SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year ended: December 31, 2000
OR
[_] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________________ to _________________ .
Commission File No. 33-35580-D
BURST.COM, INC.
(Formerly known as Instant Video Technologies, Inc.)
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-1141967
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
500 Sansome Street, Suite 500
San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 391-4455
(Registrant's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act: None.
Securities Registered Under Section 12(g) of the Exchange Act: Common Stock
$.00001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 16, 2001 was approximately $5,468,881 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date.
As of March 16, 2001, there were 21,648,125 shares of the Registrant's Common
Stock outstanding.
BURST.COM, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Property 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management 29
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 35
Signatures 39
Instant Video(R), Burstware(R), Burstaid(R), Faster-Than-Real-Time(R), Burstware
Conductor(R), Burstware Player(R), and Burstware Server(R) are registered
trademarks of BURST.COM, INC. All other names are trademarks and/or registered
trademarks of their respective owners.
2
SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
o implementing our business strategy;
o maintaining sufficient cash balances to continue in operation;
o attracting and retaining customers;
o obtaining and expanding market acceptance of the products and
services we offer;
o forecasts of Internet usage and the size and growth of relevant
markets;
o rapid technological changes in our industry and relevant markets and
o competition in our market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus, and
except as required under applicable securities law, we assume no obligation to
update them or to explain the reasons why actual results may differ.
PART I
ITEM 1: BUSINESS.
THE COMPANY
We are an independent provider of client/server network software for the
delivery of video and audio information over networks. Our office is located in
San Francisco, California. Our software manages the delivery of video and audio
content over a variety of networks; optimizing network efficiency and quality of
service. Our Burstware(R) suite of software products enables companies to
transmit video and audio files at Faster-Than-Real-Time(R)speed, which is
accomplished by utilizing available bandwidth capacity to send more video or
audio data to users than the players are consuming in real time. This data is
stored on the users' machine for playing on demand, thus isolating the user from
noise and other network interference. The result is high quality, full-motion
video and CD-quality audio to the end-user. Burstware(R) utilizes several
components of our international patent portfolio, including the
Faster-Than-Real-Time(R) delivery method.
We began as a research and development partnership in 1988, with initial
activities focused upon technical investigations, patent development and
research pertaining to the viability of transmitting and receiving video and
audio programming in faster-than-real-time over a variety of networks.
In 1990, we incorporated, changed our name to Explore Technology, and
secured $2.0 million in funding in order to develop prototype hardware and
software for demonstrating faster-than-real-time transmission and reception of
audio and video programming; we described this type of communication as "burst".
We hired an engineering firm in Palo Alto, California to construct a pair of
"burst" video/audio transceivers. At the time this work was undertaken, networks
capable of providing "burst speeds" at practical prices were not available.
During the second quarter of 1992, we were acquired by Catalina Capital
Corporation, a small public company organized as a Delaware corporation on April
27, 1990. As a result of this transaction, our original shareholders received
85% of the outstanding shares of Catalina Capital Corporation, which was renamed
Instant Video Technologies, Inc. in 1993.
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In the first half of 1995, we began development of a software product that
would incorporate our patented intellectual property for faster-than-real-time
burst transmission of multimedia content over computer networks. At that time,
we contracted with a consulting firm to develop this software product. A
prototype was created to run on a variety of networks. In 1996, we entered into
agreements with three customers for use of the software in their products and
services. We continued our product development through 1997 by contracting with
a third-party consulting firm.
In September 1997, our co-founder, Richard Lang, returned as Chairman, CEO
and President. As a result, in the last quarter of 1997 we restructured our
management team, obtained funding to continue operations, refocused our product
development, and brought technology development in-house.
At the end of the third quarter of 1997, we suspended sales of our
prototype software to customers in order to concentrate our efforts on
developing a new suite of Burstware(R) software products to position us for
future growth. Resources were directed at product development to facilitate our
new strategy and resulted in no software license sales in 1998.
In 1998, we focused on developing a commercially marketable suite of
software products; raising the capital necessary to meet operating requirements,
and building our management team. We released a test version of the Burstware(R)
suite of software products on schedule in March 1998 and began testing with
selected companies in April 1998. New versions of the test software were
released in June and November 1998.
We released our first product, Burstware(R) Version 1.1, to the public in
February 1999, and in November 1999 we released Burstware(R) Version 1.2, which
contained the Burst-Enabled(TM) Windows Media Player. In 1999, we recruited
sales, marketing and development staff and signed six reseller agreements.
Customer evaluations were undertaken during the second half of 1999. Initial
sales commenced in February 2000.
In January 2000, we changed our name from "Instant Video Technologies,
Inc." to "Burst.com, Inc." Our stock trades on the Nasdaq SmallCap Market under
the symbol "BRST".
In November 2000, due to insufficient funds and sales to support our
organization, we laid off 77 employees out of a total of 95 and cut back
drastically in our sales, marketing and engineering spending. In March 2001, we
laid off all but five of the remaining employees, and accepted the resignations
of Douglas Glen, John Lukrich, and Edward Davis. The Chief Executive Officer
position was assumed by our Chairman, Richard Lang, and our Controller, Jeffrey
Wilson, took over as Chief Financial Officer. Unless specifically noted,
references to our executive officers throughout this annual statement refer to
the officers in place at December 31, 2000. See "Liquidity and Capital
Resources" and "Risks and Uncertainties" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
INDUSTRY BACKGROUND
In recent years, several related technologies have converged to enable the
distribution of video and audio content over electronic communications networks.
As network bandwidth, data storage, processing power, and compression
technologies have become increasingly available, the demand for high quality
video and audio over the Internet, as well as over intranet and extranet
networks, has expanded rapidly. According to Piper Jaffray, the number of
households with broadband access is estimated to be 6.6 million, increasing to
21.7 million by 2002. The result of such developments has been the transition of
the Internet from a static, text-oriented network to an interactive environment
filled with graphical and audio-visual content.
Distributing audio-visual content over the Internet, or within an intranet,
offers certain advantages and capabilities not generally available through
traditional media, including consumer targeting and interactive responsiveness.
As businesses have begun to recognize the cost, inconvenience and inefficiency
of business communication tools such as audio and videoconferencing, online
communications between business-to-business, business-to-consumer and
business-to-employee have become commonplace. Piper Jaffray estimates that
streaming hours will grow at a compound rate of 124% in the next five years.
In order to capitalize on this explosion in Web-based content and the large and
growing number of Web-based communication channels in both the
business-to-business and business-to-consumer markets, a number of companies
have developed first generation software solutions intended to deliver such
content to the end user. These first generation solutions have commonly been
referred to as real-time streaming solutions that allow for the transmission and
remote playback of continuous "streams" of media content, including live video
and audio broadcasts. These technologies were designed to deliver audio and
video content over widely used 28.8 kbps
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narrow bandwidth modems and, to a limited extent, are capable of utilizing
higher speed access provided by digital subscriber lines, cable modems and other
broadband emerging technologies.
MARKET OPPORTUNITY
Although current streaming technology represents a significant advancement
over earlier technologies, it remains unable to provide the client with
reliable, uninterrupted, full-motion, studio-quality video, particularly
video-on-demand, or VOD, and CD-quality audio. That is, first generation
solutions rely upon a network design in which various client computers are
connected to centralized server computers. Typically, one server is intended to
service a multitude of clients. During a typical session, a server must deliver
data in frequent and regular intervals, or just in time, for the length of any
real-time play of content. For example, a 30-minute video requires that constant
communication between servers and clients be maintained for 30 minutes of
real-time viewing. Moreover, in all cases involving real-time streaming, as the
number of end users expands, the number of server connections must also increase
at a ratio of 1 to 1. Real-time streaming through such a network cannot scale
efficiently and, given the infrastructure requirements, remains costly.
As real-time streaming expands rapidly online with growing demand for
audio-visual content, client-centric delivery becomes increasingly susceptible
to congestion and disruption within the established client-server universe. As a
result, a client's multimedia experience typically is interrupted or degraded.
Additionally, the number of real-time connections that can be maintained
simultaneously by the server is limited by processing power as well as bandwidth
availability. This, along with the fact that a server tends to devote
disproportionate resources to the client with the most available bandwidth, also
reduces the quality as well as the availability of the video and audio content
to most users on the network.
As a result of these limitations, plus the fact that most streaming
technology involves proprietary encoding schemes and limited platform
acceptance, widespread dissemination of high-quality streaming content has yet
to occur within either the business-to-business or business-to-consumer market.
Escalating demand within these markets as well as the need for quality
enhancement of content delivery have created a need for a software solution
capable of eliminating network disruptions and utilizing client bandwidth
efficiently.
THE BURST SOLUTION
With our patented Burstware(R) technology, we provide a server-based
intelligent network management system delivering "Faster-Than-Real-Time(R)"
content across a variety of networks. Our software is designed to work equally
well with content created using any data compression/decompression (CODEC)
methodology. The Java-script Burstware(R) solution ensures a consistent,
high-quality experience over multiple platforms through optimization of network
resources and superior isolation of clients from network disturbances.
In a Burst-Enabled(TM) network, the server delivers "bursts" of content of
various sizes and frequencies, as required, into a client-side buffer at a
Faster-Than-Real-Time(R) rate of consumption. On the client side, the local
buffer of stored, or cached, data acts as a reserve providing continuous play in
the event that data flow across the network is disrupted. Once the network
recovers, the local buffer is rapidly "topped off" at a Faster-Than-Real-Time(R)
rate. Upon delivery completion, the server disengages from the client and is
free to address other clients awaiting content delivery, with service
prioritized based on the client's buffer level, rate of consumption, available
bandwidth and other variables.
Under typical network conditions, demand for media content rises and falls.
Real-time streaming's architecture must allocate network bandwidth for the peak
demand, wasting bandwidth during lower demand occurrences. Bursting tends to
average out the peaks and troughs using an intelligent buffer management system.
Buffers are replenished in anticipation of client needs at rates
Faster-Than-Real-Time(R). This intelligent network management reduces demand for
bandwidth at peak times.
With the same amount of allocated bandwidth, Burstware(R) supports more
users with less infrastructure. In a November 2000 study by Approach, Inc., a
research firm specializing in the digital media market, Burstware(R) was shown
to be up to 25% more bandwidth efficient than Microsoft's Windows Media System.
With a need-based delivery model and the ability to service the same number
of clients using fewer network resources, Burstware(R) technology also offers
quantifiable savings over a wide variety of end user environments. Simulations
have shown that
5
Burstware's(R) intelligent network management system can provide significant
improvement in network efficiency, or throughput, when compared to real-time
streaming. The Approach report also concluded that the return on investment for
a content provider using Burstware(R) was 16% to 43% more favorable than the
return on investment for a similar configuration using Windows Media System.
During all phases of content delivery, Burstware's(R) network-based
architecture allows for continuous monitoring of consumption rates, multiple
end-user needs, and changes in network conditions. Using connection acceptance
criteria, Burstware(R) can determine which network legs or servers are
overburdened and then shift the load accordingly. In addition, through
synchronizing content delivery across backup servers and conductors, the
Burstware(R) system creates a reliable failover for uninterrupted service in the
event of component or network failure, thereby eliminating the need for the
client to request that the server resend the entire file.
Developed with the flexibility of open standards, the Burstware(R) network
management elements are focused exclusively on content delivery without regard
to proprietary CODEC or rendering technologies, leaving application developers
free to use whichever CODEC is required of their application. Burstware(R)
architecture currently supports numerous encoding schemes, including MPEG1,
MPEG2, MP3, ASF, AVI and QuickTime, with the ability to adapt quickly to new
technologies as they are brought to market. Moreover, the Burstware(R) solution
is platform and player neutral. Burstware(R) operates on Microsoft Windows NT,
Solaris and Linux platforms as well as a Burst-Enabled(TM) Windows Media Player
and a Java-based player, or JMF.
The intelligent Burstware(R) network resource management features enable
multiple end user applications as well. With the capacity to deliver data in a
clear, efficient and cost-effective manner, the Burstware(R) solution creates a
high-quality audio-visual experience for the end-user and enables powerful
business-to-business, business-to-customer and business-to-employee
communication. Burstware(R) also gives producers, aggregators and developers the
ability to reach new markets with virtually unlimited access to vast libraries
of content. With these various applications, Burstware's(R) network delivery
mechanism is ideally suited for numerous industries including news,
entertainment, retail and advertising as well as local, state and federal
governments and agencies.
BUSINESS OF THE COMPANY
Overview
The Company intends to become a worldwide provider and licensor of
Burstware(R) software and intellectual property for use within commercial,
multimedia, and interactive networks. The Company also intends to expand the
number of patents contained within its patent portfolio and develop additional
Burstware(R) products and applications.
The potential applications and uses of the Company's technology are wide
reaching and are not limited to software. The Company also intends to
investigate other strategies to expand Burst's technology to other potential
applications including video servers and multimedia hardware, such as TVs,
network appliances and set top boxes, multiplying the potential markets for
Burstware(R)-based products.
Burst Technology
Burstware(R) is a client-server software product that manages and optimizes
the delivery of high quality video and audio (time-based media) across broadband
networks. The heart of Burstware's(R) capabilities is embodied in its patented
"Faster-Than-Real-Time(R)" transfers of data that enable interference-free
time-based media delivery and playback. The commercial product was released in
February 1999.
The Burstware(R) video delivery system consists of one or more servers,
conductors and client-side players interconnected by one or more networks.
Burstware(R) supports a broad array of encoding standards, although it is
neutral to specific compression technologies. This multi-tiered, client-server
system provides enterprise-class failure protection combined with full
scalability, and can operate over a combination of private LANs and public
broadband networks.
Burstware(R) is designed to benefit customers through the following
capabilities of the product: 1) more simultaneous users of video and audio
within the same bandwidth used by the competition; 2) highest quality viewing
experience without disruptions; 3) low cost, scalable expansion to meet
increased numbers of users; and 4) control over the effects of video and audio
on the enterprise network.
6
Strategy
Burst.com's goal is to be the leading provider of media delivery technology
to the broadband industry. We will pursue this goal by developing proprietary
technology, protecting that technology with international patents and licensing
the technology and patents to companies providing comprehensive media-on-demand
solutions.
Develop Proprietary Technology
Since its inception, Burst.com has been a leader in developing innovative
solutions to media delivery problems. Our Burstware(R) architecture provides
better bandwidth economies, higher reliability and a superior consumer
experience. We will continue to enhance the technology underlying Burstware(R)
to solidify our performance leadership position. These enhancements include the
development of Burstware(R) extensions supporting live events. This will permit
delivery of live events to Windows Media Player and other industry-standard
players with pausing and "rewinding" functionality.
Extend our Patent Portfolio
We regard our patent portfolio as critical to our ability to realize
maximum value for our technology. Since the company was first incorporated, we
have had 33 U.S. and international patents issued, and we currently have another
nine pending. Several additional patents are in development.
Burst patents address our Faster-Than-Real-Time(R) media delivery
mechanism, our approach to network resource optimization, and elements of
client-side functionality. Burst.com patents have issues in the United States,
Australia, Europe, Korea, India, Japan and Canada.
License our Technology To Industry Leaders
For the past several years, Burst has pursued a strategy of selling media
delivery software and hosting services. This strategy has not produced the level
of revenues necessary to sustain an effort by Burst to compete head-to-head with
powerful leaders such as Microsoft and RealNetworks. Our revised strategy is to
license our technology software and patents to one or more of leading end-to-end
solution providers. We believe that companies who license our technology and
patents will obtain a sustainable competitive advantage in terms of bandwidth
efficiency, reliability and user experience. We believe that Burst.com will be
able to maximize the value of its technology and intellectual property assets
through such licensing arrangements.
Target licensees include (i) marketers of server/client software, such as
Microsoft, Apple and RealNetworks; (ii) Internet service providers, such as
America On-Line and Excite@Home; (iii) infrastructure providers, such as
telecommunications and cable companies and (iv) marketers of enabling hardware
for broadband media-on-demand businesses.
Engineering and Product Development
We believe that our future success will depend in large part on our ability
to enhance Burstware(R) and maintain our technological leadership. Our product
development organization is responsible for product architecture and core
technology. Coding, testing and quality assurance are outsourced. As of March
01, 2001, our internal development organization consisted of two people.
During the past three years, we have made substantial investments in
product development and related hosting activities ($4,300,328 in 2000,
$4,076,700 in 1999 and $800,600 in 1998). The current version of Burstware(R)
has been developed primarily by our internal engineering staff and, in some
instances, with the assistance of external consultants. In March 1998, we
released a Beta version of Burstware(R), followed by subsequent modifications
during the year. We released our first commercial (GA) Burstware(R) product
suite in February 1999. This release is a client-server software product that
manages and optimizes the delivery of high quality video and audio across
broadband networks. The servers become intelligent network managers, efficiently
allocating bandwidth and scheduling burst delivery of multimedia content among
multiple users. Microsoft Corporation's Windows NT/95/98 operating systems are
supported on client machines, with Windows NT and Sun Microsystems' Solaris
operating systems supported on servers in client-server networks. In August
1999, we released support for the Linux platform in our Version 1.1.3. Also in
August 1999, we acquired Timeshift-TV, Inc. in a stock-only transaction from
Richard Lang, our Chairman and then CEO, Earl Mincer and Eric Walters, who
subsequently became
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employees of ours. Timeshift-TV holds assets, including intellectual property,
in the area of time-shifted real-time broadcasting, which we plan to integrate
into our advanced video and audio delivery solutions. We also plan to license
the Timeshift-TV intellectual property to other parties for various
applications. We recorded $1,333,000 in expense for in-process research and
development costs purchased in connection with this acquisition. In November
1999, we released the capability to Burst-Enable(TM) the Windows Media Player in
Version 1.2. In November 2000, due to insufficient funding and sales to support
our organization, we laid off all but two engineers and cut back drastically in
our product development spending.
Product Offerings
Our suite of Burstware(R) software is summarized below:
Burstware Component Features
------------------- --------
Conductor: o Central management service
o Monitors all servers
The Conductor manages the distribution of o Centralized point of control for
video player requests over multiple servers, and audio on network
providing scalability, load balancing and o Scalable deployment of servers reliable fail
over o Add and remove servers as needed
o Asynchronous
o No performance bottlenecks
o Reliable fail over mechanism
o Load balancing
o Replicated conductors
o Audit trail logging
Server: o Patented buffer management system
o Provides significant network efficiencies and enhanced
The server "bursts" media files to player viewer experience
memory or disk buffers in Faster-Than-Real- o Faster-Than-Real-Time(R)delivery
Time(R), tracking buffer levels and allocating o Provides isolation from network problems
bandwidth accordingly. o Traffic shaping
o Limits bandwidth usage to the allocated bandwidth
o Controls impact of video and audio on the network
o Utilizes optimized connection acceptance criteria for
guaranteed quality-of-service
o CODEC-neutral
o Replicated server for load balancing and reliable fail
over
o Extensive logging of client session statistics
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Player: Burst-Enabled(TM) Windows Media Player
o Burstware Server(R) delivers content to Windows Media
Plays data out of the local buffer to the end Player
user, shielding the end user from network o Provides both disk-based and RAM-based caching
disruptions. o Supports player scripting and high interactivity
o Existing Windows Media Player applications can easily
be burst-enabled
o Works in a browser or in a standalone application
o VCR-like functionality and controls
o CODECS supported include: MPEG-1, MPEG-2, MP3, Windows
Media Audio, and Apple Quicktime ASF
Burstware(R)Java Based (JMF) Player
o Player scripting
o Works in a browser or in a standalone application
o VCR-like functionality and controls
o Supports many industry standard CODECs
Architecture
Burstware(R) employs a multi-tier, distributed architecture to provide a
fully scalable and fault-tolerant platform for high-quality multimedia delivery
and management. The architecture is designed to take advantage of the benefits
and minimize the shortcomings of using an unreliable, heterogeneous, IP-based
network--such as the Internet--for reliable multimedia delivery to a mass
audience.
Component Overview
The central management component of the architecture is the Burstware
Conductor(R), which manages and monitors the Burstware Servers(R) and provides
the point of contact for burst-enabled client applications, such as the Windows
Media Player.
The Burstware Server(R) provides reliable media delivery to clients, and
uses flow optimization algorithms to maximize overall bandwidth throughput,
while ensuring that each client is allocated sufficient bandwidth for
uninterrupted playback of video.
Burst-enabled client applications provide an intelligently managed
client-side cache, and co-operate with the conductor and server to provide the
playback of video and audio exactly as the file was encoded, with no jitter,
dropped frames, or signal degradation.
Media Delivery Procedure
When a Burst-Enabled(TM) client requests a media file, it contacts a
conductor with a request for service. The conductor intelligently routes the
client to the server that offers the best point of service for the request. The
client then establishes a two-way reliable TCP/IP connection to the server, and
delivery and playback of the media file begins.
The client continuously provides feedback to the server about how fast the
media file is being consumed, the state of the client buffer, and other
information. This data from all clients is fed into the server's flow
optimization algorithm described above, and the server uses the flow algorithm
to schedule delivery of data to clients at the rate that maximizes use of
network resources and minimizes the likelihood of buffer starvation. Flow rates
are continuously adjusted as network conditions and server loads change.
Advantages
Burstware's(R) multi-tiered architecture offers two key advantages over the
traditional two-tier streaming architecture: enterprise-class scalability and
mission-critical fault tolerance.
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Scalability
The Burstware(R) system is highly scalable, and can grow from one server to
hundreds of servers in a manner that is completely transparent to clients. Since
only the conductors are aware of the location and number of servers, new servers
can be added and existing ones moved or removed without any updates to client
applications. One conductor can support and manage hundreds of servers. The
conductor continually monitors server loads and routes incoming client requests
to the least loaded eligible server, providing intelligent load balancing that
goes far beyond such simple schemes as round robin routing.
Because client interaction with the conductor is limited to the initial
request for service, a single conductor domain can easily scale to support tens
of thousands of concurrent client connections. Additionally scalability can be
achieved by employing multiple conductor domains, which can be integrated with
third-party IP routing solutions.
Fault Tolerance
Burstware(R) achieves complete fault-tolerance, including no single point
of failure, by fully replicating all components in the system. The conductor is
replicated in kind, and burst-enabled clients can contact either conductor for
service. Additionally, each server is automatically configured to provide
failover protection for all other servers containing the same media content.
Servers and conductors can be added and subtracted at runtime without shutting
down other system components.
If a server fails or becomes unavailable for any reason, including the
failure of a network link from the client to the server, all clients that have
lost contact with the server are automatically routed to other servers.
Burstware(R) establishes a new connection to an available server for each
client, and the new server picks up multimedia delivery exactly where the failed
server left off. Since the client-side buffer provides the ability for clients
to disconnect and re-connect without impacting the viewing experience, the
viewer is unaware that any failure has occurred.
Technology
The design mission for Burstware(R) technology is to provide the premier
platform for the management and delivery of digital video and audio content.
Burst.com has recognized the needs of the marketplace for a product that
provides quality, reliability and manageability far beyond what existing
streaming solutions can deliver.
Burstware's(R) design takes advantage of emerging trends in technology such
as available client-side storage and network bandwidth to provide a
forward-thinking, flexible and highly effective approach to multimedia delivery
and management. Our engineering team has extensive experience in network
protocols, distributed multi-tiered architectures, digital video, real-time
control systems, and optimization algorithms. As a result, we believe
Burstware(R) is well equipped to address the escalating demand for multimedia
applications.
Architected for Industry Trends
By taking the caching model all the way to the client, Burstware(R) is the
first adopter in a new paradigm for multimedia delivery, and is uniquely
positioned to take advantage of the trends toward broadband networks and
inexpensive client storage. Designed to optimize expensive resources such as
bandwidth and server-side hardware by utilizing freely available client-side
storage resources, Burstware(R) provides an advanced network management and
optimization platform for audio and video content delivery.
Central to the Burstware(R) technology are the scheduling algorithms in the
Burstware Server(R), which schedule bursts of data of varying size and time
intervals to each client. The Burstware(R) Scheduler employs proprietary
algorithms to guarantee each client quality of service while optimizing the use
of bandwidth and other network resources.
The Burstware Server(R) Scheduling Engine consists of a Call Admission
Control System, or CAC, a Flow Optimizer and a Flow Engine. The CAC ensures that
a new client is accepted onto the network only if its admission will not
compromise quality of service to existing clients or to the new client. It is
worth noting that a configurable "burst margin" of bandwidth is held in reserve
by the CAC for use by the Flow Optimizer as described below. Clients that are
rejected by one Burstware Server(R) are transparently routed to another, making
the end user unaware that one of the Burstware Servers(R) has reached its
maximum utilization.
The Flow Optimizer calculates the amount of data to deliver, or the flow
rate, to each client in order to maximize Burstware Server(R) throughput while
ensuring that each client receives sufficient data flow for uninterrupted,
continuous playback. The burst
10
margin that is held in reserve by the CAC algorithm is available for allocation
by the Flow Optimizer, which forces delivery of content in faster-than-real-time
even under heavy network load scenarios. Overall, this process exerts upward
pressure on client-side buffer levels, ensuring a jitter-free viewing
experience.
The Flow Engine is a low level sub-system responsible for achieving the
session flow rates imposed by the Flow Optimizer. It advances through disk or
cache resident content files and paces the transmission of the video data as
bursts over the outgoing transmission control protocol connections linking the
server to each player. Incoming status notifications from each player provide
any needed feedback on actual flow rates and downstream buffer conditions.
These optimization algorithms enable a single Burstware Server(R) to
simultaneously deliver files ranging the full spectrum of encoded bit rates,
from ASF files designed for 28.8 modems to MPEG-2 files encoded at 8 Mbps or
more, to a wide variety of clients with radically different connectivity and
other capabilities, while maintaining the highest quality viewing experience for
each client.
Application-Level Quality of Service in Unpredictable Networks
One of the challenges of IP-based video delivery systems is to provide a
smooth, uninterrupted video experience in the face of the variable bandwidth
capacities and network latencies of a packet-switched network. Traditional
streaming solutions, by delivering data just in time for display to the client,
are highly sensitive to moment-to-moment variations in the network capacities at
each link between the client and server. Whenever bandwidth capacities fall
below the encoding rate of the video, even briefly, video quality will suffer.
As described in the above section, Burstware(R) is able to provide a high
quality of service by employing a sophisticated client cache-management scheme
and delivering video data faster-than-real-time consumption. This
application-level quality of service is far less expensive than network-layer
quality of service, or QoS, schemes, which require that every router between the
client and server be able to guarantee that bandwidth and latency fall within a
narrow, specified range. Application-level QoS has the additional advantage of
working across network segments that are not capable of providing network-layer
QoS.
Application-level QoS also enables the use of higher-quality video
encodings across channels with variable bandwidth capacity. Real-time streaming
architecture requires that videos be encoded at a rate less than the minimum
bandwidth between the client and the server. Burstware(R), on the other hand, is
resilient to the average bandwidth between client and server, allowing delivery
of higher bit rate encodings.
Network Management Capabilities
A significant barrier to widespread adoption of streaming technologies has
been reluctance on the part of network managers to subject their networks to the
unpredictable and demanding requirements of traditional streaming solutions.
With Burstware(R), bandwidth use can be controlled at various levels, including
the entire Burstware domain, an individual Burstware Server(R) or locally on the
client side. Bandwidth limits can be adjusted dynamically at runtime, allowing
sophisticated traffic shaping over time and space. Content-specific caching and
routing controls also provide users with the flexibility needed for today's
applications.
Client configuration parameters include those for network optimization and
control, content protection, and player behavior. These parameters can be
centralized in a web page or customized by individual clients, giving
application developers a high degree of control over their video-enabled
applications.
Open Architecture
One of the keys to adoption of new technologies is a high degree of
interoperability with existing hardware and software. Burstware(R) has been
designed from the ground up to have open architecture at every product level,
allowing easy integration with a wide variety of third-party solutions.
The ability to interoperate with other applications is accomplished at
several different levels. A wide variety of industry-standard players, as well
as other applications, can be Burst-enabled using our Player Software
Development Kit. Burst-enabled players retain all of their existing
functionality, thus facilitating integration of an existing Windows Media Player
web application, for example, to the Burstware(R) delivery system. Integration
with third-party automated billing and report generation tools is accomplished
with the
11
Burstware(R) Log Toolkit, which provides both an XML-based and an ODBC-based
data transfer capability. We also believe that external cache management systems
such as those offered by Akamai and Inktomi can integrate with Burstware(R)
through our directory-based media management system.
Portability is another important aspect of an open architecture.
Burstware(R) is a software-only solution and the Burstware Servers(R) and
Conductors are written almost entirely in Java, allowing easy porting as new
hardware and OS platforms become available. Additionally, interprocess
communication is 100% IP-based and runs on nearly all modern networks, both
wired and wireless. This highly portable implementation allows Burstware to take
immediate advantage of new advances in hardware such as multiprocessor,
multi-NIC, SMP Servers, advanced storage systems and wireless technologies.
Competition
We compete in markets that are rapidly evolving and intensely competitive.
We have experienced and expect to continue to experience increasing competition
from current and potential competitors, many of which have significantly greater
financial, technical, marketing and other resources.
In addition to Burst, there are four significant media delivery companies
that compete in similar market segments. The Burstware(R) product is priced
similarly to products offered by our major competitors, but competition is based
primarily on features and functionality. Our competitors use real-time streaming
technology as opposed to our Faster-Than-Real-Time(R) solution. RealNetworks and
Microsoft have concentrated on the consumer markets, while Tektronix and Cisco
are primarily focusing on the business-to-business markets. RealNetworks, Apple
and Microsoft are moving into the business-to-business markets with large
clients such as 3Com and Northrup Grumman. Tektronix and Cisco address the
problem of network management, although in a limited fashion. Currently, there
is limited competition in the broadband arena. Because of our patent portfolio,
we are able to offer unique network efficiency management, scalability and
reliability features and functionality, which combine to provide a competitive
advantage. While we can deliver multimedia content in a real-time mode, our
architecture is ideally suited to capitalize on the growth in broadband networks
and inexpensive storage.
RealNetworks
RealSystem G2 is a fully integrated encoder, server, splitter/cache and
player system. RealNetworks is dominant in the Internet market and the low
bandwidth applications, which have primarily centered around news and
entertainment markets. With their dominance in the consumer market and brand
awareness, they are gaining ground in the business sector with clients like
3Com, Boeing and General Electric. We believe that RealNetworks' use of
real-time streaming technology, its lack of network management and its
CODEC-dependence will give us a competitive advantage in the
business-to-business market. To effectively deploy RealNetworks for a broadband
application, the software must be bundled with Digital BitCasting, and Inktomi
(or similar caching product.
Windows Media
Windows Media Technologies 7.0 provides an end-to-end solution for
streaming multimedia, from content authoring to delivery to playback. Microsoft
is building brand strength by bundling Windows Media with other Microsoft
Products. Windows Media's presence in the business-to-business market is
currently not significant. Windows Media Technologies is targeting the streaming
audio segment by being the only streaming media platform to feature FM-stereo
quality over a modem and improved piracy protection. Like RealNetworks,
Microsoft is focusing on the consumer market by attracting content providers
rather than developing their media delivery system. Windows Media is relying on
streaming technology to deliver video and audio and offers no network management
solution. Consumers with the Windows Media Player (a component of Windows Media
Technologies) can use the Burst-Enabled(TM) Windows Media Player to increase the
content quality, reliability and efficiency of their network.
Tektronix
Tektronix has two product lines, Profile video servers and Grass Valley
products that provide communication solutions that are used to distribute and
store broadcast and post-production information. Tektronix is focusing primarily
on Video-Centric LAN/WAN Networking and Broadcast Production Networking.
Tektronix is concentrating on the business-to-business markets primarily through
value added resellers, direct sales, service providers and Original Equipment
Manufacturers. Tektronix does perform minimal network management, but uses
streaming technology.
12
IP/TV
Cisco Systems, Inc.'s IP/TV claims its software offers high-quality video
broadcasting and video on demand services, industry-leading management
capabilities, built-in scalability, network-friendly technologies such as IP
Multicast, and an easy-to-use viewer interface. Cisco's IP/TV servers attempt to
provide scalable, turnkey bandwidth-efficient solutions. Their hardware
platforms are pre-configured with the IP/TV software, creating a complete
network video solution. Cisco's IP/TV is targeting the business-to-business
markets. IP/TV is combining streaming technology with its Content Manager to
balance loads and to track specific viewing and management functions. In
addition to IP/TV, Cisco recently announced that it had agreed to acquire
SightPath, Inc., a company that provides software permitting end-users to more
easily broadcast live events over the Internet and centrally manage engineering
designs or video for diagnosing medical conditions.
Others
There are other companies who offer streaming media solutions for the
Internet and corporate intranets. Many claim to have streaming media solutions
for corporate training, distance education, health care, and entertainment. Some
companies offer media servers with the ability to stream content to up to 500
desktops at one time. Others offer content management and media players.
Burstware(R)'s potential competitors offer no or limited network management.
This is a rapidly evolving market with no barriers to new entrants. Many
competitors, current and potential, may have access to more resources than are
available to us.
Sales and Marketing
While we pursue technology licensing arrangements with streaming media
industry leaders, we will continue to support our software and hosting
customers, as well as pursue new customers. Such customers include any business
or other end-user that desires to send, receive or effectively manage
high-quality video and audio content over networks. Target markets include
corporate communications, education, advertising, entertainment and
broadcasting.
We market to our customers through a combination of direct sales, sales
representatives and value added resellers. The internal sales organization
consists of two individuals as of March 16, 2001.
We do not believe that there is any significant seasonality that would
affect sales of our products or services. As of March 16, 2001, there was no
backlog of unfilled orders for our products.
Patents and Trademarks
Our business is highly dependent on our patent portfolio. We have nine U.S.
patents. The early patents describe a broad class of systems that allow a user
to view, edit, store video information and send and receive the data associated
with that video information over networks in less time than is normally required
to view or listen to the content. The later patents describe particular
distribution methods designed to deliver video information to remote systems.
Our core patents describe systems that are able to receive a high quality
video signal, store received information locally, manipulate that information
with editing, processing, compression and decompression tools, display the
signal for viewing and re-send the manipulated information on to other such
machine systems in faster-than-real-time. Our current patents will expire on
various dates in 2007 through 2016.
We have two European patents that incorporate the subject matter of the
first six U.S. patents, three Australian patents, one South Korean patent, one
Japanese patent, two Indian patents, and one Canadian patent. We have filed for
a number of additional domestic and international patents.
In addition to protecting the Burstware(R) product offerings, our patents
have broader application as various market applications appear, and our
potential to license our intellectual property expands into additional vertical
market segments.
13
We view our portfolio as a critical component in gaining relationships with
strategic partners, strongly positioning our products' competitive advantage.
Potential licensees include companies such as server and client manufacturers,
bandwidth providers, content aggregators, copyright owners, and other hardware
manufacturers.
We have registered the trademarks "INSTANT VIDEO(R)", BURSTWARE(R),
BURSTAID(R), FASTER-THAN-REAL-TIME(R), BURSTWARE CONDUCTOR(R), BURSTWARE
PLAYER(R) and BURSTWARE SERVER(R)," in the United States, as well as in certain
countries in Europe and Asia.
Employees
As of April 2, 2001, we have five full-time employees working in
administration, finance and legal. We have never experienced a work stoppage and
no personnel are represented under collective bargaining agreements. We laid off
77 employees in November 2000 and 11 on April 1, 2001 due to insufficient
funding and revenues to support our organization. Several former employees have
agreed to avail themselves on a contract basis, should the need and funding
arise.
ITEM 2. PROPERTY.
We presently occupy approximately 8,000 square feet of office space at 500
Sansome Street, San Francisco, California, under a lease that expires at the end
of October 2005. The lease provides for rent of $27,000 per month, fully
serviced. We have closed all our regional sales offices. We believe that our
facilities are not suitable and are excessive for our needs. We are currently in
negotiations to buy out the lease of the Sansome Street property and move our
offices to Santa Rosa, California.
ITEM 3. LEGAL PROCEEDINGS.
On January 17, 2001, the Company filed for arbitration in an action against
Whit SoundView f/k/a E*Offering. The action was filed with the American
Arbitration Association in San Francisco. The dispute involves the rescission of
an exclusive investment banking agreement and return of fees. At this time, the
Company estimates that its exposure for legal and court costs should not be
material. We are not aware of any other material legal proceedings pending or
threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"BRST". The following table sets forth the closing high and low bid prices of
the Common Stock for the periods indicated. These prices are believed to be
representative inter-dealer quotations, without retail markup, markdown or
commissions, and may not represent prices at which actual transactions occurred.
Bid
---------------
1999 High Low
---------- ------ -----
1st Quarter $ 11.88 $ 6.00
2nd Quarter $ 9.75 $ 6.00
3rd Quarter $ 9.6875 $ 5.875
4th Quarter $ 9.25 $ 5.50
2000
1st Quarter $ 18.375 $ 7.75
2nd Quarter $ 9.6875 $ 4.75
3rd Quarter $ 8.625 $ 4.625
4th Quarter $ 5.75 $ 0.25
The number of holders of record of the Company's $.00001 par value Common
Stock at December 31, 2000, was approximately 900. The closing price of our
stock was $0.34 on March 16, 2001.
DIVIDENDS
Holders of Common and Preferred Stock are entitled to receive such
dividends as may be declared by our Board of Directors. No dividends have been
paid with respect to our stock and we anticipate no dividends to be paid in the
foreseeable future. It is the present policy of the Board of Directors to retain
all earnings to provide for the growth of the Company. Payment of cash dividends
in the future will depend, among other things, upon our future earnings,
requirements for capital improvements and financial condition.
At December 31, 2000, we had an accumulated deficit of approximately $57
million and, until this deficit is eliminated, will be prohibited from paying
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
In November and December 2000, we entered into two Convertible Promissory
Notes aggregating $500,000. These Notes are convertible at the option of the
Noteholder into a new series of Preferred Stock to be identified as Series
A-2001 at a per share conversion price of $5.00. The Notes bear interest at the
rate of six percent (6%) per annum and are payable in full on their first
anniversary.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this document. The statement of operations data for the years ended December 31,
1996 and 1997 and the balance sheet data for December 31, 1996, 1997 and 1998
are derived from financial statements that KPMG LLP has audited but are not
included in this filing. The statement of operations data for the year ended
December 31, 1998 is derived from financial statements that KPMG LLP,
independent accountants, have audited and are included elsewhere in this
registration statement. The statements of operations data for the years ended
December 31, 1999 and 2000 and the balance sheets data as of December 31, 1999
and 2000 are derived from financial statements audited by BDO Seidman, LLP,
independent certified public accountants, and are included elsewhere in this
document. Historical results are not necessarily indicative of the results to be
expected in the future.
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ ------------
Statement of Operations
Data:
Revenue $ 1,457,597 $ 247,879 $ 15,000 $ -- $ 499,376
=========== =========== ============ ============ ============
Loss from operations $ (346,351) $(1,928,637) $ (4,663,867) $(11,509,619) $(19,556,700)
=========== =========== ============ ============ ============
Net loss $ (404,367) $(2,062,373) $ (6,916,420) $(12,977,729) $(19,609,984)
=========== =========== ============ ============ ============
Beneficial conversion
feature of Series B
Preferred Stock -- -- (8,762,425)
----------- ----------- ------------ ------------ ------------
Net loss applicable to
Common Stockholders $ (404,367) $(2,062,373) $(15,678,845) $(12,977,729) $(19,609,984)
=========== =========== ============ ============ ============
Basic and diluted net loss
per common share: $ (0.09) $ (0.39) $ (2.35) $ (1.42) $ (.98)
====================================================================================================================================
December 31,
---------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ ------------
Balance Sheet Data:
Cash and cash
equivalents $ 208,613 $ 20,551 $ 2,212,141 $ 302,979 $ 296,584
Total assets 601,182 155,191 3,249,622 1,091,826 1,662,133
Long-term obligations -- 16,833 -- -- --
Stockholders' equity
(deficit) 60,106 (983,267) 2,793,358 (5,464,646) (1,192,730)
------------------------------------------------------------------------------------------------------------------------------------
We have not declared nor paid any cash dividends on our common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar meaning, constitute forward-looking
statements which involve risks and uncertainties. Burst's actual results could
differ
15
materially from those anticipated in these forward looking statements as
a result of certain factors, including those factors set forth under "Risks and
Uncertainties" below.
GENERAL
We are an independent provider of client/server network software for the
delivery of video and audio information over networks. Our principal executive
offices are located in San Francisco, California. Our software manages the
delivery of video and audio content over various networks, including the
Internet and corporate intranets, optimizing network efficiency and quality of
service. Our Burstware(R) suite of software products enables companies to
transmit video and audio files at Faster-Than-Real-Time(R) speed, which is
accomplished by utilizing available bandwidth capacity to send more video or
audio data to users than the players are demanding. This data is stored on the
users' machine for playing on demand, thus isolating the user from noise and
other network interference. The result is high quality, full-motion video and
CD-quality audio to the end-user. Our revenue is derived from fees for software
licenses, content hosting and other consulting services.
We have incurred significant losses since our inception, and as of December
31, 2000, we had an accumulated deficit of $57,045,878 and cash on hand of
$296,584. Our operating expenses as of December 31, 2000 were approximately
$450,000 per month. As of April 2, 2001, we had approximately $62,000 cash on
hand. As previously disclosed, we have been pursuing a business plan that
envisioned raising significant additional capital to continue developing and
marketing our products. However, sales of our newly released products have been
slower than expected and we have not been successful in raising the additional
capital necessary to implement our original business plan. We believe that in
view of the limited market demand for our products and the change in market
conditions that emerging new technology companies have faced since April of
2000, it no longer appears realistic for us to pursue such a comprehensive,
capital intensive plan. As of April 2, 2001, we have reduced projected operating
expenses to approximately $100,000 per month, primarily by closing all but one
of our marketing offices and reducing our workforce from 95 to 5. The remaining
staff is key administrative, financial, and legal, and is considered necessary
to preserve continuity. Our immediate goal is to seek additional financing to
maintain limited operations and seek a combination of our business with a
strategic partner or a sale of all or a portion of our technology. There can be
no assurance that we will be successful in our efforts to raise capital or, if
successful, that we will succeed in efforts at combining our business with a
strategic partner or selling our technology, in which case we would be required
to terminate our operations. See also "Liquidity and Capital Resources" below.
We received notice from Nasdaq Listing Qualifications Staff ("Staff")on December
21, 2000 that our common stock failed to maintain a minimum bid price of $1.00
over the previous 30 consecutive trading days, as required by Marketplace Rule
4310(c)(4) ("the Rule"). In accordance with Marketplace Rule 4310(c)(8)(B), the
Company was given 90 days to regain compliance with the Rule. However, within
the set time period, the Company was unable to demonstrate such compliance. On
March 22, 2001, the Company received a determination letter from the Staff
stating that the Company had not regained compliance, and that the Company's
securities would be delisted from the Nasdaq SmallCap Market at the opening of
business on March 30, 2001. On March 29, 2001, the Company appealed the Staff's
determination pursuant to Marketplace Rule 4820(a), and a stay was granted on
March 30, 2001. The Company has requested a hearing before a Nasdaq Listing
Qualification Panel to review the Staff determination. A hearing has been set
for May 11, 2001. There can be no assurance that the Panel will grant the
Company's request for continued listing. In the event of a delisting from the
Nasdaq SmallCap Market, the Company would automatically continue to trade on the
Nasdaq OTCBB (Over-The-Counter Bulletin Board) market.
RESULTS OF OPERATIONS
Revenue
During the year ended December 31, 2000, we earned revenue in the amount of
$499,376 compared to $0.00 for 1999. We completed the commercial release of our
Burstware(R) suite of products in November 1999 and commenced shipments in
February 2000. During 2000, we also introduced our content hosting service,
which enables our customers to store their audio-video content on our Burstware
servers for delivery to their employees, customers or other end-users over
broadband networks. During 2000, our customer Interzest accounted for 60% of
revenues. No other single customer accounted for more than 10% of our revenues.
We had no revenue or cost of revenue for the year ended December 31, 1999,
compared with $15,000 revenue for the same period in 1998. These minimal
revenues were the result of our redirecting our product and market activity to
the Burstware(R) family of products. We released our first product, Burstware(R)
Version 1.1, to the public in February 1999, and in November 1999 we released
Burstware(R) Version 1.2, which contained the Burst-Enabled(TM) Windows Media
Player. In 1999 we recruited key sales, marketing, and development contributors
and signed six reseller agreements. Customer evaluations were undertaken during
the second half of 1999 and initial sales commenced in February 2000.
16
Cost of Revenue
The product cost of revenue recorded for 2000 consisted primarily of the
cost of equipment purchased from a third-party, which was resold to a customer
in connection with a software sale. Resale of equipment is not part of our sales
strategy, and we do not plan to make such sales to any significant degree in the
future. The Company had no cost of revenue for the years ended December 31, 1998
and 1999.
Operating Expenses
Operating expenses were $18,712,381 for the year ending December 31, 2000,
excluding equipment losses and write-dowms discussed below, as compared to
$11,509,619 during the same period in 1999. This resulted in total operating
expenses increasing by $7,202,762 for the year ending December 31, 2000, over
the same period in 1999. Research and development increased by $223,596 for the
year ending December 31, 2000, over the same period in 1999. There were
increases of $3,990,008 for sales and marketing and $2,989,158 in general and
administrative for the year ending December 31, 2000, over the same period in
1999. The increased costs were primarily a result of an overall increase in
business activity and the establishment and expansion of our sales force,
marketing programs and building out of our content hosting services in
particular, as more fully explained below.
During the year ended December 31, 1999, costs and expenses increased to
$11,509,619, as compared to $4,678,867 during the year ended December 31, 1998.
This $6,830,752 increase was a result of an overall expansion in business
activity, including growth in the research and development, sales and marketing
departments, as well as a non-recurring charge to expense related to the
acquisition of Timeshift-TV.
Sales and Marketing
For the year ending December 31, 2000, sales and marketing expenses were
$8,175,525, as compared to $4,185,517 during the same period in 1999. Sales and
marketing expenses consisted primarily of advertising and other marketing
related expenses, compensation and employee-related expenses, sales commissions,
and travel costs. The increase in absolute dollars is primarily attributable to
an increase in advertising costs and increases in compensation expense
associated with growth in our direct sales force and marketing personnel. As of
November 16, 2000 however, over 70% of sales, marketing, support and business
development staff has been eliminated, resulting in significant cost reductions
and revenue expectations going forward. As of April 2, 2001, all remaining sales
and marketing staff were laid off, and all sales offices have been shut down.
During the year ended December 31, 1999, the $3,354,500, or 404% increase
in Sales and Marketing over the year ended December 31, 1998, was primarily a
result of increased expenditures relating to the commercial release of our
Burstware(R) product suite. We added marketing staff and engaged in a targeted
marketing campaign, including print, radio and billboard advertising, public
relations, collateral development, and participation in a number of major trade
shows. These promotional activities allowed us to reach specific vertical
markets cost-effectively, to support the efforts of the direct sales force, and
to generate publicity for us as a whole.
The marketing campaign's objectives were to build brand awareness,
facilitate name recognition, educate the market, generate sales leads and
develop relationships with technology partners, systems integrators and
resellers. These expenditures continued as part of an overall plan to build upon
and expand the brand awareness we created in the marketplace.
Sales expenditures increased as a result of the expansion of our sales
force in conjunction with the launch of the Burstware(R) suite of products. We
had a sales and business development office in Southern California, and sales
offices in Virginia, Colorado, Michigan, Metropolitan New York and Florida. We
also partnered with The EMS Group, Limited to develop sales and marketing
channels in Europe.
Research and Development
For the year ending December 31, 2000, research and development expenses
were $4,300,328 as compared to $4,076,732 during the same period in 1999.
Research and development expenses consisted primarily of payroll and related
expenses incurred for enhancements to and maintenance of our Burstware(R)
technology and other operating costs. The increase for the year ending December
31, 2000 is primarily attributable to increases in the number of engineers that
developed and enhanced our software technologies. As of April 2, 2001, none of
the research and development staff remain as full-time employees, and we cut
back drastically in our product development spending.
During the year ended December 31, 1999, the $3,276,200, or 409% increase
in Research and Development expenditures over the year ended December 31, 1998,
resulted from the ramp-up in preparation for the initial commercial release and
development and testing of enhanced features planned for subsequent releases of
our product, as well as $1,330,000 of in-process research and development
acquired from Timeshift-TV which was charged to expense. The Quality Assurance
and Release Management Department was established in 1999 to support subsequent
releases of Burstware(R) products. Personnel were added to develop, test and
complete documentation of the product releases. Major development activities
began in the areas of player scripting, incorporation of a database for
replication, and various other features to be included in subsequent releases.
General and Administrative
For the year ending December 31, 2000, general and administrative expenses
were $6,236,528 as compared to $3,247,370 during the same period in 1999.
General and administrative expenses consist primarily of compensation and fees
for professional services, and the increase in absolute dollars is attributable
to increases in these areas. We believe that general and administrative expenses
will continue at reduced levels for the forseeable future.
We had net loss from operations of $19,609,984 for the year ending December
31, 2000, as compared to $12,977,729 during the same period in 1999. This was a
51% increase for the year ending December 31, 2000, over the same period in
1999. The increased overall year-to-date loss resulted from the increased
expenditures discussed above.
Total other expense net was $53,284 for the year ending December 31, 2000,
as compared to $1,468,110 for the same period in 1999. The decrease in net other
expenses was due to a $1,414,826 decrease in interest. The decrease in interest
expense was primarily due to reduction of debt and associated interest expense
through conversion to common stock in our January 2000 private placement and an
increase in interest income earned on the proceeds of equity financings. These
decreases in net other expenses were offset by non-cash expense recorded in
connection with additional shares of common stock issued without cash
consideration to investors in our January 2000 financing.
During the year ended December 31, 1999, we incurred a $200,100, or 7%
increase in General and Administrative expense over the year ended December 31,
1998, which resulted from additional personnel, equipment and facilities costs
to support the increased operations.
17
Impairment of Long Lived Assets
We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
During the fourth quarter of our fiscal year ending December 31, 2000, we
recognized $1,312,931 of impairment in our leasehold improvements, computers and
equipment assets located at our principal office and at seven outsourced
Internet hosting sites. The reasons for the impairment review were related to
the layoff of 77 employees (81% of our total staff) in November 2000, the
closing down of six sales offices and insufficient net cash flows generated by
our hosting business.
The write-down itself includes both the net book value of abandoned
equipment and leasehold improvements and a reduction to estimated fair value of
certain remaining equipment and computers.
LIQUIDITY AND CAPITAL RESOURCES
Our immediate goal is to seek immediate financing to maintain limited
operations and seek a combination of our business with a strategic partner or a
sale of all or a portion of our technology. We believe that we need at least $1
million in additional financing to continue our significantly reduced operations
through June 2001. However, any projection of future cash needs and cash flows
is subject to substantial uncertainty. As of March 16, 2001, we have raised
$350,000 in additional convertible debt subsequent to year-end.
Operating expenses to date have been funded primarily through debt and
equity financing. As of December 31, 2000 we had cash reserves of $296,584. Our
operating expenses as of December 31, 2000 were approximately $450,000 per
month. As of April 2, 2001, we have approximately $62,000 cash on hand. We have
reduced projected operating expenses to approximately $300,000 per month by
closing marketing offices, reducing our workforce by approximately 80%, and
implementing a payroll deferral program.
Based on our inability to reduce expenditures to a further degree, we
believe that operating requirements cannot currently be met without immediate
additional financing. We are currently in negotiations to obtain additional
financing of approximately $1 million through the issuance of debt, convertible
into preferred stock, licensing of our software, and the sale of our common
stock. We believe that if successful in obtaining this additional capital, based
upon our reduced operating costs, we will be able to operate until June 2001
without the need for additional financing. During this period, we plan to focus
our efforts on attracting a large strategic partner and investor that will
enable us to continue to develop and market our technology to customers
requiring the high-quality, reliable delivery of video and audio over broadband
networks; and/or attracting one or more merger and/or acquisition candidates who
would be willing to pay the highest price for our technology. In the event that
we are unsuccessful in obtaining this additional capital or in successfully
negotiating a business combination or sale of our technology, we would be
required to terminate our operations.
RECENT DEVELOPMENTS
Subsequent to December 31, 2000, on January 30, 2001, we sold 1,500,000
shares of common stock to Eagle Wireless International, Inc. in exchange for
400,000 shares of ClearWorks.net, Inc. (a wholly owned subsidiary of Eagle
Wireless International, Inc.) common stock. In a separate transaction, the
Company executed a software license agreement with Eagle Wireless in exchange
for 104,000 shares of Eagle Wireless Stock. On January 30, 2001, our common
stock was valued at $0.5625 and ClearWorks.net, Inc. was valued at $3.40.
RISKS AND UNCERTAINTIES
Liquidity
The opinion from our auditors on our December 31, 2000 financial statements
contains a paragraph suggesting that substantial doubt exists about our ability
to continue as a "going concern." At the time of this report, we had
insufficient cash reserves and receivables necessary to meet forecast operating
requirements. In the event we were to be unsuccessful in our fundraising, we
would be required to significantly reduce cash outflows through the further
reduction of marketing and sales, development, capital, and administrative
expenditures resulting in decreased potential revenue and profitability and the
possibility of filing a petition for bankruptcy.
18
Risks Relating to Burst.Com, Inc.
We are not currently profitable and may not achieve profitability.
We have a history of losses and expect to continue to incur net losses at
least through the year 2001. We expect to incur significant operating expenses
and, as a result, will need to generate significant revenues to achieve
profitability, which may not occur. Even if we achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis in
the future.
We will need immediate financing in order to continue our operations, and we may
not be able to raise immediate financing on favorable terms, or at all.
We need to raise immediate capital to continue our operations and implement
our plans to respond to competitive pressures, or otherwise to respond to
unanticipated requirements. We are currently offering shares of our common stock
in a private placement directed to strategic investors. The terms of such
financing, including the number of shares and the price per share, have not yet
been determined and will be subject to negotiations between us and the
prospective investors. If consummated, this financing could adversely affect the
market price of our common stock. In addition, we cannot be certain that we will
be able to obtain this or any other future financing on commercially reasonable
terms or at all. Our failure to obtain immediate financing, or inability to
obtain financing on acceptable terms, could require us to limit our plans, incur
indebtedness that has high rates of interest or substantial restrictive
covenants, issue equity securities that will dilute your holdings, or
discontinue all or a portion of our operations.
Our future success depends on our ability to keep pace with technological
changes, which could result in a loss of revenues.
The emerging video streaming and content delivery and hosting industry is
characterized by:
o rapidly changing technologies;
o frequent new product introductions; and
o rapid changes in customer requirements.
Video streaming technologies have reached commercially acceptable levels
only in the last several years and are continuing to experience numerous
changes. As a result, we must be able to maintain and extend our technological
edge in order to ensure that our products remain commercially viable.
Our future success will depend on our ability to market and enhance our
existing products and to develop and introduce new products and product
features. These products and features must be cost-effective and keep pace with
technological developments and address the increasingly sophisticated needs of
our customers. We may not be successful at these tasks. We may also experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new products and features.
We may not be able to timely adopt emerging industry standards, which may make
our products unacceptable to potential customers, delay our product
introductions or increase our costs.
Our products must comply with a number of current industry standards and
practices established by various international bodies. Our failure to comply
with evolving standards, including industry standard CODECS, will limit
acceptance of our products by market participants. If new standards are adopted
in our industry, we may be required to adopt those standards in our products. It
may take us a significant amount of time to develop and design products
incorporating these new standards. We may also become dependent upon
technologies developed by third parties and have to pay royalty fees, which may
be substantial, to the developers of the technology that constitutes the newly
adopted standards.
Our products are technologically complex and are designed to interface with
third-party products, such as Microsoft's Windows Media Player(R) and the
QuickTime(R) Player using publicly disseminated application program interfaces,
or APIs. Modifications to the APIs for these third-party products could require
further development effort on our part to continue to make the interface work
properly or, in some cases, result in an inability of our products to work
properly with third-party products. There is no assurance that these development
efforts or similar kinds of changes will be successful or that we can develop
new products effectively and quickly enough to avoid loss of revenues or market
share.
If we do not develop new products or new product features in response to
customer requirements or in a timely way, customers may not buy our products,
which would seriously harm our business.
19
The software media delivery industry is rapidly evolving and subject to
technological change and innovation. We must continue to enhance our products by
adding new product features and introduce new products in response to customer
requirements. If we fail to do so or in a timely manner, our customers may not
buy our products, resulting in serious harm to our business.
We will not be able to sell sufficient quantities of our products to sustain a
viable business if the market for software media delivery products does not
develop or if a competing technology displaces our products.
The software media delivery market is in the early stage of development and
is still evolving. For example, telecommunication companies such as SBC
Communications, Inc. intend to develop products and services for delivering
video content to their customers through digital subscriber line, or DSL,
networks. While we believe that our products can be successfully incorporated
into DSL and other broadband networks, further testing and development of our
products in a DSL network and other broadband environments will be necessary.
There can be no assurance that our products can be successfully incorporated
into DSL or other broadband networks or that companies operating such networks
will purchase our products. Our lack of product diversification exposes us to a
substantial risk of loss in the event that the software media delivery market
does not develop or if a competing technology replaces our software. If a
competing technology replaces or takes significant market share from the
products that our software support, we will not be able to sell our products in
quantities sufficient to grow our business.
We rely upon our sales of a small number of products, and the failure of any one
of our products to be successful in the market could substantially reduce our
revenue.
We rely on sales of a small number of products to generate substantially
all of our revenue. We are developing additional software products, but there
can be no assurance that we will be successful in doing so. Consequently, if our
existing products are not successful, our sales could decline materially, which
harm our financial performance.
Our products generally have long sales cycles and implementation periods, which
increase our costs in obtaining orders and reduce the predictability of our
earnings.
Our products are technologically complex. Prospective customers generally
must make a significant commitment to test and evaluate our software and to
integrate it into their products. As a result, our sales process is often
subject to delays associated with lengthy approval processes. For these and
other reasons, the initial sales cycles of our new software products has been
lengthy, recently averaging approximately four to six months from initiation in
late 1999 to completion in 2000. We expect that future sales will also
experience lengthy sales cycles.
Our products are often embedded in our customers' web pages. Since the
proper development of video enabled web pages requires a relatively high level
of technological expertise, we may be required to provide professional service
support to our customers in this area. There can be no assurance that we will be
able to continue to staff adequately for and deliver the level of professional
services required, or that we will be able to charge the customer fully for this
work. The result could be further impediments to sales and possibly higher than
anticipated costs of sales.
Long sales cycles are also subject to a number of significant risks over
which we have little or no control and that are not usually encountered in a
short sales span. These risks include our customers' budgetary constraints,
internal acceptance reviews and cancellation. In addition, orders expected in
one quarter could shift to another because of the timing of our customers'
procurement decisions. The time required to implement our products can vary
significantly with the needs of our customers and generally lasts for several
months; larger implementations can take several calendar quarters. This
complicates our planning process and reduces the predictability of our financial
results.
We may be subject to potential legal liabilities for distributing information
from our Website.
We may be subjected to claims based on negligence or other theories
relating to the information we distribute from our Website hosting service.
Similarly, we may be subjected to claims for defamation or copyright or
trademark infringement relating to the information we provide in our products.
These types of claims have been brought, sometimes successfully, against on-line
services as well as print publications in the past. We could also be subjected
to claims based upon the content that is accessible from our products through
links to other websites. These types of claims could be time-consuming and
expensive to defend, and could result in the diversion of our management's time
and attention. In addition, if our products provide faulty or inaccurate
information, or fail to
20
provide all the information a user expects, we could be subject to legal
liability. Our insurance and contractual provisions with users and information
providers may not protect us against these types of claims.
We may not be successful in protecting our intellectual property.
Our success will depend, in part, on our ability to protect the
intellectual property that we have developed through patents, trademarks, trade
secrets, copyrights, licenses and other intellectual property rights. We cannot
guarantee that we will be able to protect our intellectual property. We are
subject to a number of risks relating to intellectual property rights, including
the following:
o the means by which we seek to protect our proprietary rights may not
be adequate to prevent others from misappropriating our technology or
from independently developing or selling technology or products with
features based on or similar to ours;
o Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are
uncertain and still evolving.
o our products may be sold in foreign countries that provide less
protection to intellectual property than is provided under U.S.,
Japanese or European community laws;
o our intellectual property rights may be challenged, invalidated,
violated or circumvented and may not provide us with any competitive
advantage; and
o our patents pending may not be approved or may be only partially
approved.
As a result, we cannot predict the future viability or value of our proprietary
rights and those of other companies within the industry.
If our proprietary technology infringes upon the intellectual property rights of
others, our costs could increase and our ability to sell our products could be
limited.
We are not aware of any activity that may be infringing any proprietary
right of a third party. There can be no assurance, however, that aspects of our
technology would not be found to violate the intellectual property rights of
other parties. The resulting risks include the following:
o other companies may hold or obtain patents or may otherwise claim
proprietary rights to technology that is necessary to our business;
o if we violate the intellectual property rights of other parties, we
may be required to modify our products or intellectual property or to
obtain a license to permit their continued use; and
o any future litigation to defend us against allegations that we have
infringed upon the rights of others could result in substantial costs
to us, even if we ultimately prevail.
There are a number of companies that hold patents for various aspects of
the technology incorporated in our industry's standards (i.e. technologies that
deliver or manage audio and video content such as Java, Video, Audio, Vector
Graphics, Shockwave, and Cursors.) We expect that companies seeking to gain
competitive advantages will increase their efforts to enforce any patent rights
that they may have. The holders of patents from which we have not obtained
licenses may take the position that we are required to obtain a license from
them. We cannot be certain that we would be able to negotiate any license at an
acceptable price. Our inability to do so could substantially increase our
operating expenses or require us to seek and obtain alternative sources of
technology necessary to produce our products.
We began our current product line of software only recently and, as a result,
your ability to evaluate our prospects may be limited.
Although we have been operating since 1993, we have only recently commenced
sales of our present product line of media delivery software. Prior to that
time, we sold custom designed software products, which we do not anticipate
selling in the future. Our limited operating history with respect to our current
software may limit your ability to evaluate our prospects because of:
o our limited historical financial data relating to sales of our current
software;
o our unproven potential to generate profits; and
o our limited experience in addressing emerging trends that may affect
our software business.
21
As a young company that recently commenced a new product line, we face
risks and uncertainties relating to our ability to implement our business plan
successfully. You should consider our prospects in light of the risks, expenses
and difficulties we may encounter.
We may experience fluctuations in our future operating results, which will make
predicting our future results difficult.
These fluctuations may result from a variety of factors, including:
o market acceptance of our products, including changes in order flow
from our largest customers, and our customers' ability to forecast
their needs;
o the timing of new product announcements by us and our competitors;
o the lengthy sales cycle of our products;
o increased competition, including changes in pricing by us or our
competitors;
o delays in deliveries by our suppliers and subcontractors;
o currency exchange rate fluctuations; and
o general economic conditions in the geographic areas in which we
operate.
Accordingly, any revenues or net income in any particular period may be
lower than our revenues and net income in a preceding or comparable period.
Period-to-period comparisons of our results of operations may not be meaningful,
and you should not rely upon them as indications of our future performance. In
addition, our operating results may be below the expectations of securities
analysts and investors in future periods. Our failure to meet these expectations
will likely cause our share price to decline.
Our products could contain defects, which would reduce sales of those products
or result in claims against us.
We develop complex software for media delivery, content management and
storage. We have recently commenced sales of our first commercial product
released in late 1999 and have yet to achieve very large commercial deployments.
Despite testing, software errors have been found in our product and, in some
cases, our product's performance when initially deployed has not met customer
expectations. To date, we believe that all of the errors in question have been
resolved. There can be no assurance, however, that other errors will not occur,
as errors such as these are common in the development of any software product.
Additional errors in our product could result in, among other things, a delay in
recognition or loss of revenues, loss of market share, failure to achieve market
acceptance or substantial damage to our reputation. We could be subject to
material claims by customers, and we may need to incur substantial expenses to
correct any product defects. We do not have product liability insurance to
protect us against losses caused by defects in our products, and we do not have
"errors and omissions" insurance. As a result, any payments that we may need to
make to satisfy our customers may be substantial.
Our success depends upon our ability to attract, train and retain qualified
engineers, sales and marketing and technical support personnel.
We will need to hire additional engineers and highly trained technical
support personnel in order to succeed. We will need to increase our technical
staff to support new customers and the expanding needs of existing customers, as
well as our continued research and development operations. We will need to hire
additional sales and marketing personnel to target our potential customers.
Hiring engineers, sales and marketing and technical support personnel is very
competitive in our industry because of the limited number of people available
with the necessary skills and understanding of our products. This is
particularly true in California where the competition for qualified personnel is
intense. If we are unable to hire and retain necessary personnel, our business
will not develop and our operating results will be harmed.
22
Risks Relating to Our Industry
If software media technology or our method of implementing this technology is
not accepted, we will not be able to sustain or expand our business.
Our future success depends on the growing use and acceptance of video
applications for PCs and set-top boxes including the growth of video on the
Internet. The market for these applications is new, and may not develop to the
extent necessary to enable us to expand our business. We have recently invested
and expect to continue to invest significant time and resources in the
development of new products for this market. If the target market for our
solution does not grow, we may not obtain any benefits from these investments.
The markets in which we operate are highly competitive, and many of our
competitors have much greater resources than we do, which may make it difficult
for us to become profitable.
Competition in our industry is intense, and we expect competition to
increase. Competition could force us to charge lower prices for our products,
reduce demand for our products and reduce our ability to recover development and
manufacturing costs.
Some of our competitors:
o have greater financial, personnel and other resources than ours;
o offer a broader range of products and services than ours;
o may be able to respond faster to new or emerging technologies or
changes in customer requirements than we can;
o may have a more substantial distribution network than ours;
o benefit from greater purchasing economies than we do;
o offer more aggressive pricing than we do; and
o devote greater resources to the promotion of their products than we
do.
We will not be able to compete effectively if we are not able to develop
and implement appropriate strategies to address these factors.
Internal development efforts by our customers and new entrants to the market may
increase competition.
In the future, some of our customers may internally develop products that
will replace the products that we currently sell to them. In addition, some
leading companies, with substantially greater resources than we have, may
attempt to enter our market. The recent growth in the market for media delivery
and related technologies is attracting large entrants.
We depend on the continued growth and commercial acceptance of the Internet.
Our business will be adversely affected if usage of the Internet and
broadband access does not continue to grow as anticipated. This growth may be
inhibited by a number of factors, such as:
o inadequate network infrastructure;
o inconsistent quality of service;
o lack of cost-effective broadband high-speed services;
o lack of cost-effective storage; and
o security concerns.
Even if Internet use and broadband access grows, the Internet
infrastructure may not be able to support future growth adequately and its
reliability and quality of service may suffer. In addition, numerous websites
have experienced service interruptions due to outages and other delays occurring
internally and throughout the Internet network infrastructure. If these outages
or delays occur frequently in the future, Internet usage, as well as usage of
our products, could grow more slowly or decline.
Delivery of video using the Internet is an emerging business. Many of our
customers are new companies that are innovating and counting on Burstware(R) to
provide a technological edge. Because many of these companies are early stage
enterprises without revenues, they may delay payment or fail to pay our
invoices. For this reason, we have deferred a substantial portion of revenue
23
booked until collectibility has been assured. There is no assurance that this
revenue will ultimately be collected and recognized or that future bookings will
not be deferred.
We may face government regulation and legal uncertainties relating to the
Internet.
Currently, there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as user privacy, pricing and the
characteristics and quality of products and services. For example, recent
federal legislation prohibits the transmission of certain types of information
and content over the Internet. In addition, several telecommunications companies
have petitioned the Federal Communications Commission to regulate Internet and
on-line service providers in a manner similar to long distance telephone
carriers and to impose access fees on such providers. This could increase the
cost of transmitting data over the Internet. Moreover, it may take years to
determine the extent to which existing laws relating to issues such as property
ownership, libel and personal privacy apply to the Internet. Finally, state tax
laws and regulations relating to the provision of products and services over the
Internet are still developing. If individual states impose taxes on products and
services provided over the Internet, the cost of our products and services may
increase and we may not be able to increase the price we charge for our products
to cover these costs. Any new laws or regulations or new interpretations of
existing laws and regulations relating to the Internet could adversely affect
our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, we had no money invested in money market funds. The
primary objective of our investment activities is to preserve our capital until
it is required to fund operations while at the same time achieving a market rate
of return without significant risk. Since no funds were invested, a 10% movement
in market interest rates would not have a material impact on the total fair
value of our portfolio as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Auditors and the accompanying financial statements and
notes to the financial statements are on pages F-1 through F-17. Financial
Statement schedules are not required and have been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On December 17, 1999, KPMG LLP, who was previously engaged to audit our
financial statements for the years ended December 31, 1997 and 1998 as our
independent accountants resigned. During 1997 and 1998 and through the date of
resignation, there were no disagreements between us and KPMG LLP on any matter
of accounting principles or practices, financial statement disclousure or
auditing scope or procedure which if not resolved to their satisfaction would
have caused them to make reference to the subject matter of the disagreement in
connection with their report.
The audit report prepared by KPMG LLP did not contain any adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles, except as follows: KPMG LLP's independent
auditors' report on our consolidated financial statements as of December 31,
1998 and 1997 and for the years then ended, contained a separate paragraph
stating that "the Company has suffered recurring losses from operations and has
negative cash flows from operating activities that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters include raising sufficient capital to allow the Company to
complete development and successful commercialization of its products." The
consolidated financial statments do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG advised our Audit Committee in May 1998 regarding certain matters
involving internal control that it considered to be reportable conditions under
standards established by the American Institute of Certified Public Accountants.
Such matters involved the inappropriate recognition of revenue during the first
quarter of 1997 and an alleged misappropriation of funds.
On January 24, 2000, Burst.com, Inc. appointed BDO Seidman, LLP as the
Company's independent auditors. Prior to engaging BDO Seidman, LLP, neither the
Company nor anyone on its behalf consulted with BDO Seidman, 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.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Burst's Executive Officers and Directors and their ages as of December 31,
2000, are as follows:
Name Age Position
--------------------------- --- -------------------------------------
Richard Lang............... 47 Chairman
Douglas Glen............... 53 President, Chief Executive Officer and
Director
Edward H. Davis............ 48 General Counsel, Vice President of
Strategic Alliances and Secretary
John C. Lukrich............ 48 Chief Financial Officer
Name Age Position
--------------------------- --- --------------------------------------
Trevor Bowen (1) (2)....... 51 Director
John J. Micek III (1)...... 48 Director
Brian Murphy (2)........... 45 Director
Joseph Barletta (1)(2)..... 64 Director
Mark Hubscher.............. 48 Director
(1) Member of the compensation committee
(2) Member of the audit committee
The following sets forth biographical information as to the business experience
of each Executive Officer and Director of the Company for the year ended
December 31, 2000:
Richard Lang is our Chairman of the Board. From September 1997 through the
end of May 2000 he served as President and from September 1997 through September
2000 he served as Chief Executive Officer. From January 31, 1997 through August
1997, Mr. Lang served as one of our directors. Mr. Lang served as our Chairman
of the Board and Treasurer until January 31, 1997. He had served as Chairman of
the Board, Chief Executive Officer and Treasurer from December 1993 to September
1995 and as a Director since August 1992. He has been a Director of our
subsidiary, Explore Technology, Inc., since February 1990, and served as its
President from February 1990 to August 1992. Mr. Lang has presided over the
development of our patent portfolio. He is the inventor of record for the bulk
of our Intellectual Property. Mr. Lang was also a co-founder of Go-Video, Inc.,
Scottsdale, Arizona and co-inventor of Go-Video's patented dual-deck VCRs. Mr.
Lang received his A.A. degree from Scottsdale College. Starting April 1, 2001,
Mr. Lang has again become Chief Executive Officer as a result of the resignation
of Douglas Glen.
Douglas Glen has been President since June 2000, Chief Executive Officer
since September 2000 and a director since October 1999. Mr. Glen is general
partner of Pro Ven Private Equity's Global Rights Fund, a $250 million
investment fund focused on under-exploited brands, copyrights and media
properties. Previously, Mr. Glen was senior vice president, chief strategy
officer of Mattel, Inc. Before joining Mattel, Mr. Glen was group vice
president, business development and strategic planning for Sega of America.
Prior to joining Sega, Mr. Glen was general manager of Lucasfilm Games, the
consumer software division of George Lucas' entertainment company. Mr. Glen has
a Bachelors Degree in Business from Massachusetts Institute of Technology and a
Ph.D. from Somerset University. Mr. Glen has resigned his position as President
and Chief Executive Officer and his seat on the Board of Directors effective
April 1, 2001.
Edward H. Davis currently serves as General Counsel, Secretary and Vice
President of Strategic Alliances and has been with us since August 1998. Mr.
Davis was elected as our Secretary in October 1999. From 1987 to July 1998 Mr.
Davis was Corporate Counsel for Pacific Telesis Group, or PTG. As Corporate
Counsel he advised PTG consolidated companies, including Pacific Bell,
25
Nevada Bell, Tele-TV, Pacific Bell Video Services, Pacific Bell Information
Services, and Pacific Bell Directory. He has significant experience in mergers
and acquisitions, taxation, intellectual property and criminal prosecution. He
holds a Bachelor of Arts Degree in History and Political Science from Gonzaga
University; a Juris Doctorate Degree from the University of San Francisco, and a
post graduate Masters of Laws in Taxation from Golden Gate University. Mr. Davis
has resigned his position effective April 1, 2001.
John C. Lukrich became our Chief Financial Officer in June 2000. He has
extensive experience in mergers and acquisitions, operations, business
development, and venture capital strategies. From 1992 to 1996, Mr. Lukrich
served as CFO and Executive Vice President of Great Bear Technology,
Inc./StarPress, Inc., publisher and distributor of entertainment and
education-based CD-ROM titles. He was responsible for the required filings for
the publicly-traded company (GTBR), and for the merger, acquisition, and
transition of five software companies into Great Bear. In 1996 he joined
Intervista Software, Inc, as Chief Financial Officer and Chief Operating
Officer, and was later appointed President where he served until 1999 when
Intervista was sold to Platinum Technology, Inc. (PLAT). From 1998 to 2000, Mr.
Lukrich served as interim director for RateXchange.com (RTX), and as a part of
the senior management team with Chief Financial Officer responsibilities for
NetAmerica.com (NAMI), an incubator for Internet business-to-business startups.
Mr. Lukrich is a CPA, and practiced with Ernst & Young. He received BS degrees
in Accounting and in Finance from the University of California, Berkeley and an
MBA from Golden Gate University. Mr. Lukrich has resigned his position effective
April 1, 2001, at which time the Chief Financial Officer position was filled by
our Controller, Jeffrey D. Wilson.
Trevor Bowen is a partner in Principle Management Limited, an artiste
management company with offices in Dublin and New York. He was a partner in KPMG
LLP for eleven years before joining Principle Management Limited in 1996. Mr.
Bowen holds a number of directorships in companies in the media, entertainment
and film business. Mr. Bowen also holds a number of non-executive directorships
and is Chairman of an international consulting group. Mr. Bowen received a
Bachelor of Business Studies degree from Trinity College Dublin and is a Fellow
of The Institute of Chartered Accountants in Ireland. He has also completed a
Corporate Finance Course at Harvard University.
John J. Micek III has been one of our directors since April 1990, Secretary
and Treasurer since January 1994, and served as our President from April 1990 to
August 1992. Mr. Micek currently serves as President of Universal Warranty
Insurance located in Palo Alto, California, and Omaha, Nebraska. From 1994 to
1997, Mr. Micek served as general counsel for U.S. Electricar in San Francisco,
California. From January 1989 to March 1994, Mr. Micek practiced law in Palo
Alto, California. He has served as a Director of Armanino Foods of Distinction,
Inc., a publicly-held specialty food manufacturer in Hayward, California, since
February 1988. He also serves as a Director of Universal Group, Inc., a Midwest
group of insurance companies, and Cole Publishing Company in northern
California. He received a Bachelor of Arts Degree in History from the University
of Santa Clara and a Juris Doctorate from the University of San Francisco School
of Law.
Brian Murphy has been one of our directors since January 1997. He is a
partner in O.J. Kilkenny & Company, Chartered Accountants specializing in the
entertainment industry with offices in London, England and Dublin, Ireland. The
firm provides a wide range of services to their clients, consisting of major
international entertainment artists, covering all areas of financial management
and audit and accountancy advise. Mr. Murphy is involved at the executive level
with a number of companies in the media and entertainment business, particularly
in the field of digital post-production, film and television. Mr. Murphy
received a Bachelors Degree in Commerce from Dublin University, and became a
fellow of the Institute of Chartered Accountants in Ireland, England and Wales.
Mr. Murphy became one of our directors as representative of Draysec Finance
Limited, one of our principal stockholders.
Joseph Barletta has been one of our directors since September 1998. He is
of counsel with the firm Seyfarth, Shaw, Fairweather, and Geraldson in San
Francisco. He has served as the CEO or COO of six major companies in the media
industry including TV Guide magazine, Thomson Newspapers and the San Francisco
Newspaper Agency (Chronicle and Examiner), and he currently sits on the boards
of several companies. Mr. Barletta received his Juris Doctor Degree from
Duquensne University and Bachelor of Arts Degree from Marietta College.
Mark Hubscher has been one of our directors since August 2000. He currently
serves as Executive Director, Broadband Marketing, for SBC Communications, Inc.
("SBC") in San Antonio, Texas. In this capacity, Mr. Hubscher is responsible for
overseeing the development of products associated with SBC's DSL service,
including but not limited to its basic DSL transport product, voice over DSL and
video over DSL. Mr. Hubscher has been with SBC (and Ameritech, Inc.) since 1984
in various capacities, including strategic planning, business development and
product management. From 1976 to 1984, Mr. Hubscher has held various vice
presidential positions in subsidiaries of W.R. Grace. Mr. Hubscher has a
Bachelor of Commerce Degree from McGill University in Montreal, Canada and a
Masters of Management Degree from the Kellogg School of Business, Northwestern
University.
26
ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.
Summary of Compensation. The following table sets forth all compensation
earned or paid for services rendered to us in all capacities by our Chief
Executive Officer and by our five other most highly compensated executive
officers who earned more than $100,000 in salary and bonus for the fiscal year
ended December 31, 2000. These officers are referred to collectively in this
prospectus as the "named executive officers."
Summary Compensation Table
Long-Term
Annual Compensation Compensation
-------------------------------------------
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options (#) Compensation($)
-------------------------------------------------------------------------------------------------
Richard Lang, Chairman 2000 $330,616 $-- 269,594 $ 12,000(1)
of the Board and former Chief 1999 240,000 -- -- --
Executive Officer 1998 170,000 -- 1,011,000 --
Douglas Glen, Chief Executive 2000 188,294 -- 941,470 69,000(2)
Officer, President and Director 1999 -- -- 100,000 --
1998 -- -- -- --
John Lukrich, Chief Financial 2000 93,397 -- 403,905 9,000(1)
Officer 1999 -- -- -- --
1998 -- -- -- --
Kyle Faulkner, former Chief 2000 236,268 -- 18,500 --
Technology Officer 1999 206,583 10,000 50,000 --
1998 25,000 -- 205,716 283,940(3)
Thomas Koshy, former President of 2000 200,000 -- 134,205 --
International Operations 1999 142,000 -- 270,000 --
1998 -- -- 24,000 --
Edward Davis, General 2000 164,590 -- 85,292 --
Counsel, Vice President 1999 159,375 -- -- --
and Secretary 1998 56,250 -- 150,000 --
(1) Represents monthly auto allowance payments made to Mr. Lang and Mr.
Lukrich.
(2) Represents monthly housing and auto allowance payments made to Mr. Glen.
(3) Represents payments made to Mr. Faulkner as a contractor prior to
employment with the Company
Option Grants. The following table sets forth information with respect to
stock options granted during 2000 to the executive officers named in the Summary
Compensation Table. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. We assume that:
o the fair market value of our common stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option; and
o the option is exercised and sold on the last day of its term for the
appreciated stock price.
27
These amounts are based on assumed rates of appreciation and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock.
Option Grants in Last Fiscal Year Individual Grants(1)
% of Total Potential Realizable Value at
Number of Options Assumed Rates of Stock Price
Securities Granted to Appreciation for
Underlying Employees Option Term($)
Options in Exercise Expiration ----------------------------
Name Granted(#)(1) 2000(%)(2) Price($) Date 5% 10%
-------------------------- ------------------ --------------- ------------ --------------- -------------- -------------
Richard Lang 269,594(3) 3.13% $0.281 2/02 - 1/06 $ 617,558 $ 805,821
Douglas Glen 941,470(4) 10.12% $0.281 2/02 - 6/05 $ 57,870 $ 125,866
John Lukrich 403,905(5) 4.68% $0.281 2/02 - 6/05 $ 23,432 $ 50,876
Kyle Faulkner 18,500 .21% $5.00 06/05 $ 13,750 $ 41,575
Thomas Koshy 134,205(6) 1.56% $0.281 2/02 - 6/05 $ 4,231 $ 8,885
Edward Davis 85,292(7) .99% $0.281 2/02 - 6/05 $ 1,900 $ 3,910
(1) All options were granted under either our 1992, 1998 or 1999 Stock Option
Plan.
(2) Based on an aggregate of 8,621,242 options granted to employees, officers,
directors and consultants in fiscal 2000.
(3) 52,908 options originally granted at $5.00 and repriced in November 2000 at
a price of $0.281. In addition, 1,382,167 options granted in prior years at
$0.90 to $3.75 were also repriced to $0.281
(4) 797,000 options originally granted at $4.50 and $5.00 and repriced in
November 2000 at a price of $0.281. In addition, 100,000 options granted in
1999 at $6.625 were also repriced to $0.281.
(5) 315,000 options originally granted at $4.50 and $5.00 and repriced in
November 2000 at a price of $0.281.
(6) 45,300 options originally granted at $4.50 and $5.00 and repriced in
November 2000 at a price of $0.281. In addition, 300,000 options granted in
1998 and 1999 at $2.91 to $6.25 were also repriced to $0.281.
(7) 7,500 options originally granted at $5.00 and repriced in November 2000 at
a price of $0.281. In addition, 150,000 options granted in 1998 at $3.1563
were repriced to $0.281.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
The following table sets forth information concerning option exercises and the
aggregate value of unexercised options for the year ended December 31, 2000,
held by each executive officer named in the summary compensation table above.
None of these officers exercised any stock options in 2000.
Number of Securities Underlying Value of Unexercised In-the Money
Unexercised Options at Options at
Shares Value December 31, 2000 December 31, 2000(1)
Acquired on realized ---------------------------------------- --------------------------------------
Name Exercise(#) ($) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
----------------------- -------------- ---------- ------------------- -------------------- ----------------- --------------------
Richard Lang -- -- 1,425,445 226,316 $ -- $ --
Douglas Glen -- -- 291,401 840,069 $ -- $ --
John Lukrich -- -- 87,960 315,945 $ -- $ --
Thomas Koshy -- -- 218,906 215,299 $ -- $ --
Edward Davis -- -- 169,096 66,196 $ -- $ --
(1) The value realized on exercised options and the value of unexercised
in-the-money options at December 31, 2000 is based on a value of $0.25 per
share, the closing bid price of our common stock at December 31, 2000,
minus the per share exercise price, multiplied by the number of shares
underlying the options.
28
Ten-Year Option / Repricing
The following table sets forth information concerning all repricing of options
for the year ended December 31, 2000, held by each executive officer named in
the summary compensation table above.
Length of Original
Market Price of Option Term
Stock on Date of Exercise Price on New Exercise Remaining at Date
Name Reprice Date of Repricing Price of Repricing
----------------------- -------------- ------------ ------------------ ------------------- ----------------- --------------------
Richard Lang 11/21/00 1,435,075 $ 0.2812 $ 0.90 - 5.00 $ 0.2812 2 to 7 years
Douglas Glen 11/21/00 987,000 $ 0.2812 $ 2.80 - 6.625 $ 0.2812 2 to 4 years
John Lukrich 11/21/00 315,000 $ 0.2812 $ 4.50 - 5.00 $ 0.2812 4 years
Kyle Faulkner -- -- $ -- -- $ -- --
Thomas Koshy 11/21/00 345,300 $ 0.2812 $ 2.91 - 6.63 $ 0.2812 2 to 4 years
Edward Davis 11/21/00 157,500 $ 0.2812 $ 3.15 - 5.00 $ 0.2812 2 to 4 years
STOCK PERFORMANCE GRAPH
(To Be Filed By Amendment)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to beneficial
ownership of our common stock by:
o each person who beneficially owns more than 5% of our common stock;
o each of our executive officers;
o each of our directors; and
o all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Burst.com, Inc., 500 Sansome Street, Suite 500, San Francisco, CA
94111. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares beneficially owned. The
applicable percentage of ownership for each stockholder is based on 21,648,125
shares of common stock outstanding on March 16, 2001 together with applicable
options and warrants for that stockholder. Shares of common stock issuable upon
exercise of options and other rights beneficially owned are deemed outstanding
for the purpose of computing the percentage ownership of the person holding
those options and other rights, but are not deemed outstanding for computing the
percentage ownership of any other person.
Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------------------------------------------------ ------------------------- -----------------------
5% Stockholders
Draysec Finance Limited 2,041,678 (1) 9.43%
Storie Partners LLP 3,543,167 (2) 16.37%
Mercer Management 2,065,769 (3) 9.54%
SBC Venture Capital Corporation 1,715,266 (4) 7.92%
Stuart Rudick 1,279,000 (5) 5.91%
Chelsey Capital 1,519,750 (6) 7.02%
Robert London 1,130,915 (7) 5.22%
Ravinia Capital 1,199,829 (8) 5.54%
29
Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------------------------------------------------ ------------------------- -----------------------
Executive Officers and Directors
Richard Lang 2,599,222 (9) 12.01%
Trevor Bowen 1,826,578 (10) 8.44%
John J. Micek III 371,750 (11) 1.71%
Brian Murphy 1,945,033 (12) 8.98%
Joseph Barletta 141,174 (13) *
Douglas Glen 434,591 (14) 2.00%
John C. Lukrich 138,990 (15) *
Edward H. Davis 214,592 (16) *
All officers and directors as a group (8 persons) 7,665,680 (17) 35.41%
* Represents less than a one (1) percent interest
(1) Includes 1,525,769 shares held, options to purchase 200,000 shares, and
warrants to purchase 46,109 shares of our common stock. Also includes
options to purchase 100,000 shares of our common stock held by Trevor Bowen
and options to purchase 169,800 shares of our common stock held by Brian
Murphy, each of who represents Draysec Finance on our Board of Directors.
(2) Includes 2,913,167 shares held and warrants to purchase 630,000 shares of
our common stock.
(3) Includes 1,025,204 shares held, options to purchase 500,000 shares, and
warrants to purchase 540,565 shares of our common stock.
(4) Includes 857,633 shares held and a warrant to purchase 857,633 shares of
our common stock.
(5) Includes 1,150,000 shares held by Mindful Partners, 75,000 shares held by
Delaware Charter Guaranty Trust Company, 20,000 shares held by Stuart
Rudick, Trustee, and 1,500 shares held by Martin Rudick. Also includes
warrants to purchase 32,500 shares of our common stock held by Mindful
Partners.
(6) Includes 769,750 shares of our common stock and warrants to purchase
750,000 shares of our common stock.
(7) Includes 913,279 shares of our common stock and warrants to purchase
217,636 shares of our common stock.
(8) Includes 609,129 shares of our common stock and warrants to purchase
593,000 shares of our common stock.
(9) Includes 922,346 shares of our common stock in the name of the Lisa Walters
and Richard Lang Revocable Trust, options to purchase 1,554,876 shares of
our common stock held by Richard Lang, and options to purchase 122,000
shares of our common stock held by Lisa Walters, Mr. Lang's spouse.
(10) Includes 1,771,878 shares of our common stock held beneficially by Draysec
Finance and options to purchase 54,700 shares of our common stock.
(11) Includes 69,432 shares of our common stock held by Mr. Micek and immediate
family, 50,000 shares of our common stock held by Universal Warranty Corp.,
and 12,829 shares held by Universal Assurors Agency, Inc. Also includes
options to purchase 179,866 shares of our common stock held by Mr. Micek,
warrants to purchase 37,498 shares of our common stock held by the Miceks,
warrants to purchase 6,500 shares of our common stock held by Universal
Warranty Corp. and warrants to purchase 15,625 shares held by Universal
Assurors Agency, Inc.
(12) Includes 1,771,878 shares of our common stock held beneficially by Draysec
Finance and options to purchase 173,155 shares of our common stock held by
Mr. Murphy.
(13) Includes 25,658 shares of our common stock held beneficially by
Independence Properties, options to purchase 84,266 shares of our common
stock held by Mr. Barletta, and warrants to purchase 31,250 shares of our
common stock held by Independence Properties.
30
(14) Includes 25,658 shares of our common stock, options to purchase 377,683
shares of our common stock, and warrants to purchase 31,250 shares of our
common stock.
(15) Consists of options to purchase 138,990 shares of common stock.
(16) Consists of options to purchase 214,592 shares of our common stock.
(17) 4,649,679 shares of our common stock, options to purchase 2,900,128 shares
of our common stock, and warrants to purchase 115,873 shares of our common
stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since April 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an immediate
family member of any of the foregoing, had or will have a direct or indirect
interest other than:
o compensation arrangements, which are described where required under
"Management"; and
o the transactions described below.
Sale of Common Stock and Warrant in August and September 2000.
In August 2000, we sold to SBC Venture Capital Corporation, an affiliate of
SBC Communications, Inc. ("SBC Communications"), 857,633 shares of our common
stock at a purchase price of $5.83 per share and a three-year warrant to
purchase 857,633 shares of our common stock with an exercise price of $5.83 per
share. The aggregate purchase price of these shares and the warrant was
$5,000,000. In connection with this transaction, Mr. Mark Hubscher, Executive
Director, Broadband Marketing, of SBC, was elected to our Board of Directors. In
September 2000, we issued for no additional cash consideration an aggregate of
126,626 shares of our common stock to the purchasers in the January 2000
financing, discussed below, pursuant to certain rights granted to them in their
registration rights agreement.
Sale of Common Stock and Warrants in January 2000.
In January 2000 we sold 4,808,375 shares of common stock at a purchase
price of $4.00 per share, for an aggregate gross purchase price of $19.2
million. We raised $13.9 million in cash in the offering, before offering costs
totaling $1,103,000 for this offering and the debt conversion described below,
and the remaining $5.3 million consisted of the conversion of notes payable. The
purchasers also received warrants to purchase up to an aggregate of 4,843,371
shares of our common stock, at an exercise price of $5.00 per share. The
warrants are exercisable for a term of five years from the date of issuance. The
following directors, executive officers and principal stockholders participated
in this transaction:
Cash Purchases:
Investor Amount Invested Common Shares Warrants
------------------------------- ---------------- ---------------- -------------
Special Situations Funds $ 4,000,000 1,000,000 1,000,000
Chelsey Capital 3,000,000 750,000 750,000
BayStar Capital 3,000,000 750,000 750,000
Ravinia Capital Ventures 2,374,000 593,500 593,500
Kyle Faulkner 250,000 62,500 62,500
Douglas Glen 100,000 25,000 25,000
Conversion of Notes Payable:
Investor Notes Converted Common Shares Warrants
------------------------------- ----------------- --------------- --------------
Storie Partners $2,000,000 500,000 500,000
Mercer Management 1,550,000 387,500 387,500
31
In connection with the above financing, holders of all of our then
outstanding shares of preferred stock voluntarily converted such shares into
4,496,609 shares of our preferred stock.
Transactions with Draysec Finance Limited
During 1997, Draysec Finance Limited, one of our principal stockholders,
invested $200,000 for the purchase of investment units, consisting of 200,000
shares of our preferred stock and warrants to purchase 200,000 shares of our
common stock at an exercise price of $1.00 per share. Our Board of Directors
extended the exercise date for these warrants to February 1999 and increased the
exercise price to $1.50 per share after January 1998. These warrants were
exercised in February 1999. Additionally, Draysec Finance Limited provided a
loan of $80,000 in consideration for a six month promissory note from us with an
interest rate of 10.5% and a warrant to purchase 16,000 shares of our common
stock at an exercise price of $1.00 per share.
In 1998, Draysec Finance provided us two loans, in the aggregate principal
amount of $50,000, convertible into our common stock at $1.00 per share. These
loans included warrants to purchase 10,000 shares of our common stock at $1.00
per share. Draysec Finance loaned us an additional $75,000 in 1998 in the form
of a line of credit at an interest rate equal to the prime rate plus 2% and
received a warrant to purchase 15,000 shares of our common stock at $2.36 per
share.
Also in 1998, Draysec Finance converted $78,596 in debt and accrued
interest into 39,298 shares of our preferred stock and warrants to purchase
5,109 shares of our common stock at $2.00 per share Draysec Finance also
converted an additional $137,054 of convertible debt and accrued interest into
137,054 shares of our common stock at $1.00 per share.
In February 1999, Draysec Finance exercised the warrants issued in 1997 to
purchase 200,000 shares of our common stock for $300,000 cash.
In January 2000, 239,298 shares of preferred stock held by Draysec Finance
were converted to 239,298 shares of our common stock in connection with a
private placement financing.
Transactions with Mercer Management
During 1997, Mercer Management Inc., one of our principal stockholders,
converted 300,000 shares of our preferred stock into a like number of shares of
our common stock. Also in 1997, Mercer Management invested an additional
$200,000 for the purchase of investment units consisting of 200,000 shares of
our preferred stock and warrants to purchase 200,000 shares of our common stock
at an exercise price of $1.00 per share. Our Board of Directors extended the
exercise date for these warrants to February 1999 and increased the exercise
price to $1.50 per share after January 26, 1998. These warrants were exercised
in February 1999.
In order to provide bridge financing for us during the last quarter of
1997, Mercer Management loaned us $100,000 cash. In consideration for this loan,
we issued Mercer Management a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. Additional consideration was provided by
us in the form of a warrant to purchase 20,000 shares of our common stock at an
exercise price of $1.00 per share.
In 1998, Mercer Management loaned us an additional $525,000. The first
$100,000 was in the form of a six-month promissory note in the amount of
$100,000 at an interest rate of 10.5%. This promissory note was convertible into
shares of our common stock at the conversion rate of $1.00 per share. An
additional $200,000 was provided in exchange for a second promissory note. This
note provided for an interest rate of prime plus 2% payable monthly in arrears
and had a due date of July 15, 1998. Additional consideration for the note
included 40,000 shares of our common stock and a warrant to purchase an
additional 40,000 shares of common stock at the exercise price of $1.00 per
share. The $200,000 note also provided for an automatic extension through
December 31, 1998 for additional consideration in the form of 40,000 shares of
our common stock and a warrant to purchase an additional 40,000 shares of common
stock at the exercise price of $1.00 per share. Also in 1998, Mercer Management
loaned us an additional $75,000 in the form of a line of credit at prime plus 2%
and was granted a warrant to purchase 15,000 shares of our common stock at $2.31
per share.
32
Subsequently in 1998, Mercer provided additional credit of $150,000 at prime
plus 2% and was granted a warrant to purchase 30,000 shares of our common stock
at $1.70 per share.
Also, during March 1998, Mercer Management elected to exercise its 200,000
warrants to purchase common stock pursuant to an offering by us to reduce the
exercise price of said warrants for the period from February 1998 to March 1998
to $0.75 per share. As a result of the exercise of these warrants, we received
$150,000 from Mercer Management Inc., and Mercer Management was issued an
additional 200,000 shares of our common stock. In 1998, Mercer Management
converted $431,758 debt and accrued interest into 215,879 shares of our
preferred stock and 28,065 warrants to purchase common stock at $2.00 per share.
During 1999, we received $1,550,000 from Mercer Management in exchange for
notes payable convertible into our common stock, due in one year, and bearing
interest at 7.75%. The conversion rate for the notes was the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement.
In connection with a private placement financing, in January 2000, all of
the Mercer Management notes were converted into 387,500 shares of common stock
at a conversion rate of $4.00 per share and warrants to purchase 387,500 shares
of our common stock at an exercise price of $5.00; and 415,879 shares of
Preferred Stock were converted to common stock.
During 2000, we received $500,000 from Mercer Management, Inc. in exchange
for Notes payable, convertible into preferred stock due in one year and bearing
interest at 6%. All principal under these Notes will convert at the option of
Mercer Management into equity of the Company, prior to a change in control, into
a new series of Preferred Stock at a per share conversion price of $5.00 and a
liquidation preference of $7.50 per share. Notwithstanding Mercer's conversion
rights set forth above, in lieu of issuing Preferred Stock the Company has the
right to redeem the Notes for an amount equal to the liquidation preference.
Transactions with Storie Partners LLP
In February 1996, Storie Partners LLP, one of our principal stockholders,
invested $700,000 for the purchase of investment units consisting of 700,000
shares of our preferred stock and warrants to purchase 700,000 shares of our
common stock at an exercise price of $1.00 per share. In April 1997, Storie
Partners exercised these warrants to purchase 400,000 shares of common stock for
$400,000. Our Board of Directors extended the exercise date for these warrants
to February 1999 and increased the exercise price to $1.50 per share after
January 1998.
In 1998, Storie Partners 1,000,000 shares of our preferred stock, and
warrants to purchase 130,000 additional shares of our common stock at an
exercise price of $2.00 per share.
During 1999, we received $2,000,000 from Storie Partners in exchange for
notes payable convertible into our common stock, due in one year, and bearing
interest at 7.75%. The conversion rate for the notes was the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement.
In connection with a private placement financing in January 2000 all of the
Storie Partners notes were converted into 500,000 shares of common stock at a
conversion rate of $4.00 per share and warrants to purchase shares of our common
stock at an exercise price of $5.00 per share; and 1,700,000 shares of preferred
stock held by Storie Partners were converted to common stock.
Transactions with Stuart Rudick and Affiliates
In 1996, Mindful Partners LLP, an affiliate of Stuart Rudick, one of our
principal stockholders, invested $300,000 for the purchase of investment units
consisting of 300,000 shares of our preferred stock and warrants to purchase
300,000 shares of our common stock at an exercise price of $1.00 per share.
Rudick Asset Management, another affiliate of Mr. Rudick received an additional
100,000 units and warrants to purchase 100,000 shares of common stock at an
exercise price of $1.00 per share as a finders' fee relating to the placement of
this offering. Additionally, Rudick Asset Management invested $75,000 for
investment units consisting of 75,000 shares of preferred stock and warrants to
purchase 75,000 shares of common stock at $1.00 per share, issued in the name of
Delaware Charter Guaranty Trust Company. Our Board of Directors extended the
exercise date for these warrants to February 1999 and increased the exercise
price to $1.50 per share after January 1998.
33
In 1998, Mindful Partners invested $500,000 for 250,000 shares of our
preferred stock, and warrants to purchase 32,500 additional shares of our common
stock at $2.00 per share.
In February 1999, Mindful Partners, Rudick Asset Management and Delaware
Charter Guaranty Trust Company exercised the warrants issued in 1996 to purchase
450,000, 100,000 and 75,000 shares of our common stock for $675,000, $150,000,
and $112,500 in cash, respectively.
In January 2000, 870,000 shares of preferred stock held by Mindful Partners
and Rudick Asset Management were converted into 870,000 shares of our common
stock in connection with a private placement financing.
Transactions with Robert London
In 1996, Robert London, one of our principal stockholders, invested
$100,000 for the purchase of investment units consisting of 100,000 shares of
our preferred stock and warrants to purchase 100,000 shares of our common stock
at an exercise price of $1.00 per share. Our Board of Directors extended the
exercise date for the warrants to February 1999 and increased the exercise price
to $1.50 per share after January 1998. .
In 1998, Mr. London invested $500,000 for 250,000 shares of our preferred
stock, and warrants to purchase 32,500 additional shares of our common stock at
an exercise price of $2.00 per share. Mr. London also provided us with a
$225,000 loan convertible into shares of our common stock at $0.75 per share.
This loan together with accrued interest was converted into 318,555 shares of
common stock in October 1998. Mr. London later provided us with an additional
$75,000 and $150,000 in loans in the form of a line of credit at the prime rate
plus 2%, and warrants to purchase 15,000 and 30,000 shares of our common stock
at $2.31 and $2.15 per share, respectively. Later, Mr. London converted $232,864
in loans and accrued interest into 116,432 shares of our preferred stock and
warrants to purchase 5,136 shares of our common stock at an exercise price of
$2.00 per share.
During 1999, we received $500,000 from Mr. London in exchange for
promissory notes convertible into our common stock, due in one year, and bearing
interest at 7.75%. The conversion rate for the notes was the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement.
In connection with a private placement financing in January 2000, all of
the London notes were converted into 125,000 shares of common stock and warrants
to purchase 125,000 shares of our common stock at an exercise price of $5.00 per
share; and 366,432 shares of preferred stock held by London were converted into
366,432 shares of our common stock.
Transactions with Richard Lang
On August 3, 1999, we acquired Timeshift-TV, Inc. in a stock-only
transaction from Richard Lang, our Chairman and then CEO, Earl Mincer and Eric
Walters, who subsequently became employees of ours. Mr. Walters is Mr. Lang's
brother-in-law. Mr. Lang and the other parties were not employed by us at the
time they formed Timeshift-TV. Our Board of Directors unanimously approved our
acquisition of Timeshift-TV. Timeshift-TV holds assets, including intellectual
property, in the area of time-shifted real-time broadcasting, which we plan to
integrate into our advanced video and audio delivery solutions. We also plan to
license the Timeshift-TV intellectual property to other parties for various
applications.
Transactions with Kyle Faulkner
We paid consulting fees to Kyle Faulkner, our former Chief Technology
Officer, through his consulting company, DuoDesign, of $283,940 in 1998, prior
to his employment with us.
In January 2000, Mr. Faulkner invested $250,000 for 62,500 shares of our
common stock and 5-year warrants to purchase 62,500 shares of common stock at an
exercise price of $5.00 per share in connection with a private placement
financing.
34
Transactions with Thomas Koshy
In January 2000, Mr. Thomas Koshy, then Chief Operating Officer, invested
$40,000 for 10,000 shares of common stock and 5-year warrants to purchase 10,000
shares of our common stock at an exercise price of $5.00 per share in connection
with a private placement financing.
Transactions with Douglas Glen
In January 2000, Douglas Glen invested $100,000 for 25,000 shares of our
common stock and 5-year warrants to purchase 25,000 shares of our common stock
at an exercise price of $5.00 per share in connection with a private placement
financing. In May 2000, as part of the employment agreement with Mr. Glen, the
Company agreed to loan $100,000 initially and $5,000 monthly thereafter, the
balance bearing interest at 7%. The loan balance at December 31, 2000 is
$139,663 including interest. The loan may be forgiven if Mr. Glen remains
employed with the Company for 3 years or is terminated involuntarily before 3
years.
Transactions with John J. Micek III
In January 2000, John J. Micek III, one of our directors, invested $25,000
for 6,250 shares of common stock and 5-year warrants to purchase 6,250 shares of
our common stock at an exercise price of $5.00 per share in connection with a
private placement financing.
In December 1999, we received $50,000 from Universal Assurance, of which
Mr. Micek is a principal, in exchange for notes payable convertible into our
common stock, due in one year, and bearing interest at 7.75%. The conversion
rate for the notes was the lower of (1) $6.50, (2) 80% of the average closing
price of our publicly traded shares in the 20 trading days immediately preceding
the closing of an ongoing private placement, or (3) the price agreed in that
private placement. The Universal notes were subsequently converted into 12,500
shares of our common stock in January 2000.
Transactions with Joseph Barletta
In January 2000, we received $100,000 from Independence Properties LLC, of
which Joseph Barletta, one of our directors, is a principal, in exchange for
notes payable convertible into our common stock, due in one year, and bearing
interest at 7.75%. The conversion rate for the notes was the lower of (1) $6.50,
(2) 80% of the average closing price of our publicly traded shares in the 20
trading days immediately preceding the closing of an ongoing private placement,
or (3) the price agreed in that private placement. The notes were subsequently
converted into 25,000 shares of our common stock at the end of January in
connection with a private placement financing.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT INDEX
Exhibit Description
------- --------------------------------------------------------------------
2.1** State of Arizona, Articles of Merger of Video Press, Inc. into
Explore Technology, dated December 28, 1990; Agreement and Plan of
Merger dated August 29, 1993.
2.2** Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992.
2.3** Certificate of Merger of Time Shift TV, Inc. into IVT Delaware, Inc.
dated July 26, 1999.
35
2.4** Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August 3,
1999.
3.1.1** Certificate of Incorporation of Catalina Capital Corp. dated April
27, 1990.
3.1.2** Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992.
3.1.3** Amended and Restated Certificate of Incorporation dated January 27,
2000.
3.2.1** Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment No.
1 dated April 5, 1993.
3.3.2** Amended and Restated Bylaws dated January 27, 2000.
3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.
3.34 Certificate of Status Foreign Corporation dated August 29, 2000.
4.1** Specimen common stock certificate.
4.2** Prospectus for Catalina Capital Corp. dated October 17, 1990.
4.3** SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990.
4.4** Amendment No. 1 to SEC Form S-18 for Catalina Capital Corp. dated
August 10, 1990.
4.5** Amendment No. 2 to SEC Form S-18 for Catalina Capital Corp. dated
September 28, 1990.
4.6** Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992.
4.7** Certificate of Designation for Catalina Capital Corp. of Series B-1,
B-2, B-3 and B-4 Convertible Preferred Stock, dated August 4, 1992.
4.8** Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992.
4.9** Certificate of Designation for Instant Video Technologies, Inc. of
Series D Convertible Preferred Stock, dated December 23, 1992.
4.10** Certificate of Designation for Instant Video Technologies, Inc. of
Series E Convertible Preferred Stock, dated May 9, 1995.
4.11** Certificate of Designation for Instant Video Technologies, Inc. of
Series F Convertible Preferred Stock, dated February 13, 1996.
4.12** Certificate of Designation of Instant Video Technologies, Inc.
filing Certificate of Elimination of Series A Preferred Stock,
Series B-1, B-2, B-3, B-4 Convertible Preferred Stock, Series C
Preferred Stock, Series D Convertible Preferred Stock and Series E
Convertible Preferred Stock dated November 6, 1998.
4.13** Amended Certificate of Designation, Statement of Establishing Series
F Convertible Preferred Stock AND Certificate of Designation,
Statement Establishing Series B Convertible Preferred Stock filed
January 1, 1999
4.14** Stock Purchase Agreement (Series B Stock) with Exhibit A (Warrant to
Purchase Shares of Common Stock), Exhibit B (Certificate of
Designation), Exhibit C (Registration Rights Agreement), and Exhibit
D (Voting and Right of First Refusal)
4.15** Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996.
36
4.16** Securities Purchase Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.17** Registration Rights Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.18** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000
4.19** Form of Lock-up Agreement entered into between the registrant and
each of certain officers, directors and principal shareholders in
January 2000.
10.1** RMSI Reseller License Agreement.
10.2** RMSI End-User Software License Agreement.
10.3** I-Stream TV Reseller Agreement.
10.4** Clover Technologies, Inc. Reseller license Agreement.
10.5** Service Agreement with The EMS Group.
10.6** Lease at 500 Sansome Street, San Francisco, CA with ten (10)
Amendments.
10.7** Lease for sales office in Livonia, Michigan.
10.8** Lease for sales office in Golden, Colorado.
10.9** Lease for sales office in Alexandria, Virginia.
10.10** Lease for sales office in Mount Holly, New Jersey.
10.11** Pat Meir Assoc. contract.
10.12** Employment Agreement with Richard Lang.
10.13** Employment Agreement with Thomas Koshy.
10.14** Employment Agreement with Edward Davis.
10.15** Employment Agreement with Richard Jones.
10.16** Employment Agreement with Kyle Faulkner.
10.17** Employment Offer Letter to David Morgenstein.
10.18** Employment Offer Letter to Frank Schwartz.
10.19** Employment Offer Letter to June White.
10.20** Employment Agreement with Doug Glen.
10.21** Employment Agreement with George Zraick.
10.22** Employment Agreement with Dave Egan.
10.23** Employment Agreement with John C. Lukrich.
37
10.24 Eagle Wireless International, Inc. Securities Purchase Agreement
10.25 License Agreement with InterZest.
10.26 Eagle Wireless International, Inc. License Agreement
21.1** Subsidiaries of the registrant.
24.1** Power of Attorney (included in signature page)
--------
** Previously filed.
b) Reports on Form 8-K during quarter ended December 31, 2000:
Form 8(k) filed on October 2, 2000, announcing that the common stock would
commence trading on Nasdaq's SmallCap Market under the symbol "BRST" on
Monday, October 2, 2000.
38
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
BURST.COM, INC.
Dated: April 17, 2001 By /s/ Richard Lang
----------------------------------
Chairman and Chief Executive Officer
In accordance with 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/ Trevor Bowen Director April 17, 2001
--------------------------
Trevor Bowen
/s/ John J. Micek Director April 17, 2001
--------------------------
John J. Micek III
/s/ Brian Murphy Director April 17, 2001
--------------------------
Brian Murphy
/s/ Mark Hubscher Director April 17, 2001
--------------------------
Mark Hubscher
/s/ Jeffrey D. Wilson Chief Financial Officer and April 17, 2001
-------------------------- Principal Accounting Officer
Jeffrey D. Wilson
39
EXHIBIT INDEX
Exhibit Description
------- --------------------------------------------------------------------
2.1** State of Arizona, Articles of Merger of Video Press, Inc. into
Explore Technology, dated December 28, 1990; Agreement and Plan of
Merger dated August 29, 1993.
2.2** Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992.
2.3** Certificate of Merger of Time Shift TV, Inc. into IVT Delaware, Inc.
dated July 26, 1999.
2.4** Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August 3,
1999.
3.1.1** Certificate of Incorporation of Catalina Capital Corp. dated April
27, 1990.
3.1.2** Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992.
3.1.3** Amended and Restated Certificate of Incorporation dated January 27,
2000.
3.2.1** Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment No.
1 dated April 5, 1993.
3.3.2** Amended and Restated Bylaws dated January 27, 2000.
3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.
3.34 Certificate of Status Foreign Corporation dated August 29, 2000.
4.1** Specimen common stock certificate.
4.2** Prospectus for Catalina Capital Corp. dated October 17, 1990.
4.3** SEC Form S-18 for Catalina Capital Corp. dated June 29, 1990.
4.4** Amendment No. 1 to SEC Form S-18 for Catalina Capital Corp. dated
August 10, 1990.
4.5** Amendment No. 2 to SEC Form S-18 for Catalina Capital Corp. dated
September 28, 1990.
4.6** Certificate of Designation for Catalina Capital Corp. of Series A
Preferred Stock dated Aug. 4, 1992.
4.7** Certificate of Designation for Catalina Capital Corp. of Series B-1,
B-2, B-3 and B-4 Convertible Preferred Stock, dated August 4, 1992.
4.8** Certificate of Designation for Catalina Capital Corp. of Series C
Preferred Stock, dated August 4, 1992.
4.9** Certificate of Designation for Instant Video Technologies, Inc. of
Series D Convertible Preferred Stock, dated December 23, 1992.
4.10** Certificate of Designation for Instant Video Technologies, Inc. of
Series E Convertible Preferred Stock, dated May 9, 1995.
4.11** Certificate of Designation for Instant Video Technologies, Inc. of
Series F Convertible Preferred Stock, dated February 13, 1996.
4.12** Certificate of Designation of Instant Video Technologies, Inc.
filing Certificate of Elimination of Series A Preferred Stock,
Series B-1, B-2, B-3, B-4 Convertible Preferred Stock, Series C
Preferred Stock, Series D Convertible Preferred Stock and Series E
Convertible Preferred Stock dated November 6, 1998.
4.13** Amended Certificate of Designation, Statement of Establishing Series
F Convertible Preferred Stock AND Certificate of Designation,
Statement Establishing Series B Convertible Preferred Stock filed
January 1, 1999
4.14** Stock Purchase Agreement (Series B Stock) with Exhibit A (Warrant to
Purchase Shares of Common Stock), Exhibit B (Certificate of
Designation), Exhibit C (Registration Rights Agreement), and Exhibit
D (Voting and Right of First Refusal)
4.15** Unit Purchase Agreement between Instant Video Technologies and
Investors (Storie Partners, Mindful Partners-Stuart Rudick, Reed
Slatkin, Robert London) dated February 14, 1996.
40
4.16** Securities Purchase Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.17** Registration Rights Agreement by and among the registrant and
certain investors dated as of January 27, 2000.
4.18** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000
4.19** Form of Lock-up Agreement entered into between the registrant and
each of certain officers, directors and principal shareholders in
January 2000.
10.1** RMSI Reseller License Agreement.
10.2** RMSI End-User Software License Agreement.
10.3** I-Stream TV Reseller Agreement.
10.4** Clover Technologies, Inc. Reseller license Agreement.
10.5** Service Agreement with The EMS Group.
10.6** Lease at 500 Sansome Street, San Francisco, CA with ten (10)
Amendments.
10.7** Lease for sales office in Livonia, Michigan.
10.8** Lease for sales office in Golden, Colorado.
10.9** Lease for sales office in Alexandria, Virginia.
10.10** Lease for sales office in Mount Holly, New Jersey.
10.11** Pat Meir Assoc. contract.
10.12** Employment Agreement with Richard Lang.
10.13** Employment Agreement with Thomas Koshy.
10.14** Employment Agreement with Edward Davis.
10.15** Employment Agreement with Richard Jones.
10.16** Employment Agreement with Kyle Faulkner.
10.17** Employment Offer Letter to David Morgenstein.
10.18** Employment Offer Letter to Frank Schwartz.
10.19** Employment Offer Letter to June White.
10.20** Employment Agreement with Doug Glen.
10.21** Employment Agreement with George Zraick.
10.22** Employment Agreement with Dave Egan.
10.23** Employment Agreement with John C. Lukrich.
41
10.24 Eagle Wireless International, Inc. Securities Purchase Agreement
10.25 License Agreement with InterZest.
10.26 Eagle Wireless International, Inc. License Agreement
21.1** Subsidiaries of the registrant.
24.1** Power of Attorney (included in signature page)
--------
** Previously filed.
42
BURST.COM, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Burst.com, Inc.:
We have audited the accompanying consolidated balance sheets of Burst.com, Inc.
and subsidiaries (the Company) as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the two years in the period ending December 31, 2000. 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
generally accepted in the United States of America. 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 Burst.com, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the two years in the period ending
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficit that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO SEIDMAN, LLP
San Francisco, California
April 9, 2001
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Burst.com, Inc. (formerly Instant Video Technologies, Inc.):
We have audited the accompanying consolidated statements of operations,
stockholders' (deficit) equity, and cash flows of Burst.com, Inc. and subsidiary
(the Company) for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Instant Video
Technologies, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for the year ended December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses from operations and has negative cash flows from operating
activities that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters include raising
sufficient capital to allow the Company to complete development and successful
commercialization of its products. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
San Francisco, California
April 13, 1999
45
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 296,584 $ 302,979
Accounts receivable, net of allowance $20,419 295,795 --
Loans to officers 139,633 --
Prepaid expenses and other current assets 42,048 63,893
Total current assets 774,096 366,872
Property and equipment, net 570,700 725,412
Other assets 317,337 36,457
------------ ------------
$ 1,662,133 $ 1,128,741
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to principal stockholders $ 500,000 $ 4,834,847
Accounts payable 1,550,573 1,384,289
Accrued expenses 515,873 208,374
Accrued interest 1,192 114,277
Deferred revenue 287,225 51,600
------------ ------------
Total current liabilities 2,854,863 6,593,387
------------ ------------
Commitments and contingencies
Stockholders' (deficit) equity:
Convertible Preferred stock, $.00001 par value, 20,000,000 shares
authorized:
Series A (Renamed from Series F), 2,025,000
shares issued and outstanding in 1999,
liquidation preference of $2,025,000 -- 20
Series B, 2,476,609 shares issued and outstanding in 1999,
liquidation preference at December 31, 1999 of $20,803,516 -- 25
Common stock, $.00001 par value, 100,000,000 shares
authorized; 20,148,125 and 9,535,527 shares issued and
outstanding in 2000 and 1999 201 95
Additional paid-in-capital 55,852,947 31,971,108
Accumulated deficit (57,045,878) (37,435,894)
------------ ------------
Stockholders' deficit (1,192,730) (5,464,646)
------------ ------------
$ 1,662,133 $ 1,128,741
============ ============
See accompanying notes to consolidated financial statements
46
BURST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Revenue $ 499,376 $ -- $ 15,000
Cost of revenues 30,764 -- --
------------ ------------ ------------
468,612 -- --
------------ ------------ ------------
Costs and expenses:
Research and development 4,300,328 4,076,732 800,567
Sales and marketing 8,175,525 4,185,517 830,998
Losses on abandonment, disposition
and write-downs of equipment 1,312,931 -- --
General and administrative 6,236,528 3,247,370 3,047,302
------------ ------------ ------------
Total costs and expenses 20,025,312 11,509,619 4,678,867
------------ ------------ ------------
Loss from operations (19,556,700) (11,509,619) (4,663,867)
Other income (expense):
Interest expense, net 40,899 (1,468,110) (2,252,553)
Other income (expense) (94,183) -- --
------------ ------------ ------------
Net other (53,284) (1,468,110) (2,252,553)
------------ ------------ ------------
Net loss (19,609,984) (12,977,729) (6,916,420)
------------ ------------ ------------
Beneficial conversion feature of
Series B Preferred Stock -- -- (8,762,425)
------------ ------------ ------------
Net loss applicable to Common Stockholders $(19,609,984) $(12,977,729) $(15,678,845)
============ ============ ============
Basic and diluted net loss per common share: $ (.98) $ (1.42) $ (2.35)
============ ============ ============
Weighted average shares used in per share computation 20,058,693 9,121,947 6,658,738
============ ============ ============
See accompanying notes to consolidated financial statements.
47
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit) Equity
For the years ended December 31, 2000, 1999 and 1998
Common Stock Preferred Stock Additional
-------------------- --------------------- Paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
---------- -------- ---------- ------- ----------- ------------ ------------
Balance at December 31, 1997 5,703,553 $ 59 2,125,000 $ 22 $ 7,795,972 $ (8,779,320) $ (983,267)
Series B Preferred Stock issuances -- -- 2,105,000 21 3,873,979 -- 3,874,000
Warrants used in connection with
the issuance of Series B Preferred -- -- -- -- 336,000 -- 336,000
Stock
Common stock issuance 14,921 -- -- -- 10,000 -- 10,000
Exercise of stock options 139,501 1 -- -- 1,138,951 -- 1,138,952
Exercise of warrants 700,000 6 -- -- 749,994 -- 750,000
Conversion of debt and accrued interest 1,082,991 10 371,609 3 1,736,983 -- 1,736,996
Warrants issued with the
conversion of convertible debt 172,000 172,000
Value assigned to warrants and
stock upon issuance of debt 200,000 2 -- -- 1,947,369 -- 1,947,371
Stock options issued for services performed -- -- -- -- 727,726 -- 727,726
Conversion of Series A Preferred
Stock to common stock 100,000 1 (100,000) (1) -- -- --
Beneficial conversion feature of
Series B Preferred Stock 8,762,425 (8,762,425) --
Net loss -- -- -- -- -- (6,916,420) (6,916,420)
---------- -------- ---------- ------- ----------- ------------ ------------
Balance at December 31, 1998 7,940,966 79 4,501,609 45 27,251,399 (24,458,165) 2,793,358
Exercise of stock options 111,800 1 -- -- 112,549 -- 112,550
Exercise of warrants 1,277,262 13 -- -- 1,537,487 -- 1,537,500
Value assigned to warrants and
beneficial conversion feature
upon issuance of debt -- -- -- -- 1,467,146 -- 1,467,146
Stock and options issued for
services performed 499 -- -- -- 272,529 -- 272,529
Conversion of Series A Preferred Stock
to common stock 5,000 -- (5,000) -- -- -- --
Purchased research and development costs 200,000 2 -- -- 1,329,998 -- 1,330,000
Net loss -- -- -- -- -- (12,977,729) (12,977,729)
---------- -------- ---------- ------- ----------- ------------ ------------
Balance at December 31, 1999 9,535,527 $ 95 4,496,609 45 $31,971,108 (37,435,894) (5,464,646)
Common stock offering, net of costs 3,474,625 35 -- -- 13,486,460 -- 13,486,495
Compensation related to options -- -- -- -- 332,563 -- 332,563
Compensation related to
sale of common stock to employees -- -- -- -- 77,726 -- 77,726
Conversion of debt to common stock,
net of costs 1,333,750 13 -- -- 5,106,684 -- 5,106,697
Conversion of preferred stock to
common, net of costs 4,496,609 45 (4,496,609) (45) (533,200) -- (533,200)
Exercise of warrants 50,000 1 -- -- 49,999 -- 50,000
Stock options issued for
services performed -- -- -- -- 235,905 -- 235,905
Common stock offering, net of costs 857,633 9 -- -- 4,539,777 -- 4,539,786
Exercise of stock options 273,355 2 -- -- 393,591 -- 393,593
Penalty shares issued 126,626 1 -- -- 192,334 -- 192,335
Net loss -- -- -- -- -- (19,609,984) (19,609,984)
---------- -------- ---------- ------- ----------- ------------ ------------
Balance at December 31, 2000 20,148,125 $ 201 -- $ -- $55,852,947 $(57,045,878) $ (1,192,730)
========== ======== ========== ======= =========== ============ ============
See accompanying notes to consolidated financial statements.
48
BURST.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ -----------
Cash flows from operating activities:
Net loss $(19,609,984) $(12,977,729) $(6,916,420)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 592,494 209,198 58,531
Loss on abandonment, disposition and write-down of equipment 1,312,931 -- 5,133
Non-cash interest expense 1,396,993 2,228,940
Stock and options issued for services performed 235,905 272,529 727,726
Compensation from stock and option awards to employees 410,289 -- 1,137,499
Purchased research and development -- 1,330,000 --
Conversion of legal fees to note payable -- 25,000 --
Issuance of penalty shares 192,335 -- --
Changes in operating assets and liabilities:
Accounts receivable (295,795) -- --
Prepaid expenses and other current assets (117,824) (57,485) 6,164
Other assets (280,880) -- --
Accounts payable 166,284 1,132,245 218,018
Accrued expenses 307,499 26,890 88,702
Accrued interest (113,085) 114,277 (43,044)
-----------
Deferred revenue 235,625 51,600 --
------------ ------------ -----------
Net cash used in operating activities (16,964,206) (8,476,482) (2,488,751)
------------ ------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (1,772,133) (749,994) (162,669)
Sales of property and equipment 21,420 -- --
------------ ------------ -----------
Net cash used in investing activities (1,750,713) (749,994) (162,669)
------------ ------------ -----------
Cash flows from financing activities:
Payment of receivables from Series B Convertible stock offering -- 810,000 --
Proceeds from sale of stock, net of costs 17,868,131 -- 3,410,000
Exercise of warrants and stock options 443,593 1,650,050 751,453
Payment of costs in connection with conversion of preferred stock to common (533,200) -- --
Proceeds from debt financing 930,000 4,880,000 1,572,736
Repayment of debt -- (22,736) (891,179
------------ ------------ -----------
Net cash provided by financing activities 18,708,524 7,317,314 4,843,010
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents (6,395) (1,909,162) 2,191,590
Cash and cash equivalents, beginning of year 302,979 2,212,141 20,551
------------ ------------ -----------
Cash and cash equivalents, end of year $ 296,584 $ 302,979 $ 2,212,141
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid for state franchise tax $ 800 $ 800 $ 800
============ ============ ===========
Cash paid for interest $ -- $ 7,374 $ 65,935
============ ============ ===========
Supplemental schedule of non-cash investing and financing activities:
In 2000, 1,333,750 shares of common stock were issued for $5,335,000 face
amount of debt.
In 1999, six notes payable issued in exchange for $335,000 were issued
with front end warrants resulting in a discount to notes payable of $70,153
In 1999, 5,000 shares of Series A Preferred Stock were converted to 5,000
shares of common stock
In 1998, debt and accrued interest of $1,736,996 was converted to Series B
Preferred Stock and common stock
In 1998, 100,000 shares of preferred stock were converted to 100,000
shares of common stock
See accompanying notes to consolidated financial statements.
49
BURST.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF NAME
On January 27, 2000, the Company changed its name from Instant Video
Technologies, Inc. to Burst.com, Inc.
DESCRIPTION OF BUSINESS
Burst.com, Inc. (the Company) licenses burst transmission software for use
within commercial, multimedia and interactive environments. The burst
technology allows for time compression and burst transmission of
video/audio programming that results in time-savings, network efficiency
and superior quality products.
LIQUIDITY
Since inception, the Company has incurred development costs and other
expenses resulting in cumulative losses of $57,045,878. The Company's
current liabilities exceed current assets by $2,080,767 at December 31,
2000. In November 2000, the Company reduced its head count from 97 to 20.
On April 1, 2001, the number of employees was reduced to 5.
There is substantial doubt about the Company's ability to continue as a
growing concern. Management recognizes that the Company must raise
immediate capital to enable it to continue its operations. Management is
attempting to raise sufficient capital to allow the company to complete
development and successful commercialization of its products. The
accompanying financial statements have been prepared contemplating the
Company will continue as a going concern. No assurances can be given that
the Company will be successful in raising immediate 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, there can be no assurance the Company
can continue as a going concern.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Burst.com,
Inc. and its wholly owned subsidiaries, Explore Technology, Inc. and
Timeshift-TV. All significant intercompany transactions and accounts have
been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts and other short-term
investments with an original remaining term of three months or less.
REVENUE RECOGNITION
The Company's revenue in 1998 consisted of one non-recurring sale of test
software that was recognized upon delivery.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) No. 97-2, which
provided revised guidance for recognizing revenue on certain software
transactions. No revenue is recognized until evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collection is probable. Adoption of the new SOP had no effect on
recognition of revenue, results of operations or financial position.
License fees and services are recognized as revenue ratably over the
license period. No revenue is recognized until evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collection is probable.
50
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets that
range from three to five years.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred until
such time as both technological feasibility is established and future
economic benefit is assured. To date, such conditions have not been
satisfied, and, accordingly, all software engineering and development costs
have been expensed as incurred. See note 4 for certain in-process research
and development purchased in 1999.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company incurred
$1,489,842 of advertising in 2000, $587,000 in 1999 and none in 1998.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities, and, their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded
for deferred tax assets if it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
LOSS PER SHARE AND DILUTIVE SECURITIES
Basic net loss per share is based on the weighted average number of shares
of common stock outstanding. Diluted net loss per share is based on the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options and warrant outstanding using
the treasury stock method.
The following 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.
Year Ended December 31,
2000 1999 1998
----------- ----------- -----------
Convertible Preferred -- 4,496,609 4,501,609
Options 8,716,659 6,925,863 6,289,263
Warrants 6,435,396 905,384 2,010,210
----------- ----------- -----------
Total 15,152,055 12,327,856 12,801,082
=========== =========== ===========
51
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, accounts payable, and debt. The Company believes the reported
amounts of its financial instruments approximates fair value, based upon
the short maturity of cash equivalents, accounts receivable and payable and
based on the current rates available to the Company or similar debt issuer.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans for employees
using the intrinsic value method. As such, compensation expense is recorded
if on the measurement date, which is generally the date of grant, the
current fair value of the underlying stock exceeds the exercise price.
The equity instruments issued to non-employees are accounted for at fair
value. The fair value of the equity instrument is determined using either
the fair value of the underlying stock or the Black-Scholes option pricing
model.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates. The Company's most significant estimates
are those related to the valuation of stock, stock options, and warrants in
connection with equity and financing transactions.
COMPREHENSIVE INCOME
The Company has no component of comprehensive income other than its
reported amounts of net loss applicable to holders of common stock.
RECLASSIFICATIONS
Certain items have been reclassified to conform to current year
presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-------------------------
2000 1999
--------- ---------
Computer equipment $ 509,191 $ 671,870
Furniture 94,426 55,666
Office equipment 5,000 7,867
Software 55,000 95,724
Trade show booth 5,000 92,637
Leasehold improvements -- 72,417
--------- ---------
668,617 996,181
Less accumulated depreciation (97,917) (270,769)
--------- ---------
$ 570,700 $ 725,412
========= =========
During the fourth quarter of 2000, management determined that certain computers
and other equipment were not recoverable at their current book value, and
certain leasehold improvements and other assets had been abandoned when sales
offices were closed. Accordingly, losses and writedowns totaling $1,312,932 have
been included in the accompanying consolidated statements of operations.
52
(3) DEBT
NOTES PAYABLE TO PRINCIPAL STOCKHOLDERS 2000 1999
----------- -----------
6% note payable to Mercer Management, Inc., interest and
principal due December 28, 2001 $ 500,000 $ --
7.75% note payable to Storie Partners, interest and principal -- 2,000,000
due July in varying amounts July through October, 2000
7.75% note payable to Mercer Management, Inc., interest and
principal due in varying amounts September through December, 2000 -- 1,350,000
7.75% note payable to Robert S. London, interest and principal -- 500,000
due July 15, 2000
7.75% note payable to Reed Slatkin, interest and principal due -- 520,000
July 16, 2000
7.75% notes payable to various lenders, interest and principal
due in varying amounts April through December, 2000 -- 535,000
----------- -----------
500,000 4,905,000
Unamortized original issue discount on notes payable resulting from
front end warrants issued with 6 of the notes payable -- (70,153)
----------- -----------
500,000 4,834,847
Less current portion (500,000) (4,834,847)
----------- -----------
Long-term portion $ -- $ --
=========== ===========
The note issued during 2000 is convertible into a new series of Preferred
Stock to be identified as Series A-2001 at a per share conversion price of
Five Dollars ($5.00) at the option of the note holder.
During January, 2000 the Company received $430,000 evidenced by notes
payable convertible into common stock, due in one year. The conversion rate
was the lower of: (1) $6.50, (2) 80% of the average closing price of the
Company's publicly traded shares in the 20 trading days immediately
preceding the closing of a then ongoing private placement, or (3) the price
agreed in that private placement. Upon completion of the private placement
discussed in Note 5 below, these and all other notes outstanding, totaling
$5,335,000, were converted into 1,333,750 shares of common stock as of
January 31, 2000. The conversion price was $4.00 per share of common stock
plus one warrant per share of common stock acquired by conversion. Each
warrant has an exercise price of $5.00 and expires five years from the date
of issue.
All of the notes issued during 1999 were convertible at a price which was
the lower of (1) $6.50, (2) 80% of the average closing price of the
Company's publicly traded shares in the 20 trading days immediately
preceding the closing of an ongoing private placement, or (3) the price
agreed in that private placement. Interest expense of $1,396,993 has been
recorded for the beneficial conversion feature of these notes. In addition
six of the notes payable issued in exchange for $335,000 were issued with
front end warrants this has resulted in a discount to notes payable of
$70,153.
(4) EQUITY
Common Stock
The Company completed a sale of its common stock and warrants to purchase
common stock in January 2000. In addition to the conversion of notes
outstanding, the Company received $13,898,500 in cash from various
investors, including some directors and employees of the company, in
exchange for 3,474,625 shares of common stock and 3,474,625 warrants to
purchase common stock, offset by approximately $1,103,000 in transactions
costs. The price per share of common stock was $4.00, which included the
issuance of one warrant for each share of stock sold. Each warrant is
exercisable for one share of common stock at an exercise price of $5.00 per
share and expires 5 years from the date of issue. Compensation expense of
$77,726 was recorded as a result of sales of stock to employees for the
excess of fair value over the price paid. In connection with the offering,
98,870 five-year warrants to purchase common stock at $8.4375 per share
were issued to the placement agent.
53
The Company also completed a sale of its common stock and warrants to
purchase common stock in August 2000. The Company received $5,000,000 in
cash from SBC Venture Capital Corp. in exchange for 857,633 shares of
common stock at a price of $5.83 per share and 857,633 warrants to purchase
common stock, offset by approximately $460,214 in transaction costs. Each
warrant is exercisable for one share of common stock at an exercise price
of $5.83 per share and expires 3 years from the date of issue.
During 2000, options were exercised to purchase 283,289 shares of common
stock at a weighted average price of $1.91. Warrants were exercised to
purchase 50,000 shares of common stock at $1.00. See also Note 7. During
1999, the Company issued 499 shares of common stock to a contractor in lieu
of services performed. An expense of $4,054 was recorded as swales and
marketing expense, based on the fair value of the shares issued.
During 1999 the Company acquired certain intellectual property owned by
Timeshift-TV inc. for 200,000 shares of common stock. The Company recorded
$1,330,000 of expense for the in-process research and development costs
purchased in connection with this acquisition. Timeshift-TV Inc. and
inactive corporation that owned patented rights sought by the Company, was
owned at the time of purchase by the Company's president and two of the
Company's management employees.
Convertible Preferred Stock
In 1998, the Company issued 2,105,000 shares of $0.01 par value Series B
Convertible Preferred Stock (Series B Preferred Stock), with warrants to
purchase 321,960 shares of the Company's common Stock at $2.00 per share.
The Company has allocated $336,000 of the cash proceeds from the $4,210,000
of Series B Preferred Stock to warrants using the Black-Scholes option
pricing model. The preferred stock agreements provide for the holders of
preferred stock to participate in dividends declared on common and
preferred stock and the right to elect one director to the Company's board
of Directors. The preferred stockholders have the right to convert their
shares into the Company's common stock on a 1 for 1 basis and have
liquidation preference increasing over time from $7.50 to $9.30 per share
after 3 years. The preferred stock has antidilution provisions and
registration rights.
Warrants and Stock Issued With Debt
During 1998, the Company issued debt of $1,550,000 and added conversion
features to $743,216 of debt. In connection with these transactions the
Company issued stock and warrants. The Company valued these equity
instruments using either the underlying stock prices or the Black-Scholes
option pricing model, as applicable, resulting in the Company recording
interest expense of $1,947,371.
Series B Preferred Stock
The Company issued Series B Preferred Stock at $2.00 per share to several
individuals at various times through the fourth quarter of 1998 when the
market prices ranged from $3.19 to $8.44. The issued stock can be converted
at any time after the date of issuance into shares of common stock on a one
for one basis. As a result, the Company recorded a charge to accumulated
deficit of $8,762,425 for this beneficial conversion feature.
Stock Options
On November 6, 1992 and April 29, 1998, the Board of Directors adopted the
1992 Stock Incentive Plan and the 1998 Stock Incentive Plan, respectively.
Under the plans, the Board may grant options to officers, key employees,
directors and consultants. Incentive stock options may be granted at not
less that 100% of the fair market value of the stock on the date the option
is granted. The option price of stock not intended to qualify as incentive
stock options may not be less than 85% of the fair market value on the date
of grant. The maximum term of the options cannot exceed ten years. A total
of 3,500,000 and 4,000,000 shares has been reserved for issuance under the
plans, respectively.
On August 23, 1999, the Board of Directors adopted the 1999 Stock Incentive
Plan. Under the plan, the Board may grant options to officers, key
employees, directors and consultants. Incentive stock options may be
granted at not less than 100% of the fair market value of the stock on the
date the option is granted. The option price of stock not intended to
qualify as incentive stock options may not be less than 85% of the fair
market value on the date of grant. The maximum term of the options cannot
exceed ten years. A total of 3,000,000 shares have been reserved for
issuance under the plan. Certain options are still outstanding from prior
1992 and 1998 plans that carried similar terms.
During 1998, the Company issued stock options in lieu of cash for services
performed, covering approximately 550,000 shares of the Company's common
stock at exercise prices ranging from $1.00 to $2.90 per share, expiring
between September 2000 and December 2003. $727,726 was recorded as a
general and administrative expense based on the fair value of the stock
options issued.
During 1999, the Company issued stock options in lieu of cash for services
performed, covering 120,621 shares of the Company's common stock at
exercise prices ranging from $2.19 to $9.72 per share, expiring between
February 2000 and December 2004.
54
$105,805 was recorded as a general and administrative expense, $160,588 was
recorded as a sales and marketing expense, and $2,082 was recorded as a
research and development expense based on the fair value of the stock
options issued.
In November 2000, the Company repriced all options held by the 20 remaining
employees. The revised exercise price was $0.2812 per share.
During 2000, the Company issued stock options in lieu of cash for services
performed, covering 8,621,242 shares of the Company's common stock at
exercise prices ranging from $.2812 to $4.50 per share, expiring by
December 2005. $332,563 was recorded as general and administrative expenses
based on the fair value of the stock options issued.
The per share weighted average fair value of stock options granted during
2000, 1999 and 1998 was $1.43, $5.23 and $1.73 respectively, on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: volatility of 251%, 117%, and 136%
respectively, expected dividend yield 0% for all years, risk free interest
rate of approximately 6%, 6% and 5% respectively, and an expected life of
2.5 years for both 2000 and 1999, and 1.5 years for 1998.
Stock option activity for 2000, 1999, and 1998 is as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Balance on December 31, 1997 2,538,630 $1.85
Options granted 4,117,101 3.01
Options exercised (139,501) 2.28
Options expired (105,719) 2.65
Options forfeited (121,248) 1.56
--------- -----
Balance on December 31, 1998 6,289,263 2.52
Options granted 1,302,000 6.65
Options exercised (111,800) 1.01
Options expired (200,000) 1.00
Options forfeited (353,600) 2.78
--------- -----
Balance on December 31, 1999 6,925,863 3.36
Options granted 8,664,742 1.33
Options exercised (273,355) 1.91
Options expired (94,225) 1.86
Options forfeited (6,506,366) 4.09
--------- -----
Balance on December 31, 2000 8,716,659 $1.04
========= =====
Stock options outstanding and exercisable at December 31, 2000 from the 1992,
1998 and 1999 Plans consisted of:
Outstanding Exercisable
--------------------------------------- ----------------------
Weighted
Weighted Average Weighted
Shares Average Remaining Shares Average
Price Outstanding Price Life Outstanding Price
------------- ------------------------- ------------ ------------ ---------
$0.28 5,718,661 $0.28 3.25 3,105,644 $0.28
$0.50 -$1.00 1,378,125 $.9853 4.43 1,348,125 $.9961
$1.37 -$3.00 768,534 $2.19 2.93 768,534 $2.19
$3.13-$5.00 494,631 $3.87 3.89 428,881 $3.75
$5.75-$9.72 356,708 $6.31 3.10 274,208 $7.28
---------
Total 8,716,659 $1.04 3.44 5,925,392 $1.27
===== ==== ========= =====
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options consistent with SFAS 123, the Company's net
loss applicable to common stockholders and net loss per share would have been
increased to pro forma amounts indicated below:
2000 1999 1998
-------------- -------------- --------------
Net loss as reported $ (19,609,984) $ (12,977,729) $ (15,678,845)
Pro forma (23,422,527) $ (17,356,482) $ (16,960,138)
Net loss per share as
reported $ (0.98) $ (1.42) $ 2.35
Pro forma $ (1.17) $ (1.90) $ 2.55
55
(5) ACCRUED EXPENSES
Accrued expenses as of December 31, 2000 and 1999 is comprised of the
following:
2000 1999
-------- --------
Accrued compensation $350,723 $163,828
Professional services 117,247 44,546
Other accrued expenses 47,903 --
-------- --------
Total $515,873 $208,374
======== ========
(6) LEASE COMMITMENTS
The Company leases its office space under a five year operating lease. Rent
expense for the years ended December 31, 2000 and 1999 was $299,077 and
$104,969, respectively.
The following is a summary of future minimum lease payments for operating
leases:
OPERATING
Years ending December 31: LEASES
------------------------- ----------
2001 $ 733,628
2002 223,761
2003 165,610
2004 170,615
2005 145,167
----------
Total lease payments $1,438,781
==========
The Company entered into a one year sublease agreement in February 2001
under which the Company will receive $347,014.
(7) INCOME TAXES
At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $41,182,000, which are subject
to annual limitations, and are available to offset future taxable income,
if any, through 2020 and net operating loss carryforwards for state income
tax purposes of approximately $18,075,000, which are available to offset
future state taxable income through 2010.
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2000 and 1999 are as follows:
2000 1999
------------ -----------
Deferred tax assets:
Net operating losses $ 15,599,800 $ 8,838,300
Depreciation, amortization and basis differences 107,400 110,300
Compensation accruals 759,400 418,700
Research and experimentation credit 421,900 421,900
State income tax effect on federal (647,500) (385,200)
Other 61,100 21,800
------------ -----------
Total net deferred tax assets 16,302,100 9,425,800
Less valuation allowance (16,302,100) (9,425,800)
------------ -----------
Net deferred tax assets $ 0 $ 0
============ ===========
The net change in the valuation allowance for the years ended December 31,
2000 and 1999 was an increase of $6,876,300 and an increase of $4,178,000,
respectively. In assessing the amount of deferred tax assets to be
recognized, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. It is
not possible at this time
56
to determine that the deferred tax assets are more likely to be realized
than not; accordingly, a full valuation allowance has been established for
all periods presented.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change," as defined by the Internal Revenue Code. All federal
and state net operating loss carryforwards are subject to limitation as a
result of these restrictions. If there should be a subsequent ownership
change, as defined, the Company's ability to utilize its carryforwards
could be reduced.
(8) BUSINESS RISKS AND SEGMENT DISCLOSURES
The Company's primary source of revenue is from the licensing of Burst
technology, and its success is largely dependent on this product. Changes
in desirability of the product in the marketplace may significantly affect
the Company's future operating results.
The Company operates in one segment and accordingly has provided only the
required enterprise wide disclosure. The Company recognized no foreign
revenues in 2000, 1999 or 1998.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, The American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that certain costs related to the development or purchase if
internal-use software be capitalized and amortized over the estimated
useful life of the software. SOP No. 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 did not have a material impact on financial
condition or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of
gain or loss recognition on the hedging derivative with the recognition of
(i) the changes in the fair value of the hedged assets or liabilities that
are attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain and loss is recognized in income in the period of
change. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, which amends SFAS No. 133 to be effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No.
133, which addressed certain implementation issues of SFAS No. 133.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect the adoption of the new standard to have a material
impact on the Company's financial position, results of operations, or cash
flows.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, which provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 must be applied to financial
statements no later than the quarter ended September 30, 2000. There was no
material impact from the application of SAB 101 on the Company's financial
position, results of operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation, an interpretation of
APB Opinion No. 25. FIN 44 clarifies the application of Opinion No. 25 for
(a) the definition of an employee for purposes of applying Opinion No. 25,
(b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 became effective July 2, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. FIN 44 did not have a material impact on the
Company's financial position, results of operations, or cash flows.
57
(10) SUBSEQUENT EVENTS
In February, 2001, the Company received from Eagle Wireless International
504,000 shares of their common stock. In exchange the Company gave
1,500,000 newly issued common shares in Burst.com, Inc. to Eagle Wireless
International, Inc.
In February and March, 2001, the Company received $250,000 in cash upon the
issuance of notes payable bearing interest at six percent (6%), interest
and principal due in January and February, 2002. The notes are convertible
into shares of Preferred Stock to be identified as Series A-2001 at a per
share conversion price of five dollars ($5.00).
In March, 2001, the Company received $100,000 in cash upon the issuance of
a note payable bearing interest at ten percent (10%), interest and
principal due September 12, 2001. The Company has pledged as security one
hundred thousand common shares of Eagle Wireless International, Inc.
(11) QUARTERLY INFORMATION (UNAUDITED)
The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
---------- ---------- ---------- ---------- -----------
Year Ended 1999
Net revenue $ -- $ -- $ -- $ -- $ --
Gross profit -- -- -- -- --
Operating loss (1,579,121) (2,621,256) (4,090,618) (3,218,624) (11,509,619)
Net loss (1,572,499) (2,596,903) (4,928,890) (3,879,437) (12,977,729)
Basic and diluted loss per common share $ (0.18) $ (0.28) $ (0.53) $ (0.43) $ (1.42)
---------- ---------- ---------- ---------- -----------
First Second Third Fourth
Quarter Quarter Quarter Quarter 2000
---------- ---------- ---------- ---------- -----------
Year Ended 2000
Net revenue $ 75,012 $ 311,136 $ 94,377 $ 18,851 $ 499,376
Gross profit 44,714 311,136 93,891 18,851 468,612
Operating loss (3,768,166) (6,166,446) (4,613,669) (5,008,419) (19,556,700)
Net loss (3,799,140) (6,260,264) (4,680,188) (4,870,392) (19,609,984)
Basic and diluted loss per common share $ (0.24) $ (0.33) $ (0.24) $ (0.17) $ (0.98)
----------- ----------- ----------- ----------- ------------
Significant 2000 fourth quarter adjustments included losses and writedowns fixed
assets (See Note 2)
58