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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Fiscal Year ended: December 31, 1998
OR
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________________ to _________________ .
Commission File No. 33-35580-D
INSTANT VIDEO TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer as Specified in its Charter)
Delaware 84-1141967
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
500 Sansome Street, Suite 503
San Francisco, California 94111
- ---------------------------------------- ----------
(Address of Principal Executive Offices, (Zip Code)
(415) 391-4455
(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: None.
Securities Registered Under Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. [N/A]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [N/A]
State Issuer's revenues for its most recent fiscal year: $15,000.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 31, 1999 (based upon the last reported price of the
Common Stock on the NASDAQ OTC Bulletin Board Exchange on such date) was
approximately $63,100,000.
As of April 9, 1999, there were approximately 9,018,228 shares of the
Registrant's Common Stock outstanding.
Documents incorporated by reference Part III of this Report incorporates
information by reference from the definitive Proxy statement for the
Registrant's annual meeting of stockholders, to be filed within 120 days after
the end of the fiscal year ended December 31, 1998.
This Form 10-KSB consists of 41 pages.
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INSTANT VIDEO TECHNOLOGIES, INC.
1998 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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Page
PART I
<S> <C> <C>
Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Common Equity and Related
Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7. Financial Statements and Supplementary Data 16
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
PART III
Item 9. Directors and Executive Officers of the Registrant 18
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and
Management 20
Item 12. Certain Relationships and Related Transactions 21
Item 13. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
Instant Video and Burstware(R) are registered trademarks of Instant Video
Technologies, Inc. All other names are trademarks and/or registered trademarks
of their respective owners.
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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 the Company's
products and new technologies, the sufficiency of financial resources available
to the Company, economic, competitive, governmental and technological factors
affecting the Company's operations, markets, services, and prices, and other
factors described in this Report and in prior filings with the Securities and
Exchange Commission. The Company's actual results could differ materially from
those suggested or implied by any forward-looking statements as a result of such
risks.
PART I
ITEM 1: DESCRIPTION OF BUSINESS.
THE COMPANY
Instant Video Technologies, Inc. ("IVT" or the "Company") is an independent
provider of client/server network software for the delivery of video and audio
information over networks. IVT's Burstware(R) suite of software products enables
companies to transmit video and audio files at faster-than-real-time speed. The
result is full-motion video and CD-quality audio to the end-user. The Company's
software incorporates its portfolio of patented intellectual property to achieve
this result.
The Company was organized as a Delaware corporation on April 27, 1990, under the
name "Catalina Capital Corporation," for the purpose of obtaining funding and
creating a vehicle by which it could take advantage of business opportunities.
In August 1992, the name of Catalina Capital Corporation was changed to Instant
Video Technologies, Inc. The stock of Instant Video Technologies, Inc. trades on
the OTC Bulletin Board under the symbol "IVDO".
In the first half of 1995, the Company began development of a software product
that would incorporate its patented intellectual property for
faster-than-real-time burst transmissions of multimedia content over computer
networks. At that time, the Company contracted with a consulting firm to develop
this software product. A "test" proof of concept was created to run on broadband
local area and wide area networks. In 1996, the Company entered into agreements
with three customers for use of the prior software in their products and
services. IVT continued its product development through 1997 by contracting with
a third-party consulting firm.
In September 1997, the co-founder of IVT returned as Chairman, CEO and
President. As a result, in the last quarter of 1997 the Company restructured its
management team, obtained funding to continue operations, refocused its product
development, and brought technology development in-house.
At the end of the third quarter of 1997, the Company suspended sales of its
prior proof of concept software to new customers in order to concentrate efforts
on developing a new suite of Burstware(R) software products to position the
Company for growth in 1999. Resources were directed at product development to
facilitate this and resulted in no software license sales in 1998.
In 1998, the Company focused on: 1) developing a commercially marketable
Burstware(R) suite of software products; 2) raising the capital necessary to
meet operating requirements; and, 3) building
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its management team. The Company released the test version of the Burstware(R)
Suite on schedule in March 1998 and began testing with selected companies in
April 1998. New versions of the test software were released in June and November
1998. In February 1999, the Company released its first commercial product,
Burstware(R) Version 1.1, to the public.
The Company recruited senior executives with substantial industry and emerging
company experience in marketing, sales, and development and increased the total
number of employees from 5 to 18 during 1998.
INDUSTRY BACKGROUND
In recent years, a variety of related technologies have converged to enable the
distribution of high quality 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, intranet
and extranet has increased. Today, robust networks and powerful multimedia PCs
allow for delivery of video and audio content to consumers and businesses.
A number of companies have developed first generation software solutions
intended to deliver video/audio content to a variety of end users. The first
generation solutions have commonly been referred to as real-time "streaming"
solutions. 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
for the length of any real-time "play" of content. This means that a 30-minute
video, for example, requires that constant communication between servers and
clients be maintained for 30 minutes of real-time viewing.
The proliferation of the Internet and private intranets and extranets has
created a demand for more than just static text and graphic information. The
commercial and private consumer markets increasingly require studio-quality
video and CD-quality audio. Although real-time streaming solutions can deliver
video and audio, like most first generation technology they fall short of
satisfying consumer demand. Today, the consumer must settle for less than
full-motion, studio-quality video and CD-quality audio and endure the stops,
starts, pops, and jiggles of current streaming technology.
MARKET OPPORTUNITY
The convergence of rapid growth in the Internet, increased computing power on
the desktop, and the growth of broadband communications is opening new markets
for telephone companies and network service providers (NSPs). Companies such as
Qwest, Sprint, and Deutsche Telekom have invested in significant expansions of
their fiber optic digital backbones. Major NSPs are coordinating their resources
with backbone providers to offer combined service and access packages. This
investment in infrastructure provides an opportunity for NSPs, system
integrators, and value-added-resellers ("VARs") to bundle and resell
Burstware(R)'s unique video and audio capabilities within lucrative business to
businessvertical markets.
IVT believes that the business-to-business marketplace offers the opportunity
for rapid revenue growth and significant sales volume. These market segments,
including telecom, training, customer care, financial, industrial, and
government, need robust networked video/audio solutions.
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The consumer market is currently characterized by lower bandwidth networks and a
fragmented customer base. The latter factor translates into more difficult sales
and marketing efforts as well as lower margins. The business-to-business market
does not require the intensive, time-consuming customer support needed for
consumer products, and currently has a comparatively low penetration by
competitors.
THE INSTANT VIDEO TECHNOLOGIES SOLUTION
A major problem with real-time streaming, is that any fluctuation in the quality
of the network connections between servers and clients results in interruption
or degradation of the viewing experience by the client. Additionally, the number
of real-time connections which can be simultaneously maintained 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 attention to the client
with the most available bandwidth, results in degradation of quality to other
clients attempting to receive viewing content. These problems have limited the
quality of service available to consumers and have thus delayed the widespread
dissemination of video/audio content by various content providers and their
delivery networks. IVT's Burstware(R) is a suite of next generation software
applications designed to overcome these limitations.
IVT's technology offers many advantages over current video and audio streaming
software that is available today. Burstware(R) provides a fundamentally
different approach to the transmission of full-motion video and CD-quality audio
content.
In a "burst-enabled" network, the server delivers to each client one or more
"burst(s)" of content in faster-than-real-time. For example, a two-minute
segment of compressed programming is delivered in less than two minutes to the
client-side buffer long before it is needed for replay. Having delivered this
"burst", the server then disengages from the client and is free to address new
clients awaiting content delivery. The server continues to maintain a periodic
dialog with each client, which receives additional data bursts as needed. In
addition, the server dynamically responds to information relating to changing
network conditions (including latency), consumption rates, and multiple user
needs.
As a network management tool, Burstware(R) controls the optimal delivery of
video/audio content unaffected by network fluctuations. Information technology
("IT") managers can now serve a larger number of clients with higher quality
viewing experiences. Simulations have shown that Burstware(R)'s network
management approach can provide up to an estimated 60% improvement in network
throughput over real-time streaming architecture.
BUSINESS OF THE COMPANY
Overview
The Company intends to become a worldwide provider and licensor of Burstware(R)
software and intellectual property for use within commercial, multimedia, and
interactive networks. The Company also intends to expand the number of patents
contained within its patent portfolio and develop additional Burstware(R)
products and applications.
The potential applications and uses of the Company's technology are
wide-reaching, and are not limited to software. The Company also intends to
investigate other strategies to expand IVT's technology to
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other potential applications including video servers and multimedia hardware,
such as TVs, network appliances and set top boxes, multiplying the potential
markets for Burstware(R)-based products.
Burst Technology
Burstware(R) is a client-server software product that manages and optimizes the
delivery of high quality video and audio (time-based media) across broadband
networks. The heart of Burstware(R)'s capabilities is embodied in its patented
"Faster-Than-Real-Time" transfers of data that enable interference-free
time-based media delivery and playback. The commercial product was released in
February 1999.
The Burstware(R) video delivery system consists of one or more servers,
conductors, and client-side players interconnected by one or more networks.
Burstware(R) supports a broad array of encoding standards, although it is
neutral to specific compression technologies. This multi-tiered, client-server
system provides enterprise-class failure protection combined with full
scalability, and can operate over a combination of private LANs and public
broadband networks.
Burstware(R) is designed to benefit customers through the following capabilities
of the product: 1) more simultaneous users of video & audio within the same
bandwidth used by the competition; 2) highest quality viewing experience without
disruptions; 3) low cost, scalable expansion to meet increased numbers of users;
and 4) control over the effects of video and audio on the enterprise network.
Strategy
The Company plans to establish a foothold for its Burstware(R) software products
in the business-to-business market and to prepare for increased growth in the
next millennium. IVT intends 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, IVT's strategy
includes the following key factors:
Expand the Management Team and Workforce: The Company assembled a management
team that has been successful in developing, launching, and growing technology
companies. Key departments for new hires will be marketing, sales, and
development. The Company expects to attract and retain employees by offering
challenging opportunities, growth, and incentive compensation.
Develop Technology Leadership: The Company continues to focus on developing new
intellectual property and patents for the delivery of multimedia content over
networks. Development has already begun on Burstware(R) Version 2.0 to offer new
and improved functions and features. IVT will also focus on adapting
Burstware(R) to new, non-PC platforms including network appliances and set-top
boxes. The Company will continue to commit significant resources to research and
development.
Establish Strategic Relationships: The Company is working to establish strategic
and/or licensing relationships in sales, marketing, promotion, and technology.
In 1998, IVT became a member of the IP Multicast Initiative Group. The Company
currently has discussions or negotiations in process with value-added resellers,
original equipment manufacturers ("OEMs"), and other technology companies.
Establish Corporate Identity and Product Branding: The Company will undertake a
public relations, advertising, and promotion campaign in 1999 to increase public
awareness of IVT and Burstware(R).
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Previously, the Company relied on a strategy of periodic press releases.
Increased financial resources, completion of the commercial release of
Burstware(R), and increased marketing and sales staff has made it possible to
expand IVT's corporate awareness efforts.
Engineering and Product Development
The Company believes that its future success will depend in large part on its
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. The Company's 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, the Company has made substantial investments in
product development and related activities. Burstware(R) has been developed
primarily by the Company's internal development staff and, in some instances,
with the assistance of external consultants. The product is written in Java and
incorporates the Sun Java Media Framework.
In March 1998, the Company released a test version of Burstware(R), followed by
subsequent modifications during the year. The Company released its 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 are supported as clients with Windows NT and Sun
Microsystems' Solaris supported as servers.
As of March 1999, the Company's product development organization consisted of 15
people. The Company expects to devote substantial resources to its product
development activities, including the continued support of existing and emerging
hardware platforms, operating systems, and networking and communication
protocols.
Product Offerings
IVT's suite of Burstware(R) software, which was released in February 1999, is
currently available to customers and consists of:
Burstware(R) Client 1.1. Designed to act as the "player" for the Burstware(R)
suite of products, the Burstware(R) Client enables the viewing of video and
audio across any network. The player works in a
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browser or in a standalone application, providing VCR functionality and
controls, while supporting many industry standard compression/decompression
algorithms (codecs).
Burstware(R) Conductor 1.1. Conductor is the manager of the Burstware(R) video
delivery system. Features include: 1) balancing transmission loads across
multiple servers (traffic shaping); 2) insulating the client player from network
and server deployment issues; 3) providing server-to-player fail-over mechanism;
and, 4) performing intelligent routing, among other functions.
Burstware(R) Server 1.1. IVT's content server product provides the necessary
functions and features required to deliver full-motion video and CD-quality
audio over a network. Version 1.1 features include: 1) patented buffer
management system providing isolation from network problems; 2) limiting network
impact to the managed bandwidth; and, 3) a proprietary connection acceptance
criteria for evaluating new requests.
IVT has identified a set of future extensions to the Burstware(R) Product suite.
Capabilities that extend Burstware(R)'s core expertise in network management as
well as strategic functionality that address the needs of specific vertical
markets are planned.
Competition
In addition to IVT, there are currently four significant video technology
companies in the market: RealNetworks, Inc., Microsoft Corporation, Tektronix
Corporation, and Cisco Systems Inc.. These companies currently use real-time
streaming technology. While IVT can deliver multimedia content in a real-time
mode, its architecture is ideally suited to capitalize on the growth in
broadband networks and inexpensive storage.
RealNetworks was an early entrant to the market and commands the largest market
share of the consumer news and entertainment market. It has created its brand
strength through the consumer market and the Internet. RealNetworks' presence in
the business to business market is increasing.
Microsoft's Windows Media is building brand strength through bundling the
software with Windows. Windows Media is currently targeting both the consumer
and business to business segments.
Tektronix' VideoTele.com entered the video transmission market in late 1998.
However, Tektronix can utilize its strength in the television broadcast and
broadband videoconferencing markets to build a presence. Tektronix is
concentrating on the business to business markets.
Cisco's IP/TV is using the real-time streaming technology and combining it with
its Content Manager to balance loads and to track specific viewing and
management functions. Cisco entered the video delivery market in late 1998.
This is a rapidly evolving market with no barriers to new entrants. Many
competitors, current and potential, may have access to more resources than the
Company.
Methods of Distribution
The Company intends to utilize four channels to distribute its products into
target markets. These channels include strategic partners, system integrators,
VARs, and direct sales. Burstware(R)'s
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applications range from training/customer care, internal/external
communications, to other specific corporate usage. IVT is focusing on the
business to business markets with a specific concentration on five target
markets. The Company's primary markets include telecommunications, customer care
and training, financial, general industrial and corporate, and government. The
consumer market will be targeted by the Company's partners rather than directly
through its own sales efforts. Direct sales will be through the Company's sales
force and from the Company web site where buyers will pay for and download the
software directly to their servers.
Marketing and Sales
The Company has completed a plan to increase Company and product awareness. The
Company intends to use targeted marketing, trade shows, public relations,
advertising, and direct promotion. A complete market research plan has also been
created to support the Company's sales and marketing strategy. The objective of
the research is to clearly understand the target markets' purchase criteria,
understand the competitor's positioning, and select the corresponding marketing
tools to achieve the Company's goals.
The Company has begun implementation of a comprehensive public relations plan.
This plan involves regular press releases, executive interviews, and analyst
reports. Public relations is handled both internally and through an external
agency. The Company intends to participate in key trade shows as identified by
the Sales and Marketing departments. The Company's strategy also includes
collaborative marketing efforts with its strategic partners.
The Company began advertising in the first quarter of 1999. Advertising includes
selected magazines, trade journals, radio commercials, and outdoor billboards.
Patents and Trademarks
IVT has six 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. The Company's 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. The
Company's current patents will expire on various dates in 2007 through 2015.
The Company has been granted two Australian patents, which incorporate the
subject matter of the U.S. patents, one South Korean patent, and one Indian
patent. The Company has filed for a number of additional domestic and
international patents.
The Company has registered the trademarks "INSTANT VIDEO", "BURSTWARE(R)" and
"BURSTAID."
Employees
As of March 31, 1999, the Company had 27 full-time employees versus 5 employees
for the same date last year. The Company currently retains the services of
outside consultants on an as-required basis.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently occupies 5,948 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 $13,428 per month,
fully serviced. The Company expects to obtain up to an additional 10,000 square
feet at its San Francisco site and additional sites to be determined.
ITEM 3. LEGAL PROCEEDINGS.
Currently, the Company is in the discovery process for arbitration against its
former CEO and President, who served between June, 1994 and September, 1997, and
the Company's former Executive VP of Business Development, for the alleged
misappropriation by these persons of corporate assets. A date for arbitration is
pending.
The Company has no other legal proceedings against it or in process nor is it
aware of any other legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Effective as of December 22, 1998, the Company's stockholders approved by
written consent certain amendments to the Company's Certificate of
Incorporation. The matters approved by the stockholders were as follows:
1. The company's Certificate of Designation, Statement Establishing Series F
Convertible Preferred stock, was amended such that the Series F convertible
Preferred Stock was re-designated as Series A convertible Preferred Stock,
and certain amendments to the powers, preferences and privileges of the
Series A convertible Preferred Stock were effected.
2. A Certificate of Designation, Statement Establishing the Series B
Convertible Preferred Stock was approved, which establishes and sets forth
the powers, preferences and privileges of a new series of preferred stock,
designated as Series B Convertible Preferred Stock.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's 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.
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Bid
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1997 High Low
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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
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1st Quarter $2.50 $0.75
2nd Quarter $4.22 $1.25
3rd Quarter $3.63 $1.91
4th Quarter $8.38 $2.00
</TABLE>
The number of holders of record of the Company's $.00001 par value Common Stock
at December 31, 1998, was approximately 200.
DIVIDENDS
Holders of Common and Preferred Stock are entitled to receive such dividends as
may be declared by the Company's Board of Directors. No dividends have been paid
with respect to the Company's stock and no dividends are anticipated to be paid
in the foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for the growth of the Company. Payment of cash
dividends in the future will depend, among other things, upon the Company's
future earnings, requirements for capital improvements and financial condition.
At December 31, 1998, the Company had an accumulated deficit of approximately
$24.5 million and, until this deficit is eliminated, will be prohibited from
paying dividends except out of net profits.
RECENT SALES OF UNREGISTERED SECURITIES
As of December 31, 1998, the Company 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, the Company also issued in
the offering warrants to purchase up to an aggregate of 312,960 shares of the
Company's 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.
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Series B - Cash Purchases
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Investor Amount Invested Preferred Shares Warrant Shares
-------- --------------- ---------------- --------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
Series B - Debt Converted
<TABLE>
<CAPTION>
Investor Debt Converted Preferred Shares Warrant Shares
-------- -------------- ---------------- --------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
ITEM 6. 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 "believes," "anticipates,"
"estimates," "expects," and words of similar meaning, constitute forward-looking
statements which involve risks and uncertainties. IVT's actual results could
differ materially from those anticipated in these forward looking statements as
a result of certain factors, including those factors set forth under "Risks and
Uncertainties" below.
GENERAL
The Company's headquarters is located in San Francisco, California, with offices
in Detroit, Michigan, and Phoenix, Arizona. The Company expects to increase its
sales offices in 1999 with additional locations in the United States and Europe.
Although the Company remains optimistic about its future, its prospects must be
considered and evaluated in light of the risks, operating and capital
expenditures required, and uncertainty of economic conditions that may impact
its customers. Emerging companies are characterized by a high degree of market
and financial risk and investors should take this into account in their
evaluation of financial results and future prospects. To achieve and sustain
profitability, IVT must successfully launch, market, and establish its software
products, successfully develop new products and services, meet the demands of
its customers, respond quickly to changes in its markets, attract and retain
qualified employees, and control expenses and cash usage.
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The Company believes that period-to-period comparisons of its
operating results, including its 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. The
Company does not believe that its historical growth rates are indicative of
future growth or trends.
IVT has incurred significant losses since its inception, and as of December 31,
1998, it had an accumulated deficit of $24,458,165. There can be no assurance
that the Company will achieve or sustain profitability and the Company believes
that it will incur a net loss in 1999.
RESULTS OF OPERATIONS
Revenue
During the year ended December 31, 1998, the Company 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
The Company 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 Company's customer.
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 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 the Company's decision to expand
its internal product development team. The Company will continue to incur
increasing research and development costs as it continues to develop its
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. The Company
forecasts that sales and marketing expenses will increase to 30-35% of total
operating expenses in 1999. The increase is due to increased marketing,
advertising and promotion expenses necessary to establish the Company's brand
and software products.
11
<PAGE> 14
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 $1,219,473 non-cash, stock option
compensation in addition to increased labor and consultant expenses and
increased legal expenses for the Company's patent filings. The Company forecasts
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.
Other Expenses
Total other expense for 1998 was $2,252,553 versus $133,736 in 1997. Actual cash
expenditures for interest however, were $65,935 in 1998 versus $56,782 in 1997.
The increase was a result of increased interest expense and compensation expense
for non-cash transactions described as follows.
Interest expense for 1998 increased 1,520% from $139,013 in 1997 to $2,252,553
in 1998. The increase in 1998 was due to the cost of warrants issued with debt
and preferred equity in 1998, and for the convertible debt issued in 1998. Due
to the risk of the Company's business and associated market risk, the Company
felt it was necessary to provide an additional equity provision in order to
attract investors in the Company's debt and equity offerings. IVT would expect
this need to continue in their planned financing in 1999.
1998 compensation related to the issuance of stock options was $1,319,473, with
zero recorded in 1997. The increase in 1998 was due to the Company recording
compensation for non-qualified option granted to consultants and third parties
in lieu of cash payments. Although the stock option compensation was a non-cash
expense, it fairly represents the value of services provided by consultants and
third parties and the cash savings to the Company.
The Company incurred a net loss of $6,916,420 and a net loss to common
shareholders of $15,678,845, ($2.35 per common share) 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
virtually no 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 costs associated with beneficial
conversion terms for its Series B Preferred Stock. The beneficial conversion
expense was the result of a $6.375 per share price difference between the $2.00
per share price for the Series B offering and the closing price of $8.375 for
IVT's common stock. This difference was the result of volatility in the
Company's per share price. The Company was also not able to re-price the Series
B offering since the offering price for Series B had been agreed upon prior to
the increase in the Company's common share price. Management expects to continue
to incur losses for 1999 as the Company establishes its brand and expands sales
and market share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company 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 that raised $4,210,000 in new funds, as well as
the exercise of $750,000 in Series A Convertible Preferred Warrants in 1998.
12
<PAGE> 15
Subsequent to December 31, 1998, the Company raised an additional $1,237,500
from the exercise of Series A Warrants in February 1999.
Cash used in operating activities totaled $3,298,752 during the year ended
December 31, 1998, as compared to $1,760,507 during 1997. The 87% 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. The Company expects to have material
capital expenditures for computer and network equipment in excess of $500,000 in
1999 as the Company adds employees and expands its software test lab and
training capabilities.
Cash flows provided by financing activities during the year ended December 31,
1998, were $5,653,010 as compared to $1,657,812 during the year ended December
31,1997. The 241% increase was due to the proceeds from the sale of Preferred
Stock and additional convertible debt and proceeds from the exercise of
warrants. IVT repaid $891,179 of debt in 1998. $500,000 of this amount was for
the repayment of the line of credit from Imperial Bank. IVT was 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
preferred stock and $1.7 million in debt that was converted into equity by the
end of 1998.
Although the Company has been successful to date in raising funding to meet
operating requirements, the Company will have to raise additional funding in the
form of equity or debt to meet future operating requirements. IVT is exploring
several funding options at this time. Any new funding raised may have a dilutive
effect on the Company's existing shareholders. IVT makes no guarantees,
representations, nor warranties that it will be successful in its efforts to
raise adequate financing.
RECENT DEVELOPMENTS
Subsequent to December 31, 1998, the Company entered into agreements for
strategic relationships with Sprint, Digital Creators/Teletech, Virage, and
Carsey-Werner LLC. The relationships provide for potential sales of IVT's
Burstware(R) software products. However, at this time the actual amount of
forecast sales is still under negotiation. In March 1999, the Company secured
European distribution of Burstware(R) through the EMS Group.
RISKS AND UNCERTAINTIES
Liquidity
As in 1997, IVT received a "going concern" opinion from its independent auditors
in 1998. Although the Company has been successful in its fundraising efforts to
meet prior operating requirements, there can be no guarantee that the Company
will be successful in future fundraising efforts. At the time of this report IVT
had insufficient cash reserves and receivables necessary to meet forecast
operating requirements. In the event the Company were to be unsuccessful in its
fundraising it would be required to significantly reduce cash outflows through
the reduction of marketing and sales, development, capital, and administrative
expenditures resulting in decreased potential revenue and potential
profitability.
13
<PAGE> 16
Market for the Company's Products
IVT believes that there is a market for the Company's Burstware(R) suite of
software products. Since Burstware(R) has only been commercially available since
February 1999, the Company has not yet established a track record in the sales
of commercial software nor does it have any sales at this time. The Company is
in the process of negotiating agreements with value-added resellers and original
equipment manufacturers for the sale and distribution of Burstware(R). However,
the Company's lack of operating and sales history may be a detriment in
obtaining new customers.
IVT believes its Burstware(R) suite of software and intellectual property is
positioned for the anticipated growth in broadband networks. The delay of growth
in broadband networks or problems associated with broadband networks could have
a negative impact on the Company's ability to realize sales and market share.
Developments in Internet, intranet, and extranet infrastructure could have a
significant impact on the market for video delivery and network management
software. There can be no assurance that the growth of broadband networks or
improvements in infrastructure will be present in 1999 or beyond.
Management Growth and Dependence on Key Personnel and Skilled Associates
The Company's continued success depends to a large extent upon the efforts and
abilities of key managerial and technical employees. The loss of services of
certain key personnel could have an adverse material effect on the Company. The
Company's business also depends upon its ability to continue to attract and
retain senior managers and skilled associates. Failure to do so could adversely
affect the Company's operations. The Company is currently in the process of
recruiting a full-time CFO as well as other key positions in marketing and
sales.
The challenge to IVT to manage the growth of its executive team and Company
staff is also crucial to its success. The Company has reached a level of
employment that it has not experienced before and as a result is faced with the
challenges associated with rapid growth. The Company will be improving
management and corporate communication through the use of information technology
and the introduction of new policies and procedures.
Possible Volatility of Market Price of Common Stock
The trading price of the common stock is subject to significant fluctuations in
response to variations in quarterly operating results, general conditions in the
electronics industry and other factors. In addition, the stock market is subject
to price and volume fluctuations that affect the market price for many high
technology companies in particular, and that often are unrelated to operating
performance. The Company is working to improve the market for its stock by
building a capital structure that will allow IVT to list its stock on the
National NASDAQ exchange. The Company is contractually obligated to register
certain shares of its unregistered common and preferred hares with the
Securities and Exchange Commission. Upon the effectiveness of any such
registrations, the increased liquidity in the Company's stock could depress the
Company's share price.
Intellectual Property Protection
The Company's ability to compete may be affected by its ability to protect its
proprietary information. The Company holds a number of U.S. and foreign patents
related to the technology incorporated in the
14
<PAGE> 17
Company's current and future software products. The Company believes these
patents are valuable. However, there can be no assurance that these patents will
provide meaningful protection for the Company's technology or products.
There can be no assurance that third parties will not assert infringement claims
against the Company or its customers in the future or that the Company may have
to assert infringement claims against third parties. In the event of such a
claim, the Company may be required to expend significant resources to defend its
patents and technology. There can be no assurance that the Company would be
successful in its efforts. In addition, such litigation could be lengthy and
costly and could have an adverse material effect on the Company's financial
condition regardless of the outcome of such litigation.
Competition
The software industry for the delivery of video and audio over networks is
dominated by a few companies that have achieved substantial market share.
Certain competitors may have greater financial, research and development, and
marketing resources than the Company. The Company believes that the primary
bases of competition in its targeted markets are technology, quality,
responsiveness, and price. To be competitive, the Company must provide
technologically advanced software, high product quality levels, and reliable
delivery of its products on a timely and price competitive basis. The Company
currently may be at a competitive disadvantage due to the cost of establishing a
brand and corporate awareness and the limited amount of financial resources the
Company has to effectively launch and promote its products.
Evolving Business Model
The Company has limited history with its current product and intellectual
property licensing. The Company currently is in the process of refining pricing
for its software and intellectual property. There can be no assurance that the
strategies developed will be accepted by customers or the market nor that the
strategies will provide sufficient income for the Company to reach
profitability.
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, the Company
began a project to determine if any actions were required regarding date-related
effects to: (i) the Company's software products; (ii) the Company's internal
operating and desktop computer systems and non-information technology systems;
and (iii) the readiness of the Company's third-party vendors and business
partners.
The Company has formed a team consisting of operations, development, marketing,
and finance members to determine the impact of Year 2000 and to take corrective
action. As of February 1999, the Company had completed testing of its suite of
Burstware(R) software products and has found no known Year 2000 issues. The
Company has also tested its internal operating and desktop hardware and software
and has found that all its software is Year 2000 compliant and appears to have
no known Year 2000 issues. The Company has also confirmed with its third-party
vendors and business partners to
15
<PAGE> 18
ensure that their software and hardware will not impact IVT operations. At this
time, the Company knows of no known Year 2000 issues or problems with its
vendors, or business partners.
The majority of the costs associated with this project are not incremental to
the Company, but represents a reallocation of existing resources. The Company
believes that modifications deemed necessary will be made on a timely basis and
does not believe that the cost of such modifications will have a material effect
on the Company's operating results. To date, the Company's costs related to the
year 2000 issues have not been material, and the Company does not expect the
aggregate amount spent on the year 2000 issue to be material. In addition, the
Company is 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.
The Company's 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, including, among others, those described above in
this section. There can be no assurance that unexpected delays or problems,
including the failure to ensure year 2000 compliance by systems or products
supplied to the Company by third parties, will not have an adverse effect on the
Company, its financial performance and results of operations. In addition, the
Company cannot predict the effect of the year 2000 issues on its customers or
other third party business partners or the resulting effect on the Company. 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 the Company's
business, financial condition and results of operations. Furthermore, the
Company's 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.
ITEM 7. 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-17.
Financial Statement schedules are not required and have therefore been omitted.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 27, 1997, the Board of Directors of the Company elected to replace
Evers & Company Ltd. as its independent auditors and replace them with KPMG LLP.
This change was approved by the Company's Board of Directors, and is a result of
the Company's desire to utilize the services of a national accounting firm.
During the two years prior to the dismissal of the former accountants, their
reports did not contain an adverse opinion or disclaimer of opinion, nor were
they modified as to uncertainty, audit scope, or accounting principles.
During the two years prior to their dismissal, there were no disagreements with
the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would
16
<PAGE> 19
have caused them to make reference to the subject matter of the disagreements in
connection with their reports.
Prior to engaging KPMG LLP, neither the Company nor someone on its behalf
consulted with KPMG LLP regarding (i) the application of accounting principles
to a specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, or (ii)
any matter that was either the subject of a disagreement or a reportable event.
17
<PAGE> 20
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
IVT's Executive Officers and Directors and their ages as of December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
Name Age Positions and Offices Held
- ---- --- --------------------------
<S> <C> <C>
Richard Lang 45 Chairman, President, Chief Executive
Officer, and Director
Edward Davis 46 General Counsel and VP of Strategic
Alliances
Kyle Faulkner 42 Chief Technology Officer
Eric J. Hall, CFA 44 Chief Financial Officer and Principal
Accounting Officer
David Morgenstein 37 Chief Operating Officer
Frank Schwartz 46 VP of Business Development
June White 59 VP of Engineering
O.J. Kilkenny 50 Director
John J. Micek III 46 Secretary, Treasurer and Director
Brian Murphy 43 Director
Joseph Barletta 62 Director
</TABLE>
The following sets forth biographical information as to the business experience
of each Executive Officer and Director of the Company for the year ended
December 31, 1998:
Richard Lang currently serves as Chairman, Chief Executive Officer, President
and Director of the Company since September 1997. From January 31, 1997 through
August 1997, Mr. Lang served as a Director of the Company. Mr. Lang served as
Chairman of the Board and Treasurer of the Company until January 31, 1997. He
had served as Chairman of the Board, CEO and Treasurer of the Company from
December 1993 to September 1995 and as a Director of the Company since August
1992. He also served as President of the Company from December 1993 to November
1994, as Vice President from August 1992 until February 1993, and as Vice
Chairman of the Board from February 1993 to December 1993. He has been a
Director of the Company's 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 the IVT's patent portfolio. He is the
inventor of record for the bulk of the Company's 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.
18
<PAGE> 21
Edward Davis currently serves as General Counsel and VP of Strategic Alliances
and has been with the Company since August 1998. Mr. Davis comes to IVT with
over thirteen years of experience 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.
Kyle Faulkner currently serves as Chief Technology Officer and has been with the
Company 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.
Eric Hall, CFA, currently serves as Chief Financial Officer and Principal
Accounting Officer. Mr. Hall is a management consultant retained by IVT since
September 1997. He has over 20 years of financial and operations management
experience with the past 8 years in entrepreneurial ventures. He was Founding VP
Finance & Operations for Yahoo!, the premiere Internet portal, and has also
helped launch other successful Internet companies including women.com,
Viacom/Paramount Online, The ImagiNation Network, NetChannel, and US
Web-Cybernautics. Mr. Hall has successfully guided several companies to the IPO
or acquisition stage. Mr. Hall has tendered his resignation effective April 15,
1999, in order to devote more time to his consulting company. The Company has
retained an interim Chief Financial Officer while a search for a full-time
replacement is conducted.
David Morgenstein currently serves as VP and COO, and has been with the Company
since January 1997. Mr. Morgenstein is a former F-15 fighter pilot and was
Operations Manager at Banner Aerospace, a NYSE company with sales of $400
million, and President of Adams Industries, an aerospace distribution company.
Frank Schwartz currently serves as VP of Business Development and has been with
the Company 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 VP of Engineering and has been with the Company
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.
O. J. Kilkenny has been a Director of the Company since August 1992. Mr.
Kilkenny is Senior Partner of O. J. Kilkenny & Co., Chartered Accountants,
specializing in the entertainment industry with offices
19
<PAGE> 22
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 a
Director of the Company as a representative of Draysec Finance Limited, a
principal shareholder of the Company.
John J. Micek III has been a Director of the Company since April 1990, Secretary
and Treasurer since January 1994, 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 a Director of the Company 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 a Director of the Company 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 magazine, Thomson Newspapers, and the San Francisco
Newspaper Agency (Chronicle and Examiner), and he currently sits on the boards
of several companies.
ITEM 10. EXECUTIVE COMPENSATION AND OTHER MATTERS.
Pursuant to General Instruction G(3) to Form 10-K, the information required by
this item is incorporated by reference to the information contained in the
section captioned "Executive Compensation and Other Matters" in the Proxy
Statement to be filed with the Commission within 120 days after the end of the
fiscal year ended December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information contained in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement to be filed with the
Commission within 120 days after the end of the fiscal year ended December 31,
1998.
20
<PAGE> 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information contained in the section captioned "Voting Securities and Principal
Holders - Certain Transactions" of the Proxy Statement to be filed with the
Commission within 120 days after the end of the fiscal year ended December 31,
1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Not provided
b) Reports on Form 8-K
None
21
<PAGE> 24
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: April 9 , 1999 By /s/ Richard Lang
-----------------------------
Chairman, President, and
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard Lang Chairman, President, April 9, 1999
- ----------------------- Chief Executive Officer,
Richard Lang and Director
/s/ O.J. Kilkenny
- ----------------------- Director April 9, 1999
O.J. Kilkenny
/s/ John J. Micek Secretary and Director April 9, 1999
- -----------------------
John J. Micek III
/s/ Brian Murphy
- ----------------------- Director April 9, 1999
Brian Murphy
/s/ Joseph Barletta Director April 9, 1999
- -----------------------
Joseph Barletta
/s/ Eric J. Hall Chief Financial Officer April 9, 1999
- ----------------------- and Principal Accounting
Eric J. Hall Officer
</TABLE>
22
<PAGE> 25
INSTANT VIDEO TECHNOLOGIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-1
<PAGE> 26
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, 1998 and 1997
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended 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 a 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> 27
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,212,141 $ 20,551
Prepaid expenses 26,053 31,460
Receivables - Series B Convertible Preferred Stock 810,000 --
------------ ------------
Total current assets 3,048,194 52,011
Property and equipment, net 184,616 85,611
Other assets 16,812 17,569
------------ ------------
$ 3,249,622 $ 155,191
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit and credit facility $ -- $ 500,000
Notes payable 22,736 451,773
Accounts payable 252,044 34,026
Accrued expenses 181,484 92,782
Accrued interest 43,044
------------ ------------
Total current liabilities 456,264 1,121,625
------------ ------------
Notes payable - 16,833
------------ ------------
Total liabilities 456,264 1,138,458
------------ ------------
Stockholders' (deficiency) equity:
Convertible Preferred stock, $.00001 par value, 20,000,000 shares authorized:
Series A ( Renamed from Series F), 2,025,000 and 2,125,000
shares issued and outstanding in 1998 and 1997,
liquidation preference of $2,025,000 20 22
Series B, 2,476,609 shares issued and outstanding in 1998,
liquidation preference at December 31, 1998 of $18,574,568 25 --
Common stock, $.00001 par value, 100,000,000 shares
authorized; 7,940,966 and 5,703,553 shares issued and
outstanding in 1998 and 1997, respectively 79 59
Additional paid in capital 27,251,399 7,795,972
Accumulated deficit (24,458,165) (8,779,320)
------------ ------------
Stockholders' equity (deficit) 2,793,358 (983,267)
------------ ------------
Commitments and contingencies
$ 3,249,622 $ 155,191
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 28
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Operations
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenue $ 15,000 $ 247,879
Cost of revenues -- 230,210
------------ ------------
15,000 17,669
Costs and expenses:
Research and development 800,567 189,719
Sales and marketing 830,998 408,369
General and administrative 3,047,302 1,348,218
------------ ------------
Total costs and expenses 4,678,867 1,946,306
------------ ------------
Loss from operations (4,663,867) (1,928,637)
------------ ------------
Other income (expense):
Interest, net (2,252,553) (139,013)
Other income (expense) -- 5,277
------------ ------------
Net other (2,252,553) (133,736)
------------ ------------
Net loss (6,916,420) (2,062,373)
Beneficial conversion feature of Series B
Preferred Stock (8,762,425) --
------------ ------------
Net loss applicable to Common Stockholders $(15,678,845) $ (2,062,373)
============ ============
Basic and diluted net loss per common share: $ (2.35) $ (0.39)
============ ============
Shares used in per share computation 6,658,738 5,259,304
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 29
INSTANT VIDEO TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the two years ended December 31, 1998
<TABLE>
<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, 1996 4,803,553 $ 50 1,975,000 $ 20 $ 6,776,983 $ (6,716,947) $ 60,106
Preferred stock offering -- -- 650,000 7 549,993 -- 550,000
Exercise of stock options -- -- -- -- -- -- --
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 used 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
Warrants issued with the
conversion of convertible debt 172,000 172,000
Value assigned to warrants and
stock upon issuance of debt 200,000 2 -- -- 1,947,369 -- 1,947,371
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
========= ====== =========== ====== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 30
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(6,916,420) $(2,062,373)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 58,531 92,176
Loss on Disposal of Equipment 5,133 5,275
Write off patent costs and other assets -- 95,735
Warrants issued with conversion of debt 172,000 --
Interest expense from the value assigned to
warrants and stock upon the issuance of
convertible debt 1,947,371 69,000
Non-cash interest expense 109,569 --
Stock options issued for services performed 727,726 --
Compensation from cashless exercise of stock options 1,137,499 --
Accounts receivable -- 1,421
Costs and estimated earnings in excess of billings on
uncompleted contracts -- 136,400
Prepaid expenses 5,407 6,982
Receivables - Series B Convertible Stock offering (810,000) --
Other assets 757 35,101
Accounts payable 218,018 (94,237)
Accrued expenses 88,702 (59,218)
Accrued interest (43,044) 13,231
----------- -----------
Net cash used in operating activities (3,298,751) (1,760,507)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (162,669) (85,367)
Cash flows from financing activities:
Proceeds from sale of preferred stock 4,210,000 550,000
Proceeds from sale of common stock 10,000 --
Exercise of warrants 750,000 400,000
Exercise of stock options 1,453 --
Proceeds from debt 1,572,736 1,054,210
Repayment of debt (891,179) (346,398)
----------- -----------
Net cash provided by financing activities 5,653,010 1,657,812
----------- -----------
Increase (decrease) in cash and cash equivalents 2,191,590 (188,062)
Cash and cash equivalents, beginning of year 20,551 208,613
----------- -----------
Cash and cash equivalents, end of year $ 2,212,141 $ 20,551
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
F-6
<PAGE> 31
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 800 $ 800
======= =======
Cash paid for interest $65,935 $56,782
======= =======
Supplemental schedule of non-cash investing and financing activities:
In 1998, debt and accrued interest of $1,736,966 was converted to Series B
Preferred Stock and common stock resulting in a non-cash interest charge of
$172,000
In 1998, 100,000 shares of preferred stock was converted to 100,000 shares of
common stock
In 1997, 500,000 shares of Series E Preferred Stock was converted into
500,000 shares of Common Stock
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 32
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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
Since inception, the Company has incurred development costs and other
expenses resulting in cumulative losses of $24,458,165. The Company's
current assets exceed current liabilities by $2,591,930 at December 31,
1998.
Management recognizes that the Company must raise additional capital to
enable it to continue as a going concern. Management intends to raise
sufficient capital to allow the company to complete development and
successful commercialization of its products. The accompanying financial
statements have been prepared contemplating the company will continue as a
going concern. 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 $2,212,141 and $20,551 at December 31, 1998 and 1997,
respectively, consist of money market accounts and other short-term
investments with an original remaining term of three months or less.
REVENUE RECOGNITION
In 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-8
<PAGE> 33
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.
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.
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.
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Convertible Preferred 4,501,609 2,125,000
Options 6,289,263 2,538,630
Warrants 2,010,210 1,961,000
Convertible debt -- 303,206
---------- ----------
Total 12,801,082 6,927,836
========== ==========
</TABLE>
F-9
<PAGE> 34
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:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computer equipment $ 192,816 $ 95,053
Furniture 18,627 24,980
Office equipment 4,459 --
Software 22,016 --
Leasehold improvements 8,270 --
--------- ---------
246,188 120,033
Less accumulated depreciation (61,572) (34,422)
--------- ---------
$ 184,616 $ 85,611
========= =========
</TABLE>
(3) DEBT
<TABLE>
<CAPTION>
1998 1997
------ --------
BANK LINE OF CREDIT
<S> <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
====== ========
</TABLE>
F-10
<PAGE> 35
<TABLE>
<CAPTION>
NOTES PAYABLE 1998 1997
--------- ---------
<S> <C> <C>
10.5% unsecured note, interest and principal due at June 30, 1998,
convertible into common stock at $1.85 per share -- 100,000
10.5% unsecured note, interest and principal due on a monthly basis
over 18 months ending on March 31, 1999. Converted into common stock
at $1.00 per share -- 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 -- 100,000
8% unsecured note, principal and interest due June 10, 1998. Converted
into common stock at $2.00 per share -- 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 -- 80,000
11.14% Financing of annual insurance premium for current year,
principal and interest paid monthly until September 5, 1999. 22,736 29,794
--------- ---------
22,736 468,606
Less current portion (22,736) (451,773)
--------- ---------
Long-term portion $ -- $ 16,833
========= =========
</TABLE>
During 1998, the Company issued convertible notes in exchange for
$1,572,736. Subsequent to the issuance of these notes, the Company issued
warrants to purchase 371,609 shares of the Company's common stock at an
exercise price of $2.00 per share expiring in December 2001, to certain
note holders upon the conversion of all of the outstanding debt and
accrued interest of $164,230 to 1,082,991 and 371,609 shares of common
stock and Series B Preferred Stock respectively. The Company valued the
warrants based on the Black-Scholes option pricing model. The value of the
warrants in the amount of $172,000 was charged to interest expense.
(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 financing 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).
F-11
<PAGE> 36
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.
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.
Warrants and Stock Issued With Debt
During 1998, the Company issued debt of $1,550,000 and added 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. This resulted in the Company recording interest
expense of $1,947,371.
Series B Preferred Stock
The Company issued Series B 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.
F-12
<PAGE> 37
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
1998 and 1997 was $1.73 and $0.17 respectively, on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: volatility of 136% and 53% respectively, expected dividend
yield 0% for both years, risk free interest rate of approximately 5% and 5
1/2% respectively, and an expected life of 1.5 years for both years.
F-13
<PAGE> 38
Stock option activity for 1997 and 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------------ --------------
<S> <C> <C>
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
========== ========
</TABLE>
Stock options outstanding and exercisable at December 31, 1998 from the 1992 and
1998 Plans consisted of:
<TABLE>
<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>
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:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net loss as reported $15,678,845 $2,062,373
Pro forma $16,960,138 $2,071,358
Net loss per share as reported $2.35 $0.39
Pro forma $2.55 $0.39
</TABLE>
F-14
<PAGE> 39
(5) ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 and 1997 is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Employee benefits $ 64,711 $ --
Professional services 116,773 92,782
-------- --------
Total $181,484 $ 92,782
======== ========
</TABLE>
(6) LEASE COMMITMENTS
The Company leases its office space under a three year operating lease.
Rent expense for the years ended December 31, 1998 and 1997 was $104,969
and $91,000, respectively.
The following is a summary of future minimum lease payments for operating
leases:
<TABLE>
<CAPTION>
OPERATING
Years ending December 31: LEASES
- ------------------------ --------
<S> <C>
1999 $157,632
2000 163,518
2001 187,368
2002 15,614
--------
Total lease payments $524,132
========
</TABLE>
(7) INCOME TAXES
At December 31, 1998 and 1997, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $13,825,805
and $7,842,000, 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
$6,300,325 and $3,308,650, respectively, 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-15
<PAGE> 40
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Start-up costs $ -- $ 85,919
Accruals 10,459 --
Net operating loss carryforwards for
income taxes 5,068,360 2,859,204
Research and experimentation credit
carryforward 137,057 105,715
Patents 43,502 --
----------- -----------
Total gross deferred tax assets 5,259,378 3,050,838
Less valuation allowance (5,247,783) (2,997,490)
----------- -----------
Net deferred tax assets 11,595 53,348
----------- -----------
Deferred tax liabilities:
Patent -- (45,677)
Fixed assets (11,595) (7,671)
----------- -----------
Total gross deferred tax liabilities (11,595) (53,348)
----------- -----------
Net deferred tax asset liability $ 0 $ 0
=========== ===========
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1998 and 1997 was an increase of $250,293 and an increase of $598,147,
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 $15,000 and $247,879 in revenue during 1998 and
1997, 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 1998 or 1997.
(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
F-16
<PAGE> 41
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
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.
(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-17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<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> (15,678,845)<F1>
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> (2.35)
<FN>
<F1>Net Loss of $15,678,845 includes a Beneficial Conversion Feature of Series B
Preferred Stock of $8,762,425.
</FN>
</TABLE>
