U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For Fiscal Year Ended December 31, 1997
Commission File Number: 0-29020
MULTIMEDIA ACCESS CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 75-2528700
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(State of Incorporation) (I.R.S. Employer Identification No.)
2665 VILLA CREEK DRIVE, SUITE 200 DALLAS, TEXAS 75234 (972) 488-7200
(Address including zip code, area code and telephone number of Registrant's
executive offices.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.0001 par value NASDAQ
Redeemable Common Stock Purchase Warrants NASDAQ
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No __
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $3,360,703
As of March 20, 1998, 8,733,958 shares of the Registrant's common stock were
outstanding.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of March 20, 1998 - $15,468,796. This amount was computed by reference
to the average of the bid and asked prices of registrant's common stock.
Documents incorporated by reference: Proxy Statement, Part III
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TABLE OF CONTENTS
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ITEM NO. PAGE
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Glossary 3
PART I
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1. Description of Business 4 - 10
2. Description of Property 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 12
6. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12 -14
7. Consolidated Financial Statements 15 - 35
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 35
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act 36
10. Executive Compensation 36
11. Security Ownership of Certain Beneficial Owners and Management 36
12. Certain Relationships and Related Transactions 36
13. Exhibits List and Reports on Form 8-K 38
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GLOSSARY
Algorithm: A step-by-step problem solving procedure.
Bandwidth: The amount of information that can be transmitted across an
information channel.
Intranet: A private Internet.
ISDN: (Integrated Services Digital Network) - a digital network
that provides seamless communication of voice, video and
text between desktop and group systems. ISDN is expected to
replace current telephone lines.
LAN: (Local Area Network) - a private computer network connecting
computers in the same building or campus using coaxial
cable, twisted pair or multimode fiber.
Multimedia: A combination of multiple digitized data types: text, sound,
computer-generated graphics and animations, photographs and
video.
PCI Bus: A fast 32 bit PC bus for peripherals.
Protocol: A set of rules for data communications; a set of rules and
procedures for establishing and controlling the exchange of
data between computers.
S Bus: A proprietary high speed interface for Sun workstations.
Standards-based: A product which is designed to comply with standards
promulgated by a recognized industry organization.
Switched
Architecture: Any network or device in which switching is present and is
used to direct messages from the sender to the ultimate
recipient.
UTP: (Unshielded Twisted Pair) - standard building wiring
currently used to transmit voice (telephone) and data
throughout an office or building.
WAN: (Wide Area Network) - a computer network covering a
geographic area larger than a campus, generally linking
multiple LANs.
World Wide Web: A very large collection of linked Internet servers using a
standard linking and display language.
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PART I
Item 1. Description of Business
GENERAL
MultiMedia designs, develops, manufactures and markets advanced
standards-based videocom systems that provide enterprise-wide solutions for
business customers. The Company's VBX video distribution and switching system,
Osprey(R) Codecs and ViewCast(R) servers deliver videocom applications,
including desktop videoconferencing, video broadcasting, video-based training,
distance learning, telemedicine, surveillance and Internet and intranet video
communications.
The Company's VBX system allows customers to quickly and cost effectively
obtain videocom capabilities by creating a videocom network through the same
wiring used by their existing telephone system.
The Company's products and systems are marketed, installed and supported by
resellers, system integrators, OEMs and custom application developers. Many of
these resellers are the same entities that market, install and support a
customer's telephone PBX, LAN, e-mail file servers and other communication
systems. The Company's products are compatible with existing communications
equipment and infrastructure.
The Company believes that the convergence of multimedia PCs, the
establishment of new standards-based audio and video technologies, increased
utilization of the Internet and corporate intranets, combined with lower price
levels for such capabilities, will generate a rapid adoption of videocom
products and services.
BUSINESS STRATEGY
The Company's objective is to become the leading provider of
enterprise-wide videocom solutions. Key elements of the Company's strategy
include:
o Provide Enterprise-Wide Video Communication Systems and Applications.
The Company's strategy is to offer turn-key videocom systems, including the
individual components and applications, which appeal to customers who are
looking for a complete solution to their videocom needs. These systems are
designed to be easy to install, cost-effective and user-friendly. The Company
believes its enterprise-wide systems and applications approach provides a
significant competitive advantage.
o Distribute Through Established Channels of Distribution.
The Company's strategy is to utilize resellers, system integrators, OEMs
and custom application developers to distribute its systems and applications.
These distributors are typically the same companies that market, install and
support an organization's telephone PBX, LAN, e-mail file servers and other
communication systems. These distributors offer access to an existing customer
base, along with continuing service and support organizations.
o Develop and Acquire New Applications.
The Company believes that the continued growth of the videocom market will
be driven by the development of new applications in response to customer needs.
The Company intends to continue to invest significant resources to develop and
acquire value-added and technologically superior applications.
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o Develop Brand-Name Recognition.
The Company's strategy is to develop a strong brand identity in the
videocom marketplace. The Company believes a strong brand identity will result
in a significant competitive advantage and permit it to more easily introduce
new products and applications.
o Enhance Growth through Strategic Acquisitions and Alliances.
An important part of the Company's growth strategy is to acquire companies
with complementary technologies, products or customers and to integrate those
entities into the Company's operations. In addition, the Company seeks strategic
alliances and joint marketing relationships. The Company believes that the
videocom industry is highly fragmented and that this environment provides an
excellent opportunity to expand its business through acquisitions and alliances.
INDUSTRY BACKGROUND
Videoconferencing was introduced in the late 1970s with the introduction of
video tele-conferencing room systems. Classic video tele-conferencing room or
group systems permit communication only between compatible facilities. These
systems currently cost between $10,000 and $100,000 and are typically used by
large businesses primarily for intra-company communication between different
locations. The Company believes that the high cost of video tele-conferencing
room systems and the logistical problem of scheduling and availability have
limited their use.
Over the past decade, videoconferencing has begun to evolve from high-cost,
stand-alone boardroom systems to desktop systems. The Company offers
cost-effective video systems capable of providing commercial-quality video for
desktop video communications. The Company believes its systems meet the growing
demand for business video applications at the desktop.
To transmit live video images (which may contain over 90 million bits
per second of data) over communications networks, the video data must be
digitized and significantly compressed to fit the capacity of these networks (as
low as 28,800 bits per second). Generally, as video is compressed, redundant
data is eliminated. After transmission, the video image is reconstructed for
display at the receiving end.
The quality of the reconstructed image is a function of (i) the
sophistication of the video and audio compression algorithms, (ii) the amount of
real-time data which can be transmitted over networks, (iii) the power of the
video and audio Codec hardware, and (iv) the speed and power of PCs and
workstations. The Company believes cost-effective videoconferencing and other
videocom applications services are now attainable because the performance and
capabilities of these four key elements have recently improved significantly.
According to industry sources, the market for videocom products and
services is forecast to be $3.6 billion by 1999 with the desktop segment of that
industry forecast to exceed $1.2 billion by 1999. The PC dominates the desktop
computing market with 1995 sales of over 57 million units worldwide and an
estimated 100 million new PCs projected to be sold annually by 1999. The Company
believes it has developed products which position it to benefit from the growth
of these markets and which will have functions, performance and competitive
prices to compete successfully in the rapidly-emerging desktop video
communications industry.
PRODUCT FAMILY
The Company currently offers a broad array of products which when used
together provide an enterprise-wide solution for multiple videocom applications
for business customers. The MultiMedia product family includes: the VBX video
distribution and switching system, the Osprey(R) line of video peripheral
products and Codec cards and the ViewCast(R) line of Internet Web-video servers.
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Video Switching and Distribution System. The Company's VBX is an
enterprise-wide video distribution and switching system, which can video enable
hundreds of desktops with multiple videocom applications. The VBX switches and
distributes video content throughout an organization in much the same way as a
telephone PBX switches and distributes voice communications. The VBX provides
workgroup video communications and connectivity via shared Codecs and WAN
gateways to remote users equipped with stand-alone desktop computers, video
tele-conferencing room systems or users on another VBX. The VBX, a PC-based
WindowsNT system, employs a switched architecture to distribute uncompressed,
TV-quality video within a building or campus using UTP wiring (which typically
already exists within the organization's infrastructure as part of its telephone
system or which may be installed more cost-effectively than coaxial cable). The
VBX can support hundreds of users and allows point-to-point, multipoint and
broadcast modes of operation. The VBX is compatible with standard cameras, audio
components, speakerphones, PC video peripherals, videoconferencing systems and
other videocom products produced by third-party manufacturers.
A typical VBX system includes a video switch, a shared Codec server, WAN
interfaces and desktop components. Video and audio signals are distributed with
TV quality by utilizing the Company's VBX transceiver technology to send video
over existing UTP wiring at distances of up to 3,500 feet. An existing LAN or
telephone system is used only for non-video communications between the
multimedia switch and each user, requiring minimal use of the computer network.
The VBX also provides shared access to video sources and storage devices
located anywhere within the network. VCRs, videodisk players, broadcast or cable
TV and Direct Broadcast Satellite programming sources may also be connected to
the switch over UTP wiring or coaxial cabling and distributed on-demand to any
equipped desktop or TV monitor.
VBX transceivers allow desktop PCs, TV monitors, room systems and standard
video and audio devices to be connected to the VBX via UTP wiring. The VBX
client software allows users to place calls through a personal or system-wide
dialing directory, to subscribe to live video broadcasts, to access pre-recorded
video content or to establish a point-to-point or a multipoint videoconference.
The Company believes the VBX appeals to businesses and other institutions
with multiple users and with multiple geographic locations, such as college
campuses, office complexes, government bases and organizations with regional
offices. The VBX permits these customers to communicate and share video-based
information and resources, to distribute business and financial TV broadcasts,
to videoconference with co-workers and to receive business or industry
presentations or live broadcasts from local or remote locations.
Codecs and Video Peripheral Products. The Company designs, develops,
manufactures and markets standards-based video and audio peripheral products and
Codecs that video enable individual PCs and workstations for multimedia
applications. The Company's Osprey(R) Codecs enable video transmissions across
several different types of existing communication networks. The Osprey(R) Codecs
perform this function by capturing, digitizing, compressing, transmitting,
receiving, decompressing and displaying full-motion video. The Osprey(R) Codecs
are compatible with multiple video and audio compression standards and are
available for PCs and workstations that are equipped with the standard PCI-bus
or Sun's S-bus. The Codecs also support the Microsoft's WindowsNT, Windows 3.1
and Windows95, and Sun's Solaris and UNIX operating systems. The Company
believes its Osprey(R)-1000 is the leading standards-based, multi-algorithm
Codec for the WindowsNT operating system and that its Osprey(R)-1500 is
currently the only Codec available for Sun's new family of Ultra Workstations.
The Osprey(R) Codecs are used in connection with the VBX as a shared Codec
server to enable VBX users to video communicate with remote locations. In
addition, the Osprey(R) Codecs may be used in remote facilities to video enable
individual desktop computers.
The Company also offers a line of video peripheral products for PCs and
workstations, including SLIC-Video(R), Osprey(R)-100 and Osprey(R)-150 video
capture cards and WorkFone(TM) video applications software. SLIC-Video(R) is a
video capture product that enables Sun S-bus workstation users to view
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uncompressed, high-quality video and to capture full-motion video frames.
SLIC-Video(R) software also provides access to closed caption data which allows
key words to act as filters and thereby control video displayed on the screen.
SLIC-Video(R)'s compatibility with Sun products allows this product to support a
wide variety of video applications on existing Sun workstations. The Company's
WorkFone(TM) product provides affordable, consumer-quality video communications
capabilities over standard telephone lines with 28.8 Kbps modems. Typical uses
of this product include: families and grandparents exchanging live video
greetings, college students videoconferencing with their parents, business
workers accessing video-training courses or videoconferencing with co-workers in
remote locations.
Internet Video. The Company designs, manufactures and markets several video
products which capitalize on the growth of the Internet and the Web. Industry
improvements in video and audio compression technology, the establishment of
standards and increased access to the Internet have made delivering new forms of
motion-video content over the Internet possible. The Company's Osprey(R) Codecs
provide the necessary capability at the Web site server to allow the one-way
transmission of live broadcasts over the Internet. The Company has recently
introduced a line of ViewCast(R) Web-video servers that combine the Company's
Osprey(R) Codecs with popular video-streaming software to provide a complete
hardware and software system for Internet video broadcasting. The Company has
announced video-streaming compatibility with the following software providers:
RealNetworks, Inc. (formerly Progressive Networks, Inc.), VXtreme, Inc., Vosaic
LLC, Precept Software, Inc., Iterated Systems, Inc. and Microsoft Corporation.
The Company's products have allowed Internet users to view live broadcasts
of the NASA Mars Pathfinder expedition, the Indy 500 time trials and other live
events from their respective Web sites through Microsoft and Netscape Internet
browsers.
APPLICATIONS
Videoconferencing -- The Company's products offer the business and
institutional customer a cost-effective and efficient means of establishing an
enterprise-wide videoconferencing system. The VBX and Osprey(R) Codecs permit
employees, students or other members of the organization in different offices or
geographic locations to communicate with each other via live video.
Video Presentations or Live Video -- The Company's products offer
businesses or organizations the opportunity to broadcast live events. These
events could include educational seminars, management briefings, human resources
orientations or breaking news being created and transmitted by the organization
itself or by outside sources.
Internet Applications --Videocom products and technologies play an
important role in the development of live communications and entertainment on
the Internet. The Company markets its compression and video capture products to
many players in the Web video-streaming marketplace.
Three key applications in the Internet video marketplace include: (i)
Internet video publishing, (ii) Internet video broadcasting and (iii) Internet
video call center. Internet Video publishing refers to stored-video content,
designed to be played back to a user's system in real-time. Internet video
publishing entails compressing a video "clip" and storing it on a server which
is available to the user by accessing the relevant Web page. Internet video
broadcasting has recently come to the Internet and is characterized by one-way
live audio and motion-video. Although video broadcasting presents technical
challenges such as the limited bandwidth and multi-cast capabilities of most Web
sites, Internet video broadcasting is well suited to delivering video to distant
learning sites and to special interest broadcast recipients. The Company's
products work in conjunction with Web servers and browser software to establish
connections between multiple users and a broadcast source allowing businesses to
deliver live programs, commercials and other information over the Internet. The
Internet video call center is a new concept to the Internet, allowing one-way
live video and two-way audio across the Internet. The term "call center" is used
because the technology is well suited to utilize existing call center staff such
as help desks, catalog ordering centers, reservation systems and corporate
receptionists to provide live Web site sales assistance.
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Surveillance -- Video surveillance has expanded beyond internal systems
placed in businesses to monitor intrusions to include systems that monitor
daycare and nursing home facilities, traffic patterns and other relevant live
information which the Internet user can access from a Web site. The commercial
surveillance market represents strong business opportunity.
Industry Specific Applications -- The Company's products offer a broad
array of applications within specific industries. For instance, in the health
and medical industry, the Company's products allow doctors to collaborate via
videoconferencing, to receive computed tomography (CT) scans, ultrasounds and
other diagnostic tests at locations remote from the hospital or patient and to
take part in educational and training broadcasts. The judicial system and
correctional institutions are also taking advantage of the Company's videocom
products. In addition to surveillance, the VBX and Osprey(R) Codecs enable
prisons to hold arraignments by videoconference, to allow prisoner visitation
and legal consultation with persons in remote locations and to provide
vocational training and counseling for prisoners from outside sources.
MARKETING AND SALES
The Company markets its products primarily via third-party distribution
channels including, but not limited to, OEMs, resellers and system integrators.
The Company currently has distribution and reseller agreements with over 47
companies worldwide. In addition, the Company plans to continue to expand its
distribution channels both domestically and internationally.
The Company establishes distribution relationships with resellers and
integrators who service corporate, institutional and government customers. These
relationships are non-exclusive and typically require that these resellers
participate in the marketing, installation and technical support of the
Company's products.
For consumer products the Company will depend on major OEM customers who
provide access to consumer marketing channels. These OEMs have established
relationships with manufacturers and resellers and typically pay licensing fees
and royalties to bring new leading-edge products to market.
The Company continues to expand its marketing activities over the Internet.
The Company's products enable new ways to promote products over the Internet.
The Company intends to use its own products to increase sales productivity and
to pursue alternate selling strategies. In addition, the Company utilizes press
releases, product literature, presentations to industry analysts and
participation in trade shows to enhance brand awareness.
The Company's Internet related products are marketed primarily to Web site
designers. The Company bundles its products with other popular Web-video
products and sells or licenses its subsystems to resellers to integrate with
their Web development products. Such strategic business alliances provide Web
developers with a rich array of innovative capabilities with the familiarity of
existing tools.
PRODUCTION AND SUPPLY
The Company builds its current products using contract manufacturers in the
United States. The Company's operations personnel in Dallas are responsible for
parts planning, procurement and final testing and inspection to quality
standards. The Company plans for most high-volume production to be handled
through large OEMs or contract manufacturers. The Company has been and will
continue to be dependent on third parties for the supply and manufacture of its
components and electronic parts, including standard and custom-designed
components. The Company generally does not maintain supply agreements with such
third parties but instead purchases components and electronic parts pursuant to
purchase orders in the ordinary course of business. The Company is substantially
dependent on the ability of its third-party manufacturers and suppliers to,
among other things, meet the Company's design, performance and quality
specifications.
The electronics industry from time to time experiences short supplies of
certain high demand components, which may adversely affect the Company's ability
to meet its production schedules. Failure of
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manufacturers or suppliers to supply or delays in supplying the Company with
components, or allocations in the supply of certain high-demand components,
could adversely affect the Company's operations and ability to meet delivery
schedules on a timely and competitive basis.
INSTALLATION, SERVICE AND MAINTENANCE
Many of the Company's products are customer installable. The Company has
contracted with Data General Corporation to provide third-party field
installation and support. The Company maintains a small in-house technical
support group and also depends on its resellers to install and service its
products.
The Company offers limited warranties covering workmanship and materials,
during which period the Company or its resellers will replace parts or make
repairs. The Company also maintains an in-house staff of engineering personnel
and offers telephone support to assist resellers and end-users during normal
business hours.
In addition, the Company enters into annual contracts with end-users to
provide software and/or hardware maintenance on its products.
RESEARCH AND DEVELOPMENT
The Company has focused and will continue to focus on research and
development activities related to videocom applications. The Company's recent
development efforts have been devoted to the design and development of its
products and software applications, including the VBX, the VBX Codec server, the
WorkFone(TM), the Osprey(R) line of Codecs and the applications software for
these systems.
Total research and development expense for 1996 and 1997 was approximately
$2.0 million and $2.7 million, respectively.
COMPETITION
The market for videocom systems is highly competitive and characterized
by the frequent introduction of new products based upon innovative technologies.
The Company competes with numerous well-established manufacturers and suppliers
of videoconferencing, networking, telecommunications and multimedia products,
certain of which dominate the existing videoconferencing market for such
products. In addition, the Company is aware of others that are developing, and
in some cases have introduced, new videocom systems. Most of the Company's
competitors possess substantially greater financial, marketing, personnel and
other resources than the Company, have established reputations relating to
product design, development, manufacture, marketing and service of networking,
telecom and video products and have significant budgets to permit them to
implement extensive campaigns to market new products in response to competitors.
The Company is not aware of any direct competitors that compete in all of the
Company's product families and applications. However, among the Company's direct
competitors competing in one or more of the Company's products or applications
are C-Phone Corporation, Zydacron, Inc., VCON, Ltd., Corel Computer Corporation,
Objective Communications, Inc. and Datapoint Corporation. In addition,
electronics manufacturers such as Intel actively compete for business in this
market.
PATENTS, COPYRIGHTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company holds a United States patent covering certain aspects of
compressed video. Although the Company does not believe this patent or any other
patent is essential to its business operations, the Company may apply for
additional patents relating to other aspects of its products. The Company also
relies on copyright laws to protect its software applications, which it
considers proprietary. There can be no assurance as to the breadth or degree of
protection which existing or future patents, copyrights and trademarks, if any,
may afford the Company, that any patent, copyright or trademark applications
will result in issued patents, registered copyrights or registered trademarks,
as the case may be, that the Company's patents, copyrights or trademarks will be
upheld, if challenged, or that competitors will not
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develop similar or superior methods, products or names outside the protection of
any patent issued to or copyright held by the Company.
The Company believes that product recognition is an important competitive
factor and, accordingly, the Company promotes the ViewCast(R), Osprey(R),
SLIC-Video(R), Viewpoint VBX(TM) and WorkFone(TM) names, among others, in
connection with its marketing activities, and has applied for or received
trademark registration for such names. The Company's use of those marks may be
subject to challenge by others, which, if successful, could have a material
adverse effect on the Company.
The Company also relies on confidentiality agreements with its directors,
employees, consultants and manufacturers and employs various methods to protect
the source codes, concepts, ideas, proprietary know-how and documentation of its
proprietary technology. However, such methods may not afford the Company
complete protection, and there can be no assurance that others will not
independently develop similar know-how or obtain access to the Company's
know-how or software codes, concepts, ideas and documentation. Furthermore,
although the Company has and expects to continue to have confidentiality
agreements with its directors, employees, consultants, manufacturers, and
appropriate vendors, there can be no assurance that such arrangements will
adequately protect the Company's trade secrets. The Company purchases certain
components that are incorporated into its products from third-party suppliers
and relies on their assurances that such components do not infringe on the
patents of others. A successful claim against any components used in the
Company's products could affect the ability of the Company to manufacture,
supply and support its products. The Company uses commercially reasonable
efforts to ensure third-party supplied components are non-infringing, but there
can be no assurances against future claims.
GOVERNMENT REGULATION
The Company is subject to regulations relating to electromagnetic
radiation from its products, which impose compliance burdens on the Company. In
the event the Company redesigns or otherwise modifies its products or completes
the development of new products, it will be required to comply with Federal
Communications Commission regulations with respect to such products, of which
there can be no assurance prior to their commercialization. In addition, new
legislation and regulations, as well as revisions to existing laws and
regulations, at the federal, state and local levels may be proposed in the
future affecting the video communications industries. Such proposals could
affect the Company's operations, result in material capital expenditures, affect
the marketability of its products and limit opportunities for the Company with
respect to modifications of its products or with respect to new or proposed
products or technologies. Expansion into foreign markets may also require the
Company to comply with additional regulatory requirements. Currently, the
Company is seeking certain foreign certificates in order to expand its
international marketing opportunities.
There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not delay introduction of
new products or limit the Company's ability to distribute products outside of
the United States. Further, various countries may regulate the import of certain
technologies contained in the Company's products. Any such export or import
restrictions, new legislation or regulation or government enforcement of
existing regulations could have a material adverse effect on the Company's
business, operating results and/or financial condition. There can be no
assurance that the Company will be able to comply with additional applicable
laws and regulations without excessive cost or business interruption, if at all,
and failure to comply could have a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1997, the Company had fifty-five (55) full-time
employees, four (4) of whom are in executive positions, twenty-six (26) of whom
are engaged in engineering, research and development, thirteen (13) of whom are
engaged in marketing and sales activities, five (5) of whom are engaged in
operations and seven (7) of whom are in administration. None of the Company's
employees are represented by a labor union. The Company considers its employee
relations to be satisfactory.
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Item 2. Description of Properties
The Company's executive offices and some of its sales design and
development activities are located in approximately 16,159 square feet of leased
space in Dallas, Texas. The lease expires in September of 1998 and provides for
a base annual rent of $143,110. The Company's assembly operations are located in
approximately 4,065 square feet of leased space in Dallas, Texas. The lease
expires in January 1999 and provides for a base annual rent of $33,372. Osprey's
design and development activities are located in approximately 10,000 square
feet of leased space in Morrisville, North Carolina. The lease expires in
December of 2002 and provides for a base annual rent of $99,000. The company
leases office space for sales offices in Arlington, Virginia, Burlingame,
California, Atlanta, Georgia and London, England consisting of approximately
613, 150, 150, and 375 square feet of leased space, respectively. These leases
expire in May 2000, month to month, January 1999 and February 1999 respectively,
and provide for base annual costs of $11,034, $11,400, $10,740 and $47,880
respectively. The Company believes that its facilities are adequate for its
current and reasonable foreseeable future needs and its current facilities can
accommodate expansion, as required.
Item 3. Legal Proceedings
The Company is not currently a party to any litigation that it believes
could have a material adverse effect on the Company or its business.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq under the symbol
"MMAC." The Public Warrants are traded on the Nasdaq under the symbol "MMACW."
As of December 31, 1997, there were 8,733,958 shares of Common Stock and
2,851,977 Public Warrants outstanding. The shares of Common Stock are held by
approximately 828 beneficial holders and the Public Warrants are held of record
by approximately 18 holders. The following table sets forth, for the periods
indicated, the high and low sales prices for the Common Stock and the Public
Warrants on the Nasdaq. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The Company's IPO became effective on February 4,
1997. Before this date, there was no public market for the Company's securities.
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COMMON STOCK PUBLIC WARRANTS
------------ ---------------
FISCAL 1997 HIGH LOW HIGH LOW
----------- ---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $ 5.8750 $ 4.1875 $ 2.3750 $ 1.0000
2nd Quarter 6.5000 5.0000 2.3750 1.3750
3rd Quarter 6.0000 4.0000 2.0000 1.0000
4th Quarter 6.0000 3.8125 2.1250 0.9375
</TABLE>
On March 20, 1998, the last reported sales prices for the Common Stock
and the Public Warrants as reported on the Nasdaq were $3.50 and $1.125,
respectively.
The Company declared no cash dividends in 1996 or 1997. The Company
does not anticipate paying cash dividends in the future as it intends to retain
earnings to finance the growth of the business. The payment of future dividends
will depend on such factors as earnings levels, anticipated capital
requirements, the operating and financial condition of the Company and other
factors deemed relevant by the Company's Board of Directors.
The company has received a letter from the Nasdaq Stock Market, Inc.
notifying the Company that it is not in compliance with the new net tangible
assets/ market capitalization/ net income requirements pursuant to NASD
Marketplace Rule 4310(c)(2) which became effective on February 23, 1998. The
Company has requested a temporary exception to the new requirements and has
submitted written materials supporting its position to Nasdaq. The Company
expects to receive a response to its request for a temporary exemption by the
end of April 1998. In the event that the Company's request is denied, the
Company may request an additional oral or written hearing before the Nasdaq
Listing Qualifications Panel pursuant to NASD Marketplace Rule 4800 Series. In
the event that the Company is not granted an exemption to the new listing
requirements and does not regain compliance, the Company faces delisting from
the Nasdaq SmallCap Market. The Company is currently evaluating a variety of
alternatives which would bring the Company into compliance with the new listing
criteria and will vigorously pursue all procedures available to it.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
MultiMedia develops and markets advanced videocom systems. The Company
delivers high-performance cost-effective products that integrate video
capabilities into existing desktop computers, applications and networks,
delivering standards-based video solutions to the PC and workstation
marketplace.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1997 compared to Twelve Months Ended December
31, 1996.
Net Sales. Net sales for the year ended December 31, 1997 increased 206.9%
to $3,360,703 from $1,095,012 reported in 1996. This increase can be attributed
to significant growth in sales of both video peripheral products and video
systems during 1997 compared to 1996, offset in part by a decline in custom
programming and design revenue between the same periods.
During the year ended December 31, 1997, sales of video peripheral products
increased 193.9% over 1996 and represented approximately 65.5% of total 1997
revenues, compared to approximately 68.4% of total revenues in 1996. Sales of
video systems increased 602.2% in 1997, compared to the same period in 1996 and
represented approximately 31.8% of total 1997 revenues, compared to
approximately 13.9% of total revenues in 1996. While sales of video peripheral
products are expected to continue to increase during 1998 as new products are
developed and marketed and new contracts are finalized, the percentage of
12
<PAGE>
peripheral product sales to total sales is expected to decline as the Company
also expects to see a significant increase in video systems revenue during 1998.
The Company introduced a new product family during the third quarter of 1997,
the ViewCast(R) line of Web-video servers, that is expected to begin generating
revenue during 1998.
Cost of Goods Sold. Cost of goods sold increased $1,302,004 to $1,695,922
for the year ended December 31, 1997 compared to the same period in 1996
primarily due to the increase in net sales described above. Gross profit margin
for 1997 was 49.5%, representing a decline from the 64.0% margin during 1996.
This decline in gross margin can be attributed to greater custom programming and
design revenue in 1996, which had little or no associated costs, and to
increased sales in 1997 to distribution partners with contractual sales
discounts. The Company anticipates that its gross profit margin will generally
average 50% for the foreseeable future.
Selling, General and Administrative Expense. Selling, general, and
administrative expense increased to $4,243,485 for the year ended December 31,
1997 from $2,378,653 in 1996 due to a significant expansion of the Company's
sales, marketing and customer support efforts in 1997. During 1997, the Company
added 14 sales positions and three customer support positions that did not exist
during 1996. Also contributing to the increase are expenses related to being a
public company that were incurred subsequent to the Company's initial public
offering in February 1997, including significant increases in insurance,
investor relations, travel, legal and professional fees.
Research and Development Expense. Research and development expense
increased $743,711 to $2,740,857 for the year ended December 31, 1997 compared
to 1996, primarily due to an increase in the Company's development staff,
contract consultants and manufacturing staff during 1997. The new staff and
consultants were principally involved in the continued development of the
Company's Viewpoint VBX(TM) system, Osprey(R) video products and the newly
announced ViewCast(R) Web-video servers.
Other Income (Expense). For the year ended December 31, 1997, other expense
decreased $314,833 to $198,386, primarily as a result of an increase in interest
income and a reduction in interest expense during the year. The changes to other
income and expense can be attributed principally to increased capital and
retirement of debt in conjunction with the Company's initial public offering in
February 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company successfully completed an IPO of its Common Stock and Public
Warrants on February 7, 1997 and on March 13, 1997 sold the over-allotment
option, raising a total of $5,427,000 of net proceeds. During 1997, with the
proceeds of the IPO, the Company has endeavored to build an effective marketing
and sales organization, develop a network of independent resellers and achieve
market acceptance of its products at prices and volumes which will, in the
future, result in profitable operations. However, the Company expects operating
losses to continue until such time as gross margins from the sales of its
products exceed its development, selling, administrative and financing costs.
In August 1997, the Company registered, in a Registration Statement on Form
SB-2, 2,981,573 shares of Common Stock underlying Private Warrants that had
previously been issued by the Company at various times between June 1995 and
February 1997 in connection with various financing transactions. Each such
private warrant entitles the holder to purchase one share of Common Stock at
prices ranging from $1.00 to $3.00 per share at any time commencing immediately
upon issuance through and including three (3) years from the date of issuance.
The Company will not receive any of the proceeds of the sale of such shares of
Common Stock, but will receive proceeds of up to $7,529,719 from the exercise of
the Private Warrants. Through December 31, 1997, 821,667 of the Private Warrants
had been exercised, resulting in net proceeds to the Company of $1,676,533.
These proceeds and any additional proceeds will be used for working capital and
general corporate purposes and possible future acquisitions.
On December 9, 1997 the Company sold, in a private placement, $5,000,000
aggregate principal amount of 8% Senior Convertible Notes due 2002 (the "Notes")
at an initial offering price of 100% of the principal amount thereof, less 8%
gross commission. The Notes are convertible into shares of Common
13
<PAGE>
Stock of the Company at a conversion price of $4.625 per share of Common Stock,
subject to adjustment in certain circumstances (including upon certain issuances
of Common Stock or Common Stock Equivalents at less than the then effective
conversion price). The Notes rank senior to all existing and future subordinated
obligations and rank pari passu with all present and future senior indebtedness
of the Company, except to the extent of any collateral securing such debt. Net
proceeds to the Company in December 1997 after expenses amounted to $4,168,000.
At December 31, 1997, the Company also had outstanding $324,363 of secured
senior indebtedness, most of which is due and payable in early 1998 to a
principal stockholder and officer of the Company.
Until the completion of its IPO on February 7, 1997, the Company was
dependent upon loans from its principal stockholders, as well as private
placements of its debt and equity securities, to finance its working capital
requirements. It is anticipated that the anticipated proceeds from the exercise
of Private Warrants and Public Warrants, the remaining net proceeds from the
Notes and the anticipated proceeds from an offering of convertible preferred
stock that is currently contemplated will be sufficient to fund the operations
of the Company through at least the end of 1998. In the event that the Company's
plans change or its assumptions change or prove to be inaccurate or such
proceeds prove to be insufficient to fund operations (due to unanticipated
expenses or difficulties or otherwise), the Company may be required to seek
additional financing sooner than currently anticipated or could be required to
curtail its activities. As a result of the above, the Company's auditors have
found it necessary to include a going concern emphasis in their opinion. The
Company believes that it will be able to raise sufficient capital to fund its
growth at least through the end of 1998.
The Company has had preliminary discussions with several potential sources
of additional financing, and may seek additional financing to provide additional
working capital in the future. Such financing may include loans, lines of credit
and/or secured capital financing through the issuance of convertible preferred
stock or other equity securities and could include factoring agreements.
Although the Company has no current firm arrangements with respect to any
additional financing, it is currently considering various proposals by several
potential investors relating to the issuance of convertible preferred stock or
other equity in exchange for a cash investment in the Company. The Company is
also considering obtaining a revolving line of credit which would rank pari
passu with the Notes, except to the extent of the collateral securing such debt.
There can be no assurance that any such additional financing will be available
to the Company on acceptable terms, or at all. Additional equity financing,
including the issuance of convertible preferred stock, may involve substantial
dilution to the Company's then existing stockholders and holders of the Notes
(assuming conversion thereof).
At December 31, 1997, the Company had working capital of $4,547,850 and did
not have any material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and products
are either year 2000 compliant or will be so prior to the year 2000 without
incurring material costs. The Company is also assessing whether its key
suppliers are adequately addressing this issue and the effect this might have on
the Company. The Company has not completed its analysis and, therefore, there
can be no assurance that the Company will not be adversely impacted by the year
2000 problem as it relates to products purchased from key suppliers.
14
<PAGE>
Item 7. Financial Statements
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent
Auditors....................................................................16
Consolidated Balance Sheets at December 31, 1996 and 1997.....................17
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997..................................................18
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1996 and 1997 .................................19
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997 .................................................20
Notes to Consolidated Financial Statements....................................21
15
<PAGE>
Report of Independent Auditors
The Board of Directors
MultiMedia Access Corporation
We have audited the accompanying consolidated balance sheets of MultiMedia
Access Corporation and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 consolidated financial position of
MultiMedia Access Corporation and subsidiaries at December 31, 1996 and 1997,
and the consolidated results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. As more fully described in Note 1, the Company is dependent upon the
proceeds from additional sales of its equity securities or other alternative
financing, has incurred recurring losses from operations and anticipates
negative cash flow from operations during 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Dallas, Texas
March 6, 1998
16
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1997
------------------- -------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 18,539 $ 3,117,202
Accounts receivable, less allowance for doubtful accounts of
$43,000 and $65,000 at December 31, 1996 and 1997, respectively 185,564 1,195,230
Inventory 310,133 1,762,186
Prepaid expenses 46,239 75,096
Deferred charges 504,295 191,287
------------------- -------------------
Total current assets 1,064,770 6,341,001
Property and equipment, net 460,895 877,440
Software development costs, net 147,321 203,858
Deferred charges - 752,125
Deposits 18,272 36,991
------------------- -------------------
Total assets $ 1,691,258 $ 8,211,415
=================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 682,689 759,319
Accrued compensation 239,707 313,634
Deferred revenue 15,591 52,784
Other accrued liabilities 857,260 343,051
Short-term debt, officer 533,089 311,243
Short-term debt, other 1,966,202 13,120
Current portion of long-term debt 3,177,550 -
------------------- ------------------
Total current liabilities 7,472,088 1,793,151
Long-term debt - 5,000,000
Commitments
Stockholders' equity (deficit):
Preferred stock, $.0001 par value:
Authorized shares - 5,000,000
Issued shares - none
Common stock, $.0001 par value:
Authorized shares - 20,000,000 - -
Issued and outstanding shares - 5,315,811 and 8,995,455
at December 31, 1996 and 1997, respectively 532 900
Additional paid-in capital 6,602,572 19,628,703
Accumulated deficit (12,372,028) (18,199,433)
Treasury stock, 261,497 shares at December 31, 1996 and 1997 (11,906) (11,906)
------------------- -------------------
Total stockholders' equity (deficit) (5,780,830) 1,418,264
------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 1,691,258 $ 8,211,415
=================== ===================
</TABLE>
See accompanying notes.
17
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997
------------------ -----------------
<S> <C> <C>
NET SALES $ 1,095,012 3,360,703
Cost of goods sold 393,918 1,695,922
------------------ -----------------
GROSS PROFIT 701,094 1,664,781
Operating expenses:
Selling, general and administrative 2,378,653 4,243,485
Research and development 1,997,146 2,740,857
Depreciation and amortization 206,041 309,458
------------------ -----------------
Total operating expenses 4,581,840 7,293,800
------------------ -----------------
OPERATING LOSS (3,880,746) (5,629,019)
Other income (expense):
Dividend and interest income 36 63,613
Interest expense (513,979) (290,492)
Other 724 28,493
------------------ -----------------
Total other income (expense) (513,219) (198,386)
------------------ -----------------
NET LOSS $ (4,393,965) $ (5,827,405)
================== =================
NET LOSS PER SHARE: BASIC AND DILUTED $ (0.91) $ (0.75)
================== =================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 4,844,706 7,806,378
================== =================
</TABLE>
See accompanying notes
18
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY
SHARES PAR VALUE CAPITAL DEFICIT STOCK
--------------- ------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 4,721,268 $ 472 4,736,933 $ (7,978,063) $ (11,906)
Exchange of short-term debt for
common stock 221,195 22 571,167 - -
Sale of common stock, net of
of expenses 304,016 31 896,481 - -
Exchange of trade payables for
common stock 69,332 7 207,991 - -
Fair market value of warrants
issued for consulting services
and inducement of debt - - 190,000 - -
Net loss - - - (4,393,965) -
--------------- ------------- ------------------ ----------------- ---------------
BALANCE, DECEMBER 31, 1996 5,315,811 532 6,602,572 12,372,028) (11,906)
Sale of common stock and Public
Warrants, net of expenses 1,610,000 161 5,427,077 - -
Exchange of short-term and
long-term debt for common stock
and Public Warrants 1,241,977 124 5,713,003 - -
Fair market value of warrants issued
for inducement of debt - - 191,500 - -
Exercise of options and warrants, net 827,667 83 1,694,551 - -
Net loss - - - (5,827,405) -
--------------- ------------- ------------------ ----------------- ---------------
BALANCE, DECEMBER 31, 1997 8,995,455 900 $ 19,628,703 $ (18,199,433) $ (11,906)
=============== ============= ================== ================= ===============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
-------------------
<S> <C>
BALANCE, DECEMBER 31, 1995 $ (3,252,564)
Exchange of short-term debt for
common stock 571,189
Sale of common stock, net of
of expenses 896,512
Exchange of trade payables for
common stock 207,998
Fair market value of warrants
issued for consulting services
and inducement of debt 190,000
Net loss (4,393,965)
----------------
BALANCE, DECEMBER 31, 1996 (5,780,830)
Sale of common stock and Public
Warrants, net of expenses 5,427,238
Exchange of short-term and
long-term debt for common stock
and Public Warrants 5,713,127
Fair market value of warrants issued
for inducement of debt 191,500
Exercise of options and warrants, net 1,694,634
Net loss (5,827,405)
-------------------
BALANCE, DECEMBER 31, 1997 $ 1,418,264
===================
</TABLE>
See accompanying notes
19
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997
------------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,393,965) $(5,827,405)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 155,233 229,659
Amortization of software development 50,809 79,799
Non-cash charges to interest expense 165,001 168,691
Changes in operating assets and liabilities:
Accounts receivable (181,000) (1,009,666)
Inventory (112,664) (1,452,053)
Prepaid expenses (27,268) (28,857)
Due from debt holder 315,300 -
Deferred charges (527,531) (416,308)
Deposits (75) (18,719)
Accounts payable 310,527 76,630
Accrued compensation 13,220 73,927
Deferred revenue (59,922) 37,193
Other accrued liabilities 541,605 (133,228)
--------------- ------------------
Net cash used in operating activities (3,750,730) (8,220,337)
--------------- -----------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (133,597) (649,938)
Software development costs (54,335) (136,336)
Other 3,169 3,734
--------------- -----------------
Net cash used in investing activities (184,763) (782,540)
--------------- -----------------
FINANCING ACTIVITIES:
Net proceeds from issuance of short-term debt 2,550,000 212,202
Repayment of short-term debt-officer - (235,000)
Other (9,085) 2,466
Proceeds from issuance of long-term debt 500,000 5,000,000
Proceeds from the exercise of options and warrants - 1,694,634
Net proceeds from sale of common stock 896,512 5,427,238
--------------- -----------------
Net cash provided by financing activities 3,937,427 12,101,540
--------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,934 3,098,663
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,605 18,539
--------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,539 3,117,202
=============== =================
</TABLE>
See accompanying notes.
20
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts
of MultiMedia Access Corporation (MMAC), and its wholly-owned subsidiaries,
Viewpoint Systems, Inc. (Viewpoint), VideoWare, Inc. (VideoWare) and Osprey
Technologies, Inc. (Osprey) (collectively, the Company). MMAC, Viewpoint,
VideoWare and Osprey were incorporated in Delaware in February 1994, November
1992, September 1994 and September 1995, respectively. The Company operates in
one business segment and is engaged in developing and marketing advanced video
communications products that integrate video capabilities into existing desktop
computers, applications and networks. The Company markets its products directly
to end-users, through value-added resellers and computer system integrators,
primarily in the continental United States.
In February 1997, the Company completed an underwritten initial public
offering ("the Offering") of 1,400,000 shares of its common stock and 1,400,000
redeemable common stock purchase warrants (Public Warrants). The shares of
common stock and the Public Warrants were sold on the basis of one Public
Warrant for each share of common stock at a unit price to the public of $4.60,
and were separately transferable immediately upon issuance. Each Public Warrant
entitles the holder to purchase one share of common stock at $4.50 per share,
subject to adjustment under certain circumstances, at any time commencing six
months from the date of the Prospectus through and including five years from the
date of the Prospectus. The Public Warrants are redeemable by the Company, at
any time commencing twelve months from the date of the Prospectus, upon notice
of not less than thirty days, at a price of $.10 per Public Warrant, provided
that the closing price or bid price of the common stock for any twenty trading
days within a period of thirty consecutive trading days ending on the fifth day
prior to the day on which the Company gives notice of redemption has been at
least 150% (currently $6.75, subject to adjustment) of the initial public
offering price per share of common stock. Additionally, in March 1997, the
Company issued an additional 210,000 shares of common stock and Public Warrants
upon exercise of the underwriter's over-allotment option. The Company received
net proceeds of $5,427,000 during February and March 1997 related to this sale.
No Public Warrants have been exercised to date.
In August 1997, the Company registered, in a Registration Statement on Form
SB-2, 2,981,573 shares of common stock underlying private warrants that had
previously been issued by the Company at various times between June 1995 and
February 1997 in connection with various financing transactions. Each such
private warrant entitles the holder to purchase one (1) share of common stock at
prices ranging from $1.00 to $3.00 per share at any time commencing immediately
upon issuance through and including three years from date of issuance. The
Company will not receive any of the proceeds of the sale of such shares of
common stock, but will receive proceeds of up to $7,529,719 from the exercise of
the private warrants, to the extent the warrants are exercised. Such proceeds
will be used for working capital and general corporate purposes, and possible
future acquisitions. In September and October 1997, the Company received net
proceeds of $1,676,533 upon the exercise of 821,667 private warrants at prices
ranging from $1.00 to $3.00 per share.
On December 9, 1997 the Company sold $5,000,000 aggregate principal amount
of 8% senior convertible notes due 2002 (the "Notes") at an initial offering
price of 100% of the principal amount thereof, less 8% gross commission. The
Notes are convertible into shares of common stock of the Company at a conversion
price of $4.625 per share of common stock, subject to adjustment in certain
circumstances (including upon certain issuances of common stock or common stock
equivalents at less than the then effective conversion price). The Notes rank
senior to all existing and future subordinated obligations and rank pari passu
with all present and future senior indebtedness of the Company, except to the
extent of any collateral securing such debt. Net proceeds to the Company in
December 1997 after expenses amounted to $4,168,000.
21
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, with the proceeds from the above mentioned financings, the
Company has endeavored to build an effective marketing and sales organization,
develop a network of independent resellers and achieve market acceptance of its
products at prices and volumes which will, in the future, result in profitable
operations. However, the Company expects operating losses to continue during
1998 and until such time, if ever, as gross margins from the sales of its
products exceed its development, selling, administrative and financing costs.
The Company anticipates that additional financing will be needed in the first
half of 1998 in order to meet its working capital requirements and has had
preliminary discussions with several potential sources of financing, and may
seek additional financing to provide additional working capital in the future.
Such financing may include loans, lines of credit and/or secured capital
financing through the issuance of convertible preferred stock or other equity
securities and could include factoring agreements.
Although the Company has no current firm arrangements with respect to any
additional financing, it is currently considering various proposals by several
potential investors relating to the issuance of convertible preferred stock or
other equity in exchange for a cash investment in the Company. The Company is
also considering obtaining a revolving line of credit, which would rank pari
passu with the Notes, except to the extent of the collateral securing such debt.
There can be no assurance that any such additional financing will be available
to the Company on acceptable terms, or at all. Additional equity financing,
including the issuance of convertible preferred stock, may involve substantial
dilution to the Company's then existing stockholders and holders of the Notes
(assuming conversion thereof). In the event the Company is unable to raise
additional capital it may be required to curtail its activities.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As reflected in the
accompanying consolidated financial statements, the Company incurred significant
losses of $4,393,965 and $5,827,405 during the years ended December 31, 1996 and
1997, respectively. These losses in conjunction with the matters discussed
above, raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments which might be necessary should the Company be unable to continue as
a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All material inter-company accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
INVENTORY
Inventory consists primarily of purchased electronic components and
computer system products, along with the related documentation manuals and
packaging materials. Inventory is carried at the lower of cost or market, cost
being determined on a standard cost basis, which approximates average cost.
22
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is determined
using the straight-line method over the estimated useful lives, generally five
years, of the related assets. Leasehold improvements are amortized over the
lives of the related leases. Expenditures for repairs and maintenance are
charged to operations as incurred; renewals and betterments are capitalized.
SOFTWARE DEVELOPMENT COSTS
Costs of developing new software products and substantial enhancements
to existing software products are expensed as incurred until technological
feasibility has been established, after which time additional costs incurred are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Amortization of capitalized software development costs
begins when products are available for general release to customers, and is
computed using the straight-line method over a period not to exceed three years.
Amortization expense for the years ended December 31, 1996 and 1997 was $50,809
and $79,799, respectively.
REVENUE RECOGNITION
Revenue from the sale of video communication systems and products and
licensing of the related software is recognized upon shipment to customers. With
pre-approval by a return merchandise authorization, a customer may return
undamaged product to the Company, subject to a 30-day money back guarantee. The
Company maintains an accrued warranty reserve for products which are returned
defective during the warranty period.
NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings per Share," which has changed the method for
calculating earnings per share on the face of the income statement. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. Basic earnings per share is calculated
by dividing net income/loss by the number of weighted average common shares
outstanding for the period. Since the Company has reported net losses for all
periods presented, the computation of diluted loss per share excludes the
effects of options (see Note 8), warrants (see Note 8) and convertible debt (see
Note 6) since their effect is anti-dilutive. Loss per share amounts for prior
periods have been restated to conform to SFAS 128 requirements.
DEFERRED CHARGES AND OTHER ASSETS
Deferred charges at December 31, 1997, which consist of legal,
accounting and lead manager fees and expenses associated with the issuance of
the $5,000,000 8% senior convertible notes due 2002 in December 1997, are being
amortized using the straight-line method over the term of the notes. Net debt
issue costs at December 31, 1997 amounted to $943,412 of which $191,287 has been
classified as current.
Deferred charges at December 31, 1996 consist of legal, accounting and
other expenses associated with the Company's initial public offering consummated
in February 1997, as well as expenses incurred in connection with the issuance
of 8% debt in July through December of 1996. During February and March 1997,
$2,079,000 of legal, accounting, underwriting and printing costs incurred in
connection with the initial public offering were charged against the proceeds
from the offering.
23
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization of deferred debt issue costs charged to operations for the
years ended December 31, 1996 and 1997 was $165,001 and $168,691, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist principally of cash, cash equivalents and trade accounts
receivable. The Company invests its cash and cash equivalents with a Texas
commercial bank and a commercial brokerage firm. The brokerage firm maintains
accounts in several banks throughout the country and in government securities.
The Company sells its products and services primarily to distributors and
resellers without requiring collateral, however, the Company routinely assesses
the financial condition of its customers and maintains allowances for
anticipated losses. During the years ended December 31, 1996 and 1997, three
customers accounted for 37% and one customer accounted for 14% of total
consolidated revenues, respectively. Balances due from these customers at
December 31, 1996 and 1997 represented 0% and 10% of net accounts receivable,
respectively. The Company believes it has no significant concentration of credit
risk.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company utilizes the liability method of accounting for income
taxes as set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based upon the differences between the financial
statement and tax bases of assets and liabilities, as measured by the enacted
tax rates expected to be in effect when these differences reverse.
ADVERTISING COSTS
Advertising costs are generally expensed as incurred. Advertising
expense was $89,414 and $226,413 for the years ended December 31, 1996 and 1997,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its
financial instruments, which include cash equivalents, accounts receivable,
accounts payable, short-term debt and accrued expenses approximate fair value
due to the short-term maturities of these instruments. The Company also believes
the carrying value of its long-term debt approximates fair value at December 31,
1997 since actual interest rates were consistent with rates estimated to be
available for obligations with similar terms and conditions.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation". SFAS 123 defines a fair-value based method of
accounting for an employee stock option or similar equity instrument. As
permitted by SFAS 123, the Company has elected to continue to measure the cost
of its stock-based compensation plans using the intrinsic-value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." See Note 8 to the Consolidated Financial
Statements for additional information concerning stock-based compensation.
24
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information," which established standards for the way
public business enterprises report information in annual statements and interim
financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS 131 will first be reflected in the
Company's 1998 financial statements. The Company's management is currently
evaluating the impact of this statement.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997
------------------------------------
<S> <C> <C>
Purchased materials $180,149 $1,035,006
Finished goods 129,984 727,180
------------------------------------
$310,133 $1,762,186
====================================
</TABLE>
Inventory at December 31, 1996 is presented net of a reserve of $215,000.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997
------------------------------------
<S> <C> <C>
Computer equipment $519,966 $933,767
Software 141,841 270,386
Leasehold improvements 36,985 43,951
Office furniture and equipment 87,630 180,256
------------------------------------
786,422 1,428,360
Less accumulated depreciation
and amortization (325,527) (550,920)
------------------------------------
$460,895 $877,440
====================================
</TABLE>
25
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
OFFICER:
Secured note payable to an officer and affiliate of the
Company, due on demand with interest at 15%.
Collateralized by all assets of the Company. $ 533,089 $ 311,243
===============================
OTHER:
Secured note payable to an individual investor, due on
demand with interest at 15%. Collateralized by all
assets of the Company. $ 22,548 $ -
Convertible secured debt payable to a principal
stockholder of the Company, due on demand 10 days
subsequent to an initial public offering or 180 days
after date of issue, with interest at 8%.
Collateralized by all assets of the Company. 500,000 -
Unsecured notes payable to principal stockholders of
the Company, due on demand 10 days subsequent to an
initial public offering or 180 days after date of
issue, with interest at 8% 1,315,000 -
Unsecured , non-interest bearing note payable to
the Company's underwriter 120,000 -
Other 8,654 13,120
-------------------------------
Total short-term debt, other $ 1,966,202 $ 13,120
===============================
</TABLE>
In January and February 1996, the Company issued $650,000 of 10% 90-day
secured notes to an existing stockholder of the Company. As an incentive to
advance these notes, the stockholder received 65,000 three-year warrants to
purchase Company stock at $3.00 per share. Based on an independent appraisal,
the fair market value of these warrants of $.50 per share was charged to
interest expense over the term of the notes.
In July 1996, the Company issued $500,000 of 8% secured convertible
debt to a principal stockholder of the Company. The convertible debt was due on
demand 10 days subsequent to an initial public offering of the Company's equity
securities or 180 days from date of issue. As an incentive to advance these
notes, the stockholder received 50,000 three-year warrants to purchase Company
stock at $3.00 per share. Based on an independent appraisal, the fair market
value of these warrants of $.50 per share was charged to interest expense.
26
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Between September and December of 1996, the Company issued $1,315,000
of 8% unsecured notes to existing stockholders of the Company. The notes were
due on demand 10 days subsequent to an initial public offering of the Company's
equity securities or 180 days from date of issue. As an incentive to advance the
notes, the stockholders received 131,500 three-year warrants to purchase Company
stock at $3.00 per share. Based on an independent appraisal, the fair market
value of these warrants of $1.00 per share was charged to interest expense.
In October 1996, the Company converted salary and bonuses of $127,781
and accrued interest of $41,154 owing to its Chief Executive Officer into
$168,935 principal amount of 15% secured notes due in February of 1998.
In January and February 1997, the Company issued $600,000 of 8%
unsecured debt to two principal stockholders of the Company. The unsecured debt
was due on demand 10 days subsequent to an initial public offering of the
Company's equity securities or 180 days from the date of issue. As an incentive
to advance the debt, the stockholders were issued 60,000 three-year warrants to
purchase Company stock at $3.00 per share. Based on independent appraisal, the
fair market value of these warrants of $1.00 per share was charged to interest
expense.
In February 1997, $2,915,000 principal amount of secured and unsecured
notes were exchanged for 633,694 shares of Common Stock and Public Warrants in
the Offering. Additionally, in February 1997, the Company repaid $377,548
principal amount of secured and demand notes together with total accrued
interest of $90,745.
Interest paid was $1,287 and $253,675 for the years ended December 31,
1996 and 1997, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
-----------------------------------
<S> <C> <C>
U.S $5,000,000 Senior 8% Convertible
Notes
due December 2002 with interest payable $ - $ 5,000,000
semi-annually in arrears
Short-term notes converted to convertible notes 110,250 -
Convertible secured debt payable to a
principal
stockholder of the Company, due January
1998 with interest at 8% collateralized by all
assets of the Company 500,000 -
Convertible notes 2,567,300 -
-----------------------------------
3,177,550 5,000,000
-----------------------------------
Less: current portion 3,177,550 -
$ - $ 5,000,000
===================================
</TABLE>
27
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July of 1996, the Company issued $500,000 of 18-month 8% convertible
debt to a principal stockholder of the Company. As an incentive to advance these
notes, the stockholder was granted 50,000 three-year warrants to purchase
Company stock at $3.00 per share. Based on an independent appraisal, the fair
market value of these warrants of $.50 per share was charged to interest
expense.
In February 1997, $2,430,300 principal amount of 8% convertible notes
together with accrued interest of $367,827 were exchanged for 608,283 shares of
common stock and Public Warrants in the Offering. Additionally, in February
1997, the Company repaid $247,250 principal amount of 8% convertible debt
together with accrued interest of $118,726. Converting noteholders received
1,215,150 three-year warrants to purchase Company stock at $3.00 per share while
repayment noteholders received 82,418 three-year warrants to purchase Company
stock at $3.00 per share.
On December 9, 1997 the Company sold $5,000,000 aggregate principal amount
of 8% senior convertible notes due 2002 (the "Notes") at an initial offering
price of 100% of the principal amount thereof, less 8% gross commission (see
Note 1). The Notes rank senior to all existing and future subordinated
obligations and rank pari passu with all present and future senior indebtedness
of the Company, except to the extent of any collateral securing such debt. Lead
managers in connection with the Notes offering received 108,108 warrants to
purchase Company stock at an exercise price of $4.625 per share. In December
1997, the Company received net proceeds of $4,168,000 from the Notes offering.
At December 31, 1997, the Company had outstanding $324,363 of secured
senior indebtedness, most of which is due and payable in early 1998 to a
principal stockholder and officer of the Company.
7. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires a valuation allowance to be recorded when it is "more
likely than not that some portion or all of the deferred tax assets will not be
realized." In the opinion of management, realization of the Company's net
operating loss carryforward is not reasonably assured, and a valuation allowance
of $4,625,000 and $6,716,000 has been provided against deferred tax assets in
excess of deferred tax liabilities in the accompanying consolidated financial
statements at December 31, 1996 and 1997, respectively.
The components of the Company's net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 4,349,000 $ 6,357,000
Excess of tax over financial statement basis of
patent 41,000 37,000
Accruals deductible for tax purposes when paid 236,000 241,000
Excess of tax over financial statement basis of
software development costs 42,000 130,000
-------------------------------------
Total deferred tax assets 4,668,000 6,765,000
Less: valuation allowance (4,625,000) (6,716,000)
-------------------------------------
43,000 49,000
Deferred tax liabilities:
Excess of financial statement over tax basis of
of property and equipment 43,000 49,000
-------------------------------------
Total deferred tax liabilities 43,000 49,000
=====================================
Net deferred taxes $ - $ -
=====================================
</TABLE>
28
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the federal income tax benefit calculated by
applying U.S. federal statutory rates to net loss and the absence of a tax
benefit reported in the accompanying consolidated financial statements is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
-------------------------------------
<S> <C> <C>
U.S. federal statutory rate applied to pretax loss $ (1,494,000) $ (1,981,000)
Accrued compensation and other accruals (19,000) 70,000
Amortization of patent (3,000) (4,000)
Depreciation of property and equipment (5,000) (12,000)
Software development costs for financial reporting
purposes (11,000) (43,000)
Net operating loss carryforward not recognized for
financial reporting purposes 1,476,000 1,966,000
Inventory and doubtful account reserves 3,000 (66,000)
Non-deductible interest expense 46,000 58,000
Other 7,000 12,000
-------------------------------------
$ - $ -
=====================================
</TABLE>
The Company has a federal income tax net operating loss carryforward of
approximately $17,000,000 at December 31, 1997. Approximately $2,700,000,
$4,700,000, $4,300,000 and $5,300,0000 of the carryforward will expire in 2009,
2010, 2011 and 2012, respectively. The Company is subject to limitations
existing under Internal Revenue Code Section 382 (Change of Control) relating to
the availability of the operating loss carryforward. Beginning with 1994,
approximately $790,000 of the carryforward that will expire in 2009 is limited
to utilization at a rate of approximately $300,000 per year.
No income taxes were paid for the years ended December 31, 1996 and
1997.
8. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In September 1995, the Company began a private placement of up to
2,666,667 shares of common stock to qualified investors. In March 1996 a
principal stockholder of the company exchanged $663,589 of notes and accrued
interest for 221,195 shares of common stock and 65,000 warrants in the offering.
In April through June of 1996, the Company sold 304,016 shares of the offering
to individual investors at $3.00 per share. Proceeds to the Company were
$912,054. Additionally, in May and June of 1996, the Company converted $208,000
of accounts payable into 69,332 shares of the offering at $3.00 per share.
In February 1997, the Company completed an underwritten initial public
offering of 1,400,000 shares of its common stock and 1,400,000 redeemable common
stock purchase warrants (Public Warrants). The shares of common stock and the
Public Warrants were sold on the basis of one Public Warrant for each share of
common stock at a unit price to the public of $4.60, and were separately
transferable immediately upon issuance (see Note 1). In March 1997, the Company
issued an additional 210,000 shares of common stock and Public Warrants upon
exercise of the underwriter's over-allotment option. The Company received net
proceeds of $5,427,000 during February and March 1997 related to this sale.
Additionally, in February of 1997, $5,345,300 principal amount of convertible
and bridge notes together with accrued interest of $367,827 were converted into
1,241,977 shares of common stock and Public Warrants in the offering.
29
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1997, the Company registered, in a Registration Statement on Form
SB-2, 2,981,573 shares of common stock underlying private warrants that had
previously been issued by the Company at various times between June 1995 and
February 1997 in connection with various financing transactions. Each such
private warrant entitles the holder to purchase one (1) share of common stock at
prices ranging from $1.00 to $3.00 per share at any time commencing immediately
upon issuance through and including three years from date of issuance. The
Company will not receive any of the proceeds of the sale of such shares of
common stock, but will receive proceeds of up to $7,529,719 from the exercise of
the private warrants, to the extent the warrants are exercised. In September and
October 1997, the Company received net proceeds of $1,676,533 upon the exercise
of 821,677 private warrants at prices ranging from $1.00 to $3.00 per share. As
an inducement for early exercise of the private warrants, exercising warrant
holders received 82,000 three-year warrants to purchase Company stock at $4.50
per share.
STOCK OPTION PLANS
In April 1995, the Company adopted its 1995 Stock Plan (the 1995 Stock
Option Plan) under which 2,000,000 shares of the Company's common stock are
reserved for issuance to officers, key employees and consultants of the Company.
The objectives of the stock plan are to attract and retain qualified personnel
for positions of substantial responsibility, and to provide additional
incentives to employees and consultants to promote the success of the Company's
business. Options granted under the plan may be incentive stock options or
non-qualified stock options. The plan is administered by the Board of Directors.
The options are granted at the discretion of the Board of Directors at an option
price per share not less than fair market value at the date of grant.
In April 1995, the Company also adopted the 1995 Director Option Plan
under which 250,000 shares of the Company's common stock are reserved for
issuance to outside directors of the Company. The objective of the director plan
is to attract and retain qualified personnel for service as outside directors of
the Company, and to encourage their continued service to the Board. Only
non-qualified stock options may be granted. Grants under the plan are automatic
and nondiscretionary, and are issued at an option price per share not less than
fair market value at the date of grant.
Following is a summary of stock option activity from December 31, 1995
through December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS
--------------------------------------------------------
WEIGHTED-
AVERAGE
NUMBER PRICE PER EXERCISE PRICE
OF SHARES SHARE PER SHARE
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 1,811,774 $ .04 - 3.00 $ 2.48
Granted 870,400 3.00 - 4.00 3.32
Exercised - - -
Canceled/forfeited 588,213 .20 - 3.00 2.55
------------------
Outstanding at December 31, 1996 2,093,961 .04 - 4.00 2.81
Granted 780,666 3.00 - 5.84 4.55
Exercised 6,000 3.00 3.00
Canceled/forfeited 130,817 2.20 - 4.63 3.42
------------------
Outstanding at December 31, 1997 2,737,810 $ .04 - 5.84 $ 3.27
==================
</TABLE>
30
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted-average grant-date fair value of options granted was $0.86
and $2.23 for the years ended December 31, 1996 and 1997, respectively.
The following information applies to options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ---------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
EXERCISE DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, PRICE
PRICES 1997
---------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.01 - 1.00 154,770 4.2 $ 0.10 138,438 $ 0.10
1.01 - 2.00 - - - - -
2.01 - 3.00 1,488,040 6.7 2.85 988,255 2.80
3.01 - 4.00 381,000 6.1 3.71 115,914 3.63
4.01 - 5.00 542,500 9.5 4.37 - -
5.01 - 6.00 171,500 5.1 5.33 - -
---------------------------------------------------- ---------------------------------
2,737,810 6.9 $ 3.27 1,242,606 $2.58
</TABLE>
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
For Stock Based Compensation," requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
-----------------------------------------
<S> <C> <C>
Risk-free interest rate 6.4% 6%
Dividend yield 0% 0%
Volatility factor of the
market price of the
Company's common stock 0% 40%
Expected life of the options
(years) 5 6
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimated, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options. In addition, because SFAS 123 is applicable only to
options granted subsequent to December 31, 1994, the pro forma information
presented below is not necessarily indicative of the effects on reported net
income in future years.
31
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Pro forma
information for the years ended December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
-------------------- -------------------
<S> <C> <C>
Pro forma net loss $ (4,597,827) $ (6,212,743)
Pro forma net loss per share:
basic and diluted $ (0.95) $ (.80)
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company established an Employee Stock Purchase Plan
("ESPP") to provide employees of the Company with an opportunity to purchase
Common Stock through payroll deductions. Under the ESPP, up to 250,000 shares of
Common Stock have been reserved for issuance, subject to certain antidilution
adjustments. The ESPP, by its terms, became effective at the time of the
Company's IPO. The ESPP is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code.
Each offering period will be for a period of six months except the first
offering period under the ESPP is from October 1, 1997 through April 30, 1998.
The ESPP terminates in April, 2005. Eligible employees may participate in the
ESPP by authorizing payroll deductions during an offering period within a
percentage range determined by the Board of Directors. Initially, the amount of
authorized payroll deductions is not more than ten percent of an employee's cash
compensation during an offering period, but not more than $25,000 per year.
Amounts withheld from payroll are applied at the end of each offering period to
purchase shares of Common Stock. Participants may withdraw their contributions
at any time before stock is purchased, and in the event of withdrawal such
contributions will be returned to participants. The purchase price of the Common
Stock is equal to eighty-five percent of the lower of (i) the market price of
Common Stock immediately before the beginning of the applicable offering period
or (ii) the market price of Common Stock at the end of each offering period. The
Company will pay all expenses incurred in connection with the implementation and
administration of the ESPP.
WARRANTS
The Company has issued private warrants to purchase common stock of the
Company in connection with the issuance and repayment of certain notes payable
(as described in Notes 5 and 6), as inducement for early exercise of private
warrants and as compensation for services rendered by various consultants and a
financial consulting firm controlled by an officer, director, and stockholder of
the Company. Additionally, the Company has issued Public Warrants to purchase
common stock of the Company in connection with its initial public offering and
concurrent debt retirement and debt for equity exchange (as described in the
Common Stock section of Note 8).
32
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of warrant activity from December 31, 1995
through December 31, 1997:
WARRANTS
<TABLE>
<CAPTION>
-----------------------------------------------------------
WEIGHTED-
AVERAGE
NUMBER OF PRICE PER EXERCISE PRICE
SHARES SHARE PER SHARE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 1,147,500 $ 1.00 - 3.00 $ 1.77
Granted 376,505 3.00 3.00
Exercised - - -
--------------------
Outstanding at December 31, 1996 1,524,005 1.00 - 3.00 2.07
Granted - Non-Public Warrants 1,717,676 3.00 - 4.63 3.24
Granted - Public Warrants 2,851,977 4.50 4.50
Exercised 821,667 1.00 - 3.00 2.13
--------------------
Outstanding at December 31, 1997 5,271,991 $ 1.00 - 4.63 $ 3.76
====================
</TABLE>
In addition, at December 31, 1997 the Company's IPO representative
holds warrants to purchase 140,000 units at $6.30 per unit, each unit consisting
of one share of common stock and one common stock purchase warrant exercisable
at $4.50 per share through February 2002.
At December 31, 1997, 5,084,716 warrants at prices ranging from $1.00
to $4.50 with a weighted-average exercise price of $3.74 were exercisable.
9. EMPLOYEE BENEFIT PLAN
Effective March 1, 1997, the Company adopted a profit sharing plan pursuant
to Section 401(k) of the Internal Revenue Code whereby participants may elect to
contribute up to twenty percent (20%) of their compensation subject to statutory
limitations. The plan provides for discretionary matching and profit sharing
contributions by the Company. All full-time employees are eligible to
participate in the plan provided they meet a minimum service requirement of six
consecutive months and a minimum age requirement of twenty-one. For the year
ended December 31, 1997 no matching or profit sharing contributions were made by
the Company.
10. COMMITMENTS AND CONTINGENCIES
The Company leases various office and manufacturing space under
non-cancelable operating leases extending through 2003. The Company also leases
certain office and computer equipment under non-cancelable operating leases.
Future minimum operating lease payments with initial or remaining terms of one
year or more are as follows:
33
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATING
LEASES
----------------
Year ended December 31:
1998 $ 343,663
1999 145,172
2000 125,247
2001 122,029
2002 122,029
Thereafter 12,211
-------------
Total minimum lease payments $ 870,351
=============
Rent expense was $247,765 and $261,400 for the years ended December 31,
1996 and 1997, respectively.
The Company has entered into an employment contract with its Chief
Executive Officer through February 1999 that provides for a minimum annual
salary and incentives based generally on the Company's performance.
11. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS
In February 1994 the Company entered into two five-year consulting
agreements with two of its former directors, pursuant to which the Company
agreed to pay monthly consulting fees of $5,000 to each individual. In March
1995 one of these consulting agreements was canceled with no further liability
to the Company. In June 1996, the Company converted $80,000 of accounts payable
owed on the remaining consulting agreement into 26,666 shares of common stock at
$3.00 per share. By mutual agreement, effective May 1, 1996 consulting fees from
the remaining consulting contract were suspended until February 1997. Consulting
fees charged to expense with respect to the aforementioned agreements for the
years ended December 31, 1996 and 1997 were $20,000 and $50,000, respectively.
Consulting fees of $12,500 and $62,500 remained accrued at December 31, 1996 and
1997, respectively.
In May 1996, the Company issued three-year warrants to purchase 5,005
shares of Company stock at $3.00 per share to a company which is partially owned
by the Chief Executive Officer of the Company. The warrants were issued as
consideration for consulting services rendered during 1996. The fair market
value of the warrants of $.50 as determined by independent appraisal and fees of
$2,503 were charged to expense during 1996. Additionally, $3,562 and $8,130 of
consulting fees were paid in 1996 and 1997, respectively, for consulting
services rendered in 1994.
In January and February 1996, the Company issued to a principal stockholder
of the Company, secured notes totaling $650,000 under the terms as described in
Note 5. During March 1996, these secured notes were exchanged for equity
securities of the Company under the terms described in Note 5.
During July 1996, the Company issued $1,000,000 of 8% secured
convertible debt to a principal stockholder of the Company. The note matured 10
days subsequent an initial public offering of the Company's equity securities.
During February 1997, the note was converted into common stock and Public
Warrants in the Offering as described in Note 5. As an incentive to advance the
debt, the stockholder was issued 100,000 three-year warrants to purchase Company
stock at $3.00 per share. The fair market value of the warrants of $.50 per
share as determined by independent appraisal were charged to interest expense
over the term of the notes. Additionally, the stockholder was issued 100,000
three-year warrants to purchase Company Stock at $3.00 per share upon
conversion. The fair market value of the warrants of $1.00 per share as
determined by independent appraisal were charged against the proceeds of the
Offering.
34
<PAGE>
MULTIMEDIA ACCESS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During July 1996, the Company issued to a stockholder and former
director of the Company, 75,000 three-year warrants to purchase Company stock at
$3.00 per share pursuant to the terms of a consulting agreement more fully
described in Note 10. Based on an independent appraisal, the fair market value
of these warrants of $15,000 was charged to consulting fees in 1996.
During October 1996, the Chief Executive Officer of the Company agreed
to defer receipt of $164,154 principal amount of Secured and Demand Notes,
accrued interest of $41,154 and accrued salary and bonuses of $127,781 until
February of 1998 under the terms described in Note 5.
In November and December of 1996, the Company issued $700,000 of 8%
unsecured debt to two principal stockholders of the Company. The debt matured 10
days subsequent to an initial public offering of the Company's equity securities
or 180 days from the date of issue. During February 1997, these notes were
converted into common stock and Public Warrants in the Offering as described in
Note 5. As an incentive to advance the debt, the stockholder's were issued
70,000 three-year warrants to purchase Company stock at $3.00 per share. The
fair market value of the warrants of $1.00 per share as determined independent
appraisal were chared to interest expense over the term of the notes.
During January and February of 1997, the Company issued $600,000 of 8%
unsecured notes to two principal stockholders of the Company. The notes were due
on demand 10 days subsequent to an initial public offering of the Company's
equity securities or 180 days from date of issue. During February of 1997 these
notes were converted into common stock and Public Warrants in the Offering as
described in Note 6.
During February 1997, $1,915,000 principal amount of 8% unsecured
bridge notes and $1,000,000 principal amount of 8% secured convertible notes
owing to four principal stockholders of the Company were converted into 633,694
shares of common stock and Public Warrants in the Offering at $4.60 per share.
Additionally, during February 1997, the Company paid accrued interest of $76,634
to the stockholders.
During February 1997, $1,905,000 principal amount of 8% convertible
debt and accrued interest of $282,992 owing to four principal stockholders, its
Chief Executive Officer and the spouse of another principal stockholder and
former director, were converted into 475,647 shares of common stock and Public
Warrants in the Offering at $4.60 per share.
During February 1997, the Company repaid $235,000 principal amount of
15% secured debt to its Chief Executive Officer together with accrued interest
of $10,399.
In August 1997, the Company registered, in a Registration Statement on Form
SB-2, 2,981,573 shares of common stock underlying private warrants (see Note 8),
some of which are held by affiliates of the Company. In September and October of
1997, the Company received gross proceeds of $1,700,000 upon exercise of 805,000
private warrants from three principal stockholders of the Company and the spouse
of a principal stockholder. As an incentive for early exercise of the above
mentioned warrants, the stockholders were issued 82,000 three-year private
warrants to purchase Company stock at $4.50 per share.
During 1997 the Company paid $56,000 of consulting fees to the Chairman
of the Company.
In February 1998, the Company repaid $125,000 principal amount of
secured notes to its Chief Executive Officer and converted the remaining
principal balance of $186,243 to a demand note.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements concerning any matter of accounting
principle or financial statement disclosure between the Company and its
independent auditors.
35
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16 (a) of the Exchange Act.
The information required by this item is incorporated by reference to
disclosure in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the end of the fiscal year covered by this report
("Proxy Statement").
Item 10. Executive Compensation
The information required by this item is incorporated by reference to
the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
the Proxy Statement.
Item 12. Certain Relationship and Related Transactions
The information required by this item is incorporated by reference to
the Proxy Statement.
Item 13. Exhibits and Report on Form 8-K
a.) Exhibits
See Exhibit index.
b.) Reports on Form 8-K
On December 23, 1997, the Company filed a Form 8-K covering the
private placement of $5,000,000 aggregate principal amount of 8%
Senior Convertible Notes due 2002.
36
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date MultiMedia Access Corporation
----
March 27, 1998 By: /s/ William S. Leftwich
-----------------------
William S. Leftwich
Chief Financial Officer and
Asst. Secretary
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date MultiMedia Access Corporation
----
March 27, 1998 By: /s/ Glenn A. Norem
-------------------------------
Glenn A. Norem
Director and Chief
Executive Officer
March 27, 1998 By: /s/ William S. Leftwich
-------------------------------
William S. Leftwich
Chief Financial Officer and
Asst. Secretary
March 27, 1998 By: /s/ William D. Jobe
-------------------------------
William D. Jobe
Director and Chairman of
the Board
March 27, 1998 By: /s/ Joe C. Culp
-------------------------------
Joe C. Culp
Director
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
PAGE SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NO.
- -----------------------------------------------------------------------------------------------------------
2 Agreement and Plan of Merger and Reorganization (1)
3(a) Certificate of Incorporation (1)
3(b) Amendment to Certificate of Incorporation (1)
3(c) Restated By-Laws (1)
4(a) Form of Common Stock Certificate (1)
4(b) Form of Warrant Certificate (1)
4(c) Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company (1)
4(d) Form of Representative's Warrant Agreement (1)
9(a) Voting Trust Agreement between Robert M. Sterling, Jr. and Thomas E. Brown (1)
9(b) Voting Trust Agreement between Robert P. Bernardi and Richard Bernardi (1)
9(c) Form of Lock-Up Agreement (1)
9(d) Lock-Up Agreement with Robert Sterling Trust (1)
9(e) Lock-Up Agreement with Robert Bernardi Trust (1)
9(f) Lock-Up Agreement with Michael Nissenbaum (1)
10(a) Modified Employment Agreement between the Company and Glenn A. Norem (1)
10(b) Modified Consulting Agreement between the Company and Sterling Capital Group Inc. (1)
10(c) Form of Indemnification Agreement between the Company and Executive Officers and Directors (1)
10(d) 1995 Stock Option Plan (1)
10(e) 1994 Stock Option Plan (1)
10(f) 1993 Viewpoint Stock Plan (1)
l0(g) 1995 Director Option Plan (1)
10(h) Lease Agreement between the Company and Metro Squared, L P (1)
10(i) Employee Stock Purchase Plan (1)
l0(j) Licensing Agreement between the Company and Boca Research, Inc. (1)
10(k) Agreement between the Company and Unisys(TM)(1)
10(l) Employment Agreement between the Company and Philip M. Colquhoun (1)
10(m) Employment Agreement between the Company and William S. Leftwich (1)
10(n) Employment Agreement between the Company and David T. Stoner (1)
10(o) Employment Agreement between the Company and Neal Page (1)
10(p) Employment Agreement between the Company and A. David Boomstein (1)
10(r) Lease between the Company and Burlingame Home Office, Inc. (1)
10(s) Lease between the Company and Family Funds Partnership (1)
10(t) Agreement between the Company and Catalyst Financial Corporation (1)
10(u) Promissory Note by the Company payable to Robert Rubin dated September 5, 1996. (1)
10(v) Promissory Note by the Company payable to M. Douglas Adkins dated November 15, 1996. (1)
10(w Promissory Note by the Company payable to H.T. Ardinger dated November 15, 1996. (1)
10(x) Promissory Note by the Company payable to H.T. Ardinger dated January 15, 1997. (1)
10(y) Promissory Note by the Company payable to Adkins Family Partnership, Ltd. dated January 15,
1997. (1)
21 List of Subsidiaries of the Company (1)
23 Consent of Ernst & Young
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the Registration Statement on Form SB-2 and
all amendments thereto as declared effective on February 4, 1997.
38
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
SB-2 No. 333-31947) of MultiMedia Access Corporation and in the related
Prospectus of our report dated March 6, 1998, with respect to the consolidated
financial statements of MultiMedia Access Corporation included in this Annual
Report (Form 10-KSB) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF MULTIMEDIA ACCESS CORPORATION AND
SUBSIDIARIES AS OF DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,117,202
<SECURITIES> 0
<RECEIVABLES> 1,260,230
<ALLOWANCES> 65,000
<INVENTORY> 1,762,186
<CURRENT-ASSETS> 6,341,001
<PP&E> 1,428,360
<DEPRECIATION> 550,920
<TOTAL-ASSETS> 8,211,415
<CURRENT-LIABILITIES> 1,793,151
<BONDS> 0
0
0
<COMMON> 900
<OTHER-SE> 1,417,364
<TOTAL-LIABILITY-AND-EQUITY> 8,211,415
<SALES> 3,269,331
<TOTAL-REVENUES> 3,360,922
<CGS> 1,695,922
<TOTAL-COSTS> 1,695,922
<OTHER-EXPENSES> 3,050,315
<LOSS-PROVISION> 67,619
<INTEREST-EXPENSE> 290,492
<INCOME-PRETAX> (5,827,405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,827,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,827,405)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF MULTIMEDIA ACCESS CORPORATION AND
SUBSIDIARIES AS OF DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-01-1996
<EXCHANGE-RATE> 1
<CASH> 18,539
<SECURITIES> 0
<RECEIVABLES> 228,564
<ALLOWANCES> 43,000
<INVENTORY> 310,133
<CURRENT-ASSETS> 1,064,770
<PP&E> 786,422
<DEPRECIATION> 325,527
<TOTAL-ASSETS> 1,691,258
<CURRENT-LIABILITIES> 7,472,088
<BONDS> 0
0
0
<COMMON> 532
<OTHER-SE> (5,781,362)
<TOTAL-LIABILITY-AND-EQUITY> 1,691,258
<SALES> 901,262
<TOTAL-REVENUES> 1,095,012
<CGS> 393,918
<TOTAL-COSTS> 393,918
<OTHER-EXPENSES> 2,203,187
<LOSS-PROVISION> 42,777
<INTEREST-EXPENSE> 513,979
<INCOME-PRETAX> (4,393,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,393,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,393,965)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
