UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
BURST.COM, INC.
(FORMERLY INSTANT VIDEO TECHNOLOGIES, INC.)
------------------------------------------------
(Name of Registrant as Specified in its Charter)
Delaware
--------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)
84-1141967
---------------------------------------
(I.R.S. Employer Identification Number)
500 Sansome Street, Suite 503
San Francisco, California 94111
------------------------------------------------------------
(Address of Principal Executive Offices, including Zip Code)
(415) 391-4455
------------------------------------------------
(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
---------------- ------------------------------
$0.00001 par value Common Stock
-------------------------------
(Title of class)
-------------------------------
(Title of class)
<PAGE>
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
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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.
11
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
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 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.
17
<PAGE>
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. 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.
18
<PAGE>
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.
Interest Expense
19
<PAGE>
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 March 31, 2000.
Name Age Positions and Offices Held
- ---- --- --------------------------
Richard Lang 46 Chairman, President, Chief Executive
Officer, and Director
Thomas Koshy 62 Chief Operating Officer
Edward H. Davis 47 General Counsel, VP of Strategic
Alliances, and Secretary
Richard Jones 52 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
Doug Glen 53 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.
Tom Koshy has served as our Chief Operating Officer since September 199 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
comes 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.
Richard Jones became our Chief Financial Officer in September 1999 bringing over
25 years experience in financial and administrative management, primarily with
emerging growth technology companies. He has had extensive experience with both
public and private/pre-IPO concerns including establishment of strong accounting
systems, controls and strategic plans in order to facilitate successful growth.
From July 1993 to June 1999, Mr. Jones served as Vice President-Finance &
Administration at Sherpa Corporation, a $40 million enterprise software company
recently acquired by Inso Corporation, serving as Vice President-Finance &
Administration & Chief Financial Officer. Prior to Sherpa, Mr. Jones was Vice
President Finance & Chief Financial Officer of Quest Technologies, a start-up
medical device company in Sunnyvale, for three years. During the six years prior
to Quest, Mr. Jones acquired IPO, acquisition and SEC reporting experience as
Corporate Controller of Scientific Micro Systems, a high growth computer systems
manufacturer located in Mountain View. Mr. Jones is a CPA and practiced public
accounting with Coopers & Lybrand for four years. He holds a Bachelor of Science
degree in Accounting from the University of Illinois, Champaign-Urbana.
Kyle Faulkner currently serves as Chief Technology Officer and has been with us
since November 1997. Mr. Faulkner has over 16 years experience in client/server
software development, and 4 years experience in hardware development. Mr.
Faulkner has been a key contributor on more than 20 commercially successful
products, and was on the founding teams at Sybase and Forte Software. 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.
Brian Murphy has been one of our directors since January 1997. He is a partner
in O.J. Kilkenny & Company, Chartered Accountants specializing in the
entertainment industry with offices in London, England and Dublin, Ireland. The
firm provides a wide range of services to their clients, consisting of major
international entertainment artists, covering all areas of financial management
and audit and accountancy advise. Mr. Murphy is involved at the executive level
with a number of companies in the media and entertainment business, particularly
in the field of digital post-production, film and television. Mr. Murphy
received a Bachelors Degree in Commerce from Dublin University, and became a
fellow of the Institute of Chartered Accountants in Ireland, England and Wales.
Mr. Murphy become one of our directors as representative of Draysec Finance
Limited, one of our principal stockholders.
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 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.
29
<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
31
<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.
32
<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.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
33
<PAGE>
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
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
34
<PAGE>
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
250,000 warrants to purchase 226,140 shares of our common stock at $1.00 per
share. This same institution also exercised 31,250 warrants to purchase 26,122
shares of our common stock at $1.60 per share.
In January, 1999, two contractors, subsequently hired as employees received
options to purchase 621 and 9,000 shares of common stock at prices of $2.19 and
$2.91 per share, respectively in exchange for services rendered, resulting in
compensation expense of $26,448 to us.
1998:
As of December 31, 1998, we sold 2,476,609 shares of Series B convertible
preferred stock ("Series B"), at a purchase price of $2.00 per share, for an
aggregate purchase price of $4.95 million. IVT raised $4.21 million in cash in
the offering, and the remaining $743,000 was paid by cancellation of debt. In
addition to the Series B, we also issued in the offering warrants to purchase up
to an aggregate of 312,960 shares of our common stock, at an exercise price of
$2.00 per share. The warrants are exercisable for a term of five years from the
date of issuance.
35
<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
36
<PAGE>
$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
(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
For the Year Ended December 31, 1999
----------
* 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: April 11, 2000 By /s/ RICHARD LANG
-------------------------------------
Chairman, President, 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 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.
STOCK-BASED COMPENSATION
F-8
<PAGE>
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.
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, calculated on the
Black-Scholes option pricing model, was also charged to interest expense.
(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. The Company recorded
$1,330,000 of expense for the in-process research and development costs
purchased 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.
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.
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
1998 and 1999 was $1.73 and $5.23, respectively, on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: volatility of 136% and 117%, respectively, expected dividend
yield 0% for both years, risk free interest rate of approximately 5% for
both years, and an expected life of 1.5 and 3.5 years, respectively.
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 stock to employees.
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
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INSTANT VIDEO TECHNOLOGIES, INC.
INSTANT VIDEO TECHNOLOGIES, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: The name of the Corporation is Instant Video Technologies, Inc. and
the original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on April 27, 1990 under the
Corporation's original name of Catalina Capital Corp.
SECOND: Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, this Amended and Restated Certificate of Incorporation amends and
restates the provisions of the Certificate of Incorporation of the Corporation.
This Amended and Restated Certificate of Incorporation was duly approved by the
Corporation's Board of Directors, and was duly approved by written consent by
the holders of the requisite number of shares of the Corporation in accordance
with Sections 228, 242 and 245 of the Delaware General Corporation Law.
THIRD: The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
I
The name of this Corporation is BURST.COM, INC.
II
The address of the registered office of this Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation
Trust Company.
III
The nature of the business or purposes to be conducted or promoted by this
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General
-1-
<PAGE>
Corporation Law of the State of Delaware.
IV
A. Authorized Shares. This Corporation is authorized to issue two classes
of shares, to be designated Common Stock and Preferred Stock, respectively. This
Corporation is authorized to issue 100,000,000 shares of Common Stock with a par
value of $0.00001 per share (the "Common Stock") and 20,000,000 shares of
Preferred Stock with a par value of $0.00001 per share (the "Preferred Stock").
The Preferred Stock authorized by this Certificate of Incorporation shall be
issued from time to time in one or more series.
Upon the filing of this Amended and Restated Certificate of Incorporation,
each outstanding share of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock shall be converted into such number of fully paid
and nonassessable shares of Common Stock into which shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock are
convertible as set forth in the Certificate of Incorporation in effect
immediately prior to the filing of this Amended and Restated Certificate of
Incorporation.
B. Authorized Shares - Preferred Stock. Within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series of Preferred Stock, the
Board of Directors may increase or decrease (but neither above the total number
of authorized shares of the class, nor below the number of shares of such
series, then outstanding) the number of shares of any such series subsequent to
the issue of shares of that series. In addition, the Board of Directors is
authorized, subject to limitations prescribed by law and the provisions of this
Article IV, to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in each such series, and to fix the designation, powers, preferences and rights
of the shares of each such series and the qualifications, limitations or
restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
i) The number of shares constituting that series and the distinctive
designation of that series;
ii) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
iii) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
iv) Whether that series shall have conversion privileges, and, if so,
the
-2-
<PAGE>
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
v) Whether or not shares of that series shall be redeemable, and, if
so, the terms and conditions of such redemption, including the date or date upon
or after which they shall be redeemable, and the amount per share payable in
case of redemption, which amount may vary under different conditions and at
different redemption dates;
vi) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
vii) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of this Corporation, and
the relative rights or priority, if any, of payment of shares of that series;
and
viii) Any other relative rights, preferences and limitations of that
series.
C. Replacement of Certificates. Upon receipt of evidence reasonably
satisfactory to this Corporation of the loss, theft, destruction, or mutilation
of a certificate representing any of the outstanding shares of Common Stock or
Preferred Stock, and, in the case of loss, theft, or destruction, the execution
of an agreement and posting of any bond or other collateral satisfactory to this
Corporation to indemnify this Corporation from any loss incurred by it in
connection therewith, this Corporation will issue a new certificate representing
such shares of Common Stock or Preferred Stock in lieu of such lost, stolen,
destroyed or mutilated certificate.
V
A. Election of Directors. The election of the Directors of this Corporation
need not be by written ballot, unless the Bylaws of this Corporation shall so
provide.
B. Arrangement with Creditors. Whenever a compromise or arrangement is
proposed between this Corporation and its creditors or any class of them and/or
between this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to
-3-
<PAGE>
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
this Corporation, as the case may be, and also on this Corporation.
C. Fiduciary Duty. A director of this Corporation shall not be personally
liable to this Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to this Corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is amended
after the filing of the Certificate of Incorporation of which this Article V is
a part to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of this
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal or modification
of the foregoing paragraph by the stockholders of this Corporation shall not
adversely affect any right or protection of a director of this Corporation
existing at the time of such repeal or modification.
VI
A. Indemnification.
1. Right to Indemnification. Each person who was or is made a party,
or is threatened to be made a party to, or is involved in, any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), including, without limitation, Proceedings by or in the right of
this Corporation to procure a judgment in its favor, by reason of the fact that
he or she, or a person for whom he or she is the legal representative, is or was
a director or officer, employee or agent of this Corporation, or is or was
serving at the request of this Corporation as a director or officer, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent, or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by this Corporation to the fullest extent authorized by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent such amendment
permits this Corporation to provide broader indemnification rights than said law
permitted this Corporation to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amount paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith. Such
right shall be a contract right and shall include the right to be paid by this
Corporation for expenses incurred in defending any such Proceeding in advance of
its final disposition; provided, however, that the payment of such expenses
incurred by a director or officer of this Corporation in his or her capacity as
a director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of such Proceeding, shall be made only upon delivery to this
Corporation of an undertaking, by or on behalf
-4-
<PAGE>
of such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this section, or otherwise.
2. Right of Claimant to Bring Suit. If a claim under Section 1 (above)
is not paid in full by this Corporation within ninety (90) days after a written
claim has been received by this Corporation, the claimant may at any time
thereafter bring suit against this Corporation to recover the unpaid amount of
the claim, and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any Proceeding in advance of its final
disposition where the required undertaking has been tendered to this
Corporation), that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
this Corporation to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on this Corporation. Neither the failure
of this Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an actual
determination by this Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that claimant had not met the applicable standard of conduct.
B. Non-Exclusivity of Rights. The rights conferred by Section A.1 and A.2
(above) shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors, or otherwise.
C. Amendment or Repeal. Neither any amendment nor repeal of this Article
VI, nor the adoption of any provision of this Corporation's Certificate of
Incorporation inconsistent with this Article VI, shall eliminate or reduce the
effect of this Article VI, in respect of any matter occurring, or any action or
Proceeding accruing or arising, or that, but for this Article VI would accrue or
arise, prior to such amendment, repeal or adoption of an inconsistent provision.
VII
A. Corporation Existence. This Corporation is to have perpetual existence.
VIII
A. Directors' Powers. The Directors of this Corporation shall have the
power to adopt, amend or repeal the Bylaws of this Corporation. The management
of the business and the conduct of the affairs of this Corporation shall be
vested in its Board of Directors. The number of directors which shall constitute
the whole Board of Directors shall be fixed exclusively by, or in the manner
provided in, the Bylaws of this Corporation.
-5-
<PAGE>
B. Classified Board. For the management of the business, and for the
conduct of the affairs of this Corporation, and in further definition,
limitation and regulation of the powers of this Corporation, of its directors
and of its stockholders or any class thereof, as the case may be, it is further
provided that, at such time that this Corporation is designated as qualified for
trading as a national market system security on the National Association
Quotation System (or any successor national market system) (the "Effective
Time"):
1. Board Classes and Terms. The Board of Directors shall be divided
into three classes, designated as Class I, Class II, and Class III,
respectively. The Board of Directors shall, by one or more resolutions, assign
the Directors in office at the Effective Time to one or more Classes, and in
such equal or unequal number, as shall be set forth in such resolution or
resolutions. Following such assignment, in the event any Class shall have a
number of assigned Directors smaller than that of any other Class or Classes,
such deficiency shall be deemed newly created directorships and shall be filled
exclusively by the Board of Directors in accordance with Section B.2. hereof. At
the first annual meeting of stockholders following the date of the Effective
Time, the term of office of the Class I directors shall expire, and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the date of the Effective Time, the
term of office of the Class II directors shall expire, and Class II directors
shall be elected for a full term of three (3) years). At the third annual
meeting of stockholders following the date of the Effective Time, the term of
office of the Class III directors shall expire, and Class III directors shall be
elected for a full term of three (3) years). At each succeeding annual meeting
of stockholders, directors shall be elected for a full term of three (3) years
to succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and qualified,
or until his or her death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
2. Board Vacancies. Any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal, or other causes shall be
filled by either (i) the affirmative vote of the holders of a majority of the
voting power of the then-outstanding shares of voting stock of this Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
voting together as a single class; or (ii) by the affirmative vote of a majority
of the remaining directors then in office, even though less than a quorum of the
Board of Directors. Newly created directorships resulting from any increase in
the number of directors shall, unless the Board of Directors determines by
resolution that any such newly-created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
-6-
<PAGE>
C. Vote.
1. The affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding
shares of the Voting Stock, voting together as a single class, shall be required
for the adoption, amendment or repeal of Sections 2 (Annual Meeting) and 3
(Special Meeting) of the Corporation's Bylaws.
2. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the voting stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock.
E. No Action. Effective upon the Corporation becoming subject to the
reporting requirements of the Securities Exchange Act of 1934, no action shall
be taken by the stockholders of this Corporation, except at an annual or special
meeting of the stockholders called in accordance with the Bylaws. Effective upon
the Corporation becoming subject to the reporting requirements of the Securities
Exchange Act of 1934, the Stockholders shall not take any action by written
consent.
F. Stockholder Nomination. Advance notice of stockholder nomination for the
election of directors and of business to be brought by stockholders before any
meeting of the stockholders of this Corporation shall be given in the manner
provided in the Bylaws of this Corporation.
G. Amendment. Notwithstanding any other provisions of this Certificate of
Incorporation, or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, the affirmative
vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of the Voting Stock,
voting together as a single class, shall be required to alter, amend or repeal
this Article VIII.
IX
This Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in Article VIII of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.
-7-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed and attested by Richard Lang, its Chief Executive Officer and Edward H.
Davis, its Secretary, as of January 27, 2000.
INSTANT VIDEO TECHNOLOGIES, INC.
BY: /s/ RICHARD LANG
-------------------------------------
Richard Lang, Chief Executive Officer
ATTEST: /s/ EDWARD H. DAVIS
---------------------------------
Edward H. Davis, Secretary
-8-
AMENDED AND RESTATED
BYLAWS
OF
BURST.COM, INC.
a Delaware corporation
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: OFFICES........................................................... 1
Section 1. Registered Office.............................................. 1
Section 2. Other Offices.................................................. 1
ARTICLE II: MEETINGS OF STOCKHOLDERS......................................... 1
Section 1. Place of Meetings.............................................. 1
Section 2. Annual Meeting................................................. 1
Section 3. Special Meeting................................................ 1
Section 4. Notice of Stockholders' Meetings............................... 2
Section 5. List of Stockholders Entitled to Vote.......................... 2
Section 6. Quorum......................................................... 2
Section 7. Adjourned Meeting; Notice...................................... 2
Section 8. Voting......................................................... 3
Section 9. Waiver of Notice or Consent by Absent Stockholders............. 3
Section 10. Stockholder Action by Written Consent Without a Meeting........ 4
Section 11. Record Date for Stockholder Notice, Voting,
and Giving Consents.......................................... 4
Section 12. Proxies........................................................ 5
Section 13. Inspectors of Election......................................... 5
ARTICLE III: DIRECTORS....................................................... 6
Section 1. Powers......................................................... 6
Section 2. Number and Qualification of Directors.......................... 6
Section 3. Election and Term of Office of Directors....................... 7
Section 4. Vacancies...................................................... 7
Section 5. Place of Meetings.............................................. 7
Section 6. Annual Meeting................................................. 7
Section 7. Other Regular Meetings......................................... 7
Section 8. Special Meetings............................................... 7
Section 9. Quorum......................................................... 8
Section 10. Waiver of Notice............................................... 8
Section 11. Action Without Meeting......................................... 8
Section 12. Telephonic Meetings............................................ 8
Section 13. Fees and Compensation of Directors............................. 8
ARTICLE IV: COMMITTEES....................................................... 9
Section 1. Committees of Directors........................................ 9
Section 2. Meetings and Action of Committees.............................. 9
ARTICLE V: OFFICERS.......................................................... 9
Section 1. Officers....................................................... 9
Section 2. Election of Officers........................................... 9
Section 3. Subordinate Officers........................................... 10
Section 4. Removal and Resignation of Officers............................ 10
Section 5. Vacancies in Offices........................................... 10
Section 6. Chairman of the Board.......................................... 10
Section 7. President...................................................... 10
Section 8. Vice Presidents................................................ 10
Section 9. Secretary...................................................... 10
i
<PAGE>
Section 10. Chief Financial Officer........................................ 11
ARTICLE VI: INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS............................................... 11
Section 1. Right to Indemnification....................................... 11
Section 2. Prepayment of Expenses......................................... 12
Section 3. Claims......................................................... 12
Section 4. Non-Exclusivity of Rights...................................... 12
Section 5. Indemnification of Employees and Agents of the Corporation..... 12
Section 6. Other Indemnification.......................................... 12
Section 7. Amendment or Repeal............................................ 12
ARTICLE VII: RECORDS AND REPORTS............................................. 12
Section 1. Form of Records................................................ 12
Section 2. Inspection by Stockholders..................................... 12
Section 3. Inspection by Directors........................................ 13
ARTICLE VIII: GENERAL CORPORATE MATTERS...................................... 13
Section 1. Certificates for Shares........................................ 13
Section 2. Lost Certificates.............................................. 13
Section 3. Registered Stockholders........................................ 13
Section 4. Representation of Shares of Other Corporations................. 14
Section 5. Construction and Definitions................................... 14
ARTICLE IX: AMENDMENTS....................................................... 14
Section 1. Amendment by Stockholders...................................... 14
Section 2. Amendment by Directors......................................... 14
ii
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
BURST.COM, INC.
ARTICLE 1: OFFICES
Section 1. Registered Office. The registered office shall be at such place
within the State of Delaware that the board of directors may determine from time
to time.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held at any
place within or outside the State of Delaware designated either by the board of
directors or the president (if not contrary to any action taken by the board of
directors). In the absence of any such designation, stockholders' meetings shall
be held at the principal executive office of the corporation in the City of San
Francisco, State of California.
Section 2. Annual Meeting.
a. The annual meeting of stockholders of the corporation for the
purpose of electing directors and for the transaction of such other proper
business as may come before such meetings, shall be held at such time and place
as the board of directors shall determine by resolution. Only persons who are
nominated in accordance with the procedures set forth in this Section 2 shall be
eligible for election as Directors.
b. At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors; (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors; or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than one hundred twenty
(120) calendar days in advance of the date specified in the Corporation's Proxy
Statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they
1
<PAGE>
appear on the Corporation's books, of the stockholder proposing such business;
(iii) the class and number of shares of the Corporation which are beneficially
owned by the stockholder; (iv) any material interest of the stockholder in such
business; and (v) any other information that is required to be provided by the
stockholder pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "1934 Act"), in his capacity as a proponent to a
stockholder proposal. Notwithstanding the foregoing, in order to include
information with respect to a stockholder proposal in the Proxy Statement and
form of Proxy for a stockholder's meeting, stockholders must provide notice as
required by the regulations promulgated under the 1934 Act. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
paragraph (b). The Chairman of the annual meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this paragraph (b);
and, if he should so determine, he shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
c. Nominations of persons for election to the Board of Directors of
the Corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors, or by any stockholder of the Corporation entitled to
vote in the election of Directors at the meeting who complies with the notice
procedures set forth in this paragraph c. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation in accordance with
the provisions of paragraph (b) of this Section 2. Such stockholder's notice
shall set forth: (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a Director: (A) the name, age, business
address and residence address of such person; (B) the principal occupation or
employment of such person; (C) the class and number of shares of the Corporation
which are beneficially owned by such person; (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder; and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for elections of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including, without limitation,
such person's written consent to being named in the Proxy Statement, if any, as
a nominee and to serving as a Director, if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 2.2. At the request of the Board of Directors, any
person nominated by a stockholder for election as a Director shall furnish to
the Secretary of the Corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a Director of the Corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The Chairman
of the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he should so determine, he shall so declare at the meeting,
and the defective nomination shall be disregarded.
Section 3. Special Meeting. A special meeting of the stockholders may be
called for any purpose or purposes at any time by the board of directors, or by
the chairman of the board, or by the president, or the chief executive officer,
but such special meetings may not be called by any other person or persons;
provided, however, that special meetings of the stockholders may be called by
the holders of shares entitled to cast not less than ten percent (10%) of the
votes at the meeting if such a requirement is imposed by the California
Department of Corporations ("Department") in connection with a qualification of
the sale of the corporation's stock pursuant to applicable California securities
laws, rules or regulations ("Qualification"); and provided, further, however,
that the right of such stockholders to call special meetings of the stockholders
shall in any event terminate at such time as shares of the corporation's common
stock are listed on the Nasdaq National Market or New York Stock Exchange unless
such termination is prohibited by the Department in connection with the
Qualification.
2
<PAGE>
Section 4. Notice of Stockholders' Meetings. All notices of meetings of
stockholders shall specify the place, date and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice. Unless otherwise provided by law,
the certificate of incorporation or these bylaws, the written notice of any
annual or special meeting of stockholders shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting. If mailed, notice
is given when deposited in the United States mail, postage prepaid, directed to
the stockholder at such stockholder's address as it appears on the records of
the corporation.
An affidavit of the secretary or an assistant secretary or of the transfer
agent of the corporation that the notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
Section 5. List of Stockholders Entitled to Vote. The officer who has
charge of the stock ledger of the corporation shall prepare and make, at least
ten (10) days before every meeting of the stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 6. Quorum. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of stockholders shall
constitute a quorum for the transaction of business. The stockholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. Adjourned Meeting; Notice. Any stockholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting, except as provided in Section 6 of this Article II.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than thirty (30) days from the date set for the original
meeting, in which case the board of directors shall set a new record date.
Notice of any such adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Section 4 of this Article II. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
Section 8. Voting. Unless otherwise provided in the certificate of
incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power upon the matter in question held by such stockholder, but no
proxy shall be voted on or after three years from its date, unless the proxy
provides for a longer period. Vote may be via voice or ballot; provided,
however, that elections for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
3
<PAGE>
Any holder of shares entitled to vote on any matter may vote a part of the
shares in favor of the proposal and refrain from voting the remaining shares or,
except when the matter is the election of directors, vote them against the
proposal, but, if the stockholder fails to specify the number of shares which
the stockholder is voting affirmatively, it will be conclusively presumed that
the stockholder's approving vote is with respect to all shares that the
stockholder is entitled to vote.
At all meetings of stockholders for the election of directors a plurality
of the votes cast shall be sufficient to elect. All other elections and
questions shall, unless otherwise provided by law, the certificate of
incorporation or these bylaws, be decided by the vote of the holders of shares
of stock having a majority of the votes which could be cast by the holders of
all shares of stock entitled to vote thereon which are present in person or
represented by proxy at the meeting.
Section 9. Waiver of Notice or Consent by Absent Stockholders. The
transaction of any meeting of stockholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though transacted at
a meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes. Such waiver, consent or approval need not specify either the business
to be transacted or the purpose of any annual or special meeting of
stockholders, unless so provided by the certificate of incorporation or these
bylaws. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
law to be included in the notice of the meeting but not so included if that
objection is expressly made at the meeting.
Section 10. Stockholder Action by Written Consent Without a Meeting. Unless
otherwise provided in the certificate of incorporation, any action which may be
taken at an annual or special meeting of stockholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be delivered to the corporation
by delivery to its registered office in Delaware, its principal place of
business, or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of stockholders are recorded.
Any stockholder giving a written consent, or the stockholder's proxy
holder, or a transferee of the shares or a personal representative of the
stockholder or their respective proxy holders, may revoke the consent by a
writing received by the secretary of the corporation before written consents of
the number of shares required to authorize the proposed action have been
delivered to the corporation. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days after the
date of the earliest dated consent delivered to the corporation, a written
consent or consents signed by a sufficient number of holders to take action are
delivered to the corporation in the manner prescribed in the first paragraph of
this Section.
Section 11. Record Date for Stockholder Notice, Voting, and Giving
Consents. In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or
4
<PAGE>
any adjournment thereof, or entitled to express consent to corporate action
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors, and which record date:
(a) In the case of determination of stockholders entitled to vote at
any meeting of stockholders or adjournment thereof, shall, unless otherwise
required by law, not be more than sixty (60) nor less than ten (10) days before
the date of such meeting;
(b) In the case of determination of stockholders entitled to express
consent to corporate action in writing without a meeting, shall not be more than
ten (10) days after the date upon which the resolution fixing the record date is
adopted by the board of directors; and
(c) In the case of other action, shall not be more than sixty (60)
days prior to such other action.
If no record date is fixed by the board of directors:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held;
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action of
the board of directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation in accordance with applicable law, or if prior
action by the board of directors is required by law, shall be at the close of
business on the day on which the board of directors adopts the resolution taking
such prior action; and
(c) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 12. Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the corporation.
Section 13. Inspectors of Election. The corporation may, in advance of any
meeting of stockholders, appoint one (1) or more inspectors to act at the
meeting and make a written report thereof. The corporation may designate one (1)
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the chairman of the meeting may appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of such inspector's
5
<PAGE>
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of such his or her
ability.
These inspectors shall:
(a) Ascertain the number of shares outstanding and the voting power of
each;
(b) Determine the shares represented at the meeting and the validity
of proxies and ballots;
(c) Count all votes and ballots;
(d) Determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors;
(e) Certify the determination of the number of shares represented at
the meeting, and the count of all votes and ballots; and
(f) Do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
The inspectors may appoint or retain other persons or entities to assist
the inspectors in the performance of their duties.
ARTICLE III: DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the certificate of incorporation, and with these bylaws; fix their
compensation; and require from them security for faithful service.
(b) Change the principal executive office or the principal business
office from one location to another; cause the corporation to be qualified to do
business in any state, territory, dependency, or country and conduct business
within or without the State of Delaware; and designate any place within or
without the State of Delaware for the holding of any stockholders' meeting, or
meetings, including annual meetings.
(c) Adopt, make, and use a corporate seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates.
(d) Authorize the issuance of shares of stock of the corporation on
any lawful terms, for such consideration as permitted by law.
6
<PAGE>
(e) Borrow money and incur indebtedness on behalf of the corporation,
and cause to be executed and delivered for the corporation's purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidence of debt and securities.
Section 2. Number and Qualification of Directors. The exact number of
directors of the corporation shall consist of not less than five (5) and not
more than nine (9) until changed by a bylaw amending this Section 2, duly
adopted by the board of directors or by the stockholders. The definite number of
directors may be changed by a duly adopted amendment to the certificate of
incorporation or by an amendment to this bylaw duly adopted by the vote or
written consent of the board of directors or by the holders of a majority of the
outstanding shares entitled to vote. Directors need not be stockholders.
Section 3. Election and Term of Office of Directors. Directors shall be
elected at each annual meeting of the stockholders, but if any such annual
meeting is not held, or the directors are not elected thereat, the directors may
be elected at any special meeting of the stockholders held for that purpose. All
directors shall hold office until the expiration of the term for which elected
and until their respective successors are elected, except in the case of death,
resignation or removal of any director.
Section 4. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the remaining members of the board of directors, although such
majority is less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the expiration of the term for which
elected and until their successors are duly elected and shall qualify, unless
sooner displaced.
A vacancy or vacancies in the board of directors shall be deemed to exist
in the event of the death, resignation, or removal of any director, or if the
stockholders fail, at any meeting of stockholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting. Any director may resign at any time upon giving written notice to the
corporation. The entire board of directors or any individual director may be
removed from office, prior to the expiration of their or his term of office only
in the manner and within the limitations provided by the General Corporation Law
of Delaware
Section 5. Place of Meetings. Meetings of the board of directors may be
held at any place within or outside the State of Delaware that has been
designated in the notice of the meeting or, if not so stated or if there is no
notice, by resolution of the board or by the chairman of the board or by the
president (if not contrary to any action taken by the board of directors). In
the absence of such a designation, meetings shall be held at the principal
executive office of the corporation.
Section 6. Annual Meeting. Immediately following each annual meeting of
stockholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
Section 7. Other Regular Meetings. Other regular meetings of the board of
directors shall be held without call at such time as shall from time to time be
fixed by the board of directors. Such regular meetings may be held without
notice.
Section 8. Special Meetings. Special meetings of the board of directors for
any purpose or purposes may be called at any time by the chairman of the board
or the president or any vice president or secretary or any two directors. Notice
of the time and place of special meetings shall be delivered personally or by
telephone to each director or sent by first-class mail or telegram, charges
prepaid, addressed to each director at that director's address as it is shown on
the records of the corporation. In case the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of
the holding of the meeting. In case the notice is delivered personally, or by
telephone or telegram, it shall be delivered personally, or by telephone
7
<PAGE>
or to the telegraph company, at least forty-eight (48) hours before the time of
the holding of the meeting. Any oral notice given personally or by telephone may
be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose of the
meeting nor the place if the meeting is to be held at the principal executive
office of the corporation.
Section 9. Quorum. At all meetings of the board of directors a majority of
the authorized number of directors shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the board of directors, except as
provided by, the certificate of incorporation, or other applicable law. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
Section 10. Waiver of Notice. Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, either before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to said director. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. A waiver of notice need not specify the purpose of any regular or
special meeting of the board of directors.
Section 11. Action Without Meeting. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting if all members of the board or committee, as the
case may be, shall individually or collectively consent in writing to that
action. Such action by written consent shall have the same force and effect as a
unanimous vote of the board of directors. Such written consent or consents shall
be filed with the minutes of the proceedings of the board or committee.
Section 12. Telephonic Meetings. Members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting
thereof by means of, conference telephone or similar communication equipment, so
long as all persons participating in the meeting can hear one another, and all
such persons shall be deemed to be present in person at the meeting.
Section 13. Fees and Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. This Section 13 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
8
<PAGE>
ARTICLE IV: COMMITTEES
Section 1. Committees of Directors. The board of directors may designate
one or more committees, each consisting of one or more directors, to serve at
the pleasure of the board. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member.
Any committee, to the extent provided in the resolution of the board, shall
have and may exercise all the powers and authority of the board in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation
under Sections 251 or 252 of the General Corporation Law of Delaware,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the bylaws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provide, it shall not have the power
or authority to declare a dividend to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
Section 2. Meetings and Action of Committees. Meetings and actions of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members, except that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V: OFFICERS
Section 1. Officers. The officers of the corporation shall be a president,
a secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents, one or more assistant secretaries, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article V. Any
number of offices may be held by the same person.
Section 2. Election of Officers. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article V, shall be chosen by the board of directors, and
each shall serve at the pleasure of the board, subject to the rights, if any, of
an officer under any contract of employment.
Section 3. Subordinate Officers. The board of directors may appoint, and
may empower the president to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office
9
<PAGE>
for such period, have such authority and perform such duties as are provided in
the bylaws or as the board of directors may from time to time determine.
Section 4. Removal and Resignation of Officers. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the board of directors, at any regular or
special meeting of the board, or, except in case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
Section 5. Vacancies in Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause may be filled in the
manner prescribed in these bylaws for regular appointments to that office.
Section 6. Chairman of the Board. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is no president, the chairman of the board shall in addition be
the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article V.
Section 7. President. Subject to such supervisory powers, if any, as may be
given by the board of directors to the chairman of the board, if there be such
an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. He shall preside at all meetings of the stockholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or the bylaws.
Section 8. Vice Presidents. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors or the bylaws, and the president, or the chairman of the
board.
Section 9. Secretary. The secretary shall keep or cause to be kept, at the
principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the directors,
committees of directors, and stockholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice given,
the names of those present at directors' meetings or committee meetings, the
number of shares present or represented at stockholders' meetings, and the
proceedings.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
10
<PAGE>
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required by the bylaws or by law
to be given, and he shall keep the seal of the corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by the bylaws.
Section 10. Chief Financial Officer. The chief financial officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all monies and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
ARTICLE VI: INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
Section 1. Right to Indemnification. Each person who was or is made a
party, or is threatened to be made a party to, or is involved in, any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("Proceeding"), including, without limitation, Proceedings by or in the right of
this Corporation to procure a judgment in its favor, by reason of the fact that
he or she, or a person for whom he or she is the legal representative, is or was
a director or officer, employee or agent of this Corporation, or is or was
serving at the request of this Corporation as a director or officer, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent, or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by this Corporation to the fullest extent authorized by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent such amendment
permits this Corporation to provide broader indemnification rights than said law
permitted this Corporation to provide prior to such amendment) against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amount paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith. Such
right shall be a contract right and shall include the right to be paid by this
Corporation for expenses incurred in defending any such Proceeding in advance of
its final disposition; provided, however, that the payment of such expenses
incurred by a director or officer of this Corporation in his or her capacity as
a director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of such Proceeding, shall be made only upon delivery to this
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this section, or
otherwise.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1
(above) is not paid in full by this Corporation within ninety (90) days after a
written claim has been received by this Corporation, the claimant may at any
time thereafter bring suit against this Corporation to recover the unpaid amount
of the claim, and, if successful in whole or in part, the claimant shall be
entitled to be paid also the
11
<PAGE>
expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the required
undertaking has been tendered to this Corporation), that the claimant has not
met the standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for this Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on this Corporation. Neither the failure of this Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of the
State of Delaware, nor an actual determination by this Corporation (including
its Board of Directors, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant had not met the applicable
standard of conduct.
Section 3. Non-Exclusivity of Rights. The rights conferred by Article VI,
Sections 1 and 2 (above) shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise.
Section 4. Amendment or Repeal. Neither any amendment nor repeal of this
Article VI, nor the adoption of any provision of this Corporation's Bylaws
inconsistent with this Article VI, shall eliminate or reduce the effect of this
Article VI, in respect of any matter occurring, or any action or Proceeding
accruing or arising, or that, but for this Article VI would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE VII: RECORDS AND REPORTS
Section 1. Form of Records. Any records maintained by the corporation in
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 2. Inspection by Stockholders. Any stockholder, in person or by
attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of stockholders,
and its other books and records, and to make copies or extracts therefrom. A
proper purpose shall mean a purpose reasonably related to such person's interest
as a stockholder. In every instance where an attorney or other agent shall be
the person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or other such writing which authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand shall
be directed to the corporation at its registered office in Delaware or at its
principal place of business.
Section 3. Inspection by Directors. Any director shall have the right to
examine the corporation's stock ledger, a list of its stockholders and its other
books and records for a purpose reasonably related to his position as a
director.
12
<PAGE>
ARTICLE VIII: GENERAL CORPORATE MATTERS
Section 1. Certificates for Shares. Every holder of stock shall be entitled
to have a certificate signed by or in the name of the corporation by the
chairman or vice chairman of the board of directors, if any, or the president or
a vice president, and by chief financial officer or an assistant treasurer, or
the secretary or an assistant secretary, of the corporation, certifying the
number of shares owned by such stockholder in the corporation. Any of or all the
signatures on the certificate may be a facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person were such officer, transfer agent or
registrar at the date of issue.
The board of directors may authorize the issuance of shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor;
provided that upon the face or back of each certificate issued to represent any
such partly paid shares or upon the books and records of the corporation in the
case of uncertificated partly paid shares, the total amount of the consideration
to be paid therefor and the amount paid thereon shall be stated. Upon the
declaration of any dividend on fully paid shares, the corporation shall declare
a dividend upon partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
Section 2. Lost Certificates. Except as provided in this Section 2, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.
Section 3. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
Section 4. Representation of Shares of Other Corporations. The chairman of
the board, the president, or any vice president, or any other person authorized
by resolution of the board of directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 5. Construction and Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law of Delaware shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
13
<PAGE>
ARTICLE IX: AMENDMENTS
Section 1. Amendment by Stockholders. New bylaws may be adopted or these
bylaws may be amended or repealed by the vote or written assent of stockholders
entitled to exercise a majority of the voting power of the corporation, except
as otherwise provided by law or by the certificate of incorporation.
Section 2. Amendment by Directors. Subject to the rights of the
stockholders as provided in Section 1 of this Article IX, to adopt, amend, or
repeal bylaws, bylaws may be adopted, amended, or repealed by the board of
directors.
14
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting secretary of Burst.com, Inc., a
Delaware corporation; and,
2. That the foregoing bylaws, comprising fourteen (14) pages, constitute
the bylaws of said corporation as duly adopted by the Board of Directors of the
corporation on January 7, 2000.
IN WITNESS WHEREOF, I have hereto subscribed my name this 27th day of
January, 2000.
Dated: 1/27/2000 /s/ EDWARD H. DAVIS
------------- ----------------------------------------
Edward H. Davis, Secretary
15
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
Securities Purchase Agreement (the "Agreement"), dated as of January 27,
2000, by and among Instant Video Technologies, Inc., a Delaware corporation (the
"Company"), and each of the purchasers set forth on the signature pages hereto
(individually, a "Purchaser" and, collectively, the "Purchasers").
WHEREAS, the Company proposes to issue and sell to the Purchasers for cash,
or in exchange for cancellation or conversion of outstanding indebtedness, an
aggregate of 5,940,125 shares (individually, a "Share" and, collectively, the
"Shares") of common stock, par value $0.00001 per share, of the Company (the
"Common Stock") and warrants to purchase shares of Common Stock (as further
described below); and
WHEREAS, the Company, among other things, has agreed to provide certain
registration rights under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Shares and the warrants that are being
issued to the Purchasers pursuant to this Agreement.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants set forth herein, the parties hereto agree as follows:
1. Sale of Stock and Delivery of Warrants; Closing.
(a) Purchase and Sale. Subject to the terms and conditions hereof, the
Company shall issue and sell to each of the Purchasers, and each Purchaser,
severally, shall purchase from the Company, the number of Shares set forth
opposite such Purchaser's name on Schedule 1 hereto at a purchase price of $4.00
per Share for an aggregate purchase price set forth on such Schedule 1. The
Company shall deliver to each Purchaser warrants to purchase, at an exercise
price of $5.00 per share, such number of shares of Common Stock set forth
opposite such Purchaser's name on Schedule 1 hereto (the "Warrants"). The shares
of Common Stock issued or issuable upon exercise of the Warrants are hereinafter
referred to as the "Warrant Shares." The Warrants shall be in the form of
Exhibit A hereto.
(b) First Closing. The first closing of the purchase and sale of the
Shares and Warrants (the "First Closing") shall take place at the offices of
Winston & Strawn, 200 Park Avenue, New York, New York, at 10:00 A.M. on January
27, 2000, or such later date on which the conditions set forth in Sections 7(a)
and 8(a) hereof shall have been satisfied or waived; provided, however, that the
First Closing, in no event, shall occur later than January 31, 2000. The date of
the First Closing shall be hereinafter referred to as the "First Closing Date".
(c) Second Closing. The Second Closing of the purchase and sale of the
Shares and Warrants (the "Second Closing") shall take place at the offices of
the
<PAGE>
Securities Purchase Agreement
Company, on or before January 31, 2000, or such earlier date on which the
conditions set forth in Section 7(b) and 8(b) hereof shall have been satisfied
or waived, provided that:
(i) Purchasers participating in the Second Closing shall only
include (A) Klein-Hawk ("Klein-Hawk"), (B) Ravinia Capital Ventures, LLC (which
may only participate in the Second Closing in its corporate capacity)
("Ravinia"); (C) those note holders listed on Schedule 3(y) attached hereto (the
"Second Closing Note Holders"), and (D) those Purchaser listed on Schedule 1
attached hereto who did not participate in the First Closing; notwithstanding
the foregoing, Purchasers listed on Schedule 1 may only participate in the
Second Closing in the amount set forth next to each such Purchaser's names on
Schedule 1;
(ii) the aggregate investment made by the Purchasers
participating in the Second Closing shall not exceed, in the case of (A)
Klein-Hawk, $4,000,000, (B) Ravinia, $3,000,000, (C) the Second Closing Note
Holders, $765,000 and (D) any other Purchaser listed on Schedule 1 attached
hereto who did not participate in the First Closing, $1,025,500; provided,
however, Klein-Hawk may only participate in the Second Closing if its aggregate
investment is at least $2,000,000, and provided, further, Ravinia may only
participate in the Second Closing if its aggregate investment is at least
$2,000,000; and
(iii) Purchasers participating in the Second Closing shall become
a party to and agree to be bound by the provisions of this Agreement and each
other Transaction Documents (as defined below).
The date of the Second Closing shall be hereinafter referred to
as the "Second Closing Date", the First Closing Date and the Second Closing Date
are each referred to individually as a "Closing Date" and, collectively as the
"Closing Dates".
(d) Delivery. At each Closing, the Company shall deliver to each
Purchaser a stock certificate representing the Shares purchased by such
Purchaser and the Warrants to be delivered to such Purchaser, against payment of
the purchase price therefor by check, payable to the order of the Company, by
wire transfer of immediately available funds to the Company in accordance with
the Company's wiring instructions, or by cancellation or conversion of
indebtedness, or some combination thereof. In addition, the Company shall
deliver to each Purchaser such other agreements, documents, certificates and
opinions as specified in this Agreement or as may reasonably be requested by
such Purchaser.
2. Representations and Warranties of Purchasers. Each of the Purchasers
represents and warrants, severally, to the Company as follows:
(a) Authorization. The Purchaser has the full power and authority to
execute and deliver this Agreement and to perform its obligations hereunder. The
execution and delivery of, and the performance under, this Agreement by the
Purchaser
-2-
<PAGE>
Securities Purchase Agreement
will not conflict with any rule, regulation, judgment or agreement applicable to
the Purchaser.
(b) Investment Purpose. The Purchaser is purchasing the Shares and
acquiring the Warrants, and will purchase the Warrant Shares (together with the
Shares and the Warrants, the "Securities"), for investment purposes and not with
a present view to, or for sale in connection with, a distribution thereof within
the meaning of the Securities Act. The Purchaser understands that it must bear
the economic risk of this investment indefinitely, unless the Securities are
registered pursuant to the Securities Act and any applicable state securities or
blue sky laws or an exemption from such registration is available.
Notwithstanding anything in this Section 2(b) to the contrary, the Purchaser, by
making the representations herein, does not agree to hold the Securities for any
minimum or other specific term and reserves the right to dispose of such
Securities at any time in accordance with or pursuant to registration or an
exemption therefrom under the Securities Act and any applicable state securities
or blue sky laws.
(c) Reliance On Exemptions. The Purchaser understands that the
Securities are being offered and sold in reliance upon specific exemptions from
the registration requirements of Federal and state securities laws and that the
Company is relying upon the truth and accuracy of the representations and
warranties of the Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of the Purchaser to acquire
the Securities.
(d) Information. The Purchaser has been furnished all documents
relating to the business, finances and operations of the Company which the
Purchaser requested from the Company. The Purchaser has been afforded the
opportunity to ask questions of the Company's representatives concerning the
Company in making the decision to purchase the Shares and acquire the Warrants,
and such questions have been answered to its satisfaction. However, neither the
foregoing nor any other due diligence investigation conducted by the Purchaser
or on its behalf shall limit, modify or affect the representations and
warranties of the Company in Section 3 of this Agreement or the right of the
Purchaser to rely thereon.
(e) Governmental Review. The Purchaser understands that no Federal or
state agency or any other government or governmental agency has passed upon or
made any recommendation or endorsement of the Securities.
(f) Purchaser's Qualifications. The Purchaser is an "accredited
investor" as defined in Rule 501 under Regulation D of the Securities Act
("Regulation D"). The Purchaser is capable of evaluating the merits and risks of
an investment in the Securities.
(g) Restrictions on Transfer. The Purchaser understands that it may
not transfer any of the Securities unless such Securities are registered under
the Securities Act or unless an exemption from registration and qualification
requirements are available under the Securities Act and applicable state
securities laws. The Purchaser understands
-3-
<PAGE>
Securities Purchase Agreement
that certificates representing the Shares, the Warrants, the Warrant Shares and
shares of Common Stock issued pursuant to Section 4 of this Agreement shall bear
the following, or a substantially similar, legend until such time as they have
been registered under the Securities Act or otherwise may be sold under Rule 144
under the Securities Act:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR UNDER ANY STATE SECURITIES LAWS.
THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS
PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM.
(h) Residence. The Purchaser is a resident of the jurisdiction set
forth under its name on the signature pages hereto.
(i) Investment Experience. The Purchaser has experience as an investor
in securities of Internet - related and technology companies and acknowledges
that it is able to fend for itself, can bear the economic risk of its
investment, and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Securities. If other than an individual, the Purchaser also represents it
has not been organized for the purpose of acquiring the Securities.
3. Representations and Warranties of the Company. The Company represents
and warrants to each Purchaser that, except as set forth on a Schedule of
Exceptions attached hereto as follows:
(a) Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all necessary corporate power and authority to own or lease
its assets and to carry on its business as now being conducted and presently
proposed to be conducted. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which its
ownership or leasing of assets, or the conduct of its business, makes such
qualification necessary, except where the failure to be so qualified would not
result in a Material Adverse Change (as defined in Section 3(h) hereof). Except
for any subsidiaries listed on Schedule 3(b) hereto, the Company has no
subsidiaries and no equity interests in any corporation, partnership, joint
venture or other entity.
(b) Subsidiaries. Schedule 3(b) hereto sets forth each subsidiary of
the Company, showing the jurisdiction of its incorporation or organization. Each
subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation and has the requisite
corporate power to own, lease and operate its properties and assets and to
conduct its business as it is now being conducted. Each subsidiary is duly
qualified to do business as a foreign corporation
-4-
<PAGE>
Securities Purchase Agreement
and is in good standing in each jurisdiction in which its ownership or leasing
of assets, or the conduct of its business, makes such qualification necessary,
except where the failure to be so qualified would not result in a Material
Adverse Change. All of the outstanding shares of capital stock of each
subsidiary have been duly authorized and validly issued, and are fully paid and
nonassessable and are owned by the Company.
(c) Requisite Power and Authorization. The Company has all necessary
corporate power and authority to execute and deliver this Agreement, the
Registration Rights Agreement attached hereto as Exhibit B (the "Registration
Rights Agreement") and the Warrants (collectively, the "Transaction Documents")
and to perform its obligations under each of the Transaction Documents,
including without limitation the issuance of the Securities hereunder. All
corporate action of the Company required for the execution and delivery of the
Transaction Documents and the issuance and delivery of the Securities has been
duly and effectively taken, and, except as set forth on Schedule 3(g), no
further actions, authorizations or consents, including, without limitation, any
consents of the stockholders of the Company, are required. Each of the
Transaction Documents constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditor's rights,
(ii) as limited by general principles of equity that restrict the availability
of equitable remedies and (iii) as the indemnity provisions of the Registration
Rights Agreement may be limited by law. The Shares, when issued, delivered and
paid for in compliance with the provisions of this Agreement, will be validly
issued, fully paid and non-assessable, free and clear of any and all liens,
charges, claims or encumbrances. The Warrant Shares, if and when issued,
delivered and paid for in compliance with the provisions of this Agreement and
the Warrants will be validly issued, fully paid and non-assessable, free and
clear of any and all liens, charges, claims or encumbrances. The Company has
reserved a sufficient number of shares of Common Stock necessary for issuance of
the Shares and the Warrant Shares.
(d) SEC Documents. Prior to the date hereof, the Company, voluntarily
filed with the Securities and Exchange Commission (the "SEC") all reports,
statements, schedules and other documents to its knowledge required to be filed
by reporting companies pursuant to the Securities Act and the Exchange Act.
Since December 31, 1998, all such reports, statements, schedules and other
documents (collectively, the "SEC Documents") required to be filed by reporting
companies were filed by the Company. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder, and none of the SEC Documents, at
the time they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the financial statements included in the SEC Documents (the "Financial
Statements") complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Except (i) as may be indicated
-5-
<PAGE>
Securities Purchase Agreement
in the notes to the Financial Statements or (ii) in the case of the unaudited
interim statements, as permitted by Form 10-Q under the Exchange Act, the
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied and fairly present in all material
respects the financial position of the Company and its subsidiaries as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal recurring
year-end adjustments and footnotes). Except as set forth in the Financial
Statements filed with the SEC prior to the date hereof or as set forth on
Schedule 3(d), neither the Company nor any of its subsidiaries has any
liabilities, whether absolute, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to the date
of such Financial Statements and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in such Financial
Statements, which liabilities and obligations referred to in clauses (i) and
(ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company or any of its subsidiaries.
(e) Capitalization. The capitalization of the Company as of the date
hereof is set forth on Schedule 3(e), including (i) the authorized capital
stock, (ii) the number of shares issued and outstanding, (iii) the number of
shares reserved for issuance pursuant to stock option, employee benefit or other
plans, (iv) the number of shares reserved for issuance or issuable pursuant to
securities exercisable for, or convertible into or exchangeable for, any shares
of Common Stock, (v) the number of shares of Common Stock reserved for issuance
with respect to the sale of the Shares, and (vi) the number of shares of Common
Stock reserved for issuance upon exercise of the Warrants. All outstanding
shares of capital stock have been duly authorized and validly issued and are
fully paid and non-assessable. Except as set forth on Schedule 3(e), the Company
has (i) no outstanding securities convertible into or exchangeable for any
shares of capital stock of the Company, (ii) no rights, options, warrants, calls
or other agreements or commitments of any nature whatsoever relating to the
purchase or other acquisition of any shares of its capital stock or securities
convertible into or exchangeable for any shares of its capital stock or (iii) no
shares of its capital stock reserved for issuance. Except as set forth on
Schedule 3(e), the Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company.
(f) No Conflicts. Neither the execution, delivery and performance by
the Company of this Agreement, the other Transaction Documents, and all
instruments and documents to be delivered by the Company, nor the consummation
of the transactions contemplated by any of the foregoing (i) has constituted or
resulted in, or will constitute or result in, a default under or breach or
violation of any term or provision of the organizational documents or bylaws of
the Company or material contracts or instruments to which the Company or any of
its subsidiaries is a party or Federal, state or local laws, rules or
regulations, writs, orders, judgments or decrees which are applicable to the
Company, any of its subsidiaries or their assets, (ii) will result in the
acceleration or termination of any rights under any material contract or
instrument to which the
-6-
<PAGE>
Securities Purchase Agreement
Company or any of its subsidiaries is a party or (iii) will result in the
creation or imposition of any liens, charges or encumbrances upon any assets of
the Company or any of its subsidiaries.
(g) Consents. Except as set forth on Schedule 3(g), no approval,
consent, order, authorization or other action by, or notice to or filing with,
any governmental authority or regulatory agency or any other person or entity,
and no lapse of a waiting period, is required in connection with the execution,
delivery or performance by the Company of this Agreement, any other Transaction
Document, the issuance and delivery of any of the Securities or any other
transactions contemplated by any of the Transaction Documents except for (i) the
filing of a Form D with the SEC, (ii) filings required under applicable state
"blue sky" laws (which shall be duly filed) and (iii) the filing of a
registration statement or statements pursuant to the Registration Rights
Agreement.
(h) No Material Adverse Change. Since December 31, 1998, the business
of the Company and each subsidiary has been operated in the ordinary course and
substantially consistent with past practice and there has not been any material
adverse change in the business, assets, financial condition, results of
operations, affairs or prospects of the Company or any of its subsidiaries (a
"Material Adverse Change"). Since December 31, 1998, neither the Company nor its
subsidiaries has (i) paid any obligation or liability or discharged or satisfied
any liens or encumbrances other than in the ordinary course of business; (ii)
declared or made any payment or distribution to its stockholders or purchased or
redeemed any of its shares of capital stock or other securities; (iii)
mortgaged, pledged or subjected to any lien, charge or other encumbrance any of
its assets, tangible or intangible, except in the ordinary course of business;
(iv) sold, transferred or leased any of its assets except for fair value in the
ordinary course of business; (v) increased the annual compensation payable to
any of its officers or other employees, consultants or representatives by
greater than $25,000; (vi) cancelled or compromised any debt or claim, or waived
or released any right of material value; (vii) entered into any transaction
other than in the ordinary course of business; (viii) issued or sold any shares
of capital stock or other securities or granted any options, warrants or other
purchase rights with respect thereto that are not disclosed on Schedule 3(e); or
(ix) agreed to do any of the foregoing (other than pursuant hereto).
(i) Litigation. Except as set forth on Schedule 3(i), there is no
claim, action, suit, proceeding or investigation pending or, to the Company's
knowledge, currently threatened against the Company or any of its subsidiaries,
or any of their respective directors or officers, in their capacities as such,
(i) that questions the validity of this Agreement or any other Transaction
Document or the issuance of the Securities, or the right of the Company to enter
into this Agreement or any other Transaction Document or to consummate the
transactions contemplated by any Transaction Document or (ii) that might result,
either individually or in the aggregate, in any Material Adverse Change or in
any change in the current equity ownership of the Company. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment,
stipulation or decree
-7-
<PAGE>
Securities Purchase Agreement
of any court, administrative agency, commission, regulatory authority, other
government agency or instrumentality.
(j) No Default. Neither the Company nor any of its subsidiaries is in
violation of or default under any provision of its organizational documents or
bylaws or other constituent documents or is in default (or, with notice or the
lapse of time, would be in default) under any material agreement, contract,
commitment or instrument to which it is a party or by which it or its properties
or assets is bound or affected. To the Company's knowledge, no third party is in
material default under or in material breach or violation of any material
contract, commitment or instrument to which the Company or any of its
subsidiaries is a party or by which any of their properties or assets are bound
or affected.
(k) Compliance with Laws. The Company and each subsidiary is in
compliance and has conducted its business and operations so as to comply with
all laws (including, without limitation, any environmental laws), ordinances,
rules and regulations, judgments, decrees or orders of any regulatory authority
or other governmental or administrative body or instrumentality, whether
domestic or foreign, except where such failure would not result in a Material
Adverse Change. The Company has not during the past three years received any
notice relating to any violation or potential violation of applicable law or
regulations.
(l) Title. The Company and each subsidiary has good and marketable
title to all real and personal property owned by it which is material to its
business, in each case free and clear of all liens, encumbrances and defects.
Any property, real or personal, held under lease by the Company or any of its
subsidiaries, is held by it under valid and enforceable leases.
(m) Intellectual Property. The Company and each subsidiary owns or
possesses adequate and enforceable rights to use, all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, permits, domain names, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, the "Intangibles") necessary to conduct its
business as heretofore conducted by it, as now being conducted by it, and as
proposed to be conducted by it. To the Company's knowledge, neither the Company
nor any of its subsidiaries has infringed, is infringing, or is in conflict with
any right of any other person with respect to, any Intangibles. To the knowledge
of the Company, no person is infringing on or violating the Intangibles owned or
used by the Company or any of its subsidiaries. As of the date hereof, each
officer of the Company and its subsidiaries, and each other employee of the
Company and its subsidiaries involved in the development, implementation or
maintenance of the Company's or such subsidiary's technology, has entered into
non-compete, non-solicitation and proprietary information and invention
assignment agreements.
(n) Registration Rights. The only registration rights, including
piggyback rights, granted (or agreed to be granted) to any person or entity
other than the
-8-
<PAGE>
Securities Purchase Agreement
Purchasers are set forth on Schedule 3(n). None of the registration rights
disclosed on Schedule 3(n) are senior in priority to the registration rights
provided for in the Registration Rights Agreement.
(o) OTC Bulletin Board. The Common Stock is, as of the date hereof,
traded by means of the National Association of Securities Dealers, Inc. (the
"NASD") OTC Bulletin Board(R) service (the "OTCBB"). The sale of the Securities
as contemplated hereby will not violate any Rule of the NASD applicable to the
Company or the Common Stock. The Company has not received notification, written
or oral, that the Company has failed to satisfy any requirement of the NASD
relating to the trading of the Common Stock in the OTCBB.
(p) Registration Statement. The Company is currently eligible to
register the resale of its Common Stock under the Securities Act pursuant to a
registration statement on Form S-1. To the Company's knowledge, there exist no
facts or circumstances that would inhibit or delay the preparation and filing of
a registration statement on Form S-1 with respect to the Shares and the Warrant
Shares.
(q) No Misrepresentation. No representation or warranty by the Company
in this Agreement (including any Exhibit or Schedule hereto) and no statements
of the Company contained in any document, certificate, schedule or other
information furnished or to be furnished by or on behalf of the Company pursuant
to this Agreement or any other Transaction Document or in connection with the
transactions contemplated by any Transaction Document contains or shall contain
any untrue statement of material fact or omits or shall omit to state a material
fact required to be stated therein or necessary in order to make such
statements, in light of the circumstances under which they were made, not
misleading. There exists no event or circumstances with respect to the Company
or any of its subsidiaries which would result in a Material Adverse Change that
has not been disclosed by the Company to the Purchasers.
(r) Anti-Dilution and Other Shares. Except as set forth on Schedule
3(r), no stockholder of the Company or other person or entity has any preemptive
right of subscription or purchase or contractual right of first refusal or
similar right with respect to any of the Securities. Issuance of the Securities
will not result in the issuance of any additional shares of Common Stock or the
triggering of other anti-dilution or similar rights contained in any options,
warrants, debentures or other securities or agreements of the Company.
(s) No Brokers or Finders. Except as set forth on Schedule 3(s), no
person or entity has or will have, as a result of any act or omission by the
Company, any right, interest or valid claim against any Purchaser for any
commission, fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this Agreement.
(t) Change of Control Payments. Neither the execution, delivery and
performance by the Company of any of the Transaction Documents nor the
-9-
<PAGE>
Securities Purchase Agreement
consummation of any of the transactions contemplated thereby shall require any
payment by the Company, in cash or kind, under any agreement, plan, policy,
commitment or other arrangement. There are no agreements, plans, policies,
commitments or other arrangements with respect to any compensation, benefits or
consideration which will be materially increased, or the vesting of benefits of
which will be materially accelerated, as a result of the execution and delivery
of the Transaction Documents or the occurrence of any of the transactions
contemplated thereby. There are no payments or other benefits, the value of
which will be calculated on the basis of any of the transactions contemplated by
this Agreement or any other Transaction Document.
(u) Taxes. The Company and each of its subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, and adequate provisions have been made
and are reflected in the Financial Statements for all current taxes and other
charges to which the Company or any subsidiary is subject and which are not
currently due and payable. None of the income tax returns of the Company or any
subsidiary is currently being audited by the Internal Revenue Service or any
other governmental entity. Neither the Company nor any subsidiary has filed with
the Internal Revenue Service or any other governmental authority any agreement
or document extending, or having the effect of extending, the period for
assessment or collection of any taxes. The Company has no knowledge of any
additional assessments, adjustments or contingent tax liability (whether Federal
or state) pending or threatened against the Company or any subsidiary for any
period, nor of any basis for any such assessment, adjustment or contingency.
(v) ERISA. All "employee benefit plans", as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
any other employee benefit arrangements or payroll practices (the "Plans"),
maintained by the Company and any of its subsidiaries or to which the Company or
any of its subsidiaries contributed or is obligated to contribute thereunder, is
and has been maintained in compliance with applicable law, including but not
limited to ERISA, the Internal Revenue Code of 1986, as amended (the "Code"),
and any applicable law of any other governmental authority and with any other
contractual obligations and their terms. Each Plan that is intended to be a tax
qualified plan under Section 401(a) of the Code has been determined by the
Internal Revenue Service to qualify under Section 401 of the Code, and the
trusts created thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the Code, and nothing has occurred, including the
adoption of or failure to adopt any Plan amendment, which would adversely affect
its qualification or tax-exempt status.
(w) Labor Matters. There are no strikes or other labor disputes
against the Company or any of its subsidiaries pending or, to the Company's or
its subsidiaries' knowledge, threatened. There is no organizing activity
involving the Company or any of its subsidiaries pending or, to the Company's or
its subsidiaries' knowledge, threatened by any labor union or group of
employees.
-10-
<PAGE>
Securities Purchase Agreement
(x) Year 2000 Compliance. Each system, comprised of software,
hardware, databases or embedded control systems (microprocessor controlled or
controlled by any robotic or other device) (collectively, a "System") that
constitutes any material part of, or is used in connection with the use,
operation or enjoyment of, any material tangible or intangible asset for real
property of the Company or any of its subsidiaries will not be materially
adversely affected by the advent of the year 2000, the advent of the
twenty-first century or the transition from the twentieth century through the
year 2000 and into the twenty-first century. The Company has no reason to
believe that it or any of its subsidiaries may incur material expenses arising
from or relating to the failure of any of their Systems as a result of the
advent of the year 2000, the advent of the twenty-first century or the
transition from the twentieth century through the year 2000 and into the
twenty-first century. Each System of the Company and its subsidiaries is able to
accurately process, provide and/or receive all date/time data, including, but
not limited to, calculating, comparing and sequencing within, from, into and
between the twentieth century (through year 1999), the year 2000 and the
twenty-first century, including leap year calculations; and will, as to
performance and functionality, not be affected by any dates/times prior to, on,
after or spanning January 1, 2000 ("Year 2000 Compliant"). To the knowledge of
the Company and its subsidiaries, each of the Company's vendors will continue to
furnish its products or services to the Company or its subsidiaries, as
applicable, without interruption or material delay, on and after January 1,
2000.
(y) Conversion of Preferred Stock and Notes. Upon filing with the
Secretary of State of the State of Delaware, as of the date hereof, of the
Amended and Restated Certificate of Incorporation of the Company, in the form
attached hereto as Exhibit C, all outstanding shares of the Company's preferred
stock, including, without limitation, the Series A Convertible Preferred Stock,
par value $ .00001 per share (the "Series A Preferred Stock") and the Series B
Convertible Preferred Stock, par value $.00001 per share (the "Series B
Preferred Stock"), will be converted into Common Stock and there will be no
outstanding equity securities of the Company senior to the Securities. Except as
set forth on Schedule 3(y) hereto, concurrent with the First Closing, all
outstanding convertible notes of the Company, as of the date hereof, (the
"Notes") are being converted into Shares of Common Stock at $4.00 per share and
warrants to purchase, at an exercise price of $5.00 per share, Common Stock on
the terms and conditions provided herein.
(z) Lock-Up Agreement. The Company has entered into lock-up
agreements, in the form attached hereto as Exhibit D (each a "Lock-Up Agreement"
and, collectively the "Lock-Up Agreements") with (i) each of the officers and
directors of the Company, (ii) each of the holders of Series A Preferred Stock
and Series B Preferred Stock convertible into Common Stock upon filing of the
Company's Amended and Restated Certificate of Incorporation, and (iii) each
stockholder of the Company owning or having the right to acquire in excess of 1%
of the issued and outstanding Common Stock of the Company (on a fully diluted
basis).
4. Right of First Refusal for New Securities. (a) The Company hereby grants
to each Purchaser, so long as such Purchaser shall own the greater of 500,000
-11-
<PAGE>
Securities Purchase Agreement
shares of Common Stock (including shares issuable upon exercise of the Warrants
and adjusted for stock splits, combinations, dividends and the like) or (ii)
fifty percent (50%) of the Shares purchased by such Purchaser pursuant to this
Agreement, a right of first refusal to purchase shares of any New Securities (as
defined below) which the Company may, from time to time, propose to sell and
issue. Such right of first refusal shall allow each Purchaser to purchase its
Proportionate Share (as defined below) of the New Securities proposed to be
issued, determined with reference to the aggregate number of outstanding shares
of Common Stock (taking into account all shares of Common Stock issuable upon
exercise of the Warrants) held by such Purchasers or their permitted transferees
before the proposed issuance of New Securities. In the event that any Purchaser
shall not purchase any or all of its Proportionate Share of New Securities, the
other Purchasers shall have the right to purchase such unpurchased New
Securities, as described below. The right of first refusal granted hereunder
shall terminate if unexercised within 20 Business Days after receipt of the
notice described in Section 5(c) hereof. The Purchasers may reallocate their
right of first refusal among themselves. "Business Day" shall mean any day that
is not a Saturday, a Sunday or a day on which banks are required or permitted to
be closed in the State of New York. For the purposes hereof, any SSF Purchaser
(as hereinafter defined) may exercise rights hereunder so long as all the SSF
Purchasers, in the aggregate, hold the requisite number of Shares referred to in
the first sentence of this Section 4(a).
(b) "New Securities" shall mean any authorized but unissued shares,
and any treasury shares, of capital stock of the Company and all rights, options
or warrants to purchase or exchangeable for capital stock, and securities of any
type whatsoever that are, or may become, convertible into capital stock;
provided, however, that the term "New Securities" does not include (i)
securities issued pursuant to the acquisition of another corporation or entity
by the Company by merger, purchase of all or substantially all of the assets or
other reorganization whereby the Company shall become the owner of more than 50%
of the voting power of such corporation or entity; (ii) shares of Common Stock
issued in connection with any stock split or stock dividend of the Company;
(iii) shares of Common Stock issued pursuant to any public offering and sale of
equity securities of the Company pursuant to an effective registration statement
under the Securities Act; (iv) Warrant Shares delivered to the Purchasers upon
exercise of the Warrants; (v) shares of Common Stock issued pursuant to the
exercise of options granted or to be granted under the current stock option
plans of the Company, provided that the total number of shares of Common Stock
issuable or issued pursuant to such options does not exceed 39% of (A) the
outstanding shares of Common Stock (on a fully diluted basis) as of the date of
this Agreement and (B) any additional outstanding shares of Common Stock (on a
fully diluted basis) issued on or before January 31, 2000 pursuant to this
Agreement, (vi) shares of Common Stock issued upon the exercise or conversion of
any securities outstanding as of the date of this Agreement, (vii) securities
issued by the Company in connection with any credit, financing or leasing
agreements or similar instruments with financial institutions or equipment
lessors; and (viii) securities issued in connection with an offering pursuant to
an engagement letter dated October 5, 1999, as amended January 26, 2000, between
E*Offering and the Company (the "E*Offering Engagement Letter"), whether such
securities are issued to E*Offering or to any investor
-12-
<PAGE>
Securities Purchase Agreement
for which E*Offering is entitled is be compensated pursuant to the E*Offering
Engagement Letter. "Proportionate Share" shall be equal to a fraction, the
numerator of which shall equal the total number of shares of Common Stock
(taking into account all shares of Common Stock issuable upon exercise of the
Warrants) then owned by such Purchaser and the denominator of which shall equal
the total number of shares of Common Stock outstanding immediately prior to the
issuance of the New Securities on a fully diluted basis.
(c) If the Company shall propose to issue New Securities, it shall
give each Purchaser written notice thereof, describing the New Securities, the
number thereof to be issued, the purchase price therefor (which shall be payable
solely in cash) and the terms upon which the Company shall propose to issue the
same. Each Purchaser shall have 10 Business Days from the date such notice is
given to determine whether to purchase all or any portion of such Purchaser's
Proportionate Share of such New Securities for the purchase price and upon the
terms specified in the notice by giving written notice to the Company and
stating therein the number of New Securities to be purchased.
(d) If the Purchasers shall not have elected within such 10 Business
Day period to purchase all of the New Securities proposed to be issued, the
Company shall provide to each Purchaser, within five Business Days thereafter, a
schedule setting forth the following information: (i) the amount of New
Securities elected to be purchased; (ii) the purchasers thereof (the
"Participating Purchasers") and the specific amount of New Securities elected to
be purchased by each such Participating Purchaser; and (iii) the amount of New
Securities not elected to be purchased. Each Participating Purchaser shall
thereafter have an additional five Business Days after such five Business Day
period has elapsed to determine whether to purchase all or any portion of such
Participating Purchaser's Residual Proportionate Share (as defined below) of
such remaining New Securities for the purchase price and upon the terms
specified in the notice by giving written notice to the Company and stating
therein the number of New Securities to be purchased. "Residual Proportionate
Share" shall be equal to a fraction, the numerator of which shall equal the
total number of shares of Common Stock (as determined in the definition of
Proportionate Share) then owned by such Participating Purchaser and the
denominator of which shall equal the total number of such shares owned by all
Participating Purchasers.
(e) If the Purchasers shall not have elected to purchase all of the
New Securities proposed to be issued (within the time period for notifying the
Company set forth above), then the Company shall have 60-calendar days in which
to complete the proposed issuance of the portion of the New Securities not
purchased by the Purchasers at a price not less than that contained in the
notice previously given to the Purchasers and on terms and conditions not more
favorable to the third party than those contained in such notice. If, at the end
of such 60-calendar day period, the Company shall not have completed such
issuance of New Securities, the Company shall no longer be permitted to issue
such New Securities pursuant to this Section 4 without again fully complying
with all of the provisions of this Section 4.
-13-
<PAGE>
Securities Purchase Agreement
(f) The right of first refusal granted under this Section 4 shall
terminate upon a Termination Event (as defined in the Warrant). This Section 4
may be amended, waived or otherwise terminated by a vote or the written consent
of sixty-six and two-thirds percent (66 2/3%) of the Purchasers having rights
pursuant to this Section 4 (which 66 2/3% must include the SSF Purchasers (as
defined below), Bay Star Capital, L.P. (and its affiliate, BayStar International
Limited (together "BayStar")), and Chelsey Capital ("Chelsey")), for purposes
hereof, SSF Purchasers shall include Special Situations Fund III, L.P., Special
Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., and
Special Situations Technology Fund, L.P.
5. Buy-In Rights.
(a) In the event that (i) the Company shall fail for any reason to
deliver Warrant Shares to a Purchaser upon exercise of any Warrants within the
time period specified in paragraph (a) of such Warrants or the Company shall
fail to remove any restrictive legend on any certificates evidencing Shares,
Warrant Shares or shares of Common Stock issued pursuant to Section 5 of this
Agreement (the "Buy-In Shares") as and when required under Section 6(f) of this
Agreement and (ii) thereafter, such Purchaser shall purchase (in an open market
transaction or otherwise) shares of Common Stock to make delivery in
satisfaction of a sale by such Purchaser of (A) the Warrant Shares which such
Purchaser anticipated receiving upon such exercise or (B) such unlegended Buy-In
Shares, as the case may be (in each case, the "Sold Shares"), then the Company
shall pay to such Purchaser (in addition to any other remedies available to the
Purchaser) the amount by which (x) such Purchaser's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased shall exceed (y) the net proceeds received by such Purchaser from the
sale of the Sold Shares.
(b) The Company shall make any payments required pursuant to this
Section 5 within five (5) Business Days after receipt of written notice from the
Purchaser setting forth the calculation of the amount due hereunder. Nothing
contained herein shall relieve the Company from its continuing obligation to
deliver Warrant Shares upon any such exercise of the Warrants, or the unlegended
Buy-In Shares, as the case may be.
(c) The rights granted under this Section 5 shall be applicable only
to those Purchasers having rights under Section 4 of this Agreement.
6. Covenants of the Company. The Company hereby covenants that:
(a) Exchange Act Filings. The Company shall use its best efforts to
file in a timely manner all reports and other documents required to be filed by
it under the Exchange Act, and deliver copies of such reports not otherwise
available on the SEC's web site to each Purchaser. The Company shall not
terminate its status as an issuer required to file reports under the Exchange
Act even if the Exchange Act or the rules and regulations promulgated thereunder
would permit such termination.
-14-
<PAGE>
Securities Purchase Agreement
(b) Authorized Shares. The Company shall, from and at all times after
the Closing, maintain a reserve of authorized shares of Common Stock sufficient
to cover the issuance of the Warrant Shares underlying the Warrants and the
issuance of any Default Shares pursuant to the terms of the Registration Rights
Agreement.
(c) Use of Proceeds. The Company shall use the proceeds from the sale
of the Securities for general working capital purposes; provided, however, the
Company shall not use the proceeds from the sale of the Securities to the SSF
Purchasers, BayStar, Chelsey, Kline-Hawk and Ravinia to repay or retire any
outstanding indebtedness listed on Schedule 3(y) attached hereto.
(d) Listing. The Company shall, within seven business days of the
Closing Date, file an application for listing on the Nasdaq SmallCap Market
("Nasdaq SmallCap"). The Company will take all action necessary to effect the
listing of the Common Stock on the Nasdaq SmallCap and, if so listed, will use
its best efforts to maintain such listing, or in the event not listed on the
Nasdaq SmallCap then on OTCBB or any relevant market or system, if applicable,
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of NASD, the Nasdaq SmallCap system or any
relevant market or system.
(e) Certain Legal Expenses. The Company shall pay to Winston & Strawn,
counsel to certain of the Purchasers, at the Closing, its fees and expenses
relating to the negotiation and documentation of this Agreement and the other
documents and transactions contemplated hereby in an aggregate amount not to
exceed $20,000.
(f) Removal of Legends. Any legend endorsed on a certificate pursuant
to Section 2(g) and any related stop transfer instructions with respect to any
Securities shall be removed, and the Company shall issue promptly a certificate
without such legend to the holder thereof, if (i) such Securities shall be
registered under the Securities Act, (ii) such legend may be properly removed
under the terms of Rule 144 under the Securities Act or (iii) such holder shall
provide the Company with an opinion of counsel, reasonably satisfactory to the
Company, to the effect that a sale, transfer or assignment of such Securities
may be made pursuant to Rule 144(k) under the Securities Act.
(g) Maintenance of Existence and Conduct of Business. The Company
shall, and shall cause each of its subsidiaries to: (i) do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence, and its rights and franchises; (ii) at all times use its best efforts
to maintain, preserve and protect all of its material intellectual property
including, but not limited to, licenses, patents, trade secrets, confidential
and proprietary information, domain names, copyrights, trademarks, service marks
and trade names, and preserve all the remainder of its material assets, in use
or useful in the conduct of its business and keep the same in good repair,
working order and condition (taking into consideration ordinary wear and tear)
and from time to time make, or cause to be made, all needful and proper repairs,
renewals and replacements, betterments and improvements thereto consistent with
-15-
<PAGE>
Securities Purchase Agreement
industry practices; (iii) ensure that each officer of the Company and its
subsidiaries, and each other employee of the Company and its subsidiaries
involved in the development, implementation or maintenance of the Company's or
such subsidiary's technology, enters into non-compete, non-solicitation and
proprietary information and invention assignment agreements; and (iv) continue
to conduct only the business that the Company or its subsidiaries is engaged in
on the date hereof or businesses related thereto.
(h) Director; Observer. So long as the SSF Purchasers collectively own
at least 25% of the Securities purchased by the SSF Purchasers pursuant to this
Agreement (assuming the exercise of the SSF Purchasers' Warrants and adjusted
for stock splits, combinations, dividends and the like), the SSF Purchasers
shall have the right, but not the obligation, to designate a nominee, reasonably
acceptable to the Board of Directors of the Company, to be elected as a director
of the Company and shall promptly notify the Company of such designee. Upon
receipt of such notice, the Company shall cause the SSF Purchasers' nominee to
be placed on the slate at the next annual or special meeting of stockholders of
the Company for the election of directors and shall use its best efforts to
cause such nominee to be elected at such meeting of stockholders. In the event
the SSF Purchasers elect not to designate a nominee for director, the SSF
Purchasers may designate one individual (the "SSF Observer") to attend all
meetings of the Company's Board of Directors (and any committees thereof) in a
non-voting observer capacity. The SSF Observer shall be entitled to receive all
reports, presentations and materials as if such SSF Observer were a member of
the Company's Board of Directors. The Company shall promptly reimburse, in full,
each director designated by the SSF Purchasers for any reasonable expenses
incurred in connection with meetings of the Company's Board of Directors and
committees thereof, and shall similarly reimburse the SSF Observer.
Notwithstanding the foregoing, (a) in the event the Board of Directors intends
to discuss or vote upon any matter that is subject to attorney-client privilege,
or otherwise involves confidential or proprietary information of the Company,
the SSF Observer may be excluded from the portion of the meeting at which such
matter is discussed by the vote of a majority of the directors present, and (b)
in the event any SSF Purchaser or any of its affiliates or its representatives
becomes a direct competitor of the Company, the Chairman of the Board of
Directors or a majority of the directors present may exclude the SSF Observer
from the meetings of the Board of Directors.
(i) Amendment of Lock-Up Agreement. The Company shall not amend any
Lock-Up Agreement without the consent of those Purchasers owning or having the
right to acquire sixty-six and two-thirds percent (66 2/3%) of the Shares and
the Warrant Shares (which such 66 2/3% must include the Securities held by the
SSF Purchasers).
(j) Subsequent Issuances. In the event the Company proposes to issue
Common Stock, options or rights to acquire Common Stock or securities
convertible into Common Stock to any investor during the twelve month (12)
period following the First Closing Date, the Company shall be required to obtain
the prior written consent of the SSF Purchasers if the proposed investment is
(i) for less than $10,000,000 in the
-16-
<PAGE>
Securities Purchase Agreement
aggregate, (ii) for less than $5,000,000 by any one purchaser, or (iii) by a
Qualified Institutional Buyer (as such term is defined in the Securities Act) (a
"QIB"), or any entity controlled by, under common control with, or affiliated
with a QIB, regardless of the investment amount made by such QIB. The Company
shall require any investor specified in clauses (i) through (iii) above, (each
an "Investor"), to execute a lock-up agreement substantially in the form of
Exhibit D attached hereto beginning on the date of such investment by the
Investor and ending 180 days after the effective date of the registration
statement filed pursuant to the Registration Rights Agreement. Notwithstanding
the foregoing, this Section 6(k) shall not apply to any issuance of securities
by the Company specified in (i), (iii), (v) through (viii) of Section 4(b) of
this Agreement. In connection with this Section 6(k), or otherwise, no party
shall be granted registration rights which would adversely impact the ability of
the Purchasers to register all of their Securities in accordance with the
Registration Rights Agreement.
7. Conditions to Obligations of the Purchasers at the Closings.
(a) First Closing. The obligation of each Purchaser purchasing Shares
at the First Closing to purchase such Shares shall be subject to the fulfillment
on or prior to the First Closing Date of the following conditions, any of which
may be waived by such Purchaser:
(i) Certificates. The Company shall have delivered to each such
Purchaser a duly executed certificate representing the Shares and the Warrants
issuable to such Purchaser.
(ii) Trading. The Common Stock shall be trading on the OTCBB.
(iii) Representations and Warranties; Performance of Obligations.
The representations and warranties of the Company set forth in this Agreement
and in any other Transaction Document shall be true and correct when made, and
shall be true and correct on the First Closing Date with the same force and
effect as if they had been made on and as of said date, except for
representations and warranties made as of a specific date which shall be true
and correct as of such date. The Company shall have performed, satisfied and
complied with all obligations and conditions required to be performed or
observed by it under this Agreement or any other Transaction Document on or
prior to the First Closing Date.
(iv) Consents and Waivers. The Company shall have made all
filings and obtained any and all consents (including, without limitation, all
governmental or regulatory consents), approvals or authorizations, permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement and any other Transaction Document.
(v) No Litigation or Legislation. No statute, rule, regulation,
decree, ruling or injunction shall have been enacted or entered, and no
litigation,
-17-
<PAGE>
Securities Purchase Agreement
proceeding, government inquiry or investigation shall be pending, which
challenges, prohibits or restricts, or seeks to prohibit or restrict, the
consummation of the transactions contemplated by this Agreement or any other
Transaction Document, or restricts or impairs the ability of the Purchasers to
own an equity interest in the Company.
(vi) Compliance Certificate. The Company shall have delivered to
the Purchasers a certificate, executed by the Chief Executive Officer of the
Company, dated as of the First Closing Date, certifying to the fulfillment of
the conditions set forth in Sections 7(a)(ii), (iii), (iv), (v) and (viii) and
such other matters as the Purchasers shall reasonably request.
(vii) Opinion of Counsel. Certain Purchasers shall have received
from Bay Venture Counsel, LLP, counsel to the Company, an opinion addressed only
to those Purchasers named therein, dated as of the First Closing Date, in
substantially the form attached hereto as Exhibit E.
(viii) No Material Adverse Change. There shall not have occurred
since the execution of any of the Transaction Documents any Material Adverse
Change.
(ix) Registration Rights Agreement. The Company shall have
executed and delivered the Registration Rights Agreement with such Purchasers.
(x) Lock-Up Agreement. Except as otherwise provided on Section
3(z) of the Schedule of Exceptions, the Company and certain of its directors,
officers and stockholders shall have each entered into a lock-up agreement, in
substantially the form attached hereto as Exhibit D.
(xi) Amended and Restated Certificate of Incorporation. The
Company shall have executed and delivered to Winston and Strawn, counsel for the
SSF Purchasers, the Amended and Restated Certificate of Incorporation, together
with a letter of direction for filing with the Secretary of State of the State
of Delaware.
(xii) Aggregate Investment. The Company shall have issued and
sold to the Purchasers at least 2,000,000 Shares at an aggregate purchase price
of $8,000,000.
(xiii) Fees and Expenses. The Company shall have paid all fees
and expenses of Winston & Strawn pursuant to the terms of Section 6(e) hereto.
(xiv) Notes. In accordance with Section 3(y) hereof, the Notes
shall have been converted to Shares and warrants to purchase Common Stock.
(b) Second Closing. The obligation of each Purchaser purchasing Shares
at the Second Closing to purchase such Shares shall be subject to the
fulfillment
-18-
<PAGE>
Securities Purchase Agreement
on or prior to the Second Closing Date of the following conditions, any of which
may be waived by such Purchaser:
(i) Certificates. The Company shall have delivered to each such
Purchaser a duly executed certificate representing the Shares and the Warrants
issuable to such Purchaser.
(ii) Trading. The Common Stock shall be trading on the OTCBB.
(iii) Representations and Warranties; Performance of Obligations.
The representations and warranties of the Company set forth in this Agreement
and in any other Transaction Document shall be true and correct when made, and
shall be true and correct on the Second Closing Date with the same force and
effect as if they had been made on and as of said date, except for
representations and warranties made as of a specific date which shall be true
and correct as of such date. The Company shall have performed, satisfied and
complied with all obligations and conditions required to be performed or
observed by it under this Agreement or any other Transaction Document on or
prior to the Second Closing Date.
(iv) Consents and Waivers. The Company shall have made all
filings and obtained any and all consents (including, without limitation, all
governmental or regulatory consents), approvals or authorizations, permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement and any other Transaction Document.
(v) No Litigation or Legislation. No statute, rule, regulation,
decree, ruling or injunction shall have been enacted or entered, and no
litigation, proceeding, government inquiry or investigation shall be pending,
which challenges, prohibits or restricts, or seeks to prohibit or restrict, the
consummation of the transactions contemplated by this Agreement or any other
Transaction Document, or restricts or impairs the ability of the Purchasers to
own an equity interest in the Company.
(vi) Compliance Certificate. The Company shall have delivered to
each such Purchaser a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Second Closing Date, certifying to the fulfillment
of the conditions set forth in Sections 7(b)(ii),(iii), (iv), (v) and (viii) and
such other matters as the Purchasers shall reasonably request.
(vii) No Material Adverse Change. There shall not have occurred
since the execution of any of the Transaction Documents any Material Adverse
Change.
(viii) Registration Rights Agreement. The Company shall have
executed and delivered the Registration Rights Agreement with such Purchasers.
-19-
<PAGE>
Securities Purchase Agreement
8. Conditions to Obligation of the Company at the Closings.
(a) First Closing. The obligation of the Company to sell and issue the
Shares and the Warrants to the Purchasers at the First Closing shall be subject
to the fulfillment on or prior to the First Closing Date of the following
conditions, any of which may be waived by the Company:
(i) Purchase Price. Each such Purchaser shall have delivered the
purchase price for the Shares to be purchased by such Purchaser hereunder.
(ii) Representations and Warranties. The representations and
warranties made by such Purchasers in this Agreement shall be true and correct
when made, and shall be true and correct on the First Closing Date with the same
force and effect as if they had been made on and as of said date.
(iii) No Litigation or Legislation. No Federal, State or local
statute, rule, regulation, decree, ruling or injunction shall have been enacted
or entered, and no litigation, proceeding, government inquiry or investigation
shall be pending, which challenges, prohibits, restricts, or seeks to prohibit
or restrict, the consummation of the transactions contemplated by this Agreement
or the other agreements referred to herein, or restricts or impairs the ability
of any Purchaser to own an equity interest in the Company.
(b) Second Closing. The obligation of the Company to sell and issue
the Shares and the Warrants to each Purchaser at the Second Closing shall be
subject to the fulfillment on or prior to the Second Date of the following
conditions, any of which may be waived by the Company:
(i) Purchase Price. Each such Purchaser shall have delivered the
purchase price for the Shares to be purchased by such Purchaser hereunder.
(ii) Representations and Warranties. The representations and
warranties made by such Purchasers in this Agreement shall be true and correct
when made, and shall be true and correct on the Second Closing Date with the
same force and effect as if they had been made on and as of said date.
(iii) No Litigation or Legislation. No Federal, State or local
statute, rule, regulation, decree, ruling or injunction shall have been enacted
or entered, and no litigation, proceeding, government inquiry or investigation
shall be pending, which challenges, prohibits, restricts, or seeks to prohibit
or restrict, the consummation of the transactions contemplated by this Agreement
or the other agreements referred to herein, or restricts or impairs the ability
of any Purchaser to own an equity interest in the Company.
-20-
<PAGE>
Securities Purchase Agreement
9. Miscellaneous.
(a) Survival. The representations and warranties of the Company and
the agreements and covenants set forth in this Agreement shall survive the
Closing notwithstanding any due diligence investigation conducted by or on
behalf of any Purchaser. The Company shall indemnify and hold harmless each
Purchaser and each of such Purchaser's officers, directors, employees, partners,
members, agents and affiliates for any loss, damage or expense (including
reasonable counsel fees) arising as a result of or related to any breach or
alleged breach by the Company of any of its representations, warranties or
covenants set forth in this Agreement, including advancement of expenses as they
are incurred.
(b) Governing Law; Jury Waiver. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
Company and the Purchasers irrevocably consent to the exclusive jurisdiction of
the United States Federal courts and state courts, located in New York County,
New York, in any suit or proceeding based on or arising under this Agreement and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Service of
process on the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of any Purchaser to serve
process in any manner permitted by law. The parties hereto waive all right to
trial by jury in any action or proceeding to enforce or defend any rights under
this Agreement.
(c) Finder's Fee. Each party shall indemnify and hold the other
harmless from any liability for any commission or compensation in the nature of
a finder's or broker's fee (and the costs and expenses of defending against such
liability or asserted liability) for which such party or any of its officers,
partners, employees or representatives shall be responsible.
(d) Further Assurances. Each party, whether prior to or after the
Closing, shall execute, acknowledge and deliver all such other instruments and
documents, and shall take all such other actions, as may be reasonably requested
by any other party for the purpose of effecting and evidencing the consummation
of the transactions contemplated by this Agreement.
(e) Successors. This Agreement shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties hereto; provided,
however, that the rights of any Purchaser hereunder may be transferred in
connection with a transfer by such Purchaser of all or part of the Securities in
accordance with the terms of this Agreement or the terms of the Warrants, as the
case may be, in a private transaction exempt from registration under the
Securities Act. Any transferee of any of the Securities to whom rights shall be
transferred in such a private transaction, other than
-21-
<PAGE>
Securities Purchase Agreement
an affiliate of the Purchaser, shall be required, as a condition precedent to
acquiring such Securities, to agree in writing to be bound by all the terms and
conditions of this Agreement. A Purchaser may not assign its rights under this
Agreement in connection with the sale of Shares or Warrant Shares pursuant to a
registration statement under the Securities Act or under Rule 144.
(f) Counterparts; Facsimile Execution. This Agreement may be executed
in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Any counterpart or other
signature delivered by a party by facsimile shall be deemed for all purposes as
being good and valid execution and delivery of this Agreement by such party.
(g) Entire Agreement. This Agreement, including and incorporating all
Schedules and all Exhibits hereto and referred to herein, the Registration
Rights Agreement and the Warrants constitute and contain the entire agreements
and understandings of the parties regarding the subject matter of each such
agreement and supercede any and all prior negotiations, correspondence,
understandings and agreements, written or oral, among the parties with respect
to the subject matter of any of the foregoing agreements.
(h) Notices. All notices required to be given hereunder shall be given
by personal delivery, facsimile transmission, nationally recognized overnight
carrier (prepaid) or registered or certified mail, postage prepaid with return
receipt requested. Notices shall be addressed, if to the Company, at its
principal corporate offices located at 500 Sansome Street, Suite 503, San
Francisco, California 94111, Facsimile No. (415) 391-3392, Attention: Chief
Executive Officer and, if to a Purchaser, to the address set forth below such
Purchaser's name on the signature pages hereto. Notices delivered personally
shall be deemed given as of actual receipt; notices sent via facsimile
transmission shall be deemed given as of one business day following receipt by
the sender of written confirmation of transmission thereof; notices sent via
overnight courier shall be deemed given as of one business day following
sending; and notices mailed shall be deemed given as of five business days after
proper mailing. A party may change his or its address by written notice in
accordance with this Section 10(h).
(i) Amendments and Waivers. Except as otherwise provided therein, no
provision of this Agreement or any other Transaction Document may be waived or
amended other than by an instrument in writing signed by the Company and the
Purchasers owning or having the right to acquire sixty-six and two-thirds
percent (66 2/3%) of the Shares and Warrant Shares (which such 66 2/3 percent
must include the Securities held by the SSF Purchasers). Notwithstanding the
foregoing, no amendment or waiver may affect any Purchaser in any manner
differently from any other Purchaser without the written consent of such first
mentioned Purchaser.
(j) Severability. If one or more provisions of this Agreement shall be
held to be unenforceable under applicable law, such provisions shall be excluded
from this Agreement to the extent unenforceable and the balance of this
Agreement shall be
-22-
<PAGE>
Securities Purchase Agreement
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.
(k) Expenses. Except as otherwise provided herein, the parties hereto
shall pay their own costs and expenses.
(l) Publicity. The parties shall consult with each other, to the
extent practicable, as to the form and content of any press releases and other
third party communications or disclosures relating to this Agreement or the
transactions contemplated hereby, and shall use reasonable efforts, acting in
good faith, to agree upon disclosure which shall be satisfactory to the parties
hereto.
(m) Headings. The headings of this Agreement are for convenience of
reference and shall not form a part of, or affect the interpretation of, this
Agreement.
(n) Termination of Covenants. The covenants of the Company set forth
in Section 6 of this Agreement shall terminate at such time as the Purchasers
shall not own any Securities issued pursuant to this Agreement.
-23-
<PAGE>
Signature Pages to Instant Video Technologies Securities Purchase Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
THE COMPANY:
INSTANT VIDEO TECHNOLOGIES, INC.
By:
-----------------------------
Name: Richard Lang
Title: Chairman and CEO
Address: 500 Sansome Street
San Francisco, California 94111
Facsimile No.: (415) 391-3392
THE SPECIAL SITUATIONS FUNDS:
SPECIAL SITUATIONS FUND III, L.P. SPECIAL SITUATIONS CAYMAN FUND, L.P.
By: By:
----------------------------- -----------------------------
Name: David Greenhouse Name: David Greenhouse
Title: Managing Director Title: Managing Director
Address: 153 E. 53rd Street, Address: 153 E. 53rd Street,
55th Floor 55th Floor
New York, New York 10022 New York, New York 10022
Facsimile No.: (212) 207-6515 Facsimile No.: (212) 207-6515
Residence: New York Residence: Cayman Islands
SPECIAL SITUATIONS PRIVATE EQUITY SPECIAL SITUATIONS TECHNOLOGY
FUND, L.P. FUND, L.P.
By: By:
----------------------------- -----------------------------
Name: David Greenhouse Name: David Greenhouse
Title: Managing Director Title: Managing Director
Address: 153 E. 53rd Street, Address: 153 E. 53rd Street,
55th Floor 55th Floor
New York, New York 10022 New York, New York 10022
Facsimile No.: (212) 207-6515 Facsimile No.: (212) 207-6515
Residence: New York Residence: New York
S-1
<PAGE>
OTHER PURCHASERS:
BAYSTAR CAPITAL, L.P. BAYSTAR CAPITAL, L.P.
By: By:
----------------------------- -----------------------------
Name: Steven Lamar Name: Steven Lamar
Title: Managing Partner Title: Managing Partner
Address: 425 Market Street, Address: 425 Market Street,
22nd Floor 22nd Floor
San Francisco, CA 94105 San Francisco, CA 94105
Facsimile No.: (415) 512-6488 Facsimile No.: (415) 512-6488
Residence: California Residence: California
BAYSTAR INTERNATIONAL LIMITED CHELSEY CAPITAL
By: By:
----------------------------- -----------------------------
Name: Steven Lamar Name: Erik Franklin
Title: Managing Partner Title:
Address: 425 Market Street, Address: 1370 Avenue of the
22nd Floor Americas
San Francisco, CA 94105 New York, New York 10019
Facsimile No.: (415) 512-6488 Facsimile No.: (212) 399-5651
Residence: California Residence: New York
ERIK FRANKLIN
By:
-----------------------------
Name: Erik Franklin
Title:
Address: c/o Chelsey Capital
1370 Avenue of the
Americas
New York, New York 10019
Facsimile No.: (212) 399-5651
Residence:
S-2
<PAGE>
RAVINIA CAPITAL VENTURES STORIE PARTNERS L.P.
By: By:
----------------------------- -----------------------------
Name: Kevin Eilian Name: Steven A. Ledger
Title: Managing Member Title: Managing Partner
Address: 2025 Broadway, Suite 30H Address: 100 Pine Street,
New York, N.Y. 10023 Suite 2700
Facsimile No.: (212) 362-1238 San Francisco, CA 94111
Residence: New York Facsimile No.: (415) 434-8043
Residence: California
MERCER MANAGEMENT, INC. REED SLATKIN
By: By:
----------------------------- -----------------------------
Name: Gordon Rock Address: 890 North Kellogg Avenue
Title: President Santa Barbara, CA 93111
Address: 4820 East Mercer Way Facsimile No.: (805) 967-3844
Mercer Island, WA 98040 Residence: California
Facsimile No.: (206) 232-6874
Residence: Washington
KYLE FAULKNER
CHARLES SCHWAB & CO., INC.
CUSTODIAN FBO
ROBERT LONDON KYLE WILKE FAULKNER SEP-IRA
By: By:
----------------------------- -----------------------------
Address: c/o Cruttenden & Roth Title: Chief Technology Officer
809 Presidio Avenue Instant Video Technologies,
Santa Barbara, CA 93101 Inc
Facsimile No.: (805) 966-9302 Address: 5690 Ocean View Drive
Residence: California Oakland, CA 94618
Facsimile No.: __________________
Residence: California
DONALD C. REINKE
DOROTHY LYDDON TRUST (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Name: Dorothy Lyddon Address: Bay Venture Counsel, LLP
Title: Trustee Lake Merritt Plaza
Address: 11801 Dorothy Anne Way Building
Cupertino, CA 95014 1999 Harrison Street,
Facsimile No.: (408) 252-6122 Suite 1300
Residence: California Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
S-3
<PAGE>
BRADLEY H. REINKE JAMES L. BERG
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
ROGER E. REINKE, TRTE GREGORY L. BEATTIE
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
BRUCE WHITLEY STEPHEN P. PEZZOLA
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
BRUCE P. JOHNSON ANN LOUISE MICEK
(Reinke Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: c/o 3600 West Bayshore
Lake Merritt Plaza Suite 101
Building Palo Alto, CA 94303
1999 Harrison Street, Facsimile No.: (650) 325-0830
Suite 1300 Residence: California
Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
S-4
<PAGE>
ELISSA MICEK REECE MICEK
(Micek Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Address: c/o 3600 West Bayshore
Suite 101 Suite 101
Palo Alto, CA 94303 Palo Alto, CA 94303
Facsimile No.: (650) 325-0830 Facsimile No.: (650) 325-0830
Residence: California Residence: California
LAURA MICEK KAROLYN KELLY
(Micek Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Address: c/o 3600 West Bayshore
Suite 101 Suite 101
Palo Alto, CA 94303 Palo Alto, CA 94303
Facsimile No.: (650) 325-0830 Facsimile No.: (650) 325-0830
Residence: California Residence: California
JOHN J. MICEK III INDEPENDENCE PROPERTIES LLC
(Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Name: Joseph Barletta
Suite 101 Title:
Palo Alto, CA 94303 Address: 530 Westgate Drive
Facsimile No.: (650) 325-0830 Napa, CA 94558
Residence: California Facsimile No.: (707) 256-0877
Residence: California
DOUGLAS GLEN GREG FRIEDMAN
By: By:
----------------------------- -----------------------------
Address: 507 Bayview Drive Address: 4138 Terrace Street
Manhattan Beach, CA 90266 Oakland, CA 94611
Facsimile No.: (310) 376-6248 Facsimile No.: __________________
Residence: California Residence: California
S-5
<PAGE>
FRANK KRAMER RYAN ALLISON
By: By:
----------------------------- -----------------------------
Address: 5330 E. 17th Avenue Address: 2520 West Lake Avenue North
Denver, CO 80203 Suite 200
Facsimile No.: (303) 394-1189 Seattle, WA 98109
Residence: Colorado Facsimile No.: (206) 352-6310
Residence: Washington
ARTHUR DOUGLAS ALLEN SUZANNE M. LENTZ
By: By:
----------------------------- -----------------------------
Address: 1322 Isabella Avenue Address: 3337 Broderick
Mountain View, CA 94040 San Francisco, CA 94123
Facsimile No.: (650) 948-2989 Facsimile No.: __________________
Residence: California Residence: California
KEITH KOCH BRUCE HENSEL
By: By:
----------------------------- -----------------------------
Address: 1120 Lincoln Street, Suite 900 Address: 1212 Old Orchard Road
Denver, CO 80203 Vincennes, IN 47591
Facsimile No.: (303) 863-7080 Facsimile No.: (812) 882-8279
Residence: Colorado Residence: Indiana
UNIVERSAL ASSURORS AGENCY, INC. THOMAS KOSHY
By: By:
----------------------------- -----------------------------
Name: John J. Micek III Title: Chief Operating Officer
Title: Instant Video Technologies,
-------------------------- Inc
Address: 3600 West Bayshore, Suite 101 Address: 500 Beal Street, Suite 320
Palo Alto, CA 94303 San Francisco, CA 94105
Facsimile No.: (650) 325-0830 Facsimile No.: __________________
Residence: California Residence: California
S-6
<PAGE>
JUNE S. WHITE HAN JOO LEE
By: By:
----------------------------- -----------------------------
Title: Vice President, Engineering Address: 5509 Ash Creek Lane
Instant Video Technologies, Inc. Plano, TX 75093
Address: 20 Plaid Place Facsimile No.: (972) 699-7586
Hillsborough, CA 94010 Residence: Texas
Facsimile No.: __________________
Residence: California
YUAN MENG BAY VENTURE COUNSEL, LLP
By: By:
----------------------------- -----------------------------
Address: 281 Alvarado Avenue Name: Donald C. Reinke
Los Altos, CA 94022 Title: Managing Partner
Facsimile No.: (650) 947-7168 Address: Bay Venture Counsel, LLP
Residence: California Lake Merritt Plaza
Building
1999 Harrison Street,
Suite 1300
Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
VINCE SAKOWSKI JOHN WORTHING
By: By:
----------------------------- -----------------------------
Address: 845 Oak Grove Avenue Address: 845 Oak Grove Avenue,
Suite 105 Suite 105
Menlo Park, CA 94025 Menlo Park, CA 94025
Facsimile No.: (650) 327-6699 Facsimile No.: (650) 327-6699
Residence: California Residence: California
ROBERT WALTER MICHAEL MOSKOWITZ
By: By:
----------------------------- -----------------------------
Address: 1700 Lincoln Street. Title: Vice President, Business
Suite 4700 Development
Denver, CO 80203-4547 Instant Video Technologies,
Facsimile No.: (303) 830-1705 Inc.
Residence: Colorado Address: 200 Eagle Street
San Francisco, CA 94114
Facsimile No.: __________________
Residence: California
S-7
<PAGE>
R&T SHEPPARD FAMILY PARTNERS
THOMAS A. BELL ROGER SHEPPARD, General Partner
By: By:
----------------------------- -----------------------------
Address: 5536 Manila Avenue Name: Roger Sheppard,
Oakland, CA 94618 General Partner
Facsimile No.: __________________ Address: 14 Bracken Court
Residence: California San Rafael, CA 94901
Facsimile No.: (415) 456-0907
Residence: California
SONJA ERICKSON FRANK H. SCHWARTZ
By: By:
----------------------------- -----------------------------
Address: 887 Indian Rock Avenue Title: Vice President, Technology
Berkeley, CA 94707 Partnerships
Facsimile No.: __________________ Instant Video Technologies,
Residence: California Inc
Address: 351 W. Oakwood Boulevard
Redwood City, CA 94061
Facsimile No.: (650) 562-0220
Residence: California
STEVEN HEIST JAMES E. LANDY
By: By:
----------------------------- -----------------------------
Address: 30 Corwin Street, Apt. 12 Address: 8 Bond Place
San Francisco, CA 94114 Mt. Holly, NJ 08060
Facsimile No.: __________________ Facsimile No.: (609) 261-8155
Residence: California Residence: New Jersey
ZHIPING LIU KIMBERLEY L. MASSINGALE
By: By:
----------------------------- -----------------------------
Address: 36 Avalon Avenue Address: 5270 Boyd Avenue
San Francisco, CA 94112 Oakland, CA 94618
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
S-8
<PAGE>
FRANCIS E. VEGLIANTE RICHARD P. TREVOR
By: By:
----------------------------- -----------------------------
Address: 15010 Eaglerise Drive Address: 919 Hillcroft Circle
Lithia, FL 33547 Oakland, CA 94610
Facsimile No.: (813) 662-2774 Facsimile No.: __________________
Residence: Florida Residence: California
EVAN ZHANG ED LYONS
By: By:
----------------------------- -----------------------------
Address: 1458 39th Avenue Address: 918 Jackson Street
San Francisco, CA 94122 Albany, CA 94706
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
ALLAN BER PAUL SOC BANH
By: By:
----------------------------- -----------------------------
Address: 1259 6th Avenue Address: 3713 Langdon Common
San Francisco, CA 94122 Fremont, CA 94538
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
S-9
<PAGE>
Securities Purchase Agreement
<TABLE>
Schedule 1
Purchasers/Purchased Shares and Warrant Shares
<CAPTION>
Number of Aggregate Form of
Purchaser Shares Warrant Shares Purchase Price Payment
--------- ------ -------------- -------------- -------
<S> <C> <C> <C> <C>
Special Situations Fund III, L.P. 375,000 375,000 $1,500,000 Wire Transfer
Warrant Shares $1,500,000
Special Situations Cayman Fund, L.P. 125,000 125,000 $500,000 Wire Transfer
Warrant Shares $500,000
Special Situations Private Equity Fund, L.P 250,000 250,000 $1,000,000 Wire Transfer
Warrant Shares $1,000,000
Special Situations Technology Fund, L.P. 250,000 250,000 $1,000,000 Wire Transfer
Warrant Shares $1,000,000
BayStar Capital, L.P. 375,000 375,000 $1,500,000 Wire Transfer
Warrant Shares $1,500,000
BayStar International Limited 375,000 375,000 1,500,000 Wire Transfer
Warrant Shares 1,500,000
Chelsey Capital 750,000 750,000 $3,000,000 Wire Transfer
Warrant Shares $3,000,000
Klein Hawk* 0 0 0 0
Erik Franklin 100,000 100,000 $400,000 Wire Transfer
Warrant Shares $400,000
Ravinia Capital Ventures LLC 593,500 593,500 $2,374,000 Wire Transfer
Warrant Shares $2,374,000
Storie Partners LLP 500,000 500,000 $2,000,000 Cancelled Notes:
Warrant Shares $1,500,000
$500,000
Mercer Management, Inc. 387,500 387,500 $1,550,000 Cancelled Notes:
Warrant Shares $450,000
$100,000
$500,000
$300,000
$200,000
Reed Slatkin 130,000 130,000 $520,000 Cancelled Note
Warrant Shares $520,000
Robert London 125,000 125,000 $500,000 Cancelled Note
Warrant Shares $500,000
Kyle Faulkner 62,500 62,500 $250,000 Wire Transfer
Warrant Shares $250,000
Dorothy Lyddon Trust 50,000 50,000 $200,000 Wire Transfer
Warrant Shares $200,000
Reinke Investment Group 40,000 40,000 $160,000 Cancelled Note
Warrant Shares $110,000
Check - $50,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Aggregate Form of
Purchaser Shares Warrant Shares Purchase Price Payment
--------- ------ -------------- -------------- -------
<S> <C> <C> <C> <C>
Micek Investment Group 31,250 31,250 $125,000 Cancelled Note
Warrant Shares $100,000
Check - $25,000
Independence Properties LLC 25,000 25,000 $100,000 Cancelled Note
Warrant Shares $100,000
Doug Glen 25,000 25,000 $100,000 Wire Transfer
Warrant Shares $100,000
Greg Friedman 23,000 23,000 $92,000 Wire Transfer
Warrant Shares $92,000
Frank Kramer 18,750 18,750 $75,000 Cancelled Note
Warrant Shares $75,000
Ryan Allison 18,750 18,750 $75,000 Cancelled Note
Warrant Shares $75,000
Arthur Douglas Allen 18,750 18,750 $75,000 Check
Warrant Shares $75,000
Suzanne M. Lentz 15,000 15,000 $60,000 Check
Warrant Shares $60,000
Keith Koch 12,500 12,500 $50,000 Cancelled Note
Warrant Shares $50,000
Bruce Hensel 12,500 12,500 $50,000 Cancelled Note
Warrant Shares $50,000
Universal Assurors Agency, Inc. 12,500 12,500 $50,000 Cancelled Note
Warrant Shares $50,000
Thomas Koshy 10,000 10,000 $40,000 Check
Warrant Shares $40,000
June S. White 10,000 10,000 $40,000 Check
Warrant Shares $40,000
Han Joo Lee 10,000 10,000 $40,000 Cancelled Note
Warrant Shares $40,000
Yuan Meng 10,000 10,000 $40,000 Wire Transfer
Warrant Shares $40,000
Bay Venture Counsel , LLP 6,250 6,250 $25,000 Wire Transfer
Warrant Shares $25,000
Vince Sakowski 6,250 6,250 $25,000 Cancelled Note
Warrant Shares $25,000
John Worthing 6,250 6,250 $25,000 Cancelled Note
Warrant Shares $25,000
Robert Walter 6,250 6,250 $25,000 Cancelled Note
Warrant Shares $25,000
Michael Moskowitz 6,000 6,000 $24,000 Check
Warrant Shares $24,000
Tomas A. Bell 5,000 5,000 $20,000 Check
Warrant Shares $20,000
R&T Sheppard Family Partners
Roger Sheppard, Managing Partner 3,750 3,750 $15,000 Cancelled Note
Warrant Shares $15,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Aggregate Form of
Purchaser Shares Warrant Shares Purchase Price Payment
--------- ------ -------------- -------------- -------
<S> <C> <C> <C> <C>
Sonja Erickson 3,750 3,750 $15,000 Check
Warrant Shares $15,000
James E. Landy 3,750 3,750 $15,000 Check
Warrant Shares $15,000
Frank H. Schwartz 3,250 3,250 $13,000 Check
Warrant Shares $13,000
Steven Heist 2,500 2,500 $10,000 Check
Warrant Shares $10,000
Zhiping Liu 2,500 2,500 $10,000 Check
Warrant Shares $10,000
Kimberley L. Massingale 2,000 2,000 $8,000 Check
Warrant Shares $8,000
Francis E. Vegliante 2,000 2,000 $8,000 Check
Warrant Shares $8,000
Richard P. Trevor 2,000 2,000 $8,000 Check
Warrant Shares $8,000
Evan Zhang 2,000 2,000 $8,000 Check
Warrant Shares $8,000
Ed Lyons 1,250 1,250 $5,000 Check
Warrant Shares $5,000
Allan Ber 1,125 1,125 $4,500 Check
Warrant Shares $4,500
Paul Soc Banh 1,000 1,000 $4,000 Check
Warrant Shares $4,000
--------- --------- ----------- -----------
Total 4,808,375 4,808,375 $19,233,500 $19,233,500
========= ========= =========== ===========
</TABLE>
- ----------
* While there was a provision in the Agreement to allow Klein Hawk to invest
by January 31, no investment was made.
INSTANT VIDEO TECHNOLOGIES, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated effective as
of January 27, 2000 (the "Effective Date") by and among (i) the purchasers of
certain common stock and warrants to purchase common stock of the Company
(defined below) listed on the signature pages hereto and each other Person
(defined below) who becomes a party to this Agreement simultaneously with
becoming a party pursuant to and in accordance with the terms and conditions set
forth in that certain Purchase Agreement (defined below) on, or before, January
31, 2000 (each a "Holder" and, collectively, the "Holders") and (ii) Instant
Video Technologies, Inc., a Delaware corporation (the "Company").
RECITALS
The Holders are parties to a Securities Purchase Agreement dated for
reference purposes as of even date herewith by and between the Company and the
Holders (the "Purchase Agreement") pursuant to which the Company is obligated to
enter into this Agreement. All capitalized terms not defined herein shall have
the meaning established in the Purchase Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Agreement, the parties hereto
hereby agree as follows:
1. Definitions.
"Commission" means the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
"Common Stock" means any and all (i) common stock of the Company
issued pursuant to the Purchase Agreement; (ii) common stock of the Company
issued or issuable upon exercise of the Warrants (collectively, (i) and (ii) the
"Stock"); (iii) common stock of the Company issued as a dividend or other
distribution with respect to or in replacement of the Stock, and (iv) any common
stock issued in any combination or subdivision of the Stock. In determining the
amount of Common Stock held by any Person, the sum of (i), (ii), (iii) and (iv)
shall be used and a Person shall be deemed to "hold" all Common Stock then held
by and/or issuable to such Person.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statue and the rules and regulations of the
Commission thereunder all as the same shall be in effect at the time.
"Person" means any individual, corporation, trust, partnership,
association, or other entity.
"Registrable Shares" means the Common Stock.
<PAGE>
Registration Rights Agreement
"Registration Statement" means the registration statement and any
additional registration statements filed with the Commission as contemplated by
Section 2, including (in each case) any prospectus, amendments and supplements
to such registration statement or Prospectus, including pre- and post- effective
amendments, all exhibits thereto, and all material incorporated by reference in
such registration statement or statements.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar Federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Untrue Statement" shall include any untrue statement or alleged
untrue statement in the Registration Statement, or any omission or alleged
omission to state in the Registration Statement a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
2.1 Registration Procedures and Expenses. The Company is obligated to do
the following:
The Company shall,
(a) within 60 days following the Closing Date, prepare and file with
the Commission a Registration Statement on Form S-1 in order to register with
the Commission under the Securities Act a sale by the Holders in accordance with
the method or methods of distribution thereof as reasonably specified by the
Holders on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act all of the Registrable Shares (notwithstanding anything to the
contrary expressed or implied herein, if a registration statement on Form S-3,
or any substitute form, becomes available for registration of the Registrable
Shares, the Company may instead prepare and file with the Commission a
registration statement on Form S-3 at any time in order to register the
Registrable Shares under the Securities Act and such registration statement will
be a "Registration Statement" for the purposes of this Agreement);
(b) use its best efforts, subject to receipt of necessary information
from the Holders, to cause such Registration Statement to become effective no
later than 120 days following the Closing Date;
(c) promptly notify each Holder, at any time when a prospectus
relating to such Registration Statement is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in or relating to such Registration Statement contains an
Untrue Statement;
(d) promptly prepare and file with the Commission, and deliver to each
Holder, such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective and to comply with the provisions of the
-2-
<PAGE>
Registration Rights Agreement
Securities Act with respect to the sale or other disposition of all Registrable
Shares until termination of such obligation as provided in Section 2.6 below;
(e) furnish to each Purchaser such number of copies of prospectuses,
including preliminary prospectuses, in conformity with the requirements of the
Securities Act, in order to facilitate the public sale or other disposition of
all or any of the Registrable Shares by the Holders;
(f) file such documents as may be required of the Company for normal
securities law clearance for the resale of the Registrable Shares in any state
reasonably requested by the Holders provided, however, that the Company shall
not be required in connection with this paragraph (f) to (i) qualify as a
foreign corporation to do business under the laws of any jurisdiction in which
it shall not then be qualified or execute a general consent to service of
process in any jurisdiction or (ii) undertake any filing obligations in those
states where the Company does not currently meet such filing requirements;
(g) use its best efforts to cause all Registrable Shares to be listed
on each securities exchange, quotation system, market or over-the-counter
bulletin board, if any, on which equity securities by the Company are then
listed or traded;
(h) bear all expenses in connection with this Agreement, including,
without limitation, all registration and filing fees (including all expenses
incident to filing with the NASD), printing expenses, fees and disbursements of
counsel for company, expenses of any special audits incident to or required by
any such registration and expenses of complying with the securities or blue sky
laws of any jurisdiction, other than (i) fees and expenses, if any, of counsel
or other advisors to the Holders and (ii) brokers commissions, discounts or fees
and transfer taxes; and
(i) take all reasonable actions required to prevent the entry of any
stop order issued or threatened by the Commission or any state regulatory
authority with respect to any Registration Statement covering Registrable
Shares, and take all reasonable actions to remove it if entered.
2.2 Indemnification
(a) The Company agrees to indemnify and hold harmless each Holder,
such Holder's directors, officers, partners, agents, each underwriter of
Registered Shares, and each Person who controls any of the foregoing (within the
meaning of Section 15 of the Securities Act) (each an "Indemnified Party") from
and against any losses, claims, damages or liabilities to which such Indemnified
Party may become subject (under the Securities Act or otherwise) insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon, any Untrue Statement in the
Registration Statement, or arise out of any failure by the Company to fulfill
any undertaking included in the Registration Statement or arise under the
Securities Act or any other statute or at common law and the Company will
-3-
<PAGE>
Registration Rights Agreement
reimburse such Indemnified Party for any reasonable legal or other expenses
reasonably incurred in investigating, defending or preparing to defend any such
action, proceeding or claim; provided, however, that the Company shall not be
liable in any such case to the extent that such loss, claim, damage or liability
arises out of, or is based upon, an Untrue Statement made in such Registration
Statement in reliance upon and in conformity with written information furnished
to the Company by or on behalf of such Indemnified Party specifically for use in
preparation of the Registration Statement or the failure of such Holder to
comply with the covenants and agreements contained in Section 2.4 hereof
respecting the sale of the Registrable Shares or any Untrue Statement in any
prospectus that is corrected in any subsequent prospectus that was delivered to
the Holder prior to the pertinent sale or sales by the Holder.
(b) Each Holder, severally and not jointly, agrees to indemnify and
hold harmless the Company (and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act, each officer of the
Company who signs the Registration Statement and each director of the Company)
from and against any losses, claims, damages or liabilities to which the Company
(or any such officer, director or controlling person) may become subject (under
the Securities Act or otherwise), insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, any failure to comply with the covenants and agreements contained in
Section 2.4 hereof respecting sale of the Registrable Shares, or any Untrue
Statement contained in the Registration Statement if, but only if, such Untrue
Statement was made in reliance upon and in conformity with written information
furnished by or on behalf of such Holder specifically for use in preparation of
the Registration Statement and such Holder will reimburse the Company (or such
officer, director or controlling person), as the case may be, for any legal or
other expenses reasonably incurred in investigating, defending or preparing to
defend any such action, proceeding or claim; provided that in no event shall any
indemnity by a Holder under this Section 2.2 exceed the net proceeds received by
such Holder from the sale of the Registrable Shares covered by such Registration
Statement.
(c) Promptly after receipt by any indemnified person of a notice of a
claim or the beginning of any action in respect of which indemnity is to be
sought against an indemnifying person pursuant to this Section 2.2, such
indemnified person shall notify the indemnifying person in writing of such claim
or of the commencement of such action, and, subject to the provisions
hereinafter stated, in case any such action shall be brought against an
indemnified person and such indemnifying person shall have been notified
thereof, such indemnifying person shall be entitled to participate therein, and,
to the extent it shall wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified person. After notice from the
indemnifying person to such indemnified person of its election to assume the
defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof; provided, however,
that if there
-4-
<PAGE>
Registration Rights Agreement
exists or shall exist a conflict of interest that would make it inappropriate,
in the opinion of counsel to the indemnified person, for the same counsel to
represent both the indemnified person and such indemnifying person or any
affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person; provided,
however, that no indemnifying person shall be responsible for the fees and
expenses of more than one separate counsel for all indemnified parties. No
indemnifying party in the defense of any such claim or litigation shall, except
with the consent of each indemnified party, consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such indemnified party of a release
from all liability in respect of such claim or litigation, and no indemnified
party shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the indemnifying party.
(d) If the indemnification provided for in this Section 2.2 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission. No Person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. Notwithstanding anything to the
contrary contained herein, any contribution by a Holder hereunder shall not
exceed the net proceeds received by such Holder from the sale of the Shares
covered by the Registration Statement.
2.3 Penalty Payment.
(a) In the event that the Registration Statement required to be filed
pursuant to Section 2.1 relating to Registrable Shares shall not be declared
effective by the Commission within one hundred twenty (120) days from the
Closing Date (the "Final Registration Date"), the Company shall pay each Holder,
in cash, one percent (1%) of such Holder's Purchase Price (prorated for partial
periods) with such payment made pursuant to this Section 2.3 (referred to as a
"Penalty Payment"), within ten (10) days of the end of each thirty
-5-
<PAGE>
Registration Rights Agreement
(30) day period following the Final Registration Date, for each such thirty (30)
day period, until the earlier to occur of (i) the effectiveness of the
Registration Statement covering the Registrable Shares, or (ii) until each such
Holder is permitted to publicly sell all of the shares of Common Stock owned by
such Holder during any 3 month period pursuant to Rule 144. For example, if the
Registration Statement becomes effective on the 135th day following the Closing
Date, the Penalty Payment shall equal 1/2% of such Holder's Purchase Price.
(b) The remedies provided for in this Section 2.3 shall be in addition
to any other remedies available to the Holders under this Agreement, at law or
in equity.
2.4 Transfer of Shares After Registration; Notice. The Holder hereby
covenants with the Company not to make any sale of the Registrable Shares after
registration without effectively causing the prospectus delivery requirement
under the Securities Act to be satisfied. The Holder acknowledges that there may
be times when the Company must suspend the use of the prospectus forming a part
of the Registration Statement until such time as an amendment to the
Registration Statement has been filed by the Company and declared effective by
the Commission, or until such time as the Company has filed an appropriate
report with the Commission pursuant to the Exchange Act. The Holder hereby
covenants that it will not sell any Shares pursuant to said prospectus during
the period commencing at the time at which the Company gives the Holder notice
of the suspension of the use of said prospectus and ending at the time the
Company gives the Holder notice that the Holder may thereafter effect sales
pursuant to said prospectus; provided, however, that no such postponement shall
be permitted for more than 90 days during any 12 month period. The foregoing
provisions of this Section 2.4 shall in no manner diminish or otherwise impair
the Company's obligations under Section 2.1.
2.5 Reporting Requirements.
(a) The Company agrees to use its best efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(ii) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) so long as any of the Holders own Registrable Shares, to
furnish to the Holders forthwith upon request (1) a written statement by the
Company as to whether it complies with the reporting requirements of said Rule
144, the Securities Act and the Exchange Act, or whether it qualifies as a
registrant whose securities may be resold pursuant to Commission Form S-3, (2) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and
-6-
<PAGE>
Registration Rights Agreement
(3) such other information as may be reasonably requested in availing the
Holders of any rule or regulation of the Commission that would permit the
selling of the Registrable Shares without registration.
2.6 Termination of Obligations. The obligations of the Company pursuant to
Sections 2.1 through 2.5 hereof shall cease and terminate upon the earlier to
occur of (i) such time as all of the Registrable Shares have been resold or (ii)
such time as all of the Registrable Shares may be sold during any 3 month period
pursuant to Rule 144, including Rule 144 (k) or (iii) upon the second
anniversary date of the date of effectiveness of the Registration Statement.
2.7. Assignability of Registration Rights. The Registration rights set
forth in this Section 2 are assignable only to assignees acquiring the lesser of
250,000 or more Registrable Shares or all of a Holder's Registrable Shares held
at the time of assignment. Notwithstanding anything to the contrary herein, in
no event shall a Holder of less than 250,000 Registrable Securities assign any
rights herein after 30 days following the Effective Date and prior to the
effectiveness of the Registration Statement. Provided further that the Company
shall not be obligated to file any post-effective amendment to the Registration
Statement solely for the purpose of adding such assignee(s) to the Registration
Statement more than once during any consecutive six month period. For purposes
of this Section 2.7 only, the SSF Purchasers (as defined in the Purchase
Agreement) shall be considered one Holder.
3 Miscellaneous.
a. Consent to Amendments. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and/or the provisions
hereof waived, only with the written consent of the Company and of Holders
holding sixty-six and two-thirds percent (66 2/3%) or more of the Registrable
Shares at the time held by all Holders (which must include the Registrable
Shares held by the SSF Purchasers, as defined in the Purchase Agreement).
Notwithstanding the foregoing, no amendment or waiver may affect any Holder in
any manner differently from any other Holder without the written consent of such
first mentioned Holder. No course of dealing between the Company and any Holder
or any delay in exercising any rights hereunder or under the Company's
Certificate of Incorporation will operate as a waiver of any rights of any such
Holder.
b. Successors and Assigns. All covenants and agreements contained in
this Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.
-7-
<PAGE>
Registration Rights Agreement
c. Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
d. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts when taken together shall constitute one and
the same Agreement.
e. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
f. Notices. All notices, demands, consents or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been given (i) when personally delivered, (ii) three (3) business days following
mailing thereof, if sent by first class certified mail, return receipt
requested, or (iii) the next business day following transmission or mailing, if
sent by facsimile (receipt confirmed and followed up by one of the other
delivery methods discussed herein as well), Express Mail, Federal Express or
similar service, addressed as follows:
If to any Holder: To the applicable addresses set forth in the Purchase
Agreement
With a Copy to: Winston & Strawn
200 Park Avenue
New York, N.Y. 10166-4193
Attn. Naima K. Walker, Esq.
Fax No.: (212) 294-4700
If to the Company: Instant Video Technologies, Inc.
500 Sansome Street, Suite 503
San Francisco, CA 94111
Attn: Ed Davis, Esq.
Fax No.: (415) 391-3392
With a Copy to: Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, CA 94612
Attn: Donald C. Reinke, Esq.
Fax No.: (510) 834-7440
Any party may change its address for purposes hereof by notice given in
accordance with this Section 3.f to each of the other parties hereto.
g. Governing Law. The validity, meaning and effect of this Agreement,
and all amendments and supplements hereto and all waivers and consents
hereunder, shall be determined in accordance with the laws of New York,
applicable to contracts made and to be performed entirely within the State of
New York. Each of the parties hereby submits to personal jurisdiction in the
County of New York,
-8-
<PAGE>
Registration Rights Agreement
State of New York solely for purposes of this Agreement and waives any objection
as to venue in the County of New York, State of New York.
h. Schedules and Exhibits. All schedules and exhibits are an
integral part of this Agreement.
i. Litigation Costs. Subject to Section 2.2, if any legal action or
any arbitration or other proceeding is brought for the enforcement of this
Agreement, or because of a dispute, breach, default, or misrepresentation in
connection with any of the provisions of this Agreement, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled, if and only to the extent that
the applicable arbitrator or court shall so direct and such direction is final
and not subject to appeal or review.
j. Specific Performance. Each party's obligation under this
Agreement is unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely impracticable
to measure the resulting damages; accordingly, each non defaulting party, in
addition to any other available rights or remedies, may sue in equity for
specific performance, and the parties each expressly waive the defense that a
remedy in damages will be adequate.
k. Integration. This instrument constitutes the entire agreement of
the parties hereto respecting the registration of the Registrable Shares by the
Holders and correctly sets forth the rights, duties, and obligations of each
party hereto to the others in relation thereto as of its date. Any prior
agreements, promises, negotiations or representations concerning its subject
matter which are not expressly set forth in this Agreement.
l. No Inconsistent Agreements. The Company will not hereafter enter
into any agreement with respect to its securities that is inconsistent with or
violates the rights granted to the holders of Registrable Shares in this
Agreement.
(SIGNATURES FOLLOWING)
-9-
<PAGE>
Signature Pages to Instant Video Technologies Registration Rights Agreement
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
THE COMPANY:
INSTANT VIDEO TECHNOLOGIES, INC.
By:
-----------------------------
Name: Richard Lang
Title: Chairman and CEO
Address: 500 Sansome Street
San Francisco, California 94111
Facsimile No.: (415) 391-3392
THE SPECIAL SITUATIONS FUNDS:
SPECIAL SITUATIONS FUND III, L.P. SPECIAL SITUATIONS CAYMAN FUND, L.P.
By: By:
----------------------------- -----------------------------
Name: David Greenhouse Name: David Greenhouse
Title: Managing Director Title: Managing Director
Address: 153 E. 53rd Street, Address: 153 E. 53rd Street,
55th Floor 55th Floor
New York, New York 10022 New York, New York 10022
Facsimile No.: (212) 207-6515 Facsimile No.: (212) 207-6515
Residence: New York Residence: Cayman Islands
SPECIAL SITUATIONS PRIVATE EQUITY SPECIAL SITUATIONS TECHNOLOGY
FUND, L.P. FUND, L.P.
By: By:
----------------------------- -----------------------------
Name: David Greenhouse Name: David Greenhouse
Title: Managing Director Title: Managing Director
Address: 153 E. 53rd Street, Address: 153 E. 53rd Street,
55th Floor 55th Floor
New York, New York 10022 New York, New York 10022
Facsimile No.: (212) 207-6515 Facsimile No.: (212) 207-6515
Residence: New York Residence: New York
S-1
<PAGE>
OTHER PURCHASERS:
BAYSTAR CAPITAL, L.P. BAYSTAR CAPITAL, L.P.
By: By:
----------------------------- -----------------------------
Name: Steven Lamar Name: Steven Lamar
Title: Managing Partner Title: Managing Partner
Address: 425 Market Street, Address: 425 Market Street,
22nd Floor 22nd Floor
San Francisco, CA 94105 San Francisco, CA 94105
Facsimile No.: (415) 512-6488 Facsimile No.: (415) 512-6488
Residence: California Residence: California
BAYSTAR INTERNATIONAL LIMITED CHELSEY CAPITAL
By: By:
----------------------------- -----------------------------
Name: Steven Lamar Name: Erik Franklin
Title: Managing Partner Title:
Address: 425 Market Street, Address: 1370 Avenue of the
22nd Floor Americas
San Francisco, CA 94105 New York, New York 10019
Facsimile No.: (415) 512-6488 Facsimile No.: (212) 399-5651
Residence: California Residence: New York
ERIK FRANKLIN
By:
-----------------------------
Name: Erik Franklin
Title:
Address: c/o Chelsey Capital
1370 Avenue of the
Americas
New York, New York 10019
Facsimile No.: (212) 399-5651
Residence:
S-2
<PAGE>
RAVINIA CAPITAL VENTURES STORIE PARTNERS L.P.
By: By:
----------------------------- -----------------------------
Name: Kevin Eilian Name: Steven A. Ledger
Title: Managing Member Title: Managing Partner
Address: 2025 Broadway, Suite 30H Address: 100 Pine Street,
New York, N.Y. 10023 Suite 2700
Facsimile No.: (212) 362-1238 San Francisco, CA 94111
Residence: New York Facsimile No.: (415) 434-8043
Residence: California
MERCER MANAGEMENT, INC. REED SLATKIN
By: By:
----------------------------- -----------------------------
Name: Gordon Rock Address: 890 North Kellogg Avenue
Title: President Santa Barbara, CA 93111
Address: 4820 East Mercer Way Facsimile No.: (805) 967-3844
Mercer Island, WA 98040 Residence: California
Facsimile No.: (206) 232-6874
Residence: Washington
KYLE FAULKNER
CHARLES SCHWAB & CO., INC.
CUSTODIAN FBO
ROBERT LONDON KYLE WILKE FAULKNER SEP-IRA
By: By:
----------------------------- -----------------------------
Address: c/o Cruttenden & Roth Title: Chief Technology Officer
809 Presidio Avenue Instant Video Technologies,
Santa Barbara, CA 93101 Inc
Facsimile No.: (805) 966-9302 Address: 5690 Ocean View Drive
Residence: California Oakland, CA 94618
Facsimile No.: __________________
Residence: California
DONALD C. REINKE
DOROTHY LYDDON TRUST (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Name: Dorothy Lyddon Address: Bay Venture Counsel, LLP
Title: Trustee Lake Merritt Plaza
Address: 11801 Dorothy Anne Way Building
Cupertino, CA 95014 1999 Harrison Street,
Facsimile No.: (408) 252-6122 Suite 1300
Residence: California Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
S-3
<PAGE>
BRADLEY H. REINKE JAMES L. BERG
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
ROGER E. REINKE, TRTE GREGORY L. BEATTIE
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
BRUCE WHITLEY STEPHEN P. PEZZOLA
(Reinke Investment Group) (Reinke Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: Bay Venture Counsel, LLP
Lake Merritt Plaza Lake Merritt Plaza
Building Building
1999 Harrison Street, 1999 Harrison Street,
Suite 1300 Suite 1300
Oakland, CA 94612 Oakland, CA 94612
Facsimile No.: (510) 834-7440 Facsimile No.: (510) 834-7440
Residence: California Residence: California
BRUCE P. JOHNSON ANN LOUISE MICEK
(Reinke Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: Bay Venture Counsel, LLP Address: c/o 3600 West Bayshore
Lake Merritt Plaza Suite 101
Building Palo Alto, CA 94303
1999 Harrison Street, Facsimile No.: (650) 325-0830
Suite 1300 Residence: California
Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
S-4
<PAGE>
ELISSA MICEK REECE MICEK
(Micek Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Address: c/o 3600 West Bayshore
Suite 101 Suite 101
Palo Alto, CA 94303 Palo Alto, CA 94303
Facsimile No.: (650) 325-0830 Facsimile No.: (650) 325-0830
Residence: California Residence: California
LAURA MICEK KAROLYN KELLY
(Micek Investment Group) (Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Address: c/o 3600 West Bayshore
Suite 101 Suite 101
Palo Alto, CA 94303 Palo Alto, CA 94303
Facsimile No.: (650) 325-0830 Facsimile No.: (650) 325-0830
Residence: California Residence: California
JOHN J. MICEK III INDEPENDENCE PROPERTIES LLC
(Micek Investment Group)
By: By:
----------------------------- -----------------------------
Address: c/o 3600 West Bayshore Name: Joseph Barletta
Suite 101 Title:
Palo Alto, CA 94303 Address: 530 Westgate Drive
Facsimile No.: (650) 325-0830 Napa, CA 94558
Residence: California Facsimile No.: (707) 256-0877
Residence: California
DOUGLAS GLEN GREG FRIEDMAN
By: By:
----------------------------- -----------------------------
Address: 507 Bayview Drive Address: 4138 Terrace Street
Manhattan Beach, CA 90266 Oakland, CA 94611
Facsimile No.: (310) 376-6248 Facsimile No.: __________________
Residence: California Residence: California
S-5
<PAGE>
FRANK KRAMER RYAN ALLISON
By: By:
----------------------------- -----------------------------
Address: 5330 E. 17th Avenue Address: 2520 West Lake Avenue North
Denver, CO 80203 Suite 200
Facsimile No.: (303) 394-1189 Seattle, WA 98109
Residence: Colorado Facsimile No.: (206) 352-6310
Residence: Washington
ARTHUR DOUGLAS ALLEN SUZANNE M. LENTZ
By: By:
----------------------------- -----------------------------
Address: 1322 Isabella Avenue Address: 3337 Broderick
Mountain View, CA 94040 San Francisco, CA 94123
Facsimile No.: (650) 948-2989 Facsimile No.: __________________
Residence: California Residence: California
KEITH KOCH BRUCE HENSEL
By: By:
----------------------------- -----------------------------
Address: 1120 Lincoln Street, Suite 900 Address: 1212 Old Orchard Road
Denver, CO 80203 Vincennes, IN 47591
Facsimile No.: (303) 863-7080 Facsimile No.: (812) 882-8279
Residence: Colorado Residence: Indiana
UNIVERSAL ASSURORS AGENCY, INC. THOMAS KOSHY
By: By:
----------------------------- -----------------------------
Name: John J. Micek III Title: Chief Operating Officer
Title: Instant Video Technologies,
-------------------------- Inc
Address: 3600 West Bayshore, Suite 101 Address: 500 Beal Street, Suite 320
Palo Alto, CA 94303 San Francisco, CA 94105
Facsimile No.: (650) 325-0830 Facsimile No.: __________________
Residence: California Residence: California
S-6
<PAGE>
JUNE S. WHITE HAN JOO LEE
By: By:
----------------------------- -----------------------------
Title: Vice President, Engineering Address: 5509 Ash Creek Lane
Instant Video Technologies, Inc. Plano, TX 75093
Address: 20 Plaid Place Facsimile No.: (972) 699-7586
Hillsborough, CA 94010 Residence: Texas
Facsimile No.: __________________
Residence: California
YUAN MENG BAY VENTURE COUNSEL, LLP
By: By:
----------------------------- -----------------------------
Address: 281 Alvarado Avenue Name: Donald C. Reinke
Los Altos, CA 94022 Title: Managing Partner
Facsimile No.: (650) 947-7168 Address: Bay Venture Counsel, LLP
Residence: California Lake Merritt Plaza
Building
1999 Harrison Street,
Suite 1300
Oakland, CA 94612
Facsimile No.: (510) 834-7440
Residence: California
VINCE SAKOWSKI JOHN WORTHING
By: By:
----------------------------- -----------------------------
Address: 845 Oak Grove Avenue Address: 845 Oak Grove Avenue,
Suite 105 Suite 105
Menlo Park, CA 94025 Menlo Park, CA 94025
Facsimile No.: (650) 327-6699 Facsimile No.: (650) 327-6699
Residence: California Residence: California
ROBERT WALTER MICHAEL MOSKOWITZ
By: By:
----------------------------- -----------------------------
Address: 1700 Lincoln Street. Title: Vice President, Business
Suite 4700 Development
Denver, CO 80203-4547 Instant Video Technologies,
Facsimile No.: (303) 830-1705 Inc.
Residence: Colorado Address: 200 Eagle Street
San Francisco, CA 94114
Facsimile No.: __________________
Residence: California
S-7
<PAGE>
R&T SHEPPARD FAMILY PARTNERS
THOMAS A. BELL ROGER SHEPPARD, General Partner
By: By:
----------------------------- -----------------------------
Address: 5536 Manila Avenue Name: Roger Sheppard,
Oakland, CA 94618 General Partner
Facsimile No.: __________________ Address: 14 Bracken Court
Residence: California San Rafael, CA 94901
Facsimile No.: (415) 456-0907
Residence: California
SONJA ERICKSON FRANK H. SCHWARTZ
By: By:
----------------------------- -----------------------------
Address: 887 Indian Rock Avenue Title: Vice President, Technology
Berkeley, CA 94707 Partnerships
Facsimile No.: __________________ Instant Video Technologies,
Residence: California Inc
Address: 351 W. Oakwood Boulevard
Redwood City, CA 94061
Facsimile No.: (650) 562-0220
Residence: California
STEVEN HEIST JAMES E. LANDY
By: By:
----------------------------- -----------------------------
Address: 30 Corwin Street, Apt. 12 Address: 8 Bond Place
San Francisco, CA 94114 Mt. Holly, NJ 08060
Facsimile No.: __________________ Facsimile No.: (609) 261-8155
Residence: California Residence: New Jersey
ZHIPING LIU KIMBERLEY L. MASSINGALE
By: By:
----------------------------- -----------------------------
Address: 36 Avalon Avenue Address: 5270 Boyd Avenue
San Francisco, CA 94112 Oakland, CA 94618
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
S-8
<PAGE>
FRANCIS E. VEGLIANTE RICHARD P. TREVOR
By: By:
----------------------------- -----------------------------
Address: 15010 Eaglerise Drive Address: 919 Hillcroft Circle
Lithia, FL 33547 Oakland, CA 94610
Facsimile No.: (813) 662-2774 Facsimile No.: __________________
Residence: Florida Residence: California
EVAN ZHANG ED LYONS
By: By:
----------------------------- -----------------------------
Address: 1458 39th Avenue Address: 918 Jackson Street
San Francisco, CA 94122 Albany, CA 94706
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
ALLAN BER PAUL SOC BANH
By: By:
----------------------------- -----------------------------
Address: 1259 6th Avenue Address: 3713 Langdon Common
San Francisco, CA 94122 Fremont, CA 94538
Facsimile No.: __________________ Facsimile No.: __________________
Residence: California Residence: California
S-9
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") OR UNDER ANY STATE SECURITIES LAWS.
THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS
PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. UNLESS THE SECURITIES ARE SOLD
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR
RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
--------------------------------
WARRANT TO PURCHASE COMMON STOCK
OF
BURST.COM, INC.
--------------------------------
FOR VALUE RECEIVED, ______________, or its permitted assigns (the
"Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from Burst.Com, Inc., a Delaware corporation (the "Company", formerly Instant
Video Technologies, Inc.), up to _____________ shares of Common Stock, $0.00001,
of the Company (the "Common Stock") at a price per share equal to $5.00 (the
"Exercise Price"). The number of shares of Common Stock to be received upon the
exercise of this Warrant and the Exercise Price may be adjusted from time to
time as hereinafter set forth. The shares of Common Stock deliverable upon any
exercise of this Warrant are hereinafter sometimes referred to as "Warrant
Shares". This Warrant is issued by the Company pursuant to the Securities
Purchase Agreement dated January 27, 2000 (the "Purchase Agreement") among the
Company and each of the purchasers named on the signature pages thereto and
shall be entitled to the rights set forth therein, including certain
registration rights relating to the Warrant Shares. The Warrants exercisable
pursuant to the terms of the Purchase Agreement shall collectively be referred
to herein as the "Purchase Agreement Warrants".
(a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part
at any time or from time to time during the period commencing on the date hereof
through and including the fifth anniversary of the date hereof (the "Expiration
Date") and if the date of exercise shall be a day on which banking institutions
in the State of New York shall be authorized by law to close then the Warrant
shall be exercisable on the next succeeding day which shall not be such a day;
provided, however, that in the event of (a) the closing of the Company's sale or
transfer of all or substantially all of its assets, or (b) the closing of the
acquisition of the Company by another entity by means of merger, consolidation
or other transaction or series of related transactions, resulting in the
exchange of the outstanding shares of
<PAGE>
the Company's capital stock such that the stockholders of the Company prior to
such transaction own, directly or indirectly, less then 50% of the voting power
of the surviving entity and (c) in any such event the shareholders of the
Company shall receive consideration consisting of cash and/or marketable
securities in excess of $7.50 per share (adjusted for stock splits,
combinations, reclassifications and the like) (any such event being referred to
herein as a "Termination Event"), this Warrant shall, on the date of such
Termination Event, no longer be exercisable and become null and void. In the
event of a proposed transaction of the kind described in (a) or (b) above, the
Company shall notify the holder of the Warrant at least twenty (20) days prior
to the consummation of such Termination Event. This Warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Purchase Form annexed
hereto duly executed and accompanied by payment of the Exercise Price for the
number of Warrant Shares specified in such Form. As soon as practicable after
each such exercise, but not later than two business (2) days following the date
of such exercise, the Company shall issue and deliver to the Holder a
certificate or certificates for the Warrant Shares issuable upon such exercise,
registered in the name of the Holder or its designee(s). If this Warrant shall
be exercised in part, the Company shall, upon surrender of the Warrant for
cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder thereof to purchase the balance of the Warrant Shares purchasable
hereunder. Upon receipt by the Company of the Warrant at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise
and accompanied by proper payment, the Holder shall be deemed to be the holder
of record of the Warrant Shares issuable upon such exercise, notwithstanding
that the stock transfer books of the Company shall then be closed or that
certificates representing such shares of Common Stock shall not then have been
physically delivered to the Holder.
(b) RESERVATION OF SHARES. The Company covenants and agrees that it shall
at all times reserve for issuance and delivery upon exercise of the Warrant such
number of shares of Common Stock as shall be required for issuance and delivery
upon exercise of the Warrant. In addition, the Company further covenants and
agrees that all Warrant Shares, upon issuance, shall be duly and validly issued,
fully paid and non-assessable and no personal liability shall attach to the
holder thereof.
(c) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued
upon exercise of this Warrant. All fractional shares shall be eliminated by
rounding any fraction to the nearest whole number of shares of Common Stock.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant shall
be exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, or at the office of its stock transfer
agent, for other Warrants of different denominations entitling the Holder
thereof to purchase in the aggregate the same number of shares of Common Stock
purchasable hereunder. Upon surrender of this Warrant to the Company or the
office of its stock transfer agent, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company, without
charge, shall execute and deliver new Warrants in the name of the assignee named
in such instrument of assignment and this Warrant shall be cancelled promptly,
provided that the Company shall receive from the Holder an opinion of counsel
that such assignment, as contemplated by the Holder, shall not violate
applicable Federal or state securities laws. This
-2-
<PAGE>
Warrant may be divided or combined with other Warrants which carry the same
rights upon presentation hereof at the principal office of the Company or the
office of its stock transfer agent, together with a written notice, signed by
the Holder hereof, specifying the names and denominations in which new Warrants
are to be issued. The term "Warrants" as used herein shall include any warrants
into which this warrant may be divided or exchanged. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company shall execute and deliver a new Warrant of
like tenor and date.
(e) RIGHTS OF HOLDER. The Holder shall not, until the exercise hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder shall be limited to those expressed herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and
the number and kind of securities purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the happening of any of
the following events:
(i) In the event that the Company shall issue or sell any shares of
Common Stock (except as provided in paragraph (f)(v) hereof) for a
consideration per share less than the greater of (A) the Exercise Price in
effect immediately prior to such issue or sale and (B) the Market Price (as
defined in paragraph (f)(ii)(G) hereof) on the date of such issue or sale,
then the Exercise Price, as of the date of such issue or sale, shall be
reduced to such lesser price (calculated to the nearest cent) as shall be
determined by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum of (x) the
number of shares of Common Stock outstanding immediately prior to the
issuance or sale of such additional shares (on a fully diluted basis) and
(y) the number of shares of Common Stock which the aggregate consideration
received for the issuance or sale of such additional shares would purchase
at the greater of the Market Price on the date of such issue or sale or the
Exercise Price then in effect, and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after the issuance
or sale of such additional shares (on a fully diluted basis).
(ii) For the purposes of paragraph (f)(i) above, the following
subparagraphs (A) to (G), inclusive, shall be applicable:
(A) If at any time the Company shall issue or sell any rights to
subscribe for, or any rights or options to purchase, Common Stock or
any stock or other securities convertible into or exchangeable for
Common Stock (such convertible or exchangeable stock or securities
being hereinafter called "Convertible Securities"), whether or not
such rights or options or the right to convert or exchange any such
Convertible Securities shall be immediately exercisable, and the price
per share for which Common Stock shall be issuable upon the exercise
of such rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (1) the total amount,
if any, received or receivable
-3-
<PAGE>
by the Company as consideration for the granting of such rights or
options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of such rights or options,
plus, in the case of any such rights or options which shall relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by
(2) the total number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
rights or options) shall be less than the greater of (x) the Exercise
Price in effect immediately prior to the time of the issue or sale of
such rights or options and (y) the Market Price on the date of such
issue or sale, then the total number of shares of Common Stock
issuable upon the exercise of such rights or options or upon
conversion or exchange of the total amount of such Convertible
Securities issuable upon the exercise of such rights or options shall
(as of the date of granting of such rights or options) be deemed to be
outstanding and to have been issued for such price per share, and
except as provided in paragraph (f)(iv), no further adjustments of the
Exercise Price shall be made upon the actual issue of such Common
Stock or of such Convertible Securities, upon the exercise of such
rights or options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities.
(B) If at any time the Company shall issue or sell any
Convertible Securities, whether or not the rights to exchange or
convert thereunder shall be immediately exercisable, and the price per
share for which Common Stock shall be issuable upon such conversion or
exchange (determined by dividing (1) the total amount received or
receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (2) the total number of shares of
Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the greater of (x) the
Exercise Price in effect immediately prior to the time of such issue
or sale and (y) the Market Price on the date of such issue or sale,
then the total number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of
the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per
share, and, except as provided in paragraph (f)(iv) no further
adjustments of the Exercise Price shall be made upon the actual issue
of such Common Stock, upon conversion or exchange of such Convertible
Securities. In addition, if any issue or sale of such Convertible
Securities shall be made upon exercise of any rights to subscribe for
or to purchase or any option to purchase any such Convertible
Securities for which adjustments of the Exercise Price shall have been
or shall be made
-4-
<PAGE>
pursuant to other provisions of this paragraph (f)(ii), no further
adjustment of the Exercise Price shall be made by reason of such issue
or sale.
(C) If at any time the Company shall declare and pay a dividend
or make any other distribution upon the Common Stock payable in Common
Stock or Convertible Securities, any such Common Stock or Convertible
Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration; provided, that this provision shall not apply to any
shares of Common Stock issuable for additional consideration upon
conversion of such Convertible Securities.
(D) If at any time any shares of Common Stock or Convertible
Securities or any rights or options to purchase any such Common Stock
or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount
received by the Company therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions or
discounts paid or allowed by the Company in connection therewith. In
case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company shall be deemed to be the fair value of such consideration as
determined by the Board of Directors, without deduction therefrom of
any expenses incurred or any underwriting commissions or concessions
or discounts paid or allowed by the Company in connection therewith.
In case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible
Securities shall be issued in connection with any merger of another
corporation into the Company, the amount of consideration therefor
shall be deemed to be the fair value of such merged corporation as
determined by the Board of Directors reduced by all cash and other
consideration (if any) paid by the Company in connection with such
merger.
(E) If at any time the Company shall fail to set a record date of
the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or (2) to subscribe for or purchase Common
Stock or Convertible Securities, then such record date shall be deemed
to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may
be.
(F) The number of shares of Common Stock outstanding at any given
time shall not include shares owned or held by or for the account of
the
-5-
<PAGE>
Company, provided that such shares are neither issued, sold or
otherwise distributed by the Company.
(G) For purposes hereof, the "Market Price" shall mean the
closing bid price of the Common Stock in the over-the-counter market,
or, if the Common Stock shall be quoted on The Nasdaq National Market
or The Nasdaq SmallCap Market or listed on a national securities
exchange, the closing sale price on such principal market or exchange
on which the Common Stock may be listed, in each case on the day prior
to the date of determination of such "Market Price." If at any time
the Common Stock shall not be traded in the over-the-counter market or
quoted or listed on The Nasdaq National Market or The Nasdaq SmallCap
Market or a national securities exchange, the "Market Price" of a
share of Common Stock shall be deemed to be the higher of (x) the book
value thereof (as determined by any firm of independent public
accountants of nationally recognized standing selected by the Board of
Directors) as of the last day of any month ending within 60 days
preceding the date of determination, or (y) the fair value thereof (as
determined in good faith by the Board of Directors) as of a date which
shall be within 15 days of the date of determination.
(iii) In case at any time the Company shall subdivide its outstanding
shares of Common Stock into a greater number of shares, the Exercise Price
in effect immediately prior to such subdivision shall be proportionately
reduced. In case at any time the outstanding shares of Common Stock of the
Company shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be
proportionately increased.
(iv) If the purchase or exercise price provided for in any right or
option referred to in paragraph (f)(ii)(A), or the rate at which any
Convertible Securities referred to in paragraph (f)(ii)(A) or (B) shall be
convertible into or exchangeable for Common Stock, shall change or a
different purchase or exercise price or rate shall become effective at any
time or from time to time, then, upon such change becoming effective, the
Exercise Price then in effect hereunder shall forthwith be increased or
decreased to such Exercise Price as would have been in effect had the
adjustments made upon the granting or issuance of such rights or options or
Convertible Securities been made upon the basis of (A) the issuance of the
number of shares of Common Stock theretofore actually delivered upon the
exercise of such options or rights or upon the conversion or exchange of
such Convertible Securities consideration received therefor and (B) the
granting or issuance at the time of such change of any such options, rights
or Convertible Securities then still outstanding for the consideration, if
any, received by the Company therefor and to be received on the basis of
such changed price.
(v) The Company shall not be required to make any adjustment to the
Exercise Price in the case of:
-6-
<PAGE>
(A) the granting, after the date hereof, by the Company of stock
options or stock awards with respect to shares of Common Stock under
stock option plans of the Company, so long as the total number of
shares of Common Stock issuable or issued pursuant to such options
does not exceed 11% of (i) the outstanding shares of Common Stock (on
a fully diluted basis) as of the date of the Purchase Agreement
together with (ii) any additional outstanding shares of Common Stock
(on a fully diluted basis) issued on or before January 31, 2000
pursuant to the Purchase Agreement;
(B) the issuance of shares of Common Stock pursuant to the
exercise of the options referred to in paragraph (f)(v)(A) above or
any other options outstanding as of the date hereof, provided, that
any such issuance does not result in the Company exceeding the 39% cap
set forth in Section 4(b) of the Purchase Agreement;
(C) the issuance of shares of Common Stock pursuant to the
exercise or conversion of any securities outstanding on the date
hereof;
(D) the issuance of shares of Common Stock pursuant to the
Purchase Agreement or the Registration Rights Agreement dated as of
January 27, 2000 among the Company and each of the purchasers named on
the signature pages thereto on, or before, January 31, 2000;
(E) the issuance of shares of Common Stock upon the exercise or
triggering of any antidilution provisions thereunder of any of the
Warrants; and
(F) the issuance of equity securities in connection with an
offering pursuant to an engagement letter, dated October 5, 1999,
between E*Offering and the Company (the "E*Offering Engagement
Letter"), whether such equity securities are issued to E*Offering or
to any investor for which E*Offering is entitled to be compensated
pursuant to the E*Offering Engagement Letter.
(vi) Whenever the Exercise Price payable upon exercise of this Warrant
shall be adjusted pursuant to this paragraph (f), the number of Warrant
Shares purchasable upon exercise hereof simultaneously shall be adjusted by
multiplying the number of Warrant Shares issuable immediately prior to such
adjustment by the Exercise Price in effect immediately prior to such
adjustment and dividing the product so obtained by the Exercise Price, as
adjusted.
(g) OFFICER'S CERTIFICATE. The Company shall give notice to each record
holder of the Warrants of any event or transaction that shall result in an
adjustment in the Exercise Price, within five (5) business days thereof, at such
Holder's address as the same appears on the books of the Company, including a
computation of such adjustment and any adjustment in the number of Warrant
Shares for which such Holder may exercise such Holder's Warrant and any further
information as shall be necessary to confirm the computation of such
adjustments.
-7-
<PAGE>
(h) CERTAIN NOTICES TO HOLDERS. So long as this Warrant shall be
outstanding, if (i) the Company shall pay any dividend or make any distribution
upon the Common Stock, (ii) the Company shall offer to the holders of the Common
Stock for subscription or purchase by them any share of any class of capital
stock or any other rights or (iii) any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation, merger or
other business combination of the Company with or into another corporation,
sale, lease or transfer of all or substantially all of the assets of the Company
to another corporation, or voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be effected, then in any such case, the Company
shall cause to be mailed by certified mail to the Holder, at least twenty (20)
days prior to the date specified in (x) or (y) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (x) a record date shall be established for the purpose of such
dividend, distribution or rights offering or (y) such reclassification,
reorganization, consolidation, merger, conveyance, sale, lease, transfer,
dissolution, liquidation or winding up shall take place and the date, if any to
be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION, MERGER OR OTHER BUSINESS COMBINATION.
Except in the event of a Termination Event, in case of any reclassification,
capital reorganization or other change of outstanding shares of Common Stock, or
in case of any consolidation, merger or other business combination of the
Company with or into another corporation or other entity (other than a merger
with a subsidiary in which merger the Company shall be the continuing
corporation and which shall not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
class issuable upon exercise of this Warrant) or in case of any sale, lease or
conveyance to another corporation or other entity of all or substantially all of
the assets of the Company, the Company shall cause effective provisions to be
made so that the Holder, by exercising this Warrant at any time after the
consummation of such reclassification, change, consolidation, merger, sale,
lease or conveyance, shall be entitled to receive the stock or other securities
or property to which such Holder would have been entitled upon such consummation
if such Holder had exercised this Warrant immediately prior to such
consummation. Any such provision shall include provisions for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Warrant. Except in the event of a Termination Event, the foregoing
provisions of this paragraph (i) shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales, leases or conveyances. In the
event that, in connection with any such capital reorganization or
reclassification, consolidation, merger, sale, lease or conveyance, additional
shares of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock subject to
the provisions of paragraph (f) hereof.
(j) GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the law of the State of New York.
-8-
<PAGE>
(k) NOTICES. Any notice required to be given or delivered to the Company
under the terms of this Warrant shall be in writing and addressed to the Chief
Executive Officer of the Company at its principal corporate offices. Any notice
required to be given or delivered to the Holder shall be in writing and
addressed to the Holder at the address indicated in the Purchase Agreement or to
such other address as such party may designate in writing from time to time to
the Company. All notices shall be deemed to have been given or delivered upon
any of the following: (i) personal delivery; (ii) five (5) days after deposit in
the United States mail by certified or registered mail (return receipt
requested); (iii) one (1) business day after deposit with any nationally
recognized overnight courier (prepaid); or (iv) one (1) business day after
transmission by facsimile and receipt by the sender of written facsimile
confirmation.
(l) Consent to Amendments. Except as otherwise expressly provided herein,
the provisions of the Purchase Agreement Warrants may be amended and/or waived
only with the written consent of the Company and of Holders holding Purchase
Agreement Warrants exercisable into sixty-six and two-thirds percent (66 2/3%)
or more of the Warrant Shares into which all outstanding Purchase Agreement
Warrants are then exercisable (which such 66 2/3% must include the Warrant
Shares into which the Warrants held by the SSF Purchasers (as defined in the
Purchase Agreement) are exercisable). Notwithstanding the forgoing, no amendment
or waiver may affect any Holder in any manner differently from any other Holder
without the written consent of such first mentioned Holder. No course of dealing
between the Company and any Holder or any delay in exercising any rights
hereunder or under the Company's Certificate of Incorporation, as amended, will
operate as a waiver of any rights of such Holder.
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and
attested by the undersigned, each being duly authorized, as of the date below.
Dated: January 31, 2000
BURST.COM, INC.
By:
------------------------------------
Name: Richard Lang
Title: Chairman and Chief Executive
Officer
Attest:
- -----------------------------
Edward H. Davis
Vice President, Secretary, and General Counsel
-10-
<PAGE>
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the Warrant to the
extent of purchasing ____________ shares of Common Stock and hereby makes total
payment of $______________ in payment of the Exercise Price multiplied by such
number of shares.
----------
ASSIGNMENT FORM
FOR VALUE RECEIVED, _____________________________________ hereby sells,
assigns and transfers unto
Name: __________________________________
(print in block letters)
Social Security No. or
Federal Taxpayer Identification No.: _________________________________
Address: ________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
_________ shares of Common Stock as to which such right is exercisable and does
hereby irrevocably constitute and appoint _________________________ as Attorney,
to transfer the same on the books of the Company with full power of
substitution.
Date ____________________, 20__ Signature: _____________________________
Name:
-11-
[LETTERHEAD OF INSTANT VIDEO TECHNOLOGIES, INC.]
500 Sansome Street, Suite 503 tel 415.391.4455
San Francisco fax 415.391.3392
California 94111 http://www.burst.com
January 14, 2000
Instant Video Technologies, Inc.
500 Sansome Street, Suite 503
San Francisco, CA 94111
Re: Instant Video Technologies, Inc. (the "Company") Registration
Ladies and Gentlemen:
1. The undersigned understands that the Company has agreed to register
certain shares of Common Stock pursuant to a Registration Statement on Form S-1
to be filed by the Company with the Securities and Exchange Commission (the
"Secondary Public Offering") in connection with the Company's sale of at least
$8 million of its Common Stock and warrants (the "Private Offering") to certain
investors (the "Investors").
2. The undersigned understands further that the Investors have requested
certain directors, officers and stockholders of the Company to enter into this
Agreement because the prospect of public sales of Common Stock by these persons
during the several months after commencement of the Secondary Public Offering
would be detrimental to these Investors and that, but for this Lock-Up
Agreement, the Investors would not invest their monies in the Company.
3. The undersigned, as a director, officer or stockholder of the Company,
desires that the proposed Private Offering and subsequent proposed Secondary
Public Offering be completed, and understands that the Company and the Investors
will proceed with the proposed Private Offering in reliance on this Agreement.
4. In consideration of the foregoing and in order to induce the Investors
to consummate the Private Offering, the undersigned hereby agrees (such
agreement being referred to herein as the "Lockup") that the undersigned will
not during the period commencing on the closing date of the Private Offering and
ending 180 days after the effective date of the Final Prospectus (the
"Prospectus") relating to the Secondary Public Offering (the "Lock-Up Period"),
(A) offer, pledge, hypothecate, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any Common Stock or any securities convertible into, derivative of
<PAGE>
January 14, 2000
Page 2
Re: Instant Video Technologies, Inc.
or exercisable or exchangeable for Common Stock (collectively, the "Shares")
(whether such Shares are now owned by the undersigned or are hereafter acquired)
or (B) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Shares,
whether or not any such transaction described in clause (A) or (B) above is to
be settled by delivery of such Shares, in cash or otherwise. After the Lock-Up
Period, the undersigned shall not during any consecutive four month period until
termination of the Prospectus take any of the actions set forth in clauses (A)
and (B) above with respect to more than twenty-five percent (25%) of the shares
held by the undersigned as of the date of the Prospectus .
5. Notwithstanding anything to the contrary contained in any Registration
Rights Agreement or other agreement to which the undersigned is a party, the
undersigned agrees that it will not, during the Lock-Up Period, make any demand
for, or exercise any right, including but not limited to, piggyback registration
rights with respect to the registration of any Shares and waives any such demand
or right under such agreement. Notwithstanding the foregoing, the Lock-Up Period
shall not apply to securities acquired by the undersigned in the Private
Offering.
6. The undersigned agrees and consents to the entry of stop transfer
instructions with the Company's registrar and transfer agent to prevent the
transfer of shares of Common Stock held by the undersigned except in compliance
with this Agreement.
7. Notwithstanding the foregoing, the following transactions shall not be
restricted hereby:
a. if the undersigned is one or more natural persons, any transfer by
gift, will or intestacy to the undersigned's immediate family or to a trust for
the benefit of the undersigned, his or her immediate family, or both; or
b. if the undersigned is a corporation or partnership, any transfer by
the undersigned in connection with the sale or other bona fide transfer in a
single transaction of all or substantially all of the undersigned's assets not
undertaken for the purpose of avoiding the restrictions imposed hereby;
provided, however, that, as a condition of any transfer pursuant to this Section
7, each transferee shall agree to be bound by the terms hereof and shall execute
an agreement substantially in the form hereof which the transferor shall cause
to be delivered to the Representatives; or
c. if the undersigned sells shares at such time (the "Release Date")
that the (i) Prospectus has been declared effective by the Securities and
Exchange Commission (ii) the Company obtains a Small Cap NASDAQ listing and
(iii) its Common Stock bid price is at or above $15 per share for thirty (30) or
more consecutive trading days after the date of the Prospectus; provided,
<PAGE>
January 14, 2000
Page 3
Re: Instant Video Technologies, Inc.
however, that the undersigned shall only sell up to 25% of such Common Stock
owned by the undersigned during each consecutive thirty (30) day period
following the Release Date.
8. The undersigned agrees that the provisions of this Agreement shall be
binding upon the undersigned and the successors, assigns, heirs and personal
representatives thereof.
9. It is understood that if the proposed Private Offering does not close by
January 31, 2000, you will release us from our obligations under this Agreement.
DATED: January 27, 2000
Very truly yours,
By:
------------------------------------
----------------------------------------
(Print Name)
----------------------------------------
----------------------------------------
(Print Address)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEETS AND UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 302,979
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 366,872
<PP&E> 996,181
<DEPRECIATION> 270,769
<TOTAL-ASSETS> 1,128,741
<CURRENT-LIABILITIES> 6,593,387
<BONDS> 0
0
45
<COMMON> 95
<OTHER-SE> (5,464,786)
<TOTAL-LIABILITY-AND-EQUITY> 1,128,741
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,509,619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,468,110
<INCOME-PRETAX> (12,977,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,977,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,977,729)
<EPS-BASIC> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
