UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
INSTANT VIDEO TECHNOLOGIES, INC.
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(Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation or Organization)
84-1141967
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(I.R.S. Employer Identification Number)
500 Sansome Street, Suite 503
San Francisco, California 94111
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(Address of Principal Executive Offices, including Zip Code)
(415) 391-4455
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(Issuer's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which
To be registered each class is to be registered
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Securities to be registered pursuant to Section 12(g) of the Act:
$0.00001 par value Common Stock
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(Title of class)
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TABLE OF CONTENTS
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ITEM 1. BUSINESS.........................................................................................3
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS....................................................3
OUR COMPANY............................................................................................3
INDUSTRY BACKGROUND....................................................................................4
MARKET OPPORTUNITY.....................................................................................4
OUR SOLUTION...........................................................................................5
OUR BUSINESS...........................................................................................7
ITEM 2. FINANCIAL INFORMATION...........................................................................15
SELECTED FINANCIAL DATA...............................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................16
ITEM 3. PROPERTIES......................................................................................20
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................20
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS................................................................22
ITEM 6. EXECUTIVE COMPENSATION AND OTHER MATTERS........................................................25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................26
ITEM 8. LEGAL PROCEEDINGS...............................................................................30
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................30
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.........................................................30
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.........................................33
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.......................................................33
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................33
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............33
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS...............................................................34
SIGNATURES...............................................................................................37
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ITEM 1. BUSINESS
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Report includes forward-looking statements within
the meaning of applicable securities laws that involve substantial risks and
uncertainties including, but not limited to, market acceptance of our products
and new technologies, the sufficiency of financial resources available to us,
economic, competitive, governmental and technological factors affecting our
operations, markets, services, and prices, and other factors described in this
Registration Statement. Our actual results could differ materially from those
suggested or implied by any forward-looking statements as a result of such
risks.
All trademarks and trade names appearing in this document are the property of
their respective holders.
OUR COMPANY
We are an independent provider of client/server network software for the
delivery of video and audio information over networks. Our headquarters is
located in San Francisco, California, with additional offices in several
domestic metropolitan areas. Our software manages the delivery of video and
audio content over a variety of networks; optimizing network efficiency and
quality of service over high-speed, broadband networks in particular. Broadband
networks use cable or other transmission modes with multiple communication
channels to provide much higher bandwidth or capacity for video, audio and data.
Our Burstware(R) suite of software products enables companies to transmit video
and audio files at Faster-Than-Real-Time(TM) speed, which is accomplished by
utilizing capacity available in broadband networks to send more video or audio
data to users than the players are demanding. This data is stored on the users'
machine for playing on demand, thus isolating the user from noise and other
network interference. The result is high quality, full-motion video and
CD-quality audio to the end-user. Burstware(R) utilizes several components of
our international patent portfolio, including the Faster-Than-Real-Time(TM)
delivery method.
We began as a research and development partnership in 1988; with initial
activities focused upon technical investigations, patent development and
research pertaining to the viability of transmitting and receiving video and
audio programming in faster-than-real-time over a variety of networks.
In 1990, we incorporated, changed our name to Explore Technology, and secured
$2.0 million in funding in order to develop prototype hardware and software for
demonstrating faster-than-real-time transmission and reception of audio and
video programming; we described this type of communication as "burst". We hired
an engineering firm in Palo Alto, California to construct a pair of "burst"
video/audio transceivers. At the time this work was undertaken, networks capable
of providing "burst speeds" at practical prices were not available.
During the second quarter of 1992, we were acquired by Catalina Capital
Corporation, a small public company organized as a Delaware corporation on April
27, 1990. As a result of this transaction, our original shareholders received
85% of the outstanding shares of Catalina Capital Corporation, which was renamed
Instant Video Technologies, Inc. Our stock trades on the NASDAQ OTC Bulletin
Board under the symbol "IVDO".
In the first half of 1995, we began development of a software product that would
incorporate our patented intellectual property for faster-than-real-time burst
transmissions of multimedia content over computer networks. At that time, we
contracted with a consulting firm to develop this software product. A prototype
was created to run on a variety of networks. In 1996, we entered into agreements
with three customers for use of the software in their products and services. We
continued our product development through 1997 by contracting with a third-party
consulting firm.
In September 1997, our co-founder, Richard Lang, returned as Chairman, CEO and
President. As a result, in the last quarter of 1997 we restructured our
management team, obtained funding to continue operations, refocused our product
development, and brought technology development in-house.
At the end of the third quarter of 1997, we suspended sales of our prototype
software to customers in order to concentrate our efforts on developing a new
suite of Burstware(R) software products to position us for future growth.
Resources were directed at product development to facilitate our new strategy
and resulted in no software license sales in 1998.
In 1998, we focused on developing a commercially marketable suite of software
products; raising the capital necessary to meet operating requirements, and
building our management team. We released the test version of the Burstware(R)
suite of software products on schedule in March 1998 and began testing with
selected companies in April 1998. New versions of the test software were
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released in June and November 1998. Although we released our first commercial
product, Burstware(R) Version 1.1, to the public in February 1999, we have not
yet made any sales. In 1999, we continued to recruit key sales, marketing and
development contributors.
INDUSTRY BACKGROUND
In recent years, several related technologies have converged to enable the
distribution of video and audio content over electronic communications networks.
As network bandwidth, data storage, processing power, and compression
technologies have become increasingly available at affordable prices, the demand
for high quality video and audio over the Internet and other networks has
increased. According to Frost & Sullivan, a leading research firm, the number of
households with high-speed access is estimated to be 1.9 million with service
revenue of $574 million; by 2002, these numbers are expected to reach 12 million
and $3.6 billion, respectively. The result of such developments has been the
transition of the Internet from a static, text-oriented network to an
interactive environment filled with graphical and audio-visual content.
Distributing audio-visual content over the Internet or within an intranet offers
certain advantages and capabilities not generally available through traditional
media, including targeted, geographically dispersed and interactive viewership
at relatively low cost. Businesses have begun to recognize the cost,
inconvenience and inefficiency of business communication tools such as audio and
video conferencing over phone lines. As a result, the demand for high-quality,
cost effective online communications of audio and video data over computer
networks between businesses, between businesses and their customers, and within
the workplace among employees is growing rapidly. According to Frost & Sullivan,
video server market revenue for 1999 is expected to reach $722.7 million,
growing to $2.1 billion by 2002.
In order to capitalize on this explosion in audio-visual content on networks and
the large and growing number of Internet-based communication channels in both
the business-to-business and consumer markets, a number of companies have
developed first generation software solutions intended to deliver such content
to the end user. These first generation solutions have commonly been referred to
as real-time streaming solutions that allow for the transmission and remote
playback of continuous "streams" of media content, including live video and
audio broadcasts. These technologies were designed to deliver audio and video
content over widely used 28.8 kbps narrow bandwidth modems and, to a limited
extent, are capable of utilizing higher speed access provided by digital
subscriber lines, cable modems and other broadband emerging technologies.
MARKET OPPORTUNITY
Although current streaming technology represents a significant advancement over
earlier technologies, it remains unable to provide the client with reliable,
uninterrupted, full-motion, studio-quality video, particularly video-on-demand
("VOD"), and CD-quality audio. First generation solutions rely upon a network
design in which various client computers are connected to centralized server
computers. Typically, one server is intended to service a multitude of clients.
During a typical session, a server must deliver data in frequent and regular
intervals, or just-in-time, for the length of any real-time play of content.
This is a remote play design. For example, a 30-minute video requires that
constant communication between servers and clients be maintained for 30 minutes
of real-time viewing. Moreover, in all cases involving real-time streaming, as
the number of end users expands, the number of server connections must also
increase at a ratio of 1 to 1. Real-time streaming through such a network cannot
scale efficiently and, given the infrastructure requirements, remains costly.
As real-time streaming expands rapidly online with growing demand for
audio-visual content, client-centric delivery becomes increasingly susceptible
to congestion and disruption within the established client-server universe. As a
result, there typically is interruption or degradation of the client's
multimedia experience. Additionally, the number of real-time connections that
can be maintained simultaneously by the server is limited by processing power as
well as bandwidth availability. This, along with the fact that a server tends to
devote disproportionate resources to the client with the most available
bandwidth, also reduces the quality as well as the availability of the video and
audio content to most users on the network.
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Real-Time Streaming Delivery Solution
[GRAPHIC OMITTED]
Network disruptions cause the video
to jitter and sometimes stop
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As a result of these limitations, and including the fact that most streaming
technology involves proprietary encoding schemes and limited platform
acceptance, widespread dissemination of high-quality streaming content has yet
to occur within either the business-to-business or consumer market. Escalating
demand within these markets as well as the need for quality enhancement of
content delivery have created a need for a software solution capable of
eliminating network disruptions and utilizing client bandwidth efficiently.
OUR SOLUTION
With our patented Burstware(R) technology, we provide a server-based intelligent
network management system delivering "Faster-Than-Real-Time"(TM) content across
a variety of networks. Our software is designed to work equally well with
content created using any data compression/decompression (CODEC) methodology.
The Java-script Burstware(R) solution ensures a consistent, high-quality
experience over multiple platforms through optimization of network resources and
superior isolation of clients from network disturbances.
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Burstware(R) Delivery System
[GRAPHIC OMITTED]
Burstware(R) protects the viewing experience from network disruptions,
ensuring TV-quality viewing experience
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In a Burst-Enabled(TM) network, the server delivers "bursts" of content of
various sizes and frequencies, as required, into a client-side buffer at a
Faster-Than-Real-Time(TM) rate of consumption. On the client side, the local
buffer of stored, or cached, data acts as a reserve providing continuous play in
the event that data flow across the network is disrupted. Once the network
recovers, the local buffer is rapidly "topped off" at a
Faster-Than-Real-Time(TM) rate. Upon delivery completion, the server disengages
from the client and is free to address other clients awaiting content delivery,
with service prioritized based on the client's buffer level, rate of
consumption, available bandwidth and other variables.
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Real-Time Streaming's Use of Bandwidth
[GRAPHIC OMITTED]
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Burstware's Use of Bandwidth
[GRAPHIC OMITTED]
Burstware(R) supports more users with less infrastructure
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On a typical network, demand for
media content rises and falls.
Real-time streaming's architecture
must allocate network bandwith
for the peak demand falls.
Bursting averages out peaks and
troughs using an intelligent buffer
management system.
Buffers are replenished in
anticipation of client needs at
rates Faster-Than-Real-Time(TM).
This intelligent network
management reduces demand for
bandwidth at peak times.
With the same amount of
allocated bandwidth, Burstware(R)
supports more users with less
infrastructure.
With a need-based delivery model and the ability to service the same number of
clients using fewer network resources, Burstware(R) technology also offers
quantifiable savings over a wide variety of end user environments. Simulations
have shown that Burstware's(R) intelligent network management system can provide
significant improvement in network efficiency, or throughput, when compared to
real-time streaming.
During all phases of content delivery, Burstware's(R) network-based architecture
allows for continuous monitoring of consumption rates, multiple end user needs,
and changes in network conditions. Using connection acceptance criteria,
Burstware(R) can determine which network legs or servers are overburdened and
then shift the load accordingly. In addition, through synchronizing content
delivery across backup servers, the Burstware(R) system creates a reliable
failover for uninterrupted service in the event of component or network failure,
thereby eliminating the need for the client to request that the server resend
the entire file.
Developed with the flexibility of open standards, the Burstware(R) network
management elements are focused exclusively on content delivery without regard
to proprietary CODEC or rendering technologies, leaving application developers
free to use whichever CODEC is required of their application. Burstware(R)
architecture currently supports numerous encoding schemes, including MPEG1,
MPEG2, AVI and QuickTime, with the ability to adapt quickly to new technologies
as they are brought to market. Moreover, the Burstware(R) solution is platform
and player neutral. Burstware(R) operates on Microsoft Windows NT, Solaris and
Linux platforms as well as a Burst-Enabled Windows Media Player and a Java-based
player (JMF).
The intelligent Burstware(R) network resource management features enable
multiple end user applications as well. Providing virtually unlimited access to
vast libraries of content, Burstware(R) gives content producers, content
aggregators and audio-visual application developers the ability to reach new
markets. With the capacity to deliver data in a clear, efficient and
cost-effective manner, the Burstware(R) solution creates a high-quality
audio-visual experience for the consumer and enables powerful
business-to-business, business-to-customer and business-to-employee
communication, including distance learning and corporate training. The various
applications of Burstware's(R) network delivery mechanism make it ideally-suited
for multiple industries including news, entertainment, retail and advertising as
well as local, state and federal governments and agencies.
Streaming-based portals are turning to third-party network caching companies to
solve the problems of poor quality, reliability, and bandwidth costs. Companies
such as Inktomi, Sandpiper, and Akamai provide network caching engines that
dynamically move content closer to the node requesting the content, placing
caching servers at the edge of the Internet. However, the Internet's edge is a
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moving target; as the edge continues to spread, "chasing the edge" with ever
greater numbers of servers is a costly solution that scales poorly.
Burstware(R) does not need to place caching servers at the edge. Burstware's(R)
patented Faster-Than-Real-Time(TM) technology demonstrates superiority of
delivery from fewer, more centrally located servers. Burstware's(R) inherent
insulation to network delays and disruptions creates an opportunity wherein we
and our Internet bandwidth partners could offer a quality of service for
delivery of media over the Internet superior to that of any technology based
upon real-time streaming. This translates directly into cost savings for content
providers.
OUR BUSINESS
STRATEGY
We intend to be the leader in providing network software solutions, intellectual
property, and services for the delivery of multimedia content over high-speed
networks. To achieve these objectives, our strategy includes the following key
factors:
o Enhance Technology Platform: We will continue to focus on developing
new intellectual property and patents for the delivery of multimedia
content over networks. Development has begun on additional Burstware(R)
versions to offer new and improved functions and features. We will also
focus on maintaining our CODEC, platform and player-neutrality
including new, non-PC platforms, additional CODECs, network appliances
and set-top boxes. We will continue to commit significant resources to
research and development.
o Leverage Existing and Establish New Strategic Relationships: We are
working to establish strategic and/or licensing relationships in sales,
marketing, promotion, and technology. We currently have discussions or
negotiations in process with value-added resellers, systems
integrators, original equipment manufacturers, and other technology
companies, and have entered into reseller agreements with RMSI, iStream
T.V. Datanext, and Clover Corporation (a subsidiary of Ameritech/SBC).
o Build Brand Aggressively: We intend to establish our Burstware(R) suite
of products as the leading enabler of reliable, high-quality
audio-visual content delivery. We will endeavor to increase our brand
recognition through a variety of marketing and promotional techniques,
including advertising, tradeshows, direct mail, and coverage by
journalists. Our branding campaign will target the following market
segments: retail, education, general corporate, broadcasting and
business-to-consumer.
o We intend to Burst-Enable(TM)all industry-standard desktop players. We
released the Burstware(R)Bridge to the JMF (Java Media Framework)
player in February 1999, to the Microsoft Windows Media Player in
November 1999, and expect to release Burstware(R)Bridges to the Apple
Quicktime Player, Real Player, and MPEGTV's Player within the next two
calendar quarters. This could mean that a single Burstware(R)server
will be capable of addressing a wide variety of desktops, players and
most set top boxes, with the additional Burstware(R)quality. Up to now,
an internet service provider had to choose the streaming media solution
it would run on each server, since the different technologies (Real,
Windows Media Technologies, etc.) are incompatible when run from the
same server. Once the "Burstware(R)Bridgework" is completed, we believe
it will be easier to reach any of the players from a single
Burstware(R)server.
o Create Hosting Service: We plan to create a hosting service, which will
enable our customers to store their audio-video content on our
Burstware servers for delivery to their employees, customers or other
end-users over broadband networks supplied by our partners. Because
Burstware(R) has been demonstrated to do a superior job of delivering
data across the Internet, our strategy will be to host content for
broadband distribution to homes with high-speed, broadband access.
According to Paul Kagan Associates, there are currently, 1.9 million
homes with high-speed access; in 2000 that number is expected to rise
to 4.3 million homes and increase to over 30 million in the next 8
years.
o Applications Development: We anticipate that many of our customers will
want us to develop for them an application which combines Burstware(R)
with other tools such as editing and search programs in order to meet
specific customer or industry requirements. We have developed one such
application for the broadcast industry and are working on others. We
will be increasing our applications development staff to accommodate
demand for other applications as it surfaces.
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TECHNOLOGY
Burstware(R) is client-server software designed for small and large enterprises
that manages and optimizes the delivery of high quality video and audio across
Internet Protocol (IP) networks. Burstware(R) takes up where streaming leaves
off, providing a video delivery solution that is changing the way the industry
thinks about networked video applications.
At the heart of the Burstware(R) solution is Burstware's(R) patented
Faster-Than-Real-Time(TM) data delivery, which "bursts" data into client-side
player buffers at rates faster than the rate of play. End users play video out
of the local buffers, which insulates their viewing experience from network
disruptions.
The Burstware(R) architecture manages the network system as a whole, tracking
bandwidth usage across all of its servers and distributing client requests
accordingly. Because Burstware(R) monitors bandwidth availability across the
whole network, it can optimize allocation of network resources, resulting in
greatly increased network efficiencies. In-house simulations demonstrate
increased efficiencies of as much as 60% over real-time streaming. These
efficiencies allow Burstware(R) to service more users for the same cost.
Burstware Servers employ a need-based model, tracking the buffer levels of each
client they service and allocating bandwidth based on need. Clients whose
buffers are running low are serviced before clients whose buffer levels are
higher. Moreover, Burstware(R) applies optimized connection acceptance criteria
to guarantee the highest quality viewing experience for all clients.
Offering the reliable failover that time-based data demands, Burstware(R) is
designed for uninterrupted service should a Burstware(R) component or network
element fail. Using backup components, and synchronizing all delivery
components, Burstware(R) assures that a video or audio file will continue
playing uninterrupted should any single component fail.
Existing streaming applications are forced to build in functionality for
multiple types of servers because they cannot predict which type of player end
users may have, passing on increased product complexity and higher costs to
customers. In contrast to competitors, we have a delivery platform that can
burst video and audio to existing industry standard players of content delivered
over the Internet. We have already developed Burstware(R) so that it
"Burst-Enables(TM)" the Windows Media Player (WMP) and a Java Media Framework
(JMF) Player, enabling them to play high quality content delivered from
Burstware(R) Servers. Future releases will extend our ability to
Burst-Enable(TM) industry standard players, with additional offerings.
Historically, Asynchronous Transmission Mode (ATM) networks have been the only
solution for video-on-demand or delayed multicast applications requiring the
highest quality of service and reliability available. ATM is a method of data
transmission that allows characters to be sent at irregular (or asynchronous)
intervals by preceding each character with a start bit, and following it with a
stop bit. This methodology helps to insure quality of service (QOS), a measure
of the data transmission service quality provided to a subscriber. But, because
it adds twenty percent more bits - one before and one after each eight bit word,
ATM networks are a costly and complex infrastructure.
With QOS built into the Burstware(R) architecture by isolating the viewer from
network disruptions, Burstware(R) offers potential customers very high
reliability and quality of transmission over any network that supports the
internet protocol. We will continue to market ourselves as a viable, less
expensive solution for video-on-demand and delayed multicast applications that
desire a high quality of service.
Engineering and Product Development
We believe that our future success will depend in large part on our ability to
enhance Burstware(R), develop new products, maintain technological leadership
and satisfy an evolving range of customer requirements for the delivery of audio
and video. Our product development organization is responsible for product
architecture, core technology and functionality, product testing, user interface
development and expanding Burstware(R) to operate with leading hardware
platforms, operating systems, and network and communication protocols. This
organization is also responsible for new product development.
During the past two years, we have made substantial investments in product
development and related activities. The current version of Burstware(R) has been
developed primarily by our internal development staff and, in some instances,
with the assistance of external consultants.
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In March 1998, we released a test version of Burstware(R), followed by
subsequent modifications during the year. We released our first commercial
Burstware(R) product suite in February 1999. This release is a client-server
software product that manages and optimizes the delivery of high quality video
and audio across broadband networks. The servers become intelligent network
managers, efficiently allocating bandwidth and scheduling burst delivery of
multimedia content among multiple users. Microsoft Corporation's Windows
NT/95/98 operating systems are supported on client machines, with Windows NT and
Sun Microsystems' Solaris operating systems supported on servers in
client-server networks.
In August 1999, we added support for the Linux operating system on servers with
our Version 1.1.3. In September 1999 we shipped the early beta test version for
Release 1.2. On November 3, 1999 our Burstware(R) Release 1.2 was made
commercially available.
Upcoming features include multicasting, server-to-server content management, and
more Burst-Enabled(TM) industry-standard players.
Product Offerings
Our suite of Burstware(R) software consists of:
Burstware Server(TM) 1.2
Burstware(R) Server provides all of the necessary functions and features
required to deliver full-motion video and CD-quality audio over IP networks,
including the Internet. Version 1.2 server features include:
o Patented buffer management system
Provides significant network efficiencies and enhanced viewer
experience
o Faster-Than-Real-Time(TM) delivery
Provides isolation from network problems
o Traffic shaping
Limits bandwidth usage to the allocated bandwidth
o Controls impact of video and audio on the network
o Utilizes optimized connection acceptance criteria for guaranteed
quality of service
o CODEC-neutral
o Replicated servers for load balancing and reliable failover
o Extensive logging of client session statistics
Burstware Conductor(TM) 1.2
Burstware(R) Conductor is the manager of the Burstware(R) media delivery system.
Features include:
o Central Management Service
Monitor all servers
Centralized point of control of video and audio on network
o Scalable Deployment of Servers
Add and remove servers per application need
Asynchronous
No performance bottlenecks
o Reliable Failover Mechanism
o Load Balancing
o Replicated Conductors
o Audit Trail Logging
Burstware JMF Player(TM)
o Player scripting
o Works in a browser or in a standalone application
o VCR-like functionality and controls
o Supports many industry standard CODECs
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The current release of Burstware(R) includes technology that Burst-Enables(TM)
both Microsoft's Windows Media Player (WMP) and a JMF Player. The Burst
Enabled(TM) Windows Media Player and the Burstware JMF Player(TM) have been
designed to play content from Burstware(R) Servers. Both players work in a web
browser or as a standalone application, providing functionality and controls
comparable with a VCR, while supporting many industry CODECs.
Burst-Enabled(TM) Windows Media Player
o Burstware(R) Server delivers content to Windows Media Player
o Provides both disk-based and RAM-based caching
o Supports player scripting and high interactivity
o Existing Windows Media Player applications can be easily burst-enabled
o Works in a browser or in a standalone application
o VCR-like functionality and controls
o CODECs supported include: MPEG1, ASF, MP3, and Quicktime
As of October 31, 1999, our product development organization consisted of 30
individuals. We expect to devote substantial resources to our product
development activities, including the continued support of existing and emerging
hardware platforms, operating systems, and networking and communication
protocols.
Sales and Methods of Distribution
Potential customers for our products include any business or other end-user that
desires to send, receive or effectively manage high-quality video and audio
content over networks. We are focusing our sales efforts in three areas: Direct
sales, value-added resellers ("VARs") and other distributors, and strategic
partnerships.
Our direct sales force is organized into two regions, East and West, including
six sales offices. We currently have an eastern regional general manager, five
account executives and five sales engineers in the field and will be continuing
to expand the sales force and add additional offices. The primary goals of
direct sales are to establish significant reference accounts in each key
application and vertical market segment, focusing on enterprise-wide
applications; to support existing VARs in their sales efforts and to recruit new
VARs.
International sales will focus on Europe, the Pacific Rim, and Canada/Latin
America. We have retained the services of The EMS Group, Limited, a major sales
organization located in the United Kingdom, to act as an agent for European
sales.
Burstware(R) products will be marketed to businesses and end-users through
agreements with major resellers, integrators and service providers, either
directly or by incorporating into or bundling with third-party products or
services.
Marketing and Promotion
The market segmentation for Burstware(R) focuses on four main applications:
retail, education, business applications, and broadcasting/entertainment.
Retail
The increasing availability of broadband networks and their expanding use to
access the Internet, are creating new video and audio applications to support
and increase electronic commerce. In addition, kiosks for both financial
institutions and retail are also increasing demand for networked video and
audio. Since the Burstware(R) media delivery software solution is designed to
take advantage of broadband networks, as bandwidth becomes available,
Burstware(R) is poised to become the replacement technology for real-time
streaming.
Education
According to a recent report published by International Data Corporation, the
distance learning market (remote locations) is anticipated to expand rapidly to
approximately $2 billion in revenues worldwide by the year 2001. Revenues from
distance learning
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over the Internet amounted to approximately $48 million in 1997, and are
expected to increase to approximately $3.8 billion by 2002. For both training
and distance learning, we expect to take advantage of the migration from compact
disks and videotape to high quality MPEG digital files.
Business Applications: Training/Customer Care/Business News and Communication
Powered by trends including consolidation, global expansion, strategic alliances
and multiple delivery offerings, the entire training market and technology based
training (via CD-ROMs, satellite broadcasts, etc.) in particular is growing at a
rapid pace. The perpetual need for training within America's workforce in
information technology and software skills is expected to drive corporate
training sales up at a annual rate of 8.6% from 1998 to 2001, reaching more than
$10 billion in 2001, according to Information Inc.
Inbound customer care is changing rapidly. The last 18 months have seen a major
rise in the use of network-based audio combined with browser-based support.
In all our vertical markets there are various internal applications, such as
video news programs, video magazines, management communication, internal
training, and sales and marketing videos.
Entertainment / Broadcasting
Broadcasting and entertainment is composed of several segments, including, among
others, advertising, post-production, video-on-demand, and media distribution.
Paul Kagan Associates has predicted that video-on-demand will generate $4.8
billion in movie revenues by 2008.
Burstware(R) is capable of providing video-on-demand with effective network
resource management and high quality video and audio.
Consumer Markets
It is part of our plan to expand Burstware(R) into the consumer market once
broadband is widely available to the consumer.
Additionally, we intend to develop strategic business relationships with
application providers, hardware and software manufacturers. Our business
development team is generating business opportunities by providing end-to-end
solutions for systems integrators and network service providers.
We have begun implementation of a marketing plan to increase both our company's
and our products' visibility. We intend to use targeted marketing, trade shows,
public relations, advertising, and direct promotion. We also plan to collect
market research with the objective of allowing us to clearly understand our
target markets' purchasing criteria and understand our competitors' positioning
will permit us to select the appropriate marketing tools to achieve our goals.
Our marketing communication strategy is intended to increase brand awareness and
market exposure by:
o A regularly updated web site
o Effective advertising
o Direct mailings (email and mail)
o A comprehensive set of collateral materials
o Media tours
o Ongoing press releases
o Industry interviews
o Trade Shows
We have begun implementation of a public relations plan involving regular press
releases, executive interviews, and analyst reports. Public relations is handled
both internally and through an external agency. Our strategy also includes
collaborative marketing efforts with our strategic partners.
We will continue to participate in key industry trade shows, showcases, and
conferences. These events have commenced since the initial launch of
Burstware(R) in early February, 1999. Since April, 1999 we have demonstrated
Burstware(R) at the National Association of Broadcasters' NAB'99 show, a partner
showcase in Michigan for Clover Technology, cosponsored Streaming Media East '99
in New York, participated in the Linux pavilion at Interop in Atlanta, and in
the streaming pavilion at Telecon in Los Angeles. Our strategy involves
independent participation as well as collaborative efforts with our strategic
partners.
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We have developed a plan to build brand awareness coinciding with the February
1999 and November 1999 Burstware(R) product releases. The advertising campaign
began in February with radio sponsorship. The Burstware(R) slogan: "Why Stream
When You Can Burst?"(TM) was introduced into print advertising in March. We will
continue to advertise in more technical magazines, billboards in technology
areas and expand into high tech consumer publications and Internet sites.
Burstware(R) Partners Program: Building A Solutions-Oriented Platform
Our Burstware(R) Partners Program is designed to create a total systems solution
with Burstware(R). The objective of the Program is to form a network of partners
to provide solutions which combine Burstware(R) with their hardware and software
products and services to meet the requirements of various vertical application
categories. It is our intent that these partners will offer
Burstware(R)-compatible solutions in conjunction with their products, such as:
encoding, asset management, cataloguing, front-end development,
routing/switching, storage solutions, systems integration, set-top
implementation, and other specialty applications.
Following are some of the partners with whom we are currently working.
Minerva Systems, Inc. is the leading provider of carrier quality video
networking platforms and services that enable the delivery of rich-media content
over the broadband Internet and intranets. The company combines its unique
expertise in video processing and media authoring to scale IP networks into
robust rich-media delivery systems. Minerva delivers end-to-end solutions for a
wide range of applications, such as distance learning, corporate training,
business-to-business e-commerce, telemedicine, video conferencing and digital
television.
Virage is the pioneer and recognized market leader in video and image search
products. The Virage VideoLogger software sets the standard for real-time
indexing and distribution of video across the Internet or corporate intranets
and has been named the market winner by industry analyst group Frost & Sullivan.
Virage customers include ABC News, AltaVista, BBC, CBS News, CNN, CNN
Interactive, Compaq, Federal Bureau of Investigation, General Motors, Harvard
Business School, Lockheed Martin, Lucent Technologies, NASA, NBC News, Reuters
and several classified U.S. government agencies. These companies rely on the
Virage VideoLogger as the critical foundation technology for more effectively
deploying video within their operations.
InnovaCom, Inc. is a Silicon Valley manufacturer of video compression based
transmission and DVD PreMastering Systems. The company's MPEG-2 based product
line targets the digital television, communications and DVD production
marketplaces.
Digital OutPost, based in Carlsbad California, is an industry leader in digital
video compression and production services. Digital OutPost's services include
complete multimedia design and production for DVD Video, DVD-ROM, CD-ROM,
Internet and Broadband channels. The Digital OutPost team is a pioneer in the
MPEG video compression field. Digital OutPost's principals were integral in
developing new interactive media technologies from interactive television to
CD-ROM video games. Digital OutPost currently serves clientele in the following
markets: digital video compression technologies, video on demand, DVD, CD-ROM,
broadband and Internet video delivery and digital video production.
Los Angeles based Interactive Video Technologies is a leading provider of video
application outsourcing for major corporations and specializes in developing and
managing interactive video content to support corporate strategic objectives.
The company serves clients in major vertical markets including finance,
technology, healthcare, manufacturing, entertainment, and education.
Competition
We compete in markets that are rapidly evolving and intensely competitive. We
have experienced and expect to continue to experience increasing competition
from current and potential competitors, many of which have significantly greater
financial, technical, marketing and other resources.
In addition to us, there are four significant media delivery companies that
compete in similar market segments. The Burstware(R) product is priced similarly
to products offered by our major competitors, but competition is based primarily
on features and functionality. All competitors use real-time streaming
technology as opposed to our Faster-Than-Real-Time(TM) solution. RealNetworks
and Microsoft have concentrated on the consumer markets, while Tektronix and
Cisco are primarily focusing on the business-to-business markets. RealNetworks
and Microsoft are moving into the business-to-business markets with large
clients such as 3Com and Northrup Grumman. Tektronix and Cisco address the
problem of network management, although in a limited fashion. Currently, there
is limited competition in the broadband arena. Because of our patent portfolio,
we are able to offer unique network efficiency management, scalability and
reliability features and functionality, which combine to provide a competitive
advantage.
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While we can deliver multimedia content in a real-time mode, our architecture is
ideally suited to capitalize on the growth in broadband networks and inexpensive
storage.
RealNetworks
RealSystem G2 is a fully integrated encoder, server, splitter/cache and player
system. RealNetworks is dominant in the Internet market and the low bandwidth
applications, which have primarily centered around news and entertainment
markets. With their dominance in the consumer market and brand awareness, they
are gaining ground in the business sector with clients like 3Com, Boeing and
General Electric. We believe that RealNetworks' use of real-time streaming
technology, its lack of network management and its CODEC-dependence will give us
a competitive advantage in the business-to-business market. To effectively
deploy RealNetworks for a broadband application, the software must be bundled
with Digital BitCasting, and Inktomi (or similar caching product.).
Windows Media
Windows Media Technologies 4.0 provides an end-to-end solution for streaming
multimedia, from content authoring to delivery to playback. Microsoft is
building brand strength by bundling Windows Media with other Microsoft Products.
Windows Media's presence in the business-to-business market is currently not
significant. Windows Media Technologies is targeting the streaming audio segment
by being the only streaming media platform to feature FM-stereo quality over a
modem and improved piracy protection. Like RealNetworks, Microsoft is focusing
on the consumer market by attracting content providers rather than developing
their media delivery system. Windows Media is relying on streaming technology to
deliver video and audio and offers no network management solution.
Consumers with the Windows Media Player (a component of Windows Media
Technologies) can use the Burst-Enabled(TM) Windows Media Player to increase the
content quality, reliability, and the efficiency of their network.
Tektronix
Tektronix has two product lines, Profile video servers and Grass Valley products
that provide communication solutions that are used to distribute and store
broadcast and post-production information. Tektronix is focusing primarily on
Video-Centric LAN/WAN Networking and Broadcast Production Networking. Tektronix
is concentrating on the business-to-business markets primarily through value
added resellers, direct sales, service providers and Original Equipment
Manufacturers. Tektronix does perform minimal network management, but uses
streaming technology.
IP/TV
Cisco Systems, Inc.'s IP/TV claims its software offers high-quality video
broadcasting and video on demand services, industry-leading management
capabilities, built-in scalability, network-friendly technologies such as IP
Multicast, and an easy-to-use viewer interface. Cisco's IP/TV servers attempt to
provide scalable, turnkey bandwidth-efficient solutions. Their hardware
platforms are pre-configured with the IP/TV software, creating a complete
network video solution. Cisco's IP/TV is targeting the business-to-business
markets. IP/TV is combining streaming technology with its Content Manager to
balance loads and to track specific viewing and management functions.
Others
There are other companies who offer streaming media solutions for the Internet
and corporate intranets. Many claim to have streaming media solutions for
corporate training, distance education, health care, and entertainment. Some
companies offer media servers with the ability to stream content to up to 500
desktops at one time. Others offer content management and media players.
Burstware(R)'s potential competitors offer no or limited network management.
This is a rapidly evolving market with no barriers to new entrants. Many
competitors, current and potential, may have access to more resources than are
available to us.
Patents and Trademarks
Our business is highly dependent on our patent portfolio. We have eight U.S.
patents granted. The early patents describe a broad class of systems that allow
a user to view, edit, store video information, and send and receive the data
associated with that video information over networks in less time than is
normally required to view or listen to the content. The later patents describe
particular distribution methods designed to deliver video information to remote
systems.
Our core patents describe systems that are able to receive a high quality video
signal, store received information locally, manipulate that information with
editing, processing, compression and decompression tools, display the signal for
viewing, and re-send the manipulated information on to other such machine
systems in faster-than-real-time. Our current patents will expire on various
dates in 2007 through 2016.
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We have been granted two Australian patents, which incorporate the subject
matter of the U.S. patents, one South Korean patent, and one Indian patent. We
have filed for a number of additional domestic and international patents.
In addition to protecting the Burstware(R) product offerings, our patents have
broader application as various market applications appear, and our potential to
license our intellectual property expands into additional vertical market
segments.
We view our portfolio as a critical component in gaining relationships with
strategic partners, strongly positioning our products' competitive advantage.
Potential licensees include companies such as server and client manufacturers,
bandwidth providers, content aggregators, copyright owners, and other hardware
manufacturers.
We have registered the trademarks "INSTANT VIDEO(R)", "BURSTWARE(R)" and
"BURSTAID(R)" in the United States, as well as in certain countries in Europe
and Asia.
Employees
As of October 31, 1999, we have 59 full-time employees, of which 20 work in
product development, 25 are in sales, marketing and business development and 14
work in administration, finance and operations. We have never experienced a work
stoppage and no personnel are represented under collective bargaining
agreements.
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ITEM 2. FINANCIAL INFORMATION
<TABLE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
document. The statement of operations data for each of the years in the two year
period ended December 31, 1995 are derived from financial statements that Evers
& Company, Ltd, independent accountants, have audited and for each of the three
years in the three-year period ended December 31, 1998, and the balance sheet
data at December 31, 1997 and 1998, are derived from financial statements that
KPMG LLP, independent accountants, have audited and are included elsewhere in
this registration statement. The statement of operations data for each of the
six-month periods ended June 30, 1998 and 1999, and the balance sheet data at
June 30, 1999, are derived from unaudited interim financial statements included
elsewhere in this registration statement. The unaudited financial statements
have been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
----------- -------- -------- ---------- ----------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue $ 55,792 665,781 1,457,597 247,879 15,000 15,000 --
Loss from operations (1,084,917) (372,254) (347,551) (1,928,637) (4,663,867) (1,294,976) (4,200,377)
Net loss (1,159,636) (456,633) (404,367) (2,062,373) (6,916,420) (1,866,023) (4,169,402)
Beneficial conversion
feature of Series B -- -- -- -- (8,762,425) -- --
Preferred Stock
----------- -------- -------- ---------- ----------- ---------- ----------
Net loss applicable to
Common Stockholders $(1,159,636) (456,633) (404,367) (2,062,373) (15,678,845) (1,866,023) (4,169,402)
=========== ======== ======== ========== =========== ========== ==========
Basic and diluted net loss
per common share: $ (0.30) (0.11) (0.09) (0.39) (2.35) (0.32) (0.47)
=========== ======== ======== ========== =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 47,160 4,346 208,613 20,551 2,212,141 484,483
Total assets $ 237,862 238,855 601,182 155,191 3,249,622 1,139,420
Long-term obligations $ 523,500 141,000 -- 16,833 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
We have not declared nor paid any cash dividends on our Common Stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believe," "anticipate," "estimate,"
"expect," and words of similar meaning, constitute forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain factors set forth in other parts of this document.
General
We remain optimistic about our future, but our prospects must be considered and
evaluated in light of the risks, operating and capital expenditures required,
and uncertainty of economic conditions that may impact our customers. Emerging
companies are characterized by a high degree of market and financial risk that
should be considered in evaluating our financial results and future prospects.
To achieve and sustain profitability, we must successfully launch, market, and
establish our software products, successfully develop new products and services,
meet the demands of our customers, respond quickly to changes in our markets,
attract and retain qualified employees, and control expenses and cash usage, as
well as continue to attract significant capital investments.
We believe that period-to-period comparisons of our operating results, including
our revenues, cost of sales, gross margins, expenses, and capital expenditures
may not necessarily provide meaningful results and should not be relied upon as
indications of future performance. We do not believe that our historical results
are indicative of future growth or trends.
We have incurred significant losses since inception, and as of June 30, 1999,
had an accumulated deficit of $28,627,567. There can be no assurance that we
will achieve or sustain profitability and we believe that we will incur a net
loss in 1999.
Results of Operations
Six Months ended June 30, 1999 compared to 1998
We had no revenue or cost of revenue for the six months ended June 30, 1999
compared with $15,000 revenue for the same period in 1998. These minimal
revenues were the result of our redirecting our product and market activity to
the Burstware(R) family of products. We released the commercial version of our
Burstware(R) suite of products in 1999, and have shipped evaluation copies to
potential customers.
During the six months ended June 30, 1999 expenses increased to $4,200,377 as
compared to $1,309,976 during the six months ended June 30, 1998. This
$2,890,401 increase was a result of an overall expansion in the number of
employees, additional facilities and equipment, and increased marketing activity
as further discussed below in the sections describing growth in the research and
development, sales and marketing departments.
The $678,600, or 271% increase in Research & Development expenditures, resulted
from the ramp-up in preparation for the commercial release of our product. The
Quality Assurance and Release Management Department was established to support
subsequent releases. Personnel were added to complete documentation of the
product releases. Major development activities began in the areas of player
scripting, incorporation of a database for replication, and various other
features to be included in subsequent releases.
The $1,394,587 or 805% increase in Sales & Marketing was primarily a result of
increased expenditures relating to the commercial release of our Burstware(R)
product suite. This increase was comprised of additional costs related to new
sales and marketing employees, and to a targeted marketing campaign we have
initiated, which includes print, radio and billboard advertising, public
relations, collateral development, as well as a presence at major trade shows.
We believe that these media will allow us to reach specific vertical markets
cost-effectively, to support the efforts of the direct sales force, and to
generate publicity for us as a whole.
The marketing campaign's objectives are to build brand awareness, facilitate
name recognition, educate the market, generate sales leads and develop
relationships with technology partners, systems integrators and resellers. These
expenditures will continue as part of an overall plan to build upon and expand
brand awareness.
Sales expenditures have increased as a result of the expansion of our sales
force in conjunction with the launch of the Burstware(R) suite of products. We
currently have a business development office in Southern California, and sales
offices in Virginia, Colorado,
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Michigan, Metropolitan New York and Florida. We have also partnered with The EMS
Group, Limited, to develop sales and marketing channels in Europe.
We incurred a $817,214, or 92% increase in General and Administrative Expense
which resulted from additional personnel and space to support the increased
research, development, sales and marketing activities.
We had a net loss from operations of $4,200,377 during the six months ended June
30, 1999, as compared to $1,294,976, a 224% increase over the same six months in
1998. The increased loss resulted from the increased expenditures discussed
above. Other income (expenses), net was $30,975, as compared to $571,047 net
expense for the six months ended June 30, 1999 and 1998, respectively. This
$602,022 decrease in interest expense was principally due to the decrease in
interest expense associated with debt converted to equity or that was retired
during 1998.
Year ended December 31, 1998 compared to 1997
Revenue
During the year ended December 31, 1998, we earned revenue in the amount of
$15,000 compared to $247,879 for 1997. The 1998 revenue was from a single
domestic transaction relating to a field trial. 1997 revenue was from consulting
services for a different domestic customer.
Cost of Revenue
We had no cost of revenue for the year ended December 31, 1998, since the
above-mentioned field trial had no costs associated with it. 1997 cost of
revenue consisted of costs of services related to customization of software for
the domestic customer referred to above.
Operating Expenses
Costs and expenses during the year ended December 31, 1998, totaled $4,678,867
as compared to $1,946,306 during 1997. The increase was primarily due to
increased software development expense, increased labor expense, increased sales
and marketing expenses, and non-cash compensation expense relating to stock
options.
Software research and development ("R&D") expenses for 1998 increased 322% from
$189,719 in 1997 to $800,567 in 1998. R&D expenditures accounted for 17% of
total operating expenses in 1998. All R&D costs are expensed as they are
incurred. The majority of R&D expenses were labor-related for employee salaries
and benefits and expenses for consultants as the result of our decision to
expand our internal product development team. We will continue to incur
increasing research and development costs as we continue to develop our
Burstware(R) product line and follow-on products.
Sales and marketing expenses increased 103% from $408,369 in 1997 to $830,998 in
1998 and accounted for 18% of total operating expenses in 1998. The increase in
1998 was due to expenditures for developing and producing marketing collateral
materials, developing a public relations and promotion campaign strategy, travel
expenses, and labor expenses due to increased headcount in 1998.
General and administrative expenses increased from $1,348,218 in 1997 to
$3,047,302 in 1998 and accounted for 65% of total operating expenses in 1998.
The 126% increase from 1997 to 1998 was due to $1,865,225 non-cash, stock option
compensation in addition to increased labor and consultant expenses and
increased legal expenses for our patent filings. We expect that general and
administrative expenses should decrease as a percentage of total operating
expenses in 1999 as a result of increased spending in sales and marketing.
Inflation had no material effect on revenue or on operating income.
Other Expenses
Total other expense for 1998 was $2,252,553 versus $133,736 in 1997. This
increase was primarily due to an increase in interest expense. Interest expense
for 1998 increased 1,520% from $139,013 in 1997 to $2,252,553 in 1998. This
increase was due to interest expense recognized for beneficial conversion
features on notes issued during 1998, discount amortized and interest accrued on
these
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notes during 1998, and interest expense recognized for the fair value of
warrants issued upon conversion of these notes and related accrued interest to
common and Series B Preferred Stock during 1998. Actual cash expenditures for
interest in 1998 totaled $65,935.
Net Loss and Net Loss Applicable to Common Shareholders
We incurred a net loss of $6,916,420 and a net loss to common shareholders of
$15,678,845, ($2.35 per common share) for the year ended December 31, 1998, as
compared to a net loss and net loss to common shareholders of $2,062,373 ($.39
per share) for 1997. The 1998 loss is primarily caused by minimal revenue,
increased operating expenses, non-cash interest expense relating to now retired
debt, and compensation expense relating to stock options granted to employees
and consultants.
The additional loss of $8,762,425 to common shareholders in 1998 resulted from
beneficial conversion terms for our Series B preferred stock. The beneficial
conversion feature resulted from price differences between the $2.00 conversion
price for the Series B offering and the closing price for our common stock on
the dates the Series B preferred stock was purchased. Our Series B preferred
stock offering was sold over a period of time, and had a fixed $2.00 per share
conversion price, while our common stock price fluctuated widely during that
period. Any excess of the closing price of our common stock over the fixed
conversion price of our Series B preferred stock on the date of purchase
represented a benefit to the purchaser of the Series B preferred stock, and
consequently was recognized as a loss due to beneficial conversion feature of
Series B convertible Preferred Stock.
Management expects to continue to incur losses for 1999 as we establish our
brand, commence sales and establish market share.
Year ended December 31, 1997 compared to 1996
During the year ended December 31, 1997, we earned revenue in the amount of
$247,879 versus $1,457,597 for the same period in 1996. The 1997 results were
considerably less than 1996 due to lower sales resulting from our decision to
concentrate on our Burstware(R) product development and de-emphasize prior
products and services.
Costs and expenses during the year ended December 31, 1997, totaled $1,946,306
as compared to $1,726,953 during the year ended December 31, 1996. The increase
was primarily due to Burstware(R) project costs, the hiring of additional
employees, the increase in travel related expenses, and the write-off of
accounts receivable in the third quarter of 1997 and sales in the first quarter
of 1997.
Research and development expenses for 1997 totaled $189,719 versus $48,588 for
1996. Research and development costs are directly expensed as incurred. These
costs increased in 1997 because our decision to redesign our Burstware(R) Suite
of products in the second half of 1997. We will continue to incur increasing
research and development costs as we continue to develop our Burstware(R)
product line and follow-on products.
Inflation had no material effect on revenue or on operating income.
We incurred a net loss per common share of $.39 per share during the fiscal year
ended December 31, 1997, as compared to a net loss of $.09 per share during the
fiscal year ended December 31, 1996.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the application year. Programs or products
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. In addition, the year 2000 is a leap year, which
may also lead to incorrect calculations, functions or systems failure. As a
result, this year, computer systems and software used by many companies may need
to be upgraded to comply with such Year 2000 requirements. In 1998, we began a
project to determine if any actions were required regarding date-related effects
to: (i) our software products; (ii) our internal operating and desktop computer
systems and non-information technology systems; and (iii) the readiness of our
third-party vendors and business partners.
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We have formed a team consisting of operations, development, marketing, and
finance members to determine the impact of Year 2000 and to take corrective
action. We completed testing of our suite of Burstware(R) software products and
found no known Year 2000 issues. We have also tested our internal operating and
desktop hardware and software and have found that all our software is Year 2000
compliant and appears to have no known Year 2000 issues. We have also confirmed
with our third-party vendors and business partners to ensure that their software
and hardware will not impact our operations. At this time, we know of no known
Year 2000 issues or problems with our vendors, or business partners.
None of the costs associated with this project are anticipated to be incremental
to us, but would represent a reallocation of existing resources. We believe that
any modifications deemed necessary would be made on a timely basis and do not
believe that the cost of such modifications would have a material effect on our
operating results. To date, our costs related to the year 2000 issues have not
been material, and we do not expect the aggregate amount spent on the year 2000
issue to be material. In addition, we are in the process of evaluating the need
for contingency plans with respect to year 2000 requirements. The necessity of
any contingency plan must be evaluated on a case-by-case basis and may vary
considerably in nature depending on the year 2000 issue it may address.
Our expectations as to the extent and timeliness of modifications required in
order to achieve year 2000 compliance is a forward-looking statement subject to
risks and uncertainties. Actual results may vary materially as a result of a
number of factors. There can be no assurance that unexpected delays or problems,
including the failure to ensure year 2000 compliance by systems or products
supplied to us by third parties, will not have an adverse effect on us, our
financial performance and results of operations. In addition, we cannot predict
the effect of the year 2000 issues on our customers or other third party
business partners or the resulting effect on us. As a result, if such third
parties do not take preventative and/or corrective actions in a timely manner,
the year 2000 issue could have an adverse effect on their operations and
accordingly have a material adverse effect on our business, financial condition
and results of operations. Furthermore, our current understanding of expected
costs is subject to change as the project progresses and does not include the
cost of internal software and hardware replaced in the normal course of business
whose installation otherwise may be accelerated to provide solutions to year
2000 compliance issues.
LIQUIDITY AND CAPITAL RESOURCES
June 30, 1999 vs. December 31, 1998
Liquidity
Although we have been successful in our fundraising efforts to meet previous
operating requirements, there can be no guarantee that we will be successful in
future fundraising efforts. At the time of this registration statement we had
insufficient cash reserves and receivables necessary to meet current operating
requirements. We are currently in negotiation to obtain outside funding. In the
event we were to be unsuccessful in our fundraising we would be required to
significantly reduce cash outflows through the reduction or elimination of
marketing and sales, development, capital, and administrative expenditures
resulting in decreased potential revenue and potential profitability, or cease
operations. As a result, we received a going concern opinion from our
independent auditors in 1998. Any new funding raised may have a dilutive effect
on our existing shareholders.
We expect to have material capital expenditures for computer and network
equipment of approximately $1,000,000 in 1999 as we add employees and expand our
software, test, lab and training capabilities.
Changes in Financial Condition
As of June 30, 1999, the Company had a working capital deficiency of $189,765 as
compared to working capital of $2,591,930 at December 31, 1998. This $2,781,695
decrease was due to a $2,457,384 reduction in current assets, and an increase in
current liabilities of $324,311. These uses of current assets were partially
offset by the $1,537,500 proceeds from the exercise of warrants to purchase our
common stock and the $810,000 collection of a receivable related to the issuance
of Series B preferred stock.
Net cash used in operating activities totaled $3,637,536 during the six months
ended June 30, 1999, as compared to net cash used in operating activities of
$795,603 during the six months ended June 30, 1998.
Net cash used in investing activities during the six month period ended June 30,
1999 totaled $421,186 as compared to $40,938 during the six month period ended
June 30, 1998.
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Cash flow provided by financing activities during the six month period ended
June 30, 1999 totaled $2,331,064 as compared to $923,927 during the same period
in 1998. This increase was primarily as a result of $1,537,500 proceeds from the
exercise of warrants to purchase common stock associated with our Series A
preferred stock and collection of the $810,000 receivable related to the
issuance of Series B preferred stock.
We retired a $22,736 note during the six months ended June 30, 1999, while
retiring $561,073 in debt during the six months ended June 30, 1998.
In July, September and October 1999, we received $2,520,000, $450,000 and
$500,000, respectively, in exchange for notes payable convertible into common
stock, due one year from date of issuance. These notes are expected to be
converted to common stock prior to their maturity dates, and contain beneficial
conversion features, of which $797,330 and 121,891 will be recognized as
beneficial conversion features and increasing the loss in the three month
periods ended September 30, and December 31, 1999, respectively. (See "Item 10.
Recent Sales of Unregistered Securities".)
December 31, 1998 vs. December 31, 1997
As of December 31, 1998, we had a working capital surplus of $2,591,930 as
compared to a working capital deficiency of $1,069,614 at December 31, 1997. The
surplus was primarily due to cash balances resulting from the sale of Series B
Convertible Preferred Stock and warrants that raised $4,210,000 in new funds, as
well as the exercise of $750,000 in warrants to purchase Series A convertible
preferred stock in 1998.
Cash used in operating activities totaled $2,488,751 during the year ended
December 31, 1998, as compared to $1,760,507 during 1997. The 41% increase was
primarily a result of increased spending for labor, development, and sales and
marketing.
Cash used in investing activities during the year ended December 31, 1998, was
$162,669 as compared to $85,367 for 1997. The increase of 91% was due to
spending on computer and network equipment.
Cash flows provided by financing activities during the year ended December 31,
1998, were $4,843,010 as compared to $1,657,812 during the year ended December
31,1997. The 192% increase was due to the proceeds from the sale of Series B
convertible preferred stock and additional convertible debt and proceeds from
the exercise of warrants. We repaid $891,179 of debt in 1998. $500,000 of this
amount was for the repayment of the line of credit from Imperial Bank. We were
able to raise approximately $6.7 million of equity in 1998. This is comprised of
$750,000 received from the exercise of warrants, $4.2 million in a private
placement of Series B Convertible Preferred Stock and warrants, and $1.7 million
in debt and accrued interest that was converted into equity by the end of 1998.
ITEM 3. PROPERTIES
We presently occupy 12,900 square feet of office space at 500 Sansome Street,
Suite 503, San Francisco, California, pursuant to a lease that expires at the
end of January 2002. The lease provides for rent of $34,300 per month, fully
serviced. We rent approximately 870 square feet of office space for our regional
sales offices, with leases running from month-to-month to August 31, 2000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to beneficial ownership
of our common stock, and our Series A and Series B preferred stock by:
o each person who beneficially owns more than 5% of each class of stock;
o each of our executive officers;
o each of our directors; and
o all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Instant Video Technologies, Inc., 500 Sansome Street, Suite 503,
San Francisco, CA 94111. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. To our knowledge, except under
applicable
20
<PAGE>
community property laws or as otherwise indicated, the persons named in the
table have sole voting and sole investment control with respect to all shares
beneficially owned. The applicable percentage of ownership for each stockholder
is based on 9,435,527 shares of common stock, 2,020,000 shares of Series A
Preferred Stock and 2,476,609 shares of Series B Preferred Stock outstanding on
September 30, 1999, together with applicable options and warrants for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the person holding those options and other rights,
but are not deemed outstanding for computing the percentage ownership of any
other person.
21
<PAGE>
<TABLE>
<CAPTION>
- ---------- --------------------------- ------------------------------------------------------ ---------------------------------
Name of Beneficial Owner Amount and nature of beneficial ownership Percent of class
- ---------- --------------------------- -------------------- --------------------------------- ----------- ---------------------
Preferred Stock Common Preferred Stock
Common Stock Stock
- ---------- --------------------------- -------------------- --------------------------------- ----------- ---------------------
Series A Series B Series A Series B
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
5% Stockholder Entities
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Draysec Finance Limited 2,139,974 (1) 200,000 39,298 21.10% 9.90% 1.59%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Storie Partners LLP 2,530,000 (2)(15) 700,000 1,000,000 22.46% 34.65% 40.38%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Mercer Management 1,981,274 (3)(16) 200,000 215,879 19.73% 9.90% 8.72%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Stuart Rudick 1,641,455 (4) 620,000 (8) 250,000 15.88% 30.70% 10.09%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Robert London 937,123 (5)(17) -- 366,432 9.52% -- 14.80%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
John Lyddon 856,390 (6) 100,000 205,000 (9) 8.77% 4.95% 8.28%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Reed Slatkin 682,500 (7)(18) 200,000 250,000 6.88% 9.90% 10.09%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Peter Spies 500,576 -- -- 5.42% -- --
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Executive Officers and Directors
- -------------------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Richard Lang 1,995,313 (10) -- -- 18.89% -- --
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
O.J. Kilkenny 2,027,243 (11) -- -- 21.38% -- --
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
John J. Micek III 228,807 (12) -- 50,000 2.38% -- 2.02%
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Brian Murphy 2,083,609 (13) -- -- 21.82% -- --
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
Joseph Barletta 48,842 (14) -- -- 0.51% -- --
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
All officers and
directors as a group 2,975,983 0 50,000 45.53% 0 2.02%
(5 persons)
- ---------- --------------------------- -------------------- --------------- ----------------- ----------- ---------- ----------
<FN>
(1) Includes 1,435,471 shares held, 450,000 non qualified stock options and 46,109 warrants to purchase common shares, 200,000
shares of Class A convertible preferred stock and 39,298 shares of Series B convertible preferred stock and 56,365 and
112,731 incentive stock options held by Messrs O.J. Kilkenny and Brian Murphy, respectively, who represent Draysec on our
Board of Directors
(2) Includes 700,000 shares, 700,000 shares of Series A and 1,000,000 shares of Series B convertible preferred stock and
130,000 warrants issued with Series B convertible preferred stock.
(3) Includes 1,352,830 shares owned by Mercer Management, 17,500 shares owned by Gordon Rock, 2,000 shares owned by Gordon and
Shirley Rock as community property and 165,000 warrants to purchase common stock. Also includes 200,000 Shares of Series A
and 215,000 shares of Series B convertible preferred stock and 28,065 warrants issued with Series B convertible preferred
stock all issued in the name of Mercer Management.
(4) Includes 454,000 shares in the name of Mindful Partners LLP, 104,955 shares in the name of Rudick Asset Management,
105,000 shares in the name of Stuart Rudick, and 75,000 shares in the name of Delaware Charter Guaranty Trust Company.
Also includes 450,000, 95,000 and 75,000 shares Series A convertible preferred stock in the names of Mindful Partners LLP,
Stuart Rudick and Delaware Charter Guaranty Trust Company respectively and 250,000 shares of Class B convertible preferred
stock and 32,500 warrants issued with Series B Convertible preferred stock issued in the name of Mindful Partners LLP.
(5) Includes 533,055 shares held and 366,432 shares Series B convertible preferred stock and 37,636 warrants issued with
Series B preferred stock in the name of Robert London
(6) Includes 416,791 shares held, 100,000 shares Series A convertible preferred stock, 155,000 shares of Series B convertible
preferred stock and 20,150 warrants issued with Series B convertible preferred stock issued in the name of John Lyddon.
Also includes 107,949 shares held, and 50,000 shares of Series B convertible preferred stock and 6,500 warrants issued
with Series B convertible preferred stock issued in the name of Dorothy Lyddon Trust, with John Lyddon as named
beneficiary..
(7) Includes 200,000 shares held, 200,000 and 250,000 shares of Series A and Series B convertible preferred stock,
respectively, and 32,500 warrants issued with Series B convertible preferred stock.
(8) Includes 95,000 shares in the name of Stuart Rudick, 75,000 in the name of Delaware Charter Guaranty Trust Company and
450,000 shares in the name of Mindful Partners LLP.
(9) Includes 155,000 shares in the name of John Lyddon and 50,000 shares in the name of Dorothy Lyddon Trust, with John Lyddon
as named beneficiary.
(10) Includes 867,346 shares in the name of the Lisa Walters and Richard Lang Revocable Trust and 1,005,967 and 122,000 Stock
Options to purchase common shares in the names of Richard Lang and Lisa Walters, his spouse, respectively.
22
<PAGE>
(11) Includes 1,970,070 shares held beneficially by Draysec Finance Limited and 56,365 Incentive Stock Options to purchase
common shares.
(12) Includes 37,759 shares held beneficially, and 134,548 Incentive Stock Options to purchase common shares in the name of
John Micek, and 50,000 shares of Series B convertible preferred stock and 6,500 warrants issued with Series B Preferred
Stock in the name of Universal Warranty Corp.
(13) Includes 1,970,070 shares held beneficially by Draysec Finance Limited and 112,731 Incentive Stock Options to purchase
common shares.
(14) Includes 48,842 Incentive Stock Options to purchase common shares.
(15) Does not include shares underlying $1,500,000 and $500,000 convertible notes issued in July, 1999 and October, 1999,
respectively, with conversion rates to be negotiated. (See "Item 7. Certain Relationships and Related Transactions" and
"Item 10. Recent Sales of Unregistered Securities")
(16) Does not include shares underlying a $450,000 convertible note issued in September, 1999 with a conversion rate to be
negotiated. (See "Item 7. Certain Relationships and Related Transactions" and "Item 10. Recent Sales of Unregistered
Securities")
(17) Does not include shares underlying a $500,000 convertible note issued in July, 1999 with a conversion rate to be
negotiated. (See "Item 7. Certain Relationships and Related Transactions" and "Item 10. Recent Sales of Unregistered
Securities")
(18) Does not include shares underlying a $520,000 convertible note issued in July, 1999 with a conversion rate to be
negotiated. (See "Item 7. Certain Relationships and Related Transactions" and "Item 10. Recent Sales of Unregistered
Securities")
</FN>
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
The following table sets forth certain information with respect to the executive
officers, directors and key employees as of October 31, 1999:
<CAPTION>
Name Age Positions and Offices Held
- ---- --- --------------------------
<S> <C> <C>
Richard Lang 46 Chairman, President, Chief Executive Officer, and Director
Thomas Koshy (1) 62 Chief Operating Officer
Edward H. Davis (2) 47 General Counsel, VP of Strategic Alliances, and Secretary
Richard Jones (2) 52 Chief Financial Officer
Kyle Faulkner 43 Chief Technology Officer
O.J. Kilkenny 51 Director
John J. Micek III (1)(2) 47 Director
Brian Murphy 44 Director
Joseph Barletta (1)(2) 64 Director
<FN>
(1) Member of the compensation committee
(2) Member of the audit committee
</FN>
</TABLE>
Key employees are:
Frank Schwartz 47 VP of Business Development
June White 60 VP of Engineering
The following sets forth biographical information as to the business experience
of each or our Executive Officers and Directors:
Richard Lang has served as our Chairman, Chief Executive Officer, President and
Director since September 1997. From January 31, 1997 through August 1997, Mr.
Lang served as one of our directors. Mr. Lang served as our Chairman of the
Board and Treasurer until January 31, 1997. He had served as Chairman of the
Board, CEO and Treasurer from December 1993 to September 1995 and as a Director
since August 1992. He has been a Director of our subsidiary, Explore Technology,
Inc., since February 1990, and served as its President from February 1990 to
August 1992. Mr. Lang has presided over the development of our patent portfolio.
He is the inventor of record for the bulk of our Intellectual Property. Mr. Lang
was also a co-founder of Go-Video, Inc., Scottsdale, Arizona and co-inventor of
Go-Video's patented dual-deck VCRs.
Tom Koshy brings 25 years of wide ranging operational and program management
experience to IVT in the areas of strategic planning, network capacity planning,
engineering, software development, technical training, and large engineering and
construction projects. At MCI Telecommunications, he was involved in various
areas of MCI's backbone network and switching, and with the network
23
<PAGE>
administration of local access. Tom has successfully managed the engineering and
implementation of projects ranging in size from $50K to $250M, and has developed
organizations to support optimum process flow. Tom has a Bachelors degree in
Engineering, and Masters degrees in Business Administration and
Telecommunications Management.
Edward Davis currently serves as General Counsel and Vice President of Strategic
Alliances and has been with us since August 1998. Mr. Davis was elected as our
Secretary in October, 1999. Mr. Davis comes to us with over twenty years of
legal experience thirteen of which were as Corporate Counsel for Pacific Telesis
Group. As Corporate Counsel he advised PTG consolidated companies, including
Nevada Bell, Tele-TV, Pacific Bell Video Services, Pacific Bell Information
Services, and Pacific Bell Directory. He has significant experience in mergers
and acquisitions, taxation, intellectual property, and criminal prosecution. He
holds a Bachelor of Arts degree in History and Political Science from Gonzaga
University; a Juris Doctorate Degree from the University of San Francisco, and a
post graduate Masters in Tax from Golden Gate University.
Richard Jones became our Chief Financial Officer in September 1999 bringing over
25 years experience in financial and administrative management, primarily with
emerging growth technology companies. He has had extensive experience with both
public and private/pre-IPO concerns including establishment of strong accounting
systems, controls and strategic plans in order to facilitate successful growth.
Mr. Jones spent the last six years at Sherpa Corporation, a $40MM enterprise
software company recently acquired by Inso Corporation, serving as Vice
President-Finance & Administration & Chief Financial Officer. Prior to Sherpa,
Mr. Jones was Vice President Finance & Chief Financial Officer of Quest
Technologies, a start-up medical device company in Sunnyvale, for three years.
During the six years prior to Quest, Mr. Jones acquired IPO, acquisition and SEC
reporting experience as Corporate Controller of Scientific Micro Systems, a high
growth computer systems manufacturer located in Mountain View. Mr. Jones is a
CPA and practiced public accounting with Coopers & Lybrand for four years. He
holds a Bachelor of Science degree in Accounting from the University of
Illinois, Champaign-Urbana.
Kyle Faulkner currently serves as Chief Technology Officer and has been with us
since November 1997. Mr. Faulkner has over 16 years experience in client/server
software development, and 4 years experience in hardware development. Mr.
Faulkner has been a key contributor on more than 20 commercially successful
products, and was on the founding teams at Sybase and Forte Software. He was
also software architect for a number of other companies including Network
Equipment Corporation responsible for ATM network switches and Cellnet Data
Systems.
O. J. Kilkenny has been one of our directors since August 1992. Mr. Kilkenny is
Senior Partner of O. J. Kilkenny & Co., Chartered Accountants, specializing in
the entertainment industry with offices in London, England and Dublin, Ireland.
With his partners, he has developed the accounting practice into one of the
major accounting practices in England, specializing in the entertainment
industry. Mr. Kilkenny holds directorships in a number of companies in the media
and entertainment sector as well as positions with non-entertainment businesses.
He is also an investor in Ireland's first independent television channel and
Ardmore Studios, the National Film Studios of Ireland. Mr. Kilkenny received a
Bachelors Degree in Commerce from Dublin University in 1969, and became a fellow
of the Institute of Chartered Accountants in Ireland, England and Wales in 1982.
Mr. Kilkenny became one of our directors as a representative of Draysec Finance
Limited, one of our principal shareholders.
John J. Micek III has been one of our directors since April 1990, Secretary and
Treasurer from January 1994 until October, 1999, and served as the Company's
President from April 1990 to August 1992. Mr. Micek currently serves as
President of Universal Warranty Insurance located in Palo Alto, California, and
Omaha, Nebraska. From 1994 to 1997, Mr. Micek served as general counsel for U.S.
Electricar in San Francisco, California. From January 1989 to March 1994, Mr.
Micek practiced law in Palo Alto, California. He has served as a Director of
Armanino Foods of Distinction, Inc., a publicly-held specialty food manufacturer
in Hayward, California, since February 1988. He also serves as a Director of
Universal Group, Inc., a Midwest group of insurance companies, and Cole
Publishing Company in northern California. He received a Bachelor of Arts Degree
in History from the University of Santa Clara in 1974 and a Juris Doctorate from
the University of San Francisco School of Law in 1979.
Brian Murphy has been one of our directors since January 1997. He is a partner
in O.J. Kilkenny & Company, Chartered Accountants specializing in the
entertainment industry with offices in London, England and Dublin, Ireland. The
firm provides a wide range of services to their clients, consisting of major
international entertainment artists, covering all areas of financial management
and audit and accountancy advise. Mr. Murphy is involved at the executive level
with a number of companies in the media and entertainment business, particularly
in the field of digital post-production, film and television.
Joseph Barletta has been one of our directors since September 1998. He is of
counsel with the firm Seyfarth, Shaw, Fairweather, and Geraldson in San
Francisco. He has served as the CEO or COO of six major companies in the media
industry including TV Guide
24
<PAGE>
magazine, Thomson Newspapers, and the San Francisco Newspaper Agency (Chronicle
and Examiner), and he currently sits on the boards of several companies.
Biographies of our key employees are as follows:
Frank Schwartz currently serves as Vice President of Business Development and
has been with us since August 1998. Mr. Schwartz is one of Silicon Valley's most
respected multimedia executives. Most recently he was a Fellow and CTO of the
Silicon Valley World Internet Center and was the Technical Producer for Creative
Artists Agency/Intel Media Studio. He served as President and Chairman of
MainStream Control, Inc. and is considered to be one of the pioneers of video
streaming. He is an acclaimed author, consultant, and lecturer. His clients have
included Disney Imagineering, SRI, Compaq Computer, Intel, the FCC, and GTE. He
served on the Board of Directors of the Video Electronics Standards Association
(VESA) and was Chairman of the VESA Open Set Top (VOST) Standards Committee.
June White currently serves as Vice President of Engineering and has been with
us since June 1998. Ms. White has managed all aspects of software development
for over 20 years, emphasizing on establishing processes that are required to
support the product's life cycle. She has been a key contributor to the launch
of many new products including Forte's Application Development Environment,
ROLM's Phonemail, and Control Data's Operating Systems. Ms. White has built QA
and Release Management organizations in order to ship high quality products.
Number of Directors and Directors' Terms of Office
Our by-laws authorize seven directors, and we currently have five directors. All
directors hold office until the next annual meeting. No family relationships
exist among our officers and directors.
Committees of the Board of Directors
The board of directors includes a compensation committee which includes Mr.
Koshy, and outside directors Messrs. Barletta and Micek. The compensation
committee reviews and approves our general compensation policies and practices,
sets compensation levels for our executive offices and administers our 1998 and
1999 Incentive Sock Option Plans.
Our board of directors also includes an audit committee which is primarily
responsible for annually recommending independent auditors to the board, for
reviewing the services performed by our independent auditors and reviewing
reports submitted by the independent auditors. The audit committee includes
Messrs. Jones and Davis as well as outside directors Messrs. Barletta and Micek.
Director Compensation
Our directors do not receive any compensation for their services. Each non
employee director is eligible to participate in our Incentive Stock Option
plans.
25
<PAGE>
<TABLE>
ITEM 6. EXECUTIVE COMPENSATION AND OTHER MATTERS.
The following table sets forth information for services rendered in all
capacities for each of the past 3 years for (i) our Chief Executive Officer (ii)
and all other officers who earned more than $100,000 in any one year
(b) SUMMARY COMPENSATION TABLE
<CAPTION>
- ------------------------- ------ ---------------------------------------------- --------------------------- ----------- ------------
Long-term compensation
- ------------------------- ------ ---------------------------------------------- --------------------------- ----------- ------------
Annual Compensation Awards Payouts
- ------------------------- ------ ---------------------------------------------- --------------------------- ----------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Awards Options Compensation
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Lang, Chairman 1998 170,000 -- 21,000 (8) 990,000 8,983 (10)
of the Board and Chief 1997 32,000 27,167 (9) --
Executive Officer(1) 1996 48,000 -- -- 3,000 (4)
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
Gary R. Familian, 1998 -- -- -- --
President and Chief 1997 123,462 -- 427,770 (3)
Executive Officer(2) 1996 180,000 -- 47,852 (4)
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
Therese A. Webb Stacey, 1998 -- -- -- -- --
Executive Vice 1997 85,669 -- -- -- --
President Business 1996 79,500 -- 62,067 (6) 171,000 6,000 (7)
Development (5)
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
All officers and 1998 406,750 -- 100,209 -- 2,603,750 510,110
directors as a group 1997 301,369 -- 427,770 172,000 38,495
1996 307,500 -- 109,919 171,000 9,000
- ------------------------- ------ -------------- ----------- ---------------- ------------ -------------- ---------- ----------------
<FN>
(1) Since September 8, 1997, Mr. Lang has served us as Chairman, Chief Executive Officer and President. Mr. Lang previously served
as Chairman of the Board and Chief Executive Officer until January 31, 1996 when Gary R. Familian assumed the responsibilities
of Chairman and Chief Executive Officer.
(2) Mr. Familian received $15, 000 per month salary from 1995 until September 8, 1997.
(3) We reported $427,770 as miscellaneous income to Mr. Familian which we believe Mr. Familian misappropriated, in accordance with
IRS guidelines.
(4) Represents an advance of lease payments for automobile and apartment.
(5) On September 8, 1997, Ms Stacey's employment with us was terminated.
(6) Represents 1996 sales/licensing commissions.
(7) Represents January 1996 consulting fees.
(8) Represents 21,000 Incentive Stock Options to purchase Common Stock at $1.00 per share granted in lieu of salary. The stock was
trading at $1.06 per share on the date of grant.
(9) Represents 22,167 Incentive Stock Options to purchase Common Stock at $1.00 per share granted in lieu of salary. The stock was
trading at $1.06 per share on the date of grant, and 5,000 Incentive Stock Options to purchase Common Stock at $0.90 per share
granted also in lieu of salary. The stock was trading at $0.88 per share on the date of grant.
(10) Represents automobile lease and insurance payments made by us on behalf of. Mr. Lang.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
(c) Option/SAR Grants Table
The following table contains information concerning the granting of stock
options under our 1992 and 1998 Incentive Stock Option Plans for our Chief
Executive Officer for the year ended December 31, 1998. We have no SAR plans.
<CAPTION>
- ------------------------------------------------------------------------ ----------------------------------------------
Potential realizable value at assumed annual
rates of stock price appreciation for option
Individual grants term
- ------------------------------------------------------------------------ ----------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
- ---------------------------- --------------- --------------- ----------- ---------------- -------------- --------------
Number of Percent of
securities total
underlying options/SARs Exercise
options/SARs granted to or base
granted(#) employees in price Expiration 5% 10%
Name fiscal year ($/sh) date ($) ($)
- ---------------------------- --------------- --------------- ----------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard Lang,
Chairman of the Board and
Chief Executive Officer 990,000 34.34% 3.50 Apr. 28, 2003 4,293,858 5,270,958
- ---------------------------- --------------- --------------- ----------- ---------------- -------------- --------------
<FN>
(d) Aggregated option/SAR exercises and fiscal year-end option/SAR value table
</FN>
</TABLE>
<TABLE>
None of our officers exercised options in 1998.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last Fiscal year and FY-End Option/SAR Values
- ---------------------------- ----------------------------- ------------------------------------ ------------------------------------
(a) (d) (e)
- ---------------------------- ----------------------------- ------------------------------------ ------------------------------------
Number of securities underlying Value of unexercised in-the-money
unexercised options/SARs at FY-end options/SARs at FY-end
(#) ($)
- ---------------------------- ----------------------------- ------------------ ----------------- ------------------ -----------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------------------------- ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Richard Lang,
Chairman of the Board and
Chief Executive Officer 565,417 816,750 3,636,577 4,034,745
- ---------------------------- ----------------------------- ------------------ ----------------- ------------------ -----------------
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On August 3, 1999, we acquired Timeshift-TV, Inc. in a stock-only transaction
from Richard Lang, our Chairman and CEO, Earl Mincer and Eric Walters, who are
employees of ours. Mr. Walters is Mr. Lang's brother in law. Mr. Lang and the
other parties were not employed by us at the time they formed Timeshift-TV. Our
board of directors unanimously approved our acquisition of Timeshift-TV.
Timeshift-TV holds assets, including intellectual property, in the area of
time-shifted real-time broadcasting, which we plan to integrate into our
advanced video and audio delivery solutions. We also plan to license the
Timeshift-TV intellectual property to other parties for various applications.
Transactions with Draysec Finance Limited (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management", and "Item 10. Recent Sales of
Unregistered Securities").
During 1996, we repaid a bank loan secured by a letter of credit provided by
Draysec Finance Limited, and the balance of the Credit Facility provided by
Draysec to the Company during 1995 increased from $28,750 in 1995, to $90,000.
During 1997, Draysec Finance Limited invested $200,000 for the purchase of
200,000 investment units, consisting of Series F (renamed to Series A)
convertible preferred stock and warrants to purchase 200,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F Warrants to February 26, 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. Additionally, Draysec Finance
Limited provided a loan of $80,000 in consideration for a six
27
<PAGE>
month promissory note from us with an interest rate of 10.5% and a warrant to
purchase 16,000 shares of our common stock at an exercise price of one dollar
per share.
In 1998, Draysec Finance Ltd., provided us loan convertible into common stock at
$1.00 per share of $30,000 and $20,000. These loans included warrants to
purchase 6,000 and 4,000 shares of our common stock at $1.00 per share. Draysec
Finance Limited loaned us an additional $75,000 in the form of a line of credit
at prime plus 2% and a warrant to purchase 15,000 shares of our common stock at
$2.36 per share.
Also in 1998, Draysec Finance Ltd. converted $78,596 in debt and accrued
interest into 39,298 shares of Series B Convertible Preferred Stock, and 5,109
warrants to purchase common stock at $2.00 per share, and $137,054 of
convertible debt and accrued interest into 137,054 shares of common stock at
$1.00 per share.
In February, 1999, Draysec Finance Ltd. exercised warrants issued with Series A
(formerly Series F) convertible preferred stock to purchase 200,000 shares of
our common stock for $300,000 cash.
Transactions with Mercer Management (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
Mr. Gordon Rock, through Mercer Management, Inc., a company which Mr. Rock
controls and of which he is president, is a Principal Shareholder of our
company. During 1997, Mercer Management Inc. converted its 300,000 shares of
Series E Convertible Preferred stock into shares of our Common Stock at the
conversion rate of one share of preferred stock to one share of common stock.
Additionally, Mercer Management, Inc. invested an additional $200,000 for the
purchase of 200,000 investment units consisting of Series F (renamed to Series
A) Convertible Preferred Stock and warrants to purchase 200,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F Warrants to February 26, 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. .
In order to provide bridge financing for us during the last quarter of 1997,
Mercer Management, Inc. loaned us $100,000 cash. In consideration for this loan,
we issued Mercer Management Inc. a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. Additional consideration was provided by
us in the form of a warrant to purchase 20,000 shares of our Common Stock at the
exercise price of $1.00 per share.
In 1998, Mercer Management Inc. loaned us an additional $525,000. The first
$100,000 was in the form of a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. This promissory note provided that Mercer
Management a right of conversion at the conversion rate of $1.00 per share. An
additional $200,000 was provided in exchange for a promissory note. This note
provided for an interest rate of prime plus 2% payable monthly in arrears and
had a due date of July 15, 1998. Additional consideration for the note included
40,000 shares of our common stock and a warrant to purchase an additional 40,000
shares of Common Stock at the exercise price of $1.00 per share. The $200,000
note also provided for an automatic extension through December 31, 1998 for
additional consideration in the form of 40,000 shares of our common stock and a
warrant to purchase an additional 40,000 shares of Common Stock at the exercise
price of $1.00 per share. Also in 1998, Mercer Management Inc. loaned us an
additional $75,000 in the form of a line of credit at prime plus 2% and was
granted a warrant to purchase 15,000 shares of our common stock at $2.31 per
share. Subsequently in 1998, Mercer provided additional credit of $150,000 at
prime plus 2% and was granted a warrant to purchase 30,000 shares of our common
stock at $1.70 per share.
Also, during March 1998, Mercer Management Inc. elected to exercise its 200,000
warrants to purchase common stock pursuant to an offering by us to reduce the
exercise price of said warrants for the period from February 14, 1998 to March
15, 1998 to $.75 per share. As a result of the exercise of said warrants, we
received $150,000 from Mercer Management Inc., and Mercer Management was issued
an additional 200,000 shares of our common stock. In 1998, Mercer Management
converted $431,758 debt and accrued interest into 215,879 shares of Series B
convertible preferred stock and 28,065 warrants to purchase common stock at
$2.00 per share.
On September 22, 1999, we received from persons related to Gordon Rock in
exchange for notes payable convertible into our common stock, due in one year,
and bearing interest at 7.75% in the names of Mercer Management Inc, for
$250,000, Shirley Reynolds Rock, Custodian for Gregory Reynolds Rock under the
Uniform Gift to Minor's Act for $100,000, and Dana Reynolds Rock for $100,000.
The conversion rate is under negotiation, but shall be the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement. (See "Item 10. Recent Sales
of Unregistered Securities")
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Transactions with Storie Partners LLP (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management", and "Item 10. Recent Sales of
Unregistered Securities").
In February 1996, Storie Partners LLP invested $700,000 for the purchase of
700,000 investment units consisting of Series F (renamed to Series A)
Convertible Preferred Stock and warrants to purchase 700,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F warrants to February 26, 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. .
In April 1997, Storie Partners exercised Series F (renamed to Series A) warrants
to purchase 400,000 shares of common stock for $400,000.
In 1998, Storie Partners invested $2,000,000 for 1,000,000 shares of our Series
B convertible preferred stock, and warrants to purchase 130,000 additional
shares of our common stock at $2.00 per share.
In July, 1999, and October 26, 1999 Storie Partners loaned us $1,500,000 and
$500,000, respectively, evidenced by notes payable convertible into our common
stock, due in one year. The conversion rate is under negotiation, but shall be
the lower of (1) $6.50, (2) 80% of the average closing price of our publicly
traded shares in the 20 trading days immediately preceding the closing of an
ongoing private placement, or (3) the price agreed in that private placement.
Transactions with Mindful Partners LLP (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management", and "Item 10. Recent Sales of
Unregistered Securities").
In 1996, Mindful Partners LLP invested $300,000 for the purchase of 300,000
investment units consisting of Series F (renamed to Series A) convertible
preferred stock and warrants to purchase 300,000 shares of our common stock at
$1.00 per share. Rudick Asset Management received an additional 100,000 units
and warrants to purchase 100,000 shares of common stock at $1.00 per share as a
finders' fee relating to the placement of this offering. Additionally, Rudick
Asset Management invested $75,000 for 75,000 units of Series F convertible
preferred stock and warrants to purchase 75,000 shares of common stock at $1.00
per share, issued in the name of Delaware Charter Guaranty Trust Company. Our
board of directors extended the exercise date for the Series F warrants to
February 26, 1999 and increased the exercise price to $1.50 per share after
January 26, 1998. Mindful Partners, Delaware Charter Guaranty Trust Company and
Rudick Asset Management are affiliated with Stuart Rudick.
In 1997, Mindful Partners purchased an additional 150,000 Series F Units and
warrants to purchase 150,000 shares of our common stock at $1.00 per share for
$150,000.
In 1998, Mindful Partners invested $500,000 for 250,000 shares of our Series B
Convertible Preferred Stock, and warrants to purchase 32,500 additional shares
of our common stock at $2.00 per share.
In February, 1999, Mindful Partners, Rudick Asset Management and Delaware
Charter Guaranty Trust Company exercised warrants issued with Series A (formerly
Series F) Convertible Preferred Stock to purchase 450,000, 100,000 and 75,000
shares of our common stock for $675,000, $150,000, and $112,500 respectively
cash.
Transactions with Robert London (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In 1996, Robert London invested $100,000 for the purchase of 100,000 investment
units consisting of Series F (renamed to Series A) Convertible Preferred Stock
and warrants to purchase 100,000 shares of our common stock for $1.00 per share.
Our board of directors extended the exercise date for the Series F Warrants to
February 26, 1999 and increased the exercise price to $1.50 per share after
January 26, 1998.
In 1998, Mr. London invested $500,000 for 250,000 shares of our Series B
Convertible Preferred Stock, and warrants to purchase 32,500 additional shares
of our common stock at $2.00 per share. Mr. London also provided us with a
$225,000 loan convertible to our common stock at $0.75 per share. This loan
together with accrued interest was converted to 318,555 shares of common stock
in October 1998. Mr. London later provided us with an additional $75,000 and
$150,000 loans in the form of a line of credit at the rate of prime plus 2%, and
warrants to purchase 15,000 and 30,000 shares of our common stock at $2.31 and
$2.15 per share, respectively.
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Later, Mr. London converted $232,864 debt and accrued interest in to 116,432
shares of Series B Convertible Preferred Stock and 5,136 warrants to purchase
common stock at $2.00 per share.
In July, 1999, Mr. London loaned us $500,000 evidenced by a note payable
convertible into our common stock, due in one year. The conversion rate is under
negotiation, but shall be the lower of (1) $6.50, (2) 80% of the average closing
price of our publicly traded shares in the 20 trading days immediately preceding
the closing of an ongoing private placement, or (3) the price agreed in that
private placement.
Transactions with Reed Slatkin (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In 1996, Reed Slatkin invested $200,000 for the purchase of 200,000 investment
units consisting of Series F (renamed to Series A) convertible preferred stock
and warrants to purchase 200,000 shares of our common stock for $1.00 per share.
Our board of directors extended the exercise date for the Series F Warrants to
February 26, 1999 and increased the exercise price to $1.50 per share after
January 26, 1998.
In 1998, Mr. Slatkin invested $500,000 for 250,000 shares of our Series B
convertible preferred stock, and warrants to purchase 32,500 additional shares
of our common stock at $2.00 per share.
In February, 1999, Mr. Slatkin exercised warrants issued with Series A (formerly
Series F) convertible preferred stock to purchase 200,000 shares of our common
stock for $300,000 cash. In July, 1999, Mr. Slatkin loaned us $520,000 evidenced
by a note payable convertible into our common stock, due in one year. The
conversion rate is under negotiation, but shall be the lower of (1) $6.50, (2)
80% of the average closing price of our publicly traded shares in the 20 trading
days immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement.
Transactions with John Lyddon (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In 1996, John Lyddon invested $100,000 for the purchase of 100,000 investment
units consisting of Series F (renamed to Series A) convertible preferred stock
and warrants to purchase 100,000 shares of our common stock for $1.00 per share.
Our board of directors extended the exercise date for the Series F warrants to
February 26, 1999 and increased the exercise price to $1.50 per share after
January 26, 1998.
In 1998, Mr. Lyddon invested $310,000 for 155,000 shares of our Series B
convertible preferred stock, and warrants to purchase 20,150 additional shares
of our common stock at $2.00 per share. Dorothy Lyddon invested $100,000 for
50,000 shares of our Series B convertible preferred stock, and warrants to
purchase 6,500 additional shares of our common stock at $2.00 per share.
Transactions with Peter Spies
In 1997, Peter Spies provided us with $73,210 for an 8% note convertible into
common stock at $2.00 per share, which, with accrued interest was converted into
43,519 shares of common stock in 1998.
Transactions with David Morgenstein
In 1998, David Morgenstein, our former Chief Operating Officer advanced us
$300,000 in exchange for a promissory note. This note provided for an interest
rate of prime plus 2% payable monthly in arrears and had a due date of July 15,
1998. Additional consideration for the note included 60,000 shares of our common
stock and a warrant to purchase an additional 60,000 shares of Common Stock at
the exercise price of $1.00 per share. The $300,000 note also provided for an
automatic extension through December 31, 1998 for additional consideration in
the form of 60,000 shares of our common stock and a warrant to purchase an
additional 60,000 shares of Common Stock at the exercise price of $1.00 per
share.
Transactions with Eric Hall
Mr. Eric Hall, our interim Chief Financial Officer from September, 1997 until
April 15, 1999, was paid fees of $24,275 and $152,500 in 1997 and 1998
respectively.
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Transactions with Kyle Faulkner
Mr. Faulkner, our Chief Technology Officer, was paid fees through his consulting
company, DuoDesign, of $6,720 and $283,940 in 1997 and 1998, respectively, prior
to his employment with us.
ITEM 8. LEGAL PROCEEDINGS.
We have no material legal proceedings against us or in process nor are we aware
of any other legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse effect.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is traded on the over-the-counter market and is quoted on the
NASD's OTC Bulletin Board under the symbol "IVDO". The following table sets
forth the closing high and low bid prices of the Common Stock for the periods
indicated. These prices are believed to be representative inter-dealer
quotations, without retail markup, markdown or commissions, and may not
represent prices at which actual transactions occurred.
Bid
-----------------
1997 High Low
---------- ------ -------
1st Quarter $ 2.03 $ 1.13
2nd Quarter $ 2.47 $ 1.50
3rd Quarter $ 2.63 $ 1.22
4th Quarter $ 1.94 $ 0.75
1998
----------
1st Quarter $ 2.50 $ 0.75
2nd Quarter $ 4.22 $ 1.25
3rd Quarter $ 3.63 $ 1.91
4th Quarter $ 8.38 $ 2.00
1999
-----------
1st Quarter $ 1.875 $ 6.00
2nd Quarter $ 9.50 $ 5.875
The number of holders of record of our $.00001 par value Common Stock at
September 15, 1999, was approximately 214.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The sales of unregistered securities discussed below were exempt from
registration in reliance on Section 4(2), Regulation D, Rule 506 of the
Securities Act of 1933.
1999:
On October 26, 1999, we received $500,000 from Storie Partners evidenced by a
note payable convertible into our common stock, due in one year. The conversion
rate is under negotiation, but shall be the lower of (1) $6.50, (2) 80% of the
average closing price of our publicly traded shares in the 20 trading days
immediately preceding the closing of an ongoing private placement, or (3) the
price agreed in that private placement. (See Item 2. Financial Information -
Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and capital Resources, June 30, 1999 vs. December 31, 1998"
and "Item 7. Certain Relationships and Related Transactions").
On September 22, 1999, we received $450,000 from entities related to Gordon Rock
evidenced by a note payable convertible into our common stock, due in one year.
The conversion rate is under negotiation, but shall be the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement. (See Item 2. Financial
Information - management's Discussion and Analysis of financial Condition and
Results of Operations - Liquidity and capital Resources, June 30, 1999 vs.
December 31, 1998" and "Item 7. Certain Relationships and Related
Transactions").
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On August 3, 1999, we issued 200,000 shares of common stock in exchange for all
of the outstanding stock of Timeshift-TV. We have the option to repurchase
100,000 shares for $10.00 upon the occurrence of certain events. (See "Item 7.
Certain Relationships and Related Transactions").
In July 1999, we received $2,520,000 evidenced by notes payable convertible into
our common stock, due in one year. The conversion rate is under negotiation, but
shall be the lower of (1) $6.50, (2) 80% of the average closing price of our
publicly traded shares in the 20 trading days immediately preceding the closing
of an ongoing private placement, or (3) the price agreed in that private
placement. (See Item 2. Financial Information Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources, June 30, 1999 vs. December 31, 1998" and "Item 7. Certain
Relationships and Related Transactions").
In April, 1999 an employee exercised options to purchase 5,000 and 1,800 shares
of our common stock at $0.88 and $1.06 per share, respectively, resulting in
$6,300 proceeds to us.
A holder of Series A, (formerly Series F) convertible preferred stock converted
5,000 shares of that stock into 5,000 shares of common stock in February, 1999.
(See "Item 7. Certain Relationships and Related Transactions").
From February 10 to February 26, 1999, the holders of our Series A (formerly
Series F) convertible preferred stock exercised warrants issued with that stock
to purchase 1,025,000 shares of our common stock at $1.50 per share, resulting
in cash proceeds of $1,537,500.
In February, 1999, a contractor, Matt Rothman, received 499 shares of common
stock for services resulting in $4,054 of compensation expense to us.
Also in February, 1999, Sales Consultants of Columbia, MD received options to
purchase 36,000 shares of common stock at $9.72 per share in exchange for
services, resulting in compensation expense of $160,588 to us.
In January, 1999, in a series of cashless exercises Imperial Bank exercised
250,000 warrants to purchase 226,140 shares of our common stock at $1.00 per
share. This same institution also exercised 31,250 warrants to purchase 26,122
shares of our common stock at $1.60 per share.
In January, 1999, two contractors, subsequently hired as employees received
options to purchase 621 and 9,000 shares of common stock at prices of $2.19 and
$2.91 per share, respectively in exchange for services rendered, resulting in
compensation expense of $26,448 to us.
1998:
As of December 31, 1998, we sold 2,476,609 shares of Series B convertible
preferred stock ("Series B"), at a purchase price of $2.00 per share, for an
aggregate purchase price of $4.95 million. IVT raised $4.21 million in cash in
the offering, and the remaining $743,000 was paid by cancellation of debt. In
addition to the Series B, we also issued in the offering warrants to purchase up
to an aggregate of 312,960 shares of our common stock, at an exercise price of
$2.00 per share. The warrants are exercisable for a term of five years from the
date of issuance.
Series B - Cash Purchases
Investor Amount Invested Preferred Shares Warrant Shares
-------- --------------- ---------------- --------------
Storie Partners $ 2,000,000 1,000,000 130,000
John Lyddon 310,000 155,000 20,150
Robert London 500,000 250,000 32,500
Mindful Partners 500,000 250,000 32,500
Reed Slatkin 500,000 250,000 32,500
Dorothy Lyddon 100,000 50,000 6,500
Frank Kramer 100,000 50,000 6,500
Keith Koch 100,000 50,000 6,500
Universal Warranty Corp. 100,000 50,000 6,500
----------- --------- -------
TOTAL $ 4,210,000 2,105,000 273,650
=========== ========= =======
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Series B - Debt Converted
Investor Debt Converted Preferred Shares Warrant Shares
-------- --------------- ---------------- --------------
Mercer Management $ 431,758 215,879 28,065
Robert London 232,864 116,432 15,136
Draysec Finance Ltd. 78,596 39,298 5,109
--------- ------- ------
TOTAL $ 743,218 371,609 48,310
========= ======= ======
In 1998, Mercer Management Inc. loaned us $100,000 in exchange for a six-month
promissory note bearing at interest 10.5%. This promissory note provided that
Mercer Management a right of conversion at the conversion rate of $1.00 per
share.
Also in 1998, David Morgenstein, our former Chief Operating Officer and Mercer
Management provided funds of $300,000 and $200,000, respectively, in exchange
for promissory notes. These funds were used to retire a line of credit with
Imperial Bank. These notes provided for interest at a rate of prime plus 2%
payable monthly in arrears and had a due date of July 15, 1998. Additional
consideration for the notes included 60,000 and 40,000 shares, respectively, of
the Company's common stock and warrants to purchase an additional 60,000 and
40,000 shares, respectively, of common stock at the exercise price of $1.00 per
share. The $500,000 in notes also provided for automatic extensions through
December 31, 1998 for additional consideration in the form of 60,000 and 40,000
shares, respectively of our common stock and warrants to purchase additional
60,000 and 40,000 shares, respectively, of Common Stock at the exercise price of
$1.00 per share. (See "Item 7. Certain Relationships and Related Transactions").
Also during March 1998, Mercer Management Inc. elected to exercise its 200,000
warrants to purchase common stock associated with Series F (renamed Series A)
convertible preferred stock, pursuant to an offering by us to reduce the
exercise price of those warrants for the period from February 14, 1998 to March
15, 1998 to $0.75 per share. As a result of the exercise of these warrants, we
received $150,000 from Mercer Management Inc., and Mercer Management was issued
an additional 200,000 shares of common stock of the Company.
1997:
During 1997, Mercer Management, Mindful Partners and Draysec Finance Limited
invested an additional $550,000 for the purchase of 550,000 investment units
consisting of Series F (renamed Series A) Convertible Preferred Stock and
550,000 warrants to purchase common stock of our company at $1.00 per share.
Additionally, Rudick Asset Management received 100,000 units and 100,000
warrants to purchase our common stock at $1.00 per share as a finders' fee. (See
"Item 7. Certain Relationships and Related Transactions").
During 1997, Draysec Finance Limited invested $200,000 for the purchase of
200,000 investment units, consisting of Series F (renamed to Series A)
convertible preferred stock and warrants to purchase 200,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F Warrants to February 26, 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. Additionally, Draysec Finance
Limited provided a loan of $80,000 in consideration for a six month promissory
note from us with an interest rate of 10.5% and a warrant to purchase 16,000
shares of our common stock at an exercise price of one dollar per share.
During 1997, Mercer Management Inc. converted its 300,000 shares of Series E
Convertible Preferred stock into shares of our Common Stock at the conversion
rate of one share of preferred stock to one share of common stock.
In order to provide bridge financing for us during the last quarter of 1997,
Mercer Management, Inc. loaned us $100,000 cash. In consideration for this loan,
we issued Mercer Management Inc. a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. Additional consideration was provided by
us in the form of a warrant to purchase 20,000 shares of our common stock at the
exercise price of $1.00 per share.
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1996:
During 1996, we repaid our bank loan secured by a letter of credit provided by
Draysec Finance Limited, and the balance of the Credit Facility provided by
Draysec to us during 1995 increased from $28,750 in 1995, to $90,000.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our certificate of incorporation authorizes the issuance of up to 100,000,000
shares of common stock, par value $0.00001 per share. As of September 15, 1999,
9,435,527 shares of common stock were outstanding.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock holders of
common stock will be entitled to receive ratably any dividends that may be
declared from time to time by the board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, holders of common stock will be entitled to share in our assets
remaining after the payment of liabilities and the satisfaction of any
liquidation preference granted to the holders of any outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable. The rights, preferences and privileges
of the holders of common stock are subject to, and may be adversely affected by
the rights of the holders of shares of any series of preferred stock that we may
designate in the future.
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition operating results, capital requirements and other factors
the board of directors deems relevant. At June 30, 1999, we had an accumulated
deficit of approximately $28.6 million and, until this deficit is eliminated,
will be prohibited from paying dividends except out of net profits.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law (the"DGCL"),
our Certificate of Incorporation provides that any person who was or is or who
had agreed to become a director or officer of IVT or who had agreed at the
request of IVT to serve as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified by
IVT to the extent permitted by the DGCL. Such Certificate of Incorporation also
provides that no amendment or repeal of such Certificate of Incorporation and
the relevant provisions of the DGCL shall apply to or have any effect on the
right to indemnification permitted or authorized thereunder.
IVT maintains insurance on behalf of any person who is a director or officer
against any loss arising from any claim asserted against him and incurred by him
in any such capacity, subject to certain exclusions."
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Auditors and the accompanying financial statements and notes
to the financial statements are hereto set forth on pages F-1 through F-15.
Financial Statement schedules are not applicable and therefore are omitted.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
(b) Exhibits: ALL EXHIBITS TO BE FILED BY AMENDMENT
EXHIBIT 2: Plan of acquisition, reorganization, arrangement, liquidation, or
succession
State of Arizona, Articles of Merger of Video Press, Inc. into
Explore Technology, dated 12/28/90; Agreement and Plan of Merger
dated 8/29/93
Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992
Certificate of Merger of Time Shift TV, Inc. into IVT Delaware, Inc.
dated July 26, 1999
Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August 3,
1999
EXHIBIT 3 (i) AND (ii): Articles of Incorporation, Bylaws
Certificate of Incorporation of Catalina Capital Corp. dated April
27, 1990
Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment No.
1 dated April 5, 1993
Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992
Certificate of Status Foreign Corporation dated March 12, 1993
EXHIBIT 4: Instruments defining rights of holders, including indentures
Prospectus for Catalina Capital Corp. dated October 17, 1990
SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990
SEC Form S-18 for Catalina Capital Corp. dated August 10, 1990
SEC Form S-18 for Catalina Capital Corp. dated September 28, 1990
Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992
Certificate of Designation for Catalina Capital Corp. of Series B-1,
B-2, B-3 and B-4 Convertible
Preferred Stock, dated August 4, 1992
Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992
Certificate of Designation for Instant Video Technologies, Inc. of
Series D Convertible Preferred Stock, dated December 23, 1992
Certificate of Designation for Instant Video Technologies, Inc. of
Series E Convertible Preferred Stock, dated May 9, 1995
Certificate of Designation for Instant Video Technologies, Inc. of
Series F Convertible Preferred Stock, dated February 13, 1996
Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996
Stock Purchase Agreement (Series B Stock) with Exhibit A (Warrant to
Purchase Shares of Common Stock), Exhibit B (Certificate of
Designation), Exhibit C (Registration Rights Agreement), and Exhibit
D (Voting and Right of First Refusal)
Certificate of Designation of Instant Video Technologies, Inc. filing
Certificate of Elimination of Series A Preferred Stock, Series B-1,
B-2, B-3, B-4 Convertible Preferred Stock, Series C Preferred Stock,
Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock dated November 6, 1998
Amended Certificate of Designation, Statement of Establishing Series
F Convertible Preferred Stock AND Certificate of Designation,
Statement Establishing Series B Convertible Preferred Stock filed
January 1, 1999
EXHIBIT 10: Material Contracts:
End-User Software License Agreement with RMSI
Reseller License Agreement, RMSI
Reseller License Agreement, Clover Technologies, Inc.
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I-Stream TV Reseller license Agreement
Reseller license Agreement with DataNext
Service Agreement with The EMS Group
Lease at 500 Sansome Street, San Francisco, CA with ten (10)
Amendments
Leases for sales offices in Livonia, Michigan; Golden, Colorado;
Alexandria, Virginia, Mount Holly, New Jersey
Employment Agreements/Offer Letters:
Richard Lang
Thomas Koshy
Edward Davis
Richard Jones
Kyle Faulkner
David Morgenstein
Frank Schwartz
Frank Vegliante
June White
36
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EXHIBIT 27 FINANCIAL DATA SCHEDULES
For the Six Months Ended June 30, 1999
For the Six Months Ended June 30, 1998
For the Year Ended December 31, 1998 -- To be filed by amendment
For the Year Ended December 31, 1997 -- To be filed by amendment
For the Year Ended December 31, 1996 -- To be filed by amendment
37
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
INSTANT VIDEO TECHNOLOGIES, INC.
Dated: November 10, 1999 By /s/ Richard Lang
--------------------------------
Chairman, President, and
Chief Executive Officer
38
<PAGE>
INSTANT VIDEO TECHNOLOGIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Instant Video Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Instant Video
Technologies, Inc. and subsidiary (the Company) as of December 31, 1997 and 1998
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated net capital deficit that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
San Francisco, California
March 19, 1999
F-2
<PAGE>
<TABLE>
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Balance Sheets
<CAPTION>
December 31
----------------------------- June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,551 2,212,141 484,483
Accounts receivable -- -- 50,000
Prepaid expenses 31,460 26,053 56,327
Receivables - Series B Convertible Preferred Stock -- 810,000 --
----------- ----------- -----------
Total current assets 52,011 3,048,194 590,810
Property and equipment, net 85,611 184,616 531,273
Other assets 17,569 16,812 17,337
----------- ----------- -----------
$ 155,191 3,249,622 1,139,420
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit $ 500,000 -- --
Current portion of notes payable 451,773 22,736 --
Accounts payable 34,026 252,044 601,558
Accrued expenses 92,782 181,484 129,017
Accrued interest 43,044 -- --
Deferred revenue -- -- 50,000
----------- ----------- -----------
Total current liabilities 1,121,625 456,264 780,575
----------- ----------- -----------
Notes payable, net of current portion 16,833 -- --
----------- ----------- -----------
Total liabilities 1,138,458 456,264 780,575
Commitments and contingencies -- -- --
Stockholders' (deficiency) equity:
Convertible Preferred stock, $.00001 par value, 20,000,000 shares authorized:
Series A (Renamed from Series F), issued and outstanding:
1997 2,125,000
1998 2,025,000
1999 2,020,000
Liquidation preference of $2,125,000, $2,025,000 and
$2,020,000 in 1997, 1998 and 1999 respectively 22 20 20
Series B, 2,476,609 shares issued and outstanding in 1998 and 1999
Liquidation preference of $18,574,568 in 1998 and 1999 -- 25 25
Common stock, $.00001 par value, 100,000,000 shares authorized,
issued and outstanding:
1997 5,703,553
1998 7,940,966
1999 9,230,527 59 79 92
Additional paid in capital 7,795,972 27,251,399 28,986,275
Accumulated deficit (8,779,320) (24,458,165) (28,627,567)
----------- ----------- -----------
Stockholders' equity (deficit) (983,267) 2,793,358 358,845
----------- ----------- -----------
$ 155,191 3,249,622 1,139,420
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Operations
<CAPTION>
Year ended December 31, Six Months ended
June 30
------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ 1,457,597 247,879 15,000 15,000 --
Cost of revenues 78,195 230,210 -- -- --
----------- ----------- ----------- ----------- -----------
1,379,402 17,669 15,000 15,000 --
Costs and expenses:
Research and development 48,588 189,719 800,567 249,958 928,558
Sales and marketing 469,752 408,369 830,998 173,140 1,567,727
General and administrative 1,208,613 1,348,218 3,047,302 886,878 1,704,092
----------- ----------- ----------- ----------- -----------
Total costs and expenses 1,726,953 1,946,306 4,678,867 1,309,976 4,200,377
----------- ----------- ----------- ----------- -----------
Loss from operations (347,551) (1,928,637) (4,663,867) (1,294,976) (4,200,377)
Other income (expense):
Interest, net (56,816) (139,013) (2,252,553) (417,297) (1,760)
Other income (expense) -- 5,277 -- (153,750) 32,735
----------- ----------- ----------- ----------- -----------
Net other (56,816) (133,736) (2,252,553) (571,047) 30,975
----------- ----------- ----------- ----------- -----------
Net loss (404,367) (2,062,373) (6,916,420) (1,866,023) (4,169,402)
Beneficial conversion feature of Series B Preferred Stock -- -- (8,762,425) -- --
----------- ----------- ----------- ----------- -----------
Net loss applicable to Common Stockholders $ (404,367) (2,062,373) (15,678,845) (1,866,023) (4,169,402)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common share: $ (0.09) (0.39) (2.35) (0.32) (0.47)
=========== =========== =========== =========== ===========
Shares used in per share computation 4,600,000 5,259,304 6,658,738 5,813,142 8,884,253
=========== =========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
INSTANT VIDEO TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the three years ended December 31, 1998
and the six month period ended June 30, 1999 (unaudited)
<CAPTION>
Common Stock Preferred Stock Additional
------------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
---------- ------ ------------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 4,491,440 $ 45 1,436,000 $ 14 $ 5,005,464 $ (6,312,580) $ (1,307,057)
Preferred stock issuances -- -- 1,475,000 15 1,449,985 -- 1,450,000
Exercise of stock options 109,256 1 -- -- 1,529 -- 1,530
Stock options issued in lieu of
services performed -- 2 -- -- 149,998 -- 150,000
Conversion of debt and accrued interest 136,000 1 -- -- 169,999 -- 170,000
Conversion of Series D preferred stock
to common stock 66,857 1 (936,000) (9) 8 -- --
Net loss -- -- -- -- -- (404,367) (404,367)
---------- ------ ------------ ----- ------------ ------------ ------------
Balance at December 31, 1996 4,803,553 50 1,975,000 20 6,776,983 (6,716,947) 60,106
Preferred stock issuances -- -- 650,000 7 549,993 -- 550,000
Exercise of warrants 400,000 4 -- -- 399,996 -- 400,000
Value assigned to warrants
upon issuance of debt -- -- -- -- 69,000 -- 69,000
Conversion of preferred stock to
common stock 500,000 5 (500,000) (5) -- -- --
Net loss -- -- -- -- -- (2,062,373) (2,062,373)
---------- ------ ------------ ----- ------------ ------------ ------------
Balance at December 31, 1997 5,703,553 59 2,125,000 22 7,795,972 (8,779,320) (983,267)
Series B Preferred Stock issuances -- -- 2,105,000 21 3,873,979 -- 3,874,000
Warrants issued in connection with
the issuance of Series B Preferred
Stock -- -- -- -- 336,000 -- 336,000
Common stock issuance 14,921 -- -- -- 10,000 -- 10,000
Exercise of stock options 139,501 1 -- -- 1,138,951 -- 1,138,952
Exercise of warrants 700,000 6 -- -- 749,994 -- 750,000
Conversion of debt and accrued interest 1,082,991 10 371,609 3 1,736,983 -- 1,736,996
Allocation of proceeds from convertible
debt to beneficial conversion feature -- -- -- -- 1,010,037 -- 1,010,037
Value assigned to warrants and
stock upon issuance of debt 200,000 2 -- -- 1,109,332 -- 1,109,334
Stock options issued for services
performed -- -- -- -- 727,726 -- 727,726
Conversion of Series A Preferred
Stock to common stock 100,000 1 (100,000) (1) -- -- --
Beneficial conversion feature of
Series B Preferred Stock -- -- -- -- 8,762,425 (8,762,425) --
Net loss -- -- -- -- -- (6,916,420) (6,916,420)
---------- ------ ------------ ----- ------------ ------------ ------------
Balance at December 31, 1998 7,940,966 79 4,501,609 45 27,251,399 (24,458,165) 2,793,358
Exercise of stock options (unaudited) 6,800 -- -- -- 6,300 -- 6,300
Exercise of warrants (unaudited) 1,277,262 13 -- -- 1,537,487 -- 1,537,500
Stock issued for services performed
(unaudited) 499 -- -- -- 191,089 -- 191,089
Conversion of preferred stock to
common stock (unaudited) 5,000 -- (5,000) -- -- -- --
Net loss (unaudited) -- -- -- -- -- (4,169,402) (4,169,402)
---------- ------ ------------ ----- ------------ ------------ ------------
Balance at June 30, 1999 (unaudited) 9,230,527 $ 92 4,496,609 $ 45 $ 28,986,275 $(28,627,567) $ 358,845
========== ====== ============ ===== ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31, Six months ended June 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (404,367) (2,062,373) (6,916,420) (1,866,023) (4,169,402)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 50,681 92,176 58,531 21,457 74,529
Loss on Disposal of Equipment -- 5,275 5,133 -- --
Write off patent costs and other assets -- 95,735 -- -- --
Non-cash interest expense -- 69,000 2,119,371 552,984 --
Stock and stock options issued for services performed 150,000 -- 727,726 297,708 191,089
Compensation from cashless exercise of stock options -- -- 1,137,500 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,421) 1,421 -- -- (50,000)
Costs and estimated earnings in excess of billings on
uncompleted contracts (136,400) 136,400 -- -- --
Prepaid expenses 16,513 6,982 5,407 10,350 (30,274)
Other assets (40,000) 35,101 757 757 (525)
Accounts payable (194,017) (94,237) 218,018 194,137 349,514
Accrued expenses (74,059) (59,218) 88,702 9,464 (52,467)
Accrued interest (26,680) 13,231 66,525 (16,437) --
Deferred revenue (159,032) -- -- -- 50,000
----------- ----------- ----------- --------- ----------
Net cash used in operating activities (818,782) (1,760,507) (2,488,750) (795,603) (3,637,536)
Cash flows from investing activities:
Purchases of property and equipment (47,433) (85,367) (162,669) (40,938) (421,186)
----------- ----------- ----------- --------- ----------
Cash flows from financing activities:
Proceeds from sale of preferred stock and warrrants 1,450,000 550,000 3,400,000 -- --
Proceeds from sale of common stock -- -- 10,000 310,000 --
Exercise of warrants -- 400,000 750,000 -- 1,537,500
Exercise of stock options 1,530 -- 1,452 -- 6,300
Collection of Receivable - Series B Convertible Preferred
Stock -- -- -- -- 810,000
Proceeds from issuance of debt -- 1,054,210 1,572,736 1,175,000 --
Repayment of debt (381,048) (346,398) (891,179) (561,073) (22,736)
----------- ----------- ----------- --------- ----------
Net cash provided by financing activities 1,070,482 1,657,812 4,843,009 923,927 2,331,064
----------- ----------- ----------- --------- ----------
Increase (decrease) in cash and cash equivalents 204,267 (188,062) 2,191,590 87,386 (1,727,658)
Cash and cash equivalents, beginning of period 4,346 208,613 20,551 20,551 2,212,141
----------- ----------- ----------- --------- ----------
Cash and cash equivalents, end of period $ 208,613 20,551 2,212,141 107,937 484,483
=========== =========== =========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 104,134 56,782 65,935 31,894 913
=========== =========== =========== ========= ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1999, 5,000 shares of Series A (formerly Series F) Preferred Stock was
converted into 5,000 shares of common stock
In 1998, 405,000 shares of Series B convertible Preferred Stock was issued for
receivables of $810,000
In 1998, debt and accrued interest of $1,736,996 was converted to Series B
Convertible Preferred Stock and common stock
In 1998, 100,000 shares of Series A Convertible Preferred Stock was converted to
100,000 shares of common stock
In 1998, the Company recognized a beneficial conversion feature on Series B
Preferred stock of $8,762,425
In 1997, 500,000 shares of Series E Preferred Stock was converted to 500,000
shares of Common Stock
In 1997, the company financed an insurance premium of $29,794
In 1996, $150,000 debt and $20,000 accrued interest were converted to common
stock
In 1996, 936,000 shares of Series D Convertible Preferred Stock were converted
to 66,857 shares of common stock
In 1996, the Company granted stock options to various consultants, which
resulted in $150,000 compensation expense.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 and June 30, 1999 (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Instant Video Technologies, Inc. (the Company) licenses burst transmission
software for use within commercial, multimedia and interactive environments.
The burst technology allows for time compression and burst transmission of
video/audio programming that results in time-savings, network efficiency and
superior quality products.
LIQUIDITY
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the years ended December 31, 1996, 1997, and 1998, and
during the six-month period ended June 30, 1999, the Company incurred losses
of $404,367, $2,062,373, $6,916,420 and $4,169,402, respectively, and has an
accumulated deficit of $24,458,165 and $28,627,567 at December 31, 1998 and
June 30, 1999, respectively. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include an adjustments relating to the
recoverability of recorded asset amounts or the amounts or classification of
liabilities that might be necessary should the Company be unable to continue
as a going concern.
The Company's continuation as a going concern is dependent on its ability to
raise additional capital and ultimately to achieve profitability.
The Company is actively pursuing additional equity financing and has engaged
an investment banker for such purpose. The Company intends to raise
sufficient capital to allow the Company to complete development and
successful commercialization of its products. No assurances can be given
that the Company will be successful in raising additional capital or that
the Company will achieve profitability or positive cash flow. If the Company
is unable to obtain adequate additional financing and bring the Company to
profitability or positive cash flow, there can be no assurance the Company
can continue as a going concern.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Instant Video
Technologies, Inc. and its wholly-owned subsidiary, Explore Technology, Inc.
All significant intercompany transactions and accounts have been eliminated
in consolidation.
CASH EQUIVALENTS
Cash equivalents of $20,551 and $2,212,141 and $484,483 at December 31, 1997
and 1998 and June 30, 1999 respectively, consist of money market accounts
and other short-term investments with an original maturity of three months
or less.
REVENUE RECOGNITION
In 1996 and 1997, the Company primarily derived its revenues from license
fees and professional services.
License fees and services are recognized as revenue ratably over the license
period. No revenue is recognized until evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and collection is
probable.
In 1998, the Company derived its revenues from test software.
F-7
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to five years.
PATENTS
Direct costs incurred to obtain patents have been capitalized and amortized
over seven years using the straight-line method. Costs incurred to maintain
patents are expensed as incurred. During the fourth quarter of 1997, the
Company expensed the remaining unamortized balance of patent costs of
$87,628 due to the lack of current revenues associated with these patents.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred until
such time as both technological feasibility is established and future
economic benefit is assured. To date, such conditions have not been
satisfied, and, accordingly, all software engineering and development costs
have been expensed as incurred.
<TABLE>
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense is
as follows:
<CAPTION>
Years ended December 31, Six month periods ended June 30,
------------------------ --------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Advertising expense $ -- $ -- $ -- $ -- $ 208,942
============== =============== ============== =============== ===============
</TABLE>
INCOME TAXES
Income taxes are accounted for 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 amount of existing assets and liabilities, and, their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded
for deferred tax assets if it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
LOSS PER SHARE AND DILUTIVE SECURITIES
Basic net loss per share is based on the weighted average number of shares
of common stock outstanding. Diluted net loss per share is based on the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options and warrant outstanding using
the treasury stock method.
<TABLE>
The following table sets forth the computation of basic and diluted net loss
per shared for the periods indicated:
<CAPTION>
Year ended December 31, Six month period ended June 30,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss applicable to common
shareholders $ (404,367) (2,062,373) (15,678,845) (1,866,023) (4,169,402)
Denominator:
Weighted average shares 4,600,000 5,259,304 6,658,738 5,813,142 8,884,253
Denominator for basic and diluted
calculation 4,600,000 5,259,304 6,658,738 5,813,142 8,884,253
Net loss per share:
Basic and diluted $ (0.09) (0.39) (2.35) (0.32) (0.47)
</TABLE>
F-8
<PAGE>
<TABLE>
The following is a summary of the securities that could potentially dilute
basic loss per share in the future that were not included in the computation
of diluted loss per share because to do so would be antidilutive.
<CAPTION>
Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Convertible Preferred $ 1,975,000 2,125,000 4,501,609 2,125,000 4,496,609
Options 2,864,774 2,538,630 6,289,263 5,386,716 6,426,863
Warrants 1,450,000 1,961,000 2,010,210 1,607,000 884,448
Convertible debt 31,333 303,206 -- 868,350 --
-------------- --------- --------- --------- ---------
Total $ 6,321,107 6,927,836 12,801,082 9,987,066 11,807,920
============== ========= ========== ========= ==========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, accounts payable, and debt. The Company believes the reported
amounts of its financial instruments approximates fair value, based upon the
short maturity of cash equivalents, accounts receivable and payable and
based on the current rates available to the Company or similar debt issuer.
STOCK BASED COMPENSATION
The Company accounts for its stock based compensation plans for employees
using the intrinsic value method. As such, compensation expense is recorded
if on the measurement date, which is generally the date of grant, the
current fair value of the underlying stock exceeds the exercise price.
The equity instruments issued to non-employees are accounted for at fair
value. The fair value of the equity instrument is determined using either
the fair value of the underlying stock or the Black-Scholes option pricing
model.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
COMPREHENSIVE INCOME
The Company has no component of comprehensive income other than its reported
amounts of net loss applicable to holders of common stock.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, June 30,
---------------------- ---------
1997 1998 1999
--------- --------- ---------
(unaudited)
Computer equipment $ 95,053 $ 192,816 $ 439,691
Furniture 24,980 18,627 131,031
Office equipment -- 4,459 7,867
Software -- 22,016 75,330
Leasehold improvements -- 8,270 13,454
--------- --------- ---------
120,033 246,188 667,373
Less accumulated depreciation (34,422) (61,572) (136,100)
--------- --------- ---------
$ 85,611 $ 184,616 $ 531,273
========= ========= =========
F-9
<PAGE>
<TABLE>
(3) DEBT
<CAPTION>
December 31, June 30,
------------ ----------
BANK LINE OF CREDIT 1997 1998 1999
--------- --------- ----------
(unaudited)
<S> <C> <C> <C>
$500,000 Revolving line credit with Imperial Bank,
principal and interest rate at the Bank's Prime
rate plus 2.5% (11.00% at December 31, 1997)
paid in March 1998 $ 500,000 $ -- $ --
========== ========= ==========
NOTES PAYABLE
10.5% unsecured note, interest and principal due
at June 30, 1998, convertible into common stock at
$1.85 per share; converted in December, 1998 100,000 -- --
10.5% unsecured note, interest and principal due
on a monthly basis over 18 months ending on March
31, 1999. Convertible into common stock at $1.00
per share; converted in December, 1998 85,602 -- --
10.5% note payable to Mercer Management, Inc.,
interest and principal due June 10, 1998,
convertible at $1.00 per share into common stock;
converted in December, 1998 100,000 -- --
8% unsecured note, principal and interest due June
10, 1998. Convertible into common stock at $2.00
per share; converted in December, 1998 73,210 -- --
10.5% note payable to Draysec Finance Ltd.,
interest and principal due June 10, 1998,
convertible into common stock at $1.00 per share;
converted in December, 1998 80,000 -- --
11.14% Financing of annual insurance premium for
current year, principal and interest paid monthly 29,794 22,736 --
---------- --------- ----------
468,606 22,736 --
Less current portion (451,773) (22,736) --
---------- --------- ----------
Long-term portion $ 16,833 $ -- $ --
========== ========= ==========
</TABLE>
(4) EQUITY
Convertible Preferred Stock
In February 1996, the Company amended its articles of incorporation and
authorized the issuance of up to 5,000,000 shares of Series F Convertible
Preferred Stock and warrants to purchase common stock of the Company. As a
result, the Company obtained proceeds in the net amount of $1,445,000 in 1996
and $550,000 in 1997 of Series F Convertible Preferred Stock and warrants to
purchase common stock of the Company. In 1998, Series F was renamed Series A
Convertible Preferred Stock (Series A Preferred Stock).
The price of each share of Series A Preferred Stock was $1.00 and may be
converted into one share of the Company's common stock. The exercise price of
the common stock warrants is $1.00 per share. The offering grants the investors
the right to appoint two directors, certain registration rights, and the right
of first refusal on finance offerings for a limited period of time.
In 1998, the Company issued 2,105,000 shares of $0.01 par value Series B
Convertible Preferred Stock (Series B Preferred Stock), with warrants to
purchase 321,960 shares of the Company's common Stock at $2.00 per share. The
Company has allocated $336,000 of the cash proceeds from the $4,210,000 of
Series B Preferred Stock to warrants using the Black-Scholes option pricing
model.
The preferred stock agreements provide for the holders of preferred stock to
participate in dividends declared on common and preferred stock and the right to
elect one director to the Company's board of Directors. The preferred
stockholders have the right to convert their shares into the Company's common
stock on a 1 for 1 basis and have liquidation preference increasing over time
from $7.50 to $9.30 per share after 3 years. The preferred stock has
antidilution provisions and registration rights.
F-10
<PAGE>
During 1998, the Company issued stock options in lieu of cash to purchase
approximately 550,000 shares of the Company's common stock at exercise prices
ranging from $1.00 to $2.90 per share which will expire between September 2000
and December 2003, in exchange for services rendered to the Company. An expense
of $727,726 was recorded as a general and administrative expense based on the
fair value of the stock options issued.
The Company issued Series B Convertible Preferred Stock at $2.00 per share to
several individuals at various times through the fourth quarter of 1998 when the
market prices ranged from $3.19 to $8.44. The issued stock can be converted at
any time after the date of issuance into shares of common stock on a one for one
basis. As a result, the Company recorded a charge to accumulated deficit of
$8,762,425 for this beneficial conversion feature.
In December, 1998, The Company issued 405,000 shares of Series B convertible
Preferred Stock in exchange for receivables of $810,000. These receivables were
collected at various dates between January 4 and January 8, 1999.
Warrants and Stock Issued With Debt
During 1998, the Company issued convertible debt of $1,550,000 and added
beneficial conversion features to $743,216 of debt. In connection with these
transactions the Company issued stock and warrants. The Company valued these
equity instruments using either the underlying stock prices or the Black-Scholes
option pricing model. The Company recorded interest expense of $1,010,037 for
the beneficial conversion feature of this debt.
Stock Options
On November 6, 1992, the Board of Directors adopted the 1992 Stock Incentive
Plan. Under the plan, the Board may grant options to officers, key employees,
directors and consultants. Incentive stock options may be granted at not less
than 100% of the fair market value of the stock on the date the option is
granted. The option price of stock not intended to qualify as incentive stock
options may not be less than 85% of the fair market value on the date of grant.
The maximum term of the options cannot exceed ten years. A total of 3,500,000
shares has been reserved for issuance under the plan.
On April 29, 1998 the Board of Directors adopted the 1998 Stock Incentive Plan.
Under the plan, the Board may grant options to officers, key employees,
directors and consultants. Incentive stock options may be granted at not less
than 100% of the fair market value of the stock on the date the option is
granted. The option price of stock not intended to qualify as incentive stock
options may not be less than 85% of the fair market value on the date of grant.
The maximum term of the options cannot exceed ten years. A total of 4,000,000
shares have been reserved for issuance under the plan.
The per share weighted average fair value of stock options granted during 1996,
1997 and 1998 and the six month period ended June 30, 1999 (unaudited) was
$0.22, $0.17, $1.73 and $5.49 respectively, on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: volatility of 65%, 53%, 136% and 111% respectively, expected
dividend yield 0% for all periods, risk free interest rates of approximately
6-1/2%, 5 1/2%, 5% and 5%, respectively, and expected lives of 1.9 years in 1996
and 1.5 years for each of the remaining periods.
F-11
<PAGE>
Stock option activity for 1996, 1997, 1998 and 1999 follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Balance on December 31, 1995 $ 3,190,971 $ 1.37
Options granted 703,000 1.50
Options exercised (109,256) .01
Options forfeiteed (606,000) 1.00
Options expired (313,941) 1.40
-----------
Balance on December 31, 1996 2,864,774 1.52
Options granted 286,356 1.00
Options forfeited (500,000) 1.00
Options expired (112,500) 1.39
-----------
Balance on December 31, 1997 2,538,630 1.85
Options granted 4,117,101 3.01
Options exercised (139,501) 2.28
Options expired (105,719) 2.65
Options forfeited (121,248) 1.56
-----------
Balance on December 31, 1998 6,289,263 2.52
Options granted (unaudited) 382,000 7.29
Options exercised (unaudited) (6,800) 0.93
Options forfeited (unaudited) (237,600) 3.50
-----------
Balance on June 30, 1999
(unaudited) 6,426,863 2.84
===========
<TABLE>
Stock options outstanding and exercisable at December 31, 1998 from the 1992 and
1998 Plans consisted of:
<CAPTION>
Outstanding Exercisable
---------------------------------------- ---------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Shares Average Remaining Shares Average Remaining
Price Outstanding Price Life Outstanding Price Life
- ------------- ------------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$0.90 - $1.50 2,125,525 $ 1.06 5.46 2,125,525 $ 1.06 5.46
$2.00 - $3.16 1,248,738 $ 2.59 4.64 491,367 $ 2.53 4.62
$3.50 2,513,000 $ 3.50 4.51 655,150 $ 3.50 4.50
$3.75 - $5.75 402,000 $ 3.95 5.02 350,000 $ 3.75 5.02
------------ ------------
Total 6,289,263 $ 2.52 4.89 3,622,042 $ 1.95 5.13
============ ============= ============= ============= ============= =============
</TABLE>
<TABLE>
Stock options outstanding and exercisable at June 30, 1999 from the 1992 and
1998 Plans consisted of:
<CAPTION>
Outstanding Exercisable
---------------------------------------- ---------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Shares Average Remaining Shares Average Remaining
Price Outstanding Price Life Outstanding Price Life
- ------------- ------------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$0.90 - $1.50 2,018,725 1.06 5.13 2,013,725 1.06 5.12
$2.00 - $3.75 3,974,138 3.24 4.10 2,188,273 3.26 4.09
$5.75 - $7.94 273,000 6.61 4.75 6,000 6.63 4.77
$8.06 - $9.72 161,000 8.96 4.30 36,000 9.72 2.61
----------- ----------
Total 6,426,863 2.84 4.46 4,243,998 2.28 4.57
============ ============= ============= ============= ============= =============
</TABLE>
F-12
<PAGE>
<TABLE>
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options consistent with SFAS 123, the Company's net
loss applicable to common stockholders and net loss per share would have been
increased to pro forma amounts indicated below:
<CAPTION>
Six month period ended
Year ended December 31, June 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders, as reported $(404,367) $(2,062,373) $(15,678,845) $(1,866,023) $(4,169,402)
Pro forma (437,816) $(2,071,358) $(16,960,138) (2,428,876) (5,939,019)
Net loss per share as reported (0.09) (0.39) $(2.35) (0.32) (0.47)
Pro forma (0.09) (0.39) $(2.55) (0.42) (0.67)
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses are comprised of the following:
December 31, June 30,
------------ --------
1997 1998 1999
-------- -------- --------
(unaudited)
Employee benefits $ -- $ 64,711 $ 87,365
Professional services
92,782 116,773 41,652
-------- -------- --------
Total $ 92,782 $181,484 $129,017
======== ======== ========
<TABLE>
(6) LEASE COMMITMENTS
The Company leases its office space under an operating lease expiring in
2002.
<CAPTION>
Years ended December 31, Six month periods ended June 30,
------------------------ --------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Rent expense $ 145,148 $ 91,000 $ 104,969 $ 50,787 $ 50,923
========= ======== ========= ======== ========
</TABLE>
The following is a summary of future minimum lease payments for operating
leases at December 31, 1998:
OPERATING
Years ending December 31: LEASES
- ------------------------- -------------
1999 $ 157,632
2000 163,518
2001 187,368
2002 15,614
---------
Total lease payments $ 524,132
=========
(7) INCOME TAXES
At December 31, 1997 and 1998, and June 30, 1999, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $7,842,000 $13,826,900 and $16,481,000 (unaudited),
respectively, which, are subject to annual limitations, and are available to
offset future taxable income, if any, through 2018 and net operating loss
carryforwards for state income tax purposes of $3,309,000, $6,300,000 and
$14,148,000, respectively, (unaudited), which are available to offset future
taxable income through 2003.
Of the total net operating loss carryforwards at December 31, 1998, $750,000
is associated with an equity adjustment and is not available for reducing
the provision for income taxes in future periods.
F-13
<PAGE>
<TABLE>
Actual income tax benefit differs from the benefit expected by applying the
federal statutory rate of 34% to pretax loss as follows:
<CAPTION>
Years ended December 31, 6 month periods ended June 30,
------------------------------------------------------------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
----------------------------
<S> <C> <C> <C> <C> <C>
Expected tax benefit $ (137,000) (701,000) (2,352,000) (634,000) (1,418,000)
State tax benefit, net of
federal effect (12,000) (61,000) (207,000) (56,000) (124,000)
Research and experimentation
credit -- (4,000) (31,000) (16,000) (60,000)
Increase in valuation
allowance 115,000 589,000 2,250,000 274,000 1,746,000
Other 34,000 177,000 340,000 432,000 (144,000)
---------- ---------- ---------- ---------- ----------
Actual tax benefit $ -- -- -- -- --
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1997 and 1998 are as follows:
<CAPTION>
December 31 June 30,
------------------------ --------
1997 1998 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Start-up costs $ 85,919 $ -- $ --
Accruals -- 10,459 51,387
Net operating loss carryforwards for
income taxes 2,859,204 5,068,360 6,729,033
Research and experimentation credit
carryforward 105,715 137,057 197,413
Patents -- 43,502 65,253
----------- ----------- -----------
Total gross deferred tax assets 3,050,838 5,259,378 7,043,086
Less valuation allowance (2,997,490) (5,247,783) (6,993,794)
----------- ----------- -----------
Net deferred tax assets 53,348 11,595 49,293
----------- ----------- -----------
Deferred tax liabilities:
Patent (45,677) -- --
Fixed assets (7,671) (11,595) (49,293)
----------- ----------- -----------
Total gross deferred tax liabilities (53,348) (11,595) (49,293)
----------- ----------- -----------
Net deferred taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1997 and 1998 was an increase of $589,147 and an increase of $250,293,
respectively. In assessing the amount of deferred tax assets to be
recognized, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. It is
not possible at this time to determine that the deferred tax assets are more
likely to be realized than not; accordingly, a full valuation allowance has
been established.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change," as defined by the Internal Revenue Code. All federal and
state net operating loss carryforwards are subject to limitation as a result
of these restrictions. If there should be a subsequent ownership change, as
defined, the Company's ability to utilize its carryforwards could be
reduced.
(8) BUSINESS RISKS AND SEGMENT DISCLOSURES
The Company's primary source of revenue is from the licensing of burst
technology that generated $1,457,597, $247,879 and $15,000 in revenue
during 1996, 1997 and 1998, respectively. The Company's success is largely
dependent on this product. Changes in desirability of the product in the
marketplace may significantly affect the Company's future operating
results.
The Company operates in one segment and accordingly has provided only the
required enterprise wide disclosure. The Company's principal customer,
located in Oklahoma, accounted for substantially all of the Company's 1997
revenues. The Company recognized no foreign revenues in 1996, 1997 or 1998.
F-14
<PAGE>
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, The American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that certain costs related to the development or purchase if
internal-use software be capitalized and amortized over the estimated
useful life of the software. SOP No. 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company does not expect the adoption of SOP No. 98-1 to have a material
impact on its results of operations.
The FASB recently issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 addresses the accounting
for derivative instruments, including derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a certain
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship, and, if so, the reason for
holding it. The Company must adopt SFAS No. 133 by January 1, 2000. The
Company has determined that SFAS No. 133 will have no effect on its
financial statements.
(10) SUBSEQUENT EVENTS (unaudited)
In February 1999, warrants to purchase 1,025,000 shares of the Company's
common stock were exercised for $1,537,500.
In January and February 1999, certain warrant holders exercised their right
to purchase 281,250 shares of the Company's common stock in a cashless
exercise. Of the 281,250 warrants exercised, 81,250 warrants were utilized
to purchase 71,774 shares of common stock at an average price of $1.23. The
remaining 200,000 warrants exercised were utilized to purchase 180,488
shares of common stock at an exercise price of $1.00.
In July, 1999, the Company received $2,520,000 evidenced by notes payable
convertible into common stock, due in one year. The conversion rate is
under negotiation, but shall be the lower of (1) $6.50, (2) 80% of the
average closing price our publicly traded shares in the 20 trading days
immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement.
On August 3, 1999, the Company issued 200,000 shares of common stock in
exchange for all of the outstanding stock of Timeshift-TV in a stock-only
transaction from our Chairman and CEO, and two employees who are related to
him. These parties were not employed by the Company at the time they formed
Timeshift-TV. The Company's board of directors unanimously approved the
acquisition. The Company has the option to repurchase 100,000 shares for
$10.00 upon the occurrence of certain events.
In September and October, 1999, the Company received $450,000 and $500,000,
respectively, evidenced by notes payable convertible into our common stock,
due in one year. The conversion rate is under negotiation, but shall be the
lower of (1) $6.50, (2) 80% of the average closing price of the Company's
publicly traded shares in the 20 trading days immediately preceding the
closing of an ongoing private placement, or (3) the price agreed in that
private placement.
(11) LEGAL SETTLEMENT
In October of 1996, the Company entered into a settlement agreement with
certain investors in connection with the Company's Series F convertible
stock financing pursuant to a consulting agreement. The settlement required
the Company to pay $110,000. In October 1997 the amounts outstanding were
consolidated into one convertible promissory note maturing on March 31,
1999. Monthly payments of principal and interest were made on this note
through November 1998, at which time the remaining balance of $24,333 was
converted into common stock.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AND UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 484,483
<SECURITIES> 0
<RECEIVABLES> 50,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 590,810
<PP&E> 667,373
<DEPRECIATION> 136,100
<TOTAL-ASSETS> 1,139,420
<CURRENT-LIABILITIES> 780,575
<BONDS> 0
0
45
<COMMON> 92
<OTHER-SE> 358,708
<TOTAL-LIABILITY-AND-EQUITY> 1,139,420
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,200,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,760
<INCOME-PRETAX> (4,169,402)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,169,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,169,402)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,212,141
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,048,194
<PP&E> 246,188
<DEPRECIATION> 61,572
<TOTAL-ASSETS> 3,249,622
<CURRENT-LIABILITIES> 456,264
<BONDS> 0
0
45
<COMMON> 79
<OTHER-SE> 2,793,234
<TOTAL-LIABILITY-AND-EQUITY> 3,249,622
<SALES> 15,000
<TOTAL-REVENUES> 15,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,678,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,252,553
<INCOME-PRETAX> (6,916,420)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,916,420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,916,420)
<EPS-BASIC> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
