UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A-2
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
BURST.COM, INC.
(FORMERLY INSTANT VIDEO TECHNOLOGIES, INC.)
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(Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation or Organization)
84-1141967
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(I.R.S. Employer Identification Number)
500 Sansome Street, Suite 503
San Francisco, California 94111
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(Address of Principal Executive Offices, including Zip Code)
(415) 391-4455
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(Issuer's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
To be registered each class is to be registered
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$0.00001 par value Common Stock
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(Title of class)
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(Title of class)
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TABLE OF CONTENTS
ITEM 1. BUSINESS..............................................................3
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS...................3
OUR COMPANY...........................................................3
INDUSTRY BACKGROUND...................................................4
MARKET OPPORTUNITY....................................................4
OUR SOLUTION..........................................................5
OUR BUSINESS..........................................................7
ITEM 2. FINANCIAL INFORMATION................................................17
SELECTED FINANCIAL DATA..............................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................18
ITEM 3. PROPERTIES...........................................................22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.....................................24
ITEM 6. EXECUTIVE COMPENSATION AND OTHER MATTERS.............................28
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................30
ITEM 8. LEGAL PROCEEDINGS....................................................33
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............33
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES..............................34
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED..............37
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................37
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................37
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.............................................37
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS....................................39
SIGNATURES....................................................................42
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ITEM 1. BUSINESS
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this registration statement includes forward-looking
statements within the meaning of applicable securities laws that involve
substantial risks and uncertainties including, but not limited to, market
acceptance of our products and new technologies, the sufficiency of financial
resources available to us, economic, competitive, governmental and technological
factors affecting our operations, markets, services, and prices, and other
factors described in this registration statement. Our actual results could
differ materially from those suggested or implied by any forward-looking
statements as a result of such risks.
All trademarks and trade names appearing in this document are the property of
their respective holders.
OUR COMPANY
We are an independent provider of client/server network software for the
delivery of video and audio information over networks. Our principal executive
offices are located in San Francisco, California, and we have seven additional
sales offices in several domestic metropolitan areas. Our software manages the
delivery of video and audio content over a variety of networks, optimizing
network efficiency and quality of service. Our Burstware(R) suite of software
products enables companies to transmit video and audio files at
Faster-Than-Real-Time(TM) speed, which is accomplished by utilizing available
broadband capacity to send more video or audio data to users than the players
are demanding. This data is stored on a user's machine for playing on demand,
thus isolating the user from noise and other network interference. The result is
high quality, full-motion video and CD-quality audio to the end-user.
Burstware(R) utilizes several components of our international patent portfolio,
including the Faster-Than-Real-Time(TM) delivery method.
We began as a research and development partnership in 1988; with initial
activities focused upon technical investigations, patent development and
research pertaining to the viability of transmitting and receiving video and
audio programming in faster-than-real-time over a variety of networks.
In 1990, we incorporated, changed our name to Explore Technology, and secured
$2.0 million in funding in order to develop prototype hardware and software for
demonstrating faster-than-real-time transmission and reception of audio and
video programming; we described this type of communication as "burst". We hired
an engineering firm in Palo Alto, California to construct a pair of "burst"
video/audio transceivers. At the time this work was undertaken, networks capable
of providing "burst speeds" at practical prices were not available.
During the second quarter of 1992, we were acquired by Catalina Capital
Corporation, a small public company organized as a Delaware corporation on April
27, 1990. As a result of this transaction, our original shareholders received
85% of the outstanding shares of Catalina Capital Corporation, which was renamed
Instant Video Technologies, Inc. Our stock trades on the NASDAQ OTC Bulletin
Board under the symbol "IVDO".
In the first half of 1995, we began development of a software product that would
incorporate our patented intellectual property for faster-than-real-time burst
transmissions of multimedia content over computer networks. At that time, we
contracted with a consulting firm to develop this software product. A prototype
was created to run on a variety of networks. In 1996, we entered into agreements
with three customers for use of the software in their products and services. We
continued our product development through 1997 by contracting with a third-party
consulting firm.
In September 1997, our co-founder, Richard Lang, returned as Chairman, CEO and
President. As a result, in the last quarter of 1997 we restructured our
management team, obtained funding to continue operations, refocused our product
development, and brought technology development in-house.
At the end of the third quarter of 1997, we suspended sales of our prototype
software to customers in order to concentrate our efforts on developing a new
suite of Burstware(R) software products to position us for future growth.
Resources were directed at product development to facilitate our new strategy
and resulted in no software license sales in 1998.
In 1998, we focused on developing a commercially marketable suite of software
products; raising the capital necessary to meet operating requirements, and
building our management team. We released a test version of the Burstware(R)
suite of software products
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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.
We released our first product, Burstware(R) Version 1.1, to the public in
February 1999 and in November 1999, we released Burstware(R) Version 1.2, which
contained the Burst-Enabled(TM)Windows Media Player. In 1999, we recruited key
sales, marketing and development contributors and signed six reseller
agreements. Customer evaluations were undertaken during the second half of 1999
and initial sales commenced in February 2000.
In January 2000, we changed our name from "Instant Video Technologies, Inc." to
"Burst.com, Inc."
INDUSTRY BACKGROUND
In recent years, several related technologies have converged to enable the
distribution of video and audio content over electronic communications networks.
As network bandwidth, data storage, processing power, and compression
technologies have become increasingly available at affordable prices, the demand
for high quality video and audio over the Internet and intranet and extranet
networks has expanded rapidly. According to Paul Kagan Associates, a market
research firm, the number of households with high-speed access is estimated to
be 1.9 million with service revenue of $574 million; by 2002, these numbers are
expected to reach 12 million and $3.6 billion, respectively. The result of such
developments has been the transition of the Internet from a static,
text-oriented network to an interactive environment filled with graphical and
audio-visual content.
Distributing audio-visual content over the Internet, or within an intranet,
offers certain advantages and capabilities not generally available through
traditional media, including targeted, geographically dispersed and interactive
viewership at relatively low cost. As businesses have begun to recognize the
cost, inconvenience and inefficiency of business communication tools such as
audio and video conferencing, online communications between
business-to-business, business-to-consumer and business-to-employee have become
commonplace. Frost & Sullivan, a leading market research firm, reports that
video server market revenue for 1999 is expected to reach $722.7 million,
growing to $2.1 billion by 2002.
In order to capitalize on this explosion in Web-based content and the large and
growing number of Web-based communication channels in both the
business-to-business and consumer markets, a number of companies have developed
first generation software solutions intended to deliver such content to the end
user. These first generation solutions have commonly been referred to as
real-time streaming solutions that allow for the transmission and remote
playback of continuous "streams" of media content, including live video and
audio broadcasts. These technologies were designed to deliver audio and video
content over widely used 28.8 kbps narrow bandwidth modems and, to a limited
extent, are capable of utilizing higher speed access provided by digital
subscriber lines, cable modems and other broadband emerging technologies.
MARKET OPPORTUNITY
Although current streaming technology represents a significant advancement over
earlier technologies, it remains unable to provide the client with reliable,
uninterrupted, full-motion, studio-quality video, particularly video-on-demand,
or VOD, and CD-quality audio. That is, first generation solutions rely upon a
network design in which various client computers are connected to centralized
server computers. Typically, one server is intended to service a multitude of
clients. During a typical session, a server must deliver data in frequent and
regular intervals, or just-in-time, for the length of any real-time play of
content. This is a remote play design. For example, a 30-minute video requires
that constant communication between servers and clients be maintained for 30
minutes of real-time viewing. Moreover, in all cases involving real-time
streaming, as the number of end users expands, the number of server connections
must also increase at a ratio of 1 to 1. Real-time streaming through such a
network cannot scale efficiently and, given the infrastructure requirements,
remains costly.
As real-time streaming expands rapidly online with growing demand for
audio-visual content, client-centric delivery becomes increasingly susceptible
to congestion and disruption within the established client-server universe. As a
result, a client's multimedia experience typically is interrupted or degraded.
Additionally, the number of real-time connections that can be maintained
simultaneously by the server is limited by processing power as well as bandwidth
availability. This, along with the fact that a server tends to devote
disproportionate resources to the client with the most available bandwidth, also
reduces the quality as well as the availability of the video and audio content
to most users on the network.
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Real-Time Streaming Delivery Solution
[GRAPHIC]
Network disruptions cause the video
to jitter and sometimes stop
As a result of these limitations, and including the fact that most streaming
technology involves proprietary encoding schemes and limited platform
acceptance, widespread dissemination of high-quality streaming content has yet
to occur within either the business-to-business or business-to-consumer market.
Escalating demand within these markets as well as the need for quality
enhancement of content delivery have created a need for a software solution
capable of eliminating network disruptions and utilizing client bandwidth
efficiently.
OUR SOLUTION
With our patented Burstware(R) technology, we provide a server-based intelligent
network management system delivering "Faster-Than-Real-Time"(TM) content across
a variety of networks. Our software is designed to work equally well with
content created using any data compression/decompression (CODEC) methodology.
The Java-script Burstware(R) solution ensures a consistent, high-quality
experience over multiple platforms through optimization of network resources and
superior isolation of clients from network disturbances.
Burstware(R) Delivery System
[GRAPHIC]
Burstware(R) protects the viewing experience from network disruptions,
ensuring TV-quality viewing experience
In a Burst-Enabled(TM) network, the server delivers "bursts" of content of
various sizes and frequencies, as required, into a client-side buffer at a
Faster-Than-Real-Time(TM) rate of consumption. On the client side, the local
buffer of stored, or cached, data acts as a
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reserve providing continuous play in the event that data flow across the network
is disrupted. Once the network recovers, the local buffer is rapidly "topped
off" at a Faster-Than-Real-Time(TM) rate. Upon delivery completion, the server
disengages from the client and is free to address other clients awaiting content
delivery, with service prioritized based on the client's buffer level, rate of
consumption, available bandwidth and other variables.
Real-Time Streaming's Use of Bandwidth
[GRAPHIC]
Burstware's Use of Bandwidth
[GRAPHIC]
Burstware(R)supports more users with less infrastructure
On a typical network, demand for media content rises and falls. Real-time
streaming's architecture must allocate network bandwidth for the peak demand,
wasting bandwidth as demand falls.
Bursting averages out peaks and troughs using an intelligent buffer management
system.
Buffers are replenished in anticipation of client needs at rates
Faster-Than-Real-Time(TM). This intelligent network management reduces demand
for bandwidth at peak times.
With the same amount of allocated bandwidth, Burstware(R) supports more users
with less infrastructure.
With a need-based delivery model and the ability to service the same number of
clients using fewer network resources, Burstware(R) technology also offers
quantifiable savings over a wide variety of end user environments. Simulations
have shown that Burstware's(R) intelligent network management system can provide
significant improvement in network efficiency, or throughput, when compared to
real-time streaming.
During all phases of content delivery, Burstware's(R) network-based architecture
allows for continuous monitoring of consumption rates, multiple end user needs,
and changes in network conditions. Using connection acceptance criteria,
Burstware(R) can determine which network legs or servers are overburdened and
then shift the load accordingly. In addition, through synchronizing content
delivery across backup servers, the Burstware(R) system creates a reliable
failover for uninterrupted service in the event of component or network failure,
thereby eliminating the need for the client to request that the server resend
the entire file.
Developed with the flexibility of open standards, the Burstware(R) network
management elements are focused exclusively on content delivery without regard
to proprietary CODEC or rendering technologies, leaving application developers
free to use whichever CODEC is required of their application. Burstware(R)
architecture currently supports numerous encoding schemes, including MPEG1,
MPEG2, MP3, ASF, AVI and QuickTime, with the ability to adapt quickly to new
technologies as they are brought to market. Moreover, the Burstware(R) solution
is platform and player neutral. Burstware(R) operates on Microsoft Windows NT,
Solaris and Linux platforms as well as a Burst-Enabled(R) Windows Media Player
and a Java-based player (JMF).
The intelligent Burstware(R) network resource management features enable
multiple end user applications as well. With the capacity to deliver data in a
clear, efficient and cost-effective manner, the Burstware(R) solution creates a
high-quality audio-visual experience for the end-user and enables powerful
business-to-business, business-to-customer and
business-to-employeecommunication. Burstware(R)also gives producers, aggregators
and developers the ability to reach new markets with virtually unlimited access
to vast libraries of content. With these applications, Burstware's(R) network
delivery mechanism is ideally-suited for numerous industries including news,
entertainment, retail and advertising as well as local, state and federal
governments and agencies.
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OUR BUSINESS
STRATEGY
We intend to be the leader in providing network software solutions, intellectual
property, and services for the delivery of multimedia content over high-speed
networks. To achieve these objectives, our strategy includes the following key
factors:
Leverage First-Mover Advantage to Expand Business Model
We believe that we have significant first-mover and time-to-market advantages
that will allow us to expand our product and service offerings in areas such as
hosting and applications development. We intend to partner with Internet
bandwidth providers such as Exodus and GTE to offer a high-quality,
cost-efficient hosting service across the large, peripheral infrastructure
currently being created through streaming media technology companies and global
alliances between Internet caching services including Akami, Sandpiper,
RealNetworks, Inktomi, Digital Island and iBeam.
Enhance Technology Platform
We continue to focus on developing new intellectual property and patents for the
delivery of multimedia content over networks. We expect to release the next
major version of Burstware(R), with significant feature enhancements that enable
our hosting effort. These features include support for the Apple QuickTime
Player for Windows, improved firewall support, enhancements for low bit rate
content, including extensible authentication. Shortly thereafter, we anticipate
release of Burstware(R) extensions supporting live events. This will permit
delivery of live events to Windows Media Player and other industry-standard
players with pausing and "rewinding" functionality. We will also focus on
expanding our CODEC-, platform- and player-neutrality applications, including
new, non-PC platforms as well as support for additional CODECs, network
appliances and set-top boxes. Development has begun on additional Burstware(R)
versions to offer new and improved functions and features. We will also focus on
continuing our CODEC, Platform and Player-neutrality including new, non-PC
platforms, additional CODECs, network appliances and set-top boxes.
Build Brand Aggressively
We intend to establish the Burstware(R) brand as the leading enabler of
reliable, high-quality audio-visual content delivery. We believe that building
brand awareness of our product suite is critical to attracting new customers as
well as retaining our current installed base. We will endeavor to increase our
brand recognition through a variety of marketing and promotional techniques,
including advertising, tradeshows, direct mail, and relationships with
professional associations. Our branding campaign will target the following
market segments across both business-to-business and business-to-consumer
applications: broadcasting and media, corporate, retail and education.
Strengthen Existing and Establish New Strategic Relationships
In 1998, we became a member of the IP Multicast Initiative Group to fortify our
strategic and licensing relationships in sales, marketing, promotion, and
technology. We are currently pursuing discussions or have negotiations in
process with value-added resellers, original equipment manufacturers, and other
technology companies including Internet broadband providers and caching service
companies. To date, we have entered into reseller agreements with RMSI, Clover
Corporation, (a subsidiary of Ameritech/SBC), iStream TV and Datanext Ltd. We
intend to leverage further these relationships as our technology and end-user
applications evolve in the near future.
Create Hosting Service
We have created a hosting service that enables our customers to store their
audio-video content on our Burstware(R) servers for delivery to their employees,
customers or other end-users over broadband networks. Because Burstware(R) has
been demonstrated to do a
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superior job of delivering data across the Internet, our strategy will be to
host content for broadband distribution to homes with high-speed, broadband
access. According to Paul Kagan Associates, there are currently, 1.9 million
homes with high-speed access; in 2000 that number is expected to rise to 4.3
million homes and increase to over 30 million homes in the next 8 years.
Burstware(R) Product Family
Our suite of Burstware(R) software is summarized below:
Burstware Component Features
Conductor:
The Conductor manages the * Central management service
distribution of player * Monitors all servers
requests over multiple * Centralized point of control
servers, providing for video and audio on network
scalability, load * Scalable deployment of servers
balancing, and reliable * Add and Remove servers as needed
failover * Asynchronous
* No performance bottlenecks
* Reliable failover mechanism
* Load balancing
* Replicated conductors
* Audit trail logging
Server: * Patented buffer management system
* Provides significant network
The server "bursts" media efficiencies and enhanced viewer
files to player memory or * Faster-Than-Real-Time(TM)delivery
experience disk buffers * Provides isolation from network
in Faster-Than-Real-Time(TM), problems
tracking buffer levels * Traffic shaping
and allocating bandwidth * Limits bandwidth usage to the
accordingly. allocated bandwidth
* Controls impact of video and
audio on the network
* Utilizes optimized connection
acceptance criteria for guaranteed
quality-of-service
* CODEC-neutral
* Replicated server for load
balancing and reliable failover
* Extensive logging of client
session statistics
Player: Burst-Enabled(TM) Windows Media Player
Plays data out of the * Burstware(R)Server delivers
local buffer to the end content to Windows Media Player
user, shielding the end * Provides both disk-based and
user from network
disruptions.
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RAM-based caching
* Supports player scripting and
high interactivity
* Existing Windows Media Player
applications can easily be
burst-enabled
* Works in a browser or in a
standalone application
* VCR-like functionality and controls
* CODECS supported include: MPEG-1,
MPEG-2, MP3, Windows Media Audio,
and Apple Quicktime ASF
Burstware(R) Java Based (JMF) Player
* Player scripting
* Works in a browser or in a
standalone application
* VCR-like functionality and controls
* Supports many industry standard CODECs
Architecture
Burstware(R) employs a multi-tier, distributed architecture to provide a fully
scalable and fault-tolerant platform for high-quality multimedia delivery and
management. The architecture is designed to take advantage of the benefits, and
minimize the shortcomings, of using an unreliable, heterogeneous, IP-based
network--such as the Internet--for reliable multimedia delivery to a mass
audience.
Component Overview
The central management component of the architecture is the Burstware(R)
Conductor, which manages and monitors the Burstware(R) servers and provides the
point of contact for burst-enabled client applications, such as the Windows
Media Player.
The Burstware(R) Server provides reliable media delivery to clients, and uses
flow optimization algorithms to maximize overall bandwidth throughput, while
ensuring that each client is allocated sufficient bandwidth for uninterrupted
playback of video.
Burst-enabled client applications provide an intelligently managed client-side
cache, and co-operate with the conductor and server to provide the playback of
video and audio exactly as the file was encoded, with no jitter, dropped frames,
or signal degradation.
Media Delivery Procedure
When a burst-enabled client requests a media file, it contacts a conductor with
a request for service. The conductor intelligently routes the client to the
server that offers the best point of service for the request. The client then
establishes a two-way reliable TCP/IP connection to the server, and delivery and
playback of the media file begins.
The client continuously provides feedback to the server about how fast the media
file is being consumed, the state of the client buffer, and other information.
This data from all clients is fed into the server's flow optimization algorithm
described above, and the server uses the flow algorithm to schedule delivery of
data to clients at the rate that maximizes use of network resources and
minimizes the likelihood of buffer starvation. Flow rates are continuously
adjusted as network conditions and server loads change.
Advantages
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Burstware(R)'s multi-tiered architecture offers two key advantages over the
traditional two-tier streaming architecture: enterprise-class scalability, and
mission-critical fault tolerance.
Scalability
The Burstware(R) system is highly scalable, and can grow from one server to
hundreds of servers in a manner that is completely transparent to clients. Since
only the conductors are aware of the location and number of servers, new servers
can be added and existing ones moved or removed without any updates to client
applications. One conductor can support and manage hundreds of servers. The
conductor continually monitors server loads and routes incoming client requests
to the least loaded eligible server, providing intelligent load balancing that
goes far beyond such simple schemes as round-robin routing.
Because client interaction with the conductor is limited to the initial request
for service, a single conductor domain can easily scale to support tens of
thousands of concurrent client connections. Additionally scalability can be
achieved by employing multiple conductor domains, which can be integrated with
third-party IP routing solutions.
Fault Tolerance
Burstware(R) achieves complete fault-tolerance, including no single point of
failure, by fully replicating all components in the system. The conductor is
replicated in kind, and burst-enabled clients can contact either conductor for
service. Additionally, each server is automatically configured to provide
failover protection for all other servers containing the same media content.
Servers and conductors can be added and subtracted at runtime without shutting
down other system components.
If a server fails or becomes unavailable for any reason, including the failure
of a network link from the client to the server, all clients that have lost
contact with the server are automatically routed to other servers. Burstware(R)
establishes a new connection to an available server for each client, and the new
server picks up multimedia delivery exactly where the failed server left off.
Since the client-side buffer provides the ability for clients to disconnect and
re-connect without impacting the viewing experience, the viewer is unaware that
any failure has occurred.
Technology
The design mission for Burstware(R) technology is to provide the premier
platform for the management and delivery of digital video and audio content.
Burst.com has recognized the needs of the marketplace for a product that
provides quality, reliability, and manageability far beyond what existing
streaming solutions can deliver.
Burstware(R)'s design takes advantage of emerging trends in technology such as
available client-side storage and network bandwidth to provide a
forward-thinking, flexible, and highly effective approach to multimedia delivery
and management. Our engineering team has extensive experience in network
protocols, distributed multi-tiered architectures, digital video, real-time
control systems, and optimization algorithms. As a result, we believe
Burstware(R) is well equipped to address the escalating demand for multimedia
applications.
Architected for Industry Trends
By taking the caching model all the way to the client, Burstware(R) is the first
adopter in a new paradigm for multimedia delivery, and is uniquely positioned to
take advantage of the trends toward broadband networks and inexpensive client
storage. Designed to optimize expensive resources such as bandwidth and
server-side hardware by utilizing freely available client-side storage
resources, Burstware(R) provides an advanced network management and optimization
platform for audio and video content delivery.
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Sophisticated Scheduling of Data Delivery
[GRAPHIC]
Central to the Burstware(R) technology are the scheduling algorithms in the
Burstware(R) Server, which schedule bursts of data of varying size and time
intervals to each client. The Burstware(R) Scheduler employs proprietary
algorithms to guarantee each client quality of service while optimizing the use
of bandwidth and other network resources.
The Burstware(R) Server Scheduling Engine consists of a Call Admission Control
System, or CAC, a Flow Optimizer and a Flow Engine. The CAC ensures that a new
client is accepted onto the network only if its admission will not compromise
quality of service to existing clients or to the new client. It is worth noting
that a configurable "burst margin" of bandwidth is held in reserve by the CAC
for use by the Flow Optimizer as described below. Clients that are rejected by
one Burstware(R) Server are transparently routed to another, making the end user
unaware that one of the Burstware(R) Servers has reached its maximum
utilization.
The Flow Optimizer calculates the amount of data to deliver, or the flow rate,
to each client in order to maximize Burstware(R) Server throughput while
ensuring that each client receives sufficient data flow for uninterrupted,
continuous playback. The burst margin that is held in reserve by the CAC
algorithm is available for allocation by the Flow Optimizer, which forces
delivery of content in faster-than-real-time even under heavy network load
scenarios. Overall, this process exerts upward pressure on client-side buffer
levels, ensuring a jitter-free viewing experience.
The Flow Engine is a low level sub-system responsible for achieving the session
flow rates imposed by the Flow Optimizer. It advances through disk or cache
resident content files and paces the transmission of the video data as bursts
over the outgoing transmission control protocol connections linking the server
to each player. Incoming status notifications from each player provide any
needed feedback on actual flow rates and downstream buffer conditions.
These optimization algorithms enable a single Burstware(R) Server to
simultaneously deliver files ranging the full spectrum of encoded bit rates,
from ASF files designed for 28.8 modems to MPEG-2 files encoded at 8 Mbps or
more, to a wide variety of clients with radically different connectivity and
other capabilities, while maintaining the highest quality viewing experience for
each client.
Application-Level Quality of Service in Unpredictable Networks
One of the challenges of IP-based video delivery systems is to provide a smooth,
uninterrupted video experience in the face of the variable bandwidth capacities
and network latencies of a packet-switched network. Traditional streaming
solutions, by delivering data just in time for display to the client, are highly
sensitive to moment-to-moment variations in the network capacities at each link
between the client and server. Whenever bandwidth capacities fall below the
encoding rate of the video, even briefly, video quality will suffer.
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As described in the above section, Burstware(R) is able to provide a high
quality of service by employing a sophisticated client cache-management scheme
and delivering video data faster-than-real-time consumption. This
application-level quality of service is far less expensive than network-layer
quality of service, or QoS, schemes, which require that every router between the
client and server be able to guarantee that bandwidth and latency fall within a
narrow, specified range. Application-level QoS has the additional advantage of
working across network segments that are not capable of providing network-layer
QoS.
Application-level QoS also enables the use of higher-quality video encodings
across channels with variable bandwidth capacity. Real-time streaming
architecture requires that videos be encoded at a rate less than the minimum
bandwidth between the client and the server. Burstware(R), on the other hand, is
resilient to the average bandwidth between client and server, allowing delivery
of higher bit rate encodings.
Network Management Capabilities
A significant barrier to widespread adoption of streaming technologies has been
reluctance on the part of network managers to subject their networks to the
unpredictable and demanding requirements of traditional streaming solutions.
With Burstware(R), bandwidth use can be controlled at various levels, including
the entire Burstware domain, an individual Burstware(R) Server or locally on the
client side. Bandwidth limits can be adjusted dynamically at runtime, allowing
sophisticated traffic shaping over time and space. Content-specific caching and
routing controls also provide users with the flexibility needed for today's
applications.
Client configuration parameters include those for network optimization and
control, content protection, and player behavior. These parameters can be
centralized in a web page or customized by individual clients, giving
application developers a high degree of control over their video-enabled
applications.
Open Architecture
One of the keys to adoption of new technologies is a high degree of
interoperability with existing hardware and software. Burstware(R) has been
designed from the ground up to have open architecture at every product level,
allowing easy integration with a wide variety of third-party solutions.
The ability to interoperate with other applications is accomplished at several
different levels. A wide variety of industry-standard players, as well as other
applications, can be Burst-enabled using our Player Software Development Kit.
Burst-enabled players retain all of their existing functionality, thus
facilitating integration of an existing Windows Media Player web application,
for example, to the Burstware(R) delivery system. Integration with third-party
automated billing and report generation tools is accomplished with the
Burstware(R) Log Toolkit, which provides both an XML-based and an ODBC-based
data transfer capability. We also believe that external cache management systems
such as those offered by Akamai and Inktomi can integrate with Burstware(R)
through our directory-based media management system.
Portability is another important aspect of an open architecture. Burstware(R) is
a software-only solution and the Burstware Servers and Conductors are written
almost entirely in Java, allowing easy porting as new hardware and OS platforms
become available. Additionally, interprocess communication is 100% IP-based and
runs on nearly all modern networks, both wired and wireless. This highly
portable implementation allows Burstware to take immediate advantage of new
advances in hardware such as multiprocessor, multi-NIC, SMP Servers, advanced
storage systems and wireless technologies.
Engineering and Product Development
We believe that our future success will depend in large part on our ability to
enhance Burstware(R), develop new products, maintain technological leadership
and satisfy an evolving range of customer requirements for the delivery of audio
and video. Our product development organization is responsible for product
architecture, core technology and functionality, product testing, user interface
development and expanding Burstware(R) to operate with leading hardware
platforms, operating systems, and network and communication protocols. This
organization is also responsible for new product development.
During the past three years, we have made substantial investments in product
development and related activities ($189,700 in 1997, $800,600 in 1998 and
$4,076,700 in 1999). The current version of Burstware(R) has been developed
primarily by our internal development staff and, in some instances, with the
assistance of external consultants. In March 1998, we released a test version of
Burstware(R), followed by subsequent modifications during the year. We released
our first commercial Burstware(R) product suite in
12
<PAGE>
February 1999. This release is a client-server software product that manages and
optimizes the delivery of high quality video and audio across broadband
networks. The servers become intelligent network managers, efficiently
allocating bandwidth and scheduling burst delivery of multimedia content among
multiple users. Microsoft Corporation's Windows NT/95/98 operating systems are
supported on client machines, with Windows NT and Sun Microsystems' Solaris
operating systems supported on servers in client-server networks. In August
1999, we released support for the Linux platform in our Version 1.1.3. Also in
August 1999, we acquired Timeshift-TV, Inc. in a stock-only transaction from
Richard Lang, our Chairman and CEO, Earl Mincer and Eric Walters, who are
employees of ours. Timeshift-TV holds assets, including intellectual property,
in the area of time-shifted real-time broadcasting, which we plan to integrate
into our advanced video and audio delivery solutions. We also plan to license
the Timeshift-TV intellectual property to other parties for various
applications. We recorded $1,333,000 in expense for in-process research and
development costs purchased in connection with this acquisition. In November
1999, we released the capability to burst-enable to Windows Media Player in
Version 1.2.
As of March 31, 2000, our product development organization consisted of 24
individuals. We expect to devote substantial resources to our product
development activities, including the continued support of existing and emerging
hardware platforms, operating systems, and networking and communication
protocols.
The Burstware(R) Partners Program: Building A Solutions-Oriented Platform
Our Burstware(R) Partners Program is designed to create a total systems solution
with Burstware(R). The Program forms a network of partners to provide a total
systems solution for various vertical application categories. Partners offer
Burstware(R)-compatible solutions around their products: encoding, asset
management, cataloguing, front-end development, routing/switching, storage
solutions, systems integration, set-top implementation, and other specialty
applications. Following are some of the partners with whom we are currently
working.
Minerva Systems, Inc. is the leading provider of carrier quality video
networking platforms and services that enable the delivery of rich-media content
over the broadband Internet and intranets. The company combines its unique
expertise in video processing and media authoring to scale Internet Protocol, or
IP, networks into robust rich-media delivery systems. Minerva delivers
end-to-end solutions for a wide range of applications, such as distance
learning, corporate training, business-to-business e-commerce, telemedicine,
video conferencing and digital television.
Virage is a market leader in video and image search products. The Virage
VideoLogger software sets the standard for real-time indexing and distribution
of video across the Internet or corporate intranets and has been named the
market winner by industry analyst group Frost & Sullivan. Virage customers
include ABC News, AltaVista, BBC, CBS News, CNN, CNN Interactive, Compaq,
Federal Bureau of Investigations, General Motors, Harvard Business School,
Lockheed Martin, Lucent Technologies, NASA, NBC News, Reuters and several
classified U.S. government agencies. These companies rely on the Virage
VideoLogger as the critical foundation technology for more effectively deploying
video within their operations.
InnovaCom, Inc. is a Silicon Valley manufacturer of video compression based
transmission and DVD PreMastering Systems. The company's MPEG-2 based product
line targets the digital television, communications and DVD production
marketplaces.
Digital OutPost, based in Carlsbad California, is an industry leader in digital
video compression and production services. Digital OutPost's services include
complete multimedia design and production for DVD Video, DVD-ROM, CD-ROM,
Internet and Broadband channels. The Digital OutPost team is a pioneer in the
MPEG video compression field. Assembled in 1991 by GTE, Digital OutPost's
principals were integral in developing new interactive media technologies from
interactive television to CD-ROM video games. Digital OutPost currently serves
clientele in the following markets: digital video compression technologies,
video on demand, DVD, CD-ROM, broadband and Internet video delivery and digital
video production.
Interactive Video Technologies, based in Los Angeles, is a leading provider of
video application outsourcing for major corporations and specializes in
developing and managing interactive video content to support corporate strategic
objectives. The company serves clients in major vertical markets including
finance, technology, healthcare, manufacturing, entertainment, and education.
We are committed to offering program participants co-marketing and joint sales
opportunities, as well as input in future product directions and priority
technical and applications support. Partners will receive certification of
Burstware(R) compatibility and opportunities to co-sponsor events and trade show
booths, and will benefit from IVT public relations.
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Sales and Marketing
Potential customers for our products include any business or other end-user that
desires to send, receive or effectively manage high-quality video and audio
content over networks. We are focusing our sales efforts in three areas: direct
sales, value-added resellers, or VARs, and other distributors, and strategic
partnerships.
Our direct sales force is organized into two regions, east and west, including
six sales offices. We currently have one general manager, five account
executives and five sales engineers in the field and will be continuing to
expand the sales force and add additional offices. The primary goals of direct
sales are to establish significant reference accounts in each key application
and vertical market segment, focusing on enterprise-wide applications, to
support existing VARs in their sales efforts and to recruit new VARs.
International sales will focus on Europe, the Pacific Rim, and Canada/Latin
America. We have retained the services of EMS, a major sales organization
located in the UK, to act as an agent for European sales.
Burstware(R) products will be marketed to businesses and end-users through
agreements with major resellers, integrators and service providers, either
directly or by incorporating into or bundling with third-party products or
services. Targeted markets include corporate communication, education,
advertising, entertainment and broadcasting. We are also engaged in developing
relationships with strategic partners, including application providers, hardware
and software manufacturers who will distribute our products as part of their
offerings to end-users.
We do not believe that there is any significant seasonality that would affect
sales of our products or services. As of March 31, 2000, there was no backlog of
unfilled orders for our products.
Competition
We compete in markets that are rapidly evolving and intensely competitive. We
have experienced and expect to continue to experience increasing competition
from current and potential competitors, many of which have significantly greater
financial, technical, marketing and other resources.
In addition to us, there are four significant media delivery companies that
compete in similar market segments. The Burstware(R) product is priced similarly
to products offered by our major competitors, but competition is based primarily
on features and functionality. All competitors use real-time streaming
technology as opposed to our Faster-Than-Real-Time(TM) solution. RealNetworks
and Microsoft have concentrated on the consumer markets, while Tektronix and
Cisco are primarily focusing on the business-to-business markets. RealNetworks
and Microsoft are moving into the business-to-business markets with large
clients such as 3Com and Northrup Grumman. Tektronix and Cisco address the
problem of network management, although in a limited fashion. Currently, there
is limited competition in the broadband arena. Because of our patent portfolio,
we are able to offer unique network efficiency management, scalability and
reliability features and functionality, which combine to provide a competitive
advantage. While we can deliver multimedia content in a real-time mode, our
architecture is ideally suited to capitalize on the growth in broadband networks
and inexpensive storage.
RealNetworks
RealSystem G2 is a fully integrated encoder, server, splitter/cache and player
system. RealNetworks is dominant in the Internet market and the low bandwidth
applications, which have primarily centered around news and entertainment
markets. With their dominance in the consumer market and brand awareness, they
are gaining ground in the business sector with clients like 3Com, Boeing and
General Electric. We believe that RealNetworks' use of real-time streaming
technology, its lack of network management and its CODEC-dependence will give us
a competitive advantage in the business-to-business market. To effectively
deploy RealNetworks for a broadband application, the software must be bundled
with Digital BitCasting, and Inktomi (or similar caching product.).
Windows Media
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Windows Media Technologies 4.0 provides an end-to-end solution for streaming
multimedia, from content authoring to delivery to playback. Microsoft is
building brand strength by bundling Windows Media with other Microsoft Products.
Windows Media's presence in the business-to-business market is currently not
significant. Windows Media Technologies is targeting the streaming audio segment
by being the only streaming media platform to feature FM-stereo quality over a
modem and improved piracy protection. Like RealNetworks, Microsoft is focusing
on the consumer market by attracting content providers rather than developing
their media delivery system. Windows Media is relying on streaming technology to
deliver video and audio and offers no network management solution. Consumers
with the Windows Media Player (a component of Windows Media Technologies) can
use the Burst-Enabled(TM) Windows Media Player to increase the content quality,
reliability, and the efficiency of their network.
Tektronix
Tektronix has two product lines, Profile video servers and Grass Valley products
that provide communication solutions that are used to distribute and store
broadcast and post-production information. Tektronix is focusing primarily on
Video-Centric LAN/WAN Networking and Broadcast Production Networking. Tektronix
is concentrating on the business-to-business markets primarily through value
added resellers, direct sales, service providers and Original Equipment
Manufacturers. Tektronix does perform minimal network management, but uses
streaming technology.
IP/TV
Cisco Systems, Inc.'s IP/TV claims its software offers high-quality video
broadcasting and video on demand services, industry-leading management
capabilities, built-in scalability, network-friendly technologies such as IP
Multicast, and an easy-to-use viewer interface. Cisco's IP/TV servers attempt to
provide scalable, turnkey bandwidth-efficient solutions. Their hardware
platforms are pre-configured with the IP/TV software, creating a complete
network video solution. Cisco's IP/TV is targeting the business-to-business
markets. IP/TV is combining streaming technology with its Content Manager to
balance loads and to track specific viewing and management functions.
Others
There are other companies who offer streaming media solutions for the Internet
and corporate intranets. Many claim to have streaming media solutions for
corporate training, distance education, health care, and entertainment. Some
companies offer media servers with the ability to stream content to up to 500
desktops at one time. Others offer content management and media players.
Burstware(R)'s potential competitors offer no or limited network management.
This is a rapidly evolving market with no barriers to new entrants. Many
competitors, current and potential, may have access to more resources than are
available to us.
Patents and Trademarks
Our business is highly dependent on our patent portfolio. We have eight U.S.
patents. The early patents describe a broad class of systems that allow a user
to view, edit, store video information, and send and receive the data associated
with that video information over networks in less time than is normally required
to view or listen to the content. The later patents describe particular
distribution methods designed to deliver video information to remote systems.
Our core patents describe systems that are able to receive a high quality video
signal, store received information locally, manipulate that information with
editing, processing, compression and decompression tools, display the signal for
viewing, and re-send the manipulated information on to other such machine
systems in faster-than-real-time. Our current patents will expire on various
dates in 2007 through 2016.
We have two Australian patents that which incorporate the subject matter of the
first six U.S. patents, one South Korean patent, and one Indian patent. We have
filed for a number of additional domestic and international patents.
In addition to protecting the Burstware(R) product offerings, our patents have
broader application as various market applications appear, and our potential to
license our intellectual property expands into additional vertical market
segments.
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We view our portfolio as a critical component in gaining relationships with
strategic partners, strongly positioning our products' competitive advantage.
Potential licensees include companies such as server and client manufacturers,
bandwidth providers, content aggregators, copyright owners, and other hardware
manufacturers.
We have registered the trademarks "INSTANT VIDEO(R)", "BURSTWARE(R)" and
"BURSTAID(R)" in the United States, as well as in certain countries in Europe
and Asia.
Employees
As of March 31, 2000 we have 75 full-time employees, of which 24 work in product
development, 33 are in sales, marketing and business development and 18 work in
administration, finance and operations. We have never experienced a work
stoppage and no personnel are represented under collective bargaining
agreements.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
document. The statement of operations and balance sheet data for the year ended
December 31, 1995 are derived from financial statements that Evers & Company,
Ltd, independent accountants, have audited but are not included in this
registration statement. The statement of operations data for the year ended
December 31, 1996 and the balance sheet data for December 31, 1996 and 1997 are
derived from financial statements that KPMG LLP have audited but are not
included in this registration statement. The statement of operations data for
each of the two years in the two-year period ended December 31, 1998, and the
balance sheet data at December 31, 1998, are derived from financial statements
that KPMG LLP, independent accountants, have audited and are included elsewhere
in this registration statement. The reports of KPMG LLP contained explanatory
paragraphs that state there is substantial doubt about the entity's ability to
continue as a going concern. The statement of operations data for the year ended
December 31, 1999 and the balance sheet data as of December 31, 1999, including
the 1999 performa, are derived from financial statements audited by BDO Seidman,
LLP, independent certified public accountants, and are included elsewhere in
this registration statement. Historical results are not necessarily indicative
of the results to be expected in the future.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 665,781 $ 1,457,597 $ 247,879 $ 15,000 $ --
========== =========== ============ ============ ============
Loss from operations $ (372,254) $ (346,351) $ (1,928,637) $ (4,663,867) $(11,509,619)
========== =========== ============ ============ ============
Net loss $ (456,633) $ (404,367) $ (2,062,373) $ (6,916,420) $(12,977,729)
========== =========== ============ ============ ============
Beneficial conversion feature
of Series B Preferred Stock -- -- -- (8,762,425) --
---------- ----------- ------------ ------------ ------------
Net loss applicable to
Common Stockholders $ (456,633) $ (404,367) $ (2,062,373) $(15,678,845) $(12,977,729)
========== =========== ============ ============ ============
Basic and diluted net loss
per common share: $ (0.11) $ (0.09) $ (0.39) $ (2.35) $ (1.42)
========== =========== ============ ============ ============
December 31,
------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999 Pro Forma
----------- ----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents $ 4,346 $ 208,613 $ 20,551 $ 2,212,141 $ 302,979 $13,585,039
Total assets 238,855 601,182 155,191 3,249,622 1,091,826 14,410,801
Long-term obligations 141,000 -- 16,833 -- -- --
Stockholders' equity
(deficit) (1,307,057) 60,106 (983,267) 2,793,358 (5464,646) 12,722,414
</TABLE>
We have not declared nor paid any cash dividends on our common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believe," "anticipate," "estimate,"
"expect," and words of similar meaning, constitute forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain factors set forth in other parts of this document.
General
We remain optimistic about our future, but our prospects must be considered and
evaluated in light of the risks, operating and capital expenditures required,
and uncertainty of economic conditions that may impact our customers. Emerging
companies are characterized by a high degree of market and financial risk that
should be considered in evaluating our financial results and future prospects.
To achieve and sustain profitability, we must successfully launch, market, and
establish our software products, successfully develop new products and services,
meet the demands of our customers, respond quickly to changes in our markets,
attract and retain qualified employees, and control expenses and cash usage, as
well as continue to attract significant capital investments.
We believe that period-to-period comparisons of our operating results, including
our revenues, cost of sales, gross margins, expenses, and capital expenditures
may not necessarily provide meaningful results and should not be relied upon as
indications of future performance. We do not believe that our historical results
are indicative of future growth or trends.
We have incurred significant losses since inception, and as of December 31,
1999, had an accumulated deficit of $37,435,900. There can be no assurance that
we will achieve or sustain profitability and we believe that we will incur a net
loss in 2000.
Results of Operations
Year ended December 31, 1999 compared to 1998
We had no revenue or cost of revenue for the year ended December 31, 1999
compared with $15,000 revenue for the same period in 1998. These minimal
revenues were the result of our redirecting our product and market activity to
the Burstware(R) family of products. We released our first product, Burstware(R)
Version 1.1, to the public in February 1999 and in November 1999, we released
Burstware(R) Version 1.2, which contained the Burst-Enabled(TM)Windows Media
Player. In 1999, we recruited key sales, marketing and development contributors
and signed six reseller agreements. Customer evaluations were undertaken during
the second half of 1999 and initial sales commenced in February 2000.
During the year ended December 31, 1999 costs and expenses increased to
$11,509,600 as compared to $4,678,900 during the year ended December 31, 1998.
This $6,830,800 increase was a result of an overall expansion in business
activity, including growth in the research and development, sales and marketing
departments as well as a non-recurring charge to expense related to the
acquisition of Timeshift-TV.
The $3,276,200, or 409% increase in Research & Development expenditures,
resulted from the ramp-up in preparation for the initial commercial release and
development and testing of enhanced features planned for subsequent releases of
our product as well as $1,330,000 of in-process research and development
acquired from Timeshift-TV which was charged to expense.
At the time of the acquisition, Time-Shift TV had a pending application in the
U.S. Patent office; a registered domain name (TimeShiftTV.com); a strategy for
introducing the technology to the marketplace; a strategy for integration with
other burst.com products; proof of conception pre-dating the existence of other
companies with similar products that have since emerged; applications for
Trademark protection; additional derivative patent applications in preparation.
The TSTV in process research and development was acquired in order to accomplish
three primary objectives.
1) To incorporate TSTV functionality, or elements of the technology, into the
Burstware(r) software system for live, multicast and unicast applications.
(Development is underway at this writing and should be released sometime in
2000)
2) To develop a set top box software application that integrates TSTV
functionality and Burst delivery of digital audio/video content. No timetable
for development or release has been set.
3) To license TSTV technology to third party hardware manufacturers. (set top
boxes, digital VCR's, digital TVs). We do not anticipate licensing TSTV
technology/IP until we have been granted a patent.
We estimate the cost of item #2 to be in the range of $700-900K. The cost
associated with licensing the technology (item 3) is factored into the overall
licensing program budget.
Material risks that may affect the timely completion or commercialization of
these projects include competing or alternate solutions offered by significantly
larger, established companies with much higher profiles; inability to complete
the development work timely due to lack of financial or human resources; and
unexpected delays due to technological difficulties which may be encountered to
commercialize the products.
The Quality Assurance and Release Management Department was established in 1999
to support subsequent releases of Burstware(R) products. Personnel were added to
develop, test and complete documentation of the product releases. Major
development activities began in the areas of player scripting, incorporation of
a database for replication, and various other features to be included in
subsequent releases.
The $3,354,500 or 404% increase in Sales & Marketing was primarily a result of
increased expenditures relating to the commercial release of our Burstware(R)
product suite. We have added marketing staff and have engaged in a targeted
marketing campaign, including print, radio and billboard advertising, public
relations, collateral development, and participation in a number of major trade
shows. We believe that these promotional activities will allow us to reach
specific vertical markets cost-effectively, to support the efforts of the direct
sales force, and to generate publicity for us as a whole.
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The marketing campaign's objectives are to build brand awareness, facilitate
name recognition, educate the market, generate sales leads and develop
relationships with technology partners, systems integrators and resellers. These
expenditures will continue as part of an overall plan to build upon and expand
the brand awareness we have created in the marketplace.
Sales expenditures have increased as a result of the expansion of our sales
force in conjunction with the launch of the Burstware(R) suite of products. We
currently have a sales and business development office in Southern California,
and sales offices in Virginia, Colorado, Michigan, Metropolitan New York and
Florida. We have also partnered with The EMS Group, Limited to develop sales and
marketing channels in Europe.
We incurred a $200,100, or 7% increase in General and Administrative expense,
which resulted from additional personnel, equipment and facilities costs to
support the increased operations.
We had a net loss from operations of $11,509,600 during the year ended December
31, 1999, as compared to $4,663,900, a 247% increase over the year ended 1998.
The increased loss resulted from the increased expenditures and charges
discussed above. Net interest expense was $1,468,100, as compared to $2,252,600
net interest expense for the years ended December 31, 1999 and 1998,
respectively. This $784,400 decrease was principally due to the decrease in
interest expense associated with debt converted to equity or debt that was
retired during the latter part of 1998. In addition, $2,228,900 was charged to
interest expense in 1998 for non-cash amounts related to beneficial conversion
features, warrants and stock grants issued with debt. In 1999, such non-cash
interest charges decreased to $1,397,000
Year ended December 31, 1998 compared to 1997
Revenue
During the year ended December 31, 1998, we earned revenue in the amount of
$15,000 compared to $247,900 for 1997. The 1998 revenue was from a single
domestic transaction relating to a field trial. Revenue in 1997 was from
consulting services for a different domestic customer.
Cost of Revenue
We had no cost of revenue for the year ended December 31, 1998, since the
above-mentioned field trial had no costs associated with it. Cost of revenue in
1997 consisted of costs of services related to customization of software for the
domestic customer referred to above.
Operating Expenses
Costs and expenses during the year ended December 31, 1998, totaled $4,678,900
as compared to $1,946,300 during 1997. The increase was primarily due to
increased software development expense, increased labor expense, increased sales
and marketing expenses, and non-cash compensation expense relating to stock
options.
Software research and development ("R&D") expenses for 1998 increased 322% from
$189,700 in 1997 to $800,600 in 1998. R&D expenditures accounted for 17% of
total operating expenses in 1998. All R&D costs have been expensed as incurred
since no significant amounts qualified for capitalization. The majority of R&D
expenses were labor-related for employee salaries and benefits and expenses for
consultants as the result of our decision to expand our internal product
development team.
Sales and marketing expenses increased 103% from $408,400 in 1997 to $831,000 in
1998 and accounted for 18% of total operating expenses in 1998. The increase in
1998 was due to expenditures for developing and producing marketing collateral
materials, developing a public relations and promotion campaign strategy, travel
expenses, and labor expenses due to increased headcount in 1998.
General and administrative expenses increased from $1,348,200 in 1997 to
$3,047,300 in 1998 and accounted for 65% of total operating expenses in 1998.
The 126% increase from 1997 to 1998 was due to $1,865,200 non-cash, stock-based
compensation in addition to increased labor and consultant expenses and
increased legal expenses for our patent filings.
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<PAGE>
Interest Expense
Total interest expense for 1998 was $2,252,600 versus $139,000 in 1997. This
1,520% increase was due to interest expense recognized for beneficial conversion
features on notes issued during 1998, discount amortized and interest accrued on
these notes during 1998, and interest expense recognized for the fair value of
warrants issued upon conversion of these notes and related accrued interest to
common and Series B Preferred Stock during 1998. Actual cash expenditures for
interest in 1998 totaled $65,900.
Net Loss and Net Loss Applicable to Common Shareholders
We incurred a net loss of $6,916,400 and a net loss to common shareholders of
$15,678,800, ($2.35 per common share) for the year ended December 31, 1998, as
compared to a net loss and net loss to common shareholders of $2,062,400 ($.39
per share) for 1997. The 1998 loss is primarily caused by minimal revenue,
increased operating expenses, non-cash interest expense relating to now retired
debt, and compensation expense relating to stock options granted to employees
and consultants.
The additional loss of $8,762,400 to common shareholders in 1998 resulted from
beneficial conversion terms for our Series B preferred stock. The beneficial
conversion feature resulted from price differences between the $2.00 conversion
price for the Series B offering and the closing price for our common stock on
the dates the Series B preferred stock was purchased. Our Series B preferred
stock offering was sold over a period of time, and had a fixed $2.00 per share
conversion price, while our common stock price fluctuated widely during that
period. Any excess of the closing price of our common stock over the fixed
conversion price of our Series B preferred stock on the date of purchase
represented a benefit to the purchaser of the Series B preferred stock, and
consequently was recognized as a loss due to beneficial conversion feature of
Series B convertible Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
December 31, 1999 vs. December 31, 1998
Liquidity
Although we have been successful in our fundraising efforts to meet previous
operating requirements, there can be no guarantee that we will be successful in
future fundraising efforts. In January 2000, we raised $12,853,000 in cash, net
of offering costs of $1,046,000 and converted $5,335,000 of debt (including
$430,000 in new debt raised in January 2000) , by issuing 4,808,395 shares of
our common stock. At the time of this registration statement we had cash
reserves of $9 million, which we believe will meet current operating
requirements. We are currently in negotiation to obtain additional outside
funding. Any new funding raised may have a dilutive effect on our existing
shareholders. In the event we are unsuccessful in our additional fundraising
efforts and if projected revenues are significantly lower than expected, we
would be required to significantly reduce cash outflows through the reduction or
elimination of marketing and sales, development, capital, and administrative
expenditures, resulting in decreased potential revenue and potential
profitability.
We expect to have material capital expenditures for computer and network
equipment and software of approximately $1,500,000 in 2000 as we add employees
and expand our software, test lab and training capabilities. We will continue to
incur increasing research and development costs as we continue to develop our
Burstware(R) product line and follow-on products.
Changes in Financial Condition
As of December 31, 1999, the Company had a working capital deficiency of
$6,226,500 as compared to working capital of $2,591,900 at December 31, 1998.
This $8,818,400 decrease was due to a $2,681,300 reduction in current assets,
and an increase in current liabilities of $6,137,100, principally due to an
increase in notes payable of $4,812,100. These uses of current assets were
partially offset by the $1,537,500 proceeds from the exercise of warrants to
purchase our common stock and the $810,000 collection of a receivable related to
the issuance of Series B preferred stock.
Net cash used in operating activities totaled $8,476,500 during the year ended
December 31, 1999, as compared to net cash used in operating activities of
$2,488,800 during the year ended December 31, 1998, principally because of the
increase in net loss during 1999.
Net cash used in investing activities during the year ended December 31, 1999
totaled $750,000 as compared to $162,700 during the year ended December 31, 1998
because of the increase in capital purchases (primarily increases in computer
equipment) in 1999.
20
<PAGE>
Cash flow provided by financing activities during the year ended December 31,
1999 totaled $7,317,300 as compared to $4,843,000 during the same period in
1998. This increase was primarily as a result of the use of funds to retire debt
during 1998. We retired a $22,700 note during the year ended December 31, 1999,
while retiring $891,200 in debt during the year ended December 31, 1998, versus
the additional proceeds from new debt and equity in 1999 over 1998.
During the year ended December 31, 1999 the Company received $4,905,000
evidenced by notes payable convertible into our common stock, due in one year.
The conversion rate was the lower of (1) $6.50, (2) 80% of the average closing
price of the Company's publicly traded shares in the 20 trading days immediately
preceding the conversion date, or (3) the price agreed in any subsequent private
placement financing completed prior to the payment of the note. These notes
contained beneficial conversion features which resulted in recording
incremental, non-cash interest expense of $1,397,000 during the year ended
December 31, 1999. The notes were converted to common stock in January 2000.
(See "Item 10. Recent Sales of Unregistered Securities".)
Management expects to continue to incur losses for 2000 as we establish our
brand, commence sales and establish market share.
December 31, 1998 vs. December 31, 1997
As of December 31, 1998, we had working capital of $2,591,900 as compared to a
working capital deficiency of $1,069,600 at December 31, 1997. The increase was
primarily due to cash balances resulting from the sale of Series B Convertible
Preferred Stock and warrants that raised $4,210,000 in new funds, as well as the
exercise of $750,000 in warrants to purchase Series A convertible preferred
stock in 1998.
Cash used in operating activities totaled $2,488,800 during the year ended
December 31, 1998, as compared to $1,760,500 during 1997. The 41% increase was
primarily a result of increased spending for labor, development, and sales and
marketing.
Cash used in investing activities during the year ended December 31, 1998, was
$162,700 as compared to $85,400 for 1997. The increase of 91% was due to
spending on computer and network equipment.
Cash flows provided by financing activities during the year ended December 31,
1998, were $4,843,000 as compared to $1,657,800 during the year ended December
31,1997. The 192% increase was due to the proceeds from the sale of Series B
convertible preferred stock and additional convertible debt and proceeds from
the exercise of warrants. We repaid $891,200 of debt in 1998. $500,000 of this
amount was for the repayment of the line of credit from Imperial Bank. We raised
approximately $6,697,000 of equity in 1998. This is comprised of $750,000
received from the exercise of warrants, $4,210,000 in a private placement of
Series B Convertible Preferred Stock and warrants, and $1,737,000 in debt and
accrued interest that was converted into equity by the end of 1998.
Deferred Tax Asset Valuation
Because of our history of operating losses, management is unable to determine
whether it is more likely than not that deferred tax assets will be realized.
Accordingly, a 100% valuation allowance has been provided for all periods
presented.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits 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 had to be upgraded to comply with such Year 2000 requirements. In
1998, we began a project to determine if any actions were required regarding
date-related effects to: (i) our software products; (ii) our internal operating
and desktop computer systems and non-information technology systems; and (iii)
the readiness of our third-party vendors and business partners. We formed a team
consisting of operations, development, marketing, and finance members to
determine the impact of Year 2000 and to take corrective action. We completed
testing of our suite of Burstware(R) software products and found no known Year
2000 issues. We have also tested our internal operating and desktop hardware and
software and have found that all our software is Year 2000 compliant and appears
to have no known Year 2000 issues. We also confirmed with our third-party
vendors and business partners to ensure that their software and hardware will
not impact our operations. As of the date of this filing, we know of no known
Year 2000 issues or problems with our vendors or business partners, nor did we
experience any such problems with the advent of the year 2000.
21
<PAGE>
Recently Issued Accounting Standards
In March 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP No. 98-1 requires that
certain costs related to the development or purchase if internal-use software be
capitalized and amortized over the estimated useful life of the software. The
adoption of SOP No. 98-1 as of January 1, 1999, did not 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. SFAS No. 133, as amended, is effective for years
beginning after July 15, 2000. The Company historically has not used derivatives
or hedges, and thus believes adoption of this standard will have little or no
effect.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999 we had approximately $300,000 invested in two different
money market funds. The primary objective of our investment activities is to
preserve our capital until it is required to fund operations while at the same
time achieving a market rate of return without significant risk. Since these
funds are available immediately, a 10% movement in market interest rates would
not have a material impact on the total fair value of our portfolio as of
December 31, 1999.
ITEM 3. PROPERTIES
We presently occupy 12,900 square feet of office space at 500 Sansome Street,
Suite 503, San Francisco, California, pursuant to a lease that expires at the
end of January 2002. The lease provides for rent of $34,300 per month, fully
serviced. We rent approximately 1,200 square feet of office space for our seven
regional sales offices, with leases running from month-to-month to August 31,
2000. We believe that our facilities are suitable and adequate for our needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to beneficial ownership
of our common stock by:
* each person who beneficially owns more than 5% of our common stock;
* each of our executive officers;
* each of our directors;
* and all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Instant Video Technologies, Inc., 500 Sansome Street, Suite 503,
San Francisco, CA 94111. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares beneficially owned. The applicable percentage of ownership for each
stockholder is based on 18,953,065 shares of common stock outstanding on March
31, 2000 together with applicable options and warrants for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned are deemed outstanding for the purpose of computing the
percentage ownership of the person holding those options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.
Percent of
Name of Stockholder Common Stock Class
------------------- ------------ -----
5% Stockholders Entities
Draysec Finance Limited 2,081,660 (1) 10.70%
Storie Partners LLP 3,530,000 (2) 18.03%
Mercer Management 2,536,774 (3) 12.99%
22
<PAGE>
Stuart Rudick 1,533,500 (4) 8.08%
Special Situations Funds 2,000,000 (5) 10.02%
Chelsey Capital 1,500,000 (6) 7.61%
Baystar Capital 1,500,000 (7) 7.61%
Robert London 1,127,623 (8) 5.88%
Ravinia Capital 1,187,000 (9) 6.07%
Executive Officers and Directors
Richard Lang 2,240,888 (10) 11.05%
O.J. Kilkenny 1,942,083 (11) 10.05%
John J. Micek III 289,166 (12) 1.51%
Brian Murphy 2,011,455 (13) 10.37%
Joseph Barletta 120,849 (14) *
Doug Glen 177,499 (15) *
Tom Koshy 175,306 (16) *
Ed Davis 107,100 (17) *
Kyle Faulkner 323,249 (18) 1.68%
David Morgenstein 578,092 (19) 2.97%
All officers and directors
as a group (11 persons) 6,093,810 (20) 27.48%
----------
* Represents less than one percent.
(1) Includes 1,575,769 shares of our common stock, options to purchase 250,000
shares of our common stock and warrants to purchase 46,109 shares of our
common stock. Also includes options to purchase 70,205 shares of our common
stock held by O.J. Kilkenny and options to purchase 139,577 shares of our
common stock held by Brian Murphy, each of whom represent Draysec Finance
on our Board of Directors.
(2) Includes 2,900,000 shares held and warrants to purchase 630,000 shares of
our common stock.
(3) Includes 1,956,209 shares held and warrants to purchase 580,565 shares of
our common stock.
(4) Includes 1,150,000 shares held by Mindful Partners, 175,000 shares held by
Rudick Asset Management, 150,000 shares held by Delaware Charter Guaranty
Trust Company, 20,000 shares held by Stuart Rudick and 6,000 shares held by
Martin Rudick. Also includes warrants to purchase 32,500 shares of our
common stock held by Mindful Partners.
(5) Includes 1,000,000 shares of our common stock and warrants to purchase
1,000,000 shares of our common stock.
(6) Includes 750,000 shares of our common stock and warrants to purchase
750,000 shares of our common stock.
(7) Includes 750,000 shares of our common stock and warrants to purchase
750,000 shares of our common stock.
(8) Includes 909,987 shares of our common stock and warrants to purchase
217,636 shares of our common stock.
(9) Includes 593,500 shares of our common stock and warrants to purchase
593,500 shares of our common stock.
(10) Includes 852,346 shares in the name of the Lisa Walters and Richard Lang
Revocable Trust, options to purchase 1,196,542 shares of our common stock
held by Richard Lang and options to purchase 122,000 shares of our common
stock held by Lisa Walters, Mr. Lang's spouse. Also includes 70,000 shares
of our common stock held in escrow for Richard Lang pending issuance of a
patent applied for in connection with the TimeShift-TV acquisition.
(11) Includes 1,871,878 shares of our common stock held by Draysec Finance and
options to purchase70,205 shares of our common stock.
23
<PAGE>
(12) Includes 43,608 shares of our common stock held by Mr. Micek and 62,500
shares of our common stock held by Universal Warranty Corp. Also includes
options to purchase 154,683 shares of our common stock held by Mr. Micek,
warrants to purchase 6,250 shares of our common stock held by Mr. Micek and
warrants to purchase 22,125 shares of our common stock held by Universal
Warranty Corp.
(13) Includes 1,970,878 shares of our common stock held beneficially by Draysec
Finance and options to purchase 139,577 shares of our common stock held by
Mr. Murphy.
(14) Includes 25,000 shares of our common stock held beneficially by
Independence Properties' options to purchase 64,599 shares of our common
stock held by Mr. Barletta and warrants to purchase 31,250 shares of our
common stock held by Independence Properties.
(15) Includes 25,000 shares of our common stock, options to purchase 127,499
shares of our common stock and warrants to purchase 25,000 shares of our
common stock.
(16) Includes 66,000 shares of our common stock, options to purchase 99,306
shares of our common stock and warrants to purchase 10,000 shares of our
common stock.
(17) Consists of options to purchase 107,100 shares of our common stock.
(18) Includes 62,500 shares of our common stock, options to purchase 198,249
shares of our common stock and warrants to purchase 62,500 shares of our
common stock.
(19) Includes 85,000 shares of our common stock, options to purchase 373,092
shares of our common stock and warrants to purchase 120,000 shares of our
common stock.
(20) Includes 2,867,723 shares of our common stock, options to purchase
2,902,853 shares of our common stock and warrants to purchase 323,234
shares of our common stock.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive
officers, directors and key employees as of June 1, 2000.
Name Age Positions and Offices Held
---- --- --------------------------
Richard Lang 46 Chairman, Chief Executive Officer,
and Director
Doug Glen 53 President and Director
Thomas Koshy 62 Chief Operating Officer
Edward H. Davis 47 General Counsel, VP of Strategic
Alliances, and Secretary
John C. Lukrich 47 Chief Financial Officer
Kyle Faulkner 43 Chief Technology Officer
David Egan 42 Vice President of Sales
O.J. Kilkenny 51 Director
John J. Micek III (1)(2) 47 Director
Brian Murphy 44 Director
Joseph Barletta (1)(2) 64 Director
(1) Member of the compensation committee
(2) Member of the audit committee
Key employees are:
Michael Moskowitz 38 Vice President of Business Development
June White 60 Vice President of Engineering
Suzanne Lentz 31 Director of Marketing
24
<PAGE>
The following sets forth biographical information as to the business experience
of each or our Executive Officers and Directors:
Richard Lang has served as our Chairman, Chief Executive Officer, President and
Director since September 1997. From January 31, 1997 through August 1997, Mr.
Lang served as one of our directors. Mr. Lang served as our Chairman of the
Board and Treasurer until January 31, 1997. He had served as Chairman of the
Board, CEO and Treasurer from December 1993 to September 1995 and as a Director
since August 1992. He has been a Director of our subsidiary, Explore Technology,
Inc., since February 1990, and served as its President from February 1990 to
August 1992. Mr. Lang has presided over the development of our patent portfolio.
He is the inventor of record for the bulk of our Intellectual Property. Mr. Lang
was also a co-founder of Go-Video, Inc., Scottsdale, Arizona and co-inventor of
Go-Video's patented dual-deck VCRs. Mr. Lang received his A.A. degree from
Scottsdale College.
Douglas Glen has been President since June 2000 and a director since October
1999. Mr. Glen is general partner of Pro Ven Private Equity's Global Rights
Fund, a $250 million investment fund focused on under-exploited brands,
copyrights and media properties. Previously, Mr. Glen was senior vice president,
chief strategy officer of Mattel, Inc. Before joining Mattel, Mr. Glen was group
vice president, business development and strategic planning for Sega of America.
Prior to joining Sega, Mr. Glen was general manager of Lucasfilm Games, the
consumer software division of George Lucas' entertainment company. Mr. Glen has
a Bachelors Degree in Business from Massachusetts Institute of Technology and a
Ph.D. from Somerset University
Tom Koshy has served as our Chief Operating Officer since September 1999 and
brings 25 years of wide ranging operational and program management experience in
the areas of strategic planning, network capacity planning, engineering,
software development, technical training, and large engineering and construction
projects. For the five year period prior to joining us, Mr. Koshy was employed
at MCI Telecommunications, where he was involved in various areas of that
company's backbone network and switching, and with the network administration of
local access. Mr. Koshy has successfully managed the engineering and
implementation of projects ranging in size from $50K to $250M, and has developed
organizations to support optimum process flow. Mr. Koshy has a Bachelors degree
in Engineering, and Masters degrees in Business Administration and
Telecommunications Management.
Edward Davis currently serves as General Counsel, Secretary and Vice President
of Strategic Alliances and has been with us since August 1998. Mr. Davis was
elected as our Secretary in October 1999. From 1987 to July 1998, Mr. Davis was
Corporate Counsel for Pacific Telesis Group. As Corporate Counsel he advised PTG
consolidated companies, including Nevada Bell, Tele-TV, Pacific Bell Video
Services, Pacific Bell Information Services, and Pacific Bell Directory. He has
significant experience in mergers and acquisitions, taxation, intellectual
property, and criminal prosecution. He holds a Bachelor of Arts degree in
History and Political Science from Gonzaga University; a Juris Doctorate Degree
from the University of San Francisco, and a post graduate Masters in Tax from
Golden Gate University.
John C. Lukrich became our Chief Financial Officer in June 2000. He has
extensive experience in mergers and acquisitions, operations, business
development, and venture capital strategies. For ten years beginning in 1982,
Mr. Lukrich headed his own accounting software consulting firm, J.C. Lukrich &
Co. CPAs, specializing in the selection, implementation and support of software
systems for medium size businesses. From 1992 to 1996, Mr. Lukrich served as CFO
and Executive Vice President of Great Bear Technology, Inc./StarPress, Inc.,
publisher and distributor of entertainment and education-based CD-ROM titles. He
was responsible for the required filings for the publicly-traded company (GTBR),
and for the merger, acquistion, and transition of five software companies into
Great Bear. In 1996 he joined Intervista Software, Inc, as CFO and COO, and was
later appointed President where he served until 1999. Most recently, Mr. Lukrich
served as interim director for RateXchange.com, and as a part of the senior
management team with CFO responsibilites for NetAmerica.com (NAMI), an incubator
for Internet business-to-business startups. Mr. Lukrich is a CPA, and practiced
with Ernst & Young. He received BS degrees in Accounting and in Finance from the
University of California, Berkeley and an MBA from Golden Gate University.
Kyle Faulkner currently serves as Chief Technology Officer and has been with us
since November 1997. Mr. Faulkner has over 16 years experience in client/server
software development, and 4 years experience in hardware development. Mr.
Faulkner has been a key contributor on more than 20 commercially successful
products, and was on the founding teams at Sybase and Forte Software. From 1995
to November 1997, Mr. Faulkner was an independent contractor for Network
Equipment Technologies responsible for that company's core system services for
its next generation ATM network switch. Mr. Faulkner received a B.A. in
Electrical Engineering and Applied Physics from Case Western University.
David Egan has been our Vice President of Sales since December 1999. Mr. Egan
served as Vice President, Sales of Lincoln Software from February 1999 until
November 1999. From January 1998 to January 1999, he was Vice President, Sales
of ZNYX Corporation, a network Ethernet LAN adapter and software company. From
January 1996 until December 1998, Mr. Egan served as President and Chief
Executive Officer of DGE Solutions, an e-commerce hosting company. From July
1993 until December 1995, Mr. Egan was Vice President - Open Systems Sales &
Marketing for Hitachi Data Systems. He received his B.A. in Economics from
Stanford University.
O. J. Kilkenny has been one of our directors since August 1992. Mr. Kilkenny is
Senior Partner of O. J. Kilkenny & Co., Chartered Accountants, specializing in
the entertainment industry with offices in London, England and Dublin, Ireland.
With his partners, he has developed the accounting practice into one of the
major accounting practices in England, specializing in the entertainment
industry.
25
<PAGE>
Mr. Kilkenny holds directorships in a number of companies in the media and
entertainment sector as well as positions with non-entertainment businesses. He
is also an investor in Ireland's first independent television channel and
Ardmore Studios, the National Film Studios of Ireland. Mr. Kilkenny received a
Bachelors Degree in Commerce from Dublin University in 1969, and became a fellow
of the Institute of Chartered Accountants in Ireland, England and Wales in 1982.
Mr. Kilkenny became one of our directors as a representative of Draysec Finance
Limited, one of our principal shareholders.
John J. Micek III has been one of our directors since April 1990, Secretary and
Treasurer from January 1994 until October, 1999, and served as the Company's
President from April 1990 to August 1992. Mr. Micek currently serves as
President of Universal Warranty Insurance located in Palo Alto, California, and
Omaha, Nebraska. From 1994 to 1997, Mr. Micek served as general counsel for U.S.
Electricar in San Francisco, California. From January 1989 to March 1994, Mr.
Micek practiced law in Palo Alto, California. He has served as a Director of
Armanino Foods of Distinction, Inc., a publicly-held specialty food manufacturer
in Hayward, California, since February 1988. He also serves as a Director of
Universal Group, Inc., a Midwest group of insurance companies, and Cole
Publishing Company in northern California. He received a Bachelor of Arts Degree
in History from the University of Santa Clara and a Juris Doctorate from the
University of San Francisco School of Law.
Joseph Barletta has been one of our directors since September 1998. He is of
counsel with the firm Seyfarth, Shaw, Fairweather, and Geraldson in San
Francisco. He has served as the CEO or COO of six major companies in the media
industry including TV Guide magazine, Thomson Newspapers, and the San Francisco
Newspaper Agency (Chronicle and Examiner), and he currently sits on the boards
of several companies. Mr. Barletta received his Juris Doctor Degree from
Duquensne University and Bachelor of Arts Degree from Marietta College.
Douglas Glen has been president since June 2000 and a director since October
1999. Mr. Glen is general partner of Pro Ven Private Equity's Global Rights
Fund, a $250 million investment fund focused on under-exploited brands,
copyrights and media properties. Previously, Mr. Glen was senior vice president,
chief strategy officer of Mattel, Inc. Before joining Mattel, Mr. Glen was group
vice president, business development and strategic planning for Sega of America.
Prior to joining Sega, Mr. Glen was general manager of Lucasfilm Games, the
consumer software division of George Lucas' entertainment company. Mr. Glen has
a Bachelors Degree in Business from Massachusetts Institute of Technology and a
Ph.D. from Somerset University
Biographies of our key employees are as follows:
Michael Moskowitz currently serves as Vice President of Business Development and
has been with us since July 1999. Dr. Moskowitz has focused on the Business and
Technical aspects of transporting video and static images across data networks
for over 10 years. Prior to joining us, Dr. Moskowitz had served as a Senior
Manager at Silicon Graphics, Inc., or SGI, charged with creating new business
opportunities and product directions for their MPEG-2 and streaming media
technologies. At SGI, one of Dr. Moskowitz' initial responsibilities centered
around the VOD trials at TimeWarner-Orlando, and Cablevision-Long Island. Prior
to SGI, Dr. Moskowitz worked on new technologies for transmitting medical images
at the University of California, San Francisco. He holds a Ph.D. in Electrical
Engineering from Dartmouth College, a Masters Degree from University of
Massachusetts, Amherst, and a Bachelor of Science degree in Physics from State
University of New York, Binghamton.
June White currently serves as Vice President of Engineering and has been with
us since June 1998. Ms. White has managed all aspects of software development
for over 20 years, emphasizing on establishing processes that are required to
support the product's life cycle. She has been a key contributor to the launch
of many new products including Forte's Application Development Environment,
ROLM's Phonemail, and Control Data's Operating Systems. Ms. White has built QA
and Release Management organizations in order to ship high quality products.
Suzanne Lentz currently serves as Director of Marketing and has been with us
since September 1998. Ms. Lentz has extensive marketing and sales experience in
emerging and high-tech markets. She was one of the founding employees of AMI's
Business
26
<PAGE>
Consulting Group in Hong Kong. Ms. Lentz was also the OEM Sales Manager selling
and marketing to a number of semiconductor and laser companies including Applied
Materials, Coherent Laser, LAM and Silicon Valley Group. She holds a Bachelor of
Science degree in Mechanical Management Engineering from the University of
Pacific.
Number of Directors and Directors' Terms of Office
Our by-laws authorize seven directors, and we currently have six directors. All
directors hold office until the next annual meeting. No family relationships
exist among our officers and directors. In the event our common stock becomes
listed on the Nasdaq National Market, our board will be divided into three
classes of directors and the members of each class would hold their office for
three-year staggered terms. Our certificate of incorporation does not provide
for cumulative voting; therefore, our stockholders representing a majority of
the shares of common stock outstanding will be able to elect all of the
directors. The classification of the board of directors, if effected as
indicated above, and the lack of cumulative voting will make it more difficult
for our existing stockholders to replace the board of directors or for another
party to obtain control of our company by replacing the board of directors.
Since the board of directors has the power to retain and discharge our officers,
these provisions could also make it more difficult for existing stockholders or
another party to effect a change in our management.
Committees of the Board of Directors
We have established an audit committee and a compensation committee. The audit
committee reviews our internal accounting procedures and considers and reports
to the board of directors with respect to other auditing and accounting matters,
including the selection of our independent auditors, the scope of annual audits,
the fees to be paid to our independent auditors and the performance of our
independent auditors. The audit committee currently consists of Messrs. Micek
and Barletta. The compensation committee reviews and recommends to the board of
directors the salaries, benefits and stock option grants for all employees,
consultants, directors and other individuals compensated by us. The compensation
committee also administers our stock option and benefit plans. The compensation
committee currently consists of Messrs. Micek and Barletta.
Director Compensation
Our directors do not receive any compensation for their services. Each non
employee director is eligible to participate in our Incentive Stock Option
plans.
27
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION AND OTHER MATTERS.
<TABLE>
The following table sets forth information for services rendered in all
capacities for each of the past 3 years for (i) our Chief Executive Officer (ii)
and all other executive officers who earned more than $100,000 during the last
completed fiscal year.
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long term compensation
----------------- ----------------------
Name and Principal Securities Underlying All Other
Position Year Salary Bonus Options Compensation
-------- ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Richard Lang, Chairman 1999 $240,000 -- -- --
of the Board and Chief 1998 170,000 -- 1,011,000 --
Executive Officer(1) 1997 32,000 -- 27,167 --
Kyle Faulkner, Chief 1999 $206,583 $10,000 50,000 --
Technology Officer 1998 25,000 -- 392,000 $283,940 (1)
1997 -- -- 6,720 (1)
Thomas Koshy, Chief 1999 $142,000 -- 285,000 --
Operating Officer 1998 -- 15,000 --
1997 -- -- --
Ed Davis, General 1999 $159,375 -- -- --
Counsel, Vice President 1998 56,250 -- 150,000 --
and Secretary 1997 -- -- -- --
David Morgenstein, 1999 $135,000 -- -- --
former Chief Operating 1998 72,500 -- 320,000 --
Officer 1997 60,208 -- 122,292 --
<FN>
(1) Represents payments made to Mr. Faulkner as a contractor prior to
employment with the company.
</FN>
</TABLE>
Option/SAR Grants Table
Option grants. The following table sets forth information with respect to stock
options granted during 1999 to the executive officers named in the summary
compensation table. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. We assume that:
* the fair market value of our common stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option; and
* the option is exercised and sold on the last day of its term for the
appreciated stock price.
These amounts are based on assumed rates of appreciation and do not represent
our estimate of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our common stock. We
have no SAR plans.
28
<PAGE>
<TABLE>
<CAPTION>
Potential realizable value at assumed
annual rates of stock price appreciation
Individual grants for option term ($)
------------------------- --------------------------------
Percent of
Number of total
securities options/SARs Exercise
underlying granted to or base
options/SARs employees in price Expiration 5% 10%
Name granted(#) fiscal year ($/sh) date ($) ($)
---- ---------- ----------- ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Richard Lang -- -- -- -- -- --
Thomas Koshy 76,000 5.84% $ 6.63 04/04 139,213 307,624
200,000 15.36% $ 6.25 08/04 345,352 763,138
Kyle Faulkner 50,000 3.84% $7.125 11/15/04 98,425 217,494
Edward Davis -- -- -- -- -- --
David Morganstein -- -- -- -- -- --
</TABLE>
Aggregated option/SAR exercises and fiscal year-end option/SAR value table
The following table sets forth information concerning option exercises and the
aggregate value of unexercised options for the year ended December 31, 1999,
held by each executive officer named in the summary compensation table above.
None of these officers exercised any stock options in 1999.
<TABLE>
<CAPTION>
Number of securities underlying Value of unexercised in-the-money
unexercised options at FY-end (#)(1) options at FY-end ($)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard Lang 1,060,417 321,750 6,940,815 1,850,063
Kyle Faulkner 159,708 282,292 1,094,543 1,445,707
Thomas Koshy 76,000 224,000 303,600 647,680
Edward Davis 90,600 59,400 552,089 361,966
David Morgenstein 337,892 104,400 2,249,109 600,300
</TABLE>
(1) The value realized on exercised options and the value of unexercised
in-the-money options at December 31, 1999 is based on a value of $9.25 per
share, the closing bid price of our common stock at December 31, 1999,
minus the per share exercise price, multiplied by the number of shares
underlying the options.
Employment Agreements
We have entered into employment agreements with Richard Lang, our Chairman,
President and Chief Executive Officer, Thomas Koshy, our Chief Operating
Officer, Edward H. Davis, our Vice President of Strategic Alliances, Secretary,
and General Counsel, and Kyle Faulkner, Chief Technology Officer. Each agreement
provides for an initial term of two years. The term of employment will be
automatically extended for one additional year at the end of the initial term,
unless sooner terminated by us for cause or on three months notice without
clause, or by the employee on 90 days notice. If the employee's employment is
terminated by us without cause, he is entitled to receive as severance the
continuation of his base salary at the then current rate through the later of
(i) one-third of the remaining period of the initial term, or (ii) a period of
six months from the effective date of termination. In addition to continuation
of base salary, one-third of the remaining unvested stock options granted to the
employee will vest on the effective date of termination. If the employee is
terminated during any extended term for any reason other than cause, he will be
entitled to receive continuation of base salary for a period of three months.
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<PAGE>
The employment agreement with Mr. Lang commenced on June 23, 1998 and
provides for a base salary of $20,000 per month. The employment agreement with
Mr. Koshy commenced on August 16, 1999 and provides for a base salary of $15,000
per month. The employment agreement with Mr. Davis commenced on July 30, 1998
and provides for a base salary of $14,583 per month. The employment agreement
with Mr. Faulkner commenced on November 13, 1998 and provides for a base salary
of $16,667 per month.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All of the transactions with related parties described in this section are at
terms at least as favorable to us as they would be had they been made with
unrelated third parties.
Transactions with Draysec Finance Limited (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management" and "Item 10. Recent Sales of
Unregistered Securities").
During 1997, Draysec Finance Limited, one of our principal stockholders,
invested $200,000 for the purchase of investment units, consisting of 200,000
shares of our preferred stock and warrants to purchase 200,000 shares of our
common stock at an exercise price of $1.00 per share. Our board of directors
extended the exercise date for these warrants to February 1999 and increased the
exercise price to $1.50 per share after January 1998. These warrants were
exercised in February 1999. Additionally, Draysec Finance Limited provided a
loan of $80,000 in consideration for a six month promissory note from us with an
interest rate of 10.5% and a warrant to purchase 16,000 shares of our common
stock at an exercise price of $1.00 per share.
In 1998, Draysec Finance provided us loans, in the aggregate principal amount of
$50,000, convertible into our common stock at $1.00 per share. These loans
included warrants to purchase 10,000 shares of our common stock at $1.00 per
share. Draysec Finance loaned us an additional $75,000 in 1998 in the form of a
line of credit at an interest rate equal to the prime rate plus 2% and received
a warrant to purchase 15,000 shares of our common stock at $2.36 per share.
Also in 1998, Draysec Finance converted $78,596 in debt and accrued interest
into 39,298 shares of our preferred stock and warrants to purchase 5,109 shares
of our common stock at $2.00 per share Draysec Finance also converted an
additional $137,054 of convertible debt and accrued interest into 137,054 shares
of our common stock at $1.00 per share.
In February 1999, Draysec Finance exercised the warrants issued in 1997 to
purchase 200,000 shares of our common stock for $300,000 cash.
In January 2000, 239,298 shares of preferred stock held by Draysec Finance were
converted to 239,298 shares of our common stock in connection with a private
placement financing. (See "Item 10. Recent Sales of Unregistered Securities")
Transactions with Mercer Management (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
During 1997, Mercer Management Inc., one of our principal stockholders,
converted 300,000 shares of our preferred stock into a like number of shares of
our common stock. Also in 1997, Mercer Management invested an additional
$200,000 for the purchase of investment units consisting of 200,000 shares of
our preferred stock and warrants to purchase 200,000 shares of our common stock
at an exercise price of $1.00 per share. Our board of directors extended the
exercise date for these warrants to February 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. These warrants were exercised
in February 1999.
In order to provide bridge financing for us during the last quarter of 1997,
Mercer Management loaned us $100,000 cash. In consideration for this loan, we
issued Mercer Management a six-month promissory note in the amount of $100,000
at an interest rate of 10.5%. Additional consideration was provided by us in the
form of a warrant to purchase 20,000 shares of our common stock at an exercise
price of $1.00 per share.
In 1998, Mercer Management loaned us an additional $525,000. The first $100,000
was in the form of a six-month promissory note in the amount of $100,000 at an
interest rate of 10.5%. This promissory note was convertible into shares of our
common stock at the conversion rate of $1.00 per share. An additional $200,000
was provided in exchange for a second promissory note. This note provided for an
interest rate of prime plus 2% payable monthly in arrears and had a due date of
July 15, 1998. Additional
30
<PAGE>
consideration for the note included 40,000 shares of our common stock and a
warrant to purchase an additional 40,000 shares of common stock at the exercise
price of $1.00 per share. The $200,000 note also provided for an automatic
extension through December 31, 1998 for additional consideration in the form of
40,000 shares of our common stock and a warrant to purchase an additional 40,000
shares of common stock at the exercise price of $1.00 per share. Also in 1998,
Mercer Management loaned us an additional $75,000 in the form of a line of
credit at prime plus 2% and was granted a warrant to purchase 15,000 shares of
our common stock at $2.31 per share. Subsequently in 1998, Mercer provided
additional credit of $150,000 at prime plus 2% and was granted a warrant to
purchase 30,000 shares of our common stock at $1.70 per share.
Also, during March 1998, Mercer Management elected to exercise its 200,000
warrants to purchase common stock pursuant to an offering by us to reduce the
exercise price of said warrants for the period from February 1998 to March 1998
to $.75 per share. As a result of the exercise of these warrants, we received
$150,000 from Mercer Management Inc., and Mercer Management was issued an
additional 200,000 shares of our common stock. In 1998, Mercer Management
converted $431,758 debt and accrued interest into 215,879 shares of our
preferred stock and 28,065 warrants to purchase common stock at $2.00 per share.
During 1999, we received $1,550,000 from Mercer Management in exchange for notes
payable convertible into our common stock, due in one year, and bearing interest
at 7.75%. The conversion rate for the notes was the lower of (1) $6.50, (2) 80%
of the average closing price of our publicly traded shares in the 20 trading
days immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement.
In connection with a private placement financing, in January, 2000 all of the
Mercer Management notes were converted into 387,500 shares of common stock at a
conversion rate of $4.00 per share and warrants to purchase 387500 shares of our
common stock at an exercise price of $5.00; and 415,879 shares of Preferred
Stock were converted to common stock.
(See "Item 10. Recent Sales of Unregistered Securities")
Transactions with Storie Partners LLP (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management", and "Item 10. Recent Sales of
Unregistered Securities").
In February 1996, Storie Partners LLP, one of our principal stockholders,
invested $700,000 for the purchase of investment units consisting of 700,000
shares of our preferred stock and warrants to purchase 700,000 shares of our
common stock at an exercise price of $1.00 per share. Our board of directors
extended the exercise date for these warrants to February 1999 and increased the
exercise price to $1.50 per share after January 1998.
In April 1997, Storie Partners exercised these warrants to purchase 400,000
shares of common stock for $400,000.
In 1998, Storie Partners 1,000,000 shares of our preferred stock, and warrants
to purchase 130,000 additional shares of our common stock at an exercise price
of $2.00 per share.
During 1999, we received $2,000,000 from Storie Partners in exchange for notes
payable convertible into our common stock, due in one year, and bearing interest
at 7.75%. The conversion rate for the notes was the lower of (1) $6.50, (2) 80%
of the average closing price of our publicly traded shares in the 20 trading
days immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement.
In connection with a private placement financing in January 2000 all of the
Storie Partners notes were converted into 500,000 shares of common stock at a
conversion rate of $4.00 per share and warrants to purchase shares of our common
stock at an exercise price of $5.00 per share; and 1,700,000 shares of preferred
stock held by Storie Partners were converted to common stock.(See "Item 10.
Recent Sales of Unregistered Securities")
Transactions with Mindful Partners LLP (See "Item 4. Security Ownership of
Certain Beneficial Owners and Management", and "Item 10. Recent Sales of
Unregistered Securities").
In 1996, Mindful Partners LLP, an affiliate of Stuart Rudick, one of our
principal stockholders, invested $300,000 for the purchase of investment units
consisting of 300,000 shares of our preferred stock and warrants to purchase
300,000 shares of our common stock at an exercise price of $1.00 per share.
Rudick Asset Management, another affiliate of Mr. Rudick received an additional
100,000 units and warrants to purchase 100,000 shares of common stock at an
exercise price of $1.00 per share as a finders' fee relating to the placement of
this offering. Additionally, Rudick Asset Management invested $75,000 for
investment units consisting of 75,000 shares
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<PAGE>
of preferred stock and warrants to purchase 75,000 shares of common stock at
$1.00 per share, issued in the name of Delaware Charter Guaranty Trust Company.
Our board of directors extended the exercise date for these warrants to February
1999 and increased the exercise price to $1.50 per share after January 1998.
In 1997, Mindful Partners purchased additional investment units consisting of
150,000 shares of preferred stock and warrants to purchase 150,000 shares of our
common stock at $1.00 per share for $150,000.
In 1998, Mindful Partners invested $500,000 for 250,000 shares of our preferred
stock, and warrants to purchase 32,500 additional shares of our common stock at
$2.00 per share.
In February 1999, Mindful Partners, Rudick Asset Management and Delaware Charter
Guaranty Trust Company exercised the warrants issued in 1996 to purchase
450,000, 100,000 and 75,000 shares of our common stock for $675,000, $150,000,
and $112,500 in cash, respectively.
In January 2000, 870,000 shares of preferred stock held by Mindful Partners and
Rudick Asset Management were converted into 870,000 shares of our common stock
in connection with a private placement financing. (See "Item 10. Recent Sales of
Unregistered Securities")
Transactions with Robert London (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In 1996, Robert London, one of our principal stockholders, invested $100,000 for
the purchase of investment units consisting of 100,000 shares of our preferred
stock and warrants to purchase 100,000 shares of our common stock at an exercise
price of $1.00 per share. Our board of directors extended the exercise date for
the Warrants to February 1999 and increased the exercise price to $1.50 per
share after January 1998.
In 1998, Mr. London invested $500,000 for 250,000 shares of our preferred stock,
and warrants to purchase 32,500 additional shares of our common stock at an
exercise price of $2.00 per share. Mr. London also provided us with a $225,000
loan convertible into shares of our common stock at $0.75 per share. This loan
together with accrued interest was converted into 318,555 shares of common stock
in October 1998. Mr. London later provided us with an additional $75,000 and
$150,000 in loans in the form of a line of credit at the prime rate plus 2%, and
warrants to purchase 15,000 and 30,000 shares of our common stock at $2.31 and
$2.15 per share, respectively. Later, Mr. London converted $232,864 in loans and
accrued interest into 116,432 shares of our preferred stock and warrants to
purchase 5,136 shares of our common stock at an exercise price of $2.00 per
share.
During 1999, we received $500,000 from Mr. London in exchange for promissory
notes convertible into our common stock, due in one year, and bearing interest
at 7.75%. The conversion rate for the notes was the lower of (1) $6.50, (2) 80%
of the average closing price of our publicly traded shares in the 20 trading
days immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement.
In connection with a private placement financing in January 2000, all of the
London notes were converted into 125,000 shares of common stock and warrants to
purchase 125,000 shares of our common stock at an exercise price of $5.00 per
share; and 366,432 shares of preferred stock held by London were converted into
366,432 shares of our common stock. (See "Item 10. Recent Sales of Unregistered
Securities")
Transactions with Richard Lang (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", "Item 6. Executive Compensation" and "Item
10. Recent Sales of Unregistered Securities").
On August 3, 1999, we acquired Timeshift-TV, Inc. in a stock-only transaction
from Richard Lang, our Chairman and CEO, Earl Mincer and Eric Walters, who are
employees of ours. Mr. Walters is Mr. Lang's brother in law. Mr. Lang and the
other parties were not employed by us at the time they formed Timeshift-TV. Our
board of directors unanimously approved our acquisition of Timeshift-TV.
Timeshift-TV holds assets, including intellectual property, in the area of
time-shifted real-time broadcasting, which we plan to integrate into our
advanced video and audio delivery solutions. We also plan to license the
Timeshift-TV intellectual property to other parties for various applications.
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<PAGE>
Transactions with Kyle Faulkner (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", "Item 6. Executive Compensation" and "Item
10. Recent Sales of Unregistered Securities").
Mr. Faulkner, our Chief Technology Officer, was paid fees through his consulting
company, DuoDesign, of $6,720 and $283,940 in 1997 and 1998, respectively, prior
to his employment with us.
In January 2000, Mr. Faulkner invested $250,000 for 62,500 shares of common
stock and 62,500 5-year warrants to purchase shares of common stock for $5.00
per share in connection with a private placement financing. (See "Item 10.
Recent Sales of Unregistered Securities")
Transactions with Thomas Koshy (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management"and "Item 6. Executive Compensation").
In January 2000, Mr. Koshy, our Chief Operating Officer, invested $40,000 for
10,000 shares of common stock and 10,000 5-year warrants to purchase shares of
common stock for $5.00 per share in connection with a private placement
financing. (See "Item 10. Recent Sales of Unregistered Securities")
Transactions with Doug Glen (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In January 2000, Mr. Glen, one of our directors, invested $100,000 for 25,000
shares of common stock and 25,000 5-year warrants to purchase shares of common
stock for $5.00 per share in connection with a private placement financing. (See
"Item 10. Recent Sales of Unregistered Securities").
Transactions with John Micek (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In January 2000, Mr. Micek, one of our directors, invested $25,000 for 6,250
shares of common stock and 6,250 5-year warrants to purchase shares of common
stock for $5.00 per share in connection with a private placement financing. (See
"Item 10. Recent Sales of Unregistered Securities").
In December 1999, we received $50,000 from Universal Assurance, of which Mr.
Micek is a principal, in exchange for notes payable convertible into our common
stock, due in one year, and bearing interest at 7.75%. The conversion rate for
the notes was the lower of (1) $6.50, (2) 80% of the average closing price of
our publicly traded shares in the 20 trading days immediately preceding the
closing of an ongoing private placement, or (3) the price agreed in that private
placement. The Universal notes were subsequently converted to common shares in
January.
Transactions with Joseph Barletta (See "Item 4. Security Ownership of Certain
Beneficial Owners and Management", and "Item 10. Recent Sales of Unregistered
Securities").
In January 2000, we received $100,000 from Independence Properties LLC, of which
Mr. Barletta, one of our directors, is a principal, in exchange for notes
payable convertible into our common stock, due in one year, and bearing interest
at 7.75%. The conversion rate for the notes was the lower of (1) $6.50, (2) 80%
of the average closing price of our publicly traded shares in the 20 trading
days immediately preceding the closing of an ongoing private placement, or (3)
the price agreed in that private placement. The notes were subsequently
converted to common shares at the end of January in connection with a private
placement financing. (See "Item 10. Recent Sales of Unregistered Securities").
ITEM 8. LEGAL PROCEEDINGS.
We have no material legal proceedings against us or in process nor are we aware
of any other legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse effect.
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<PAGE>
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the over-the-counter market and is quoted on the
NASD's OTC Bulletin Board under the symbol "IVDO". The following table sets
forth the closing high and low bid prices of the common stock for the periods
indicated. These prices are believed to be representative inter-dealer
quotations, without retail markup, markdown or commissions, and may not
represent prices at which actual transactions occurred.
Bid
--------------------
1997 High Low
------- -------
1st Quarter $ 2.03 $ 1.13
2nd Quarter $ 2.47 $ 1.50
3rd Quarter $ 2.63 $ 1.22
4th Quarter $ 1.94 $ 0.75
1998
1st Quarter $ 2.50 $ 0.75
2nd Quarter $ 4.22 $ 1.25
3rd Quarter $ 3.63 $ 1.91
4th Quarter $ 8.38 $ 2.00
1999
1st Quarter $ 1.88 $ 6.00
2nd Quarter $ 9.50 $ 5.88
3rd Quarter $ 9.688 $ 5.38
4th Quarter $ 9.25 $ 5.50
2000
1st Quarter $19.375 $17.125
The number of holders of record of our $.00001 par value Common Stock at March
31, 2000, was approximately 1,256.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The sales of unregistered securities discussed below were exempt from
registration in reliance on Section 4(2) and Regulation D, Rule 506 of the
Securities Act of 1933.
2000:
As of January 31, 2000 we sold 4,808,375 shares of common stock at a purchase
price of $4.00 per share, for an aggregate purchase price of $19.2 million. We
raised $13.9 million in cash in the offering, and the remaining $5.3 million was
conversion of notes payable. In addition to the common shares, purchasers also
received warrants to purchase up to an aggregate of 4,808,375 shares of our
common stock, at an exercise price of $5.00 per share. The warrants are
exercisable for a term of five years from the date of issuance.
Cash Purchases
Investor Amount Invested Common Shares Warrants
-------- ----------- --------- ---------
Special Situations Funds $ 4,000,000 1,000,000 1,000,000
Chelsey Capital 3,000,000 750,000 750,000
BayStar Capital 3,000,000 750,000 750,000
Ravinia Capital Ventures 2,374,000 593,500 593,500
Erik Franklin 400,000 100,000 100,000
Dorothy Lyddon 200,000 50,000 50,000
Kyle Faulkner 250,000 62,500 62,500
Doug Glen 100,000 25,000 25,000
Others (under $100,000) 574,500 143,625 143,625
----------- --------- ---------
Total Cash Purchases $13,898,500 3,474,625 3,474,625
=========== ========= =========
Conversion of Notes Payable
Notes
Investor Converted Common Shares Warrants
-------- ---------- --------- ---------
Storie Partners $2,000,000 500,000 500,000
Mercer Management 1,550,000 387,500 387,500
Reed Slatkin 520,000 130,000 130,000
Robert London 500,000 125,000 125,000
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Independence Properties LLC 100,000 25,000 25,000
---------- --------- ---------
Others (under $100,000) 665,000 166,250 166,250
---------- --------- ---------
Total Note Conversions $5,335,000 1,333,750 1,333,750
========== ========= =========
During January 2000, we received an additional $430,000 evidenced by notes
payable convertible into our common stock, due in one year. The conversion rate
was the lower of (1) $6.50, (2) 80% of the average closing price of our publicly
traded shares in the 20 trading days immediately preceding the closing of an
ongoing private placement, or (3) the price agreed in that private placement.
1999:
During the period July 1999 through December 31, 1999, we received $4,905,000
evidenced by notes payable convertible into our common stock, due in one year.
The conversion rate was the lower of (1) $6.50, (2) 80% of the average closing
price of our publicly traded shares in the 20 trading days immediately preceding
the closing of an ongoing private placement, or (3) the price agreed in that
private placement. (See Item 2. Financial Information - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources, June 30, 1999 vs. December 31, 1998" and "Item 7. Certain
Relationships and Related Transactions").
On August 3, 1999, we issued 200,000 shares of common stock in exchange for all
of the outstanding stock of Timeshift-TV. We have the option to repurchase
100,000 shares for $10.00 upon the occurrence of certain events. (See "Item 7.
Certain Relationships and Related Transactions").
In April, 1999 an employee exercised options to purchase 5,000 and 1,800 shares
of our common stock at $0.88 and $1.06 per share, respectively, resulting in
$6,300 proceeds to us.
A holder of Series A, (formerly Series F) convertible preferred stock converted
5,000 shares of that stock into 5,000 shares of common stock in February, 1999.
(See "Item 7. Certain Relationships and Related Transactions").
From February 10 to February 26, 1999, the holders of our Series A (formerly
Series F) convertible preferred stock exercised warrants issued with that stock
to purchase 1,025,000 shares of our common stock at $1.50 per share, resulting
in cash proceeds of $1,537,500.
In February, 1999, a contractor, Matt Rothman, received 499 shares of common
stock for services resulting in $4,054 of compensation expense to us.
Also in February, 1999, Sales Consultants of Columbia, MD received options to
purchase 36,000 shares of common stock at $9.72 per share in exchange for
services, resulting in compensation expense of $160,588 to us.
In January, 1999, in a series of cashless exercises Imperial Bank exercised
200,000 warrants to purchase 180,488 investment units of Series "A" convertible
preferred stock at $1.00 a share. Imperial Bank also exercised 50,000 and 31,250
warrants to purchase 45,152 and 26,122 shares of common stock at prices of $1.00
and $1.60 per share respectively.
In January, 1999, two contractors, subsequently hired as employees received
options to purchase 621 and 9,000 shares of common stock at prices of $2.19 and
$2.91 per share, respectively in exchange for services rendered, resulting in
compensation expense of $26,448 to us.
1998:
As of December 31, 1998, we sold 2,476,609 shares of Series B convertible
preferred stock ("Series B"), at a purchase price of $2.00 per share, for an
aggregate purchase price of $4.95 million. IVT raised $4.21 million in cash in
the offering, and the remaining $743,000 was paid by cancellation of debt. In
addition to the Series B, we also issued in the offering warrants to purchase up
to an aggregate of 312,960 shares of our common stock, at an exercise price of
$2.00 per share. The warrants are exercisable for a term of five years from the
date of issuance.
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<PAGE>
Series B - Cash Purchases
Preferred Warrant
Investor Amount Invested Shares Shares
-------- ---------- --------- ---------
Storie Partners $2,000,000 1,000,000 130,000
John Lyddon 310,000 155,000 20,150
Robert London 500,000 250,000 32,500
Mindful Partners 500,000 250,000 32,500
Reed Slatkin 500,000 250,000 32,500
Dorothy Lyddon 100,000 50,000 6,500
Frank Kramer 100,000 50,000 6,500
Keith Koch 100,000 50,000 6,500
Universal Warranty Corp. 100,000 50,000 6,500
---------- --------- ---------
TOTAL $4,210,000 2,105,000 273,650
========== ========= =========
Series B - Debt Converted
Preferred Warrant
Investor Debt Converted Shares Shares
-------- --------- --------- ---------
Mercer Management $ 431,758 215,879 28,065
Robert London 232,864 116,432 15,136
Draysec Finance Ltd. 78,596 39,298 5,109
--------- --------- ---------
TOTAL $ 743,218 371,609 48,310
========= ========= =========
In 1998, Mercer Management Inc. loaned us $100,000 in exchange for a six-month
promissory note bearing at interest 10.5%. This promissory note provided that
Mercer Management a right of conversion at the conversion rate of $1.00 per
share.
Also in 1998, David Morgenstein, our former Chief Operating Officer and Mercer
Management provided funds of $300,000 and $200,000, respectively, in exchange
for promissory notes. These funds were used to retire a line of credit with
Imperial Bank. These notes provided for interest at a rate of prime plus 2%
payable monthly in arrears and had a due date of July 15, 1998. Additional
consideration for the notes included 60,000 and 40,000 shares, respectively, of
the Company's common stock and warrants to purchase an additional 60,000 and
40,000 shares, respectively, of common stock at the exercise price of $1.00 per
share. The $500,000 in notes also provided for automatic extensions through
December 31, 1998 for additional consideration in the form of 60,000 and 40,000
shares, respectively of our common stock and warrants to purchase additional
60,000 and 40,000 shares, respectively, of Common Stock at the exercise price of
$1.00 per share. (See "Item 7. Certain Relationships and Related Transactions").
Also during March 1998, Mercer Management Inc. elected to exercise its 200,000
warrants to purchase common stock associated with Series F (renamed Series A)
convertible preferred stock, pursuant to an offering by us to reduce the
exercise price of those warrants for the period from February 14, 1998 to March
15, 1998 to $0.75 per share. As a result of the exercise of these warrants, we
received $150,000 from Mercer Management Inc., and Mercer Management was issued
an additional 200,000 shares of common stock of the Company.
1997:
During 1997, Mercer Management, Mindful Partners and Draysec Finance Limited
invested an additional $550,000 for the purchase of 550,000 investment units
consisting of Series F (renamed Series A) Convertible Preferred Stock and
550,000 warrants to purchase common stock of our company at $1.00 per share.
Additionally, Rudick Asset Management received 100,000 units and 100,000
warrants to purchase our common stock at $1.00 per share as a finders' fee. (See
"Item 7. Certain Relationships and Related Transactions").
During 1997, Draysec Finance Limited invested $200,000 for the purchase of
200,000 investment units, consisting of Series F (renamed to Series A)
convertible preferred stock and warrants to purchase 200,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F Warrants to February 26, 1999 and increased the exercise
price to
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$1.50 per share after January 26, 1998. Additionally, Draysec Finance Limited
provided a loan of $80,000 in consideration for a six month promissory note from
us with an interest rate of 10.5% and a warrant to purchase 16,000 shares of our
common stock at an exercise price of one dollar per share.
During 1997, Mercer Management Inc. converted its 300,000 shares of Series E
Convertible Preferred stock into shares of our Common Stock at the conversion
rate of one share of preferred stock to one share of common stock.
In order to provide bridge financing for us during the last quarter of 1997,
Mercer Management, Inc. loaned us $100,000 cash. In consideration for this loan,
we issued Mercer Management Inc. a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. Additional consideration was provided by
us in the form of a warrant to purchase 20,000 shares of our common stock at the
exercise price of $1.00 per share.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Our certificate of incorporation authorizes the issuance of up to 100,000,000
shares of common stock, par value $0.00001 per share. As of March 31, 2000,
18,953,065 shares of common stock were outstanding.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock holders of
common stock will be entitled to receive ratably any dividends that may be
declared from time to time by the board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, holders of common stock will be entitled to share in our assets
remaining after the payment of liabilities and the satisfaction of any
liquidation preference granted to the holders of any outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable. The rights, preferences and privileges
of the holders of common stock are subject to, and may be adversely affected by
the rights of the holders of shares of any series of preferred stock that we may
designate in the future.
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition operating results, capital requirements and other factors
the board of directors deems relevant. At December 31, 1999, we had an
accumulated deficit of approximately $37.4 million and, until this deficit is
eliminated, will be prohibited from paying dividends except out of net profits.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law (the"DGCL"),
our Certificate of Incorporation provides that any person who was or is or who
had agreed to become a director or officer of IVT or who had agreed at the
request of IVT to serve as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified by
IVT to the extent permitted by the DGCL. Such Certificate of Incorporation also
provides that no amendment or repeal of such Certificate of Incorporation and
the relevant provisions of the DGCL shall apply to or have any effect on the
right to indemnification permitted or authorized thereunder.
We maintain insurance on behalf of any person who is a director or officer
against any loss arising from any claim asserted against him and incurred by him
in any such capacity, subject to certain exclusions.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Auditors and the accompanying financial statements and notes
to the financial statements are hereto set forth on pages F-1 through F-16.
Financial Statement schedules are not applicable and therefore are omitted.
37
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 17, 1999 KPMG LLP, who was previously engaged to audit our financial
statements for the years ended December 31, 1997 and 1998 as our independent
accountants resigned. During 1998 and 1999 and through the date of resignation,
there were no disagreements between us and KPMG LLP on any matter of accounting
principle or practices, financial statement disclosure or auditing scope or
procedures which if not resolved to their satisfaction would have caused them to
make reference to the subject matter of the disagreement in connection with
their report. The audit reports of KPMG LLP did not contain any adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainly,
audit scope or accounting principles, except as follows: KPMG LLP's independent
auditors' report on our consolidated financial statements as of December 31,
1998 and 1997 and for the years then ended, contained a separate paragraph
stating that "the Company has suffered recurring losses from operations and has
negative cash flow from operating activities, which raise substantial doubt
about its ability to continue as a going concern." KPMG LLP's independent
auditors' report on our consolidated financial statements as of December 31,
1997 and 1996 and for the years then ended contained a separate paragraph
stating that "the Company has suffered recurring losses from operations and has
a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern." The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. KPMG advised
our Audit Committee in May 1998 regarding certain matters involving internal
control that it considered to be reportable conditions under standards
established by the American Institute of Certified Public Accountants. Such
matters involved the inappropriate recognition of revenue during the first
quarter of 1997 and an alleged misappropriation of funds.
On January 24, 2000 BDO Seidman LLP was engaged as independent accountants to
audit our financial statements. BDO Seidman LLP had not been consulted on any
application of accounting principles, audit opinion or matters which were
previously the subject of disagreements or a reportable event.
We have agreed to indemnify and hold KPMG LLP ("KPMG") harmless against and from
any and all legal costs and expenses incurred by KPMG in successful defense of
any legal action or proceeding that arises as a result of KPMG's consent to the
inclusion of its audit report on our past financial statements included in this
registration statement.
38
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
Independent Auditors' Report (BDO Seidman LLP) F-2
Independent Auditors' Report (KPMG LLP) F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Unaudited Financial Statements for the Quarter ended March 31, 2000 F-17
(b) Exhibits:
EXHIBIT 2: Plan of acquisition, reorganization, arrangement, liquidation, or
succession
2.1* State of Arizona, Articles of Merger of Video Press, Inc. into
Explore Technology, dated 12/28/90; Agreement and Plan of Merger
dated 8/29/93
2.2* Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992
2.3* Certificate of Merger of Time Shift TV, Inc. into IVT Delaware,
Inc. dated July 26, 1999
2.4* Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August
3, 1999
EXHIBIT 3: Articles of Incorporation, Bylaws
3.1.1* Certificate of Incorporation of Catalina Capital Corp. dated
April 27, 1990.
3.1.2* Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992.
3.1.3* Amended and Restated Certificate of Incorporation dated January
27, 2000.
3.2.1* Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment
No. 1 dated April 5, 1993.
3.3.2* Amended and Restated Bylaws.
3.3.3* Certificate of Status Foreign Corporation dated March 12, 1993.
EXHIBIT 4: Instruments defining rights of holders, including indentures
4.1* Prospectus for Catalina Capital Corp. dated October 17, 1990.
4.2* SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990.
4.3* Amendment No. 1 to SEC Form S-18 for Catalina Capital Corp. dated
August 10, 1990.
4.4* Amendment No. 2 to SEC Form S-18 for Catalina Capital Corp. dated
September 28, 1990.
4.5* Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992.
4.6* Certificate of Designation for Catalina Capital Corp. of Series
B-1, B-2, B-3 and B-4 Convertible Preferred Stock, dated August
4, 1992.
4.7* Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992.
39
<PAGE>
4.8* Certificate of Designation for Instant Video Technologies, Inc.
of Series D Convertible Preferred Stock, dated December 23, 1992.
4.9* Certificate of Designation for Instant Video Technologies, Inc.
of Series E Convertible Preferred Stock, dated May 9, 1995.
4.10* Certificate of Designation for Instant Video Technologies, Inc.
of Series F Convertible Preferred Stock, dated February 13, 1996.
4.11* Certificate of Designation of Instant Video Technologies, Inc.
filing Certificate of Elimination of Series A Preferred Stock,
Series B-1, B-2, B-3, B-4 Convertible Preferred Stock, Series C
Preferred Stock, Series D Convertible Preferred Stock and Series
E Convertible Preferred Stock dated November 6, 1998.
4.12* Amended Certificate of Designation, Statement of Establishing
Series F Convertible Preferred Stock AND Certificate of
Designation, Statement Establishing Series B Convertible
Preferred Stock filed January 1, 1999.
4.13* Stock Purchase Agreement (Series B Stock) with Exhibit A (Warrant
to Purchase Shares of Common Stock), Exhibit B (Certificate of
Designation), Exhibit C (Registration Rights Agreement), and
Exhibit D (Voting and Right of First Refusal).
4.14* Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996.
4.15* Securities Purchase Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.16* Registration Rights Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.17* Form of Warrant to purchase shares of common stock issued to
certain investors on January 27, 2000.
4.18* Form of Lock-up Agreement entered into between the registrant and
each of certain officers, directors and principal shareholders in
January 2000.
EXHIBIT 10: Material Contracts:
10.1* RMSI Reseller License Agreement
10.2* RMSI End-User Software License Agreement
10.3* I-Stream TV Reseller Agreement
10.4* Clover Technologies, Inc. Reseller license Agreement
10.5* Service Agreement with The EMS Group
10.6* Lease at 500 Sansome Street, San Francisco, CA with ten (10)
Amendments
10.7* Lease for sales office in Livonia, Michigan
10.8* Lease for sales office in Golden, Colorado
10.9* Lease for sales office in Alexandria, Virginia
10.10* Lease for sales office in Mount Holly, New Jersey
40
<PAGE>
10.11* Pat Meir Assoc. contract
Employment Agreements/Offer Letters:
10.12* Richard Lang
10.13* Thomas Koshy
10.14* Edward Davis
10.15* Richard Jones
10.16* Kyle Faulkner
10.17* David Morgenstein
10.18* Frank Schwartz
10.19* June White
EXHIBIT 27 FINANCIAL DATA SCHEDULES
27.1 For the Quarter ended March 31, 2000
----------
* previously filed.
41
<PAGE>
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.
BURST.COM, INC.
Dated: June 5, 2000 By /s/ RICHARD LANG
-------------------------------------
Chairman and
Chief Executive Officer
42
<PAGE>
BURST.COM, INC.
(FORMERLY INSTANT VIDEO TECHNOLOGIES, INC.)
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997, 1998 and 1999
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Burst.com, Inc. (formerly Instant Video Technologies, Inc.):
We have audited the accompanying consolidated balance sheet of Burst.com, Inc.
(formerly Instant Video Technologies, Inc.) and subsidiaries as of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Burst.com, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
San Francisco, California
March 24, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Instant Video Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Instant Video
Technologies, Inc. and subsidiary (the Company) as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the two-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for the each of the years in the two-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has negative cash flows from operating activities that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
San Francisco, California
March 19, 1999
F-2
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
December 31, 1999
---------------------------- (Proforma
1998 1999 Note 11)
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,212,141 $ 302,979 $13,585,039
Prepaid expenses 26,053 63,893 63,893
Receivables - Series B Convertible
Preferred Stock (Note 4) 810,000 -- --
------------ ------------ -----------
Total current assets 3,048,194 366,872 13,648,932
Property and equipment, net (Note 2) 184,616 725,412 725,412
Other assets 16,812 36,457 36,457
------------ ------------ -----------
$ 3,249,622 $ 1,128,741 $14,410,801
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable (Notes 3 and 11) $ 22,736 $ 4,834,847 $ --
Accounts payable 252,044 1,384,289 1,384,289
Accrued expenses (Note 5) 181,484 208,374 208,374
Accrued interest (Note 3) -- 114,277 44,124
Deferred revenue -- 51,600 51,600
------------ ------------ -----------
Total liabilities 456,264 6,593,387 1,688,387
------------ ------------ -----------
Commitments, contingencies and subsequent
events (Notes 6, 8, 10 and 11)
Stockholders' equity/deficit (Notes 4 and 11):
Convertible Preferred stock, $.00001 par value,
20,000,000 shares authorized:
Series A, 2,025,000 and 2,020,000
shares issued and outstanding
liquidation preference of $2,025,000
and $2,020,000 (proforma issued and
outstanding, zero) 20 20 --
Series B, 2,476,609 shares issued and
outstanding, Liquidation preference of
$18,574,568 and $20,803,516
(proforma issued and outstanding, zero) 25 25 --
Common stock, $.00001 par value, 100,000,000
shares authorized; 7,940,966 and 9,535,527
shares issued and outstanding (proforma
issued and outstanding, 18,840,511 shares) 79 95 188
Additional paid in capital 27,251,399 31,971,108 50,158,120
Accumulated deficit (24,458,165) (37,435,894) (37,435,894)
------------ ------------ -----------
Stockholders' equity (deficit) 2,793,358 (5,464,646) 12,722,414
------------ ------------ -----------
$ 3,249,622 $ 1,128,741 $14,410,801
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenue (Note 8) $ 247,879 $ 15,000 $ --
Cost of revenues 230,210 -- --
----------- ------------ ------------
17,669 15,000 --
----------- ------------ ------------
Costs and expenses:
Research and development, including
$1,330,000 in purchased research
and development costs
paid to a related party in 1999 (Note 4) 189,719 800,567 4,076,732
Sales and marketing 408,369 830,998 4,185,517
General and administrative 1,348,218 3,047,302 3,247,370
----------- ------------ ------------
Total costs and expenses 1,946,306 4,678,867 11,509,619
----------- ------------ ------------
Loss from operations (1,928,637) (4,663,867) (11,509,619)
----------- ------------ ------------
Other income (expense):
Interest, net (139,013) (2,252,553) (1,468,110)
Other income, net 5,277 -- --
----------- ------------ ------------
Total other expense (133,736) (2,252,553) (1,468,110)
----------- ------------ ------------
Net loss $(2,062,373) $ (6,916,420) $(12,977,729)
=========== ============ ============
Net loss applicable to Common Stockholders:
Net Loss $(2,062,373) $ (6,916,420) $(12,977,729)
Beneficial conversion feature of
Series B Preferred Stock -- (8,762,425) --
----------- ------------ ------------
Net loss applicable to Common Stockholders $(2,062,373) $(15,678,845) $(12,977,729)
=========== ============ ============
Basic and diluted net loss per common share $ (0.39) $ (2.35) $ (1.42)
=========== ============ ============
Weighted Average Shares used in per share computation 5,259,304 6,658,738 9,121,647
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<CAPTION>
(Notes 3, 4 and 11) 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 warrants 400,000 4 -- -- 399,996 -- 400,000
Value assigned to warrants
upon issuance of debt -- -- -- -- 69,000 -- 69,000
Conversion of preferred stock
to common stock 500,000 5 (500,000) (5) -- -- --
Net loss -- -- -- -- -- (2,062,373) (2,062,373)
--------- ------ ---------- ------ ----------- ------------ ------------
Balance at December 31, 1997 5,703,553 59 2,125,000 22 7,795,972 (8,779,320) (983,267)
Series B Preferred Stock issuances -- -- 2,105,000 21 3,873,979 -- 3,874,000
Warrants issued in connection
with the issuance of Series B
Preferred Stock -- -- -- -- 336,000 -- 336,000
Common stock issuance 14,921 -- -- -- 10,000 -- 10,000
Exercise of stock options 139,501 1 -- -- 1,138,951 -- 1,138,952
Exercise of warrants 700,000 6 -- -- 749,994 -- 750,000
Conversion of debt and
accrued interest 1,082,991 10 371,609 3 1,736,983 -- 1,736,996
Warrants issued upon conversion of
convertible debt -- -- -- -- 172,000 -- 172,000
Value assigned to warrants, stock
grants, and beneficial conversion
feature 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
Exercise of stock options 111,800 1 -- -- 112,549 -- 112,550
Exercise of warrants 1,277,262 13 -- -- 1,537,487 -- 1,537,500
Value assigned to warrants and
beneficial conversion feature upon
issuance of debt -- -- -- -- 1,467,146 -- 1,467,146
Stock issued for services performed 499 -- -- -- 4,054 -- 4,054
Stock options issued for services
performed -- -- -- -- 268,475 -- 268,475
Conversion of Series A Preferred Stock
to common stock 5,000 -- (5,000) -- -- -- --
Purchased research and development
costs 200,000 2 -- -- 1,329,998 -- 1,330,000
Net loss -- -- -- -- -- (12,977,729) (12,977,729)
--------- ------ ---------- ------ ----------- ------------ ------------
Balance at December 31, 1999 9,535,527 $ 95 4,496,609 $ 45 $31,971,108 $ 37,435,894) $ (5,464,646)
========= ====== ========== ====== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
BURST.COM, INC.AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,062,373) $(6,916,420) $(12,977,729)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 92,176 58,531 209,198
Loss on disposal of equipment 5,275 5,133 --
Write off patent costs and other assets 95,735 -- --
Non-cash interest expense 69,000 2,228,940 1,396,993
Stock options issued for services
performed -- 727,726 272,529
Compensation from cashless exercise
of stock options -- 1,137,499 --
Purchased research and development -- -- 1,330,000
Payment of legal fees by issuance of
note payable -- -- 25,000
Changes in operating assets and liabilities:
Accounts receivable 1,421 -- --
Costs and estimated earnings in excess of
billings on uncompleted contracts 136,400 -- --
Prepaid expenses 6,982 5,407 (37,840)
Other assets 35,101 757 (19,645)
Accounts payable (94,237) 218,018 1,132,245
Accrued expenses (59,218) 88,702 26,890
Accrued interest 13,231 (43,044) 114,277
Deferred revenue -- -- 51,600
----------- ----------- ------------
Net cash used in operating activities (1,760,507) (2,488,751) (8,476,482)
Cash flows from investing activities:
Purchases of property and equipment (85,367) (162,669) (749,994)
----------- ----------- ------------
Cash flows from financing activities:
Payment of receivables from Series B
Convertible Stock offering -- -- 810,000
Proceeds from sale of stock 550,000 3,410,000 --
Proceeds from exercise of warrants
and stock options 400,000 751,453 1,650,050
Proceeds from debt 1,054,210 1,572,736 4,880,000
Repayment of debt (346,398) (891,179) (22,736)
----------- ----------- ------------
Net cash provided by financing activities 1,657,812 4,843,010 7,317,314
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents (188,062) 2,191,590 (1,909,162)
Cash and cash equivalents, beginning of year 208,613 20,551 2,212,141
----------- ----------- ------------
Cash and cash equivalents, end of year $ 20,551 $ 2,212,141 $ 302,979
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 800 $ 800 $ 800
=========== =========== ============
Cash paid for interest $ 56,782 $ 65,935 $ 7,374
=========== =========== ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In 1999, six notes payable issued in exchange for $335,000 were issued with
front end warrants resulting in a discount to notes payable of $70,153.
In 1999, 5,000 shares of Series A (formerly Series F) Preferred Stock was
converted into 5,000 shares of common stock.
In 1998 Series B Convertible Stock was sold for $810,000 not collected until
January 1999.
In 1998, debt and accrued interest of $1,736,996 was converted to Series B
Preferred Stock and common stock.
In 1998, 100,000 shares of Series A Convertible Preferred Stock was converted to
100,000 shares of common stock.
In 1997, 500,000 shares of Series E Preferred Stock was converted to 500,000
shares of Common Stock.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
(formerly Instant Video Technologies, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF NAME
On January 27, 2000 the Company changed its name from Instant Video
Technologies, Inc. to Burst.com, Inc.
DESCRIPTION OF BUSINESS
Burst.com, Inc., formerly 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.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Explore Technology, Inc. and
Timeshift-TV. All significant intercompany transactions and accounts have
been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts and other highly liquid
investments with an original maturity of three months or less.
REVENUE RECOGNITION
In 1997, the Company primarily derived its revenues from custom software
license fees and professional services. License fees and services were
recognized as revenue ratably over the license or service period. The
Company's revenue in 1998 consisted of one, non-recurring sale of test
software that was recognized upon delivery.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) No. 97-2, which
provided revised guidance for recognizing revenue on certain software
transactions. No revenue is recognized until evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collection is probable. Adoption of the new SOP had no effect on
recognition of revenue, results of operations or financial position.
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.
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. See note 4 for certain in-process research
and development purchased in 1999.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company incurred
$582,700 of advertising expense in 1999 and none in 1998 and 1997.
F-7
<PAGE>
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 management determines 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 table sets forth the computation of basic and diluted net
loss per shared for the periods indicated:
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
Numerator:
Net loss applicable to
common shareholders $(2,062,373) $(15,678,845) $(12,977,729)
Denominator:
Weighted average shares 5,259,304 6,658,738 9,121,647
Net loss per share:
Basic and diluted $ (0.39) $ (2.35) $ (1.42)
=========== ============ ============
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.
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- ---------- ----------
Convertible Preferred 2,125,000 4,501,609 4,496,609
Options 2,538,630 6,289,263 6,925,863
Warrants 1,961,000 2,010,210 905,384
Convertible debt 303,206 -- --
--------- ---------- ----------
Total 6,927,836 12,801,082 12,327,856
========= ========== ==========
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.
F-8
<PAGE>
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation plans for employees
using the intrinsic value method as described in Accounting Principles
Board Opinion (APB) No. 25 "Stock Based Compensation" as permitted by
Statement of the Financial Accounting Standards Board (SFAS) No. 123
"Accounting for Stock-Based Compensation." 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. The Company's most significant estimates
are those related to the valuation of stock, stock options and warrants in
connection with equity and financing transactions.
COMPREHENSIVE INCOME
The Company has no component of comprehensive income other than its
reported amounts of net loss applicable to holders of common stock.
RECLASSIFICATIONS
Certain items have been reclassified to conform to current year
presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
----------------------
1998 1999
--------- ---------
Computer equipment $ 192,816 $ 671,870
Furniture 18,627 55,666
Office equipment 4,459 7,867
Software 22,016 95,724
Trade show booth -- 92,637
Leasehold improvements 8,270 72,417
--------- ---------
246,188 996,181
Less accumulated depreciation (61,572) (270,769)
--------- ---------
$ 184,616 $ 725,412
========= =========
(3) DEBT
December 31,
------------------------
1998 1999
---------- -----------
NOTES PAYABLE
7.75% notes payable to Storie Partners, $ -- $ 2,000,000
interest and principal due in varying
amounts July through October, 2000
7.75% notes payable to Mercer Management, -- 1,350,000
Inc., interest and principal due in
varying amounts September through
December, 2000
7.75% note payable to Reed Slatkin, -- 520,000
interest and principal due July, 2000
7.75% note payable to Robert S. London, -- 500,000
interest and principal due July, 2000
7.75% note payable to Don Renkie Investment -- 110,000
Group, interest and
F-9
<PAGE>
principal due December, 2000 (*)
7.75% note payable to Shirley Reynolds Rock, -- 100,000
interest and principal due September, 2000
7.75% note payable to Dana Reynolds Rock, -- 100,000
interest and principal due September, 2000
7.75% note payable to Frank Kramer, interest -- 75,000
and principal due December, 2000 (*)
7.75% note payable to Universal Assurors -- 50,000
Agency, Inc., interest and principal due
April, 2000 (*)
7.75% note payable to Keith Koch, interest -- 50,000
and principal due December, 2000 (*)
7.75% note payable to Robert Walter, interest -- 25,000
and principal due December, 2000 (*)
7.75% note payable to Bay Venture Counsel, -- 25,000
interest and principal due December, 2000 (*)
Other 22,736 --
---------- -----------
22,736 4,905,000
Less unamortized original issue discount -- (70,153)
---------- -----------
$ 22,736 $ 4,834,847
========== ===========
All of the notes issued during 1999 are convertible into common stock (see
Note 4) at a price which shall be the lower of: (1) $6.50, (2) 80% of the
average closing price of the Company's publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private
placement, or (3) the price agreed in that private placement. Accordingly,
interest expense of $1,396,993 has been recorded for the beneficial
conversion feature of these notes. In addition six (*) of the notes payable
issued in exchange for $335,000 were issued with 20,936 warrants to
purchase common stock at $5 per share, resulting in a discount to notes
payable of $70,153 based on the fair value of the warrants issued. All
notes outstanding at December 31, 1999 were converted into common stock in
January 2000 (see Note 11).
During 1998, the Company issued 10-1/2% notes totaling $1,550,000 plus
accrued interest. Certain of these notes contained beneficial conversion
features allowing immediate conversion to common and Series B Convertible
Preferred Stock (Series B Preferred Stock) at below-market rates. Similar
beneficial conversion features were later added to the remaining notes.
Additionally, 200,000 shares of common stock, plus warrants to purchase
335,000 shares of common stock at $1.00 to $2.36 per share, were granted to
various noteholders. Accordingly, $1,947,400 was charged to interest
expense for the beneficial conversion features and the fair value of the
stock and warrants issued, calculated on the Black-Scholes option pricing
model with the following weighted average assumptions: volatility of 53%,
expected dividend yield 0%, risk free interest rate of 5.5%, and an
expected lives of 2.5 to 3.0 years.
During 1998, the 10-1/2% notes plus accrued interest of $164,200 were
converted into 1,082,991 and 371,609 shares of common stock and Series B
Preferred Stock, respectively (see Note 4). In connection with this
conversion, the noteholders received warrants to purchase 48,310 shares of
common stock at $2.00 per share, expiring in December 2001. Accordingly,
the resulting $172,000 value of the warrants was charged to interest
expense, calculated on the Black-Scholes option pricing model with the
following weighted average assumptions: volatility of 134%, expected
dividend yield 0%, risk free interest rate of 4.61%, and an expected life
of 2.0 years.
(4) EQUITY
Convertible Preferred Stock (see also Common Stock below)
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 $1,475,000 in
1996 and $550,000 in 1997 of Series F Convertible Preferred Stock and
warrants to purchase 2,025,000 shares of common stock of the Company at $1
per share. In 1998, Series F was renamed Series A Convertible Preferred
Stock (Series A Preferred Stock).
F-10
<PAGE>
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 new finance offerings for a limited
period of time.
During 1998, when the market prices of common stock ranged from $3.19 to
$8.44 per share, the Company issued 2,105,000 shares of $0.01 par value
Series B Preferred Stock, with warrants to purchase 321,960 shares of the
Company's common stock at $2.00 per share. As a result, the Company
recorded a charge to accumulated deficit of $8,762,425 for this beneficial
conversion feature. The Company received cash proceeds of $4,210,000. Out
of the total cash proceeds, $810,000 was collected subsequent to December
31, 1998 at various dates between January 4 and January 8, 1999 and thus
was recorded as a receivable as of December 31, 1998. The issued preferred
stock can be converted into shares of common stock on a one for one basis.
The preferred stock agreements provide for the holders of preferred stock
to participate in dividends as and if 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.
Common Stock
During 1998, $72,300, $488,700 and $375,000 of convertible debt (see Note
3) and accrued interest of $56,800 were converted to common stock at
conversion prices of $2.00, $1.00, and $0.75 per share, respectively.
Another $725,000 of convertible debt and accrued interest of $19,200 was
converted to Series B Preferred Stock at $2.00 per share. In connection
with the conversions to Series B Preferred Stock, the Company granted the
noteholders 48,310 warrants to purchase common stock at $2.00 per share
(see Note 3).
During 1999 the Company issued 499 shares of common stock to a contractor
in lieu of services performed. An expense of $4,054 was recorded as sales
and marketing expense, based on the fair value of the shares issued.
During 1999 the Company acquired certain intellectual property owned by
Timeshift-TV Inc. for 200,000 shares of common stock valued at $6.65 per
share, which approximated the trading value of the Company's Stock on the
closing date, for a total purchase price of $1,330,000. The Company
allocated the entire purchase price to in process research and development,
which had not yet reached technological feasibility, and accordingly,
recorded $1,330,000 of expense in connection with this acquisition.
Timeshift-TV Inc, an inactive corporation which owned patented rights
sought by the Company, was owned at the time of purchase by the Company's
president and two of the Company's management employees.
Warrants
At December 31, 1999, warrants are outstanding as follows:
Warrants issued upon 1998 issuance of convertible debt,
$2.00 per share 382,000
Warrants issued upon 1998 conversion of convertible debt
to Series B Preferred Stock, $2.00 per share 48,310
Warrants issued upon 1998 sale of Series B Preferred Stock,
$2.00 per share 273,650
Warrants issued upon 1999 conversion of Series A Preferred
Stock to Common stock, $1.50 per share 180,488
Warrants issued upon 1999 issuance of convertible debt,
$5.00 per share 20,936
-------
905,384
=======
During 1999 the Company issued debt of $4,905,000, in the form of notes
payable, containing a beneficial conversion feature which resulted in the
Company recording an interest expense of $1,396,993 (see Note 3). Certain
of these notes were issued
F-11
<PAGE>
with warrants covering 20,936 shares of common stock with a strike price of
$5.00, expiring in five years. This resulted in an additional expense to
the Company of $70,153 based on the fair value of the warrants issued,
calculated on the Black-Scholes option pricing model with the following
weighted average assumptions: volatility of 117%, expected dividend yield
0%, risk free interst rate of 6.10%, and an expected life of 2.5 year.
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.
On August 23, 1999, the Board of Directors adopted the 1999 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 3,000,000 shares have been reserved for
issuance under the plan.
During 1998, the Company issued stock options in lieu of cash for services
performed, covering approximately 550,000 shares of the Company's common
stock at exercise prices ranging from $1.00 to $3.50 per share, expiring
between September 2000 and December 2003. $727,726 was recorded as a
general and administrative expense based on the fair value of the stock
options issued. The per share weighted average fair value of stock options
granted during 1998 was $1.73, calculated on the Black-Scholes option
pricing model with the following weighted average assumptions: volatility
of 136%, expected dividend yield of 0%, risk free interest rate of 5.05%,
and an expected life of 1.5 years.
During 1999, the Company issued stock options in lieu of cash for services
performed, covering 120,621 shares of the Company's common stock at
exercise prices ranging from $2.19 to $9.72 per share, expiring between
February 2000 and December 2004. $105,805 was recorded as a general and
administrative expense, $160,588 was recorded as a sales and marketing
expense and $2,082 was recorded as a research and development expense based
on the fair value of the stock options issued. The per share weighted
average fair value of stock options granted during 1999 was $5.23
calculated on the Black-Scholes option pricing model with the following
weighted average assumptions: volatility of 117%, expected dividend yield
of 0%, risk free interest rate of 5.08%, and an expected life of 1.5 years.
Stock option activity for 1997, 1998 and 1999 follows:
Weighted
Number of Average
Shares Exercise Price
------ --------------
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
F-12
<PAGE>
Options granted 1,302,000 6.65
Options exercised (111,800) 1.01
Options expired (200,000) 1.00
Options forfeited (353,600) 2.78
--------- --------
Balance on December 31, 1999 6,925,863 $ 3.36
========= ========
Stock options outstanding and exercisable at December 31, 1999 from the 1992,
1998 and 1999 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 - $1.00 1,453,580 $1.00 4.90 1,453,580 $1.00 4.90
$1.37 - $2.91 1,166,556 $2.15 3.42 917,538 $2.11 3.34
$3.00 - $3.16 371,327 $3.07 3.62 176,126 $3.08 3.63
$3.50 2,375,400 $3.50 3.51 1,497,031 $3.50 3.47
$3.75 - $9.72 1,559,000 $6.31 4.35 478,083 $4.70 3.98
--------- ----- ---- ---------- ----- ----
Total $0.90 to $9.72 6,925,863 $3.36 3.98 4,522,358 $2.53 3.96
========= ===== ==== ========= ===== ====
</TABLE>
The Company accounts for employee and director stock options under the
intrinsic value method permitted by APB No. 25. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options consistent with the fair value method described in SFAS No. 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:
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
Net loss applicable to
common shareholders, as
reported $(2,062,373) $(15,678,845) $(12,977,729)
Pro forma $(2,071,358) $(16,960,138) $(17,356,452)
Net loss per share as
reported $ (0.39) $ (2.35) $ (1.42)
Pro forma $ (0.39) $ (2.55) $ (1.90)
(5) ACCRUED EXPENSES
Accrued expenses are comprised of the following:
December 31,
-------------------
1998 1999
-------- --------
Employee benefits $ 64,711 $163,828
Professional services 116,773 44,546
-------- --------
Total $181,484 $208,374
======== ========
(6) LEASE COMMITMENTS
The Company leases its office space under an operating lease expiring in
2002.
Years ended December 31,
-------------------------------
1997 1998 1999
-------- --------- --------
Rent expense $ 91,000 $ 104,969 $299,077
======== ========= ========
F-13
<PAGE>
The following is a summary of future minimum lease payments for operating
leases at December 31, 1999:
Operating
Years Ending December 31: Leases
------------------------- ------
2000 $442,100
2001 439,600
2002 36,000
--------
Total lease payments $917,700
========
(7) INCOME TAXES
At December 31, 1999 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $21,329,000 and
$9,522,000 respectively, which, are available to offset future taxable
income, if any, through 2019 and 2004, respectively.
Actual income tax benefit differs from the benefit expected by applying the
federal statutory rate of 34% to pretax loss as follows:
Years ended December 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
Expected tax benefit $(701,000) $(2,352,000) $(4,412,000)
State tax benefit, net of
federal effect (61,000) (207,000) (715,000)
Non deductible equity
adjustment -- -- 442,000
Research and experimentation
credit (4,000) (31,000) (289,000)
Increase in valuation
allowance 589,000 2,250,000 4,096,000
Other 177,000 340,000 (878,000)
--------- ----------- -----------
Actual tax benefit $ -- $ -- $ --
========= =========== ===========
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
December 31,
--------------------------
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards
for income taxes $ 5,068,400 $ 7,807,400
Accruals 10,400 62,500
Capitalized research and experimentation -- 984,400
Research and experimentation credit
carryforward 137,100 449,900
Patents 43,500 41,500
----------- -----------
Total gross deferred tax assets 5,259,400 9,345,700
Less valuation allowance (5,247,800) (9,343,600)
----------- -----------
Net deferred tax assets 11,600 2,100
----------- -----------
Deferred tax liabilities-depreciation and
amortization (11,600) (2,100)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The net change in the valuation allowance for 1997, 1998 and 1999 was an
increase of $589,100, $2,250,300 and $4,095,800, respectively. In assessing
the amount of deferred tax assets to be recognized, management considers
whether it is more likely
F-14
<PAGE>
than not that some portion or all of the deferred tax assets will not be
realized. Management cannot determine at this time 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) CONCENTRATIONS AND SEGMENT DISCLOSURES
The Company's primary source of future revenue is from the licensing of
burst technology and the Company's eventual success will be 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 only enterprise-wide
disclosure is presented. The Company recognized no foreign revenues in
1997, 1998 or 1999.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, The American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that certain costs related to the development or purchase if
internal-use software be capitalized and amortized over the estimated
useful life of the software. The adoption of SOP No. 98-1 as of January 1,
1999, did not 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. SFAS No. 133, as amended, is effective for years beginning
after July 15, 2000. The Company historically has not used derivatives or
hedges and thus believes adoption of this standard will have little or no
effect.
(10) 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.
(11) SUBSEQUENT EVENTS
During January, 2000 the Company received $430,000 evidenced by notes
payable convertible into common stock, due in one year. The conversion rate
was the same as the convertible notes issued in 1999 (see Note 3). Upon
completion of the private placement discussed in the following paragraph,
these and all other notes currently outstanding (see Note 3), totaling
$5,335,000, were converted as of January 31, 2000. The conversion price was
$4.00 per share of common stock plus one warrant per share of common stock
acquired by conversion. Each warrant has an exercise price of $5.00 and
expires 5 years from the date of issue.
The Company completed a purchase and sales agreement of its common stock in
January 2000. In addition to the conversion of notes outstanding referred
to above, the Company received $13,898,500 in cash from various investors,
including some directors and employees of the company, in exchange for
4,808,375 shares of common stock and 4,808,375 warrants to purchase common
stock, offset by approximately $1,046,000 in transactions costs. The price
per share of common stock was $4.00. Each warrant is exercisable for one
share of common stock at an exercise price of $5.00 per share and expires 5
years from the date of issue. Compensation expense of $79,313 was recorded
as a result of sales of 158,625 shares of stock and issuance of 158,625
warrants to employees. The fair market of each warrant was determined to be
$.62, calculated using the minimum present value method assuming an
interest rate of 6.10% and an estimated life of 30 months. the compensation
expense of $79,313 represents the excess of the fair market value of both
the stock and warrants over the price paid.
F-15
<PAGE>
At the same time, conditioned on the closing of the above private placement
financing, all holders of preferred stock agreed to exchange their
preferred stock for common stock at a 1:1 conversion. The proforma column
of the accompanying balance sheets gives effect to these transactions as if
they had occurred on December 31, 1999. The following table summarizes the
capitalization of the Company before and after these events.
Outstanding Fully Diluted Shares
--------------------------------
Prior to After
Financing & Financing &
Conversion Conversion
---------- ----------
Common stock 9,535,527 18,840,511
Preferred Series A 2,020,000 --
Preferred Series B 2,476,609 --
Stock Options 6,954,020 6,954,020
Warrants 921,006 5,828,251
---------- ----------
Total Fully Diluted Shares 21,907,162 31,622,782
========== ==========
The Company granted options to purchase 90,250 shares of common stock to
employees on February 1, 2000. Of these options, options to purchase 45,125
shares were issued with an exercise price of $4.00 per share and expire on
April 30, 2000. The remaining options to purchase 45,125 shares were issued
with an exercise price of $5.00 per share and expire 5 years from the issue
date. To the extent that any of the options with an exercise price of $4.00
per share are not exercised by April 30, 2000, then options to purchase a
equal number of shares at an exercise price of $5.00 will terminate. As a
result of these grants, the Company recorded compensation expense of
$22,563.
F-16
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
March 31, 2000
(Unaudited)
ASSETS
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 9,549,325
Accounts receivable, net 361,987
Prepaid expenses and other current assets 221,997
------------
Total current assets 10,133,309
Property and equipment, net 1,056,307
Other assets 40,105
------------
Total assets $ 11,229,721
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ --
Accounts payable 1,218,856
Accrued expenses 545,190
Accrued interest 145,905
Deferred revenue 378,275
------------
Total liabilities 2,288,226
Stockholders' equity:
Preferred stock, $.00001 par value, 20,000,000
shares authorized:
Series A, 2,020,000 shares issued and outstanding
in 1999 --
Series B, 2,476,609 shares issued and outstanding
in 1999 --
Common stock, $.00001 par value, 100,000,000 shares
authorized; 18,953,065 and 9,535,527 shares issued and
outstanding in 2000 and 1999, respectively 188
Additional paid-in capital 50,176,341
Accumulated deficit (41,235,034)
------------
Total stockholders' equity 8,941,495
------------
Total liabilities and stockholders' equity $ 11,229,721
============
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
F-17
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2000
(Unaudited)
Revenue $ 75,012
Cost of revenues 30,271
------------
44,741
------------
Costs and expenses:
Research and development 933,975
Sales and marketing 1,727,283
General and administrative 1,151,649
------------
Total costs and expenses 3,812,907
------------
Loss from operations (3,768,166)
------------
Other income (expense):
Interest expense (32,484)
Interest income 104,030
Other, net (102,520)
------------
Total other income (expense), net (30,974)
------------
Net loss (3,799,140)
Accumulated deficit, beginning of the period (37,435,894)
------------
Accumulated deficit, end of period $(41,235,034)
============
Basic and diluted net loss per common share $ (0.24)
============
Shares used in per share computation 15,938,027
============
See accompanying notes to condensed consolidated financial statements
F-18
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 2000
(Unaudited)
<CAPTION>
Additional
Common Stock Preferred Stock Paid-in Accumulated
Shares Amount Shares Amount Capital deficit Total
------------ --------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 9,535,527 $ 95 4,496,609 $ 45 $ 31,971,108 $(37,435,894) $ (5,464,646)
Common stock offering 3,474,625 35 -- -- 13,898,465 -- 13,898,500
Exercise of stock options 112,554 -- -- -- 45,000 -- 45,000
Non-cash compensation related to
February 1, 2000 options -- -- -- -- 22,563 -- 22,563
Non-cash compensation related to sale
of common stock to employees -- -- -- -- 77,726 -- 77,726
Transaction costs related to common
stock offering -- -- -- -- (1,103,355) -- (1,103,355)
Conversion of debt to common stock 1,333,750 13 -- -- 5,334,987 -- 5,335,000
Write-off of convertible note discount -- -- -- -- (70,153) -- (70,153)
Conversion of preferred stock to common 4,496,609 45 (4,496,609) (45) -- -- --
Net loss -- -- -- -- -- (3,799,140) (3,799,140)
------------ --------- ------------ --------- ------------ ------------ ------------
Balance at March 31, 2000 18,953,065 $ 188 -- $ -- $ 50,176,341 $(41,235,034) $ 8,941,495
============ ========= ============ ========= ============ ============ ============
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
F-19
<PAGE>
<TABLE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000
(Unaudited)
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $ (3,799,140)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 95,425
Non-cash compensation expense related to sale of stock to employees 77,726
Stock option compensation 22,563
Changes in operating assets and liabilities:
Accounts receivable (361,987)
Prepaid expenses and other current assets (161,752)
Accounts payable (165,433)
Accrued expenses 336,816
Accrued interest 31,628
Deferred revenue 326,675
------------
Net cash used in operating activities (3,597,479)
------------
Cash flows from investing activities:
Purchases of property and equipment (426,320)
------------
Cash flows from financing activities:
Payment of receivables from Series B Convertible Stock offering --
Proceeds from sale of common stock 12,795,145
Proceeds from convertible debt 430,000
Proceeds from exercise of warrants and stock options 45,000
Repayment of debt --
------------
Net cash provided by financing activities 13,270,145
------------
Increase in cash and cash equivalents 9,246,346
Cash and cash equivalents, beginning of period 302,979
------------
Cash and cash equivalents, end of period $ 9,549,325
============
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
F-20
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
For the Three Months Ended March 31, 2000
(Unaudited)
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 850
==========
Cash paid for interest $ --
==========
Supplemental schedule of non-cash financing activities:
Debt converted into 1,333,750 shares of common stock $5,335,000
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) CHANGE OF NAME
On January 27, 2000 the Company changed its name from Instant Video
Technologies, Inc. to Burst.com, Inc.
(2) BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Explore Technology, Inc. and
Timeshift-TV. All significant intercompany transactions and accounts have
been eliminated in consolidation.
(3) INTERIM FINANCIAL INFORMATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions for Form 10-Q and Article 10 of Regulation S-X. In the
Company's opinion, the financial statements include all adjustments,
consisting of normal recurring adjustments, that the Company considers
necessary to fairly state the Company's financial position and the results
of operations and cash flows. The balance sheet at December 31, 1999, has
been derived from the audited financial statements at that date but does not
include all of the necessary informational disclosures and footnotes as
required by generally accepted accounting principles. The accompanying
financial statements should be read in conjunction with the financial
statements and notes thereto included with the Company's Amended Form 10
filed April 13, 2000 and other documents filed with the Securities and
Exchange Commission. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's
operations for any other interim period or for a full fiscal year.
(4) NOTES PAYABLE
During January, 2000 the Company received $430,000 evidenced by notes
payable convertible into common stock, due in one year. The conversion rate
was the lower of: (1) $6.50, (2) 80% of the average closing price of the
Company's publicly traded shares in the 20 trading days immediately
preceding the closing of an ongoing private placement, or (3) the price
agreed in that private placement. Upon completion of the private placement
discussed in Note 5 below, these and all other notes outstanding, totaling
$5,335,000, were converted into 1,333,750 shares of common stock as of
January 31, 2000. The conversion price was $4.00 per share of common stock
plus one warrant per share of common stock acquired by conversion. Each
warrant has an exercise price of $5.00 and expires 5 years from the date of
issue.
(5) EQUITY FINANCING
The Company completed a sale of its common stock and warrants to purchase
common stock in January 2000. In addition to the conversion of notes
outstanding referred to above, the Company received $13,898,500 in cash from
various investors, including some directors and employees of the company, in
exchange for 4,808,375 shares of common stock and 4,808,375 warrants to
purchase common stock, offset by approximately $1,103,000 in transactions
costs. The price per share of common stock was $4.00, which included the
issuance of one warrant for each share of stock sold. Each warrant is
exercisable for one share of common stock at an exercise price of $5.00 per
share and expires 5 years from the date of issue. Compensation expense of
$77,726 was recorded as a result of sales of stock to employees for the
excess of fair value over the price paid. In connection with the offering,
98,870 five-year warrants to purchase common stock at $8.4375 per share were
issued to the placement agent.
During 2000, 104,645 options and during 1999, 281,250 warrants granted to
non-employees in connection with previous equity transactions were exercised
to purchase 94,711 and 252,262 shares of common stock in cashless exercises,
respectively.
F-22
<PAGE>
(6) PREFERRED STOCK
Concurrently with and conditioned on the closing of the equity financing
described in Note 5 above, all holders of preferred stock converted their
shares of preferred stock into common stock at a 1:1 conversion ratio. As a
result, 2,020,000 shares of Series A preferred stock and 2,476,609 shares of
Series B preferred stock were converted into 4,496,609 shares of common
stock.
(7) STOCK OPTIONS
The Company granted options to purchase 90,250 shares of common stock to
employees on February 1, 2000. Of these options, options to purchase 45,125
shares were issued with an exercise price of $4.00 per share and expiring on
April 30, 2000. The remaining options to purchase 45,125 shares were issued
with an exercise price of $5.00 per share and expire 5 years from the issue
date. To the extent that any of the options with an exercise price of $4.00
per share are not exercised by April 30, 2000, then options to purchase an
equal number of shares at an exercise price of $5.00 will terminate. As a
result of these grants, the Company recorded compensation expense of $22,563
for the excess of the fair value over the exercise price.
F-23
