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BURST COM INC - 10KSB - 19980415 - MANAGEMENTS_DISCUSSION
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Over the course of the past two years, the Company has migrated from licensing
the intellectual properties contained in its patent portfolio to developing,
marketing, and licensing software products and applications that cover the
faster-than-real-time transmission of audio and video programming. The Company's
Burstware(R) Suite software incorporates the technology described in the
Company's patent portfolio. Over the next twelve months and beyond, the Company
intends to continue pursuing developing commercially viable software products
and follow-on software products.
In order to accomplish these goals, the Company has organized a core group of
employees and consultants with extensive experience in the fields of licensing,
marketing, administration, technology, patents, and law. Upon Company growth, if
any, this team will be augmented. Over the next twelve months, the Company
intends to add in-house technology, marketing and sales, operations, and
administrative staff, as required.
Product Development
In September 1997, the Company refocused its product development around three
key objectives: a) the software should be platform independent, b) the software
should be usable "off the shelf" without modification, c) the software should
incorporate industry standards such as Java(TM), ActiveX(TM), and TCP/IP. The
Company also realized that product development should be located locally rather
than in New York.
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IVT established a core team of software professionals with experience in
developing over 35 new software products in its San Francisco headquarters. The
team rewrote the entire Burstware(R) Suite to incorporate the above-mentioned
objectives. The beta version was completed ahead of schedule and delivered in
March 1998 for internal testing.
The Company has begun testing the beta software of its Burstware(R) Suite with
several key customers and expects to release the first commercial product to the
general public in mid-1998.
Financial Condition and Results of Operations
During the year ended December 31, 1997, the Company received revenue in the
amount of $247,879 versus $1,457,597 for the same period in 1996. The 1997
results were considerably less due to lower sales resulting from the Company's
decision to restart its Burstware(R) product development.
Costs and expenses during the year ended December 31, 1997, totaled $1,946,306
as compared to $1,725,753 during the year ended December 31, 1996. The increase
was primarily due to Burstware(R) project costs, the hiring of additional human
resources, the increase in travel related expenses, and the write-off of
accounts receivable in the third quarter of 1997 and sales in the first quarter
of 1997.
Research and development expenses for 1997 totaled $189,719 versus $48,588 for
1996. Research and development costs are directly expensed as incurred. These
costs increased in 1997 because the Company's decision to redesign and restart
its Burstware(R) Suite of products in the second half of 1997. The Company will
continue to incur increasing research and development costs as they continue to
develop its Burstware(R) product line and follow-on products.
The Company incurred a net loss per common share of $.39 per share during the
fiscal year ended December 31, 1997, as compared to a net loss of $.09 per share
during the fiscal year ended December 31, 1996. Management expects to continue
to incur quarterly losses for 1998.
Liquidity and Capital Resources
As of December 31, 1997, the Company had a working capital deficit of $1,069,614
as compared to a working capital deficit of $185,994 at December 31, 1996. The
increased deficit was primarily due to the increase in notes payable, operating
expenses, and reduced sales during 1997.
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Cash used in operating activities totaled $1,765,782 during the year ended
December 31, 1997, as compared to cash used in operating activities of $818,782
during the year ended December 31, 1996. The increase was primarily a result of
net losses of $2,062,373 and the restatement of accounts receivables and sales
in the third and first quarters of 1997, respectively.
Cash flows provided by financing activities during the year ended December 31,
1997, were $1,657,812 as compared to $1,070,482 during the prior year. The
increase was due to the proceeds from the sale of Preferred Stock and additional
convertible and non-convertible debt. This increase is partially offset by
repayment of debt during 1997.
In 1997, the Company raised an additional $950,000 including $550,000 in
proceeds from the sale of investment units consisting of Series F Convertible
Preferred Stock and Warrants to purchase common stock at the exercise price of
one dollar per share, in a private placement, and $400,000 in proceeds from the
exercise of certain warrants to purchase Common Stock at the exercise price of
$1.00 per share. A revolving line of credit in the amount of $500,000 was
obtained from Imperial Bank. The line was increased to $600,000 with terms and
covenants requiring the Company to raise additional capital from other sources.
The Company failed to meet the terms and covenants and the full amount became
due and payable on September 15, 1997. The Company negotiated an extension until
January 31, 1998, that included paying down the principal to $500,000 and the
issuance of 200,000 investment units consisting of 200,000 shares of Series F
Convertible Preferred Stock and 200,000 warrants to purchase Common Stock of the
Company. The line was paid off in full on March 31, 1998. The Company raised an
additional $280,000 in privately placed debt, through six-month notes at an
interest rate of prime plus two percent. In conjunction with the promissory
notes, a total of 36,000 warrants to purchase common stock of the Company were
issued.
Due to its financing activities, the Company was able to meet its operating
requirements for 1997. However, the Company does not have adequate working
capital to meet operating requirements in 1998 and will have to raise additional
funding. Since December 31, 1997, the Company has raised $1,175,000, including
$300,000 through the exercise of warrants to purchase common stock at the
exercise price of $.75 per share, and $875,000 from the issuance of convertible
debt with conversion prices ranging from $.75 to $1.00 per share. The
convertible promissory notes are due six months from the date of issue and are
accruing interest at the rate of prime plus two percent. While the Company has
engaged an institutional finance agent to assist the Company in raising
additional funds, there is no guarantee that any additional capital financing
will be forthcoming this year. Financing may not be available or may have a
dilutive effect on current stockholders' equity.
The Company presently has no commitments for material capital expenditures.
During the period subsequent to year-end, the Company realized cash from
operating activities in excess of budgeted amount, and cash from investor
exercise of warrants that provided positive cash flow. Although Management
believes that there will be sufficient cash available from operating, financing
and investing activities to meet Company obligations for the twelve-month period
ended March 31, 1999, there can be no assurance the Company will be successful
in its efforts.
Item 7. Financial Statements.
The Report of the Auditors and the accompanying financial statements and notes
to the financial statements are hereto set forth on pages F-1 through F-20.
Financial Statement schedules that are not required have therefore been omitted.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
As of March 27, 1997, the Board of Directors of the Company dismissed Evers &
Company Ltd. as its certifying accountant and appointed KPMG Peat Marwick LLP,
pending completion of the necessary client approval process. The client approval
was complete as of April 11, 1997.
This change has been approved by the Company's board of directors, and is a
result of the Company's desire to utilize the services of a national accounting
firm. There is no time in the past two years that the former accountant's report
on the financial statements contained an adverse opinion or disclaimer of
opinion, or was modified as to uncertainty, audit scope, or accounting
principles.
During the two most recent fiscal years and through March 27, 1997, preceding
the dismissal of Evers and Company, there were no disagreements at that time
with the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would have caused them to make reference to the subject matter of the
disagreements in connection with their reports.
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During the two most recent fiscal years, and any subsequent interim period prior
to engaging KPMG Peat Marwick LLP, neither the Company nor someone on its behalf
consulted with KPMG Peat Marwick LLP regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's financial statements,
or (ii) any matter that was either the subject of a disagreement or a reportable
event.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
The Directors and Executive Officers of the Company are as follows:
Name Age Positions and Offices Held
---- --- --------------------------
Richard Lang 44 Chairman, President, Chief Executive
Officer, and Director
O. J. Kilkenny 49 Director
John J. Micek III 43 Secretary and Director
Brian Murphy 42 Director
Eric J. Hall CFA 43 Chief Financial Officer
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The Company has an audit and compensation committee consisting of Richard Lang,
John J. Micek, and Brian Murphy.
The following sets forth biographical information as to the business experience
of each Director and Officer of the Company for at least the past five years:
Richard Lang currently serves as Chairman, Chief Executive Officer, President
and Director of the Company. From January 31, 1997 through August 1997, Mr. Lang
served as a Director of the Company. Mr. Lang served as Chairman of the Board
and Treasurer of the Company until January 31, 1997. He had served as Chairman
of the Board, CEO and Treasurer of the Company from December 1993 to September
1995, and as a Director of the Company since August 1992. He also served as
President of the Company from December 1993 to November 1994, as Vice President
from August 1992 until February 1993, and as Vice Chairman of the Board from
February 1993 to December 1993. He has been a Director of the Company's
subsidiary, Explore Technology, Inc., since February 1990, and served as its
President from February 1990 to August 1992. Mr. Lang was also a co-founder of
Go-Video.
O. J. Kilkenny has been a Director of the Company since August 1992. Mr.
Kilkenny is Senior Partner of O. J. Kilkenny & Co., Chartered Accountants,
specialising in the entertainment industry with offices in London, England and
Dublin, Ireland. With his partners, he has developed the accounting practice
into one of the major accounting practices in England, specialising in the
entertainment industry. Mr. Kilkenny holds directorships in a number of
companies in the media and entertainment sector as well
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as each with non-entertainment businesses. He is also an investor in Ireland's
first independent television channel and Ardmore Studios, the National Film
Studios of Ireland. Mr. Kilkenny received a Bachelors Degree in Commerce from
Dublin University in 1969, and became a fellow of the Institute of Chartered
Accountants in Ireland, England and Wales in 1982. Mr. Kilkenny became a
Director of the Company as a representative of Draysec Finance Limited, a
principal shareholder of the Company.
John J. Micek III has been a Director of the Company since April 1990, Secretary
since January 1994, and served as the Company's President from April 1990 to
August 1992. Mr. Micek currently serves as the Chief Operating Officer of
Protozoa, Inc. located in San Francisco, California. From 1994 to 1997, Mr.
Micek served as General Counsel for U.S. Electricar in San Francisco,
California. From January 1989 to March 1994, Mr. Micek practiced law in Palo
Alto, California. He has served as a Director of Armanino Foods of Distinction,
Inc., a publicly-held specialty food manufacturer in Hayward, California, since
February 1988. He also serves as a Director of Universal Group, Inc., a Midwest
group of insurance companies, and Cole Publishing Company in Northern
California. He received a Bachelor of Arts Degree in History from the University
of Santa Clara in 1974 and a Juris Doctorate from the University of San
Francisco School of Law in 1979.
Brian Murphy has been a Director of the Company since January 1997. He is a
partner in O.J. Kilkenny & Company, Chartered Accountants specialising in the
entertainment industry with offices in London, England and Dublin, Ireland. The
firm provides a wide range of services to their clients, consisting of major
international entertainment artists, covering all areas of financial management
and audit and accountancy advise. Mr. Murphy is involved at the executive level
with a number of companies in the media and entertainment business, particularly
in the field of digital post production, film and television.
Eric Hall, CFA, serves as a consultant to the Company and as the Company's Chief
Financial Officer. Mr. Hall has over twenty years of experience in management
consulting, finance, investment management, fund raising, and international
banking. Mr. Hall was Founding V.P. Finance & Operations for Yahoo!, the
premiere Internet directory. He has also helped launch other successful Internet
companies including Viacom/Paramount Online, The ImagiNation Network (acquired
by AT&T), Cybernautics (acquired by US Web), Women's Wire, and NetChannel. Mr.
Hall has been a consultant to over 20 companies including Microsoft, NEC,
Kleiner Perkins Caufield & Byers, and The Learning Company. He was a partner at
Technology Perspectives from 1994 until 1997 and prior to that was a partner at
David Powell, Inc. from 1992 until 1994. Mr. Hall has also worked for Arthur
Andersen & Co., Amdahl, and Wells Fargo Bank.
All Directors of the Company will hold office until the next annual meeting of
the shareholders and until their successors have been elected and qualified.
The Officers of the Company are elected by the Board of Directors, and hold
office until their death, or until they shall resign or have been removed from
office.
He is a graduate of the Owen Graduate School of Management, Vanderbilt
University, the University of California-Davis, and is a Chartered Financial
Analyst and member of the Association for Investment Management & Research.
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Key Consultants
David Genin is the company's Director of Business Development. Mr. Genin joined
the company in November 1997 and has assumed responsibility for coordinating
business development efforts in conjunction with the Company's upcoming release
of Burstware(TM) software solutions for network providers. Genin was previously
Vice President Worldwide Sales & Marketing for Next Level Communications, a
premiere purveyor of telecommunications equipment, which enables voice, data and
video delivery to the business and residence. Genin was on the founding team and
an officer of Next Level. He built a nationwide sales force focusing on the
introduction of Next Level's architecture to all Regional Bell Operating
Companies, and successfully led negotiations of a $300 million multiple-year
contract with Bell Atlantic as well as a $550 million contract with U.S. West
for Next Level's Local Loop Access System. Next Level was sold to General
Instrument in 1996. Prior to Next Level, Genin was Regional Vice President and
Regional Sales Director for DSC Communications Corporation, where he opened and
staffed three regional offices with twenty sales and service personnel.
He accomplished $100 million in sales at DSC in 1995.
Kyle Faulkner, Ph.D. has been appointed as the Company's Chief Technology
Officer. Faulkner joined the company in November 1997 and has assumed
responsibility for coordinating technology development efforts in conjunction
with the Company's 1998 release of Burstware(TM) software solutions for the
optimized delivery of video and audio over communications networks. Faulkner has
created over 20 commercially successful products for a multitude of large and
small companies. He has been a key architect and technology contributor at
Network Equipment Technology, Forte Software, Cell Net Data Systems and Sybase.
Ed Lyons has been appointed IVT's Manager of Software Development. He joined the
Company's technology team in December of last year. He previously worked for
Sybase Inc. and PLATINUM Technology, developing products that made new
technology reliable and easy to use. At Sybase, he developed tools that made its
products more robust and easier to maintain. At PLATINUM, he led teams that
developed and released commercially successful products that simplified complex
tasks such as database backups.
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Item 10. Executive Compensation.
The following table sets forth information regarding executive compensation for
the Company's Chief Executive Officer and officers who received compensation in
excess of $100,000 for the years ended December 31, 1995, 1996 and 1997.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Compensation Awards
------------------------------------------ -------------------
Other Restricted Options/ All
Annual Stock LTIP
Other
Name and Principal Year Salary Bonus Comp. Award(s) (Number) Comp.
---- -------- ----- ----------- ------- --------- ----------
Richard Lang, 1997 $32,000 -0- -0- -0- -0- -0-
Chairman of the Board 1996 $48,000 -0- -0- -0- $3,000
and Chief Executive 1995 $76,000 -0- -0- -0- 244,000(2) $3,000(3)
Officer(1)
Gary R. Familian, 1997 $123,462 -0- $427,770(9) -0- -0- -0-
President and Chief 1996 180,000 -0- 47,852(8) -0- -0- -0-
Executive Officer(4) 1995 52,500 -0- $16,887(5) -0- 150,000(6) $85,000(7)
Therese A. Webb Stacy 1997 $85,699 -0- -0- -0- -0- -0-
Executive Vice President 1996 $79,500 -0- $62,067(10) -0- 171,000 $6,000(11)
Business Development(12)
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(1) As of September 8, 1997, Mr. Lang has served the Company as Chairman,
Chief Executive Officer and President. Mr. Lang had served as Chairman
of the Board and Chief Executive Officer until January 31, 1997, when
Gary Familian assumed the responsibilities of Chairman and Chief
Executive Officer.
(2) This amount represents options to purchase common stock of the Company
that is held in the Joint Revocable Declaration of Trust of Lisa Marie
Walters and Richard Alain Lang, of which Mr. Lang is a trustee and
beneficiary. An option to purchase 125,000 shares of Common Stock,
had expired December 31, 1996.
(3) This amount represents a monthly car allowance made payable to Mr. Lang
in the amount of $250 per month.
(4) Mr. Familian began to receive salary from the Company in the amount of
$15,000 per month beginning September 16, 1995. Mr. Familian served as
the Company's Chairman and Chief Executive Officer until September 8,
1997 at which time his employment with the Company was terminated and he
resigned from the Board of Directors.
(5) Represents lease payments for automobile and apartment.
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(6) Upon the signing of Mr. Familian's Employment Agreement with the
Company, he was granted an option to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $1.00 per share. During
1996, said option was returned by Mr. Familian and cancelled by the
Company.
(7) This amount represents consulting fees received during the period of
time from August 1993, to November 1994. During this time, additional
consulting fees in the total amount of $50,750 had been accrued by Mr.
Familian, and waived pursuant to an Agreement dated July 15, 1995.
(8) Represents an advance of lease payments for automobile and apartment.
(9) The Company reported $427,770 in 1099-Misc income, which the Company
believes to have been misappropriated for Mr. Familian under IRS
guidelines for reporting income.
(10) This amount represents sales/licensing commissions during 1996.
(11) This amount represents consulting fees paid in January 1996.
(12) On September 8, 1998, Ms. Stacy's employment with the Company was
terminated.
Option Grants in Last Fiscal Year
Percent of
Total Options/ Market
Granted Exercise Price
Options to Employees or Base on Date Expiration
Name (Number) in Fiscal Year Price ($/Sh) of Grant Date
-------- -------------- ------------ -------- ----
Richard Lang N/A N/A N/A N/A N/A
Gary R. Familian N/A N/A N/A N/A N/A
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Aggregated Option Exercises in
Last Fiscal Year and FY-End Option Values
Securities Value of
Underlying Unexercised in
Unexercised the Money Options/
Acquired on Options at FY-End SARs at FY-End
Exercise Value Exercisable/ Exercisable/
Name (Number) Realized Unexercisable Unexercisable
-------- -------- ------------- -------------
Richard Lang -0- -0- 344,000 $344,000
Gary R. Familian -0- -0- N/A N/A
Therese A. Stacy -0- -0- 171,000 $171,000
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Gary R. Familian, who served as the Company's Chairman, Chief Executive Officer,
President and Interim Treasurer until September 1997, served in the capacity of
President and Chief Executive Officer since September 1995, and served in the
capacity of President and Chief Operating Officer of the Company since November
1994.
At the time Mr. Familian executed his Employment Agreement with the Company,
effective September 1, 1995, he agreed to waive payment of all accrued
compensation that was accrued under his previous Consulting Agreement with the
Company. At that time, Mr. Familian received an option to purchase 150,000
shares of the Company's Common Stock at the exercise price of $1.00 per share.
Mr. Familian has since returned said option that has been canceled by the
Company. Mr. Familian's Employment Agreement with the Company provided for
future incentive options to be granted subject to certain increases in the price
of the Company's Common Stock. The performance criteria are measured during the
last calendar month of the Company's fiscal year and is predicated upon the
price of the Company's stock during the last fiscal month ending December 31,
1995. Pursuant to the terms of this Agreement, Mr. Familian did not qualify for
issuance of any options for fiscal year ended December 31, 1995, or for fiscal
year ended December 31, 1996. Since Mr. Familian was terminated by the Company
in 1997 he was not eligible for options in 1997.
From September 15, 1995 to January 31, 1997, Mr. Lang has served as Chairman of
the Board, and received compensation in the amount of $4,000 per month. During
the year of 1995, Mr. Lang received a total of $93,091, of which $17,091 related
to payment of prior year accruals. During 1996, Mr. Lang received total
compensation in the amount of $51,000 in addition to the payment of accrued
compensation in the amount of $183,288. On December 31, 1994, the balance due to
him was approximately $85,000, which carried through December 31, 1995. In
February 1996, $79,644 had been paid to reduce this balance due. As of December
31, 1996 the remaining balance has been paid to Mr. Lang. Mr. Lang resumed the
responsibilities of Chairman of the Board, Chief Executive Officer, and
President of the Company upon Mr. Familian's termination in September 1997.
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Although Directors do not receive compensation for their services as Directors
as such, Directors may be reimbursed for expenses incurred in attending Board
meetings.
Stock Incentive Plan
In November 1992, the Board of Directors adopted the 1992 Stock Incentive Plan
(the "Plan") which was subsequently amended in December 1992, in April, August
and September 1993, and was approved by the Company's shareholders in October
1993. The Plan provides that options may be granted to any employee (including
officers), director or consultant of the Company or any parent or subsidiary of
the Company and that restricted stock may be awarded or sold. Incentive stock
options may only be granted to employees. The Company has reserved 3,000,000
shares of the Company's Common Stock for issuance under the Plan. As of December
31, 1997, the Company has issued stock options at exercise prices ranging from
$1.00 per share to $3.75 per share. The following table contains information
concerning the stock option grants made to each of the named officers.
Number Exercise
of Shares Price
--------- -----
Richard Lang 244,000(1) $1.00
Gary R. Familian 150,000(2) $1.00
Therese A. Webb Stacy 171,000(3) $1.00
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(1) Mr. Lang received options pursuant to his Employment Agreement with the
Company, effective September 1, 1995, and for being a member of the
Board of Directors.
(2) Mr. Familian received options to purchase 150,000 shares of the
Company's common stock upon the execution of his Employment Agreement
with the Company, effective September 1, 1995. During 1996 said options
were returned by Mr. Familian and canceled by the Company.
(3) Ms. Stacy received 85,000 options pursuant to her Consulting Agreement
with the Company dated July 11, 1995. Additional 100,000 options were
issued to Ms. Stacy pursuant to her Employment Agreement with the
Company. 14,000 of the options granted to Ms. Stacy have been assigned
to third parties. This number reflects the options currently held by Ms.
Stacy.
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The Company granted both incentive and non-statutory stock options to purchase
shares of the Company's Common Stock to employees and key consultants to the
Company. The total number of stock options granted during 1996 is 703,000, and
the total number granted during 1997 is 286,356.
The Company believes that grants of stock options and awards of restricted stock
motivate high levels of performance, provide an effective means of recognizing
employee contributions to the Company's success, and assist the Company in
recruiting and retaining highly qualified personnel who are in great demand. The
Board believes that the ability to grant options and make awards of restricted
stock under the Plan, including, in certain cases, non-qualified stock options
at below fair market value, will be important to the future success of the
Company. These stock options will be expensed to the statement of operations
during the period granted and vested.
Options granted under the Plan may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code, or non-qualified stock
options. The Plan has been and will be administered by the Compensation
Committee of the Company's Board of Directors.
The Board may amend the Plan at any time or from time to time or may terminate
the Plan without approval of the stockholders; provided, however, that
stockholder approval is required for any amendment to the Plan for which
stockholder approval would be required under the federal securities laws or the
Code. No action by the Board or stockholders may alter or impair any options
previously granted under the Plan. In any event, the Plan shall terminate on
November 5, 2002. Any options outstanding under the Plan at the time of its
termination shall remain outstanding until they expire by their terms.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 1997, the stock ownership of
each person known by the Company to be the beneficial owner of five percent or
more of the Company's Common Stock, each Officer and Director individually, and
all Directors and Officers of the Company as a group. Except as noted, each
person has sole voting and investment power with respect to the shares shown.
Amount and
Name and Address Nature of Bene- Percent
of Beneficial Owners ficial Ownership of Class
-------------------- ---------------- --------
Richard Lang 1,345,346(1) 16%
500 Sansome Street, Suite 503
San Francisco, CA 94111
G. Peter Spiess 510,057(2) 7%
1509 West Frier Drive
Phoenix, AZ 85021
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Amount and
Name and Address Nature of Bene- Percent
of Beneficial Owners ficial Ownership of Class
-------------------- ---------------- --------
Draysec Finance Limited 2,129,467(3) 25%
P.O. Box SS-5539
Nassau, Bahamas
John J. Micek III 117,358(4) 1%
2727 Mariposa Street, Studio 100
San Francisco, CA 94110
Mercer Management, Inc. 1,102,071(5) 14%
135 Lake Street South, Suite 265
Kirkland, WA 98033
Storie Partners LLP 1,400,000(6) 17%
One Bush Street, Suite 1350
San Francisco, CA 94104
Mindful Partners LLP 900,000(7) 11%
591 Redwood Hwy., Suite 5295
Mill Valley, CA 94941
Delaware Charter Guaranty 150,000(8) 2%
Trust Company FBO Stuart
L. Rudick IRA Rollover
591 Redwood Hwy., Suite 5295
Mill Valley, CA 94941
Rudick Asset Management 200,000(9) 3%
591 Redwood Hwy., Suite 5295
Mill Valley, CA 94941
Reed Slatkin 400,000(10) 5%
11684 Ventura Blvd., Suite 922
Studio City, CA 91604
Imperial Bank 400,000(11) 5%
2460 Sandhill Road, Suite 102
Menlo Park, CA 94025
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Amount and
Name and Address Nature of Bene- Percent
of Beneficial Owners ficial Ownership of Class
-------------------- ---------------- --------
All Directors and 1,426,704(12) 17%
Officers as a Group
(2 Persons)
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(1) Includes 879,346 shares of Common Stock and 466,000 options to purchase
common stock owned of record by the Joint Revocable Declaration of Trust
of Lisa Marie Walters and Richard Alain Lang, of which Mr. Lang is a
trustee and beneficiary. Also includes 50,000 shares underlying options
held by Mr. Lang and 50,000 shares underlying options held by Mr. Lang's
wife, Lisa Walters. Mr. Lang and Ms. Walters also each granted the
Company the option to purchase 92,956 shares of the Company's Common
Stock (owned by each of them respectively) at a price of $1.40 per share
at any time on or before December 31, 1996. This option which was
transferred by the Company to Mercer Management, Inc. during December
1994, expired on December 31, 1996. As a result, the option to purchase
250,000 shares of common stock issued to the Joint Revocable Declaration
of Trust of Lisa Marie Walters and Richard Alain Lang, the vesting of
said options contingent upon the exercise of the Repurchase option held
by Mercer Management, Inc., expired December 31, 1996.
(2) Includes 510,057 shares of Common Stock owned by Mr. Spiess.
Additionally, Mr. Spiess granted the Company the option to purchase
128,028 shares of the Company's Common Stock owned by him, at a price
of $1.40 per share at any time on or before December 31, 1996. This
option which was transferred by the Company to Mercer Management, Inc.
during December 1994, expired on December 31, 1996.
(3) Includes 1,163,467 shares of Common Stock owned by Draysec Finance
Limited and 200,000 shares of Common Stock that resulted from the
conversion of 2,800,000 shares of Series D Preferred Stock. Also
includes 450,000 shares of Common Stock which may be purchased under
stock options held by Draysec Finance Limited and 100,000 shares of
Common Stock into which 100,000 shares of Series E Preferred Stock held
by Draysec Finance Limited may be converted. Also includes 200,000
Shares of Series F Convertible Preferred Stock and 216,000 Warrants to
Purchase Common Stock. Draysec Finance Ltd. holds .09% of the total
outstanding Series F Preferred Stock. Draysec had been issued an option
to purchase 200,000 shares of common stock, the vesting of which was
contingent upon the exercise of certain Repurchase Options issued to
Mercer Management, Inc. as described hereinabove. The Repurchase Options
expired December 31, 1996, and, as a result, the contingency options
issued to Draysec also expired December 31, 1996.
(4) Includes 67,358 shares of Common Stock held by Mr. Micek and 50,000
shares underlying options held by him.
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(5) Includes 333,500 shares of common stock owned and 28,572 shares of
Common Stock from which 400,000 shares of Series D Convertible Preferred
Stock have been converted and are held by Mercer Management, Inc. Also
includes 300,000 shares of Common Stock from which 300,000 shares of
Series E Convertible Preferred Stock held by Mercer Management, Inc. was
converted. In October 1997, Mercer Management Inc. purchased 200,000
Units consisting of 200,000 shares of Series F Convertible Preferred
Stock and 200,000 Warrants to purchase Common Stock. Mercer Management
holds .09% of the total outstanding Series F Preferred Stock. In
December 1997, Mercer Management Inc. obtained an additional 40,000
warrants to purchase Common Stock. 313,913 shares underlying repurchase
options previously held by the Company and assigned to Mercer
Management, Inc. expired as of December 31, 1996.
(6) Includes 700,000 shares of Series F Convertible Preferred Stock and
300,000 warrants to purchase common stock of the Company, and 400,000
shares of the Company's Common Stock. Storie Partners holds 30% of the
total outstanding Series F Preferred Stock.
(7) Includes 450,000 shares of Series F Convertible Preferred Stock and
450,000 warrants to purchase common stock of the Company. Stuart L.
Rudick is the General Partner of Mindful Partners LLP. Mindful Partners
holds 19% of the total outstanding Series F Preferred stock.
(8) Includes 75,000 shares of Series F Convertible Preferred Stock and
75,000 warrants to purchase common stock of the Company. Investor holds
3% of the total outstanding Series F Preferred stock.
(9) Includes 100,000 shares of Series F Convertible Preferred Stock and
100,000 warrants to purchase common stock of the Company. Rudick Asset
Management holds 4% of the total outstanding Series F Preferred stock.
(10) Includes 200,000 shares of Series F Convertible Preferred Stock and
200,000 warrants to purchase common stock of the Company. Reed Slatkin
holds 9% of the total outstanding Series F Preferred stock.
(11) Includes 200,000 shares of Series F Convertible Preferred Stock and
200,000 warrants to purchase common stock. Imperial Bank holds 9% of
the total outstanding Series F Preferred stock.
(12) Includes the beneficial ownership of Richard Lang and John J. Micek, and
does not include 171,000 options held by Therese Stacy, the Company's
former Executive Vice President of Business Development.
Item 12. Certain Relationships and Related Transactions.
Transactions with Draysec Finance Limited
During the year of 1996, the Company repaid its bank loan secured by a letter of
credit provided by Draysec Finance Limited, and the balance of the Credit
Facility provided by Draysec to the Company during 1995 increased from $28,750
in 1995, to $90,000.
During 1997, Draysec Finance Limited invested an additional $200,000 for the
purchase of 200,000 investment units consisting of Series F Convertible
Preferred Stock and warrants to purchase Common Stock of the Company.
Additionally, Draysec Finance Limited provided a loan of $80,000 in
consideration for a six month promissory note from the Company with an interest
rate of 10.5% and a warrant to purchase 16,000 shares of the Company's common
stock at an exercise price of one dollar per share.
23
Investments by Principal Shareholder
During 1994, Gordon Rock, through Mercer Management, Inc., a company which Mr.
Rock controls and of which he is president, agreed to purchase 262,000 shares of
Common Stock for $150,000 in cash and $112,000 in the form of the conversion of
a promissory note and interest on such note. He also received 71,500 shares of
Common Stock as consideration for providing this financing. Mercer Management,
Inc. also agreed to purchase 300,000 shares of Series E Convertible Preferred
Stock for $300,000 in cash which shares will be convertible into 300,000 shares
of Common Stock, and converted 400,000 shares of Series D Convertible Preferred
Stock into 28,571 shares of the Company's Common Stock. As a result of these
transactions, Mr. Rock is a Principal Shareholder of the Company. Mercer
Management had also received options to purchase 313,913 shares of Common Stock
at a price of $1.40 per share from certain Officers and Principal Shareholders
of the Company. These options expired on December 31, 1996.
During 1997, Mercer Management Inc. converted its 300,000 shares of Series E
Convertible Preferred stock into shares of the Company's Common Stock at the
conversion rate of one share of preferred stock to one share of common stock.
Additionally, Mercer Management, Inc. invested an additional $200,000 for the
purchase of 200,000 investment units consisting of Series F Convertible
Preferred Stock and warrants to purchase Common Stock of the Company.
In order to provide bridge financing for the Company during the last quarter of
1997, Mercer Management, Inc. loaned the Company $100,000 cash. In consideration
for this loan, the Company issued Mercer Management Inc. a six-month promissory
note in the amount of $100,000 at an interest rate of 10.5%. Additional
consideration was provided by the Company in the form of a warrant to purchase
20,000 shares of the Company's Common Stock at the exercise price of $1.00 per
share.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
INSTANT VIDEO TECHNOLOGIES, INC.
Dated: April 15, 1998 By /s/ Richard Lang
------------------
Chairman, President,
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Richard Lang Chairman, President, April 15, 1998
-------------------------------
Richard Lang Chief Executive Officer,
and Director
/s/ O.J. Kilkenny Director April 15, 1998
-------------------------------
O.J. Kilkenny
/s/ John J. Micek Secretary and Director April 15, 1998
-------------------------------
John J. Micek III
/s/ Brian Murphy Director April 15, 1998
-------------------------------
Brian Murphy
/s/ Eric J. Hall Chief Financial Officer April 15, 1998
------------------------------- and Principal Accounting
Eric J. Hall Officer
|
25
INSTANT VIDEO TECHNOLOGIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Instant Video Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' (deficiency)
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Mountain View, California
March 11, 1998
27
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
ASSETS 1997 1996
-------- -------
Current assets:
Cash and cash equivalents $ 20,551 208,613
Accounts receivable -- 1,421
Costs and estimated earnings in excess of billings on
uncompleted contracts -- 136,400
Prepaid expenses 31,460 8,648
-------- -------
Total current assets 52,011 355,082
-------- -------
Property and equipment, net 85,611 72,322
Patents, net of accumulated amortization of $121,365 in 1996
-- 121,108
Other assets 17,569 52,670
-------- -------
$155,191 601,182
======== =======
|
See accompanying notes to consolidated financial statements.
28
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY 1997 1996
----------- ----------
Current liabilities:
Bank line of credit and credit facility $ 500,000 90,000
Notes payable 451,773 141,000
Accounts payable 34,026 128,263
Accrued expenses 92,782 152,000
Accrued interest 43,044 29,813
----------- ----------
Total current liabilities 1,121,625 541,076
----------- ----------
Notes payable 16,833 --
----------- ----------
Stockholders' (deficiency) equity:
Preferred stock, $.00001 par value, 20,000,000 shares authorized:
Series D, none outstanding -- --
Series E, zero and 500,000 shares issued and outstanding in 1997
and 1996, respectively, liquidation preference of $1.00 per share -- 5
Series F, 5,000,000 shares authorized, 2,125,000 and 1,475,000
shares issued and outstanding in 1997 and 1996, respectively;
liquidation preferences of $1.00 per share 22 15
Common stock, $.00001 par value, 100,000,000 shares
authorized; 5,703,553 and 4,803,553 shares issued and
outstanding in 1997 and 1996 59 50
Additional paid in capital 7,795,972 6,776,983
Accumulated deficit (8,779,320) (6,716,947)
----------- ----------
Stockholders' (deficiency) equity (983,267) 60,106
----------- ----------
Commitments and contingencies
$ 155,191 601,182
=========== ==========
|
See accompanying notes to consolidated financial statements.
29
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Operations
For the years ended December 31, 1997 and 1996
1997 1996
----------- ----------
Revenue $ 247,879 1,457,597
Cost of revenues 230,210 78,195
----------- ----------
17,669 1,379,402
Costs and expenses:
Research and development 189,719 48,588
Sales and marketing 408,369 469,752
General and administrative 1,348,218 1,207,413
----------- ----------
Total costs and expenses 1,946,306 1,725,753
----------- ----------
Loss from operations (1,928,637) (346,351)
----------- ----------
Other income (expense):
Interest, net (139,013) (56,818)
Other income 5,277 --
----------- ----------
(133,736) (56,816)
----------- ----------
Loss before income taxes (2,062,373) (403,167)
Income taxes -- (1,200)
----------- ----------
Net loss $(2,062,373) (404,367)
=========== ==========
Net loss per common share:
Basic $ (0.39) (0.09)
=========== ==========
Diluted $ (0.39) (0.09)
=========== ==========
5,259,304 4,600,000
Weighted average shares outstanding
=========== ==========
Weighted average shares outstanding assuming dilution 5,259,304 4,600,000
=========== ==========
See accompanying notes to consolidated financial statements.
|
30
INSTANT VIDEO TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' (Deficiency) Equity
For the years ended December 31, 1997 and 1996
Common stock Preferred stock
------------------- ------------------ Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit Total
--------- ------ --------- ------ --------------- ------------ -----------
Balance at December 31, 1995 4,491,440 $45 1,436,000 $14 $5,005,464 $(6,312,580) $(1,307,057)
Preferred stock offering,
net of costs of $25,000 -- -- 1,475,000 15 1,449,985 -- 1,450,000
Exercise of stock options 109,256 1 -- -- 1,529 -- 1,530
Stock options issued in lieu
of services performed -- 2 -- -- 149,998 -- 150,000
Conversion of debt and
accrued interest 136,000 1 -- -- 169,999 -- 170,000
Conversion of Series D
preferred stock to
common stock 66,857 1 (936,000) (9) 8 -- --
Net loss -- -- -- -- -- (404,367) (404,367)
--------- --- --------- --- ---------- ----------- -----------
Balance at December 31, 1996 4,803,553 50 1,975,000 20 6,776,983 (6,716,947) 60,106
Preferred stock offering -- -- 650,000 7 549,993 -- 550,000
Exercise of warrants 400,000 4 -- -- 399,996 -- 400,000
Allocation of proceeds to
warrants upon issuance
of debt -- -- -- -- 69,000 -- 69,000
Conversion of Series E preferred
stock to common stock 500,000 5 (500,000) (5) -- -- --
Net loss -- -- -- -- -- (2,062,373) (2,062,373)
--------- --- --------- --- ---------- ----------- -----------
Balance at December 31, 1997 5,703,553 $59 2,125,000 $22 $7,795,972 $(8,779,320) $ (983,267)
========= === ========= === ========== =========== ===========
|
See accompanying notes to financial statements.
31
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
----------- ----------
Cash flows from operating activities:
Net loss $(2,062,373) (404,367)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 92,176 50,681
Write off patent costs and other assets 95,735 --
Warrant expense issued with debt 69,000 --
Stock option compensation -- 150,000
Decrease (increase) in accounts receivable 1,421 (1,421)
Decrease (increase) in costs and estimated earnings in
excess of billings on uncompleted contracts 136,400 (136,400)
Decrease in prepaid expenses 6,982 16,513
(Increase) decrease in other assets 35,101 (40,000)
Decrease in accounts payable (94,237) (194,017)
Decrease in accrued expenses (59,218) (74,059)
Increase (decrease) in accrued interest 13,231 (26,680)
Decrease in deferred revenue -- (159,032)
----------- ----------
Net cash used in operating activities (1,765,782) (818,782)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (85,367) (36,022)
Proceeds on Sale of Equipment 5,275 --
----------- ----------
Net cash used in investing activities (80,092) (47,433)
----------- ----------
Cash flows from financing activities:
Proceeds from sale of stock 950,000 1,451,530
Proceeds from debt 1,054,210 --
Repayment of debt (346,398) (381,048)
----------- ----------
Net cash provided by financing activities 1,657,812 1,070,482
----------- ----------
Increase (decrease) in cash and cash equivalents (188,062) 204,267
Cash and cash equivalents, beginning of year 208,613 4,346
----------- ----------
Cash and cash equivalents, end of year $ 20,551 208,613
=========== ==========
|
See accompanying notes to consolidated financial statements. (Continued)
32
INSTANT VIDEO TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997 and 1996
1997 1996
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- 1,200
============== ==============
Cash paid for interest $ 56,782 104,134
============== ==============
Supplemental schedule of noncash investing and financing activities:
During 1996, debt of $150,000 and accrued interest of $20,000 were converted
to common stock.
During 1996, 936,000 shares of Series D preferred stock were converted to
66,857 shares of common stock.
During 1996, the Company granted stock options to various consultants, which
resulted in $150,000 of compensation expense.
During 1997, the Company financed an insurance premium of $29,794.
During 1997, 500,000 shares of Series E preferred stock was converted into
500,000 shares of common stock.
|
See accompanying notes to consolidated financial statements.
33
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Instant Video Technologies, Inc. (the Company) licenses burst transmission
software for use within commercial, multimedia and interactive
environments. The burst technology allows for time compression and burst
transmission of video/audio programming which results in time-savings,
network efficiency and superior quality products.
LIQUIDITY
Since inception, the Company has incurred development costs and other
expenses resulting in cumulative losses of approximately $8,779,000, and
the Company's current liabilities exceed current assets by approximately
$1,070,000 at December 31, 1997. Management recognizes that the Company
must raise additional capital to enable it to continue operations.
Management has engaged an institutional finance agent to raise sufficient
capital to allow the company to complete development and successful
commercialization of its products. However, no assurances can be given
that the Company will be successful in raising additional capital or that
the Company will achieve profitability or positive cash flow. If the
company is unable to obtain adequate additional financing and bring the
company to profitability or positive cash flow, management will be
required to sharply curtail operations.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Instant
Video Technologies, Inc. and its wholly-owned subsidiary, Explore
Technology, Inc. All significant intercompany transactions and accounts
have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents include money market accounts and other short-term
investments with an original remaining maturity of three months or less
when acquired.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
which range from three to five years.
PATENTS
Direct costs incurred to obtain patents have been capitalized and
amortized over seven years using the straight-line method. Costs incurred
to maintain patents are expensed as incurred. During the fourth quarter of
1997, the Company expensed the remaining unamortized balance of patent
costs of $87,628 due to the lack of current revenues associated with these
patents (see "Liquidity" above).
34
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
REVENUE RECOGNITION
Revenues under milestone contracts generally are recognized under the
percentage-of-completion method based on a ratio of cost incurred to date
to estimated total costs of the milestone.
License fee revenue is deferred and recorded as revenue over the term of
the license. Transactions in foreign currencies are converted to U.S.
dollar at prevailing market rates.
RESEARCH AND DEVELOPMENT
Research and development costs, prior to the establishment of
technological feasibility including contract services, are expensed as
incurred. The Company capitalizes development costs subsequent to the
establishment of technological feasibility, and amortizes such costs over
the estimated product life. To date, all software development costs are
expensed as incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities; and, their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
LOSS PER SHARE AND DILUTIVE SECURITIES
The following is a summary of the securities that could potentially dilute
basic loss per share in the future that were not included in the
computation of diluted loss per share because to do so would be
antidilutive.
December 31,
--------------------------
1997 1996
--------- -----------
Convertible Preferred Stock 2,125,000 1,975,000
Options 2,538,630 2,864,774
Warrants 1,961,000 1,450,000
Convertible debt 303,206 31,333
--------- -----------
Total 6,927,836 6,321,107
========= ===========
|
35
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
STOCK OPTIONS
The Company accounts for its stock option plan in accordance with the
provisions of APB Opinion No. 25, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant.
Pursuant to the provisions of SFAS No. 123, entities that continue to
apply the provisions of APB No. 25, must disclose pro forma net loss and
pro forma loss per share disclosure for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123, had been applied.
IMPAIRMENT OF LONG LIVED ASSETS
Pursuant to SFAS No. 121, the Company assesses the recoverability of the
carrying amount of its long lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may be
impaired. If the estimated future undiscounted operating cash flows over
the remaining useful life of the long-lived asset is in excess of the
carrying amount of the asset, a charge to income would be recognized for
the excess carrying amount of the asset over its fair value.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1997 1996
--------- --------
Computer equipment $ 95,053 90,984
Furniture 24,980 11,255
Office equipment -- 6,685
--------- --------
120,033 108,924
Less accumulated depreciation (34,422) (36,602)
--------- --------
$ 85,611 72,322
========= ========
|
36
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
(3) DEBT
Debt consists of the following:
DECEMBER 31,
--------------------
BANK LINE OF CREDIT AND CREDIT FACILITY 1997 1996
-------- ------
8% note payable to Draysec Finance Ltd. unsecured
note, paid June 1997 $ -- 90,000
$500,000 Revolving line of credit with Imperial
Bank, principal and interest rate at the Bank's 500,000 --
Prime rate plus 2.5% (11.00% at December 31,
1997) due January 31, 1998
-------- ------
$500,000 90,000
======== ======
|
37
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
DECEMBER 31,
------------------------
NOTES PAYABLE 1997 1996
--------- --------
8% unsecured notes, interest and principal due at
maturity, convertible at $4.50 per share, due
from August 1997 through September 1997 $ -- 141,000
10.5% unsecured note, interest and principal due
at June 30, 1998, convertible into common stock 100,000 --
at $1.85 per share
10.5% unsecured note, interest and principal due
on a monthly basis over 18 months ending on
March 31, 1999, convertible at $1.00 per share 85,602 --
into Common Stock.
10.5% note payable to Mercer Management, Inc.,
interest and principal due June 10, 1998,
convertible at $1.00 per share into common stock 100,000 --
8% unsecured note, principal and interest due
June 10, 1998, convertible at $2.00 per share $ 73,210 --
into Common Stock.
10.5% note payable to Draysec Finance Ltd.,
interest and principal due June 10, 1998, $ 80,000 --
convertible into common stock at $1.00 per share
11.04% Insurance premium financing, principal
and interest paid monthly until October 5, 1998 29,794 --
--------- --------
468,606 141,000
Less current portion (451,773) (141,000)
--------- --------
Long-term portion $ 16,833 --
========= ========
|
38
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
(4) PREFERRED STOCK
In February 1996, the Company amended its articles of incorporation and
authorized the issuance of up to 5,000,000 shares of Series F Convertible
Preferred Stock with a detachable warrant to purchase common stock of the
Company (a Unit). The liquidation preference of the preferred share is $1
per share and each share of preferred stock may be converted into one
share of the Company's common stock. The exercise price of the common
stock warrants is also $1.00 per share.
As a result, the Company obtained financing in the net amount of
$1,445,000 in 1996 and $550,000 in 1997 of Series F Convertible Preferred
Stock and warrants to purchase common stock of the Company. The price of
each unit was $1.00. The offering grants the investors the right to
appoint two directors, certain registration rights, and the right of first
refusal on financing offerings for a limited period of time.
(5) STOCK OPTIONS AND WARRANTS
On November 6, 1992, the Board of Directors adopted the 1992 Stock
Incentive Plan. Under the plan, the Board may grant options to officers,
key employees, directors and consultants. Incentive stock options may be
granted at not less than 100% of the fair market value of the stock on the
date the option is granted. The option price of stock not intended to
qualify as incentive stock options may not be less than 85% of the fair
market value on the date of grant. The maximum term of the options cannot
exceed ten years. A total of 3,000,000 shares have been reserved for
issuance under the plan.
The per share weighted average fair value of stock options granted during
1997 and 1996 was $0.17 and $0.22, respectively on the date of grant using
the Black-Scholes Model with the following weighted average assumptions:
volatility of 53% for 1997 and 65% for 1996, expected dividend yield 0%
for all years, risk free interest rate of approximately 5 1/2% in 1997 and
6 1/2% for 1996 and an expected life of 1.5 and 1.9 years, respectively.
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of options was $1.00 - $3.75 and 5.9 years,
respectively. At December 31, 1997 all options outstanding were
exercisable.
39
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
Stock option activity is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Balance on December 31, 1995 3,190,971 1.37
Options granted 703,000 1.50
Options exercised (109,256) .01
Options forfeited (606,000) 1.00
Options expired (313,941) 1.40
---------- ----
Balance on December 31, 1996 2,864,774 1.52
Options granted 286,356 1.00
Options forfeited (500,000) 1.00
Options expired (112,500) 1.39
---------- ----
Balance on December 31, 1997 2,538,630 1.85
========== ====
|
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the impact on the company's net loss would have
been increased by approximately $34,000.
(6) LEASE COMMITMENTS
The Company leases its office space under an operating lease which is
currently a three year lease. Rent expense for the years ended December
31, 1997 and 1996 was $91,000 and $145,148, respectively.
The following is a summary of future minimum lease payments for operating
leases:
OPERATING
Years ending December 31: LEASES
---------------
1998 $ 91,033
1999 91,033
2000 86,736
---------------
Total minimum lease payments 268,802
|
(7) INCOME TAXES
The Company had no federal income taxes in 1997 and 1996 due to its net
loss and its accumulated losses. At December 31, 1997 and 1996, the
Company had net operating loss carryforwards for federal income tax
40
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
purposes of approximately $7,842,000 and $5,690,518, which, subject to
annual limitations, are available to offset future taxable income, if any,
through 2012 and net operating loss carryforwards for state income tax
purposes of $3,308,650 and $2,232,131 which are available to offset future
taxable income through 2002.
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
---------- ---------
Deferred tax assets:
Start-up costs $ 85,919 259,721
Accrued payroll 25,688
Net operating loss carryforward for
income taxes 2,859,204 2,071,784
R&E credit carryforward 105,715 101,815
---------- ---------
Total gross deferred tax assets 3,050,838 2,459,008
Less valuation allowance (2,997,490) (2,408,343)
---------- ---------
Net deferred tax assets 53,348 50,665
---------- ---------
Deferred tax liabilities:
Patent (45,677) (45,705)
Property and Equipment (7,671) (4,960)
---------- ---------
Total gross deferred tax liabilities (53,348) (50,665)
---------- ---------
Net deferred tax asset liability $ -- --
========== =========
|
The valuation allowance for deferred tax assets as of December 31, 1997
and 1996 was $2,997,490 and $2,408,343, respectively. The net change in
the valuation allowance for the years ended December 31, 1997 and 1996 was
an increase of $589,147 and an increase of $114,925, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
In the event of an ownership change as defined by the Internal Revenue
Code, section 382, and the California equivalent, both federal and
California impose substantial restrictions on the utilization of net
operating losses and tax credits.
(8) BUSINESS AND PRODUCT CONCENTRATIONS
The Company's primary source of revenue is from the licensing of burst
technology which generated $247,879 and $1,321,197 in revenue during 1997
and 1996, respectively. The Company's success is largely dependent on this
product. Changes in desirability of the product in the marketplace may
significantly effect management's estimates and the Company's performance.
41
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
The Company's principal customer is located in Oklahoma. This customer
accounted for substantially all of the Company's revenues in 1997 and
1996. The Company recognized $-0- and $126,970 in foreign revenues in 1997
and 1996, respectively.
During 1996, the Company used a single consulting firm for the majority of
its research and product development work. This firm earned fees of
approximately $362,000 in 1996. Management does not believe that it will
need to depend on this firm as heavily in the future.
(9) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties,
matters of judgment and, therefore, cannot be determined with precision.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holding of a
particular instrument. Changes in assumptions could significantly affect
these estimates.
Since the fair value is estimated as of December 31, 1997 and 1996, the
amounts that will actually be realized or paid in settlement of the
instruments could be significantly different.
CASH AND CASH EQUIVALENTS
The carrying amount is assumed to be the fair value because of the
relative short maturity of the portfolio.
ACCOUNTS RECEIVABLES
The carrying amount approximates fair value because of the short maturity
of these instruments.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES, AND NOTES PAYABLE
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's note payable approximate
the terms in the marketplace at which they could be replaced. Therefore,
the fair market value approximates the carrying value of these financial
instruments.
(10) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income; and SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, which are effective for the Company beginning with
its year ended December 31, 1998.
42
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
(11) LEGAL SETTLEMENTS
In October of 1996, the Company entered into a settlement agreement with
certain investors in connection with the Company's Series F convertible
stock financing pursuant to a consulting agreement. The Settlement
amounted to $122,500. During 1997, the Company paid $21,500 towards this
amount and converted the remaining amount of $101,000 into a convertible
note payable. The note bears interest at the rate of prime plus two
percent monthly (10.5% as of December 31, 1997). Payments of principal and
interest are due on a monthly basis over 18 months, ending on March 31,
1999. The balance due on this note as of December 31, 1997 was $85,602.
The remaining amount due on the note is convertible to shares of the
Company's common stock at the exercise price of $1.00 per share.
43
INSTANT VIDEO TECHNOLOGIES, INC.
Notes to Financial Statements, Continued
(12) RESTATEMENT
During the third quarter of 1997, the Company discovered that it
inappropriately recognized revenue of approximately $172,000 for the three
months ended March 31, 1997. The error resulted from the recognition of
service to a single customer under a service contract. However, prior to
March 31, 1997, the customer had canceled the contract and therefore the
revenue should not have been recorded. In addition, as of June 30, 1997
the Company incorrectly recorded an increase in cash and a decrease of the
improperly recorded receivable. The financial statements as of March 31,
1997 and June 30, 1997 and the three and six month periods ended March 31,
1997 and June 30, 1997, respectively have been restated as follows:
For March 31, 1997 and the three-months then ended:
As Previously Adjustment As
Reported Restated
------------ ------------ ----------
Costs & estimated earnings in
excess of billings on uncompleted
contracts $ 193,995 (171,896) 22,099
============ ============ ==========
Accumulated deficit $ (6,687,911) (171,896) (6,859,807)
============ ============ ==========
Revenue $ 467,879 (171,896) 295,983
============ ============ ==========
Net income (loss) $ 29,036 (171,896) (142,860)
============ ============ ==========
Net income (loss) per share $ 0.01 (0.04) (0.03)
============ ============ ==========
|
For June 30, 1997 and the six-months then ended:
As Previously Adjustment As
Reported Restated
----------- ----------- ----------
Cash $ 198,473 (171,896) 26,577
=========== =========== ==========
Accumulated deficit $(7,301,594) (171,896) (7,473,490)
=========== =========== ==========
Revenue $ 609,629 (171,896) 437,733
=========== =========== ==========
Net loss $ (584,647) (171,896) (756,543)
=========== =========== ==========
Net loss per share $ ( 0.12) (0.04) (0.16)
=========== =========== ==========
|
44
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. DESCRIPTION LOCATION PAGE NO.
------- ------------------------------ --------------------------------------- ----------
3.1 Articles of Incorporation and Incorporated by reference to Exhibit
Bylaws Nos. 3.1 and 3.2 to Registrant's Form
S-18 Registration Statement (No.
33-35580-D). --
3.2 Bylaws, as amended Incorporated by reference to Exhibit
No. 3.2 to Registrant's Form SB-2
Registration Statement (No. 33-69914). --
3.3 Certificate of Amendment to Incorporated by reference to Exhibit
Certificate of Incorporation No. 3.3 to Registrant's Form SB-2
filed August 19, 1992 Registration Statement (No. 33-69914). --
3.4 Statement Establishing Series Incorporated by reference to Exhibit
D Preferred Stock No. 3.4 to Registrant's Form SB-2
Registration Statement (No. 33-69914). --
3.5 Statement Establishing Series Incorporated by reference to Exhibit
E Preferred Stock No. 3.5 to Registrant's Form 10-KSB for
year ended December 31, 1994. --
3.6 Statement Establishing Series Incorporated by reference to Exhibit
F Preferred Stock No. 3.6 to Registrant's Form 10-KSB for
year ended December 31, 1994. --
10.1 Amended Plan of Agreement and Incorporated by reference to Exhibit
Reorganization Among Catalina No. 10 to Registrant's Current Report
Capital Corp., Explore on Form 8-K dated August 17, 1992.
Technology, Inc. and certain
officers, directors and
shareholders of Catalina
Capital Corp. and Explore
Technology, Inc. --
10.2 Employment Agreement with Incorporated by reference to Exhibit
Wayne Van Dyck No. 10.2 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.3 Employment Agreement with Incorporated by reference to Exhibit
Richard Lang No. 10.3 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.4 Repurchase Option Agreement Incorporated by reference to Exhibit
with Richard Lang No. 10.4 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.5 Repurchase Option Agreement Incorporated by reference to Exhibit
with Lisa Walters No. 10.5 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.6 Repurchase Option Agreement Incorporated by reference to Exhibit
with Peter Spiess No. 10.6 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.7 License Agreement with Incorporated by reference to Exhibit
Singularity Corporation No. 10.6 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.8 Amended 1992 Stock Incentive Incorporated by reference to Exhibit
Plan 10.8 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
|
45
EXHIBIT SEQUENTIAL
NO. DESCRIPTION LOCATION PAGE NO.
------- ------------------------------ --------------------------------------- ----------
10.9 Office Lease for 500 Sansome Incorporated by reference to Exhibit
Street No. 10.6 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
10.10 Settlement Agreement with Incorporated by reference to Exhibit
Wayne Van Dyck and Promissory 10.10 to Registrant's Report on Form
Note to Wayne Van Dyck, as 10-KSB for the year ended December 31,
amended 1993. --
10.11 Master License Agreement with Incorporated by reference to Exhibit
Burst Communications Pty Ltd. 10.11 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.12 License Agreement with VI- Incorporated by reference to Exhibit
FACTS, Inc. 10.12 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.13 Consulting Agreement with Gary Incorporated by reference to Exhibit
R. Familian 10.13 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.14 Memorandum of Understanding Incorporated by reference to Exhibit
with 525 Post Production 10.14 to Registrant's Report on Form
Company 10-KSB for the year ended December 31,
1993. --
10.15 Third Amendment to Lease for Incorporated by reference to Exhibit
500 Sansome Street 10.15 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.16 Credit Facility with Draysec Incorporated by reference to Exhibit
Finance Limited 10.16 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.17 Promissory Note to Draysec Incorporated by reference to Exhibit
Finance Limited 10.17 to Registrant's Report on Form
10-KSB for the year ended December 31,
1993. --
10.18 Amendment to Master License Incorporated by reference to Exhibit
Agreement with Burst 10.18 to Registrant's Report on Form
Communications Pty Ltd. 10-KSB for the year ended December 31,
1994. --
10.19 Amendment No. 1 to Credit Incorporated by reference to Exhibit
Facility with Draysec Finance 10.19 to Registrant's Report on Form
Limited 10-KSB for the year ended December 31,
1994. --
10.20 Second Promissory Note to Incorporated by reference to Exhibit
Draysec Finance Limited 10.20 to Registrant's Report on Form
10-KSB for the year ended December 31,
1994. --
10.21 Fourth Amendment to Lease for Incorporated by reference to Exhibit
500 Sansome Street 10.21 to Registrant's Report on Form
10-KSB for the quarter ended March 31,
1995. --
10.22 Employment Agreement with Gary Incorporated by reference to Exhibit
R. Familian 10.22 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
10.23 Employment Agreement with Incorporated by reference to Exhibit
Richard A. Lang 10.23 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
10.24 Employment Agreement with Incorporated by reference to Exhibit
Therese A. Webb Stacy 10.24 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
10.25 Consulting Agreement with Lisa Incorporated by reference to Exhibit
Walters 10.25 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
10.26 Letter Agreement with The Mill Incorporated by reference to Exhibit
(Facility) Limited 10.26 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
|
46
EXHIBIT SEQUENTIAL
NO. DESCRIPTION LOCATION PAGE NO.
------- ------------------------------ --------------------------------------- ----------
10.27 Memorandum of Understanding Incorporated by reference to Exhibit
with Vyvx, Inc. 10.27 to Registrant's Report on Form
10-QSB for the year ended December 31,
1995. --
10.28 Unit Purchase Agreement Incorporated by reference to Exhibit
pertaining to Series F 10.28 to Registrant's Report on Form
Convertible Preferred Stock 10-QSB for the year ended December 31,
1995. --
10.29 Fifth Amendment to Lease for Incorporated by reference to Exhibit
500 Sansome Street 10.29 to Registrant's Report on Form
10-QSB for the quarter ended March 31,
1996. --
10.30 Sixth Amendment to Lease for Incorporated by reference to Exhibit
500 Sansome Street 10.30 to Registrant's Report on Form
10-QSB for the quarter ended September
30, 1996. --
10.31 Development and License Incorporated by reference to Exhibit
Agreement with Vyvx, Inc. 10.31 to Registrant's Report on Form
dated July 3, 1996 10-QSB for the quarter ended September
30, 1996. --
10.32 Marketing Alliance Agreement Incorporated by reference to Exhibit
with Vyvx, Inc. dated July 3, 10.32 to Registrant's Report on Form
1996 10-QSB for the quarter ended September
30, 1996. --
10.33 Settlement Agreement with Incorporated by reference to Exhibit
Bennett Johnston 10.33 to Registrant's Report on Form
10-QSB for the quarter ended September
30, 1996. --
10.36 Summary of new office lease Incorporated by reference to Exhibit
for 500 Sansome Street 10.36 to Registrant's Form 10QSB for
quarter ended June 30, 1997. --
10.37 Amendment to Unit Purchase Attached
Agreement dated February 14,
1996 --
21 Subsidiaries of the Registrant Incorporated by reference to Exhibit
No. 22 to Registrant's Report on Form
10-KSB for the period ended December
31, 1992. --
27 Financial Data Schedule Attached --
|
47
EXHIBIT 10.37
Amendment to Unit Purchase Agreement
dated February 14, 1996
offered by
Instant Video Technologies, Inc.
This Amendment to Unit Purchase Agreement ("Agreement") is entered into
as of September 16, 1997, with reference to the following facts:
WHEREAS, the undersigned have entered into a Unit Purchase Agreement
with Instant Video Technologies, Inc. dated February 14, 1996;
WHEREAS, section 1.2(a) of said Unit Purchase Agreement states: "At any
time and from time to time during the period immediately following the Closing
and ending on December 31, 1996, the Company may at one or more additional
closings (each an "Additional Closing"), without obtaining the signature,
consent or permission of any of the Investors, offer and sell to other
investors ("New Investors"), at a price of $1.00 per Unit, (i) up to that
number of units such that the total number of Units sold by the Company
(inclusive of the number of Units sold at the Closing and at any prior
Additional Closings) equals five million (5,000,000)."
WHEREAS, Instant Video Technologies, Inc. desires to sell additional
Units beyond the December 31, 1996 date;
WHEREAS, section 8.9 of the Unit Purchase Agreement provides for a vote
of the holders of two-thirds of the Units to amend the Agreement;
NOW THEREFORE the Parties agree as follows: The first sentence of
section 2.2(a) shall be modified to read "At any time and from time to time
during the period immediately following the Closing and ending on December 341,
1998, the Company may have additional closings (each an "Additional Closing"),
without obtaining the signature, consent or permission of any of the
Investors, offer and sell to other investors ("New Investors"), at a price of
$1.00 per Unit, (i) up to that number of units such that the total number of
Units sold by the Company (inclusive of the number of Units sold at the Closing
and at any prior Additional Closings) equals five million (5,000,000)."
IN WITNESS WHEREOF the Parties have entered into this Amendment as of
the date first written hereinabove.
STORIE PARTNERS, A CALIFORNIA MINDFUL PARTNERS, A CALIFORNIA
LIMITED PARTNERSHIP LIMITED PARTNERSHIP
By: Storie Advisors, Inc. By: /s/ STUART RUDICK
General Partner ------------------------------
Stuart Rudick, General Partner
By: /s/ STEVE LEDGER
----------------------- INSTANT VIDEO TECHNOLOGIES, INC.
Title: Managing Partner A DELAWARE CORPORATION
By: /s/ RICHARD LANG
------------------------------
Richard Lang, President
|
|
|
|
PERIOD TYPE
|
YEAR
|
|
FISCAL YEAR END
|
DEC 31 1997
|
|
PERIOD START
|
JAN 01 1997
|
|
PERIOD END
|
DEC 31 1997
|
|
CASH
|
20,551
|
|
SECURITIES
|
0
|
|
RECEIVABLES
|
0
|
|
ALLOWANCES
|
0
|
|
INVENTORY
|
0
|
|
CURRENT ASSETS
|
52,011
|
|
PP&E
|
85,611
|
|
DEPRECIATION
|
0
|
|
TOTAL ASSETS
|
155,191
|
|
CURRENT LIABILITIES
|
1,121,625
|
|
BONDS
|
16,833
|
|
PREFERRED MANDATORY
|
0
|
|
PREFERRED
|
22
|
|
COMMON
|
59
|
|
OTHER SE
|
(983,348)
|
|
TOTAL LIABILITY AND EQUITY
|
155,191
|
|
SALES
|
0
|
|
TOTAL REVENUES
|
247,879
|
|
CGS
|
230,210
|
|
TOTAL COSTS
|
1,946,306
|
|
OTHER EXPENSES
|
0
|
|
LOSS PROVISION
|
0
|
|
INTEREST EXPENSE
|
133,736
|
|
INCOME PRETAX
|
(2,062,373)
|
|
INCOME TAX
|
0
|
|
INCOME CONTINUING
|
0
|
|
DISCONTINUED
|
0
|
|
EXTRAORDINARY
|
0
|
|
CHANGES
|
0
|
|
NET INCOME
|
(2,062,373)
|
|
EPS PRIMARY
|
(0.39)
|
|
EPS DILUTED
|
(0.39)
|
|
|
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