional
increase in revenues. This increase in operating expenses is primarily the
result of our strategy to simultaneously accelerate research and development of
the mPresence(TM) product and the build up of sales and marketing resources in
anticipation of the launch of mPresence(TM).
INTEREST INCOME (EXPENSE), NET. Our interest income, net was $430,573 in
1999 compared to net expense of $134,637 in 1998. The increase is primarily the
result of an increase in cash holdings as a result of capital investments by
Ericsson during 1999 in the aggregate amount of $13,068,160.
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<PAGE> 24
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Our revenues increased 92.7% to $1,745,902 in the three months
ended March 31, 2000 from $906,028 in the three months ended March 31, 1999. The
increase is primarily the result of an increase in development revenues from
Ericsson. Revenues from Ericsson increased 124.5% to $1,718,388 in the three
months ended March 31, 2000 from $799,172 in the three months ended March 31,
1999.
COST OF SALES. Our cost of sales increased 30.5% to $973,367 in the three
months ended March 31, 2000 from $746,148 in the three months ended March 31,
1999. The increase is primarily the result of an increase in development work
for Ericsson.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased
147.4% to $646,157 in the three months ended March 31, 2000 from $261,151 in the
three months ended March 31, 1999. The increase is primarily the result of the
establishment of sales offices in Boston, Massachusetts and Stockholm, Sweden,
the hiring of additional sales people in all offices, and the initiation of a
focused sales and marketing campaign in connection with both the iPulse(TM) and
mPresence(TM) products.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses increased 70.3% to $1,197,543 in the three months ended March 31, 2000
from $703,228 in the three months ended March 31, 1999. The increase is
primarily the result of the establishment of new offices in Boston,
Massachusetts and Stockholm, Sweden, the hiring of management in all offices,
and added costs associated with preparing for a public offering of our shares.
RESEARCH AND DEVELOPMENT. Our research and development cost increased
191.3% to $231,859 in the three months ended March 31, 2000 from $79,597 in the
three months ended March 31, 1999. The increase is primarily the result of
research and development expenses related to mPresence(TM) as well as research
and development in the area of online training (related to the subsidiary
SmartVR) and music awareness solutions, which led to the establishment of the
subsidiary Ozmo.com in February 2000.
OPERATING LOSS. Our operating loss increased 47.4% to $1,303,024 in the
three months ended March 31, 2000 from $884,096 in the three months ended March
31, 1999. The increase is primarily the result of an increase in all operating
expense categories, which were only partially offset by a proportional increase
in revenues. This increase in operating expenses is primarily the result of our
strategy to simultaneously accelerate research and development of the
mPresence(TM) product and the build up of sales and marketing resources in
anticipation of the launch of mPresence(TM).
INTEREST INCOME (EXPENSE), NET. Our interest income, net was $97,814 in the
three months ended March 31, 2000 compared to net expense of $15,768 in the
three months ended March 31, 1999. The increase is primarily the result of an
increase in cash holdings as a result of capital investments by Ericsson during
the second and fourth quarters of 1999 in the aggregate amount of $13,068,160.
OTHER INCOME (EXPENSE), NET. Our other expense, net was $89,050 in the
three months ended March 31, 2000 compared to net expense of $36,376 in the
three months ended March 31, 1999. The increase is primarily the result of
changes in US dollar currency exchange rates in comparison with European
currencies.
LIQUIDITY AND CAPITAL RESOURCES
From December 31, 1998 to December 31, 1999, our total assets increased
from $3,170,424 to $17,634,137, total liabilities decreased from $4,248,859 to
$1,570,176 and total shareholders' equity increased from ($1,078,435) to
$2,995,807. The increases in total assets and total shareholders' equity, and
the decrease in total liabilities resulted from the Ericsson financing, a
private equity financing in Iceland and the conversion of the convertible bonds
issued in 1998 into shares of Common Stock.
Our primary liquidity needs are for working capital, capital expenditures,
acquisitions and investments, and, to a lesser extent, debt service. Our primary
sources of liquidity are cash flows from operations and issuances of stock.
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<PAGE> 25
Net cash used in operating activities was $763,839 for the three months
ended March 31, 2000, compared to $159,824 for the same period in 1999. The
increase in net cash used in operating activities in 2000 was due primarily to
increased working capital needs related to our growth.
Our working capital at March 31, 2000 was $13,093,187 compared to
$14,531,285 at December 31, 1999. Working capital as of March 31, 2000 was
comprised of $12,622,995 million in cash, $1,705,719 in accounts receivable, and
$317,159 in other current assets, net of $1,552,686 in current liabilities. As
of December 31, 1999, our working capital was comprised of $13,603,592 million
in cash, $1,414,272 in accounts receivable, and $406,232 in other current
assets, net of $892,811 in current liabilities.
During the quarter ended March 31, 2000, we invested $401,326 primarily in
computer systems for employees and an iPulse(TM) network system (we call this an
"iPulse cluster") in Boston to support revenue growth. This first iPulse(TM)
cluster will be used to in the delivery of our mPresence(TM) services in North
America. We expect to continue to spend significant amounts on computer systems
for both new employees and new iPulse(TM) clusters as we continue to grow
aggressively.
Through our Icelandic subsidiary, OZ hf., we have outstanding long-term
notes payable to Bunaoarbanki Islands, an Icelandic bank, and to the seller of
our building at Snorrabraut 54 in Reykjavik, Iceland. We have pledged our
building as collateral for these loans. The amount due on these loans at
December 31, 1999, is approximately $530,000. The loans accrue interest at rates
between 6.0% and 7.35% per annum. We currently have no working capital line of
credit or similar credit facility.
In February 1999, we entered into a Stock and Warrant Purchase Agreement
with Ericsson Inc. under the terms of which Ericsson Inc. had the right to
purchase up to 10,052,431 shares of Series A Preferred stock at $1.30 per share.
In March and April of 1999, we sold and issued 2,000,000 shares of Common
Stock for cash at $1.90 per share.
In June 1998 we sold and issued a series of convertible bonds in
consideration for an aggregate of $2,500,000. The convertible bonds could be
converted at the election of the bondholder any time prior to June 1, 1999 for
that number of shares equal to the face value of the bond, divided by $0.65.
Prior to June 1999, all of the holders of the convertible bonds converted their
bonds into an aggregate of 3,846,150 shares of Common Stock at a value of $0.65
per share.
In June 1999, Ericsson exercised a portion of its warrant by purchasing
4,769,231 shares of our Series A Preferred Stock for total cash consideration of
$6,200,000.
In October 1999, Ericsson exercised the balance of its purchase rights by
purchasing 5,283,200 shares of our Series A Preferred Stock for total cash
consideration of $6,868,160.
We may seek additional debt or equity financing through public or private
placements of our securities. We cannot be sure that any such financing will be
obtained or, if obtained, will be adequate to meet our needs.
We currently plan to expand aggressively by hiring additional people in all
segments of our operations, particularly in research and development, sales and
corporate development, by acquiring capital assets and inventory for use in our
business and by opening new offices in strategic locations. We believe that our
operating requirements for the next 12 months will be funded from cash from
operations and cash reserves. We may revise our plans in response to future
changes in the mobile communications industry in general and the demand for our
services in particular, our results of operations, our other capital
requirements and other relevant factors. We also intend to expand by making
strategic acquisitions of businesses or assets and we are currently in
discussions that may result in our acquiring one or more businesses. We believe
that we will likely fund any such acquisition through the issuance of debt or
additional equity securities.
MARKET RISK DISCLOSURE
The lack of or delay in market acceptance for wireless devices as a means
for wireless delivery of Internet-based services could have a material adverse
effect on our business, operating results and financial
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<PAGE> 26
condition. We have focused our efforts on wireless Internet-related
communication. Our technological solutions, in particular mPresence(TM), are not
necessarily dependent on wireless devices for the conveyance of the
communication. However, we believe that the success of mPresence(TM) is
interlinked with the acceptance by the market of wireless devices as a viable
means for Internet-based services, giving increasingly more wireless network
operators and Internet businesses incentive to adopt technological solutions
supporting such services. This acceptance may not occur or may be delayed for a
number of reasons. These reasons could include an inadequate supply of the
required hardware and software, limitations to the performance and functionality
of wireless devices, conflicting technical standards and lack of
interoperability, lack of adequate Internet-based applications and content for
such Internet-based services, costs, and inadequate security arrangements.
The failure of wireless network operators and Internet businesses to
introduce and support services utilizing our products in a timely and effective
manner could have a material adverse effect on our business, operating results
and financial condition. We believe that a major part of our future revenues
will derive from sales of the mPresence(TM) solution, the iPulse(TM) service
platform and related services to existing and new wireless service providers and
Internet communities. Therefore, our future success depends on the acceptance by
wireless network operators and Internet businesses of these new products and
services that we may not be able to achieve. The relatively small numbers of
wireless network operators and Internet businesses worldwide compounds this
dependence. To date, we have only one wireless network operator customer who has
signed an agreement to implement our mPresence(TM) solution. We cannot be
certain that wireless network operators or Internet businesses will widely use
our products. In addition, wireless network operators have historically been
relatively slow to implement new complex services such as Internet-based
services, and Internet businesses may be slow to implement the use of wireless
services as a means of expanding Internet-based services. We have limited or no
control over the pace at which wireless network operators or Internet businesses
implement these new services.
INCOME TAXES
At December 31, 1999 we had net operating loss carryforwards of
approximately $11,800,000, $5,600,000, and $100,000 for federal, state and
Icelandic income tax purposes, respectively. Unless we utilize these beforehand
to offset future taxable income, if any, these carryforwards will expire from
year 2001 through 2013.
IMPACT OF PRICING, INFLATION AND SEASONALITY
The pricing of our products and services is primarily a function of the
perceived need for our products and services, the availability of competitive
products or services, the presence of competition for end-users within a
particular market and the degree of acceptance of the mobile phone as an
entertainment and commercial transaction device. Our pricing model for
mPresence(TM) will in many cases be based on a revenue sharing model in which we
will take a certain percentage of revenues resulting from each end-user using
the various services or being exposed to advertisements. Our future revenues are
therefore largely dependent on the number of subscribers to the wireless network
operators or Internet businesses that utilize our products and services. We are
not able to make reliable estimates as to the rate of adoption by the
subscribers of the particular services offered through our products. It is
therefore difficult to predict the size of our future revenues and these future
revenues will be largely dependent on the number of subscribers to the wireless
network operators or Internet businesses, in general, and the subscription to
the services offered through our products, in particular. The price that
subscribers will be willing to pay for these services is also difficult to
estimate.
We believe that inflationary trends had no material impact on the results
of our operations during the year ended December 31, 1999.
Our revenues and operating results are expected to vary, sometimes
substantially, from quarter to quarter. Quarterly revenues and operating results
may fluctuate as a result of a variety of factors, including:
- the timing of large transactions,
- an estimated initial sales cycle of three to six months,
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<PAGE> 27
- the proportion of revenues attributable to revenue-sharing or fixed per
end-user fees versus revenues from software sales,
- changes in the level of operating expenses,
- the utilization rate of our development services employees,
- demand for our products and services,
- the introduction of new products and product enhancements by us or our
competitors,
- changes in customer budgets,
- competitive conditions in the industry, and
- general economic conditions.
Further, the purchase of our products and services often involves a
significant commitment of capital by our customers with the attendant delays
frequently associated with large capital expenditures and authorization
procedures within an organization. Accordingly, the sales cycles for our
products and services are typically lengthy, with an estimated initial sales
cycle of three to six months, and subject to a number of significant risks over
which we have little or no control, including our customers' budgetary
constraints and internal authorization reviews.
In addition, we expect our quarterly operating results to be subject to
certain seasonal fluctuations. Our revenues and operating results are typically
lower in its first fiscal quarter than the remainder of the year. In addition,
our third fiscal quarter includes the months of July and August, when billable
service activity by professional staff, as well as purchase decisions by
customers, are reduced due to summer vacation schedules.
ITEM 3. DESCRIPTION OF PROPERTY
We maintain offices at (1) Snorrabraut 54 and Snorrabraut 56, IS-105,
Reykjavik, Iceland, (2) Drottninggatan 82, Stockholm, Sweden, and (3) 77 South
Bedford Street, Suite 420, Burlington, Massachusetts. We own the space at
Snorrabraut 54, Iceland and rent all the other offices from unaffiliated
parties.
The rent for the Snorrabraut 56, Iceland office, which consists of 451.7
square meters, is $4,517 per month, subject to monthly adjustment in accordance
with the price-index for housing in Iceland. The lease terminates on November 1,
2004.
The rent for the Sweden office, which consists of 486 square meters, is
$18,500 per month. The term of the lease is from April 1, 2000 to September 30,
2003.
The rent for the United States office, which consists of 7,622 square feet,
is $795 for each occupant of the space. Currently, there are seven occupants,
and the rent is $5,565. The term of the lease is six months with an option to
extend the lease every three months.
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<PAGE> 28
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth the number of shares and percent of our
outstanding Common Stock and Series A Preferred stock beneficially owned as of
March 24, 2000, by each person known to our Board of Directors to be the
beneficial owner of 5% or more of the outstanding shares of our Common Stock
and/or Series A Preferred stock, each Director, each Named Officer, and all
Directors and Executive Officers as a group.
COMMON STOCK
<TABLE>
<CAPTION>
AS OF MARCH 24, 2000
-----------------------------------------
SHARES PERCENTAGE
SHARES ACQUIRABLE OF ALL
BENEFICIALLY WITHIN 60 COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED DAYS(1)(2) STOCK(3)
------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Skuli Mogensen(4)...................................... 18,597,000 0 26.65%
Guojon Mar Guojonsson(4)............................... 34,597,000 100,000 49.50%
Ericsson, Inc.(5)...................................... 0 20,104,862 22.37%
Lars Boman(6).......................................... 0 0 0%
Stig-Arne Larsson(7)................................... 0 0 0%
Jeff Pulver(8)......................................... 0 0 0%
Robert G. Quinn(9)..................................... 0 200,000 0.29%
Kjartan Pierre Emilsson(4)............................. 266,626 260,000 0.75%
Skuli Valberg Olafsson(4).............................. 0(10) 100,000 0.14%
Gunnar Thoroddsen(4)................................... 34,708 0 0.05%
Jon L. Arnason(4)...................................... 71,412 0 0.10%
Fredrik Torstensson(11)................................ 0 0 0%
All executive officers and directors as a group (11
persons)............................................. 53,566,746 660,000 76.98%
</TABLE>
---------------
(1) Includes 260,000 shares that could be purchased by Kjartan Pierre Emilsson,
200,000 shares that could be purchased by Robert G. Quinn and 100,000
shares that could be purchased by Skuli Valberg Olafsson by exercise of
options available on March 24, 2000 or within 60 days thereafter.
(2) Includes 50,000 and 10,052,431 shares of Series A Preferred stock of which
each share could be converted into two shares of Common Stock by Guojon Mar
Guojonsson and Ericsson Inc., respectively, as of March 24, 2000.
(3) Options that are currently exercisable or exercisable within sixty days
and/or shares of Series A Preferred stock are deemed to be shares of Common
Stock, outstanding and beneficially owned by the person holding such
options and/or Series A Preferred stock, for the purpose of computing the
percentage ownership of such person, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
(4) Shareholder is at the following address: Snorrabraut 54, IS-105, Reykjavik,
Iceland.
(5) Shareholder is at the following address: 1010 East Arapaho Road,
Richardson, Texas 75083.
(6) Shareholder is at the following address: Hornsgatan 63 11849 Stockholm.
(7) Shareholder is at the following address: Lonnv 31B, 13552, TYRESO, Sweden.
(8) Shareholder is at the following address: P.O. Box 1432, Melville, New York
11747.
(9) Shareholder is at the following address: 18665 Via Torino, Irvine,
California 92612.
(10) Does not include 5,390 shares owned by Mr. Olafsson's family of which Mr.
Olafsson disclaims beneficial ownership.
(11) Shareholder is at the following address: 834 Brook Arbor Drive,
Morrisville, North Carolina 27560.
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<PAGE> 29
SERIES A PREFERRED STOCK
<TABLE>
<CAPTION>
AS OF MARCH 24, 2000
---------------------------------------------------
SHARES SHARES
BENEFICIALLY ACQUIRABLE PERCENTAGE OF ALL
NAME OF BENEFICIAL OWNER OWNED WITHIN 60 DAYS PREFERRED STOCK
------------------------ ------------ -------------- -----------------
<S> <C> <C> <C>
Skuli Mogensen.................................... 0 0 0%
Guojon Mar Guojonsson............................. 50,000 0 0.32%
Ericsson Inc...................................... 10,052,431 0 64.63%
Lars Boman........................................ 0 0 0%
Stig-Arne Larsson................................. 0 0 0%
Jeff Pulver....................................... 0 0 0%
Robert G. Quinn................................... 0 0 0%
Kjartan Pierre Emilsson........................... 0 0 0%
Skuli Valberg Olafsson............................ 0 0 0%
Gunnar Thoroddsen................................. 0 0 0%
Jon L. Arnason.................................... 0 0 0%
Fredrik Torstensson............................... 0 0 0%
All executive officers and directors as a group
(11 persons).................................... 50,000 0 0.32%
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS
The following table lists the members of the Board of Directors and
provides their ages and current positions with us. Biographical information for
each nominee is provided below.
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE COMPANY
---- --------------------------
<S> <C>
Guojon Mar Guojonsson..................... Director, Chairman of the Board, Chief Visionary
Skuli Mogensen............................ Director, Chief Executive Officer
Stig-Arne Larsson......................... Director
Lars Boman................................ Director
Jeffrey Pulver............................ Director
</TABLE>
Guojon Mar Guojonsson, age 27, is our co-founder and our Chief Visionary.
He has served as a director since December 1995 and as Chairman of the Board
since November 1997. In 1990, he founded OZ, hf, our predecessor in Iceland. Mr.
Guojonsson has worked extensively in the computer software, communications and
Internet industry over the last decade. He has served as a government consultant
on various projects and was responsible for designing a future vision for the
Ministry of Communication in Iceland in 1998.
Skuli Mogensen, age 31, is our co-founder and our Chief Executive Officer.
Mr. Mogensen has served as a director since December 1995. He has been involved
in several successful ventures in Scandinavia and has extensive international
business experience. Mr. Mogensen is responsible for our overall business
development, investment banking, major partners, general strategy and tactical
input in major contracts and key accounts.
Stig-Arne Larsson, age 57, is currently the Chief Executive Officer of Sal
Ventures AB, a telecom and information technology consulting firm. Previously,
he was the Chief Executive Officer and Chief Financial Officer of Telia Group,
the incumbent Swedish telecom operator, and Deputy Director General and Finance
Director at Swedish Telecom Televerket. Mr. Larsson is also a member of the
board of directors of TradeDoubler AB, Generic Systems AB and Castellum AB.
Jeffrey Pulver, age 37, is the President and founder of Pulver.com, Inc.,
an Internet based consulting firm that publishes Internet technology related
research, produces trade shows and related conferences and provides consulting
services to the telecommunications industry. Mr. Pulver is one of the leading
experts in the field of streaming audio and video technologies and their effect
on business communications. He is a pioneer
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<PAGE> 30
in the field of Internet telephony and is the founder of the Voice on the Net
Coalition, which aims to keep the Internet telephony industry free from
regulations.
Lars Boman, age 51, is Vice President and Head of the Internet Applications
Business Unit for Ericsson Radio Systems AB (ERA), Stockholm.
OFFICERS
Officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment. See "Executive Compensation."
There is no family relationship between any director or executive officer and
any other director or executive officer. Our current executive officers are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Skuli Mogensen.................... 31 Chief Executive Officer
Guojon Mar Guojonsson............. 27 Chief Visionary
Robert G. Quinn................... 42 Chief Financial Officer
Kjartan Pierre Emilsson........... 34 Chief Technology Officer
Skuli Valberg Olafsson............ 33 Chief Operating Officer
Fredrik Torstensson............... 30 Executive Vice President of Business Development and
Sales
Gunnar Thoroddsen................. 30 General Counsel
Jon L. Arnason.................... 39 Secretary and Treasurer
</TABLE>
Biographical information for Skuli Mogensen and Guojon Mar Guojonsson is
provided above. Our executive officers in 1999 were Skuli Mogensen (Chief
Executive Officer), Guojon Mar Guojonsson (Chief Visionary), Jon L. Arnason
(Chief Financial Officer) and Robert G. Quinn (General Counsel).
Robert G. Quinn has been Chief Financial Officer since April 2000. Prior to
serving as our CFO, Mr. Quinn was our General Counsel. Mr. Quinn was formerly
the CFO for Safety Syringes, Inc., Paulsson Geophysical Services, Inc., Net4TV
Corporation, and Novora, Inc., and served as our Interim CFO from May 1996
through May 1997. Mr. Quinn is a founding partner of Quinn & Quinn, a law firm,
and is a member of the boards of directors of About Publishing, Inc., Heart Sine
Technologies, Inc., Paulsson Geophysical Services, Inc. and WebMetro. He earned
his B.A. from California State University and his J.D. from Vanderbilt
University School of Law.
Kjartan Pierre Emilsson has been Chief Technology Officer since 1996 and
Chief Software Architect from 1995 to 1996. Prior to joining us he worked both
in physics research and Internet communication technology at the Institut
Non-Lineaire De Nice -- Sophia Antipolis, the Advanced Center for Mathematical
Studies at the University of Arizona and the Science and Engineering Institute
of the University of Iceland. Mr. Emilsson holds a Ph.D. in Mathematical Physics
from the University of Nice -- Sophia Antipolis.
Skuli Valberg Olafsson has been Chief Operating Officer since October 1999.
Prior to joining us he was Assistant Managing Director at EJS hf, the largest
systems integrator and solution developer in Iceland, specializing in banking,
finance, and retail solutions and services. Mr. Olafsson is a substitute
director of Iceland Telecom. He also serves as Chairman of SmartVR, Inc., a
wholly owned subsidiary of the Company. Mr. Olafsson holds a B.Sc. degree in
Industrial and Systems Engineering from the University of Florida and has
completed postgraduate studies in Total Quality Management and Process
Engineering.
Fredrik Torstensson has been Executive Vice President of Business
Development and Sales since April 2000. Prior to joining us, Mr. Torstensson
worked for six years for Ericsson, most recently as Director of Business
Development for Ericsson Mobile Phones. He holds a Bachelor Degree in
Engineering from the Chalmers University of Technology in Gothenburg, Sweden,
and a Master of International Management from the University of Texas.
Gunnar Thoroddsen has been in-house legal counsel since July 1998. Prior to
joining us, Mr. Thoroddsen was a partner at a large Icelandic law firm. Mr.
Thoroddsen holds a law degree from the University of Iceland and an LL.M. from
Duke University in North Carolina. He was admitted to the Icelandic Bar in 1995.
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<PAGE> 31
Jon L. Arnason has been Secretary and Treasurer since April 2000 and
formerly was Chief Financial Officer from 1997 to April 2000. Prior to joining
us, Mr. Arnason worked for three years for an accounting firm in Iceland,
representing Arthur Andersen Worldwide. Mr. Arnason is an International Chess
Grandmaster and was a member of the Icelandic Olympic team from 1978 to 1994. He
is three times Icelandic Champion and a former junior World Champion. He holds a
Cand. Oecon. Degree in Finance and Accounting from the University of Iceland.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table summarizes the annual and
long-term compensation of, and stock options held by our Chief Executive Officer
and the two additional most highly compensated executive officers whose annual
salaries and bonuses exceeded $100,000 in total during the fiscal year ended
December 31, 1999 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ----------------------- ------------
------------------------------ SECURITIES RESTRICTED ALL
SALARY BONUS OTHER ANNUAL UNDERLYING STOCK OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION OPTION AWARDS COMPENSATION
--------------------------- ---- ------- ----- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Skuli Mogensen.................... 1999 150,600 0 0 0 0 0
Chief Executive Officer 1998 129,763 0 0 0 0 0
1997 152,000 0 0 0 0 0
Guojon Mar Guojonsson............. 1999 151,710 0 0 0 0 0
Chairman of the Board, 1998 146,000 0 0 0 0 0
Chief Visionary 1997 132,000 0 0 0 0 0
Robert Quinn...................... 1999 103,640 0 0 0 0 0
Chief Financial Officer 1998 81,170 0 0 0 0 0
1997 175,000 0 0 0 0 0
</TABLE>
Option Grants in Last Fiscal Year
No stock options or SARs have been granted to any Named Officer in 1999.
Long-Term Incentive Plans
No long-term incentive plan was in effect in 1999.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
SHARES UNDERLYING UNEXERCISED
ACQUIRED ON VALUE UNEXERCISED IN-THE-MONEY
NAME EXERCISE REALIZED(1) OPTIONS OPTIONS(1)
---- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Skuli Mogensen............................. 0 N/A N/A N/A
Guojon Mar Guojonsson...................... 0 N/A N/A N/A
Robert Quinn............................... 200,000 $155,000 175,000 $188,125
</TABLE>
---------------
(1) Market value of underlying security at exercise date minus the exercise or
base price of in the money options.
EMPLOYMENT CONTRACTS
Skuli Mogensen has entered into an employment contract with us effective
until January 2002 by which he will receive an annual salary of $132,000 and an
annual bonus based on increases in revenues from the previous year, with the
bonus capped at 100% of salary. Under the employment contract, Mr. Mogensen
receives standard expatriation benefits. If Mr. Mogensen is terminated without
cause, he will receive a twelve-month continuation of salary and benefits and a
pro rata portion of his annual bonus. The employment contract includes a
non-competition provision.
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<PAGE> 32
Guojon Mar Guojonsson has entered into an employment contract with us
effective until January 2002 by which he will receive an annual salary of
$132,000 and an annual bonus based on increases in revenues from the previous
year, with the bonus capped at 100% of salary. Under the employment contract,
Mr. Guojonsson receives standard expatriation benefits. If Mr. Guojonsson is
terminated without cause, he will receive a twelve-month continuation of salary
and benefits and a pro rata portion of his annual bonus. The employment contract
includes a non-competition provision.
Robert G. Quinn has entered into an employment contract with us effective
until March 31, 2002 by which he will receive an annual salary of $250,000,
adjusted for locations where the cost of living is higher than that of
California, an annual bonus based on increases in revenues from the previous
year, with the bonus capped at 100% of salary, expatriation benefits, and
400,000 incentive stock options vesting quarterly over two years at an exercise
price of $1.17. If we terminate Mr. Quinn for any reason other than "good
cause," he will be paid the remainder of the salary due under the employment
agreement and the options will vest immediately.
Skuli Valberg Olafsson has entered into an employment contract with us, by
which he will receive an annual salary of $128,571, 400,000 options vesting
during the next 3 years, and use of an automobile. If Mr. Olafsson's employment
is terminated, he will receive six months base salary. All other benefits will
terminate as of the date of Mr. Olafsson's termination of employment. The
employment contract contains confidentiality and assignment of intellectual
property rights provisions.
DIRECTOR COMPENSATION
Commencing in 2000, outside directors will receive a nonstatutary stock
option to purchase up to 25,000 shares of Common Stock at 85% of the fair market
value of the Common Stock at the date of grant and the reimbursement of their
expenses associated with the performance of their duties.
STOCK OPTION PLANS
2000 EMPLOYEE STOCK PURCHASE PLAN
Our Board of Directors and shareholders have approved and adopted the 2000
Employee Stock Purchase Plan (the "Stock Purchase Plan") which is intended to
qualify under the provisions of Sections 421 and 423 of the United States
Internal Revenue Code of 1986, as amended (the "Code"). A total of 5,000,000
shares of Common Stock are reserved for issuance under the Stock Purchase Plan.
The Stock Purchase Plan is administered by the Board of Directors or a committee
appointed by the Board. Subject to certain limitations imposed by Section 423 of
the Code, any person employed by us, or by any of our majority-owned
subsidiaries that are designated by the Board, is eligible to participate in the
Stock Purchase Plan. The Stock Purchase Plan is to be implemented through a
series of 24-month offering periods. Each offering period is comprised of a
series of one or more successive purchase intervals which run from the first
payroll day on or after June 15 of each year to the last payroll day in December
of the same year and from the first payroll day in January of each year to the
last payroll day prior to June 15 of the following year. The last day of each
purchase interval is a purchase date under the Stock Purchase Plan. Should the
fair market value per share of Common Stock on any purchase date within an
offering period be less than the fair market value per share of Common Stock on
the start date of that offering period, then that offering period shall
automatically terminate immediately after the purchase of shares of Common Stock
on such purchase date, and a new offering period shall commence on the next
business day following such purchase date. The new offering period shall have a
duration of 24 months, unless a shorter duration is established by the plan
administrator within 5 business days following the start date of that offering
period.
On the first day of each offering period (or quarterly entry date, in the
case of a newly-eligible employee), each eligible employee will be granted an
option to purchase, on each purchase date during the offering period, a number
of shares of Common Stock determined by dividing the participant's accumulated
payroll deductions prior to such exercise date by the purchase price.
Notwithstanding the foregoing, no employee is permitted to subscribe for shares
under the Stock Purchase Plan, if, immediately after the grant of the option,
the employee would own 5% or more of the voting power or value of all classes of
our stock or of a parent or of any of our subsidiaries (including stock which
may be purchased under the Stock Purchase Plan or pursuant
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<PAGE> 33
to any other options), nor shall any employee be granted an option which would
permit the employee to purchase more than $25,000 worth of stock (determined
based on the fair market value of the shares at the time the option is granted)
under the Stock Purchase Plan in any calendar year.
Unless a participant withdraws from the Stock Purchase Plan, such
participant's option to purchase shares will be exercised automatically on each
purchase date of the offering period to purchase the maximum number of whole
shares that may be purchased at the exercise price with the accumulated payroll
deductions in the participant's account.
The purchase price per share at which shares are sold under the Stock
Purchase Plan shall be equal to the lower of 85% of the fair market value of the
Common Stock on the date of commencement of the applicable 24-month offering
period (or quarterly entry date, in the case of a newly-eligible employee) or
85% of the fair market value of the Common Stock on each purchase date of the
option. The fair market value of the Common Stock on a given date will be the
closing price of the Common Stock on the Stockholm Stock Exchange as of such
date.
The purchase price of the shares will be accumulated by payroll deductions
during an offering period. The payroll deductions may be any whole percentage
amount between 1% and 15%, as determined by the participant, of the
participant's cash earnings (as defined in the Stock Purchase Plan) on each
payroll date during the offering period. A participant may discontinue his or
her participation in the Stock Purchase Plan at any time during the offering
period, in which case he or she may obtain a refund of his or her payroll
deductions for the purchase interval in which the discontinuance occurs, and he
or she cannot rejoin the Stock Purchase Plan during the offering period. In
addition, a participant may, no more than once in any purchase interval, reduce
the rate of payroll deductions. Payroll deductions will commence on the first
payday following the offering date (or quarterly entry date, in the case of a
newly-eligible employee), and will continue at the same rate until the end of
the offering period unless the participant terminates participation in the Stock
Purchase Plan or reduces the rate of the payroll deductions. The amounts
collected through payroll deductions shall be credited to the participant's book
account under the Stock Purchase Plan, but no interest shall be paid on the
balance from time to time outstanding in such account. The amounts collected
from the participant shall not be required to be held in any segregated account
or trust fund and may be commingled with our general assets and used for general
corporate purposes. Any payroll deductions not applied to the purchase of shares
of Common Stock on any purchase date because they are not sufficient to purchase
a whole share of Common Stock shall be held for the purchase of Common Stock on
the next purchase date.
Appropriate adjustments may be made to the shares subject to purchase and
the purchase price per share in the event of certain changes in our
capitalization as set forth in the Stock Purchase Plan. Each outstanding option
shall automatically be exercised, immediately prior to the effective date of any
change in control (as defined in the Stock Purchase Plan), by applying the
payroll deductions of each participant for the purchase interval in which such
change in control occurs to the purchase of whole shares of Common Stock at a
purchase price per share equal to 85% of the lower of (i) the fair market value
per share of Common Stock on the first day of the offering period (or quarterly
entry date, in the case of a newly-eligible employee) in which such change in
control occurs or (ii) the fair market value per share of Common Stock
immediately prior to the effective date of such change in control. Options to
purchase Common Stock under the Stock Purchase Plan may not be transferred by a
participant except by the laws of descent and distribution, and may be exercised
during a participant's lifetime only by the participant.
1995 STOCK OPTION PLAN
On March 13, 2000, our Board of Directors approved, and on May 3, 2000 our
shareholders approved, an increase in the number of shares reserved for issuance
under our 1995 Stock Option Plan (the "1995 Plan") from 13,000,000 to
18,000,000.
Options granted under the 1995 Option Plan may be "incentive stock options"
as defined in Section 422 of the Code, or nonqualified options. Under the terms
of the Plan, incentive stock options may be granted only to our key employees.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the Common Stock as of the date of grant (110% of the fair
market value if the grant is to a
33
<PAGE> 34
person who owns more than 10% of the total combined voting power of all classes
of our capital stock or any of our affiliates). The Code and the Plan limit the
options first becoming exercisable in any calendar year which are treated as
incentive stock options to options covering $100,000 of aggregate value
(determined as of the date of the grant of the options) of Common Stock; options
first becoming exercisable in any calendar year in excess of this limit are
treated as nonqualified stock options. Nonqualified options may be granted under
the 1995 Option Plan at an exercise price of not less than 85% of the fair
market value of the Common Stock on the date of grant, or, if the grant is to a
person who owns more than 10% of the total combined voting power of all classes
of our capital stock or any of our affiliates, not less than 110% of the fair
market value of the Common Stock as of the date of grant. The purchase price of
stock acquired may be paid in cash or, at the discretion of the Committee, in
Common Stock or through a deferred payment or other arrangement. We may require
an optionee to give written assurances with respect to the optionee's business
experience and investment purposes if required under the then applicable
securities laws before exercising an option. If provided by the terms of the
option, the optionee may satisfy tax-withholding obligations relating to the
exercise of options by a cash payment or the withholding or delivery of Common
Stock with a fair market value equal to the obligations.
Unless otherwise provided in the applicable stock option agreement, upon
termination of employment of an optionee, all options that were then exercisable
will terminate three months (twelve months in the case of termination by reason
of disability and eighteen months in the case of death) after the termination of
employment. Upon an optionee's leave of absence, we may decide that such leave
will be treated as a termination for the purposes of determining the termination
date of the options or may suspend the vesting of the options.
Options granted under the 1995 Option Plan may not be exercised more than
ten years after the grant (five years after the grant if the grant is an option
to a person who owns more than 10% of the total combined voting power of all
classes of our capital stock or any of our affiliates). Options granted under
the 1995 Option Plan are not transferable and may be exercised only by the
respective grantees during their lifetime or by their heirs, executors or
administrators in the event of death (or, in the case of nonqualified options, a
transferee pursuant to a qualified domestic relations order). Shares subject to
cancelled or terminated options are reserved for subsequently granted options.
The number of options outstanding and the exercise price thereof are subject to
adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends.
The 1995 Plan may be administered by the Board of Directors or in the
Board's discretion by a committee designated by the Board. The 1995 Option Plan
is effective for ten years, unless sooner terminated or suspended.
1998 INCENTIVE STOCK PLAN
Two million shares of Common Stock are reserved for issuance under our 1998
Incentive Stock Plan (the "1998 Plan"). The Plan is administered by the Board of
Directors, which may delegate administration to a committee (in both cases, the
"Committee"). Under the 1998 Plan, the Committee may grant stock to directors,
executive officers and selected employees ("Participants") for which the
Participant is not obligated to pay additional consideration ("Stock Award") and
may grant Participants the right to purchase a specified number of shares of
Common Stock pursuant to a written agreement issued under the 1998 Plan ("Stock
Purchase Offer"). Shares of Common Stock that Participants may receive as a
Stock Award or under a Stock Purchase Offer may include restrictions on
transfer, repurchase rights, rights of first refusal and forfeiture provisions
as the Committee may determine. Under certain Stock Purchase Offers, we may
issue shares of Common Stock to employees upon the receipt of a note receivable
from the employee. The note receivable is secured by the shares of Common Stock,
does not have a maturity date and is interest free. Upon termination any amount
unpaid is settled through receipt of the original shares issued. The 1998 Plan
will terminate in 2008, unless terminated earlier by the Board of Directors. As
of March 31, 2000 no option to purchase shares of Common Stock was outstanding
under the 1998 Plan, no shares had been issued by us upon exercise of options
under the 1998 Plan, and 682,076 shares remained available for future grants
under the 1998 Plan.
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<PAGE> 35
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors. In July 1998 we loaned Skuli Mogensen and Guojon Mar Guojonsson
$75,000, respectively. The loans accrued interest at a rate of 8% per annum and
were due and payable on June 1, 1999. The total indebtedness for each of Messrs.
Mogensen and Guojonsson was $84,240 at December 31, 1999. Both of these loans
(including accrued interest) were repaid in full in April 2000.
Ericsson. In February 1999 we and Ericsson agreed to create a long-term
strategic partnership and to cooperate in the area of Internet-based
technologies, applications and services. We and Ericsson anticipated joint
development, testing, integration, marketing, sales, distribution, support and
maintenance of solutions based on relevant technologies and services. We signed
the GCDA with Ericsson that set the framework for current and future development
projects. The GCDA anticipates specific development projects to be structured
under various specific agreements. In the months following the execution of the
GCDA, Ericsson, Inc. invested $13.1 million in us in exchange for 10,052,431
shares of Series A Preferred stock.
We and Ericsson entered into a specific agreement under the GCDA to develop
iPulse(TM) solutions. iPulse(TM) is a client-server application merging secure
Internet messaging, message routing, IP telephony and traditional phone systems
in one application. As a starting point for the iPulse(TM) development project,
under the GCDA we licensed our server- and client technology to Ericsson. More
specifically, Ericsson acquired the license to use, modify and distribute our
server and client technology in connection with Ericsson's commercialization of
the iPulse(TM) solution. With respect to further development of technologies and
solutions for which Ericsson would fund development costs, the parties agreed
that ownership of specific results of the joint development work, including
iPulse(TM), would reside with Ericsson. As a net result of the GCDA, we receive
11.81% royalties of iPulse(TM) sales. We also retained a cross-license that
gives us the right to use, modify and distribute any such development results.
We and Ericsson also agreed that we would have the right to use, modify and
distribute an OZ-branded version of the iPulse(TM) solution as a complementary
service to the iPulse(TM) offering of Ericsson, without any charge by Ericsson.
To further establish the framework in which we would be free to develop and
distribute our proprietary products and services in combination with the joint
development of iPulse(TM), the parties concluded a value-added reseller
agreement in February 2000. The agreement is intended to secure the rights for
us to a) license and distribute iPulse(TM) directly to our customers, b) use the
iPulse(TM) software code to develop and market additional products and services
based upon the iPulse(TM) technology platform, and c) provide our customers with
hosting and maintenance services as a separate product offering running parallel
with the iPulse(TM) solution marketed by Ericsson. In addition, the value-added
reseller agreement grants Ericsson the non-exclusive right to buy or license any
such products and solutions that are developed under the terms of the
value-added reseller agreement.
We received from Ericsson $3,577,348 in development revenues in 1998 and
$3,909,533 in development revenues in 1999 related to the aforementioned
agreements. We also received a license fee of $1,000,000 from Ericsson during
1999, half of which has been deferred and will be recognized over the three-year
life of the GCDA.
Lars Boman, a director, is currently Vice President of Ericsson radio
systems AB (ERA). Ericsson nominated Mr. Boman to the Board of directors under
the terms of a shareholder rights agreement among us, Ericsson, Skuli Mogensen,
Guojon Mar Guojonsson and OZ Holdings LLC. Each of the parties to the
shareholders rights agreement agreed to vote a sufficient number of shares in
favor of one nominee designated by Ericsson. Fredrik Torstensson, our Executive
Vice President of Business Development and Sales, was Director of Business
Development for Ericsson Mobile Phones from 1998 until April 2000.
Under the shareholders rights agreement, certain holders of our securities
have the right to require registration of our securities under the Securities
Act of 1933 ("Securities Act"), subject to certain terms and conditions. See
Item 8, "Description of Securities -- Registration Rights." In addition,
Ericsson has the right to require us to purchase any of the Common Stock or
Series A Preferred stock it owns in certain circumstances, as further described
in Part I, Item 1, "Risk Factors -- We May Have to Repurchase Shares."
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<PAGE> 36
Until we effect a public offering of our securities, each party to the
shareholder rights agreement has the right of first refusal with respect to any
proposed transfer of our securities by another party other than a transfer to an
affiliate (as defined in the agreement); provided, however, that the first
1,000,000 shares transferred by Skuli Mogensen and Guojon Mar Guojonsson is not
subject to the right of first refusal and shares held by a former affiliate of a
party to the shareholder rights agreement shall become subject to the right of
first refusal at the time of the transaction by which the affiliate loses its
affiliate status. Upon notice by the transferor stating the purchase price and
terms of the third party offer to purchase the shares, the other parties have
the right for a period of ten days to elect to purchase a pro rata portion of
the offered shares. If none of the parties elects to purchase the shares, the
transferor may sell the shares to a third party purchaser.
If we sell shares of common stock or preferred stock or options, warrants
or other rights convertible or exercisable into shares of common stock or
preferred stock at any time until a public offering, each party to the
shareholder rights agreement has the right to purchase its pro rata portion of
the number of securities offered for sale. However, the parties shall not have
this right with respect to an issuance or sale of securities:
- in connection with a stock split;
- issuable to our employees, consultants or agents directly or through an
equity incentive arrangement, not to exceed in the aggregate 10% of the
outstanding capital stock as of February 4, 1999;
- issuable or issued upon conversion of our preferred stock or warrants,
rights or other securities convertible for common stock or preferred
stock;
- issuable or issued in connection with the acquisition of all or
substantially all of the stock or assets of a person or entity; and
- issuable or issued to a strategic investor that is not a competitor to us
or Ericsson, not to exceed 20% of the outstanding capital stock as of
February 4, 1999.
If we offer to sell shares not exceeding 20% of our capital stock
outstanding on February 4, 1999 to a strategic investor that is not a competitor
to us or Ericsson, then Ericsson has the right to purchase from us a certain
number of shares as determined by the formula set forth in the shareholder
rights agreement.
The parties to the shareholder rights agreement agree that until the
earlier of a public offering or February 4, 2001, Skuli Mogensen and Guojon Mar
Guojonsson will not transfer any shares other than to an affiliate if, after
such transfer, Skuli Mogensen and Guojon Mar Guojonsson would own in the
aggregate less than 30% of the outstanding capital stock on a fully diluted
basis.
Until a public offering, we have agreed in the shareholder rights agreement
that we will not without the consent of Ericsson increase the authorized number
of shares reserved under any stock option or purchase plan that results in the
aggregate number of shares of common stock issued or issuable to providers of
services to us exceeding [10,000,000] shares, issue any equity security or right
to acquire an equity security to any primary competitor of Ericsson, or enter
into any agreements with lenders providing for the borrowing of more than
$750,000 or issue any notes, bonds, debentures, or similar instruments with an
aggregate value in excess of $750,000.
ITEM 8. DESCRIPTION OF SECURITIES
The following is a summary of certain information concerning our shares and
certain provisions of our Articles and California law in effect on the date
hereof. This summary does not purport to be complete and is qualified in its
entirety by reference to the Articles and the laws of California. Any change to
the Articles is subject to approval by a general meeting of shareholders.
Our authorized share capital consists of two hundred seventy-five million
shares of Common Stock and twenty-five million shares of Preferred Stock. Our
Board of Directors is authorized to issue the Preferred Stock from time to time
in one or more series and is authorized to fix, alter or revoke the rights of
such series and to increase or decrease the number of shares of that series.
Twenty million shares of Preferred Stock have been designated as Series A
Preferred.
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<PAGE> 37
COMMON STOCK
As of March 24, 2000, 69,785,848 shares of Common Stock were outstanding
and held of record by 1,217 shareholders of record. The holders of Common Stock
are entitled to one vote per share on all matters to be voted upon by the
stockholders and to vote as a single class with the holders of Series A
Preferred stock, unless otherwise required by law and except in certain
circumstances enumerated in the Articles. Shareholders may have cumulative
voting rights with respect to the election of directors if one or more
shareholders gives notice at the shareholder's meeting of the intention to
cumulate votes prior to the commencement of voting. Holders of Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors out of legally available funds. In the event of our liquidation,
dissolution, or winding up, each holder of Common Stock will be paid an amount
equal to fifty cents per share (as adjusted for stock splits, stock dividends
and other recapitalizations) out of the proceeds remaining after the payment of
the liquidation preference to the Series A Preferred stock. Holders of Common
Stock have no preemptive, conversion, subscription or other rights. All
outstanding shares of Common Stock are fully paid and non-assessable, except for
802,000 shares of restricted Common Stock that were issued to certain employees
in consideration of non-recourse promissory notes in the aggregate amount of
$381,000.
SERIES A PREFERRED STOCK
As of March 24, 2000, 15,554,264 shares of Series A Preferred stock were
outstanding and held by 32 shareholders. Holders of Series A Preferred stock are
entitled to vote as a single class with holders of Common Stock with each holder
of Series A Preferred stock entitled to one vote on an as converted basis. The
approval of a majority of outstanding shares of Series A Preferred stock voting
separately as a class is required before we may:
- change the rights, preferences, privileges or restrictions so as to
adversely affect any shares of Series A Preferred stock or issue any
shares of Series A Preferred stock in excess of 20,000,000;
- reclassify any shares of Common Stock or give them preference or priority
as to dividends or assets superior to or on a parity with any shares of
Series A Preferred stock;
- increase the authorized number of Series A Preferred stock or authorize
or issue shares of any class or series of stock having any preference or
priority as to dividends, assets or voting rights superior to or on
parity with such preferences, priority or rights of Series A Preferred
stock;
- purchase or redeem Common Stock except pursuant to a stock restriction,
stock option, or any other agreement or plan providing for employee
ownership of our shares;
- sell or transfer all or substantially all of our assets or effect any
liquidation, consolidation or merger by us; or
- fix special qualifications of persons who may hold any shares of Series A
Preferred stock or restrict the right to transfer Series A Preferred
stock, unless required by law.
Holders of Series A Preferred stock are entitled to a one dollar
liquidation preference (subject to adjustment) in the event of our liquidation,
dissolution or winding up. The merger or consolidation by us in which the
shareholders own less than a majority of the outstanding shares of the surviving
corporation, or the sale of all or substantially all of our assets is deemed to
be a liquidation, dissolution or winding up.
Each share of Series A Preferred stock may be converted at the option of
the holder into shares of Common Stock based on a conversion ratio. After the
stock split on May 26, one share of Series A Preferred may be converted into two
shares of Common Stock. All shares of Series A Preferred stock will
automatically be converted into Common Stock upon the closing of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of Common Stock for our
account and resulting in our receipt of more than $5,000,000, at a purchase
price (prior to underwriters' commissions and offering expenses) of not less
than $0.50 per share (subject to adjustment). Our Board of Directors and
shareholders have recently approved an amendment to our Articles that provides
that each share of Series A Preferred stock shall also be automatically
converted into fully paid and nonassessable shares of
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<PAGE> 38
Common Stock at the conversion price then in effect in the event of a closing of
a public offering in connection with which our shares are listed or otherwise
designated for trading on any "designated offshore securities market" as that
term is defined in Regulation S under the Securities Act, provided that such an
offering covers the offer and sale of Common Stock for our account and results
in our receipt of more than $5,000,000 at a purchase price (prior to
underwriting commissions and offering expenses of not less than $0.50 per share
(subject to adjustment), and provides that when we reacquire shares of a series,
we are prohibited only from reissuing shares of the same series. Our Board of
Directors and shareholders also have recently approved amendments that would
designate a par value of $0.01 per share of Common Stock and Preferred Stock.
Each share of Series A Preferred stock is presently convertible into the number
of shares of Common Stock that results from dividing $1.00 by the conversion
price. The conversion price will be proportionately changed in the event we at
any time subdivide our outstanding Common Stock, issue a stock dividend on our
outstanding Common Stock, or combine or consolidate the outstanding shares of
Common Stock by reverse stock split or otherwise. The 2-for-1 stock split of our
Common Stock which took effect on approximately May 26, 2000 decreased the
conversion price to $0.50 per share of Common Stock. If we should at any time
make any distribution to the holders of Common Stock, then the holder of each
share of Series A Preferred stock is entitled to receive at the time of the
distribution the amount of property or the number of securities that the holder
would have received had the holder's Series A Preferred stock been converted.
Except in the case of a merger or consolidation described above, in the event of
any reorganization or reclassification of the outstanding shares of Common Stock
(other than certain changes relating to the par value or as a result of a stock
dividend or subdivision, split-up or combination of shares), or in the case of
any consolidation or merger by us (other than a merger in which we are the
surviving party and which does not result in any reclassification of the
outstanding shares of Common Stock), the holder of each share of Series A
Preferred stock shall have the right to convert the share into the kind and
amount of stock and other securities and property that would have been received
in such event by a holder of the number of shares of Common Stock into which the
shares of Series A Preferred was convertible immediately prior to such event.
The Articles also provide for the adjustment of the conversion price in the
event of certain diluting issues. The shares of Series A Preferred stock do not
have preemptive or subscription rights.
WARRANTS
In December 1996, we issued warrants to purchase up to a total of 308,000
shares at an exercise price of $0.55 per share to three individuals for
professional services performed in connection with the sale of our Common Stock
to investors. The warrants vested immediately and were exercisable until
September 30, 1997. The warrants were not exercised by the expiration date. In
April 1998 these warrants were extended and are exercisable until a public sale
of our Common Stock pursuant to an effective registration statement under the
Securities Act or a consolidation or merger by us into another corporation. As
of March 24, 2000, these warrants to purchase 308,000 shares of Common Stock
remain outstanding.
In December 1996, we issued warrants to purchase up to 40,000 shares of
Common Stock at an exercise price of $0.25 per share to a third party in
exchange for the transfer of an Internet domain to us. The warrants are fully
vested and are exercisable until the earlier of October 31, 2001 or immediately
prior to the closing of any consolidation or merger by us. As of March 24, 2000,
these warrants to purchase 40,000 shares of Common Stock remain outstanding.
In January 1997, we issued a warrant to purchase up to 80,000 shares of
Common Stock at an exercise price of $0.25 per share to a former employee for
services received. The warrant is fully vested and is exercisable until the
earlier of February 1, 2002 or immediately prior to the closing of any
consolidation or merger by us. As of March 24, 2000, this warrant to purchase up
to 80,000 shares of Common Stock remains outstanding.
REGISTRATION RIGHTS
We have entered into a shareholder rights agreement with Ericsson, Skuli
Mogensen, Guojon Mar Guojonsson and OZ Holdings LLC. The following is a brief
summary of certain registration rights and other provisions included in this
agreement. Because the following is a summary description only, it does not
include
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<PAGE> 39
the specific terms and provisions of the agreement. In addition, summary
descriptions of our obligation to repurchase shares from Ericsson under certain
conditions and rights of first refusal, participation rights and other
provisions with respect to the issuance and transfer of our securities in the
shareholders rights agreement are included in Item 1 ("Risk Factors") and Item 8
("Description of Securities"). These summaries are qualified in their entirety
by reference to the shareholder rights agreement which is included as an exhibit
to this registration statement.
Under the shareholder rights agreement, at any time after the earlier of
February 4, 2004 or six months after the effective date of a public offering, we
have agreed to register under the Securities Act the Common Stock outstanding
and/or, the Common Stock issued or issuable upon the conversion of Series A
Preferred stock or the exercise of warrants to purchase Common Stock requested
to be registered by the parties or their permitted assigns holding a majority of
such registrable securities. However, we may exercise our right once during any
twelve-month period to defer the registration of the registrable securities for
four months if our Board of Directors decides that it would be to our detriment
and the detriment of our shareholders to register the registrable securities. In
addition, we are not obligated to effect a registration if we have effected two
registrations upon the request of a majority of the holders; during a specified
time period when we are registering our securities for cash; or if the holders
propose to dispose of their registrable securities on a Form S-3. If we propose
to register any stock solely for cash in connection with a public offering,
these holders may also request that their securities also be registered. We will
bear all the expenses of registering the registrable securities other than
underwriting discounts and commissions. In an offering involving the
underwriting of shares, the underwriters may limit the number of shares to be
underwritten as a result of marketing factors subject to certain exceptions. In
connection with the registration of the registrable securities, we will
indemnify each holder for any losses incurred with respect to any material
misstatements in the prospectus or any violations of any securities laws. Each
holder will indemnify us against losses based on our reliance on the material
furnished to us which leads to a misstatement in the prospectus or a violation
of securities laws.
We will effect a registration of Common Stock on a Form S-3 if requested by
the holders under the shareholders rights agreement at least 25% of the
registrable securities, subject to certain exceptions set forth in the
shareholders rights agreement. We will bear the costs for the registration on
the Form S-3 other than underwriters' discounts or commissions.
Subject to certain terms and conditions, a holder under the shareholder
rights agreement may transfer its right to cause us to register registrable
securities if such assignee holds at least one percent of the registrable
securities initially issued to the holder.
Each of the parties to the shareholder rights agreement agrees that, during
the period (not to exceed 180 days) specified by us or an underwriter following
the date of the final prospectus to effect a registration under the Securities
Act, it shall not to the extent requested by us or an underwriter transfer or
dispose of any of our securities except for Common Stock included in the
registration if it is our first such registration statement covering Common
Stock or other securities to be sold to the public in an underwritten offering
and all officers, directors, holders of at least 1% of our voting securities,
and persons with registration rights enter into similar agreements.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
Currently there is no public trading market for our Common Stock in the
United States. No class of our capital stock is quoted on either the National
Quotations Bureau "Pink Sheets" or the NASD OTC Bulletin Board.
As of March 31, 2000 options to purchase 5,944,266 shares of Common Stock
were outstanding under the 1995 Stock Option Plan, no options were outstanding
under the 1998 Incentive Stock Plan, and
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<PAGE> 40
15,554,264 shares of Series A Preferred stock convertible into 31,108,528 shares
of Common Stock were outstanding. As of March 31, 2000, warrants to purchase
428,000 shares of Common Stock were outstanding.
DIVIDENDS
We have not paid dividends since our formation and do not anticipate paying
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, business, results of operations, capital requirements
and such other factors as the Board of Directors deems relevant.
HOLDERS
As of March 24, 2000, there were 1,217 holders of record of Common Stock
and 32 holders of record of Series A Preferred stock.
As of March 24, 2000, 69,785,848 shares of Common Stock and 15,554,264
shares of Series A Preferred stock were outstanding. Shares held by our
affiliates, as defined in Rule 144 of the Securities Act, may be sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as Rule 144.
RULE 144
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the effective date of this Registration Statement a number of shares of Common
Stock that does not exceed the greater of (a) 1% of the then outstanding shares
of common stock, or (b) the average weekly trading volume during the four
calendar weeks immediately preceding the date on which the notice of sale is
filed with the U.S. Securities and Exchange Commission, provided certain manner
of sale and notice requirements and requirements as to the availability of
current public information about us are satisfied. A person, or persons whose
shares are aggregated, who is not deemed to have been our affiliate at any time
during the 90 days immediately preceding the sale and who has beneficially owned
his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for the Common Stock, the
personal circumstances of the sellers and other factors. Currently, there is no
public trading market for the Common Stock in the United States, and we cannot
be certain that an active trading market will ever develop or be sustained.
Should a market develop for our Common Stock, any future sale of substantial
amounts of the Common Stock may adversely affect the market price of the Common
Stock.
RULE 701
In general, under Rule 701, any of our employees, consultants or advisors
who purchases or receives our shares in connection with a compensatory plan will
be eligible to resell his shares beginning 90 days after the date on which this
Registration Statement becomes effective. Non-affiliates will be able to sell
their shares subject only to the manner-of-sale provisions of Rule 144.
Affiliates will be able to sell their shares without compliance with the holding
period requirements of Rule 144.
REGISTRATION STATEMENT ON FORM S-8
We intend to file a registration statement on Form S-8 under the Securities
Act after this Registration Statement becomes effective to register the shares
of common stock subject to outstanding stock options reserved for issuance under
our stock option, incentive and purchase plans, thus permitting the resale of
such shares by nonaffiliates without restriction under the Securities Act. As of
March 31, 2000, there were
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<PAGE> 41
outstanding options to purchase approximately 5,944,266 shares of Common Stock
under our 1995 Stock Option Plan. We have also entered into the shareholder
rights agreement pursuant to which we have agreed under certain conditions to
register shares of common stock. See Part I, Item 8 "Description of Securities."
ITEM 2. LEGAL PROCEEDINGS
We are not a party to any legal proceeding in any court, and management is
not aware of any contemplated proceedings by any governmental authority against
us.
A former officer and director who was terminated in December 1998 notified
us in July 2000 that he is claiming the right to rescind his termination
agreement and general release and obtain additional payments under his
employment agreement. He has also threatened to file a class action lawsuit
against certain of our officers alleging securities fraud. He has demanded
$200,000 and the issuance of 500,000 shares of our Common Stock to settle these
claims. We believe these claims are without merit and intend to defend
vigorously any proceedings that may be instituted.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In January 1997, we issued a warrant to purchase up to 80,000 shares of
Common Stock at an exercise price of $0.25 per share to a former employee for
services received. The warrant is fully vested and is exercisable until the
earlier of February 1, 2002 or immediately prior to the closing of any
consolidation or merger by us. As of March 24, 2000, this warrant to purchase up
to 80,000 shares of Common Stock remains outstanding. The sale was made in
reliance on Regulation S under the Securities Act. No commissions were paid by
us.
Between March 28, 1997 and October 22, 1997, 5,380,000 shares of Common
Stock were issued to eighteen individual and institutional Japanese investors
for an aggregate purchase price of $3,497,000. Of these shares, 200,000 shares
were issued in exchange for professional services as well as monetary
consideration. The sales were made in reliance on Regulation S under the
Securities Act. Yamaichi Securities served as an agent for the placement of some
of these shares. No commissions were paid by us.
On October 29, 1997 and November 6, 1997, we issued 319,646 shares of
Common Stock to two Icelandic investors for an aggregate purchase price of
$207,770. The sales were made in reliance on Regulation S under the Securities
Act. No commissions were paid by us.
In June 1998 we sold and issued a series of 1998 Convertible Bonds in
consideration for an aggregate amount of $2,500,000. The Convertible Bonds could
be converted at the election of the bondholder any time prior to June 1, 1999
for that number of shares equal to the face value of the bond, divided by $0.65.
Prior to June 1999, all of the holders of the Convertible Bonds converted their
bonds into an aggregate of 3,846,150 shares of Common Stock at a value of $0.65
per share. The sales were in reliance on Regulation S under the Securities Act.
No commissions were paid by us.
On March 16, 1999, we issued and sold 1,000,000 shares of Common Stock to
Landsbref hf. for resale to Icelandic individuals and institutional investors.
On May 12, 1999, we issued and sold an additional 1,000,000 shares of Common
Stock to Fjarfestingabanki atvinnulifsins hf. for resale to Icelandic
individuals and institutional investors. The purchase price was $1.90 per share
from which the purchasers received a ten percent discount. The sales were made
in reliance on Regulation S under the Securities Act.
In each of the six preceding paragraphs, the issuances were made to buyers
who were outside the United States and no directed selling efforts were made in
the United States by us or any of our agents. The buyers have certified that
they are not United States persons and have agreed to the resale provisions of
Regulation S. The shares of Common Stock contain a legend regarding the
restrictions on transfer, and we will not register any transfer of our shares
not made in accordance with Regulation S.
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On December 14, 1997, the Board of Directors and shareholders approved and
adopted a plan of recapitalization. Under this plan, all shareholders who paid
$0.2344 or more per share of Common Stock were permitted to exchange two shares
of Common Stock for one share of Series A Preferred Stock. The exchange was
terminated on February 15, 1999. As of December 31, 1998 and 1999, an aggregate
of 10,797,510 and 11,370,436 shares of Common Stock had been exchanged for
Series A Preferred Stock, respectively. The exchange was made in reliance on
Sections 3(a)(9) and 4(2) under the Securities Act.
During 1998, 1999 and as of March 31, 2000, we issued respectively 746,000,
120,000 and 160,000 shares of Common Stock to employees in exchange for payments
of notes receivable in the amount of $74,600, $141,000 and $188,000,
respectively. During 1999 and as of March 31, 2000, we received payments of
$15,400 and $12,400 in exchange for 144,000 and 124,000 shares respectively of
Common Stock. On December 31, 1998 and 1999 and as of March 31, 2000, notes
receivable in the amount of $74,600, $200,200 and $375,800 were outstanding for
646,000, 712,000 and 748,000 shares of Common Stock, respectively. These shares
of Common Stock were issued under the 1998 Incentive Stock Option Plan which
provides that we may issue shares of Common Stock upon the receipt of a note
receivable from the employee. These shares were issued in reliance of Rule 701
under the Securities Act.
In 1998 and 1999 we issued 811,000 and 1,513,484 shares of Common Stock
respectively upon exercise of options issued under our 1995 Option Plan. These
sales were made in reliance on Rule 701 under the Securities Act.
In 1998 and 1999 we issued 269,110 and 122,814 shares of Common Stock
respectively as bonuses to employees under the 1998 Incentive Stock Option Plan.
These sales were made in reliance on Rule 701 under the Securities Act.
In February 1999, we entered into a Stock and Warrant Purchase Agreement
with Ericsson, Inc. under the terms of which Ericsson, Inc. had the right to
purchase up to 10,052,431 shares of Series A Preferred stock at $1.30 per share.
In June 1999, Ericsson, Inc. exercised its warrant by purchasing 4,769,231
shares of Series A Preferred stock for an aggregate purchase price of
$6,200,000. In October 1999, Ericsson, Inc. exercised the balance of its
purchase rights by purchasing 5,283,200 shares of Series A Preferred stock for
an aggregate purchase price of $6,868,160. The sales were made in reliance on
Section 4(2) of the Securities Act. We believe that Ericsson, Inc. is an
accredited investor as defined in Regulation D of the Securities Act. No
commissions were paid by us.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code, as amended, allows us to
indemnify our officers, directors, employees and agents for any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that the person is or was
our agent against expenses, judgments, fines and settlements actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in our best
interests and, in the case of a criminal proceeding, had no reasonable cause to
believe the conduct of the person was unlawful.
Article V of our Articles provides that our directors shall be protected
from personal liability from monetary damages to the fullest extent permitted by
law. Article IV of the Company's Bylaws also contains a provision for the
indemnification of our directors and agents.
We have entered into an indemnification agreement with certain of our
directors and certain of our executive officers, among others, to provide them
with the maximum indemnification allowed under our Bylaws and applicable law,
including indemnification for all judgments and expenses incurred as the result
of any lawsuit in which such person is named as a defendant by reason of being
our director, officer or employee, to the extent such indemnification is
permitted by the laws of California.
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OZ.COM
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Independent Accountants........................... 44
Consolidated Balance Sheets as of December 31, 1998, and
1999...................................................... 45
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... 46
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) and Comprehensive Income for the years ended
December 31, 1997, 1998 and 1999.......................... 47
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 48
Notes to Consolidated Financial Statements.................. 49-59
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999..................................... 60
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1999 and 2000................ 61
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1999 and 2000................ 62
Consolidated Statements of Comprehensive Income (unaudited)
for the three months ended March 31, 1999 and 2000........ 63
Notes to Consolidated Financial Statements (unaudited) for
the three months ended March 31, 1999 and 2000............ 64
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of OZ.COM.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity (deficit) and comprehensive income and of cash flows present fairly, in
all material respects, the financial position of OZ.COM and its subsidiaries at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for each of the three years ended December 31, 1999 in conformity with
generally accepted accounting principles in the United States. These financial
statements are the responsibility of OZ.COM'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 generally accepted
auditing standards 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 EHF
Reykjavik, Iceland
April 14, 2000, except for
Note 17 which is as of
May 3, 2000
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OZ.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 368,275 $ 13,603,592
Trade accounts receivable................................. 625,357 22,456
Trade accounts receivable from shareholder (Note 2)....... 292,634 1,391,816
Prepaid expenses and other current assets................. 143,461 406,232
------------ ------------
Total current assets................................... 1,429,727 15,830,328
Property and equipment, net (Note 3)........................ 1,525,648 2,079,531
Other assets................................................ 215,049 130,510
------------ ------------
Total assets........................................... $ 3,170,424 $ 17,634,137
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft............................................ $ 383,304 $ --
Trade accounts payable.................................... 380,923 188,305
Accrued liabilities (Note 4).............................. 416,978 505,133
Current portion of deferred revenue....................... -- 171,920
Current portion of notes payable (Note 5)................. 25,244 24,069
Current portion of capital lease obligations (Note 7)..... 14,953 3,384
------------ ------------
Total current liabilities.............................. 1,221,402 892,811
Notes payable (Note 5).................................... 523,317 505,445
Deferred revenue.......................................... -- 171,920
Convertible bonds (Note 6)................................ 2,500,000 --
Capital lease obligations, net of current portion (Note
7)..................................................... 4,140 --
------------ ------------
Total liabilities...................................... 4,248,859 1,570,176
------------ ------------
Redeemable preferred stock, $0.01 par value 10,052,431
shares issued and outstanding (liquidation value
$10,052,431)........................................... -- 13,068,160
Commitments and contingencies (Note 16)
Shareholders' equity (deficit): (Note 8)
Preferred Stock, $0.01 par value:
5,398,755 and 5,685,218 shares issued and outstanding,
respectively (liquidation value $5,685,218).......... 5,012,574 5,384,976
Common stock, $0.01 par value:
275,000,000 shares authorized:
61,449,556 and 68,359,078 shares issued and
outstanding, respectively............................ 614,496 683,591
Additional paid in capital................................ 3,601,688 9,880,238
Notes receivable from shareholders (Note 12)................ (74,600) (200,200)
Deferred compensation (Note 10)............................. (114,292) (376,668)
Accumulated deficit including other comprehensive income of
$71,906 and $56,886, respectively......................... (10,118,301) (12,376,136)
------------ ------------
Total shareholders' equity (deficit)................... (1,078,435) 2,995,801
------------ ------------
Total liabilities and shareholders' equity (deficit)... $ 3,170,424 $ 17,634,137
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE> 46
OZ.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE............................................. $ 926,325 $ 4,119,815 $ 5,174,398
----------- ----------- -----------
OPERATING EXPENSES
Cost of sales..................................... 1,496,918 2,059,389 3,309,870
Sales and marketing............................... 1,597,727 1,236,314 1,924,807
General and administrative........................ 2,474,764 2,065,788 2,256,542
Research and development.......................... 225,527 446,212 487,388
----------- ----------- -----------
Total operating expenses.................. 5,794,936 5,807,703 7,978,607
----------- ----------- -----------
Operating loss............................ (4,868,611) (1,687,888) (2,804,209)
----------- ----------- -----------
Interest income..................................... 87,439 35,187 399,322
Interest expense (Note 5 & 6)....................... (111,430) (169,824) 31,251
Other income (expense), net......................... 39,659 11,138 130,821
----------- ----------- -----------
Loss before provision for income taxes.... (4,852,943) (1,811,387) (2,242,815)
Income taxes (Note 13).............................. 0 0 0
----------- ----------- -----------
Net loss.................................. $(4,852,943) $(1,811,387) $(2,242,815)
=========== =========== ===========
Loss per share: (Note 9)
Basic.......................................... $ (0.07) $ (0.03) $ (0.03)
=========== =========== ===========
Diluted........................................ $ (0.07) $ (0.03) $ (0.03)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 47
OZ.COM
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1998 1999
----------------------- ------------------------- ------------------------
SHARES $ SHARES $ SHARES $
---------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock
Balance, beginning of year.......... -- -- -- -- 5,398,755 5,012,574
Conversion of common shares to
Series A Preferred................ -- -- 5,398,755 5,012,574 286,463 372,402
---------- ---------- ----------- ----------- ---------- -----------
Balance, end of year.............. -- -- 5,398,755 5,012,574 5,685,218 5,384,976
========== ========== =========== =========== ========== ===========
Common Stock and Additional Paid in
Capital
Balance, beginning of year.......... 65,467,310 5,265,212 71,166,956 9,120,748 61,449,556 4,216,184
Common stock issued................. 5,499,646 3,574,933 2,000,000 3,510,000
Employee stock options exercised.... -- -- 811,000 81,100 1,513,484 280,348
Common stock issued for professional
services.......................... 200,000 130,000 -- -- -- --
Common stock issued for employee
compensation...................... -- -- 269,110 26,910 122,814 79,229
Deferred compensation from stock
option grants..................... -- 110,333 -- -- -- 350,470
Issuance of warrants to purchase
common stock...................... -- 40,270
Convertible bonds converted to
common stock...................... -- -- -- -- 3,846,150 2,500,000
Conversion of common stock to
preferred stock................... -- -- (10,797,510) (5,012,574) (572,926) (372,402)
---------- ---------- ----------- ----------- ---------- -----------
Balance, end of year.............. 71,166,956 9,120,748 61,449,556 4,216,184 68,359,078 10,563,829
========== ========== =========== =========== ========== ===========
Notes Receivable from Shareholders
(Note 12)
Balance, beginning of year.......... -- -- (74,600)
Notes receivable issued............. -- (74,600) (141,000)
Payments received................... -- -- 15,400
---------- ----------- -----------
Balance, end of year.............. -- (74,600) (200,200)
========== =========== ===========
Deferred Compensation
Balance, beginning of year.......... (82,667) (165,292) (114,292)
Deferred compensation arising from
option grants..................... (110,333) -- 350,470
Amortization of deferred
compensation...................... 27,708 51,000 88,094
---------- ----------- -----------
Balance, end of year.............. (165,292) (114,292) (376,668)
========== =========== ===========
Accumulated Deficit
Balance, beginning of year.......... (3,518,970) (8,310,431) (10,118,301)
---------- ----------- -----------
Net loss.......................... (4,852,943) (1,811,387) (2,242,815)
Other comprehensive income:
Translation adjustments........... 61,482 3,517 (15,020)
---------- ----------- -----------
Comprehensive income.............. (4,791,461) (1,807,870) (2,257,835)
---------- ----------- -----------
Balance, end of year.............. (8,310,431) (10,118,301) (12,376,136)
========== =========== ===========
Total shareholders' equity
(deficit)....................... 645,025 (1,078,435) 2,995,801
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE> 48
OZ.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(4,852,943) $(1,811,387) $(2,242,815)
Adjustments to reconcile net loss to net cash provided
(used) in operating activities:
Depreciation....................................... 309,180 288,471 344,000
Noncash charges (credits), net..................... 170,270 (129,004) 99,920
Amortization of deferred compensation.............. 27,708 51,000 88,094
Changes in operating assets and liabilities:
Increase in trade accounts receivable.............. (200,394) (604,644) (496,281)
(Increase) decrease in prepaid expenses and other
assets........................................... 25,299 (83,761) (165,744)
Increase (decrease) in trade accounts payable...... (135,382) 268,050 (192,618)
Increase (decrease) in accrued liabilities......... (66,105) 223,731 260,075
Increase in deferred revenue....................... -- -- 171,920
----------- ----------- -----------
Net cash used in operating activities.............. (4,722,367) (1,797,544) (2,133,449)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment.................... (193,981) (547,349) (948,932)
Proceeds from sales of furniture and equipment........ -- -- 17,875
----------- ----------- -----------
Net cash used in investing activities................. (193,981) (547,349) (931,057)
----------- ----------- -----------
Cash flows from financing activities:
Bank overdraft........................................ 121,340 261,964 (383,304)
Issuance of preferred stock........................... -- -- 13,068,160
Issuance of common stock.............................. 3,574,933 -- 3,510,000
Exercise of employee stock options.................... -- 6,500 154,748
Issuance of notes payable and convertible bonds....... 54,476 2,500,000 --
Payments of notes payable............................. (182,465) (39,986) (19,047)
Payment of capital lease obligation................... (46,634) (22,939) (15,714)
----------- ----------- -----------
Net cash provided by financing activities............. 3,521,650 2,705,539 16,314,841
----------- ----------- -----------
Effect of currency exchange rates on cash............... 61,482 3,518 (15,020)
----------- ----------- -----------
Net increase (decrease) in cash....................... (1,333,216) 364,164 13,235,317
Cash and cash equivalents at beginning of period........ 1,337,327 4,111 368,275
----------- ----------- -----------
Cash and cash equivalents at end of period.............. $ 4,111 $ 368,275 $13,603,592
=========== =========== ===========
Supplemental cash flow information:
Cash paid for interest................................ $ 54,660 $ 55,235 $ 49,698
=========== =========== ===========
Supplemental schedule of non-cash investing and
financing activities:
Conversion of bonds to common stock................... $ -- $ -- $ 2,500,000
=========== =========== ===========
Conversion of common stock to preferred stock......... $ -- $ 5,012,574 $ 372,402
=========== =========== ===========
Common stock issued for notes......................... $ -- $ 74,600 $ 141,000
=========== =========== ===========
Common stock issued for employee compensation......... $ -- $ 26,910 $ 79,229
=========== =========== ===========
Common stock issued for professional services......... $ 130,000 $ -- $ --
=========== =========== ===========
Capital lease obligations for equipment............... $ 44,185 $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE> 49
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
OZ.COM was incorporated in California on December 14, 1995. OZ.COM and its
subsidiaries (the Company) are developers and vendors of software and services,
including hosting services, that enable the delivery of wireless and
Internet-based services over multiple communications networks, including
wireless networks, the public fixed telephone network and the Internet. The
Company conducts its marketing and sales in North America, Iceland and Sweden,
while, design and development activities are primarily conducted in Iceland.
Through December 1999 the Company's business has primarily been in the
development of customer specific software products.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
OZ.COM and its subsidiaries. Significant intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in its consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily
convertible into cash or have maturities of three months or less on the date of
purchase.
Financial Instruments
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash and cash equivalents
and accounts receivable. Cash and cash equivalents are held with financial
institutions with high credit standings.
The customer base currently consists of one large related party customer.
The concentration of credit risk with this one customer is not considered
significant due to their size and credit standing. See the discussion of related
parties in Note 2. Cost approximates market value for all financial instruments.
Property and Equipment
Property, and equipment, including property under capital leases, are
recorded at cost. The Company uses the straight line method in computing
depreciation based on the estimated useful lives of the assets. The annual
provisions for depreciation have been computed principally in accordance with
the following ranges of asset lives: buildings -- 50 years; computer equipment
and software -- 2 to 3 years; furniture and leasehold improvements -- 5 years;
and other equipment -- 5 years.
Maintenance and repairs are expensed as incurred, while capital
improvements to assets are recorded as an addition to the original cost of the
asset and depreciated over the remaining useful life of the related asset. When
assets are retired or otherwise disposed of, the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
reflected in the statement of operations.
49
<PAGE> 50
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
As appropriate, management determines whether any property or equipment has
been impaired based on the criteria established by Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of." The Company has made no
adjustments to the carrying values of property and equipment during the years
ended December 31, 1997, 1998, and 1999.
Capitalized Research and Development Costs
Software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until
the product is available for general release to customers. To date, the
establishment of technological feasibility of products and general release of
such software have substantially coincided. As a result, software development
costs qualifying for capitalization have been insignificant and, therefore, the
Company has not capitalized any such costs.
Research and Development
The Company expenses all research and development costs as incurred.
Revenue Recognition
The Company's revenues consist primarily of fees for software development
received from contracted research and development agreements; additionally,
there are some software license revenues. Revenues from contracted research and
development agreements are recognized at the completion and acceptance of the
project by the customer provided that the fee is fixed and determinable, and
collection is considered probable by management. Software license revenues
consist of sales of software licenses, which are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management.
Amounts received in advance of satisfying revenue recognition criteria are
classified as deferred revenue in the accompanying consolidated balance sheets.
The Company generally warrants that its products will function
substantially in accordance with documentation provided to customers for
approximately twelve months following initial shipment to the customer. As of
December 31, 1999, the Company has not incurred any significant expenses related
to warranty claims.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities using enacted statutory rates in the relevant tax
jurisdictions. A valuation allowance against net deferred tax assets is
established if, based on the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. No provision is
made for U.S. income taxes applicable to undistributed earnings of foreign
subsidiaries that are indefinitely reinvested in foreign operations.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, whose functional currency
is the local currency, are translated at the year-end exchange rates. Revenues
and expenses are translated at the average rates of
50
<PAGE> 51
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange prevailing during the year. The adjustments resulting from translating
the financial statements of such foreign subsidiaries is included in accumulated
other comprehensive income, which is reflected as a separate component of
shareholders' equity.
Earnings per Share
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the year. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding during the year plus the effect of common stock issuable upon the
exercise of employee stock options using the treasury stock method and the
effect of convertible debt, conversion of preferred shares, or common stock
warrants using the if converted method. Reconciliations of the net loss per
share computations for the years ended December 31, 1997, 1998 and 1999 are
included in Note 9.
Employee Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method as set forth in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The alternative fair value accounting provided
for under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation," is discussed in Note 10.
Stock-Based Compensation for Non-Employees
The Company periodically settles fees incurred for professional services
through the issuance of common stock. The number of shares of common stock equal
to the fees incurred is calculated and issued based upon the fair value of
common stock on the date of issuance. The Company records an expense equal to
the fair value of common stock issued.
Recently Issued Accounting Pronouncements:
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 is effective for
fiscal years beginning after January 1, 2001. The Company does not believe the
adoption of SFAS 133 will have a material effect on the Company's results of
operations or financial condition.
2. RELATED PARTY TRANSACTIONS:
In February 1999, the Company entered into a stock and warrant purchase
agreement with Ericsson, Inc. pursuant to which Ericsson received a warrant and
other purchase rights to purchase up to 10,052,431 shares of the Company's
Series A Preferred stock at $1.30 per share, at the time equal to approximately
20% of the capital stock of the Company. In June 1999, Ericsson exercised a
portion of its warrant by purchasing 4,769,231 shares of the Company's Series A
Preferred stock for total cash consideration of $6,200,000. In October 1999,
Ericsson exercised the balance of its warrant by purchasing 5,283,200 shares of
the Company's Series A Preferred stock for total cash consideration of
$6,868,160. On the date of issuance of the stock warrants to Ericsson, the fair
value of the Company's common stock was approximately $0.10 and the price of the
warrants was $1.30. The warrants have a contracted life of nine months and based
upon a fair value calculation the value of the warrants is insignificant.
In February 1999, Ericsson and the Company entered into two agreements,
which laid the basis for a strategic partnership between the two companies.
Pursuant to these agreements, the companies agreed to cooperate in the area of
Internet-based technologies, applications and services, including, but not
limited to, development, testing, integration, marketing, sales, distribution,
support and maintenance of solutions based
51
<PAGE> 52
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the technologies and services of each company. The parties' co-operation is
non-exclusive and each party's participation is based on its individual
evaluation of the commercial viability and expected benefits of the
relationship. The initial terms of the agreements expire on December 31, 2001,
but the agreements renew automatically for one year terms until terminated by
either party.
Under the terms of one of the agreements, as long as Ericsson owns shares
representing 5% or more of the capital stock of OZ.COM, OZ.COM must inform
Ericsson of any proposal to license or sell any of the technology covered in the
agreement or to enter into any transaction with any principal competitor of
Ericsson. Ericsson may opt to enter into the proposed transaction on the same
terms and conditions.
For the years ended December 31, 1997, 1998 and 1999, the Company
recognized revenue from Ericsson in the amounts of $798,500, $3,577,348 and
$4,565,693, respectively. At year end all amounts due to the Company from
Ericsson in connection with development agreements have been classified as trade
accounts receivables from shareholders in the accompanying consolidated balance
sheets.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Buildings................................................. $ 991,691 $ 1,383,156
Computer equipment and software........................... 874,097 1,272,654
Computer equipment under capital leases................... 197,252 197,252
Furniture and leasehold improvements...................... 404,778 400,940
Other equipment........................................... 62,281 61,695
----------- -----------
2,530,099 3,315,697
Less accumulated depreciation............................. (1,004,451) (1,236,166)
----------- -----------
$ 1,525,648 $ 2,079,531
=========== ===========
</TABLE>
At December 31, 1998 and 1999, accumulated depreciation on computer
equipment under capital leases is $190,708, and $197,252, respectively.
Depreciation expense is $309,180, $288,471 and $344,000 for 1997, 1998 and 1999,
respectively.
4. ACCRUED LIABILITIES:
Accrued liabilities is comprised of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accrued vacations........................................... $168,591 $239,058
Other payroll liabilities................................... 133,390 189,389
Accrued interest on bonds................................... 100,000 --
Other accrued liabilities................................... 14,997 76,686
-------- --------
$416,978 $505,133
======== ========
</TABLE>
52
<PAGE> 53
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE:
The Company has entered into several long-term borrowing agreements with
Icelandic lenders. At December 31, 1998 and 1999 the following borrowings are
outstanding:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OUTSTANDING AT
DECEMBER 31,
ANNUAL INTEREST --------------------
LENDER RATE MATURITY DATE 1998 1999
------ --------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Bunaoarbanki Islands hf......... -- July 1, 1999 $ 1,457 $ --
Bunaoarbanki Islands hf(1)...... 6.85% Dec. 15, 2021 148,461 150,219
Bunaoarbanki Islands hf(2)...... 7.35% June 15, 2009 124,707 114,167
Osta-og smjorsalan sf(3)........ 6.00% Oct. 1, 2022 273,936 265,128
-------- --------
$548,561 $529,514
======== ========
</TABLE>
---------------
(1) The bank note payable is denominated in Icelandic Krona with a original
principal balance of ISK 10 million. The original principal balance is
adjusted monthly for fluctuations in the Icelandic consumer price index, in
accordance with the terms of the note agreement. At December 31, 1998 and
1999 the adjusted principal balances are ISK 10,291,317 and ISK 10,868,347,
respectively. Principal payments commence on July 15, 2009. Payments are
made monthly on a pro-rata basis over the remaining 150 months of the note
term. Interest payments are made on a monthly basis.
(2) The bank note payable is denominated in Icelandic Krona with a original
principal balance of ISK 10 million. The original principal balance is
adjusted annually for fluctuations in the Icelandic consumer price index, in
accordance with the terms of the note agreement. At December 31, 1998 and
1999 the adjusted principal balances are ISK 8,644,705 and 8,259,942,
respectively. Principal payments commenced on January 15, 1997. Principal
and interest payments are made monthly on a pro-rata basis of the remaining
principal plus accrued interest balance.
(3) Note payable is denominated in Icelandic Krona with a original principal
balance of ISK 20 million. The original principal balance is adjusted
annually for fluctuations in the Icelandic consumer price index, in
accordance with the terms of the note agreement. At December 31, 1998 and
1999 the adjusted principal balances are ISK 18,989,213 and 19,182,022,
respectively. Principal payments commenced on October 1, 1997. Principal and
interest payments are made annually on a pro-rata basis of the remaining
principal plus accrued interest balance.
Principal maturities of notes payable at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Years ending December 31,
2000........................................................ $ 24,069
2001........................................................ 24,069
2002........................................................ 24,069
2003........................................................ 24,069
2004........................................................ 24,069
Thereafter.................................................. 409,169
--------
Total principal amounts due................................. 529,514
Current maturities.......................................... (24,069)
--------
Long term portion of notes payable.......................... $505,445
========
</TABLE>
Pursuant to the note agreements, the Company has pledged its buildings as
collateral for several loans. The amount pledged at December 31, 1998 and 1999
approximates $914,000 and $534,000, respectively.
53
<PAGE> 54
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CONVERTIBLE BONDS:
In June 1998, the Company issued $2.5 million in convertible bonds. The
bonds bore interest at a rate of 8% and were to mature on September 1, 2001. The
bonds provided for annual interest commencing on September 1, 1999.
In accordance with the terms of the bond agreement, the bonds were
converted at the option of the bondholders into common stock from January 11 to
May 31, 1999 at a conversion price of $0.65 per share of common stock on a
post-split basis. As the date of the conversion preceded the interest payment
date all accrued interest was reversed in the 1999 statement of operations,
which included $100,000 of interest expense recognized in the year ended 1998.
This amount was recognized as a reduction to interest expense in fiscal year
1999.
7. CAPITAL LEASES:
The Company's lease obligations under capital leases having an initial or
remaining term of more than one year, are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------
<S> <C>
Fiscal year ending December 31:
2000........................................................ $4,182
------
Total minimum lease payments.............................. 4,182
Less amount representing interest........................... (798)
------
Present value of net minimum lease payments............... $3,384
======
</TABLE>
8. PREFERRED AND COMMON STOCK:
The Company is authorized to issue two hundred seventy five million shares
of $0.01 par value common stock and twenty-five million shares of $0.01 par
value preferred stock. Twenty million shares of preferred stock are designated
as Series A Preferred. The remaining five million shares of preferred stock has
not yet been designated.
On December 14, 1997, the shareholders of the Company approved and adopted
a plan of recapitalization. Under this plan, all shareholders who paid $0.2344
or more per share of common stock were permitted to exchange two shares of
common stock for one share of Series A Preferred. The exchange was terminated on
February 15, 1999. At December 31, 1998 and 1999, 10,797,510 and 11,370,436
shares of common stock were exchanged for Series A Preferred, respectively.
Amounts were reclassified from common stock to preferred stock on the specific
identification method.
Series A Preferred Shares
The Company is authorized to issue 25 million shares of Series A Preferred
stock. On December 31, 1998 and 1999, 5,398,755 and 15,737,649 shares of Series
A Preferred were issued and outstanding. A shareholder rights agreement exists
between the Company and Ericsson, the holder of 10,052,431 shares of Series A
Preferred stock at December 31, 1999, which was signed on February 4, 1999. The
shareholder rights agreement provides the holder of these shares with a put
right which requires the Company to redeem the shares at the issuance price of
$1.30 per share. As a result, the shares subject to the put option have not been
classified within shareholders equity in the accompanying consolidated balance
sheet with the other Series A Preferred shares which are not subject to the
shareholder rights agreement.
54
<PAGE> 55
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company may be obligated to purchase the shares of any stock owned by
Ericsson pursuant to a shareholder rights agreement between the Company,
Ericsson, Skuli Mogensen, Guojon Mar Guojonsson and OZ Holdings LLC that the
Company entered into in connection with Ericsson's purchase of shares of Series
A Preferred stock in 1999. Under this agreement, Ericsson has the right until an
initial public offering of the Company's securities and following certain
trigger events for a period of 120 days after such trigger event to require the
Company, to the extent permitted by law, to purchase any or all shares of Series
A Preferred stock or Common Stock owned by Ericsson at the original purchase
price paid by Ericsson for those shares. The trigger events are the discovery by
Ericsson of any breach or nonfulfillment by the Company of any covenant in the
agreement pursuant to which Ericsson acquired shares of Series A Preferred stock
or the breach or nonfulfillment by the Company or another party to the
shareholder rights agreement (other than Ericsson) of any covenant or agreement
in the shareholder rights agreement; provided, however, that the breach or
nonfulfillment must continue for 30 days after written notice and result in a
material adverse effect on the Company's assets, condition, affairs, or
prospects, financially or otherwise.
The remaining shares not held by Ericsson are not subject to the obligation
to repurchase pursuant to the shareholder rights agreement and are classified
within shareholders' equity.
In the event of liquidation, dissolution, winding up or merger of the
Company, either voluntary or involuntary, the holders of the Series A Preferred
shares retain liquidation preference over the common shareholders equal to $1.00
per share, as adjusted for stock splits, stock dividends and other
recapitalizations. If there are sufficient proceeds to pay the holders of the
Series A Preferred stock their liquidation preference in full, then the holders
of common stock are entitled to be paid an amount equal to $0.50 per share (as
adjusted). Thereafter, holders of preferred and common stock share equally in
any remaining assets.
Holders of the Series A Preferred shares are entitled to vote on the basis
of the number of shares of common stock into which the preferred stock could be
converted on the record date for the vote.
The Series A Preferred shares are convertible at any time into common stock
at a ratio of one to two. All preferred shares will be converted into shares of
common stock upon the closing of the sale of shares pursuant to a registration
statement under the Securities Act of 1933 at an offering price of not less than
$0.50 per share (adjusted to reflect any stock splits, recapitalizations, or
combinations), and $5 million in the aggregate.
9. EARNINGS PER SHARE:
The components of basic and diluted loss per share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss.................................... $(4,852,943) $(1,811,387) $(2,242,815)
=========== =========== ===========
Weighted average outstanding shares of
common stock.............................. 69,352,284 63,306,314 66,228,956
Loss per share:
Basic..................................... $ (0.07) $ (0.03) $ (0.03)
=========== =========== ===========
Diluted................................... $ (0.07) $ (0.03) $ (0.03)
=========== =========== ===========
</TABLE>
Diluted net loss per share does not differ from basic net loss per share
since potential common shares from the conversion of preferred stock, stock
options, convertible bonds and warrants are antidilutive for all periods
presented and are, therefore, excluded from the calculation.
55
<PAGE> 56
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE STOCK OPTION PLANS:
1995 Stock Option Plan
In December 1995, the Company adopted the 1995 Stock Option Plan (the 1995
Plan), under which the Company has now reserved up to 13,000,000 shares of
common stock for issuance to certain employees, directors and consultants. The
Company has the ability to grant both incentive and supplemental stock options.
Incentive stock options are issuable at an exercise price at least equal to the
fair value of the Company's shares of common stock at the date of grant.
Supplemental stock options may be issued at prices as low as 85% of fair market
value. Compensation expense is recorded for options granted at prices below fair
market value on the date of grant. Both incentive and supplemental stock options
have a maximum term of ten years.
In December 1997, all outstanding options were cancelled and re-issued with
a grant price of $0.10 in connection with the recapitalization of the Company as
described in Note 8. The grant price of $0.10 reflected the fair market value of
the Company's common stock following the recapitalization. At December 31, 1999,
the Company had 4,064,250 authorized shares to be granted under the 1995 Plan.
1998 Incentive Stock Option Plan
In May 1998, the Company adopted the 1998 Incentive Stock Plan (the 1998
Plan), under which the Company has reserved up to 2,000,000 shares of common
stock. The 1998 Plan provides for grants to directors, executive officers and
selected employees and consultants ("Participants"). Under this plan the Company
may grant stock to Participants for which the Participant is not obligated to
pay additional consideration ("Stock Award") and may grant Participants the
right to purchase a specified number of shares of common stock pursuant to a
written agreement issued under the 1998 Plan ("Stock Purchase Offer"). Shares of
common stock that Participants may receive as a Stock Award or under a Stock
Purchase Offer may include restrictions on transfer, repurchase rights, rights
of first refusal and forfeiture provisions. At December 31, 1999, there were
842,076 shares remaining which were available for future grants under the 1998
Plan.
A summary of options outstanding and activity under the 1995 and 1998 stock
option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
---------- ------------ --------
<S> <C> <C> <C>
Outstanding at January 1, 1997.................. 3,200,000 $0.24 - 0.65 $0.40
Options granted................................. 2,800,000 0.10 - 0.65 0.60
Options forfeited............................... (1,140,000) 0.24 - 0.65 0.40
Options cancelled............................... (4,860,000) 0.24 - 0.65 0.49
Options reissued................................ 4,860,000 0.10 0.10
---------- ------------ -----
Outstanding at December 31, 1997................ 4,860,000 0.10 0.10
Options granted................................. 4,219,110 0.10 0.10
Options exercised............................... (1,080,110) 0.10 0.10
---------- ------------ -----
Outstanding at December 31, 1998................ 7,799,000 0.10 0.10
Options granted................................. 2,736,000 0.10 - 1.20 0.93
Options exercised............................... (1,636,298) 0.10 - 1.18 0.22
Options forfeited............................... (1,721,436) 0.10 - 1.20 0.35
---------- ------------ -----
Outstanding at December 31, 1999................ 7,377,266 0.10 - 1.20 0.33
========== ============ =====
</TABLE>
56
<PAGE> 57
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the stock options outstanding at December 31, 1999 is
summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
---------------------- EXERCISABLE
REMAINING -----------
EXERCISE PRICE SHARES LIFE SHARES
-------------- --------- --------- -----------
<S> <C> <C> <C>
$0.10............................................. 5,793,266 6.4 years 3,707,260
$1.175............................................ 1,354,000 9.9 years 378,500
$1.20............................................. 230,000 9.4 years 57,500
--------- ---------
7,377,266 4,143,260
========= =========
</TABLE>
The Company recorded deferred compensation of $110,333 and $350,470 for
options granted at less than fair value during 1997 and 1999, respectively. This
deferred compensation, net of cancellations, is being amortized ratably over the
vesting period of the related options.
The following information concerning OZ.COM's stock option plans is
provided in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). OZ.COM accounts for the
Plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
The fair value of each grant option has been estimated on the date of grant
using the minimum value method. Weighted average assumptions used in determining
the fair value of grants in 1997, 1998 and 1999, include a risk-free interest
rate of 6.17%, 4.81% and 5.9%, respectively, and an expected life of five and a
half years. Volatility and dividend yields are not factors in OZ.COM's minimum
value calculation.
As a result of the above assumptions, the weighted average fair value of
options granted in 1997, 1998 and 1999, was $0.17, $0.02 and $0.93 per share,
respectively.
The pro forma net loss for the Company, for the years ended December 31,
1997, 1998 and 1999, following the provisions of SFAS 123, is $4,921,879,
$1,868,448, and $2,776,516, respectively. The pro forma net loss per share for
the Company for the years ended December 31, 1997, 1998, and 1999, following the
provisions of SFAS 123, is $0.07, $0.03 and $0.04, respectively.
11. WARRANTS TO PURCHASE COMMON STOCK:
In December 1996, the Company issued warrants to purchase up to a total of
308,000 shares of common stock at an exercise price of $0.55 per share to three
individuals in consideration for professional services performed in connection
with a private equity offering by the Company. The warrants vested immediately
and were exercisable until September 30, 1997. The fair value of these warrants
has been charged to common stock as issuance costs. The warrants were not
exercised by the expiration date. In April 1998 these warrants were extended and
are exercisable until a sale of the Company's shares of common stock pursuant to
an effective registration statement under the Securities Act or a consolidation
or merger of the Company into another corporation. As of December 31, 1999, all
of these warrants remain unexercised and outstanding.
Also in December 1996, the Company issued warrants to purchase up to 40,000
shares of common stock at an exercise price of $0.25 per share to a third party
in exchange for the transfer of an Internet domain to the Company. The warrants
are fully vested and are exercisable until the earlier of October 31, 2001 or
immediately prior to the completion of any consolidation or merger of the
Company. The fair value of these warrants has been charged to general and
administrative expenses during the year ended December 31, 1996. As of December
31, 1999, all of these warrants remain unexercised and outstanding.
In January 1997, the Company issued a warrant to purchase up to 80,000
shares of common stock at an exercise price of $0.25 per share to a former
employee for services rendered during his employment. The warrant is fully
vested and is exercisable until the earlier of February 1, 2002 or immediately
prior to the
57
<PAGE> 58
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
completion of any consolidation or merger of the Company. As of December 31,
1999, all of these warrants remain unexercised and outstanding. The fair value
of this warrant has been charged to compensation expenses during the year ended
December 31, 1997.
12. NOTES RECEIVABLE FROM SHAREHOLDERS:
Notes receivable issued to founders
In July 1998, the Company advanced $150,000 in total to the two founders of
the Company. The notes receivable have a maturity date of April 27, 2000 and a
stated interest rate of 8% compounded annually. Principal and interest are due
upon maturity of the notes. Accrued interest on the notes receivable is $6,000
and $18,480 at December 31, 1998 and 1999, respectively. These notes are
classified as other current assets in the consolidated financial statements in
1999.
Notes receivable issued for common stock
Under certain written agreements issued under the 1998 Incentive Stock
Plan, the Company may issue shares of common stock to employees upon the receipt
of a note receivable from the employee. The note receivable is secured by the
shares of common stock, does not have a maturity date and is interest free. Upon
termination any amount unpaid is settled through receipt of the original shares
issued.
During 1998 and 1999, the Company issued 746,000 and 120,000 shares of
common stock in exchange for notes receivable in the amount of $74,600 and
$141,000, respectively. During 1999, the Company received payments of $15,400 in
exchange for 154,000 shares of common stock. At December 31, 1998 and 1999,
notes receivable in the amount of $74,600 and $200,200 were outstanding for
746,000 and 712,000 shares of common stock, respectively.
13. INCOME TAXES:
The components of deferred taxes at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Non-current deferred tax assets:
Net operating loss carryforwards.......................... $ 3,576,727 $ 4,377,138
Other..................................................... 144,099 144,111
----------- -----------
Total deferred tax asset............................. 3,720,826 4,521,249
Valuation allowance....................................... (3,720,826) (4,521,249)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
Due to the uncertain nature of the ultimate realization of the above
deferred tax asset, the Company has recorded a valuation allowance against
deferred tax assets.
At December 31, 1999 the Company has net operating loss carryforwards of
approximately $11,800,000, $5,600,000 and $100,000 for federal, state and
Icelandic income tax purposes, respectively. These carryforwards will expire
from year 2001 through 2013.
14. EMPLOYEE BENEFIT PLAN:
In July 1997, the Company established a 401(k) defined contribution benefit
plan covering all eligible employees. Company contributions to the plan may be
made at the discretion of the Company. As of December 31, 1999 the Company has
not made any contributions to the plan since its inception.
58
<PAGE> 59
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENTS:
The Company operates in a single industry segment -- the design and
development of computer software and services. Substantially all revenues result
from the development of various solutions for clients' needs based upon agreed
upon contracts.
Revenues attributable to geographic regions are based upon the origination
of the sales. Geographic information for the Company is as follows:
<TABLE>
<CAPTION>
REVENUES LONG LIVED ASSETS
------------------------------------ ------------------------
1997 1998 1999 1998 1999
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
United States......... $858,500 $4,020,760 $4,468,827 $ 137,380 $ 44,118
Iceland............... 67,825 99,055 705,571 1,388,268 2,035,413
-------- ---------- ---------- ---------- ----------
$926,325 $4,119,815 $5,174,398 $1,525,648 $2,079,531
======== ========== ========== ========== ==========
</TABLE>
During the years ended 1997, 1998 and 1999, total revenues derived from one
customer were $798,500 (86%), $3,577,348 (87%), and $4,565,693 (88%),
respectively. See Note 2 which discusses the nature of the relationship with
this customer.
16. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various noncancellable operating leases for
office space. Future minimum lease payments under operating leases as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 206,974
2001........................................................ 276,204
2002........................................................ 276,204
2003........................................................ 220,704
2004........................................................ 45,170
----------
Total minimum lease payments........................... $1,025,256
==========
</TABLE>
17. SUBSEQUENT EVENT:
On May 3, 2000 the shareholders of the Company approved the following
changes in the capital structure of the Company, 1.) an increase in the number
of authorized shares of common stock from 75 million to 275 million; 2.) a 2 for
1 stock split of the Company's common stock; and 3.) the establishment of a par
value for common stock and preferred stock of $0.01 per share. The accompanying
consolidated financial statements give effect to these events as if they had
occurred on December 31, 1996.
59
<PAGE> 60
OZ.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,603,592 $ 12,622,995
Trade accounts receivable................................. 22,456 4,029
Trade accounts receivable from shareholder................ 1,391,816 1,701,690
Prepaid expenses and other current assets................. 406,232 317,159
------------ ------------
Total current assets.............................. 15,424,096 14,645,873
Property and equipment, net................................. 2,079,531 2,353,064
Other assets................................................ 130,510 176,073
------------ ------------
Total assets...................................... $ 17,634,137 $ 17,175,010
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 188,305 $ 486,010
Accrued liabilities....................................... 505,133 870,767
Current portion of deferred revenue....................... 171,920 171,920
Current portion of notes payable.......................... 24,069 23,989
Current portion of capital lease obligations.............. 3,384 --
------------ ------------
Total current liabilities......................... 892,811 1,552,686
Notes payable............................................... 505,445 500,765
Deferred revenue............................................ 171,920 128,940
------------ ------------
Total liabilities................................. 1,570,176 2,182,391
------------ ------------
Redeemable preferred stock, $0.01 par value:
10,052,431 shares issued and outstanding (liquidation
value $10,052,431)..................................... 13,068,160 13,068,160
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $0.01 par value:
5,685,218 and 5,521,833 shares issued and outstanding,
respectively, (liquidation value $5,521,833)........... 5,384,976 5,172,575
Common stock, $0.01 par value:
275,000,000 shares authorized:
68,359,078 and 70,118,848 shares issued and
outstanding, respectively.............................. 683,591 701,188
Additional paid in capital................................ 9,880,238 10,412,342
Notes receivable from shareholders.......................... (200,200) (375,800)
Deferred compensation....................................... (376,668) (346,372)
Accumulated deficit including other comprehensive income of
$56,886 and $87,808, respectively......................... (12,376,136) (13,639,474)
------------ ------------
Total shareholders' equity........................ 16,063,961 14,992,619
------------ ------------
Total liabilities and shareholders' equity........ $ 17,634,137 $ 17,175,010
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
60
<PAGE> 61
OZ.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE..................................................... $ 906,028 $ 1,745,902
---------- -----------
OPERATING EXPENSES
Cost of sales............................................. 746,148 973,367
Sales and marketing....................................... 261,151 646,157
General and administrative................................ 703,228 1,197,543
Research and development.................................. 79,597 231,859
---------- -----------
Total operating expenses.......................... 1,790,124 3,048,926
---------- -----------
Operating loss.................................... (884,096) (1,303,024)
---------- -----------
Interest income............................................. 3,614 113,855
Interest expense............................................ (19,382) (16,041)
Other income (expense), net................................. (36,376) (89,050)
---------- -----------
Loss before provision for income taxes............ (936,240) (1,294,260)
Income taxes................................................ 0 0
---------- -----------
Net loss.......................................... $ (936,240) $(1,294,260)
========== ===========
Loss per share:
Basic..................................................... $ (0.01) $ (0.02)
========== ===========
Diluted................................................... $ (0.01) $ (0.02)
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
61
<PAGE> 62
OZ.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (936,240) $(1,294,260)
Adjustments to reconcile net loss to net cash provided
(used) in operating activities:
Depreciation........................................... 58,728 127,703
Amortization of deferred compensation.................. 12,750 30,296
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable....... 350,817 (291,447)
(Increase) decrease in prepaid expenses and other
assets................................................ (22,311) 43,510
Increase (decrease) in trade accounts payable.......... (105,853) 297,705
Increase (decrease) in accrued liabilities............. 9,505 365,634
Increase (decrease) in deferred revenue................ 472,780 (42,980)
---------- -----------
Net cash used in operating activities.................. (159,824) (763,839)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (197,734) (401,326)
---------- -----------
Net cash used in investing activities.................. (197,734) (401,326)
---------- -----------
Cash flows from financing activities:
Repayment of bank overdraft............................... (351,219) --
Issuance of common stock.................................. 1,800,000 --
Exercise of employee stock options........................ 116,600 161,700
Payments on notes payable................................. (23,109) (4,760)
Payment of capital lease obligation....................... (3,805) (3,384)
---------- -----------
Net cash provided by financing activities................. 1,538,467 153,556
---------- -----------
Effect of currency exchange rates on cash................... 77,831 30,922
---------- -----------
Net increase (decrease) in cash........................... 1,258,740 (980,687)
Cash and cash equivalents at beginning of period............ 368,275 13,603,592
---------- -----------
Cash and cash equivalents at end of period.................. $1,627,015 $12,622,905
========== ===========
Supplemental cash flow information:
Cash paid for interest.................................... $ 15,703 $ 6,163
========== ===========
Supplemental schedule of non-cash investing and financing
activities:
Conversion of bonds to common stock....................... $ 900,000 $ --
========== ===========
Conversion of common stock to preferred stock............. $ 686,212 $ --
========== ===========
Conversion of preferred stock to common stock............. $ -- $ 212,401
========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
62
<PAGE> 63
OZ.COM
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 2000
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss.................................................... $(936,240) $(1,294,260)
Other comprehensive income:
Foreign currency translation adjustment................... 77,831 30,922
--------- -----------
Comprehensive loss.......................................... $(858,409) $(1,263,338)
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
63
<PAGE> 64
OZ.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS:
The accompanying financial statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations.
Accordingly, these interim financial statements and notes should be read in
connection with the Company's Registration Statement on Form 10-SB for the year
ended December 31, 1999. The results of operations for the interim periods shown
in this report are not necessarily indicative of results to be expected for
other interim periods or for the full fiscal year. In the opinion of management,
the information contained herein reflects all adjustments necessary for a fair
statement of the interim results of operations.
The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
The accompanying consolidated financial statements include accounts of the
Company and its subsidiaries.
2. LOSS PER SHARE:
Basic loss per share is computed based upon the weighted average number of
common shares outstanding. Diluted loss per share is computed based upon the
weighted average number of common shares outstanding and any potentially
dilutive securities. Potentially dilutive securities are not included in the
diluted earnings per share calculations if their inclusion would be
anti-dilutive to the basic loss per share calculations. Potentially dilutive
securities not included in the diluted loss per share calculation and
outstanding during the three months ended March 31, 1999, included preferred
shares, convertible bonds, stock options, and stock warrants. Potentially
dilutive securities not include in the diluted loss per share calculation and
outstanding during the three months ended March 31, 2000, included preferred
shares, stock options, and stock warrants.
The components of basic and diluted loss per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Net loss.................................................. $ (936,240) $(1,294,260)
=========== ===========
Weighted average outstanding shares of Common Stock....... 62,535,918 68,861,956
Loss per share:
Basic................................................... $ (0.01) $ (0.02)
=========== ===========
Diluted................................................. $ (0.01) $ (0.02)
=========== ===========
</TABLE>
3. CONVERTIBLE BONDS:
During the three months ended March 31, 1999, holders of $900,000 of
convertible bonds exercised their option to convert their bonds into the
Company's Common Stock. In connection with the conversion the Company issued
1,384,616 shares of Common Stock. As the conversion of the bonds into Common
Stock occurred prior to the interest payment date, accrued interest expense at
December 31, 1998 in the amount of $36,000 was recognized as a reduction of
interest expense during the three months ended March 31, 1999, as the interest
is no longer payable as a result of the conversion of the bonds.
4. CONVERSION OF SERIES A PREFERRED STOCK INTO COMMON STOCK:
During the three months ended March 31, 2000, holders of 163,385 shares of
Series A Preferred stock elected to convert their shares into shares of Common
Stock. In accordance with the terms of conversion, the shares of Preferred stock
were converted into 326,770 shares of Common Stock.
64
<PAGE> 65
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
* 3.1 Amended and Restated Articles of Incorporation
* 3.2 Certificate of Amendment
* 3.3 Bylaws
*10.1 1995 Stock Option Plan
*10.2 1998 Incentive Stock Option Plan
*10.3 2000 Employee Stock Purchase Plan
*10.4 Employment Agreement between the Company and Skuli Mogensen
*10.5 Employment Agreement between the Company and Guojon Mar
Guojonsson
10.6 Employment Agreement between the Company and Robert Quinn
*10.7 Employment Agreement between the Company and Skuli Valberg
Olafsson
*10.8 Form of Indemnification Agreement
*10.9 General Co-operation and Development Agreement with Ericsson
Telecom AB
*10.10 Specific Co-operation and Development Agreement with
Ericsson Telecom AB for Communities and Link
*10.11 VAR Agreement with Ericsson Telecom AB
10.12 Shareholder Rights Agreement
21.1 List of Subsidiaries
</TABLE>
---------------
* Previously Filed
ITEM 2. DESCRIPTION OF EXHIBITS
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
* 3.1 Amended and Restated Articles of Incorporation
* 3.2 Certificate of Amendment
* 3.3 Bylaws
*10.1 1995 Stock Option Plan
*10.2 1998 Incentive Stock Option Plan
*10.3 2000 Employee Stock Purchase Plan
*10.4 Employment Agreement between the Company and Skuli Mogensen
*10.5 Employment Agreement between the Company and Guojon Mar
Guojonsson
10.6 Employment Agreement between the Company and Robert Quinn
*10.7 Employment Agreement between the Company and Skuli Valberg
Olafsson
*10.8 Form of Indemnification Agreement
*10.9 General Co-operation and Development Agreement with Ericsson
Telecom AB
*10.10 Specific Co-operation and Development Agreement with
Ericsson Telecom AB for Communities and Link
*10.11 VAR Agreement with Ericsson Telecom AB
10.12 Shareholder Rights Agreement
21.1 List of Subsidiaries
</TABLE>
---------------
* Previously Filed
65
<PAGE> 66
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
OZ.COM
a California Corporation
Date: July 21, 2000
By: /s/ ROBERT G. QUINN
------------------------------------
Robert G. Quinn
Chief Financial Officer
66
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
* 3.1 Amended and Restated Articles of Incorporation
* 3.2 Certificate of Amendment
* 3.3 Bylaws
* 10.1 1995 Stock Option Plan
* 10.2 1998 Incentive Stock Option Plan
* 10.3 2000 Employee Stock Purchase Plan
* 10.4 Employment Agreement between the Company and Skuli Mogensen
* 10.5 Employment Agreement between the Company and Guojon Mar
Guojonsson
10.6 Employment Agreement between the Company and Robert Quinn
* 10.7 Employment Agreement between the Company and Skuli Valberg
Olafsson
* 10.8 Form of Indemnification Agreement
* 10.9 General Co-operation and Development Agreement with Ericsson
Telecom AB
* 10.10 Specific Co-operation and Development Agreement with
Ericsson Telecom AB for Communities and Link
* 10.11 VAR Agreement with Ericsson Telecom AB
10.12 Shareholder Rights Agreement
21.1 List of Subsidiaries
</TABLE>
---------------
* Previously Filed
67
