<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission File Number 033-25779
----------------
* * * * * *
CODESTREAM HOLDINGS, INC.
--------------------------
(Exact name of Company as specified in its charter)
NEVADA 84-1100609
-------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1771 International Parkway, Suite 121
Richardson, Texas 75081
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(972) 479-0534
----------------------------------------------------
(Company's telephone number, including area code)
Bud Financial Group, Inc.
----------------------------------------------------
Former name, if changed since last report)
* * * * * *
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
* * * * * *
The number of shares outstanding of the Company's Common Stock, $.001 par
value, on July 31, 2000 was 18,916,400.
<PAGE>
CODESTREAM HOLDINGS,INC.
(a development stage company)
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 . . . . 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and June 30, 1999 . . . . . . . . 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and June 30, 1999 . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and June 30, 1999 . . . . . . . . 6-7
Notes to Condensed Consolidated Financial Statements. . . . . . . 8-10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . 11-14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
Signature Page. . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
CODESTREAM HOLDINGS, INC. AND SUBSIDIARY
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
ASSETS
Current Assets:
Cash $4,694,656
Prepaid expenses 105,568
----------
Total current assets 4,800,224
Property and equipment, net 633,236
Other assets 12,091
----------
TOTAL ASSETS $5,445,551
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 896,512
Capital lease obligation 130,172
Notes payable -
---------
Total current liabilities 1,026,684
Capital lease obligation -
Stockholders' Equity:
Common stock, $.001 par value,
Authorized shares - 50,000,000
Issued and outstanding shares - 18,916,400
in 2000 and 7,424,266 in 1999 18,916
Additional paid-in capital 21,027,633
Accumulated deficit (16,627,682)
-----------
Total stockholders' equity 4,418,867
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,445,551
===========
</TABLE>
See accompanying notes.
3
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CODESTREAM HOLDINGS, INC. AND SUBSIDIARY
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
June 30, June 30,
2000 1999
-------- -------
<S> <C> <C>
Operating expenses:
Research and development $ 872,209 $ 571,359
General and administrative 291,069 782,079
----------- -----------
Operating loss (1,163,278) (1,353,438)
Interest income (expense), net (13,564) 57,563
----------- -----------
Net loss $(1,176,842) $(1,295,875)
=========== ===========
Basic and diluted loss per share $ (0.15) $ (0.34)
=========== ===========
Weighted average common shares
outstanding 7,878,000 3,778,000
=========== ===========
</TABLE>
See accompanying notes.
4
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CODESTREAM HOLDINGS, INC. AND SUBSIDIARY
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the
Period from
January 17,
Six Months Ended 1996
------------------------- (Inception)
June 30, June 30, to June 30,
2000 1999 2000
-------- -------- -----------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 1,231,352 $ 1,415,009 $ 4,644,488
General and administrative 938,657 1,487,792 12,218,227
----------- ----------- ------------
Operating loss (2,170,009) (2,902,801) (16,862,715)
Interest income (expense), net (17,804) 125,461 235,033
----------- ----------- ------------
Net loss $(2,187,813) $(2,777,340) $(16,627,682)
=========== =========== ============
Basic and diluted loss per share $ (0.36) $ (0.74) $ (5.20)
=========== =========== ============
Weighted average common shares
outstanding 6,128,000 3,778,000 3,197,000
=========== =========== ============
</TABLE>
See accompanying notes.
5
<PAGE>
CODESTREAM HOLDINGS, INC. AND SUBSIDIARY
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net loss $(2,187,813) $(2,777,340)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 196,891 144,939
Compensation for re-pricing of stock options 7,235 -
Changes in operating assets and liabilities:
Increase in Prepaid expenses (105,568) -
Decrease in Other assets 975 12,743
Increase (decrease) in Accounts payable (230,483) 224,565
Increase in Accrued expenses 133,402 12,508
----------- -----------
Net cash used in operating activities (2,185,361) (2,382,585)
----------- -----------
Investing Activities:
Purchases of property and equipment (150,467) (140,612)
----------- -----------
Net cash used in investment activities (150,467) (140,612)
----------- -----------
Financing Activities:
Proceeds from notes payable 1,400,000 -
Proceeds from private placement 5,500,000 -
Exercise of employee stock options 1,500 -
Repayment of short term note payable - (33,770)
Repayment of capital leases (59,745) -
----------- -----------
Net cash provided by (used in) financing 6,841,755 (33,770)
activities ----------- -----------
Net increase (decrease) in cash and
cash equivalents 4,505,927 (2,556,967)
Cash and cash equivalents at beginning of
period 188,729 2,601,686
----------- -----------
Cash and cash equivalents at end of period $ 4,694,656 $ 44,719
=========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the periods ended June 30, 2000 and 1999, CTC entered into capital
lease agreements for computer and lab equipment valued at $31,500 and
$208,700, respectively.
See accompanying notes.
6
<PAGE>
CODESTREAM HOLDINGS, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all the adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included. The results of operations
for the three and six month periods ending June 30, 2000 are not necessarily
indicative of the results which may be achieved for the full fiscal year or
for any future period. The condensed consolidated financial statements
included herein should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's report on Form 8-K
effective June 8, 2000.
2. Description of Business
CodeStream Holdings, Inc., formerly Bud Financial Group, Inc. ("CHI"), a
Colorado publicly-traded corporation, was originally incorporated for the sole
purpose of raising capital and then seeking out, investigating, and acquiring
any suitable assets or business without regard to any specific business or
industry. In 1991, CHI completed a public offering of its common stock which
raised a total of $9,500, which offering was registered under the Securities
Act pursuant to a Registration Statement on Form S-18. In 1997, CHI completed
a private placement of its common stock which raised $7,500. CHI changed its
state of incorporation to Nevada in March 1999.
CodeStream Technologies Corporation ("CTC") is a Delaware corporation that was
formed on January 17, 1996 to develop certain technologies acquired from a
government defense and aerospace contractor. Since its incorporation, CTC has
privately sold $12,000,000 of preferred stock to certain institutional
investors. In August 1999, CTC acquired the 975,000 issued and outstanding
shares of common stock of an affiliated company, RDL Photonic Integrated Chip
Corporation ("PIC"), a Delaware company. PIC owned certain intellectual
property for photonic integrated circuits for optical code division multiple
access that was complimentary to the technology being developed by CTC. CTC
currently is a development stage company that is developing technology
intended to increase the fiber optic network capacity of telecommunications
traffic carriers.
On June 8, 2000, CHI entered into an Agreement and Plan of Reorganization,
whereby it acquired all the issued and outstanding shares of common stock of
CTC in exchange for an aggregate of 10,000,000 shares of newly issued common
stock of CHI. For accounting purposes, the transaction has been treated as a
recapitalization of CTC, with CTC as the accounting acquirer (reverse
acquisition), and has been accounted for in a manner similar to a pooling of
interests. To effect this transaction, CTC converted all of its outstanding
Series A, B, and C convertible preferred stock into 14,612,779 shares of common
7
<PAGE>
stock and converted notes payable totaling $1,091,121 into 9,444,447 shares
of common stock. CTC then completed a reverse stock split of the aggregate
31,481,492 shares common stock on a one-for-3.148149 basis so that 10,000,000
shares of common stock were issued and outstanding prior to the reverse
merger. The operations of CHI have been included with those of CTC from the
acquisition date.
CHI was incorporated in Colorado on June 6, 1988. CHI had minimal assets and
liabilities at the date of the acquisition and did not have significant
operations prior to the acquisition. Therefore, no pro forma information is
presented.
8
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3. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CHI and its
wholly-owned subsidiary, CTC (collectively, the "Company"). All intercompany
accounts and transactions have been eliminated.
LOSS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share
is computed by dividing the loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share
is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Because the Company has incurred net
losses, basic and diluted loss per share are the same.
COMPREHENSIVE INCOME
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. Comprehensive
income is not presented in the Company's financial statements since the
Company did not have any of the items of comprehensive income in any period
presented.
4. Property and Equipment
Property and equipment at June 30, 2000 are as follows:
<TABLE>
<S> <C>
Machinery and equipment $ 976,928
Furniture and office equipment 149,877
Computer software 62,282
Leasehold improvements 41,689
----------
1,230,776
Less accumulated depreciation
And amortization 597,540
----------
Total $ 633,236
==========
</TABLE>
Depreciation and amortization expense for the six months ended June 30, 2000
was $196,891.
9
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5. SHORT TERM LOANS
In February, March, April and May 2000, CTC borrowed $500,000, $500,000,
$200,000 and $200,000, respectively, from a third party to provide additional
interim working capital for the operations of its business. These borrowings
were converted into 1,400,000 shares of CHI common stock on June 8, 2000 at
the same time as the reverse acquisition between CHI and CTC.
6. Stockholders' Equity
During the six months ended June 30, 2000, the Company sold 5,500,000 shares
of common stock in a private placement for proceeds of $5,450,000, net of
offering costs of $50,000.
During the six month period ended June 30, 2000, 437,500 stock options were
granted to certain employees of the Company at a price of $1.00.
During the year ended December 31, 1999, the Company re-priced an aggregate
of 49,223 options issued to six employees under the Company's stock option
plan. In relation to this re-pricing, the Company recorded compensation
expense totaling $7,235 for the six months ended June 30, 2000. In accordance
with generally accepted accounting principles, the employee stock option
awards that were re-priced will be accounted for as variable awards from the
date of the re-pricing to the date the options are exercised, forfeited or
expire.
7. Related Party Transactions
During the six months ended June 30, 2000, the Company paid $131,160 to a
former officer/director of CTC for consulting services rendered pursuant to a
consulting agreement. Under the terms of the consulting agreement, the Company
is committed to pay this former officer/director $163,950 during the year
ended December 31, 2000.
8. Legal Proceeding
During May 1999, RDL was served with a subpoena duces tecum to produce
documents and to testify before the Grand Jury of the United States District
Court, Central District of California. The subpoena appeared to relate to
allegations of mischarging or improper billing with respect to federal
government contracts and was directed to RDL and, among others, all of its
then present and former officers and directors, together with its then
affiliates, including the Company (then named RDL Commercial Technologies
Corporation). At a meeting with the Assistant United States Attorney ("AUSA")
in charge of the investigation during July 1999, the attorneys for the
Company were advised that the Company was a subject of the investigation.
Subsequent to this meeting, the Company produced to the AUSA all documents
requested by the subpoena and provided the AUSA with a copy of an analysis of
cash receipts and disbursements of the Company since its inception prepared
by PricewaterhouseCoopers LLP showing that the Company has never received
funds from the federal government under any government contracts. The Company
also offered to cooperate completely with the Grand Jury Investigation and on
November 30, 1999, the CFO of the Company met with the AUSA and agents of the
FBI to answer their questions concerning RDL and the Company. At the
conclusion of this meeting, the AUSA indicated that she believed the CFO's
commentary to be truthful, and also indicated that, based upon the
government's investigation to date, the Company was no longer a subject of
the investigation. It should be noted that the AUSA has absolute discretion
as to who, if anyone, will be indicted and until this matter is completely
resolved, the Company remains as a possible target of the investigation.
9. Subsequent Events
Subsequent to June 30, 2000, the Company entered into a financing agreement
with a current shareholder for the sale of common stock to the shareholder up
to $1,000,000. The Company has received $300,000 to date under this agreement
and is to receive the balance no later than September 5, 2000. As part of the
financing agreement, the Company also granted the stockholder the right to
purchase additional common stock up to $4,000,000.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information contained herein may include forward looking statements. Such
statements involve risks and uncertainties which could cause actual results to
differ materially from those set forth herein. Factors that could cause actual
results to differ include changes in technology, the company' ability to raise
additional capital, and the ability to develop its products in accordance with
its plans. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof based on information currently available to it. The company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof.
Overview
The Company was incorporated in 1988 for the sole purpose of raising capital
and then seeking out, investigating, and acquiring any suitable assets or
business without regard to any specific business or industry. In 1991, the
Company completed a public offering of its common stock in which it raised a
total of $9,500. The public offering was registered with the Securities and
Exchange Commission under the Securities Act of 1933 pursuant to a
Registration Statement on Form S-18. Prior to the transactions described
below, the Company had not engaged in any significant business activities.
In accordance with its business purpose, on February 15, 2000 the Company, BFG
Subsidiary, Inc. and CodeStream Technology Corporation, a Delaware corporation
("CTC"), entered into that certain Agreement and Plan of Reorganization (the
"Acquisition Agreement") pursuant to which CTC agreed to merge with BFG
Subsidary, Inc., with CTC being the surviving company. BFG Subsidiary, Inc.
was a wholly-owned subsidiary of the Company that the Company formed for the
sole purpose of effecting the acquisition of CTC (the "Acquisition"). As a
result of the Acquisition, CTC became, and is now, a wholly-owned subsidiary
of the Company. The Company currently intends to conduct all of its operations
through CTC, and to move all of the Company's offices to the principal offices
of CTC in Richardson, Texas.
CTC is a development stage company that was formed in 1996 to develop certain
technologies it acquired from a government defense and aerospace contractor.
CTC is currently developing products based on a patented technology that is
intended to enable telecommunications network service providers to increase
the capacity of their new and existing fiber optic networks. CTC owns the
commercial intellectual property rights to a broadband optical networking
technology known as Optical Code Division Multiple Access ("OCDMA"). This
technology, in the opinion of CTC, can significantly increase the transmission
rate and the channel count of a fiber-optic telecommunications network. The
new optical transport system that CTC is developing utilizes a proprietary,
patented encoding scheme that enables hundreds of independent channels to
coexist on the same fiber optic pair. Based on the currently estimated
development schedule, if CTC is adequately funded and the technology is
successfully developed, the Company expects that the first product using CTC's
new technology can be released in 18 to 24 months.
Since its incorporation, CTC has been funded from the private sale to certain
institutional investors of $12,000,000 of preferred stock. In addition to the
11
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foregoing funding, the United States Air Force has also provided funding for
research into the bulk optics and photonic integrated circuit technology now
being developed into a product line at CTC. As a result of the foregoing U.S.
governmental funding, the United States Air Force owns certain rights to
non-commercial applications of the technology. In August 1999, CTC merged with
RDL Photonic Integrated Chip Corporation, a private research firm that owned
certain intellectual property for photonic integrated circuits that was
complimentary to the technology being developed by CTC. (Unless otherwise
specified, all references herein to CTC shall refer to CodeStream Technologies
Corporation, formerly known as RDL Commercial Technologies Corporation, and
RDL Photonic Integrated Chip Corporation.)
Prior to the Acquisition, a total of 2,000,000 shares of $0.001 par value
common stock of the Company (the "Common Stock") were issued and outstanding.
Of the 2,000,000 outstanding shares of Common Stock, 1,643,800 shares were
owned by Thomas Kimble. Mr. Kimble also was the sole officer and the sole
director of the Company. As a result, control of the Company resided with Mr.
Kimble prior to the Acquisition.
In connection with the merger by which the Acquisition was effected, and in
accordance with the Acquisition Agreement, all of the issued and outstanding
shares of CTC's common stock were converted into 10,000,000 shares of the
Company's Common Stock. In addition, all of the currently outstanding CTC
options that entitle CTC's employees and former employees to purchase a total
of 784,171 shares of CTC common stock at an exercise price of $1.00 per share
were assumed by the Company and became options to purchase the Company's
common stock at an exercise price of $1.00 per share.
Results of Operations
Research and Development. Research and development expenses increased to
$872,000 from $571,000, or 53%, for the quarter ended June 30, 2000 compared
to the quarter ended June 30, 1999. Research and development expenses
decreased to $1,230,000 for the six months ended June 30, 2000 compared to
$1,415,009, or 13%, for the same period of 1999. Research and development
expenses were relatively constant in the first six months of 2000 compared to
the same period of 1999. The Company expects that research and development
costs will increase during the remainder of 2000 to support the continued
development of optical transport products. The Company's research and
development costs are expensed in the period incurred.
General and Administrative. General and administrative expenses decreased to
$291,000 for the quarter ended June 30, 2000 compared to $782,000, or 63%,
for the quarter ended June 30, 1999. General and administrative expenses
decreased to $939,000 for the six months ended June 30, 2000 compared to
$1,488,000, or 37%, for the same period of 1999. General and administrative
expense expenses decreased in the first six months of 2000 compared to the
same period of 1999 due to the reduction in administrative personnel and
associated expenses. The Company believes that general and administrative
costs for the remainder of 2000 will increase due to expanding operations.
Interest. Net interest income (expense) decreased to $(14,000) for the
quarter ended June 30, 2000 compared to $58,000, or 124%, for the quarter
ended June 30, 1999. Net interest income (expense) decreased to $(18,000) for
the six months ended June 30, 2000 compared to $125,000, or 114%, for the six
months ended June 30, 1999. Net interest income (expense) may vary in the
future based on the Company's borrowings and rate of return on cash balances.
12
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Liquidity and Capital Resources
The Company's principal source of liquidity at June 30, 2000 was $4.7 million
of cash.
During the six months ended June 30, 2000, the Company funded its operations
through cash flows from the private placement of common stock.
Cash flows used in operations for the six months ended June 30, 2000 were $2.2
million, primarily due to the loss from operations.
Cash used in investing activities in the six months ended June 30, 2000 was
for equipment purchases of $150,000.
Cash provided by financing activities in the six months ended June 30, 2000
was $6.9 million. In order to fund the working capital needs of CTC, and in
order to repay certain outstanding loans, immediately following the
consummation of the Acquisition, the Company completed a $5.5 million private
placement of its Common Stock to certain accredited investors (including $2.0
million that was sold to some of the existing stockholders of CTC) at a price
of $1.00 per share. CTC also received proceeds of $1,400,000 from the issuance
of notes payable prior to the Acquisition.
At June 30, 2000, the Company did not have any material commitments for
capital expenditures.
The Company believes that its cash and potential cash flow from additional
financing activities will provide sufficient cash resources to finance its
operations and currently projected capital expenditures through 2000. However,
there can be no assurance that the Company's cash resources will be sufficient
for 2000. Any equity or debt financings, if available at all, may be on terms
which are not favorable to the Company and, in the case of equity financings,
may result in dilution to the Company's stockholders.
Factors That May Affect Future Results of Operations
Numerous factors may affect the Company's business and future results of
operations. These factors include, but are not limited to, technological
changes, competition and market acceptance, acquisitions, intellectual
property and licenses. The discussion below addresses some of these and other
factors.
Technological Changes. The market for the Company's product currently under
development is characterized by rapidly changing technology and continued
evolution of new industry standards. The Company's success will depend to a
substantial degree upon its ability to develop and introduce in a timely
manner a product that meets changing customer requirements and evolving
industry standards. The development of technologically advanced products is a
complex and uncertain process requiring high levels of innovation as well as
the accurate anticipation of technological and market trends. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market and support new or enhanced products successfully or in a timely manner.
13
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Competition and Market Acceptance. The market for optical networking equipment
is intensely competitive and subject to frequent product introductions with
improved price/performance characteristics.
There are numerous companies competing in various segments of the optical
networking market. The Company's principal competitors include CIENA
Corporation ("CIENA"), Lucent Technologies ("Lucent"), Nortel Networks
("Nortel"), Alcatel USA, Inc. ("Alcatel"), and Cisco Systems, Inc. ("Cisco").
The Company's competitors have substantially greater financial, technical,
sales and resources and better name recognition than the Company.
Even if the Company does introduce advanced products which meet evolving
customer requirements in a timely manner, there can be no assurance that the
new Company products will gain market acceptance.
There can be no assurance that the Company will be able to compete
successfully in the future with current or new competitors.
Acquisitions. Lucent, Nortel, Cisco, and other competitors have recently
acquired several optical networking companies with complementary technologies,
and the Company anticipates that such acquisitions will continue in the
future. These acquisitions may permit such competitors to accelerate the
development and commercialization of broader product lines and more
comprehensive solutions than the Company may offer. Certain of the recent and
future acquisitions by the Company's competitors may have the effect of
limiting the Company's access to commercially significant technologies.
Further, the business combinations and acquisitions in the optical networking
industry are creating companies with larger market shares, customer bases,
sales forces, product offerings and technology and marketing expertise. There
can be no assurance that the Company will be able to compete successfully in
such an environment.
Patents, Intellectual Property and Licenses. The Company's success and its
ability to compete are dependent, in part, upon its proprietary technology.
The Company holds issued patents and relies on a combination of contractual
rights, trade secrets and copyright laws to establish and protect its
proprietary rights in its products. There can be no assurance that the steps
taken by the Company to protect its intellectual property will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent
or superior to the Company's technology.
There are many patents held by companies which relate to the design and
manufacture of optical networking equipment. Potential claims of infringement
could be asserted by the holders of those patents. The Company could incur
substantial costs in defending itself and its customers against any such claim
regardless of the merits of such claims. In the event of a successful claim of
infringement, the Company may be required to obtain one or more licenses from
third parties. There can be no assurance that the Company could obtain the
necessary licenses on reasonable terms.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates. The Company invests its cash in financial instruments
including bank time deposits. These investments are denominated in U.S.
dollars.
14
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
During May 1999, RDL was served with a subpoena duces tecum to produce
documents and to testify before the Grand Jury of the United States District
Court, Central District of California. The subpoena appeared to relate to
allegations of mischarging or improper billing with respect to federal
government contracts and was directed to RDL and, among others, all of its
then present and former officers and directors, together with its then
affiliates, including the Company (then named RDL Commercial Technologies
Corporation). At a meeting with the Assistant United States Attorney ("AUSA")
in charge of the investigation during July 1999, the attorneys for the Company
were advised that the Company was a subject of the investigation. Subsequent
to this meeting, the Company produced to the AUSA all documents requested by
the subpoena and provided the AUSA with a copy of an analysis of cash receipts
and disbursements of the Company since its inception prepared by
PricewaterhouseCoopers LLP showing that the Company has never received funds
from the federal government under any government contracts. The Company also
offered to cooperate completely with the Grand Jury investigation and on
November 30, 1999, the CFO of the Company met with the AUSA and agents of the
FBI to answer their questions concerning RDL and the Company. At the
conclusion of this meeting, the AUSA indicated that she believed the CFO's
commentary to be truthful and also indicated that, based upon the government's
investigation to date, the Company was no longer a subject of the
investigation. It should be noted that the AUSA has absolute discretion as to
who, if anyone, will be indicted and until this matter is completely resolved,
the Company remains as a possible target of the investigation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A.) EXHIBITS. The following exhibits are included herein:
(27) Financial Data Schedule
(B.) FORM 8-K. On June 8, 2000, the Company filed a report on Form 8-K
(Item 2) to announce the merger with Codestream Technologies
Corporation.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CODESTREAM HOLDINGS, INC.
(Company)
Date: August 19, 2000 /s/ D. Gordon Werner
---------------------------
D. Gordon Werner
President, Chief Executive Officer and
Chief Financial Officer
(Principal Financial Officer)
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