<TABLE>
As filed with the Securities and Exchange Commission on August 11, 2000
<CAPTION>
Registration Statement No. 333-35002
=======================================================================================================================
<S> <C> <C> <C>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
BURST.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7372 84-1141967
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
------------------------------
500 Sansome Street, Suite 503
San Francisco, California 94111
(415) 391-4455
(Address, Including Zip Code, and Telephone Number
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
Richard Lang
Chief Executive Officer
Burst.com, Inc.
500 Sansome Street, Suite 503
San Francisco, California 94111
(415) 391-4455
(Name, Address, Including Zip Code, and Telephone Number
Including Area Code, of Agent for Service)
------------------------------
Copies to:
Donald C. Reinke, Esq. Edward H. Davis, Esq.
James L. Berg, Esq. General Counsel
Nicola R. Knight, Esq. Burst.com
500 Sansome Street, Suite 500
Bay Venture Counsel, LLP San Francisco, California 94111
1999 Harrison Street, Suite 1300 (415) 391-4455
Oakland, California 94612
(510) 273-8750
------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis
pursuant under Rule 415 of the Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to Be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price Registration Fee
---------------------------------------------------------------------------------------------------------------------------------
Common stock, par value
$0.00001 per share............ 9,750,616 shares $6.25 $60,941,350 $19,953(3)
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<FN>
(1) Includes (a) 4,808,375 shares of Common Stock (b) 4,942,241 shares of Common Stock issuable upon exercise of
warrants to purchase shares of Common Stock and (b) an indeterminate number of additional shares of Common Stock
as may from time to time become issuable upon exercise of such warrants by reason of stock splits, stock dividends
and other similar transactions, which shares are registered hereunder pursuant to Rule 416 under the Securities
Act.
(2) The price of $6.25 per share, which was the average of the bid and asked prices for the Common Stock on August 9,
2000, is set forth solely for the purpose of calculating the registration fee in accordance with Rule 475(c) of the
Securities Act.
(3) Previously paid.
</FN>
------------------------------
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
</TABLE>
<PAGE>
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 11, 2000
Up to 9,750,616 Shares
Common Stock
This is a public offering of up to 9,750,616 shares of common stock of
Burst.com, Inc. All of these shares are being offered by the selling
stockholders identified in this prospectus. Burst.com will not receive any of
the proceeds from the sale of shares by the selling stockholders. The shares
offered by this prospectus may be sold from time to time by the selling
stockholders in the national over-the-counter market (or upon listing of the
common stock on the Nasdaq SmallCap Market, on that market) at their prevailing
prices, or in negotiated transactions.
Burst.com's common stock is traded on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board ("OTC Bulletin Board") under
the symbol "IVDO". On August 9, 2000, the OTC Bulletin Board reported that the
bid price per share was $6.1875 and the asked price per share was $6.3125. We
have applied for listing of our common stock on the Nasdaq SmallCap Market.
The shares of common stock offered by this prospectus consist of
4,808,375 shares owned by the selling stockholders, 4,942,241 shares that may be
issued upon the exercise of warrants held by the selling stockholders and an
indeterminate number of additional shares of common stock as may from time to
time become issuable upon exercise of the warrants by reason of stock splits,
stock dividends and antidilution provisions. These shares and warrants were
purchased from Burst.com by the selling stockholders in connection with private
placements in December 1999 and January 2000.
--------------------------------------------------------------------------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 5.
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any presentation to the contrary is a
criminal offense.
The shares of common stock offered by this prospectus have not been
registered under the blue sky or securities laws of any jurisdiction, and any
broker or dealer should assure itself of the existence of an exemption from
registration or the effect of such registration in connection with the offer and
sale of such shares.
The date of this prospectus is August___, 2000
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 1
The Offering............................................................... 3
Summary Consolidated Financial Data........................................ 4
Risk Factors............................................................... 5
Cautionary Note on Forward-Looking Statements.............................. 17
Use of Proceeds............................................................ 18
Dividend Policy............................................................ 18
Capitalization............................................................. 19
Selected Financial Data.................................................... 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 22
Business................................................................... 29
Management................................................................. 49
Plan of Distribution....................................................... 59
Selling Stockholders....................................................... 61
Certain Relationships and Related Transactions............................. 63
Principal Stockholders..................................................... 70
Description of Capital Stock............................................... 72
Shares Eligible for Future Sale............................................ 76
Legal Matters.............................................................. 77
Experts.................................................................... 77
Where You Can Get More Information......................................... 79
Consolidated Financial Statements.......................................... F1
You should rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our common stock.
"Burstware(R)," "Burstaid(R)" and "Instant Video(R)" are our registered
trademarks. We have filed an application for the trademarks
"Faster-Than-Real-Time(TM)," "Burst Enabled(TM)," "Burst Hosting(TM),"
"Burst.com(TM)" and "Burstware Bridge(TM)." Other service marks, trademarks and
trade names referred to in this prospectus are the property of their respective
owners.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and does not contain all the
information you should consider before buying shares in this offering. You
should read the entire prospectus carefully, including the risk factors and
consolidated financial statements and related notes appearing elsewhere in this
prospectus. The prospectus contains forward-looking statements, which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described under "Risk Factors" and elsewhere in this prospectus. See "Cautionary
Note on Forward-Looking Statements."
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 various networks, including the
Internet and corporate intranets, 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 bandwidth capacity to send more video or
audio data to users than the players are demanding. This data is stored on the
users' machine for playing on demand, thus isolating the user from noise and
other network interference. The result is high quality, full-motion video and
CD-quality audio to the end-user. Burstware(R) utilizes several components of
our international patent portfolio, including the Faster-Than-Real-Time(TM)
delivery method.
As network bandwidth, data storage, processing power and compression
technologies have become increasingly available, the demand for high-quality
video and audio over the Internet, intranet and extranet has expanded rapidly.
According to Paul Kagan Associates, in 1999, the number of households with
high-speed access was estimated to be 1.9 million with service revenue of $574.0
million; by 2002, these figures are expected to reach 12.0 million and $3.6
billion, respectively. As businesses have begun to recognize the cost,
inconvenience and inefficiency of business communication tools such as audio and
videoconferencing, online business-to-business, business-to-consumer and
business-to-employee communications have become commonplace. Frost & Sullivan, a
leading market research firm, reported that video server market revenue for 1999
was expected to reach $722.7 million, growing to $2.1 billion by 2002.
As current real-time streaming technology expands rapidly online, content
delivery becomes increasingly susceptible to network congestion and disruption
causing interruption or degradation of the client's multimedia experience.
Additionally, the number of real-time connections that can be maintained
simultaneously by the server is limited by processing power as well as bandwidth
availability. This, along with the fact that a server tends to devote
disproportionate resources to the client with the most available bandwidth, also
reduces the quality as well as the availability of the audio-visual content. As
a result of these limitations, and including the fact that most streaming
technology involves proprietary encoding schemes
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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 for audio-visual content as well
as quality enhancement in its delivery has created a need for a software
solution capable of eliminating network disruptions and utilizing client
bandwidth efficiently.
Our Java-based Burstware(R) architecture delivers consistent,
high-quality multimedia content with open standard flexibility through
optimization of network resources and superior isolation from network
disturbances. In a Burst-Enabled(TM) network, the server sends multiplexed
"bursts" of content into the network at rates faster than real-time consumption,
providing a local reserve in the event that data across the network slows or
ceases. During all phases of content delivery, Burstware(R) provides continuous
monitoring of consumption rates, multiple end-user needs and changes in network
conditions. With a need-based delivery model and the ability to service the same
number of real-time streaming clients using fewer network resources, our
Burstware(R) Network Simulator has shown improvements of up to 60% in network
efficiency, or throughput, when compared to real-time streaming.
Burstware(R) intelligence allows for multiple end-user applications as
well. With the capacity to deliver data in a clear, efficient and cost-effective
manner, Burstware(R) enables powerful business-to-business, business-to-consumer
and business-to-employee communication. Burstware(R) also gives producers,
aggregators and developers the ability to reach new markets with virtually
unlimited access to vast libraries of content. Finally, Burstware(R)'s 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.
Our principal executive offices are located at 500 Sansome Street, Suite
503, San Francisco, California, 95111, and our telephone number is (415)
391-4455.
In this prospectus, the terms "Burst.com," "we," "us," and "our" refer to
Burst.com and our subsidiaries Timeshift-TV, Inc. and Explore Technology, Inc.
unless the context otherwise requires.
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THE OFFERING
Common Stock offered by the selling
stockholders................................... 9,750,616 shares (1)
Common stock to be outstanding after this
offering....................................... 19,083,531 shares (2)
Use of proceeds................................ We will not receive any of the
proceeds from the shares sold
by the selling stockholders. See
"Selling Stockholders".
OTC Bulletin Board symbol...................... IVDO
(1) Includes 4,808,375 outstanding shares of our common stock and 4,942,241
shares of our common stock issuable on exercise of outstanding warrants.
(2) Common stock outstanding on July 31, 2000. It excludes (A) 7,644,700 shares
of common stock issuable upon exercise of outstanding options granted under our
1992, 1998 and 1999 Stock Option Plans plus an additional 1,519,641 shares
reserved for issuance under our Stock Option Plans, and (B) 5,778,251 shares
issuable upon exercise of outstanding warrants.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
The following table summarizes the consolidated financial data of our
business.
<CAPTION>
Year ended December 31, Three months ended March 31,
------------------------------- ----------------------------
1997 1998 1999 1999 2000
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales...................................... $ 248 $ 15 $ --- $ --- $ 75
Gross profit................................. $ 18 $ 15 $ --- $ --- $ 45
Operating loss............................... $(1,929) $(4,664) $(11,510) $ (1,579) $ (3,768)
Net loss..................................... $(2,062) $(6,916) $(12,978) $ (1,572) $ (3,799)
Net loss applicable to common
Stockholders............................... $(2,062) $(15,679) $(12,978) $ (1,572) $ (3,799)
Net loss per share of common stock:
Basic and diluted.......................... $(0.39) $ (2.35) $ (1.42) $ (0.18) $ (.24)
Weighted average number of shares of
common stock outstanding................... 5,259 6,659 9,122 8,533 15,938
The following table summarizes our balance sheet data as of December
31, 1999 and March 31, 2000.
The March data includes the effects of the following transactions:
o our sale of 3,474,625 shares of our common stock in January 2000,
resulting in gross proceeds of $13,899,000
o the conversion of our preferred stock into 4,496,609 shares of our
common stock in January 2000;
o the conversion of $5,335,000 of notes payable (including $430,000
in notes issued in January 2000) into 1,333,750 shares of our
common stock in January 2000; and
o offering costs totaling $1,103,000 related to the above
transactions.
As of December 31, 1999 March 31, 2000
----------------------- --------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents............................. $ 303 $ 9,549
Working capital (deficit)............................. (6,227) 7,845
Total assets.......................................... 1,129 11,230
Long-term obligations, net of current portion......... -- --
Stockholders' equity (deficit)........................ (5,465) 8,941
</TABLE>
4
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RISK FACTORS
You should carefully consider the following risks and all other
information contained in this prospectus before you decide to buy our common
stock. We have included a discussion of each material risk that we have
identified as of the date of this prospectus. However, additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks actually
occur, our business, financial condition or operating results could suffer. If
this occurs, the trading price of our common stock could decline, and you could
lose all or part of the money you paid to buy our common stock.
Risks Relating to Burst.Com, Inc.
We are not currently profitable and may not achieve profitability.
We have a history of losses and expect to continue to incur net losses
at least through the year 2001. We expect to incur significant operating
expenses and, as a result, will need to generate significant revenues to achieve
profitability, which may not occur. Even if we achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis in
the future.
We will need additional financing, and may not be able to raise additional
financing on favorable terms, or at all, which could increase our costs and
limit our ability to grow.
We will need to raise additional capital in the future to continue our
longer term expansion plans to respond to competitive pressures, or otherwise to
respond to unanticipated requirements. We are currently offering shares of our
common stock in a private placement directed to strategic investors. The terms
of such financing, including the number of shares and the price per share, have
not yet been determined and will be subject to negotiations between us and the
prospective investors. If consummated, this financing could adversely affect the
market price of our common stock. In addition, we cannot be certain that we will
be able to obtain this or any other future additional financing on commercially
reasonable terms or at all. Our failure to obtain additional financing, or
inability to obtain financing on acceptable terms, could require us to limit our
plans for expansion, incur indebtedness that has high rates of interest or
substantial restrictive covenants, issue equity securities that will dilute your
holdings, or discontinue a portion of our operations.
Our future success depends on our ability to keep pace with technological
changes, which could result in a loss of revenues.
The emerging video streaming and content delivery and hosting industry
is characterized by:
o rapidly changing technologies;
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<PAGE>
o frequent new product introductions; and
o rapid changes in customer requirements.
Video streaming technologies have reached commercially acceptable
levels only in the last several years and are continuing to experience numerous
changes. As a result, we must be able to maintain and extend our technological
edge in order to ensure that our products remain commercially viable.
Our future success will depend on our ability to enhance our existing
products and to develop and introduce new products and product features. These
products and features must be cost-effective and keep pace with technological
developments and address the increasingly sophisticated needs of our customers.
We may not be successful at these tasks. We may also experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these new products and features.
We may not be able to timely adopt emerging industry standards, which may make
our products unacceptable to potential customers, delay our product
introductions or increase our costs.
Our products must comply with a number of current industry standards
and practices established by various international bodies. Our failure to comply
with evolving standards, including industry standard CODECS, will limit
acceptance of our products by market participants. If new standards are adopted
in our industry, we may be required to adopt those standards in our products. It
may take us a significant amount of time to develop and design products
incorporating these new standards. We may also become dependent upon
technologies developed by third parties and have to pay royalty fees, which may
be substantial, to the developers of the technology that constitutes the newly
adopted standards.
Our products are technologically complex and are designed to interface
with third-party products, such as Microsoft's Windows Media Player(R) and the
QuickTime(R) Player using publicly disseminated application program interfaces,
or APIs. Modifications to the APIs for these third-party products could require
further development effort on our part to continue to make the interface work
properly or, in some cases, result in an inability of our products to work
properly with third-party products. There is no assurance that these kinds of
changes will occur or that we can develop new products effectively and quickly
enough to avoid loss of revenues or market share.
If we do not develop new products or new product features in response to
customer requirements or in a timely way, customers may not buy our products,
which would seriously harm our business.
The software media delivery industry is rapidly evolving and subject to
technological change and innovation. We must continue to enhance our products by
adding new product features and introduce new products in response to customer
requirements. If we fail to do so or in a timely manner, our customers may not
buy our products, resulting in serious harm to our business.
We will not be able to sell sufficient quantities of our products to sustain a
viable business if the market for software media delivery products does not
develop or if a competing technology displaces our products.
The software media delivery market is in the early stage of development
and is still evolving. Our lack of product diversification exposes us to a
substantial risk of loss in the event that the software media delivery market
does not develop or if a competing technology
6
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replaces our software. If a competing technology replaces or takes significant
market share from the products that our software support, we will not be able to
sell our products in quantities sufficient to grow our business.
We rely upon our sales of a small number of products, and the failure of any one
of our products to be successful in the market could substantially reduce our
revenue.
We rely on sales of a small number of products to generate
substantially all of our revenue. We are developing additional software
products, but there can be no assurance that we will be successful in doing so.
Consequently, if our existing products are not successful, our sales could
decline materially, which harm our financial performance.
Our products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduce the predictability of our
earnings.
Our products are technologically complex. Prospective customers
generally must make a significant commitment to test and evaluate our software
and to integrate it into their products. As a result, our sales process is often
subject to delays associated with lengthy approval processes. For these and
other reasons, the initial sales cycles of our new software products has been
lengthy, recently averaging approximately four to six months from initiation in
late 1999 to completion in 2000. We expect that future sales will also
experience lengthy sales cycles.
Our products are often embedded in our customers' web pages. Since the
proper development of video enabled web pages requires a relatively high level
of technological expertise, we may be required to provide professional service
support to our customers in this area. There can be no assurance that we will be
able to staff adequately for and deliver the level of professional services
required, or that we will be able to charge the customer fully for this work.
The result could be further impediments to sales and possibly higher than
anticipated costs of sales.
Long sales cycles are also subject to a number of significant risks
over which we have little or no control and which are not usually encountered in
a short sales span. These risks include our customers' budgetary constraints,
internal acceptance reviews and cancellation. In addition, orders expected in
one quarter could shift to another because of the timing of our customers'
procurement decisions. The time required to implement our products can vary
significantly with the needs of our customers and generally lasts for several
months; larger implementations can take several calendar quarters. This
complicates our planning process and reduces the predictability of our financial
results.
We may be subject to potential legal liabilities for distributing information
from our Website.
We may be subjected to claims based on negligence or other theories
relating to the information we distribute from our Website hosting service.
Similarly, we may be subjected to claims for defamation or copyright or
trademark infringement relating to the information we provide in our products.
These types of claims have been brought, sometimes successfully, against on-line
services as well as print publications in the past. We could also be subjected
to claims based upon the content that is accessible from our products through
links to other websites. These types of claims could be time-consuming and
expensive to defend, and could result in the diversion of our management's time
and attention. In addition, if our products provide faulty or inaccurate
information, or fail to provide all the information a user expects, we could be
subject to legal liability. Our insurance and contractual provisions with users
and information providers may not protect us against these types of claims.
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We may not be successful in protecting our intellectual property
Our success will depend, in part, on our ability to protect the
intellectual property that we have developed through patents, trademarks, trade
secrets, copyrights, licenses and other intellectual property rights. We cannot
guarantee that we will be able to protect our intellectual property. We are
subject to a number of risks relating to intellectual property rights, including
the following:
o the means by which we seek to protect our proprietary rights
may not be adequate to prevent others from misappropriating
our technology or from independently developing or selling
technology or products with features based on or similar to
ours;
o Legal standards relating to the validity, enforceability and
scope of protection of proprietary rights in Internet-related
businesses are uncertain and still evolving.
o our products may be sold in foreign countries that provide
less protection to intellectual property than is provided
under U.S., Japanese or European community laws;
o our intellectual property rights may be challenged,
invalidated, violated or circumvented and may not provide us
with any competitive advantage; and
o our patents pending may not be approved or may be only
partially approved.
As a result, we cannot predict the future viability or value of our
proprietary rights and those of other companies within the industry.
If our proprietary technology infringes upon the intellectual property rights of
others, our costs could increase and our ability to sell our products could be
limited.
We are not aware of any activity that may be infringing any proprietary
right of a third party. There can be no assurance, however, that aspects of our
technology would not be found to violate the intellectual property rights of
other parties. The resulting risks include the following:
o other companies may hold or obtain patents or may otherwise
claim proprietary rights to technology that is necessary to
our business;
o if we violate the intellectual property rights of other
parties, we may be required to modify our products or
intellectual property or to obtain a license to permit their
continued use; and
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o any future litigation to defend us against allegations that we
have infringed upon the rights of others could result in
substantial costs to us, even if we ultimately prevail.
There are a number of companies that hold patents for various aspects
of the technology incorporated in our industry's standards (i.e. technologies
that deliver or manage audio and video content such as Java, Video, Audio,
Vector Graphics, Shockwave, and Cursors.) We expect that companies seeking to
gain competitive advantages will increase their efforts to enforce any patent
rights that they may have. The holders of patents from which we have not
obtained licenses may take the position that we are required to obtain a license
from them. We cannot be certain that we would be able to negotiate any license
at an acceptable price. Our inability to do so could substantially increase our
operating expenses or require us to seek and obtain alternative sources of
technology necessary to produce our products.
We began our current product line of software only recently and, as a result,
your ability to evaluate our prospects may be limited.
Although we have been operating since 1993, we have only recently
commenced sales of our present product line of media delivery software. Prior to
that time, we sold custom designed software products, which we do not anticipate
selling in the future. Our limited operating history with respect to our current
software may limit your ability to evaluate our prospects because of:
o our limited historical financial data relating to sales of our
current software;
o our unproven potential to generate profits; and
o our limited experience in addressing emerging trends that may
affect our software business.
As a young company that recently commenced a new product line, we face
risks and uncertainties relating to our ability to implement our business plan
successfully. You should consider our prospects in light of the risks, expenses
and difficulties we may encounter.
Our inability to manage effectively our recent growth, and our expected
continuing increased growth, could materially harm our performance.
The growth in our research, development, sales and marketing operations
has placed, and is expected to continue to place, a significant strain on our
management and operations. To manage our growth, we must continue to implement
and improve our operational, financial and management information systems and
expand, train and manage our employees. The anticipated increase in product
development and sales and marketing expenses, together with our reliance on
value added resellers to market products that incorporate our software, could
materially harm our performance if we do not manage these factors effectively.
We may not have made adequate allowances for the costs and risks associated with
this expansion, and our systems, procedures or controls may not be adequate to
support our operations. Our failure to manage growth effectively could cause us
to incur substantial additional costs, lose opportunities to generate revenues
or impair our ability to maintain our customers.
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Future acquisitions by us could divert substantial management resources, give
rise to unknown or unanticipated liabilities and lead to adverse market
consequences for our stock.
We may acquire or make substantial investments in other companies or
businesses in order to maintain our technological leadership or to obtain other
commercial advantages. Identifying and negotiating these transactions may divert
substantial management resources. An acquisition could require us to expend
substantial cash resources, to incur or assume debt obligations, or to issue
additional common or preferred stock. These additional equity securities would
dilute your holdings, and could have rights that are senior to or greater than
the shares that you purchase in this offering. An acquisition that could involve
significant one-time non-cash write offs, or could involve the amortization of
goodwill over a number of years, which would adversely affect earnings in those
years. Acquisitions outside our current business may be viewed by market
analysts as a diversion of our focus. For these and other reasons, the market
for our stock may react negatively to the announcement of any acquisition. An
acquisition will continue to require attention from our management to integrate
the acquired entity into our operations, may require us to develop expertise in
fields outside our current area of focus, and may result in departures of
management of the acquired entity. An acquired entity may have unknown
liabilities, and its business may not achieve the results anticipated at the
time of the acquisition. Furthermore, we have no experience in making
acquisitions and we may not be successful in executing an acquisition
transaction or integrating an acquisition.
We are subject to risks from international sales, including the risk that the
prices of our products may become less competitive because of foreign exchange
fluctuations.
We expect that revenue from international sales will be a significant
part of our revenue in the future. International sales are subject to a variety
of risks, including risks arising from currency fluctuations, trading
restrictions, tariffs, trade barriers and taxes. Because most of our sales are
denominated in dollars, our products will become less price competitive in
countries with currencies that are low or are declining in value against the
dollar. In addition, future international customers may not continue to place
orders denominated in dollars. If they do not, our reported revenue and earnings
will be subject to foreign exchange fluctuations.
We may experience fluctuations in our future operating results, which will make
predicting our future results difficult.
These fluctuations may result from a variety of factors, including:
o market acceptance of our products, including changes in order
flow from our largest customers, and our customers' ability to
forecast their needs;
o the timing of new product announcements by us and our
competitors;
o the lengthy sales cycle of our products;
10
<PAGE>
o increased competition, including changes in pricing by us or
our competitors;
o delays in deliveries by our suppliers and subcontractors;
o currency exchange rate fluctuations; and
o general economic conditions in the geographic areas in which
we operate.
Accordingly, any revenues or net income in any particular period may be
lower than our revenues and net income in a preceding or comparable period.
Period-to-period comparisons of our results of operations may not be meaningful,
and you should not rely upon them as indications of our future performance. In
addition, our operating results may be below the expectations of securities
analysts and investors in future periods. Our failure to meet these expectations
will likely cause our share price to decline.
Our products could contain defects, which would reduce sales of those products
or result in claims against us.
We develop complex software for media delivery, content management and
storage. We have recently commenced sales of our first commercial product
released in late 1999 and have yet to achieve very large commercial deployments.
Despite testing, software errors have been found in our product and, in some
cases, our product's performance when initially deployed has not met customer
expectations. To date, we believe that all of the errors in question have been
resolved. There can be no assurance, however, that other errors will not occur,
as errors such as these are common in the development of any software product.
Additional errors in our product could result in, among other things, a delay in
recognition or loss of revenues, loss of market share, failure to achieve market
acceptance or substantial damage to our reputation. We could be subject to
material claims by customers, and we may need to incur substantial expenses to
correct any product defects. We do not have product liability insurance to
protect us against losses caused by defects in our products, and we do not have
"errors and omissions" insurance. As a result, any payments that we may need to
make to satisfy our customers may be substantial.
We depend on a limited number of key personnel who would be difficult to
replace, and we may not be able to attract and retain management and technical
personnel.
Because our products are complex and our market is new and evolving,
the success of our business depends in large part upon the continuing
contributions of our management and technical personnel. The loss of the
services of several of our key officers, including Richard Lang, our Chairman of
the Board and Chief Executive Officer, and Kyle Faulkner, our Chief Technical
Officer, could substantially interfere with our operations. We do not have key
person life insurance policies covering any of our employees other than Richard
Lang. The insurance coverage that we have on Mr. Lang may be insufficient to
compensate us for the loss of his services.
Our success depends upon our ability to attract, train and retain qualified
engineers, sales and marketing and technical support personnel.
We will need to hire additional engineers and highly trained technical
support personnel in order to succeed. We will need to increase our technical
staff to support new customers and the expanding needs of existing customers, as
well as our continued research
11
<PAGE>
and development operations. We will need to hire additional sales and marketing
personnel to target our potential customers. Hiring engineers, sales and
marketing and technical support personnel is very competitive in our industry
because of the limited number of people available with the necessary skills and
understanding of our products. This is particularly true in California where the
competition for qualified personnel is intense. If we are unable to hire and
retain necessary personnel, our business will not develop and our operating
results will be harmed.
Risks Relating to Our Industry
If software media technology or our method of implementing this technology is
not accepted, we will not be able to sustain or expand our business.
Our future success depends on the growing use and acceptance of video
applications for PCs and set-top boxes including the growth of video on the
Internet. The market for these applications is new, and may not develop to the
extent necessary to enable us to expand our business. We have recently invested
and expect to continue to invest significant time and resources in the
development of new products for this market. If the target market for our
solution does not grow, we may not obtain any benefits from these investments.
The markets in which we operate are highly competitive, and many of our
competitors have much greater resources than we do, which may make it difficult
for us to become profitable.
Competition in our industry is intense, and we expect competition to
increase. Competition could force us to charge lower prices for our products,
reduce demand for our products and reduce our ability to recover development and
manufacturing costs.
Some of our competitors:
o have greater financial, personnel and other resources than
ours;
o offer a broader range of products and services than ours;
o may be able to respond faster to new or emerging technologies
or changes in customer requirements than we can;
o may have a more substantial distribution network than ours;
o benefit from greater purchasing economies than we do;
o offer more aggressive pricing than we do; and
o devote greater resources to the promotion of their products
than we do.
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<PAGE>
We will not be able to compete effectively if we are not able to
develop and implement appropriate strategies to address these factors.
Internal development efforts by our customers and new entrants to the market may
increase competition.
In the future, some of our customers may internally develop products
that will replace the products that we currently sell to them. In addition, some
leading companies, with substantially greater resources than we have, may
attempt to enter our market. The recent growth in the market for media delivery
and related technologies is attracting large entrants.
We depend on the continued growth and commercial acceptance of the Internet.
Our business will be adversely affected if usage of the Internet and
broadband access does not continue to grow as anticipated. This growth may be
inhibited by a number of factors, such as:
o inadequate network infrastructure;
o inconsistent quality of service;
o lack of cost-effective broadband high-speed services;
o lack of cost-effective storage; and
o security concerns.
Even if Internet use and broadband access grows, the Internet
infrastructure may not be able to support future growth adequately and its
reliability and quality of service may suffer. In addition, numerous websites
have experienced service interruptions due to outages and other delays occurring
internally and throughout the Internet network infrastructure. If these outages
or delays occur frequently in the future, Internet usage, as well as usage of
our products, could grow more slowly or decline.
Delivery of video using the Internet is an emerging business. Many of
our customers are new companies that are innovating and counting on Burstware(R)
to provide a technological edge. Because many of these companies are early stage
enterprises without revenues, they may delay payment or fail to pay our
invoices. For this reason, we have deferred a substantial portion of revenue
booked until collectibility has been assured. There is no assurance that this
revenue will ultimately be collected and recognized or that furture bookings
will not be deferred.
We may face government regulation and legal uncertainties relating to the
Internet
Currently, there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as user privacy, pricing and the
characteristics and quality of products and services. For example, recent
federal legislation prohibits the transmission of certain types of information
and content over the Internet. In addition, several telecommunications companies
have petitioned the Federal Communications Commission to regulate Internet and
on-line service providers in a manner similar to long distance telephone
carriers and to impose access fees on such providers. This could increase the
cost of transmitting data over the Internet. Moreover, it may take years to
determine the extent to which existing laws relating to issues such as property
ownership, libel and personal privacy apply to the Internet. Finally, state tax
13
<PAGE>
laws and regulations relating to the provision of products and services over the
Internet are still developing. If individual states impose taxes on products and
services provided over the Internet, the cost of our products and services may
increase and we may not be able to increase the price we charge for our products
to cover these costs. Any new laws or regulations or new interpretations of
existing laws and regulations relating to the Internet could adversely affect
our business.
Risks Relating to this Offering
If the warrants held by the selling stockholders are exercised, additional
shares of our common stock will be outstanding, which could reduce the market
price of our common stock.
If the warrants held by the selling stockholders are exercised,
additional shares of our common stock will be outstanding that are not subject
to restrictions on resale. Sales of substantial amounts of shares in the public
market following exercise of the warrants, or the prospect of such sales, could
adversely affect the market price of our common stock.
There has been a limited market for our common stock, an active market may not
develop, the market price of our common stock may fluctuate significantly, and
the market price may not exceed the initial public offering price.
Before this offering, our common stock traded on the OTC Electronic
Bulletin Board. Securities traded on the OTC Bulletin Board are for the most
part thinly traded. While we have applied to have our common stock listed for
trading on the Nasdaq SmallCap Market, we cannot be certain that our application
will be accepted. Even if our common stock becomes listed for trading on the
Nasdaq SmallCap Market, we cannot be certain that an active market will develop.
Numerous factors, many of which are beyond our control, may cause the market
price of the common stock to fluctuate significantly. These factors include, but
are not limited to, the following:
o fluctuations in our quarterly revenues and operating results;
o shortfalls in our operating results from levels forecast by
securities analysts;
o announcements concerning us, our competitors or our customers;
o announcements of technological innovations, new industry
standards or changes in product price by us or our
competitors; or
14
<PAGE>
o market conditions in the industry and the general state of the
securities markets.
In addition, the stock prices of many technology companies fluctuate
significantly for reasons that may be unrelated to operating results. These
fluctuations, as well as general economic, political and market conditions,
including recession, international instability or military tension or conflicts
may adversely affect the market price of our common stock. If we are named as a
defendant in any securities-related litigation as a result of decreases in the
market price of our shares, we may incur substantial costs, and our management's
attention may be diverted, for lengthy periods of time. The market price of our
common stock may not increase above the initial public offering price or
maintain its price at or above any particular level.
We do not expect to pay cash dividends in the foreseeable future.
We have not declared or paid any cash dividends in the past and do not
expect to pay cash dividends in the foreseeable future. We intend to retain our
future earnings, if any, to finance the development of our business. The board
of directors will determine any future dividend policy in light of then existing
conditions, including our earnings, financial condition and financial
requirements. You may never receive dividend payments from us.
Future sales of our common stock in the public market may depress our stock
price.
We have outstanding 19,123,866 shares of common stock. Sales of a
substantial number of shares of our common stock in the public market following
this offering could cause our stock price to decline. All the shares sold and
the shares issuable on exercise of the warrants in this offering will be freely
tradable. Currently 3,934,253 shares of common stock are freely tradable. An
additional 1,090,025 shares are eligible for sale in the public market subject
to volume restrictions of Rule 144, Shares issuable upon exercise of outstanding
options will become freely tradable upon issuance. The remaining outstanding
shares will be eligible for sale in the public market at various times after the
date of this prospectus, including 12,996,715 shares that are subject to lock-up
agreements that will begin to expire 180 days after the date of this prospectus.
In addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock. See "Shares Eligible for Future Sale."
Our principal stockholders, executive officers and directors have substantial
control over most matters submitted to a vote of the stockholders, thereby
limiting your power to influence corporate action.
Our officers, directors and principal stockholders will beneficially
own approximately 69% of our common stock. As a result, these stockholders will
have the power to control the outcome of most matters submitted to a vote of
stockholders, including the election of members of our board, and the approval
of significant corporate transactions. The stockholders purchasing shares in
this offering will have little influence on these matters. This concentration of
ownership may also have the effect of making it more difficult to obtain the
15
<PAGE>
needed approval for some types of transactions that these stockholders oppose,
and may result in delaying, deferring or preventing a change in control of our
company.
The effects of anti-takeover provisions in our charter and bylaws could inhibit
the acquisition of us by others.
Several provisions of our certificate of incorporation and bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of our company. For example, only one-third of our board of directors
will be elected at each of our annual meetings of stockholders, which will make
it more difficult for a potential acquirer to change the management of our
company, even after acquiring a majority of the shares of our common stock.
These provisions, which cannot be amended without the approval of 2/3 of our own
stockholders, could diminish the opportunities for a stockholder to participate
in tender offers, including tender offers at a price above the then current
market value of our common stock. In addition, our board of directors, without
further stockholder approval, may issue preferred stock, with such terms as the
board of directors may determine, that could have the effect of delaying or
preventing a change in control of our company. The issuance of preferred stock
could also adversely affect the voting powers of the holders of common stock,
including the loss of voting control to others. We are also afforded the
protections of section 203 of the Delaware General Corporation Law, which could
delay or prevent a change in control of our company or could impede a merger,
consolidation, takeover or other business combination involving our company or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
16
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
o implementing our business strategy;
o attracting and retaining customers;
o obtaining and expanding market acceptance of the products and
services we offer;
o forecasts of Internet usage and the size and growth of
relevant markets;
o rapid technological changes in our industry and relevant
markets; and
o competition in our market.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "predicts," "potential,"
"continue," "expects," "anticipates," "future," "intends," "plans," "believes,"
"estimates" and similar expressions. These statements are based on our current
beliefs, expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus, and
except as required under applicable securities law, we assume no obligation to
update them or to explain the reasons why actual results may differ.
17
<PAGE>
USE OF PROCEEDS
All proceeds from any sale of shares of common stock offered by the
selling stockholders will be received by the selling stockholders and not by us.
The shares being offered include shares that may be issued under
currently outstanding warrants held by the selling stockholders. We would
receive proceeds of up to $25,051,318 from the exercise of the selling
stockholders' warrants currently exercisable into up to 4,942,241 shares of our
common stock. Any proceeds from the exercise of the warrants will be used for
general corporate purposes. The exercise price of the warrants is less than the
current market price for our shares of common stock and, accordingly, the
selling stockholders could choose to exercise the warrants so long as the market
price for our shares of common stock remains higher than the exercise price of
the warrants. If no warrants are exercised, however, none of the shares
registered in this offering issuable on exercise of the warrants would become
available for sale. See "Selling Stockholders".
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock.
We retain any future earnings to fund the development and expansion our
business. Therefore, we do not anticipate paying cash dividends on our common
stock in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table summarizes our balance sheet data as of December
31, 1999 and March 31, 2000:
The March data includes the effects from the following transactions:
o our sale of 3,474,625 shares of common stock in January
2000;
o the conversion of our preferred stock into 4,496,609
shares of common stock in January 2000;
o the conversion of $5,335,000 of notes payable (including
$430,000 in new January 2000 notes) into 1,333,750
shares of common stock in January 2000; and
o offering costs totaling $1,103,000 related to the above
transactions.
We sold our shares of common stock in January 2000 at a price of $4.00
per share, and for each share sold, we issued one warrant to purchase our common
stock at an exercise price $5.00 per share and with a term of five years.
<TABLE>
This information should be read together with our Consolidated
Financial Statements and the related Notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
<CAPTION>
As of December 31, 1999 As of March 31, 2000
----------------------- ---------------------
(in thousands except share data)
<S> <C> <C>
Convertible Preferred Stock; $0.00001 par value; 20,000,000 shares authorized:
Series A Convertible Preferred Stock; 2,020,000 shares issued and
outstanding in 1999 $ -- $ --
Series B Convertible Preferred Stock; 2,476,609 shares issued and
outstanding in 1999 -- --
Common stock, $0.00001 par value; 100,000,000 shares
authorized; 9,535,527 and 18,953,065 shares issued and outstanding -- --
Additional paid-in-capital 31,971 50,176
Accumulated deficit (37,436) (41,235)
Total stockholders' equity (deficit) $ (5,465) $ 8,941
</TABLE>
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<PAGE>
The shares of common stock outstanding exclude:
o 7,644,700 shares of common stock issuable as of July 31, 2000
upon the exercise of outstanding stock options issued under
our stock option plans at a weighted average exercise price of
$ 3.63 per share;
o 1,519,641 additional shares of common stock reserved for
issuance under our Stock Option Plans; and
o 5,778,251 shares of common stock issuable as of July 31, 2000
upon the exercise of outstanding warrants with a weighted
average exercise price of $4.54 per share.
20
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
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 that there is substantial doubt about our 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. The statement of operations data for the three months ended March 31,
1999 and 2000 and the balance sheet data as of March 31, 2000 are derived from
unaudited financial statements included elsewere in this registration statement.
Historical results are not necessarily indicative of the results to be expected
in the future.
<CAPTION>
Years ended Three months ended March 31,
--------------------------------------------------------------------- ----------------------------
1995 1996 1997 1998 1999 1999 2000
--------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue $ 665,781 $1,457,597 $ 247,879 $ 15,000 $ -- $ -- $ 75,012
============ ========== =========== ============ ============ =========== ===========
Loss from operations $ (372,254) $ (346,351) $(1,928,637) $ (4,663,867) $(11,509,619) $(1,579,121) $(3,768,166)
============ ========== =========== ============ ============ =========== ===========
Net loss $ (456,633) $ (404,367) $(2,062,373) $ (6,916,420) $(12,977,729) $(1,572,499) $(3,799,140)
Beneficial conversion
feature of Series B -- -- -- (8,762,425) -- -- --
Preferred Stock
----------------------------------------------------------------------- ----------- -----------
Net loss applicable to
Common Stockholders $ (456,633) $ (404,367) $(2,062,373) $(15,678,845) $(12,977,729) $(1,572,499) $(3,799,140)
======================================================================= =========== ===========
Basic and diluted net loss
per common share: $(0.11) $(0.09) $(0.39) $(2.35) $(1.42) $ (0.18) $ (0.24)
======================================================================= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------- March
1995 1996 1997 1998 1999 31, 2000
-------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents $ 4,346 $ 208,613 $ 20,551 $ 2,212,141 $ 302,979 $ 9,549,325
Total assets $ 238,855 $ 601,182 $ 155,191 $ 3,249,622 $ 1,091,826 $11,229,721
Long-term
obligations $ 141,000 $ -- $ 16,833 $ -- $ -- --
Stockholders'
equity (deficit) $(1,307,057) $ 60,106 $ (983,267) $ 2,793,358 $(5,464,646) $ 8,941,495
-------------------------------------------------------------------------------------------------- -----------
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with the financial statements and related notes included elsewhere in this
prospectus. Except for historical information, the discussion in this prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The principal factors that could cause or contribute to
differences in our actual results are discussed in the section titled "Risk
Factors."
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
Three months ended March 31, 2000 Compared to 1999
Revenue recorded for the three months ended March 31, 2000 was $75,012
versus none in 1999. We completed the commercial release of our Burstware(R)
suite of products in November, 1999 and commenced shipments in February, 2000.
During the three months ended March 31, 2000, we also introduced our content
hosting service, which enables our customers to store their audio-video content
on our Burstware servers for delivery to their employees, customers or other
end-users over broadband networks. Orders for approximately $441,000, consisting
of software license fees and hosting and other consulting services and related
equipment were taken during the quarter. Of this amount, approximately $279,000
in software license fee revenue (excluding deferred maintenance revenue of
approximately $48,000) was deferred and will be recognized as collectibility is
assured and/or acceptance conditions are met. The remaining revenue not
recognized or deferred relate to establishment of a returns reserve and deferral
of customer support, hosting and other services that will be recognized as
services are provided. The cost of revenue recorded for the quarter ended March
31, 2000 consisted primarily of the cost of equipment purchased from a
third-party, which was resold to a customer in connection with a software sale.
Resale of equipment is not part of our sales strategy, and we do not plan to
make such sales to any significant degree in the future.
Costs and expenses during the three months ended March 31, 2000,
totaled $3,812,907 as compared to $1,579,121 during the three months ended March
31, 1999. The $2,233,786 increase was due to a $473,073, or 103%, increase in
research & development expenditures, a $1,278,465, or 285%, increase in sales &
marketing expenditures, as well as a $482,248, or 72% increase in general and
administrative expense. The increased costs were primarily a result of an
overall increase in business activity and the establishment and expansion of our
sales force and marketing programs in particular.
The increase in research & development expenditures resulted from
personnel added to develop, test and complete documentation of new product
releases and fix errors found in previous releases. There was no significant
amount of research and development that would qualify for capitalization under
SFAS 86. Major development activities began later in 1999 and continued in the
first three months of 2000 in the areas of player scripting, incorporation of a
database for replication, and various other features to be included in
subsequent releases.
The increase in sales & marketing was primarily a result of adding
sales account managers, sales engineers and other sales support staff and
opening various sales offices around the country. We have also added marketing
staff and have engaged in a targeted marketing campaign, including print, radio
and billboard advertising, public relations, collateral development, and
participation in major trade shows.
We incurred an increase in general and administrative expenses as a
result of additional personnel, equipment and facilities costs to support the
increased operations.
We had a loss from operations of $3,768,166 during the three months
ended March 31, 2000, as compared to $1,579,121, a 139% increase over the same
three months in 1999. The increased loss resulted from the increased
expenditures discussed above. Other expense, net was $30,974 for the three
months ended March 31, 1999. This $24,352 decrease from the same period in 1999
was principally due to approximately $100,000 in non-cash expense recorded in
connection with the equity financing closed during the 2000 period, offset by
interest earned on the proceeds of that financing.
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.
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<PAGE>
The $3,276,200, or 409% increase in Research & Development
expenditures, resulted from the ramp-up in preparation for the initial
commercial release and development and testing of enhanced features planned for
subsequent releases of our product as well as $1,330,000 of in-process research
and development acquired from Timeshift-TV which was charged to expense.
At the time of the acquisition, Time-Shift TV had a pending application
in the U.S. Patent office; a registered domain name (TimeShiftTV.com); a
strategy for introducing the technology to the marketplace; a strategy for
integration with other burst.com products; proof of conception pre-dating the
existence of other companies with similar products that have since emerged;
applications for Trademark protection; additional derivative patent applications
in preparation.
The TSTV in process research and development was acquired in order to
accomplish three primary objectives.
1) To incorporate TSTV functionality, or elements of the technology,
into the Burstware(r) software system for live, multicast and unicast
applications. (Development is underway at this writing and should be released
sometime in 2000)
2) To develop a set top box software application that integrates TSTV
functionality and Burst delivery of digital audio/video content. No timetable
for development or release has been set.
3) To license TSTV technology to third party hardware manufacturers.
(set top boxes, digital VCR's, digital TVs). We do not anticipate licensing TSTV
technology/IP until we have been granted a patent.
We estimate the cost of item #2 to be in the range of $700-900K. The
cost associated with licensing the technology (item 3) is factored into the
overall licensing program budget.
Material risks that may affect the timely completion or
commercialization of these projects include competing or alternate solutions
offered by significantly larger, established companies with much higher
profiles; inability to complete the development work timely due to lack of
financial or human resources; and unexpected delays due to technological
difficulties which may be encountered to commercialize the products.
The Quality Assurance and Release Management Department was established
in 1999 to support subsequent releases of Burstware(R) products. Personnel were
added to develop, test and complete documentation of the product releases. Major
development activities began in the areas of player scripting, incorporation of
a database for replication, and various other features to be included in
subsequent releases.
The $3,354,500 or 404% increase in Sales & Marketing was primarily a
result of increased expenditures relating to the commercial release of our
Burstware(R) product suite. We have added marketing staff and have engaged in a
targeted marketing campaign, including print, radio and billboard advertising,
public relations, collateral development, and participation in a number of major
trade shows. We believe that these promotional activities will allow us to reach
specific vertical markets cost-effectively, to support the efforts of the direct
sales force, and to generate publicity for us as a whole.
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.
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Year ended December 31, 1998 compared to 1997
Revenue
During the year ended December 31, 1998, we earned revenue in the
amount of $15,000 compared to $247,900 for 1997. The 1998 revenue was from a
single domestic transaction relating to a field trial. Revenue in 1997 was from
consulting services for a different domestic customer.
Cost of Revenue
We had no cost of revenue for the year ended December 31, 1998, since
the above-mentioned field trial had no costs associated with it. Cost of revenue
in 1997 consisted of costs of services related to customization of software for
the domestic customer referred to above.
Operating Expenses
Costs and expenses during the year ended December 31, 1998, totaled
$4,678,900 as compared to $1,946,300 during 1997. The increase was primarily due
to increased software development expense, increased labor expense, increased
sales and marketing expenses, and non-cash compensation expense relating to
stock options.
Software research and development ("R&D") expenses for 1998 increased
322% from $189,700 in 1997 to $800,600 in 1998. R&D expenditures accounted for
17% of total operating expenses in 1998. All R&D costs have been expensed as
incurred since no significant amounts qualified for capitalization. The majority
of R&D expenses were labor-related for employee salaries and benefits and
expenses for consultants as the result of our decision to expand our internal
product development team.
Sales and marketing expenses increased 103% from $408,400 in 1997 to
$831,000 in 1998 and accounted for 18% of total operating expenses in 1998. The
increase in 1998 was due to expenditures for developing and producing marketing
collateral materials, developing a public relations and promotion campaign
strategy, travel expenses, and labor expenses due to increased headcount in
1998.
General and administrative expenses increased from $1,348,200 in 1997
to $3,047,300 in 1998 and accounted for 65% of total operating expenses in 1998.
The 126% increase from 1997 to 1998 was due to $1,865,200 non-cash, stock-based
compensation in addition to increased labor and consultant expenses and
increased legal expenses for our patent filings.
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Interest Expense
Total interest expense for 1998 was $2,252,600 versus $139,000 in 1997.
This 1,520% increase was due to interest expense recognized for beneficial
conversion features on notes issued during 1998, discount amortized and interest
accrued on these notes during 1998, and interest expense recognized for the fair
value of warrants issued upon conversion of these notes and related accrued
interest to common and Series B Preferred Stock during 1998. Actual cash
expenditures for interest in 1998 totaled $65,900.
Net Loss and Net Loss Applicable to Common Shareholders
We incurred a net loss of $6,916,400 and a net loss to common
shareholders of $15,678,800, ($2.35 per common share) for the year ended
December 31, 1998, as compared to a net loss and net loss to common shareholders
of $2,062,400 ($0.39 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
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 $13,899,000
in gross cash proceeds, 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. We spent a total of $1,103,000 in offering costs for these transactions
and the conversion of 4,496,609 shares of preferred stock to common stock. As of
March 31, 2000, we had cash reserves of approximately $9.5 million, which we
believe will meet current operating requirements for approximately six months,
assuming no revenue. However, we have begun collecting revenue in 2000. Based on
projected revenues and our ability to reduce expenditures as required, we
believe operating revenues could possibly be met through year-end without
additional outside financing or extensive cutbacks. We are currently in
negotiations to obtain additional outside funding through the sale of shares of
our common stock in a private placement. Any new funding raised may have a
dilutive effect on our existing shareholders. In the event we were to be
unsuccessful in our additional fundraising efforts and projected revenues were
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.
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We expect to have material capital expenditures for computer and
network equipment 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
March 31, 2000 vs. 1999
As of March 31, 2000, we had working capital of $7,845,083 as compared
to a deficit of $6,226,515 at December 31, 1999. This $14,071,598 increase
reflects a $9,766,437 increase in current assets and a decrease in current
liabilities of $4,305,161. The reason for the increase was the closing of the
equity financing and conversion of notes payable that netted $18,137,718,
including cash and note conversions, partially offset by our $3,799,140 net loss
for the quarter.
Net cash used in operating activities totaled $3,597,479 during the
three months ended March 31, 2000, as compared to net cash used in operating
activities of $1,368,396 during the three months ended March 31, 1999, primarily
as the result of the increased operating loss.
Net cash used in investing activities during the three month period
ended March 31, 2000 totaled $426,320 as compared to $227,999 during the three
month period ended March 31, 1999. Investing activities in both periods
consisted of purchases of personal property and equipment.
Cash flow provided by financing activities during the three month
period ended March 31, 2000 totaled $13,270,145 as compared to $2,039,565 during
the same period in 1999. This increase was primarily as a result of $12,795,145
net cash proceeds from the sale of common stock and $430,000 from issuance of
convertible notes in 2000, vs. approximately $2.0 million received from the
exercise of options and warrants and proceeds from the Series B convertible
stock offering in 1999.
Although $5,335,000 in debt converted to common stock, the Company paid
down no debt in 2000 in cash, while it paid down $7,935 during the three months
ended March 31, 1999.
December 31, 1999 vs. 1998
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). 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 versus the additional proceeds from new
debt and equity in 1999 over 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.
During the year ended December 31, 1999 the Company received $4,905,000
(including $25,000 in services received, exchanged for a note) 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.
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
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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
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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.
Recently Issued Accounting Standards
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 June 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.
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BUSINESS
Overview
We are an independent provider of client/server network software for
the delivery of video and audio information over networks. Our headquarters is
located in San Francisco, California, with additional offices in several
domestic metropolitan areas. Our software manages the delivery of video and
audio content over a variety of networks; optimizing network efficiency and
quality of service. 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 bandwidth capacity to send more
video or audio data to users than the players are demanding. This data is stored
on the users' machine for playing on demand, thus isolating the user from noise
and other network interference. The result is high quality, full-motion video
and CD-quality audio to the end-user. Burstware(R) utilizes several components
of our international patent portfolio, including the Faster-Than-Real-Time(TM)
delivery method.
We began as a research and development partnership in 1988, with
initial activities focused upon technical investigations, patent development and
research pertaining to the viability of transmitting and receiving video and
audio programming in faster-than-real-time over a variety of networks.
In 1990, we incorporated, changed our name to Explore Technology, and
secured $2.0 million in funding in order to develop prototype hardware and
software for demonstrating faster-than-real-time transmission and reception of
audio and video programming; we described this type of communication as "burst".
We hired an engineering firm in Palo Alto, California to construct a pair of
"burst" video/audio transceivers. At the time this work was undertaken, networks
capable of providing "burst speeds" at practical prices were not available.
During the second quarter of 1992, we were acquired by Catalina Capital
Corporation, a small public company organized as a Delaware corporation on April
27, 1990. As a result of this transaction, our original shareholders received
85% of the outstanding shares of Catalina Capital Corporation, which was renamed
Instant Video Technologies, Inc. Our stock trades on the NASDAQ OTC Bulletin
Board under the symbol "IVDO".
In the first half of 1995, we began development of a software product
that would incorporate our patented intellectual property for
faster-than-real-time burst transmissions of multimedia content over computer
networks. At that time, we contracted with a consulting firm to develop this
software product. A prototype was created to run on a variety of networks. In
1996, we entered into agreements with three customers for use of the software in
their products and services. We continued our product development through 1997
by contracting with a third-party consulting firm.
In September 1997, our co-founder, Richard Lang, returned as Chairman,
CEO and President. As a result, in the last quarter of 1997 we restructured our
management team,
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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 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, 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, in
1999, the number of households with high-speed access is estimated to be 1.9
million with service revenue of $574.0 million; by 2002, these figures are
expected to reach 12.0 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 videoconferencing, 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 business-
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to-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 extend, 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. 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.
Real-Time Streaming Delivery Solution
[GRAPHIC OMITTED]
Network disruptions cause the video
to jitter and sometimes stop
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As a result of these limitations, and including the fact that most
streaming technology involves proprietary encoding schemes and limited platform
acceptance, widespread dissemination of high-quality streaming content has yet
to occur within either the business-to-business or 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 OMITTED]
Burstware(R)protects the viewing experience from network disruptions,
ensuting a 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 reserve providing continuous play in
the event that data flow across the network is disrupted. Once the network
recovers, the local buffer is rapidly "topped off" at a
Faster-Than-Real-Time(TM) rate. Upon delivery completion, the server disengages
from the client and is free to address other clients awaiting content delivery,
with service prioritized based on the client's buffer level, rate of
consumption, available bandwidth and other variables.
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Real-Time Streaming's Use of Bandwidth
[GRAPHIC OMITTED]
Burstware's Use of Bandwidth
[GRAPHIC OMITTED]
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 and conductors, 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)
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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, or 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-employee
communication. 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 various 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.
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.
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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 servers for delivery to their
employees, customers or other end-users over broadband networks. Because
Burstware(R) has been demonstrated to do a superior job of delivering data
across the Internet, our strategy will be to host content for broadband
distribution to homes with high-speed, broadband access. According to Paul Kagan
Associates, there are currently, 1.9 million homes with high-speed access; in
2000 that number is expected to rise to 4.3 million homes and increase to over
30 million in the next 8 years.
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Burstware(R) Product Family
<TABLE>
Our suite of Burstware(R) software is summarized below:
<CAPTION>
------------------------------------------------ ---------------------------------------------------
Burstware Component Features
------------------------------------------------ ---------------------------------------------------
<S> <C>
Conductor: o Central management service
The Conductor manages the o Monitors all servers
distribution of player requests over o Centralized point of control for video
multiple servers, providing and audio on network
scalability, load balancing, and o Scalable deployment of servers
reliable failover o Add and Remove servers as needed
o Asynchronous
o No performance bottlenecks
o Reliable failover mechanism
o Load balancing
o Replicated conductors
o Audit trail logging
------------------------------------------------ ---------------------------------------------------
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<PAGE>
------------------------------------------------ ---------------------------------------------------
Server: o Patented buffer management system
The server "bursts" media files to o Provides significant network
player memory or disk buffers in efficiencies and enhanced
Faster-Than-Real-Time(TM), tracking viewer experience
buffer levels and allocating o Faster-Than-Real-Time(TM)delivery
bandwidth accordingly. o Provides isolation from network problems
o Traffic shaping
o Limits bandwidth usage to the allocated
bandwidth
o Controls impact of video and audio on
the network
o Utilizes optimized connection acceptance
criteria for guaranteed
quality-of-service
o CODEC-neutral
o Replicated server for load balancing and
reliable failover
o Extensive logging of client session
statistics
------------------------------------------------ ---------------------------------------------------
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<PAGE>
------------------------------------------------ ---------------------------------------------------
Player: Burst-Enabled(TM)Windows Media Player
Plays data out of the local buffer to o Burstware(R)Server delivers content to
the end user, shielding the end user Windows Media Player
from network disruptions. o Provides both disk-based and RAM-based
caching
o Supports player scripting and high
interactivity
o Existing Windows Media Player
applications can easily be
burst-enabled
o Works in a browser or in a standalone
application
o VCR-like functionality and controls
o CODECS supported include: MPEG-1,
MPEG-2, MP3, Windows Media
Audio, and Apple Quicktime ASF
Burstware(R) Java Based (JMF) Player
o Player scripting
o Works in a browser or in a standalone
application
o VCR-like functionality and controls
o Supports many industry standard CODECs
------------------------------------------------ ---------------------------------------------------
</TABLE>
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.
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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(TM) 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
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.
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Fault Tolerance
Burstware(R) achieves complete fault-tolerance, including no single
point of failure, by fully replicating all components in the system. The
conductor is replicated in kind, and burst-enabled clients can contact either
conductor for service. Additionally, each server is automatically configured to
provide failover protection for all other servers containing the same media
content. Servers and conductors can be added and subtracted at runtime without
shutting down other system components.
If a server fails or becomes unavailable for any reason, including the
failure of a network link from the client to the server, all clients that have
lost contact with the server are automatically routed to other servers.
Burstware(R) establishes a new connection to an available server for each
client, and the new server picks up multimedia delivery exactly where the failed
server left off. Since the client-side buffer provides the ability for clients
to disconnect and re-connect without impacting the viewing experience, the
viewer is unaware that any failure has occurred.
Technology
The design mission for Burstware(R) technology is to provide the
premier platform for the management and delivery of digital video and audio
content. Burst.com has recognized the needs of the marketplace for a product
that provides quality, reliability, and manageability far beyond what existing
streaming solutions can deliver.
Burstware(R)'s design takes advantage of emerging trends in technology
such as available client-side storage and network bandwidth to provide a
forward-thinking, flexible, and highly effective approach to multimedia delivery
and management. Our engineering team has extensive experience in network
protocols, distributed multi-tiered architectures, digital video, real-time
control systems, and optimization algorithms. As a result, we believe
Burstware(R) is well equipped to address the escalating demand for multimedia
applications.
Architected for Industry Trends
By taking the caching model all the way to the client, Burstware(R) is
the first adopter in a new paradigm for multimedia delivery, and is uniquely
positioned to take advantage of the trends toward broadband networks and
inexpensive client storage. Designed to optimize expensive resources such as
bandwidth and server-side hardware by utilizing freely available client-side
storage resources, Burstware(R) provides an advanced network management and
optimization platform for audio and video content delivery.
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<PAGE>
Sophisticated Scheduling of Data Delivery
[GRAPHIC OMITTED]
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.
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<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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(TM) the Windows Media Player in
Version 1.2.
As of June 30, 2000, our product development organization consisted of
29 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 a 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 provides 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
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targets the digital television, communications and DVD production marketplaces.
Digital OutPost, based in Carlsbad California, provides 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, provides 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.
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 seven sales offices. We currently have two general managers, eight
account executives and six 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.
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
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<PAGE>
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 July 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
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
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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. In
addition to IP/TV, Cisco recently announced that it had agreed to acquire
SightPath, Inc., a company that provides software permitting end-users to more
easily broadcast live events over the Internet and centrally manage engineering
designs or video for diagnosing medical conditions.
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.
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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 one European patent that incorporates the subject matter of the
first six U.S. patents, two Australian patents, one South Korean patent, and one
Indian patent. We have filed for a number of additional domestic and
international patents.
In addition to protecting the Burstware(R) product offerings, our
patents have broader application as various market applications appear, and our
potential to license our intellectual property expands into additional vertical
market segments.
We view our portfolio as a critical component in gaining relationships
with strategic partners, strongly positioning our products' competitive
advantage. Potential licensees include companies such as server and client
manufacturers, bandwidth providers, content aggregators, copyright owners, and
other hardware manufacturers.
We have registered the trademarks "INSTANT VIDEO(R)", "BURSTWARE(R)"
and "BURSTAID(R)" in the United States, as well as in certain countries in
Europe and Asia.
Employees
As of the June 30, 2000, we have 92 full-time employees, of which 29
work in product development, 36 are in sales, marketing and business development
and 27 work in administration, finance and operations. We have never experienced
a work stoppage and no personnel are represented under collective bargaining
agreements. We consider our relations with employees to be good.
Facilities
We presently occupy 12,900 square feet of office space at 500 Sansome
Street, Suite 503, San Francisco, California, under a lease that expires at the
end of January 2002. The lease provides for rent of $34,300 per month, fully
serviced. We rent a total of 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.
Legal Proceedings
We are not aware of any material legal proceedings pending or
threatened against us.
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MANAGEMENT
The following table sets forth certain information with respect to our
executive officers, directors and key employees:
Name Age Position
---- --- --------
Richard Lang..................... 46 Chairman, Chief Executive Officer,
and Director
Douglas Glen..................... 53 President and Director
Thomas Koshy..................... 62 Chief Operating Officer
Edward H. Davis.................. 47 General Counsel, Vice President of
Strategic Alliances and Secretary
John C. Lukrich ................. 47 Chief Financial Officer
Kyle Faulkner.................... 43 Chief Technology Officer
David Egan 42 Vice President of Sales
Trevor Bowen (1)................. 51 Director
John J. Micek III (1)(2)......... 47 Director
Brian Murphy..................... 44 Director
Joseph Barletta (1)(2)........... 64 Director
(1) Member of the compensation committee
(2) Member of the audit committee
Key employees are:
June White....................... 60 Vice President of Engineering
Michael Moskowitz................ 38 Vice President of Business Development
George Zraick ................... 47 Vice President of Marketing
Richard Lang has served as our Chairman of the Board and CEO since
September 1997. From September 1997 through May of 2000 he also served as
President. From January 31, 1997 through August 1997, Mr. Lang served as one of
our directors. Mr. Lang served as our Chairman of the Board and Treasurer until
January 31, 1997. He had served as Chairman of the Board, CEO and Treasurer from
December 1993 to September 1995 and as a Director since August 1992. He has been
a Director of our subsidiary, Explore Technology, Inc., since February 1990, and
served as its President from February 1990 to August 1992. Mr. Lang has presided
over the development of our patent portfolio. He is the inventor of record for
the bulk of our Intellectual Property. Mr. Lang was also a co-founder of
Go-Video, Inc., Scottsdale, Arizona and co-inventor of Go-Video's patented
dual-deck VCRs. Mr. Lang received his A.A. degree from Scottsdale College.
Douglas Glen has been President since June 2000 and a director since
October 1999. Mr. Glen is general partner of Pro Ven Private Equity's Global
Rights Fund, a $250 million investment fund focused on under-exploited brands,
copyrights and media properties. Previously, Mr. Glen was senior vice president,
chief strategy officer of Mattel, Inc. Before joining Mattel, Mr. Glen was group
vice president, business development and strategic planning for Sega of America.
Prior to joining Sega, Mr. Glen was general manager of Lucasfilm Games, the
consumer software division of George Lucas' entertainment company. Mr. Glen has
a Bachelors Degree in Business from Massachusetts Institute of Technology and a
Ph.D. from Somerset University.
Thomas Koshy has served as our Chief Operating Officer since September
1999 and brings 25 years of wide ranging operational and program management
experience in the areas of strategic planning, network capacity planning,
engineering, software development, technical training, and large engineering and
construction projects. For the five-year period prior to joining us, Mr. Koshy
was employed by 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 $50,000 to
$250,000, and has developed
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organizations to support optimum process flow. Mr. Koshy has a Bachelors degree
in Engineering, and Masters degrees in Business Administration and
Telecommunications Management.
Edward H.Davis currently serves as General Counsel, Secretary and Vice
President of Strategic Alliances and has been with us since August 1998. Mr.
Davis was elected as our Secretary in October 1999. From 1987 to July 1998 Mr.
Davis was Corporate Counsel for Pacific Telesis Group, or PTG. As Corporate
Counsel he advised PTG consolidated companies, including Pacific Bell, 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 of Laws in Taxation from Golden Gate University.
John C. Lukrich became our Chief Financial Officer in June 2000. He has
extensive experience in mergers and acquisitions, operations, business
development, and venture capital strategies. For ten years beginning in 1982,
Mr. Lukrich headed his own accounting software consulting firm, J.C. Lukrich &
Co. CPAs, specializing in the selection, implementation and support of software
systems for medium size businesses. From 1992 to 1996, Mr. Lukrich served as CFO
and Executive Vice President of Great Bear Technology, Inc./StarPress, Inc.,
publisher and distributor of entertainment and education-based CD-ROM titles. He
was responsible for the required filings for the publicly-traded company (GTBR),
and for the merger, acquistion, and transition of five software companies into
Great Bear. In 1996 he joined Intervista Software, Inc, as Chief Financial
Officer and Chief Operating Officer, and was later appointed President where he
served until 1999. From 1998 to 2000, Mr. Lukrich served as interim director for
RateXchange.com (RTX), and as a part of the senior management team with Chief
Financial Officer responsibilites for NetAmerica.com (NAMI), an incubator for
Internet business-to-business startups. Mr. Lukrich is a CPA, and practiced with
Ernst & Young. He received BS degrees in Accounting and in Finance from the
University of California, Berkeley and an MBA from Golden Gate University.
Kyle Faulkner currently serves as Chief Technology Officer and has been
with us since November 1997. Mr. Faulkner has over 16 years experience in
client/server software development, and four 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. degree 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
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President - Open Systems Sales & Marketing for Hitachi Data Systems. He received
his B.A. in Economics from Stanford University.
Trevor Bowen is a partner in Principle Management Limited, an artiste
management company with offices in Dublin and New York. He was a partner in KPMG
LLP for eleven years before joining Principle Management Limited in 1996. Mr.
Bowen holds a number of directorships in companies in the media, entertainment
and film business. Mr. Bowen also holds a number of non-executive directorships
and is Chairman of an international consulting group. Mr. Bowen received a
Bachelor of Business Studies degree from Trinity College Dublin and is a Fellow
of The Institute of Chartered Accountants in Ireland. He has also completed a
Corporate Finance Course at Harvard University.
John J. Micek III has been one of our directors since April 1990,
Secretary and Treasurer since January 1994, and served as our President from
April 1990 to August 1992. Mr. Micek currently serves as President of Universal
Warranty Insurance located in Palo Alto,
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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.
Biographies of our key employees are as follows:
June White currently serves as Vice President of Engineering and has
been with us since October 1998. Ms. White has managed all aspects of software
development for over 20 years, emphasizing the establishment of processes that
are required to support a 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. Ms. White received her B.A. degree in Mathematics from Harvard
University.
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.
George Zraick became our Vice President of Marketing in April 2000. Mr.
Zraick has over twenty-five years of marketing and sales experience. Prior to
joining Burst.Com, Mr. Zraick served as Vice President Marketing and Sales at
CRU/Labtec Technologies from February 1998 to April 2000; from February 1997 to
February 1998 he was Corporate Development and Sales Manager at
Internex/Concentric; from January 1996 to February 1997 he served as Director of
Marketing and North America Sales at C-Net Technolgy; and from 1989-1995 he
served in Director level capacity in the Computer Wholesale Industry with Tech
Data Corp., Globelle, and ASI. Mr. Zraick completed coursework towards degree in
Engineering from Devry in Chicago II and a Bachelors Degree in Business from the
University of Iowa.
Classified Board and Term of Offices
Our bylaws provide for a board of directors consisting of
seven members. There are currently six directors on the board. 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 (we have applied to have our common stock listed on the
Nasdaq SmallCap 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
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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.
Board Committees
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 stock option plans.
Executive Compensation
Summary of compensation. The following table sets forth all
compensation earned or paid for services rendered to us in all capacities by our
Chief Executive Officer and by our other most highly compensated executive
officer who earned more than $100,000 in salary and bonus for the fiscal year
ended December 31, 1999. These officers are referred to collectively in this
prospectus as the named executive officers.
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<TABLE>
<CAPTION>
Summary Compensation Table
------------------------- ----------------------------------- --------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------- --------------------------------------------------------------- ----------------------------
------------------------- --------------------------------------------------------------- ----------------------------
Name and Principal Year Salary Bonus Securities Underlying All Other
------------------ ---- ------ ----- ---------------------- ---------
Position Options (#) Compensation($)
-------- ----------- ---------------
------------------------- ------- ------------ -------------- --------------------------- ----------------------------
<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 -- --
Technology Officer 1998 25,000 -- 50,000 283,940(1)
1997 -- -- 392,000 6,720(1)
------------------------- ------- ------------ -------------- --------------------------- ----------------------------
Thomas Koshy, Chief 1999 142,000 -- -- --
Operating Officer 1998 -- -- 285,000 --
1997 -- -- 15,000 --
------------------------- ------- ------------ -------------- --------------------------- ----------------------------
Edward 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 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:
o 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
o 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.
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<TABLE>
Option Grants in Last Fiscal Year
Individual Grants(1)
<CAPTION>
Potential Realizable Value at
Number of % of Total Assumed Rates of Stock Price
Securities Options Appreciation for
Underlying Granted to Option Term($)
Options Employees in Exercise Expiration --------------
Name Granted(#)(1) 1999(%)(2) Price($) Date 5% 10%
---- ------------- ---------- -------- ---- ----- ------
<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 11/04 $ 98,425 $217,494
Edward Davis -- -- -- -- -- --
David Morgenstein -- -- -- -- -- --
<FN>
(1) All options were granted under our 1999 Stock Option Plan.
(2) Based on an aggregate of 1,302,000 options granted to employees, officers, directors and consultants in
fiscal 1999.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
The following table sets forth information concerning option exercises
and the aggregate value of unexercised options for the year ended December 31,
1999, held by each executive officer named in the summary compensation table
above. None of these officers exercised any stock options in 1999.
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the Money
Unexercised Options at Options at
Shares December 31, 1999 December 31, 1999(1)
Acquired on Value ----------------- --------------------
Name Exercise(#) realized ($) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
---- ----------- ------------ -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard Lang -- -- 1,060,417 321,750 $6,940,815 $1,850,063
Kyle Faulkner -- -- 159,708 282,292 $1,940,815 $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
<FN>
(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.
</FN>
</TABLE>
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Stock Option Plans
A total of 9,700,000 shares of common stock have been reserved for
issuance upon exercise of incentive and non-statutory options and stock purchase
rights granted under our 1992, 1998 and 1999 Stock Plans (the "Plans"). As of
July 31, 2000 there were 7,644,700 options outstanding to purchase shares of
common stock. No shares of common stock have been issued pursuant to stock
purchase rights, and no stock appreciation rights have been granted under the
Plans. Under the Plans options may be granted to employees, officers, directors,
and consultants (the 1992 Stock Plan also permits the grant of restricted stock
and stock appreciation rights). Only employees and officers may receive
"incentive stock options," which are intended to qualify for certain tax
treatment, and consultants may receive "nonstatutory stock options," which do
not qualify for such treatment. The exercise price of incentive stock options
under the Plans must be at least equal to the fair market value of the common
stock on the date of grant, while the exercise price of nonstatutory options
must be at least equal to 85% of such market value. A holder of more than 10% of
the outstanding voting shares may only be granted options with an exercise price
of at least 110% of the fair market value of the underlying stock on the date of
the grant, and if such holder has incentive stock options, the term of the
options must not exceed five years. Options granted under the Plans generally
vest ratably over a four year period. All options must be exercised within ten
years. The Board of Directors may amend the Plans at any time.
Employment Agreements
We have entered into employment agreements with Richard Lang, our
Chairman, 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.
The agreements with Mr. Glen and Mr. Lukrich provide for an initial
term of one year with automatic annual renewals and annual salary reviews. If
the employee's employment is terminated by us without cause, the employee is
entitled to receive as severance the continuation of their base salary at the
then current rate for a period of 12 months. In, addition the employee will be
entitled to accelerate vesting of the stock options, with the 12 months of
otherwise normal vesting becoming vested immediately.
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. Glen commenced on June 1, 2000 and provides for a base salary of $27,083 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. Lukrich commenced on June 1, 2000
and provides for a base salary of $16,667 per month. The employment agreement
with Mr. Faulker commenced on November 13, 1998 and provides for a base salary
of $16,667 per month.
The employment agreement with Mr. Glen commenced in June 1, 2000 and
provides for a base salary of $27,083 per month. Mr. Glen has also been granted
incentive stock options to purchase 750,000 shares of Common Stock at an
exercise price of $4.50 per share with a 42 month vesting period. Options to
purchase an additional 500,000 shares at an exercise price of $4.50 per share
have been granted to Mr. Glen, one-half of which vest on each of the first and
second anniversary dates of his agreement. Mr. Glen will also be eligible for an
incentive bonus equal to no less than 100% of base salary and annual stock
option grants. Targets for said bonus will be mutually agreed upon by Mr. Glen
and the Board Compensation Committee. The company has also agreed to loan Mr.
Glen $100,000 immediately and an additional $5,000 per month for 36 months to
enable Mr. Glen to make a down payment and monthly payments on a San Francisco
Residence.
The employment agreement with Mr. Lukrich commenced on June 1, 2000 and
provides for a base salary of $16,667 per month. Mr. Lukrich has also been given
a stock option grant of 300,000 incentive stock options. 150,000 options were
granted on June 1, 2000. Options to purchase an additional 150,000 shares at an
exercise price of $4.50 per share have been granted to Mr. Lukrich, one-half of
which vest on each of the first and second anniversary dates of his agreement.
Mr. Lukrich will also be eligible for an incentive bonus equal to no less than
50% of his base salary. Mr. Lukrich and the Compensation Committee will mutually
agree upon targets.
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Compensation Committee Interlocks and Insider Participation
The compensation committee currently consists of Directors Micek, Bowen
and Barletta. John C. Lukrich, our Chief Financial Officer, participates in
deliberations of the committee concerning executive compensation. None of our
executive officers serve as members of the board of directors or compensation
committee of any entity that has one or more executive officers who serve on our
board or compensation committee.
In January 2000, Mr. Micek invested $25,000 for 6,250 shares of common
stock and 5-year warrants to purchase 6,250 shares of common stock for $5.00 per
share in connection with a private placement financing. 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 2000.
In January 2000, we received $100,000 from Independence Properties LLC,
of which Mr. Barletta 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 shares of
our common stock in January 2000 in connection with a private placement
financing.
Limitation on Liabilities and Indemnification Matters
Our certificate of incorporation limits the personal liability of our
directors to our stockholders to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except with respect to liability for:
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases
or redemptions; or
o any transaction from which the director derived an improper
personal benefit.
This provision will have no effect on any non-monetary remedies that may be
available to us or our stockholders, nor will it relieve us or other officers or
directors from compliance with federal or state securities laws.
Our certificate of incorporation and bylaws also generally provide that
we will
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indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he or she is or was a director or officer of ours, or is or was
serving at our request as a director, officer, employee or agent of another
entity, against expenses incurred by him or her in connection that proceeding.
An officer or director will not be entitled to indemnification by us if:
o the officer or director did not act in good faith and in a
manner reasonably believed to be in, or not opposed to, our
best interests; or
o with respect to any criminal action or proceeding, the officer
or director had reasonable cause to believe his or her conduct
was unlawful.
At the present time there is no pending litigation or proceeding
involving any of our directors, officers, employees or agents for which
indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding which may result in a claim for
indemnification.
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PLAN OF DISTRIBUTION
We are registering all 9,752,178 of the shares of our common stock
offered by this prospectus on behalf of the selling stockholders, and will
receive no proceeds from this offering. The selling stockholders, or pledgees,
donees, transferees or other successors-in-interest selling shares received from
a selling stockholder as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus are free to sell the shares
from time to time. The selling stockholders will act independently of us in
making decisions with respect to the timing, manner and size of each sale. The
sales may be made in the national over-the-counter market or otherwise, at
prices and at terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The selling stockholders may effect
such transactions by selling the shares to or through broker-dealers. The shares
may be sold by one or more of, or a combination of, the following:
o block trade in which the broker-dealer so engaged will attempt
to sell the shares as agent, but may position and resell a
portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o in privately negotiated transactions.
In effecting sales, broker-dealers engaged by the selling stockholders
may arrange for other broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with
broker-dealers in connection with distributions of the shares or otherwise. In
such transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with selling stockholders. The
selling stockholders also may sell shares short and redeliver the shares to
close out such short positions. The selling stockholders may enter into option
or other transactions with broker-dealers that require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling stockholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned, or upon a default the broker-dealer may sell the pledged
shares pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the selling stockholders.
Broker-dealers or agents may also receive compensation from the purchasers of
the shares for whom they act as agents or to whom they sell as principals, or
both. Compensation as to a particular broker-dealer might be
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<PAGE>
in excess of customary commissions and will be in amounts to be negotiated in
connection with the sale. Brokers-dealers or agents and any other participating
broker-dealers or the selling stockholders may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act of 1933, in connection
with sales of the shares. Accordingly, any such commission, discount or
concession received by them and any profit on the resale of the shares purchased
by them may be deemed to be underwriting discounts or commissions under the
Securities Act. Because the selling stockholders may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act, the
selling stockholders will be subject to the prospectus delivery requirements of
the Securities Act. In addition, any securities covered by this prospectus that
qualify for sale pursuant to Rule 144 promulgated under the Securities Act may
be sold under Rule 144 rather than pursuant to this prospectus. The selling
stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of the shares; nor is any underwriter or coordinating broker acting in
connection with the proposed sale of the shares by the selling stockholders.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states the shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirements is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the shares may not simultaneously engage
in market-making activities with respect to our common stock for a period of two
business days prior to the commencement of such distribution. In addition, each
selling stockholder will be subject to applicable provisions of the Exchange Act
and the associated rules and regulations under the Exchange Act, including
Regulation M, which provisions may limit the timing of purchases and sales of
shares of our common stock by the selling stockholders. We will make copies of
this prospectus available to the selling stockholders and we have informed them
of the need for delivery of copies of this prospectus to purchasers at or prior
to the time of any sale of the shares.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
stockholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
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SELLING STOCKHOLDERS
<TABLE>
The following table sets forth information, as of July 31, 2000, with
respect to the selling stockholders. We sold the shares of our common stock
being offered by the selling stockholders in private placements in December 1999
and January 2000. We sold (i) 4,808,375 shares of our common stock at a price of
$4.00 per share, (ii) warrants to purchase 4,843,371 shares of our common stock
with an exercise price of $5.00 per share and (iii) warrants to purchase 98,870
shares of our common stock with an exercise price of $8.44 per share. This
prospectus covers the resale by the selling stockholders of these shares, plus,
in accordance with Rule 416 under the Securities Act of 1933, such additional
number of shares of our common stock as may be issued on exercise of the
warrants resulting from stock splits, stock dividends or the application of
antidilution provisions in the warrants. The number of shares shown in the
following table as being offered by the selling stockholders does not include
such presently indeterminate number of additional shares of our common stock.
Any and all of the shares of common stock may be offered for sale
pursuant to this prospectus by the selling stockholders from time to time.
Accordingly, no estimate can be given as to the amounts of shares of our common
stock that will be held by the selling stockholders upon consummation of any
such sales. In addition, the selling stockholders may have sold, transferred or
otherwise disposed of all or a portion of their shares since the date on which
the information regarding their common stock was provided in transactions exempt
from the registration requirements of the Securities Act of 1933.
Except as set forth below or elsewhere in this prospectus, none of the
selling stockholders is currently an affiliate of us, and none of them has had a
material relationship with us within the past three years other than as a result
of the ownership of the shares and warrants or other securities issued by us:
<CAPTION>
Shares Beneficially Owned Prior Shares Offered
To this Offering (1) --------------
-------------------- Issuable
Selling Stockholders Number Percent Owned Under Warrants
-------------------- ------ ------- ----- --------------
<S> <C> <C> <C> <C>
Chelsey Capital 1,500,000 7.86% 750,000 750,000
Ravinia Capital Ventures 1,187,000 6.22% 593,500 593,500
Storie Partners LLP 3,530,000 18.50% 500,000 500,000
Mercer Management, Inc. 2,536,774 13.29% 387,500 387,500
BayStar Capital, L.P. 750,000 3.93% 375,000 375,000
BayStar International Limited 750,000 3.93% 375,000 375,000
Special Situations Fund III 750,000 3.93% 375,000 375,000
Special Situations Private
Equity Fund 500,000 2.62% 250,000 250,000
Special Situations Technology
Fund 500,000 2.62% 250,000 250,000
Reed Slatkin 942,500 4.94% 130,000 130,000
Special Situations Cayman
Fund 250,000 1.31% 125,000 125,000
Robert London 1,127,623 5.91% 125,000 125,000
Dorothy Lyddon Trust 651,870 3.42% 50,000 50,000
Erik Franklin 200,000 1.05% 100,000 100,000
Kyle Faulkner (2) 323,249 1.69% 62,500 62,500
Independence Properties LLC (3) 120,849 * 25,000 31,250
Douglas Glen (4) 245,624 1.18% 25,000 25,000
Greg Friedman (5) 52,875 * 23,000 23,000
Ryan Allison 37,500 * 18,750 18,750
Frank Kramer 42,187 * 18,750 23,437
Arthur D. Allen (5) 37,500 * 18,750 18,750
Suzanne Lentz (6) 41,837 * 15,000 15,000
Bruce Hensel 25,000 * 12,500 12,500
Universal Assurors
Agency, Inc. (7) 28,125 * 12,500 15,625
Keith Koch 75,000 * 12,500 15,625
Donald C. Reinke (8) 26,563 * 12,500 14,063
June S. White (9) 56,457 * 10,000 10,000
Han Joo Lee 20,000 * 10,000 10,000
Yuan Meng (5) 20,000 * 10,000 10,000
Thomas Koshy (10) 177,430 * 10,000 10,000
Ann Louise Micek 19,687 * 8,750 10,937
Vince Sakowski 14,062 * 6,250 7,812
John Worthing 14,062 * 6,250 7,812
Bay Venture Counsel, LLP (11) 12,500 * 6,250 6,250
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<PAGE>
Robert Walter 14,062 * 6,250 7,812
John J. Micek III (12) 177,266 * 6,250 6,250
Reece Micek 14,062 * 6,250 7,812
Elissa Micek 14,062 * 6,250 7,812
Bradley H. Reinke 26,563 * 12,500 14,063
Michael Moskowitz (13) 22,930 * 6,000 6,000
Thomas A. Bell (5) 10,000 * 5,000 5,000
Sonja Erickson (5) 15,833 * 3,750 3,750
R&T Sheppard Family
Partners 7,500 * 3,750 3,750
James E. Landy (5) 7,500 * 3,750 3,750
James L. Berg (8) 8,437 * 3,750 4,687
Frank H. Schwartz (5) 165,250 * 3,250 3,250
Steven Heist (5) 7,000 * 2,500 2,500
Zhiping Liu (5) 6,375 * 2,500 2,500
Laura Micek 5,625 * 2,500 3,125
Stephen P. Pezzola 5,625 * 2,500 3,125
Gregory L. Beattie (8) 5,625 * 2,500 3,125
Bruce Whitley (8) 5,625 * 2,500 3,125
Roger E. Reinke 5,625 * 2,500 3,125
Kimberly L. Massingale (5) 10,337 * 2,000 2,000
Francis E. Vegliante (5) 16,395 * 2,000 2,000
Evan Zhang (5) 6,916 * 2,000 2,000
Richard P. Trevor (5) 11,166 * 2,000 2,000
Allan Ber (5) 2,250 * 1,125 1,125
Howard E. Lyons (5) 116,273 * 1,250 1,250
Karolyn Kelly 2,812 * 1,250 1,562
Bruce P. Johnson 2,812 * 1,250 1,562
Paul Boc Banh (5) 12,810 * 1,000 1,000
Reedland Capital Partners(14) 98,870 * -0- 98,870
<FN>
----------
* Represents beneficially ownership of less than 1% of our outstanding common
stock.
(1) The number of shares listed in these columns include all shares
beneficially owned and all options and warrants to purchase shares
held, whether or not deemed to be beneficially owned, by each selling
stockholder. The ownership percentages listed in these columns include
only shares beneficially owned by the listed selling stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the percentage of
shares beneficially owned by a selling stockholder, shares of common
stock subject to options or warrants held by that stockholder that are
exercisable now or within 60 days after July 31, 2000 are deemed
outstanding, although those shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. The
ownership percentages are calculated assuming that 19,083,531 shares of
common stock were outstanding immediately prior to this offering.
(2) Mr. Faulkner is our Chief Technology Officer.
(3) This entity is controlled by Joseph Barletta, one of our directors.
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<PAGE>
(4) Mr. Glen is President and one of our directors.
(5) The individual listed is an employee or independent contractor of us.
(6) Ms. Lentz is our Director of Marketing.
(7) Mr. John J. Micek III, one of our directors, is an affiliate of this
entity.
(8) The individual listed is an attorney with Bay Venture Counsel, LLP, our
legal counsel. See "Legal Matters."
(9) Ms. White is our Vice President of Engineering.
(10) Mr. Koshy is our Chief Operating Officer.
(11) Bay Venture Counsel, LLP is our legal counsel. See "Legal Matters."
(12) Mr. Micek is one of our directors.
(13) Mr. Moskowitz is our Vice President of Business Development.
(14) Reedland Capital Partners received 98,870 warrants as a placement fee
in connection with the private placement closed in January, 2000.
</FN>
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since April 1, 1997, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which we were or
are to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of our common stock, or an
immediate family member of any of the foregoing, had or will have a direct or
indirect interest other than:
o compensation arrangements, which are described where required
under "Management"; and
o the transactions described below.
Sale of Common Stock and Warrants in January 2000.
In January 2000 we sold 4,808,375 shares of common stock at a purchase
price of $4.00 per share, for an aggregate gross purchase price of $19.2
million. We raised $13.9 million in cash in the offering, before offering costs
totalling $1,103,000 for this offering and the debt conversion described below,
and the remaining $5.3 million consisted of the conversion of notes payable. The
purchasers also received warrants to purchase up to an aggregate of 4,843,371
shares of our common stock, at an exercise price of $5.00 per share. The
warrants are
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<PAGE>
exercisable for a term of five years from the date of issuance. The following
directors, executive officers and principal stockholders participated in this
transaction:
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
Kyle Faulkner 250,000 62,500 62,500
Douglas Glen 100,000 25,000 25,000
Conversion of Notes Payable:
---------------------------
Investor Notes Converted Common Shares Warrants
-------- --------------- ------------- --------
Storie Partners $ 2,000,000 500,000 500,000
Mercer Management 1,550,000 387,500 387,500
In connection with the above financing, holders of all of our then
outstanding shares of preferred stock voluntarily converted such shares into
4,496,609 shares of our preferred stock.
Transactions with Draysec Finance Limited
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 two 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
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<PAGE>
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.
Transactions with Mercer Management
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 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
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<PAGE>
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
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.
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<PAGE>
Transactions with Stuart Rudick and Affiliates
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 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.
Transactions with Robert London
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.
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<PAGE>
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.
Transactions with Richard Lang
On August 3, 1999, we acquired Timeshift-TV, Inc. in a stock-only
transaction from Richard Lang, our Chairman and CEO, Earl Mincer and Eric
Walters, who are employees of ours. Mr. Walters is Mr. Lang's brother in law.
Mr. Lang and the other parties were not employed by us at the time they formed
Timeshift-TV. Our board of directors unanimously approved our acquisition of
Timeshift-TV. Timeshift-TV holds assets, including intellectual property, in the
area of time-shifted real-time broadcasting, which we plan to integrate into our
advanced video and audio delivery solutions. We also plan to license the
Timeshift-TV intellectual property to other parties for various applications.
Transactions with Kyle Faulkner
We paid consulting fees to Kyle Faulkner, our Chief Technology Officer,
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
our common stock and 5-year warrants to purchase 62,500 shares of common stock
at an exercise price of $5.00 per share in connection with a private placement
financing.
Transactions with Thomas Koshy
In January 2000, Mr Thomas Koshy, our Chief Operating Officer, invested
$40,000 for 10,000 shares of common stock and 5-year warrants to purchase 10,000
shares of our common stock at an exercise price of $5.00 per share in connection
with a private placement financing.
Transactions with Douglas Glen
In January 2000, Douglas Glen, one of our directors and currently our
President, invested $100,000 for 25,000 shares of our common stock and 5-year
warrants to purchase 25,000 shares of our common stock at an exercise price of
$5.00 per share in connection with a private placement financing.
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Transactions with John J. Micek III
In January 2000, John J. Micek III, one of our directors, invested
$25,000 for 6,250 shares of common stock and 5-year warrants to purchase 6,250
shares of our common stock at an exercise price of $5.00 per share in connection
with a private placement financing.
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 into 12,500
shares of our common stock in January 2000.
Transactions with Joseph Barletta
In January 2000, we received $100,000 from Independence Properties LLC,
of which Joseph 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 into 25,000 shares of our common stock at the end of January in
connection with a private placement financing.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock by:
o each person who beneficially owns more than 5% of our common
stock;
o each of our executive officers;
o each of our directors; and
o all executive officers and directors as a group.
<TABLE>
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 19,083,531 shares of common stock outstanding on July
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.
<CAPTION>
Number of Percentage of
Name and Address of Beneficial Owner Shares Beneficially Owned Outstanding Shares
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
5% Stockholders
Draysec Finance Limited 2,111,455(1) 11.06%
Storie Partners LLP 3,530,000(2) 18.50%
Mercer Management 2,536,774(3) 13.29%
Stuart Rudick 1,533,500(4) 8.04%
Special Situations Funds 2,000,000(5) 10.48%
Chelsey Capital 1,500,000(6) 7.86%
Baystar Capital 1,500,000(7) 7.86%
Robert London 1,127,623(8) 5.91%
Ravinia Capital 1,187,000(9) 6.22%
Executive Officers and Directors
Richard Lang 2,295,338(10) 12.03%
Trevor Bowen 1,913,155(11) 10.03%
John J. Micek III 274,216(12) 1.54%
Brian Murphy 2,018,189(13) 10.58%
Joseph Barletta 124,783(14) *
Douglas Glen 232,811(15) 1.13%
John C. Lukrich 28,590(16)
Thomas Koshy 176,625(17) *
Edward Davis 113,700(18) *
Kyle Faulkner 330,332(19) 1.73%
All officers and directors as a group (11 persons) (20) 39.45%
--------------------------------------------------------------------------------------------------------------
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<FN>
* Represents less than a one percent interest.
(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 100,000
shares of our common stock held by Trevor Bowen and options to purchase
139,577 shares of our common stock held by Brian Murphy, each of whom
represents Draysec 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.
(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 1,250,992 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.
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(11) Includes 1,871,878 shares of our common stock held beneficially by
Draysec Finance and options to purchase 41,277 shares of our common
stock.
(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 159,733 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 1,871,878 shares of our common stock held beneficially by
Draysec Finance and options to purchase 146,311 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 68,533 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 182,811
shares of our common stock and warrants to purchase 25,000 shares of
our common stock.
(16) Consists of options to purchase 28,590 shares of common stock.
(17) Includes 66,000 shares of our common stock, options to purchase 100,625
shares of our common stock and warrants to purchase 10,000 shares of
our common stock.
(18) Consists of options to purchase 113,700 shares of our common stock.
(19) Includes 62,500 shares of our common stock, options to purchase 205,332
shares of our common stock and warrants to purchase 62,500 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.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.00001 par value per share, and 20,000,000 shares of preferred stock,
$0.00001 par value per share.
We currently have 19,083,531 shares of common stock outstanding and no
shares of preferred stock outstanding.
Common Stock
Voting Rights. Each outstanding share of common stock is entitled to
one vote on all matters submitted to a vote of our stockholders, including the
election of directors. There are
73
<PAGE>
no cumulative voting rights, and therefore the holders of a plurality of the
shares of common stock voting for the election of directors may elect all of our
directors standing for election. However, our certificate of incorporation
provides that actions may only be taken by our stockholders at a duly called
meeting, and may not be taken by written consent.
Dividends. Holders of common stock are entitled to receive dividends at
the same rate if and when dividends are declared by our board of directors out
of assets legally available for the payment of dividends, subject to
preferential rights or any outstanding share of preferred stock.
Liquidation. In the event of a liquidation, dissolution or winding up
our affairs, whether voluntary or involuntary, after payment of our debts or
other liabilities and making provisions for the holders of any outstanding
shares of preferred stock, our remaining assets will be distributed ratably
among the holders of shares of common stock.
Rights and Preferences. Our common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, references and privileges
of 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 any
designate and issue in the future.
Fully Paid and Nonassessable. All of our outstanding shares of common
stock are, and the shares of common stock to be issued pursuant to this offering
will be, fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by our
stockholders, to provide for the issuance of preferred stock in one or more
classes or series and to designate the rights, preferences and privileges of
each class or series, which may be greater than the rights of the common stock.
We cannot predict the effect of the issuance of any shares of preferred stock
upon the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of the preferred stock. However,
the effects could include one or more of the following:
o restricting dividends on the common stock;
o diluting the voting power of the common stock;
o impairing the liquidation rights of the common stock; or
o delaying or preventing a change in control of us without
further action by the stockholders.
There are no shares of preferred stock outstanding, and we have no
present plans to issue any shares of preferred stock.
74
<PAGE>
Warrants
As of July 31, 2000, there were outstanding warrants to purchase (i)
382,000 shares of common stock at an average exercise price of $1.31 per share,
(ii) 180,488 shares of common stock at an exercise price of $1.50 per share,
(iii) 321,960 shares of common stock at an exercise price of $2.00 per share,
(iv) 4,843,371 shares of common stock at an exercise price of $5.00 (subject to
adjustment for certain anti-dilutive issuances) and (v) 98,970 shares of common
stock at an exercise price of $8.44 per share. The 4,843,371 shares of common
stock issuable on exercise of the warrants at an exercise price of $5.00 share
and the 98,870 shares of common stock issuable on exercise of the warrants at an
exercise price of $8.44 per share are being offered by this prospectus.
Dividends
The holders of our common stock are not entitled to receive any fixed
dividend.
Registration Rights
Under the terms of registration rights agreements between us and the
holders of outstanding shares of common stock issued on the conversion of their
shares of preferred stock, such holders or their transferees are entitled to
certain rights with respect to the registration under the Securities Act of
1933, as amended, of such shares of common stock and shares of common stock
issuable on conversion of warrants purchased in connection with such holder's
purchase of preferred stock. Such agreements provide that if we register any of
our common stock either for our own account or for the account of others, with
certain exceptions, the holders of such registrable securities are entitled to
include their shares of common stock in the registration. A holder's right to
include shares in an underwritten registration initiated by us is subject to the
right of the underwriters to limit the number of shares included in the
offering, subject to certain limitations. All registration expenses are to be
borne by us, and all selling expenses (such as underwriting discounts and
selling commissions) must be borne by the holders of the shares being
registered, in proportion to the number of shares so registered. Such holders
are also entitled to require us to register their registrable shares on Form S-3
in certain cases if such Form is available to us for registration. Among other
exceptions, we are not required to register such shares, in the case of holders
of shares issued on conversion of our prior Series A preferred stock, if the
aggregate offering price of the registrable shares is less than $500,000, and in
the case of the holders of shares issued on conversion of our prior Series B
preferred stock, if the aggregate offering price of the registrable shares is
less than $15,000,000. The holders of these registrations rights have agreed to
waive their rights with respect to the registration of the selling stockholders'
shares and shares issuable on exercise of warrants that are being offered by
this prospectus.
Under the terms of certain employee stock option agreements, a total of
1,578,630 shares of our common stock issued or issuable on exercise of these
stock options are entitled to certain rights with respect to registration under
the Securities Act. We intend to file a registration statement on Form S-8 with
the SEC with respect to these shares.
Under the terms of a registration rights agreement between us and the
selling stockholders, who purchased shares of our common stock and warrants to
purchase common stock in January 2000, we are required to register such
purchasers' common stock and common stock issuable on exercise of the warrants.
We have filed with the Securities and Exchange Commission the required
registration statement on Form S-1 with respect to the selling
75
<PAGE>
stockholders' shares of common stock and shares of common stock issuable on
exercise of their warrants. Such shares are being offered by this prospectus.
Rights of First Refusal
The selling stockholders have been granted rights of first refusal to
purchase shares of new securities that we may, from time to time, propose to
sell and issue, subject to certain exceptions.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law,
an anti-takeover law. Generally, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
o prior to the date of the business combination, the transaction
is approved by the board of directors of the corporation;
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock
of the corporation; or
o on or after the date the business combination is approved by
the board of directors of the corporation and by the
affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other
transactions that may result in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within the three-year period immediately prior to the
relevant date, did own, 15% or more of the corporation's outstanding voting
stock. The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved in advance by our
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Transfer Agent and Registrar
American Securities Transfer & Trust, Inc. serves as our transfer agent
and registrar for our common stock.
Listing
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". We have applied for
listing of our common stock on the Nasdaq SmallCap Market.
76
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock, and the availability of our common
stock for sale, may depress the market price for our common stock. Approximately
5,024,278 shares of our common stock currently are freely tradeable, of which
1,090,025 shares are currently subject to the volume limitations of Rule 144
discussed below. All of the shares sold in this offering will be freely
tradable except for any shares purchased by our affiliates. In addition,
7,968,019 shares of our common stock previously issued or upon issuance
pursuant the exercise options granted under our stock option plans may be
resold in reliance on Rule 144 and Rule 701, as discussed above. The remaining
shares of common stock outstanding after this offering will be restricted as a
result of securities laws or lock-up agreements. These remaining shares will be
available for sale in the public market as follows:
Certain of our directors, executive officers and holders of our
outstanding common stock have agreed to certain restrictions on their ability to
sell, offer, contract or grant any option to sell, pledge, transfer or otherwise
dispose of an aggregate of 13,167,960 shares of our common stock for a period
ending on the date that is 180 days after the date of this prospectus, subject
to certain exceptions. Following this period and until the termination of this
prospectus, each such stockholder may not during any consecutive four-month
period dispose of more than 25% of the shares owned by the stockholder as of the
date of this prospectus.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; or
o the average weekly trading volume of the common stock during
the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. An aggregate of 7,247,933 shares of our
common stock previously issued, or when issued, pursuant to our stock option
plans, may be resold under the provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without
77
<PAGE>
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell their shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitations or notice provisions of Rule 144. However, approximately 2,152,000
Rule 701 shares are subject to lock-up agreements and will only become eligible
for sale at the expiration of the 180-day lock-up agreements described above.
We intend to file a Registration Statement on Form S-8 registering
shares of common stock subject to outstanding options or reserved for future
issuance under our stock plans (including shares that may be resold under Rule
701, discussed above). As of July 31, 2000, options to purchase a total of
7,644,700 shares were outstanding and 1,519,641 shares were reserved for future
issuance under our 1999 stock option plans. Common stock issued upon exercise of
outstanding vested options after the filing of this Registration Statement on
Form S-8, other than common stock issued to our affiliates, will be available
for immediate resale in the open market.
Registration Rights
The holders of an aggregate of approximately 4,746,609 shares of our
common stock are (other than the shares being sold by this prospectus) entitled
to rights with respect to the registration of these shares under the Securities
Act of 1933. See "Description of Capital Stock."
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed
for the selling stockholders by Bay Venture Counsel LLP, Oakland, California.
Bay Venture Counsel, LLP and certain of its attorneys are offering by this
prospectus an aggregate of 40,000 shares of our common stock and 48,438 shares
issuable on exercise of warrants. See "Selling Stockholders."
EXPERTS
The financial statements, as of and for the year ended December 31,
1999, included in this prospectus, and in the registration statement have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the period set forth in their reports appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in auditing and
accounting.
78
<PAGE>
The financial statements and schedules as of December 31, 1998 and for
each of the years in the two-year period ended December 31, 1998, have been
included in this prospectus and in the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, contained in
this prospectus, and upon the authority of such firm as experts in auditing and
accounting.
The report of KPMG LLP covering the December 31, 1998 financial
statements contains an explanatory paragraph that states that our recurring
losses from operations and negative cash flows from operating activities raise
substantial doubt about our ability to continue as a going concern. The December
31, 1998 financial statements do not include any adjustments that might result
from the outcome of that uncertainty.
CHANGE IN ACCOUNTANTS
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 1997 and 1998 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 procedure 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 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.
We have agreed to indemnify and hold KPMG LLP harmless against and from
any and all legal costs and expenses incurred by KPMG in the 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.
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
that were previously the subject of disagreements or a reportable event.
79
<PAGE>
WHERE YOU CAN GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock being offered. This prospectus does not contain all of
the information described in the registration statement and the related exhibits
and schedules. For further information with respect to us and the common stock
being offered, reference is made to the registration statement and the related
exhibits and schedule. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of the contract or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by the reference. A
copy of the registration statement and the related exhibits and schedule may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the registration statement may be obtained from these offices upon the payment
of the fees prescribed by the Commission. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. Upon approval of our common stock for quotation on
the Nasdaq SmallCap Market, our reports, proxy statements and other information
may be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We intend to provide our stockholders with annual reports containing
combined financial statements audited by an independent accounting firm and to
file with the Commission quarterly reports containing unaudited combined
financial data for the first three quarters of each year.
80
<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. 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 include raising
sufficient capital to allow the Company to complete development and successful
commercialization of its products. 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,
---------------------------- March 31,
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,212,141 $ 302,979 $ 9,549,325
Accounts receivable, net -- -- 361,987
Prepaid expenses 26,053 63,893 221,997
Receivables - Series B Convertible
Preferred Stock (Note 4) 810,000 -- --
------------ ------------ -----------
Total current assets 3,048,194 366,872 10,133,309
Property and equipment, net (Note 2) 184,616 725,412 1,056,307
Other assets 16,812 36,457 40,105
------------ ------------ -----------
$ 3,249,622 $ 1,128,741 $11,229,721
============ ============ ===========
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 1,218,856
Accrued expenses (Note 5) 181,484 208,374 545,190
Accrued interest (Note 3) -- 114,277 145,905
Deferred revenue -- 51,600 378,275
------------ ------------ -----------
Total liabilities 456,264 6,593,387 2,288,226
------------ ------------ -----------
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, 2,020,000 and 0
shares issued and outstanding
liquidation preference of $2,025,000,
$2,020,000 and 0 20 20 --
Series B, 2,476,609, 2,476,609 and 0 shares
issued and outstanding, Liquidation preference
of $18,574,568, $20,803,516 and 0 25 25 --
Common stock, $.00001 par value, 100,000,000
shares authorized; 7,940,966, 9,535,527
and 18,953,065 shares issued and outstanding 79 95 188
Additional paid-in capital 27,251,399 31,971,108 50,176,341
Accumulated deficit (24,458,165) (37,435,894) (41,235,034)
------------ ------------ -----------
Stockholders' equity (deficit) 2,793,358 (5,464,646) 8,941,495
------------ ------------ -----------
$ 3,249,622 $ 1,128,741 $11,229,721
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months
Years ended December 31, Ended March 31,
------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue (Note 8) $ 247,879 $ 15,000 $ -- $ -- $ 75,012
Cost of revenues 230,210 -- -- -- 30,271
----------- ------------ ------------ ------------ ------------
17,669 15,000 -- -- 44,741
----------- ------------ ------------ ------------ ------------
Costs and expenses:
Research and development, including
$1,330,000 in purchased research
and development costs
paid to a related party in 1999 (Note 4) 189,719 800,567 4,076,732 460,902 933,975
Sales and marketing 408,369 830,998 4,185,517 448,818 1,727,283
General and administrative 1,348,218 3,047,302 3,247,370 669,401 1,151,649
----------- ------------ ------------ ------------ ------------
Total costs and expenses 1,946,306 4,678,867 11,509,619 1,579,121 3,812,907
----------- ------------ ------------ ------------ ------------
Loss from operations (1,928,637) (4,663,867) (11,509,619) (1,579,121) (3,768,166)
----------- ------------ ------------ ------------ ------------
Other income (expense):
Interest, net (139,013) (2,252,553) (1,468,110) (365) 71,546
Other income (expense), net 5,277 -- -- 6,987 (102,520)
----------- ------------ ------------ ------------ ------------
Total other expense (133,736) (2,252,553) (1,468,110) 6,622) (30,974)
----------- ------------ ------------ ------------ ------------
Net loss $(2,062,373) $ (6,916,420) $(12,977,729) $ (1,572,499) $ (3,799,140)
=========== ============ ============ ============ ============
Net loss applicable to Common Stockholders:
Net Loss $(2,062,373) $ (6,916,420) $(12,977,729) $ (1,572,499) $ (3,799,140)
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) $ (1,572,499) $ (3,799,140)
============ ============ ============ ============ ============
Basic and diluted net loss per common share $ (0.39) $ (2.35) $ (1.42) $ (0.18) $ (0.24)
=========== ============ ============ ============ ============
Weighted Average Shares used in per share computation 5,259,304 6,658,738 9,121,647 8,532,685 15,938,027
</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)
Exercise of stock options (Unaudited) 112,554 -- -- -- 45,000 -- 45,000
Non-cash compensation related to sale
of common stock to employees (Unaudited) -- -- -- -- 77,726 -- 77,726
Common Stock Offering, net of
costs of $412,005 (Unaudited) 3,474,625 35 -- -- 13,486,460 -- 13,486,495
Conversion of debt to
common stock net of costs
of $158,150 (Unaudited) 1,333,750 13 -- -- 5,106,684 -- 5,106,697
Compensation expense related
to options (Unaudited) -- -- -- -- 22,563 -- 22,563
Conversion of preferred stock
to common stock, net of costs
of $533,200 (Unaudited) 4,496,609 45 (4,496,609) (45) (533,200) -- (533,200)
Net loss (Unaudited) -- -- -- -- -- (3,799,140) (3,799,140)
--------- ------ ---------- ------ ----------- ------------ ------------
Balance at March 31, 2000 (Unaudited) 18,953,065 $ 188 -- $ -- $50,176,341 $(41,235,034) $ 8,941,495
========= ====== ========== ====== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
BURST.COM, INC.AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months
Years ended December 31, Ended March 31,
------------------------------------------ ----------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ -------------- -----------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss $(2,062,373) $(6,916,420) $(12,977,729) $(1,572,499) $(3,799,140)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 92,176 58,531 209,198 28,887 95,425
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 30,501 22,563
Compensation from cashless exercise
of stock options -- 1,137,499 -- -- 77,726
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 -- -- -- (361,987)
Costs and estimated earnings in excess of
billings on uncompleted contracts 136,400 -- -- -- --
Prepaid expenses 6,982 5,407 (37,840) (102,997) (158,104)
Other assets 35,101 757 (19,645) (19,645) (3,648)
Accounts payable (94,237) 218,018 1,132,245 391,264 (165,433)
Accrued expenses (59,218) 88,702 26,890 (123,907) 336,816
Accrued interest 13,231 (43,044) 114,277 -- 31,628
Deferred revenue -- -- 51,600 -- 326,675
----------- ----------- ------------ ------------ -----------
Net cash used in operating activities (1,760,507) (2,488,751) (8,476,482) (1,368,396) (3,597,479)
Cash flows from investing activities:
Purchases of property and equipment (85,367) (162,669) (749,994) (227,999) (426,320)
----------- ----------- ------------ ------------ -----------
Cash flows from financing activities:
Payment of receivables from Series B
Convertible Stock offering -- -- 810,000 810,000 --
Proceeds from sale of stock 550,000 3,410,000 -- -- 13,898,500
Payment of costs related to stock
offerings, debt conversion
and preferred stock conversion -- -- -- -- (1,103,355)
Proceeds from exercise of warrants
and stock options 400,000 751,453 1,650,050 1,237,500 45,000
Proceeds from debt 1,054,210 1,572,736 4,880,000 -- 430,000
Repayment of debt (346,398) (891,179) (22,736) (7,935) --
----------- ----------- ------------ ------------ -----------
Net cash provided by financing activities 1,657,812 4,843,010 7,317,314 2,039,565 13,270,145
----------- ----------- ------------ ------------ -----------
Increase (decrease) in cash and cash equivalents (188,062) 2,191,590 (1,909,162) 443,170 9,246,346
Cash and cash equivalents, beginning of period 208,613 20,551 2,212,141 2,212,141 302,979
----------- ----------- ------------ ------------ -----------
Cash and cash equivalents, end of period $ 20,551 $ 2,212,141 $ 302,979 $ 2,655,311 $ 9,549,325
=========== =========== ============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 800 $ 800 $ 800 $ 800 $ 850
=========== =========== ============ ============ ===========
Cash paid for interest $ 56,782 $ 65,935 $ 7,374 $ 365 $ --
=========== =========== ============ ============ ===========
Supplemental schedule of non-cash investing
and financing activities:
Debt converted into common stock $ -- $ -- $ -- $ -- $ 5,335,000
Debt and accrued interest converted to
Preferred Stock and common stock $ -- $ 1,736,996 $ -- $ -- $ --
Preferred Stock conversion into common $ -- $ -- $ -- $ -- $ 4,496,609
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-6
<PAGE>
BURST.COM, INC. AND SUBSIDIARIES
(formerly Instant Video Technologies, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
(INFORMATION FOR MARCH 31, 2000 AND 1999 IS UNAUDITED)
(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 plus any
dilutive common equivalent shares from stock options and warrants
outstanding using the treasury stock method.
The following table sets forth the computation of basic and diluted net
loss per shared for the periods indicated:
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
Numerator:
Net loss applicable to
common shareholders $(2,062,373) $(15,678,845) $(12,977,729)
Denominator:
Weighted average shares 5,259,304 6,658,738 9,121,647
Net loss per share:
Basic and diluted $ (0.39) $ (2.35) $ (1.42)
=========== ============ ============
The following is a summary of the securities that could potentially dilute basic
loss per share in the future that were not included in the computation of
diluted loss per share because to do so would be antidilutive.
Years ended December 31,
-----------------------------------
1997 1998 1999
--------- ---------- ----------
Convertible Preferred 2,125,000 4,501,609 4,496,609
Options 2,538,630 6,289,263 6,925,863
Warrants 1,961,000 2,010,210 905,384
Convertible debt 303,206 -- --
--------- ---------- ----------
Total 6,927,836 12,801,082 12,327,856
========= ========== ==========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, accounts payable, and debt. The Company believes the reported
amounts of its financial instruments approximates fair value, based upon
the short maturity of cash equivalents, accounts receivable and payable and
based on the current rates available to the Company or similar debt issuer.
F-8
<PAGE>
STOCK-BASED COMPENSATION
The Company accounts for its stock based compensation plans for employees
using the intrinsic value method as described in Accounting Principles
Board Opinion (APB) No. 25 "Stock Based Compensation" as permitted by
Statement of the Financial Accounting Standards Board (SFAS) No. 123
"Accounting for Stock-Based Compensation." As such, compensation expense is
recorded if on the measurement date, which is generally the date of grant,
the current fair value of the underlying stock exceeds the exercise price.
The equity instruments issued to non-employees are accounted for at fair
value. The fair value of the equity instrument is determined using either
the fair value of the underlying stock or the Black-Scholes option pricing
model.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates. The Company's most significant estimates
are those related to the valuation of stock, stock options and warrants in
connection with equity and financing transactions.
COMPREHENSIVE INCOME
The Company has no component of comprehensive income other than its
reported amounts of net loss applicable to holders of common stock.
RECLASSIFICATIONS
Certain items have been reclassified to conform to current year
presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of:
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. One of
the 1999 notes (**) is payable to an entity in which one of our directors
is a principal. All notes outstanding at December 31, 1999 were converted
into common stock in January 2000 (see Note 11).
During 1998, the Company issued 10-1/2% notes totaling $1,550,000 plus
accrued interest. Certain of these notes contained beneficial conversion
features allowing immediate conversion to common and Series B Convertible
Preferred Stock (Series B Preferred Stock) at below-market rates. Similar
beneficial conversion features were later added to the remaining notes.
Additionally, 200,000 shares of common stock, plus warrants to purchase
335,000 shares of common stock at $1.00 to $2.36 per share, were granted to
various noteholders. Accordingly, $1,947,400 was charged to interest
expense for the beneficial conversion features and the fair value of the
stock and warrants issued, calculated on the Black-Scholes option pricing
model with the following weighted average assumptions: volatility of 53%,
expected dividend yield 0%, risk free interest rate of 5.5%, and an
expected lives of 2.5 to 3.0 years.
During 1998, the 10-1/2% notes plus accrued interest of $164,200 were
converted into 1,082,991 and 371,609 shares of common stock and Series B
Preferred Stock, respectively (see Note 4). In connection with this
conversion, the noteholders received warrants to purchase 48,310 shares of
common stock at $2.00 per share, expiring in December 2001. Accordingly,
the resulting $172,000 value of the warrants was charged to interest
expense, calculated on the Black-Scholes option pricing model with the
following weighted average assumptions: volatility of 134%, expected
dividend yield 0%, risk free interest rate of 4.61%, and an expected life
of 2.0 years.
(4) EQUITY
Convertible Preferred Stock (see also Common Stock below)
In February 1996, the Company amended its articles of incorporation and
authorized the issuance of up to 5,000,000 shares of Series F Convertible
Preferred Stock and warrants to purchase common stock of the Company. As a
result, the Company obtained financing in the net amount of $1,475,000 in
1996 and $550,000 in 1997 of Series F Convertible Preferred Stock and
warrants to purchase 2,025,000 shares of common stock of the Company at $1
per share. In 1998, Series F was renamed Series A Convertible Preferred
Stock (Series A Preferred Stock).
F-10
<PAGE>
The price of each share of Series A Preferred Stock was $1.00 and may be
converted into one share of the Company's common stock. The exercise price
of the common stock warrants is $1.00 per share. The offering grants the
investors the right to appoint two directors, certain registration rights,
and the right of first refusal on new finance offerings for a limited
period of time.
During 1998, when the market prices of common stock ranged from $3.19 to
$8.44 per share, the Company issued 2,105,000 shares of $.00001 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 all the stock of a privately held
Delaware corporation Timeshift TV Inc. ("Timeshift TV") in order to obtain
certain intellectual property and patent application rights owned by
Timeshift TV. Timeshift TV had no active business operations; the
intellectual properties were its sole assets. There were no liabilities
assumed in the transaction. The consideration of 200,000 shares of the
Company's common stock was valued at $6.65 per share, which approximated
the trading value of the stock on the OTC market, for a total of
$1,330,000. Since the technology acquired had not yet reached technological
feasibility, the entire amount was expensed as in-process research and
development. Timeshift TV was owned at the time of purchase by the
Company's CEO 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 exercise of warrants for investment
units of Series A Preferred Stock and additional warrants for
Common stock, $1.50 per share 180,488
Warrants issued upon 1999 issuance of convertible debt,
$5.00 per share 20,936
-------
905,384
=======
During 1999 the Company issued debt of $4,905,000, in the form of notes
payable, containing a beneficial conversion feature which resulted in the
Company recording an interest expense of $1,396,993 (see Note 3). Certain
of these notes were issued
F-11
<PAGE>
with warrants covering 20,936 shares of common stock with a strike price of
$5.00, expiring in five years. This resulted in an additional expense to
the Company of $70,153 based on the fair value of the warrants issued,
calculated on the Black-Scholes option pricing model with the following
weighted average assumptions: volatility of 117%, expected dividend yield
0%, risk free interest rate of 6.10%, and an expected life of 2.5 years.
See also Note 11 for warrants issued in January 2000.
Stock Options
On November 6, 1992, the Board of Directors adopted the 1992 Stock
Incentive Plan. Under the plan, the Board may grant options to officers,
key employees, directors and consultants. Incentive stock options may be
granted at not less than 100% of the fair market value of the stock on the
date the option is granted. The option price of stock not intended to
qualify as incentive stock options may not be less than 85% of the fair
market value on the date of grant. The maximum term of the options cannot
exceed ten years. A total of 3,500,000 shares has been reserved for
issuance under the plan.
On April 29, 1998 the Board of Directors adopted the 1998 Stock Incentive
Plan. Under the plan, the Board may grant options to officers, key
employees, directors and consultants. Incentive stock options may be
granted at not less than 100% of the fair market value of the stock on the
date the option is granted. The option price of stock not intended to
qualify as incentive stock options may not be less than 85% of the fair
market value on the date of grant. The maximum term of the options cannot
exceed ten years. A total of 4,000,000 shares have been reserved for
issuance under the plan.
On August 23, 1999, the Board of Directors adopted the 1999 Stock Incentive
Plan. Under the plan, the Board may grant options to officers, key
employees, directors and consultants. Incentive stock options may be
granted at not less than 100% of the fair market value of the stock on the
date the option is granted. The option price of stock not intended to
qualify as incentive stock options may not be less than 85% of the fair
market value on the date of grant. The maximum term of the options cannot
exceed ten years. A total of 3,000,000 shares have been reserved for
issuance under the plan.
During 1998, the Company issued stock options in lieu of cash for services
performed, covering approximately 550,000 shares of the Company's common
stock at exercise prices ranging from $1.00 to $3.50 per share, expiring
between September 2000 and December 2003. $727,726 was recorded as a
general and administrative expense based on the fair value of the stock
options issued. The per share weighted average fair value of stock options
granted during 1998 was $1.73, calculated on the Black-Scholes option
pricing model with the following weighted avererage assumptions: volatility
of 136% expected dividend yield of 0%, risk free interest rate of 5.05%,
and an expected life of 1.5 years.
During 1999, the Company issued stock options in lieu of cash for services
performed, covering 120,621 shares of the Company's common stock at
exercise prices ranging from $2.19 to $9.72 per share, expiring between
February 2000 and December 2004. $105,805 was recorded as a general and
administrative expense, $160,588 was recorded as a sales and marketing
expense and $2,082 was recorded as a research and development expense based
on the fair value of the stock options issued. The per share weighted
average fair value of stock options granted during 1999 was $5.23
calculated on the Black-Scholes option pricing model with the following
weighted average assumptions: volatility of 117% expected dividend yield of
0%, risk free interest rate of 5.08%, and an expected life of 1.5 years.
Stock option activity for 1997, 1998 and 1999 follows:
Weighted
Number of Average
Shares Exercise Price
------ --------------
Balance on December 31, 1996 2,864,774 $ 1.52
Options granted 286,356 1.00
Options forfeited (500,000) 1.00
Options expired (112,500) 1.39
--------- --------
Balance on December 31, 1997 2,538,630 1.85
Options granted 4,117,101 3.01
Options exercised (139,501) 2.28
Options expired (105,719) 2.65
Options forfeited (121,248) 1.56
--------- --------
Balance on December 31, 1998 6,289,263 2.52
F-12
<PAGE>
Options granted 1,302,000 6.65
Options exercised (111,800) 1.01
Options expired (200,000) 1.00
Options forfeited (353,600) 2.78
--------- --------
Balance on December 31, 1999 6,925,863 $ 3.36
========= ========
Stock options outstanding and exercisable at December 31, 1999 from the 1992,
1998 and 1999 Plans consisted of:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------- -----------------------------------
Weighted Weighted
Weighted Average Weighted Average
Shares Average Remaining Shares Average Remaining
Price Outstanding Price Life Outstanding Price Life
----- ----------- ----- ---- ----------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
$0.90 - $1.00 1,453,580 $1.00 4.90 1,453,580 $1.00 4.90
$1.37 - $2.91 1,166,556 $2.15 3.42 917,538 $2.11 3.34
$3.00 - $3.16 371,327 $3.07 3.62 176,126 $3.08 3.63
$3.50 2,375,400 $3.50 3.51 1,497,031 $3.50 3.47
$3.75 - $9.72 1,559,000 $6.31 4.35 478,083 $4.70 3.98
--------- ----- ---- ---------- ----- ----
Total $0.90 to $9.72 6,925,863 $3.36 3.98 4,522,358 $2.53 3.96
========= ===== ==== ========= ===== ====
</TABLE>
The Company accounts for employee and director stock options under the
intrinsic value method permitted by APB No. 25. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options consistent with the fair value method described in SFAS No. 123,
the Company's net loss applicable to common stockholders and net loss per
share would have been increased to pro forma amounts indicated below:
Years ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
Net loss applicable to
common shareholders, as
reported $(2,062,373) $(15,678,845) $(12,977,729)
Pro forma $(2,071,358) $(16,960,138) $(17,356,452)
Net loss per share as
reported $ (0.39) $ (2.35) $ (1.42)
Pro forma $ (0.39) $ (2.55) $ (1.90)
(5) ACCRUED EXPENSES
Accrued expenses are comprised of the following:
December 31,
-------------------
1998 1999
-------- --------
Employee benefits $ 64,711 $163,828
Professional services 116,773 44,546
-------- --------
Total $181,484 $208,374
======== ========
(6) LEASE COMMITMENTS
The Company leases its office space under an operating lease expiring in
2002.
Years ended December 31,
-------------------------------
1997 1998 1999
-------- --------- --------
Rent expense $ 91,000 $ 104,969 $299,077
======== ========= ========
F-13
<PAGE>
The following is a summary of future minimum lease payments for operating
leases at December 31, 1999:
Operating
Years Ending December 31: Leases
------------------------- ------
2000 $442,100
2001 439,600
2002 36,000
--------
Total lease payments $917,700
========
(7) INCOME TAXES
At December 31, 1999 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $21,329,000 and
$9,522,000 respectively, which, are available to offset future taxable
income, if any, through 2019 and 2004, respectively.
Actual income tax benefit differs from the benefit expected by applying the
federal statutory rate of 34% to pretax loss as follows:
Years ended December 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
Expected tax benefit $(701,000) $(2,352,000) $(4,412,000)
State tax benefit, net of
federal effect (61,000) (207,000) (715,000)
Non deductible equity
adjustment -- -- 442,000
Research and experimentation
credit (4,000) (31,000) (289,000)
Increase in valuation
allowance 589,000 2,250,000 4,096,000
Other 177,000 340,000 (878,000)
--------- ----------- -----------
Actual tax benefit $ -- $ -- $ --
========= =========== ===========
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
December 31,
--------------------------
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards
for income taxes $ 5,068,400 $ 7,807,400
Accruals 10,400 62,500
Capitalized research and experimentation -- 984,400
Research and experimentation credit
carryforward 137,100 449,900
Patents 43,500 41,500
----------- -----------
Total gross deferred tax assets 5,259,400 9,345,700
Less valuation allowance (5,247,800) (9,343,600)
----------- -----------
Net deferred tax assets 11,600 2,100
----------- -----------
Deferred tax liabilities-depreciation and
amortization (11,600) (2,100)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The net change in the valuation allowance for 1997, 1998 and 1999 was an
increase of $589,100, $2,250,300 and $4,095,800, respectively. In assessing
the amount of deferred tax assets to be recognized, management considers
whether it is more likely
F-14
<PAGE>
than not that some portion or all of the deferred tax assets will not be
realized. Management cannot determine at this time that the deferred tax
assets are more likely to be realized than not; accordingly, a full
valuation allowance has been established.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change," as defined by the Internal Revenue Code. All federal
and state net operating loss carryforwards are subject to limitation as a
result of these restrictions. If there should be a subsequent ownership
change, as defined, the Company's ability to utilize its carryforwards
could be reduced.
(8) CONCENTRATIONS AND SEGMENT DISCLOSURES
The Company's primary source of future revenue is from the licensing of
burst technology and the Company's eventual success will be largely
dependent on this product. Changes in desirability of the product in the
marketplace may significantly affect the Company's future operating
results.
The Company operates in one segment and, accordingly only enterprise-wide
disclosure is presented. The Company recognized no foreign revenues in
1997, 1998 or 1999.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, The American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that certain costs related to the development or purchase if
internal-use software be capitalized and amortized over the estimated
useful life of the software. The adoption of SOP No. 98-1 as of January 1,
1999, did not have a material impact on its results of operations
The FASB recently issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 addresses the accounting
for derivative instruments, including derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a certain
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship, and, if so, the reason for
holding it. SFAS No. 133, as amended, is effective for years beginning
after June 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. Of the total,
$100,000 was received from an entity in which one of the Company's
directors is a principal. Of the total, $100,000 was received from an
entity in which one of the Company's directors is a principal. The
conversion rate was the same as the convertible notes issued in 1999 (see
Note 3). The notes were issued with a total of 14,060 warrants to purchase
common stock at $5.00 per share valued at $11,440 based on the fair value
of the warrants. 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 $1,103,000 in transactions costs. The price
per share of common stock was $4.00. Each warrant is exercisable for one
share of common stock at an exercise price of $5.00 per share and expires 5
years from the date of issue. Compensation expense of $79,313 was recorded
as a result of sales of 158,625 shares of stock and issuance of 158,625
warrants to employees. The fair value of each warrant was determined to be
$.62, calculated using the minimum present value method assuming an
interest rate of 6.10% and an estimated life of 30 months. The compensation
expense of $79,313 represents the excess of the fair market value of both
the stock and warrants over the price paid.
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<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 Company granted options to purchase 90,250 shares of common stock to
employees on February 1, 2000. Of these options, options to purchase 45,125
shares were issued with an exercise price of $4.00 per share and expire on
April 30, 2000. The remaining options to purchase 45,125 shares were issued
with an exercise price of $5.00 per share and expire 5 years from the issue
date. To the extent that any of the options with an exercise price of $4.00
per share are not exercised by April 30, 2000, then options to purchase a
equal number of shares at an exercise price of $5.00 will terminate. As a
result of these grants, the Company recorded compensation expense of
$22,563.
F-16
<PAGE>
II-1
PART II
[INFORMATION NOT REQUIRED IN PROSPECTUS]
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, all of which will be
paid by us. All amounts are estimates, other than the registration fee,
the NASD filing fee, and the Nasdaq Small Cap Market listing fee.
SEC Registration fee............................... $19,953
Nasdaq Small Cap listing fee....................... $ 1,000
Accounting fees and expenses....................... 15,000
Legal fees and expenses............................ 25,000
Printing expenses.................................. 7,500
Blue sky fees and expenses......................... 5,000
Miscellaneous fees and expenses.................... 5,000
-------
Total ..........................................$ 78,453
Item 14. Indemnification of Directors and Officers.
Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that we may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by us or in our right) by reason of the fact that the person is or was
our director, officer, agent or employee or is or was serving at our request as
a director, officer, agent, or employee of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgment, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding. The
power to indemnify applies (a) if the person is successful on the merits or
otherwise in defense of any action, suit or proceeding, or (b) if the person
acted in good faith and in a manner he reasonably believed to be in our best
interest, or not opposed to our best interest, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The power to indemnify applies to
II-1
<PAGE>
actions brought by us or in our right as well, but only to the extent of defense
expenses (including attorneys' fees but excluding amounts paid in settlement)
actually and reasonably incurred and not to any satisfaction of judgment or
settlement of the claim itself, and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to us, unless the
court believes that in light of all the circumstances indemnification should
apply.
Section 174 of the DGCL provides, among other things, that a director,
who willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to
these actions to be entered in the books containing the minutes of the meetings
of the board of directors at the time the action occurred or immediately after
the absent director receives notice of the unlawful acts.
Our certificate of incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o under the section 174 of the DGCL regarding unlawful dividends
and stock purchases; or
o for any transaction from which the director derived an
improper personal benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
o we must indemnify our directors and officers to the fullest
extent permitted by Delaware law;
o we may indemnify our other employees and agents to the same
extent that we indemnified our officers and directors, unless
otherwise determined by our board of directors; and
o we must advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to
the fullest extent permitted by Delaware law.
II-2
<PAGE>
The indemnification provisions contained in our certificate of
incorporation and bylaws are not exclusive of any other rights to which a person
may be entitled by law, agreement, vote of stockholders or disinterested
directors or otherwise. In addition, we maintain insurance on behalf of our
directors and executive officers insuring them against any liability asserted
against them in their capacities as directors or officers or arising out of this
status.
We intend to enter into agreements to indemnify our directors and
executive officers, in addition to indemnification provided for in our bylaws.
These agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
the person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
Item 15. Recent Sales of Unregistered Securities.
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
=========== ========= =========
II-3
<PAGE>
Conversion of Notes Payable:
---------------------------
Investor Notes 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
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
=========== ========= =========
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").
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.
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.
II-4
<PAGE>
Also in February, 1999, Sales Consultants of Columbia, MD received
options to purchase 36,000 shares of common stock at $9.72 per share in exchange
for services, resulting in compensation expense of $160,588 to us.
In January, 1999, in a series of cashless exercises Imperial Bank
exercised 250,000 warrants to purchase 226,140 shares of our common stock at
$1.00 per share. This same institution also exercised 31,250 warrants to
purchase 26,122 shares of our common stock at $1.60 per share.
In January, 1999, two contractors, subsequently hired as employees,
received options to purchase 621 and 9,000 shares of common stock at prices of
$2.19 and $2.91 per share, respectively in exchange for services rendered,
resulting in compensation expense of $26,448 to us.
1998:
As of December 31, 1998, we sold 2,476,609 shares of Series B
convertible preferred stock ("Series B"), at a purchase price of $2.00 per
share, for an aggregate purchase price of $4.95 million. IVT raised $4.21
million in cash in the offering, and the remaining $743,000 was paid by
cancellation of debt. In addition to the Series B, we also issued in the
offering warrants to purchase up to an aggregate of 312,960 shares of our common
stock, at an exercise price of $2.00 per share. The warrants are exercisable for
a term of five years from the date of issuance.
Series B - Cash Purchases:
--------------------------
Investor Amount Invested Preferred Shares Warrant Shares
-------- --------------- ---------------- --------------
Storie Partners $ 2,000,000 1,000,000 130,000
John Lyddon 310,000 155,000 20,150
Robert London 500,000 250,000 32,500
Mindful Partners 500,000 250,000 32,500
Reed Slatkin 500,000 250,000 32,500
Dorothy Lyddon 100,000 50,000 6,500
Frank Kramer 100,000 50,000 6,500
Keith Koch 100,000 50,000 6,500
Universal Warranty Corp. 100,000 50,000 6,500
---------- --------- -------
TOTAL $4,210,000 2,105,000 273,650
========== ========= =======
II-5
<PAGE>
Series B - Debt Converted:
--------------------------
Investor Debt Converted Preferred Shares Warrant Shares
-------- --------------- ---------------- --------------
Mercer Management $ 431,758 215,879 28,065
Robert London 232,864 116,432 15,136
Draysec Finance Ltd. 78,596 39,298 5,109
--------- ------- ------
TOTAL $ 743,218 371,609 48,310
========= ======= ======
In 1998, Mercer Management. 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.
Also during March 1998, Mercer Management 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, and Mercer Management was
issued an additional 200,000 shares of common stock of the Company.
1997:
During 1997, Mercer Management, Mindful Partners and Draysec Finance
Limited invested an additional $550,000 for the purchase of 550,000 investment
units consisting of Series F (renamed Series A) Convertible Preferred Stock and
550,000 warrants to purchase common stock of our company at $1.00 per share.
Additionally, Rudick Asset Management received 100,000 units and 100,000
warrants to purchase our common stock at $1.00 per share as a finders' fee. (See
"Item 7. Certain Relationships and Related Transactions").
During 1997, Draysec Finance Limited invested $200,000 for the purchase
of 200,000 investment units, consisting of Series F (renamed to Series A)
convertible preferred stock and warrants to purchase 200,000 shares of our
common stock at $1.00 per share. Our board of directors extended the exercise
date for the Series F Warrants to February 26, 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. Additionally, Draysec
II-6
<PAGE>
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.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act") in
reliance on Section 4(2) of the Act, Regulation D promulgated under the Act,
Regulation S promulgated under the Act, or Rule 701 promulgated under Section
3(b) of the Act. In each such transaction, the recipients of securities
represented their intentions to acquire securities for investment only and not
with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the securities issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules.
a. Exhibits
Exhibit Description
------- -----------
2.1 ** State of Arizona, Articles of Merger of Video Press, Inc. into Explore
Technology, dated December 28, 1990; Agreement and Plan of Merger dated
August 29, 1993.
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.
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.
II-7
<PAGE>
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 dated January 27, 2000.
3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.
4.1 Specimen common stock certificate.
4.2 ** Prospectus for Catalina Capital Corp. dated October 17, 1990.
4.3 ** SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990.
4.4 ** Amendment No. 1 to SEC Form S-18 for Catalina Capital Corp. dated
August 10, 1990.
4.5 ** Amendment No. 2 to SEC Form S-18 for Catalina Capital Corp. dated
September 28, 1990.
4.6 ** Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992.
4.7 ** 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.
4.8 ** Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992.
4.9 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series D Convertible Preferred Stock, dated December 23, 1992.
4.10 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series E Convertible Preferred Stock, dated May 9, 1995.
4.11 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series F Convertible Preferred Stock, dated February 13, 1996.
4.12 ** 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.
II-8
<PAGE>
4.13 ** 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
4.14 ** 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)
4.15 ** Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996.
4.16 ** Securities Purchase Agreement by and among the registrant and certain
investors dated as of January 27, 2000.
4.17 ** Registration Rights Agreement by and among the registrant and certain
investors dated as of January 27, 2000.
4.18 ** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000.
4.19 ** Form of Lock-up Agreement entered into between the registrant and each
of certain officers, directors and principal shareholders in January
2000.
5.1 Opinion of Bay Venture Counsel, LLP.
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.
II-9
<PAGE>
10.11** Pat Meir Assoc. contract.
10.12** Employment Agreement with Richard Lang.
10.13** Employment Agreement with Thomas Koshy.
10.14** Employment Agreement with Edward Davis.
10.15** Employment Agreement with Richard Jones.
10.16** Employment Agreement with Kyle Faulkner.
10.17** Employment Offer Letter to David Morgenstein.
10.18** Employment Offer Letter to Frank Schwartz.
10.19** Employment Offer Letter to June White.
10.20 Employment Agreement with Doug Glen.
10.21 Employment Agreement with George Zraick.
10.22 Employment Agreement with Dave Egan.
10.23 Employment Agreement with John C. Lukrich.
21.1 ** Subsidiaries of the registrant.
23.1 Consent of BDO Seidman, LLP, Independent Accountants.
23.2 Consent of KPMG LLP, Independent Accountants.
23.3 Consent of Bay Venture Counsel, LLP (included at Exhibit 5.1)
24.1 ** Power of Attorney (included in signature page)
27.1 Financial Data Schedule.
-------------------
** Previously filed.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that (i) and (ii) do not apply if the Registration Statement is on Form
S-3 or Form S-8, and the information required to be included in a post-effective
amendment by (i) and (ii) is contained in periodic reports filed with or
furnished to the SEC by the Registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against pubic policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.
II-10
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant under Rule 424(b) (1)
or (4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bonafide offering thereof.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on August 11, 2000.
BURST.COM, INC.
By: /s/ Richard Lang
------------------------------------
Richard Lang, Chief Executive Officer
We, the undersigned directors and/or officers of Burst.com, Inc. (the
"Registrant"), hereby severally constitute and appoint Richard Lang, Edward H.
Davis and John C. Lukrich, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to each of them to sign for us, in our names and in the capacities indicated
below, the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of equity securities of the Registrant, and to file or cause to be filed with
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney. This Power of Attorney may be executed in counterparts.
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Richard Lang Chief Executive August 11, 2000
------------------------------------ Officer and Chairman of the
Richard Lang Board (Principal Executive Officer)
/s/ Douglas Glen President, and Director August 11, 2000
------------------------------------
Douglas Glen
/s/ John C. Lukrich Chief Financial Officer (Principal August 11, 2000
------------------------------------ Financial and Accounting Officer)
John C. Lukrich
II-12
<PAGE>
* Director August 11, 2000
------------------------------------
John J. Micek, III
* Director August 11, 2000
------------------------------------
Brian Murphy
* Director August 11, 2000
------------------------------------
Joseph Barletta
Director August 11, 2000
------------------------------------
Trevor Bowen
* By: /s/ Richard Lang
-------------------------------
Richard Lang, Attorney-in-Fact
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
2.1 ** State of Arizona, Articles of Merger of Video Press, Inc. into Explore
Technology, dated December 28, 1990; Agreement and Plan of Merger dated
August 29, 1993.
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.
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 dated January 27, 2000.
3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.
4.1 Specimen common stock certificate.
4.2 ** Prospectus for Catalina Capital Corp. dated October 17, 1990.
4.3 ** SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990.
4.4 ** Amendment No. 1 to SEC Form S-18 for Catalina Capital Corp. dated
August 10, 1990.
4.5 ** Amendment No. 2 to SEC Form S-18 for Catalina Capital Corp. dated
September 28, 1990.
II-14
<PAGE>
4.6 ** Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992.
4.7 ** 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.
4.8 ** Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992.
4.9 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series D Convertible Preferred Stock, dated December 23, 1992.
4.10 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series E Convertible Preferred Stock, dated May 9, 1995.
4.11 ** Certificate of Designation for Instant Video Technologies, Inc. of
Series F Convertible Preferred Stock, dated February 13, 1996.
4.12 ** 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.
4.13 ** 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
4.14 ** 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)
4.15 ** Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996.
4.16 ** Securities Purchase Agreement by and among the registrant and certain
investors dated as of January 27, 2000.
4.17 ** Registration Rights Agreement by and among the registrant and certain
investors dated as of January 27, 2000.
4.18 ** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000.
II-15
<PAGE>
4.19 ** Form of Lock-up Agreement entered into between the registrant and each
of certain officers, directors and principal shareholders in January
2000.
5.1 Opinion of Bay Venture Counsel, LLP.
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.
10.11** Pat Meir Assoc. contract.
10.12** Employment Agreement with Richard Lang.
10.13** Employment Agreement with Thomas Koshy.
10.14** Employment Agreement with Edward Davis.
10.15** Employment Agreement with Richard Jones.
10.16** Employment Agreement with Kyle Faulkner.
10.17** Employment Offer Letter to David Morgenstein.
10.18** Employment Offer Letter to Frank Schwartz.
10.19** Employment Offer Letter to June White.
10.20 Employment Agreement with Doug Glen.
10.21 Employment Agreement with George Zraick.
10.22 Employment Agreement with Dave Egan.
10.23 Employment Agreement with John C. Lukrich.
21.1 ** Subsidiaries of the registrant
II-16
<PAGE>
23.1 Consent of BDO Seidman, LLP, Independent Accountants
23.2 Consent of KPMG LLP, Independent Accountants
23.3 Consent of Bay Venture Counsel, LLP (included at Exhibit 5.1)
24.1 ** Power of Attorney (included in signature pages)
27.1 Financial Data Schedule
-------------------
** Previously filed.
II-17
