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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No fee required] for the fiscal year ended December 31, 2000.
[_] Transition Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the transition period from
to .
COMMISSION FILE NUMBER: 000-26287
RAVISENT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2763854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
205 Great Valley Parkway
Malvern, Pennsylvania 19355
(800) 700-0362
(Address, including zip code, and telephone number, including area code,
of the registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, par value $.001 per share NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required
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 is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 23, 2001, RAVISENT Technologies Inc. had 17,464,756 outstanding shares
of common stock. Of those, 15,383,241 shares of common stock were held by non-
affiliates. The aggregate market value of such common stock held by non-
affiliates, based on the average of the high and low sales prices of such shares
on the NASDAQ National Market on March 23, 2001, was approximately $33,650,840.
Shares of common stock held by each officer and director and each person who
owns 5% or more of our outstanding common stock have been excluded from this
computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement prepared in connection with
its 2001 Annual Meeting of Stockholders, to be held on June 19, 2001 are
incorporated by reference into Part III of this Annual Report on Form 10-K where
indicated. The table of Exhibits filed appears on page 90.
RAVISENT TECHNOLOGIES INC.
FORM 10-K ANNUAL REPORT
(Year Ended December 31, 2000)
Table of Contents
PART I
Part I Page
----
Item 1 Business 4
Item 2 Properties 33
Item 3 Legal Proceedings 33
Item 4 Submission of Matters to a Vote of Security Holders 34
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholders Matters 35
Item 6 Selected Financial Data 37
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 38
Item 7a Quantitative and Qualitative Disclosure about Market Risk 54
Item 8 Financial Statements and Supplementary Data 54
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 89
Part III
Item 10 Directors and Executive Officers of the Registrant 89
Item 11 Executive Compensation 89
Item 12 Security Ownership of Certain Beneficial Owners and Management 89
Item 13 Certain Relationships and Related Transactions 89
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
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Cautionary Statement Concerning Forward-Looking Statements
The information herein contains forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involve a
number of risks and uncertainties. A number of factors could cause our actual
results, performance, and achievements or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, but are not
limited to, the competitive environment in the personal computer industry in
general and our specific market areas; changes in prevailing interest rates and
the availability of terms of financing to fund the growth of our business;
inflation; changes in costs of goods and services; our inability to protect our
intellectual property; economic conditions in general and in our specific market
areas; demographic changes; changes in foreign, federal, state and/or local
government regulations; claims for damages asserted against us; changes in
operating strategy or development plans; the ability to attract and retain
qualified personnel; changes in our acquisition and capital expenditure plans;
and other factors referenced herein. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown risks and other
factors. Accordingly, any forward-looking statements included herein do not
purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other things,
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates," or "intends," or the
negative of any thereof, or other variations thereon or comparable terminology,
or by discussions of strategy or intentions. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such forward-
looking statements. We disclaim any obligations to update any such factors or to
publicly announce the results of any revisions to any of the forward- looking
statements contained herein to reflect future events or developments. References
herein to "RAVISENT," "we," "our," and "us" collectively refer to RAVISENT
Technologies Inc., a Delaware corporation, and all of its direct and indirect
U.S., German and Canadian subsidiaries.
PART I
ITEM 1. Business
General
RAVISENT is an intellectual property licensing company providing digital
audio and video software solutions and technology to industry leading PC OEMs,
empowering them to deliver highly competitive, cost-effective products with a
strong time-to-market advantage. We also provide customization services and
customer support. We offer a web based retail site to allow users to upgrade and
purchase the latest products from us. Our software allows personal computer
manufacturers to address digital multimedia formats such as digital versatile
disks, or DVD; digital video recording, or DVR; direct broadcast satellite, or
DBS; its European counterpart, digital video broadcasting, or DVB; and high-
definition television, or HDTV. Until March 2001, we also sold products and
provided services in the consumer electronics market and the Internet appliance
market. However, as described below under the heading "Company History," we have
disposed of our electronics business and our Internet appliance business.
In 2001, we plan to continue to focus on the PC market. In general, the
PC DVD market continues to be a very competitive place. Our focus will be to
continue to sell our PC DVD, DTV and DVR IP solutions. We plan to exploit our
technology by enhancing our product offering, building new products, expanding
our partnerships globally and building market share. Our organization continues
to see opportunity for our PC products in the marketplace and we have confidence
in the prospects of our products being released in 2001.
We are well positioned to move forward with key distribution partnerships
such as that with Phoenix Technologies Ltd., the strength of our balance sheet,
our managerial expertise and our core intellectual property. As part of our
efforts in 2001, we will continue to evaluate alternative strategic directions
for the organization.
Our products incorporate a common, high-performance software code using
modular software architecture and are independent of operating systems and
silicon components. As digital technology continues to evolve and standards
change, we can add new modules to our software to provide additional
functionality without altering the existing core components of our digital
solution. This allows personal computer manufacturers to use our products across
multiple markets, achieve faster time-to-market, develop a customizable,
consistent look and feel across product lines and reduce technical support
costs. Our current products consist of high-performance digital video and audio
decoding and encoding solutions. Our software and hardware reference design
solutions provide personal computer manufacturers with a foundation to support
future components, operating systems and functionalities in a rapid and cost
effective manner.
Our products focus on the personal computer market. We license our software
and hardware reference design solutions to the top personal computer
manufacturers based on total unit sales. Personal computer and
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peripherals manufacturers currently shipping our products include ATI
Technologies, Inc., Dell Computer Corporation, Fujitsu Microelectronics, Inc.,
Gateway Inc., Hewlett-Packard Company, Matrox Graphics, Inc., and Siemens
Corporation. We also have strategic relationships with ATI Technologies, Cirrus
Logic, Inc., Dolby Laboratories, Inc., Intel Corporation, and STMicroelectronics
NV. The strategic relationship with Conexant Systems Inc. was transferred to
Phoenix Technologies Ltd. pursuant to the Asset Purchase Agreement.
Company History
We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994. In April 1999, we changed our name to Divicore Inc and then reincorporated
in Delaware as RAVISENT Technologies Inc. in June 1999.
During the year ended December 31, 2000, and prior to the asset sale
transactions described below, our business focused on the development and
licensing of software and hardware design solutions that serve as platforms for
digital entertainment devices. Our intellectual property was licensed by
manufacturers of personal computers, consumer electronics devices and Internet
appliances. We also provided customization services and customer support.
In August 2000, we acquired Cinax Designs Inc., a provider of digital video
technology and tools, for an aggregate of approximately $3.5 million in cash and
the issuance of an aggregate of 825,000 shares of our common stock and no par,
non-voting exchangeable preferred stock of Ravisent British Columbia Inc., which
shares of preferred stock are exchangeable on a one-for-one basis at the option
of the holder, into shares of common stock of RAVISENT Technologies Inc. The
acquisition was recorded under the purchase method of accounting. In connection
with the acquisition, we expensed $1.4 million of the purchase price as acquired
in-process research and development. Cinax products include a suite of
authoring, editing and encryption tools used by clients in the Internet,
multimedia and consumer electronics industries worldwide. Cinax' flagship
product, WinVCR, enables computer users to record real-time MPEG video straight
to their hard drives.
Effective as of March 23, 2001, and pursuant to an Asset Acquisition
Agreement dated as of March 21, 2001, RAVISENT Technologies Inc. and certain of
its subsidiaries, RAVISENT Technologies Internet Appliance Group, Inc., Ravisent
I.P., Inc. and Ravisent Operating Company, Inc. sold substantially all of the
assets of our Internet appliance business, excluding inventory, to Phoenix
Technologies, Ltd., a Delaware corporation, for approximately $18 million in
cash consideration, of which $1.8 million is being held by a third party in
escrow for 12 months for indemnification purposes. The assets sold include
certain of the contracts, equipment, intangible assets, intellectual property,
prepaid expenses, and other assets primarily related to the operation of the
Internet appliance business. Under the agreement, Phoenix Technologies
purchased, among other things, our e-Surfer embedded software Internet browser
and related hardware designs for the Internet Appliance market. In addition, in
connection with this asset sale, 13 of our employees associated with our
Internet appliance business accepted employment with Phoenix.
Effective as of March 1, 2001, and pursuant to an Asset Acquisition
Agreement dated as of January 18, 2001, RAVISENT Technologies Inc. and certain
of its direct and indirect subsidiaries, Ravisent I.P., Inc., Ravisent Operating
Company, Inc. and VIONA Development Hard and Software Engineering GmbH & Co. KG,
transferred certain assets related to our consumer electronics business to
STMicroelectronics, NV, a Dutch corporation, STMicroelectronics, Inc., a
Delaware corporation and STMicroelectronics GmbH, a German corporation. The
assets transferred include certain of the contracts, equipment, intangible
assets,
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intellectual property, prepaid expenses, accounts receivable and other assets
primarily related to the operation of the consumer electronics business. In
addition, approximately 80 of our employees, most of whom were associated with
the consumer electronics business, accepted employment with STMicroelectronics
in connection with the asset sale. Pursuant to the terms of the Asset
Acquisition Agreement, STMicroelectronics paid approximately $55.1 million in
cash consideration, of which $0.8 million is being held by a third party in
escrow for a period of 18 months for indemnification purposes. In connection
with the asset sale, we granted to STMicroelectronics certain non-exclusive
rights to license and distribute certain of our technology used in our Internet
appliance products and personal computer products. Further, pursuant to the
terms of the Asset Acquisition Agreement, we have agreed not to compete in
significant aspects of the consumer electronics market for a period of five
years from March 1, 2001.
Industry Background
Historically, the personal computer developed around digital technology
using the central processing unit, or CPU, which was initially expensive and
unable to simultaneously run the operating system and manipulate video and audio
inputs at satisfactory performance levels. As a result, digital entertainment
content was managed by a stand-alone semiconductor device or module. Advances in
semiconductor technology have dramatically lowered the price of high performance
microprocessors, allowing personal computers to employ software solutions to
manage video and audio streams in a digital format without overburdening their
CPUs. Moreover, today, when evaluating a digital personal computer, consumers
are increasingly demanding digital entertainment capabilities such as DVD, 3-D
graphics, video editing and MP3 audio playback. Analog formatted devices cannot
provide these capabilities. Meanwhile, digital formats have emerged that provide
higher image resolution and quality, the opportunity to deliver a wide range of
new services and content, more efficient use of limited transmission spectrums
and the ability to deliver customized and interactive services. As a result, a
growing number of personal computer manufacturers are storing, accessing and
playing video and audio streams in a digital format.
A number of trends are accelerating the migration of manufacturers from
analog to digital technology, including advances in technology, the evolution of
standards, government and private initiatives, the widespread growth of the
Internet and the increasing availability of content.
. Advances in Technology.
In the past, multiple silicon devices were needed to process digital video
and audio streams. As silicon technology progressed, in many instances only
one such device was needed. Today, as microprocessor-computing speeds
continue to increase, software-only solutions are capable of providing
video and audio stream management at a lower cost and at a performance
level indistinguishable from dedicated silicon approaches.
. Evolution of Standards.
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Historically, a significant barrier to the growth of digital video and
audio technology was the lack of widely accepted technological standards.
Today, industry participants have adopted a video compression standard
known as MPEG-2 and MPEG-4 that enables video and audio compression for
digital transmission and storage. MPEG-2 is currently deployed as the DVD
solution in personal computers and DVD players and has been adopted as the
standard for digital television, or DTV, and high-definition television, or
HDTV. In addition, Dolby Digital, formerly known as AC-3, designed by Dolby
Laboratories, has emerged as an industry standard for audio compression.
. Government and Private Initiatives.
A number of government and private initiatives have also emerged to fuel
the shift from analog to digital technology. For example, the cable
television industry has adopted the "OpenCable" standard under which
digital cable boxes will be manufactured and sold through retail channels
similar to personal computers and television sets, thereby creating a new
product market. Also, under the Telecommunications Act of 1996, all
broadcasters are scheduled to change their broadcasting formats to digital
and to cease carrying analog broadcasts by 2006. This may require every
owner of an analog television set to purchase either a new digital
television set or a digital converter box in the next 5 years.
. Increasing Availability of Content.
The introduction of many forms of stand-alone content for digital media
will lead consumers to shop for devices, such as DVD players and recorders,
digital cable set-top devices and digital television sets, on which stand-
alone content can be seen, heard, edited and stored. Already, there are
over 3,000 movie titles available in DVD format. The recording industry has
adopted the DVD format to be used in next-generation audio devices. Cable
television providers have adopted content strategies intended to capitalize
on the trend toward digital technology through increased channel capacity
and higher-resolution, interactive digital programming.
Advances in microprocessor speed and capacity coupled with the shift to
digital technology are leading the personal computer market to change at an
accelerating pace. As the personal computer industry changes, two major trends
have emerged. First, the integration of video and audio streams with digital
technology is increasing the complexity of product design. Second, products have
shorter life cycles as a result of rising digital processing capabilities,
falling prices of semiconductors and rapidly improving software. Therefore,
personal computer manufacturers are looking for easily adaptable software-based
solutions that provide faster time-to-market and the flexibility to innovate in
response to changing consumer preferences without the risk of quick
obsolescence.
We believe that major personal computer manufacturers will seek to leverage
their brand recognition in order to capitalize on the emerging market for
digital entertainment devices. For example, all existing television sets,
videocassette recorders and stereos are candidates for upgrade to digital
technologies. We believe that these product solutions must be extendible, have a
customizable architecture that allows product differentiation, facilitate
migration across product lines and markets, and enable multiple technologies
within a single device. In particular, in order to keep pace with the rapidly
changing product cycles of personal computer manufacturers and be cost
effective, these product solutions must rely on software that is independent of
operating system and hardware platforms.
The RAVISENT Solution
We develop and license IP software and hardware reference design solutions
that enable digital entertainment in personal computer systems. Our solutions
include high-performance digital video and audio decoding and encoding engines,
graphical user interface tools, device software drivers, navigation software
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system test tools and hardware design expertise. Our digital solutions
incorporate industry standards and are independent of operating system and
silicon components. By using our solutions, our customers can reduce material
costs, development costs and time-to-market, increase functionality and improve
the quality of their digital entertainment products.
We believe that our digital solutions provide a number of significant
advantages for manufacturers of personal computers. Our digital solutions are
built using the same powerful, easily customizable, modular software
architecture. This modular approach frees our customers from semiconductor
design cycles and provides them with enhanced flexibility, enabling them to
rapidly introduce products to market that incorporate customized feature sets.
As digital technology continues to evolve and standards change, we can add new
modules to our software to address the changes without altering existing
components of our digital solutions.
For example, Gateway Computer uses our DVD decoding solutions across
multiple product lines of its DVD-enabled desktop personal computers. Gateway
has migrated our solution across multiple product cycles through our
customization and optimization services, even when the different cycles involve
changing graphics requirements and different microprocessors. Our digital
solution allows Gateway to use the same user interface in each of these product
lines while maintaining high quality video and audio performance and rapid time-
to-market delivery.
Markets and Applications
We believe our digital video and audio solutions will enable personal
computer manufacturers to provide the next generation of digital devices. A few
of the current and future applications for these devices are the following:
Digital Versatile Disk. The DVD market is expected to experience rapid
growth. IDC predicts that the number of DVD-ROM units for personal computers
sold worldwide will grow from 18 million units in 2000 to 35 million units in
2002, representing a compound annual growth rate of 75%. This market projection
is based upon assumptions regarding the level of growth in sales of personal
computers, the desire of personal computer manufacturers to offer additional
functionality by upgrading CD ROM drives to DVD-ROM and the current supply of
necessary components and the speed with which the prices of DVD-ROM drives is
expected to decline. There can be no assurance that these projections will be
achieved. Currently, we are shipping various products for the decoding and
playback of DVD titles on a personal computer.
Digital Television. One of our key strategies is to pursue the digital
television market, which we expect to be the next major technological
advancement in home electronics. According to The Yankee Group, there is an
installed base of 250 million analog television sets in the United States alone
that may ultimately require a separate set-top box or upgrade to accommodate
digital technologies. Digital broadcast television was first successfully
launched in the United States in 1996 via digital broadcast satellite, with
digital broadcast satellite now delivering direct broadcast television to over
five million households today. Digital television has also begun to move into
the large over-the-air market. Under the Telecommunications Act of 1996, all
broadcasts are scheduled to be in a digital format by 2006. We are currently
developing software and hardware design solutions that enable the viewing of
digital television streams on personal computers.
Digital Cable. In an effort to deliver more channels and services,
including online and interactive services, cable providers are beginning to
upgrade analog cable boxes with digital boxes. For example, Tele-Communications,
Inc. and eight other multiple cable system operators announced in January 1999
the purchase of
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15 million digital cable set-tops from General Instrument Corporation. We have
not shipped any digital cable products to date, but are developing software and
hardware design solutions that will enable the viewing of digital cable
television streams using a personal computer.
Strategy
In 2001, we plan to continue to focus on the PC market. In general, the PC
DVD market continues to be a very competitive place. Our focus will be to
continue to sell our PC DVD, DTV and DVR IP solutions. We will exploit our
technology by enhancing our product offering, building new products, expanding
our partnerships globally and building market share. We continue to see
opportunity for our PC products in the marketplace and we have confidence in the
prospects of our new products being released in 2001.
We are well positioned to move forward with key distribution partnerships
such as that with Phoenix Technologies, the strength of our balance sheet, our
managerial expertise and our core intellectual property. As part of our efforts
in 2001, we will continue to evaluate alternative strategic directions for our
business.
Key elements of our strategy include:
Grow License Business Model Among Top Tier Personal Computer
Manufactureres. Our strategy includes licensing our software and hardware
reference design solutions to leading manufacturers of personal computers and to
continue to partner with STMicroelectronics to deliver products into the
consumer electronics market. We believe that the success of our manufacturing
customers in the digital entertainment markets will continue to validate our
technology. We intend to leverage our existing customer relationships into
additional product lines and to seek out additional customers in the personal
computer market. We believe that our license model avoids the risks of
manufacturing, storing and distributing hardware-based digital solutions while
simultaneously increasing profitability. We also believe that by developing
customized solutions in partnership with our customers, we will secure a
stronger position in a market that is increasingly commoditized.
Leverage Technology and Expertise into New Markets. We intend to leverage
our modular software and hardware reference design solutions into multiple
markets, such as the emerging DTV, HDTV, DBS/DVB, and digital cable. We believe
that these markets will continue to undergo dramatic growth in the next few
years and that the extensibility of our products across multiple digital markets
will provide us with an advantage over competitors focused on a single product,
technology or market.
Extend Technological Leadership. We have established our line of CineMaster
and CinePlayer products as a leading DVD solution for the personal computer
market. Our experience in providing digital video and audio technologies has
enabled us to stay at the forefront of the transition to digital technologies
and successfully bring DTV and DVR solutions to market. For example, we believe
we were the first company to display a working DVD decode solution on a personal
computer, the first company to demonstrate an HDTV decode solution on a personal
computer and the first company to display an all-software HDTV decode solution.
We intend to continue to invest in research and development both internally and
in conjunction with our customers and strategic partners to maintain our
technological leadership, improve our current product offerings and leverage our
proprietary technologies.
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Technology
We have designed our digital entertainment solutions to be independent of
the hardware platform on which they run. Our designs are based on a modular
software architecture, whereby each of the technical standards that are used for
various digital media is addressed through an independent self-contained module
of our software. For example, compliance with MPEG-2 and Dolby Digital has been
achieved through completely discrete components of our software that can be
"plugged in" to each other or to other modules addressing other standards or
features of our products. Furthermore, each of these modules can address
particular semiconductors or CPUs as needed. As a result, our architecture
allows personal computer manufacturers to choose different combinations of
software and hardware configurations for their products while maintaining a
consistent look and feel.
Our module-based approach to our digital solutions is designed to provide
flexibility and adaptability as relevant technologies evolve and standards
change. For example, as new digital technology develops, whether hardware or
software-based, we can add new modules to address the new technology without
altering other components of our digital solution. In addition, as the
processing speeds and capabilities of personal computers and graphics cards
improve, hardware-based modules can be replaced with software modules, again
without requiring the alteration of other components of our overall
architecture. The same flexibility also applies to the user interface and
storage modules. For example, as new platforms and operating environments
arrive, only the interface modules will need to be altered to adapt.
We identify emerging technologies necessary for future platforms that
address various media sources such as those shown below.
. Software Algorithms and IP Cores
Software algorithms are designed to work with multiple microprocessors,
operating environments or semiconductor devices. These IP Cores exist in
high-level language forms but perform silicon level functions such as video
decoding and encoding.
. Software Drivers
Software drivers control the core software or hardware implementations.
They are designed for specific operating systems and typically run in
Microsoft operating environments; nonetheless, the core design allows for
porting to other environments. Software drivers are the "middleware" that
connects the algorithms of our solution to the operating environments.
. Hardware Reference Designs
Hardware designs are developed with a modular approach to allow for
flexible silicon device selection and adaptation to industry standard
interfaces. We license our hardware designs to enable our software
licensees to deliver a complete product.
. Application Programming Interfaces
Application programming interfaces, or APIs, allow for the use of our
software drivers or hardware components by third party applications as well
as independent application development by our teams. These tools are
developed around multiple industry standards and interfaces to allow for
full-feature access.
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. End User Applications
End user applications are delivered to our customers as complete multi-
language installations that provide customizable, full-featured graphical
user interfaces.
We then apply our high-performance modular software solution to manage
these sources in a digital format, enabling manufacturers to support these
technologies in various devices. Our modular solution can be divided into five
stages:
. Source Management
Our digital entertainment solution starts by controlling and decoding
multiple video and audio streams from either digital or digitally converted
analog sources.
. Media Router/Media Caching
After the streams are received and converted, they are directed via the
"Media Router" module to either deliver them to the "Media Decode" module
for immediate presentation, or store the streams for future playback using
a temporary memory storage module called the "Media Caching" module.
. Media Decode/Convergence User Interface/Internet Browser/Intelligent Agent
Upon delivery, the "Media Decode" module translates the compressed data
into video and audio streams. At this point, our "Convergence User
Interface" module allows users to control the final presentation of the
stream as well as to provide a customized look and feel. We plan to add
intelligent agents that would enable user habit-based automatic programming
and simultaneous playback and recording capabilities.
. User Presentation
As a final step, our "User Presentation" module converts the audio and
video streams to the proper output format for presentation on multiple
devices including computer monitors, television sets and speakers.
Products and Services
Products
We license our high-performance, customizable, modular software and
hardware design solutions to manufacturers to enable digital video and audio
playback and recording within the personal computer industry. We currently
license the following products:
Software CineMaster, a software-only DVD solution that is licensed to the
top personal computer manufacturers to enable DVD playback in their products.
Software CineMaster is incorporated into the operating system of personal
computers or sold separately as part of an after-market solution bundled with a
graphics card. Compaq and Gateway systems incorporating Software CineMaster won
the PC Magazine Editors' Choice Award in March 1999 and December 1998,
respectively. These awards cited both the quality of the DVD playback in these
systems and our Software CineMaster product as responsible for DVD decoding in
these systems. We receive a per unit license fee from the personal computer
manufacturers for each system or device sold by them that incorporates this
product.
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Software CineMaster HDTV, a software design solution that provides high
definition television audio and video. We offer this product to personal
computer original equipment manufacturers and independent hardware
manufacturers. We are currently shipping this product. We receive a per unit
license fee from the partner for each system or device sold by them that
incorporates this product.
Software CineMaster DVR, a software application that provides personal computer
users with the ability to view and record simultaneously their live broadcast
video and other sources of analog video input. Additionally, while recording,
the user will be able to pause, rewind and playback video at any chosen point in
the video stream. This product is released to the market, we receive a per unit
license fee from the personal computer original equipment manufacturers and the
television tuner manufacturers licensing or shipping this product. We are not
currently shipping this product.
DVD Software Encoder, a software solution to enable the processing of digital
video signals which is designed to eliminate the need for a DVD encoder chip or
circuit board by utilizing software to record DVD and video streams on a
personal computer. This core technology was completed in the second quarter of
2000 and was released in our CinePlayer(TM) DVR product for use by PC OEMs and
IHVs.
Information pertaining to revenues attributed to classes of products is
included in note 21 of the notes to the consolidated financial statements, filed
herewith at Item 8 - Financial Statements and Supplementary Data.
Services
We work with our customers to customize elements of our solutions (such as
the graphical user interface) to their products and to mutually agreed-upon
specifications. In addition, we typically add specific features that a customer
requests that may be different from those installed in the same product licensed
to another customer. Finally, we modify our software drivers to ensure
compatibility with hardware components (such as different graphics cards) that
differ among our customers and among the various models of a single customer.
E-Commerce Opportunities
In November 2000, we launched RAVISENTDIRECT.com, the first e-commerce site
designed to distribute our digital video products, updates and upgrades directly
to consumers. The goal is to allow users of our CineMaster and CinePlayer
digital video software to have a vehicle to access the latest product updates
and upgrades. In connection with launch of the web site, we also conducted a
weeklong kick-off promotion including special introductory product promotions to
inaugurate the launch of the site. The launch of RAVISENTDIRECT.COM is our
initiative to help the marketplace get access to the latest software products
directly from us. Digital video technology is forever changing. Our ability to
respond to market needs quickly and build a vehicle that can facilitate better
relationships with the market is critical to our long-term success.
CinePalette, CinePlayer Editor, CinePlayer DVR and CinePlayer DVR Plus are
available through our online store. CinePalette is a tool for compressing video
and audio files for the Internet. CinePlayer Editor is a video-editing product
designed for the PC desktop and Internet marketplace. Our CinePlayer DVR and
CinePlayer DVR Plus each record TV and video from a PC TV tuner card directly
into MPEG-1, ASF and
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MPEG-2 file formats. Users can record from any video source straight onto a hard
drive in real-time allowing users the flexibility to watch shows whenever they
choose without requiring additional external hardware.
All of the products featured on our site have full technical support
resources online so that users can get answers to their most pressing questions.
Users have the ability to download free trial versions of our software, giving
them the ability to "try-before-they-buy." The web site contains technical
documentation on how to obtain the latest drivers and how to obtain online
support for our products.
We anticipate a significant amount of interest in RAVISENTDIRECT.com as
many of our users have been waiting for a vehicle, which enables them to remain
connected with the latest multimedia technology from us, and we have made every
effort to make RAVISENTDIRECT.com the answer.
The ultimate goal for RAVISENTDIRECT.com is to create a community where
CinePlayer and CineMaster users can gather to exchange information and
experiences, helping them stay informed and connected. Additionally, a free
monthly email newsletter is also available for all users wishing to subscribe.
We believe that RAVISENTDIRECT.com will be a place for users to collaborate,
communicate and share their collective knowledge.
Sales and Marketing
Our sales and marketing activities are focused on establishing and
maintaining license arrangements with personal computer, peripherals and
semiconductor manufacturers. We license our digital solutions on a non-exclusive
worldwide basis to personal computer, peripherals and semiconductor
manufacturers that sell products incorporating these technologies to end users.
We also license our digital solutions on a non-exclusive worldwide basis to
manufacturers that incorporate our technology in products for personal
computers.
We sell our digital solutions worldwide to personal computer manufacturers
through our direct sales force.
We continue to establish strategic relationships with peripherals and
semiconductor manufacturers in an effort to establish our solutions as the
standard for digital video and audio stream management. In addition to our
relationships with STMicroelectronics, we work closely with major software and
hardware providers such as Advanced Micro Devices, Inc., ATI Technologies
and Intel in designing our digital solutions so that our final product will
interact smoothly with their software and hardware platforms. We also maintain
close relationships with graphics card vendors to maximize our product
flexibility and support. We work closely with our customers to anticipate market
demand and user requirements and to maximize consumer acceptance and long-term
viability of our solutions. In 2000 we supplemented our distribution channel by
establishing an Internet presence, RAVISENTDIRECT.com, to maximize direct
contact with our customers, facilitate electronic sales of our products and sell
associated products directly to end users.
We participate in industry conferences to market and demonstrate our
technology and distribute quarterly press kits to disseminate information
regarding our latest advances.
Customers
Our typical customers and partners are personal computer, peripherals and
semiconductor manufacturers that benefit from our digital entertainment
solutions. As of December 31, 2000, computer and peripherals manufacturers
shipping products that incorporate our technology included: Dell Computer,
Gateway, Hewlett-Packard, ATI Technologies, and ST Microelectronics. For the
year ended December 31, 2000,
13
three customers, Wongs Electronics Co., Ltd., Gateway, Inc. and Hewlett-Packard
Company, accounted for 19%, 19%,and 11%, respectively of our revenues and for
the years ended December 31, 1999 and 1998, one customer, Dell, accounted for
53% and 85%, respectively, of our revenues. With the exception of our
arrangement with Phoenix Technologies which has a term in excess of one year,
all of our agreements have a duration of one year or less or may be cancelled by
the customer following notice at any time.
Geographic Areas
- ----------------
Information pertaining to revenues attributed to our country of domicile,
the United States of America, foreign sales in total and individual foreign
countries is included in note 20 of the notes to the consolidated financial
statements, filed herewith at Item 8 - Financial Statements and Supplementary
Data. Revenues from individual countries are based upon information available
to us regarding our customers' country of domicile.
Long-lived assets, at cost, consisting principally of furniture and
equipment, were located in the following countries, including our country of
domicile, the U.S., for the following years noted (in thousands):
-------------------------------------------------
December 31,
-------------------------------------------------
Country 2000 1999 1998
-------------------------------------------------
United States $4,844 $1,970 $ 883
-------------------------------------------------
Germany 643 547 494
-------------------------------------------------
Canada 79 - -
------ ------ ------
-------------------------------------------------
Total $5,566 $2,517 $1,377
====== ====== ======
-------------------------------------------------
Research and Development
We believe that our future competitive position will depend in large part
on our ability to develop new and enhanced digital entertainment solutions and
our ability to meet the evolving and rapidly changing needs of personal
computer, peripherals and semiconductor manufacturers. We have invested
significant time and resources in creating a structured process for undertaking
product development. This process involves several functional groups within our
organization and is designed to provide a framework for defining and addressing
the activities required to bring product concepts and development projects to
market. We have assembled a core team of experienced software architects,
software engineers and system hardware engineers.
As of December 31, 2000, we employed a total of ninety-seven (97) research
and development personnel in four offices. For the years ended December 31,
2000, 1999 and 1998, our research and development expenditures, excluding
non-cash compensation, totaled, $10.2 million, $8.1 million and $3.1 million,
respectively. To date, we have not capitalized any research and development
expenses. In connection with our sale of the assets of our consumer electronics
business in March 2001, approximately 80 of our employees, most of whom were
associated with the consumer electronics business, joined STMicroelectronics. In
connection with our sale of the assets of our Internet appliance business in
March 2001, approximately 13 of our employees, most of whom were associated with
the Internet appliance business, joined Phoenix Technologies Ltd.
Intellectual Property and Proprietary Rights
We rely upon a combination of patent, copyright, trade secret and trademark
laws to protect our intellectual property. We currently have six pending U.S.
patent applications related to our digital video
14
management technology. Five of the six pending U.S. patent applications cover
future products, and do not relate directly to our current products. The sixth
patent application relates to the personal computer industry and is utilized in
our Software CineMaster product. In addition, we have numerous pending trademark
applications for the marks "RAVISENT," "RAVISENT Technologies" and the RAVISENT
logo. We also have an issued U.S. trademark registration for the mark
"CineMaster." Although we rely on patent, copyright, trade secret and trademark
laws to protect our technology, we believe that factors such as the
technological and creative skill of personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position.
However, our intellectual property covers all aspects of our business and if we
are not successful in protecting such rights (i.e. patent applications are
rejected or patents are successfully challenged) our business may be
substantially harmed.
We generally enter into confidentiality or license agreements with our
employees and consultants and companies with whom we have strategic or other
business relationships, and generally control access to and distribution of our
software, documentation and other proprietary information. There can be no
guarantee that these measures will effectively protect our intellectual property
for infringement by unauthorized third parties. In addition, we sometimes
incorporate the intellectual property of our strategic customers into our
designs and we have obligations with respect to the use and disclosure of such
intellectual property.
We license technology from Dolby Laboratories for the audio format that is
used in all of our DVD-related products. We pay a royalty to Dolby on a per-unit
shipped basis. The technology, called Dolby Digital, permits audio from a DVD to
be routed to different speakers in a multi-speaker set up to permit "theater
quality" audio. The Dolby Digital technology is part of the industry standard
DVD specification. The license for the Dolby Digital technology is for a term
expiring at the expiration of the patent covered thereby with the furthest
expiration date from the date of the license. The license for the encryption and
decryption technology may be terminated at any time. In addition, we license
encryption and decryption software technology from DVD Copy Control Association,
Inc. This technology is designed to prevent unauthorized persons from accessing
DVD content such as movies. We have a royalty-free license from DVD Copy Control
Association, Inc. If these license agreements were not renewed, our business
would be severely harmed, and we would not be able to ship product for the DVD
market.
The market for digital entertainment solutions is characterized by vigorous
protection and pursuit of intellectual property rights. From time to time, we
have received, and we expect to continue to receive, notice of claims of
infringement of other parties' proprietary rights. For example, we received
notice from two of our largest customers which are personal computer
manufacturers that a third party with a history of litigating its proprietary
rights and that has substantial financial resources has alleged that aspects of
MPEG-2 technology infringe upon patents held by the third party. The third party
has invited these customers to license the technology covered by the patents.
These customers have contacted us for assistance in determining whether our
technology falls within the scope of the asserted patent claims and may in the
future seek compensation or indemnification from us arising out of the third
party claims. In addition, a consortium of companies known as MPEG-LA has
notified us and a number of personal computer manufacturers, including our
customers, that patents owned by members of the consortium are infringed by the
personal computer manufacturers in their distribution of MPEG-2 technology.
MPEG-LA has requested that these personal computer manufacturers pay license
royalties for use of the technology covered by MPEG-LA patents. These personal
computer manufacturers may in the future seek compensation or indemnification
from us arising out of the MPEG-LA claims. In addition, the members of the MPEG-
LA consortium may in the future seek compensation from us arising out of the
consortium's claims. A second consortium of companies known as "6C" (formerly
known as the DVD Patent Licensing Program) has notified us as well as a number
of DVD product manufacturers that patents owned by members of the consortium are
infringed by the manufacturers in their distribution of products incorporating
DVD technology. 6C has requested that the Company and these manufacturers pay
license royalties for use of the technology covered by the patents licensed by
the consortium. The manufacturers may in the future seek compensation or
indemnification from us arising out of the consortium's claims. In addition, the
members of 6C may in the future seek compensation from us arising out of the
consortium's claims. A third consortium of companies
15
known as "3C" has notified a number of DVD product manufacturers that patents
owned by members of the consortium are infringed by the manufacturers in their
distribution of products incorporating DVD technology. 3C has requested that the
manufacturers pay license royalties for use of the technology covered by the
patents licensed by the consortium. The manufacturers may in the future seek
compensation or indemnification from us arising out of the consortium's claims.
Also, a third party has asserted that the parental control features of our
CineMaster products infringe certain patents held by the third party. This third
party has also contacted at least three of our customers asserting such claims.
Such customers may in the future seek compensation or indemnification from us
arising out of such third party's claims. These and any other claims of
infringement against us, whether or not such claims have merit, could result in
litigation that could severely harm our business.
Competition
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing and which are characterized by short product
life cycles and price erosion. Our principal competitors in the software-based
digital solution market are Mediamatics, Inc. (a subsidiary of National
Semiconductor, Inc.), MGI Software Corp., Intervideo Inc. and RealNetworks, Inc.
Our principal competitors in the hardware-based digital solution market are
Sigma Designs, Inc. and Zoran Corporation. We also compete against several
smaller companies and the internal research and development departments of other
software companies as well as those of personal computer, peripherals and
semiconductor manufacturers who are in the market for specific digital video or
audio software applications. Numerous other major personal computer
manufacturers, software developers and other companies are focusing significant
resources on developing and marketing products and services that will compete
with our CineMaster products. At least two semiconductor manufacturers,
including C-Cube Microsystems and Zoran, are positioning their products as
offering hardware-based digital video and audio management capabilities and
marketing such products as equal or superior to our CineMaster products. In the
future, operating system providers with a larger established customer base, such
as Microsoft, may enter the digital video or audio stream management markets by
building video or audio stream management applications into their operating
systems. For example, Microsoft currently markets a basic MPEG-1 compliant
digital solution that is bundled into its operating system, which is used by a
substantial number of personal computer users. If Microsoft were to successfully
develop or license a DVD-compliant digital video solution and incorporate the
solution into its operating system, our revenues could be substantially harmed.
We anticipate continued growth and competition in the personal computer
industry and the entrance of new competitors into our markets, and accordingly,
the market for our products will remain intensely competitive. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may have
significantly more personnel or greater financial, technical, marketing and
other resources than either we or our current competitors do. Furthermore, our
future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business.
Employees
As of December 31, 2000, we had a total of one hundred and sixty-five (165)
full-time employees, ninety-seven (97) of whom were engaged in research and
development, thirty-one (31) in sales and marketing, and thirty-seven (37) in
administration. Upon the closing of the sales of the assets of our consumer
electronics and Internet appliance businesses in March 2001, we had a total of
approximately seventy-six (76) full-time employees, twenty-seven (27) of whom
were engaged in research and development, twenty-two (22) in sales and
marketing, and twenty-seven (27) in administration. Our future performance
depends in significant part upon the continued services of our key technical,
sales and senior management personnel. The loss of the services of one or more
of our key employees could harm our business. Our future success also depends on
our continuing ability to attract,
16
train and retain highly qualified technical, sales and managerial personnel.
Competition for highly qualified personnel is intense, particularly in the
Philadelphia area, where we are headquartered and in the Silicon Valley area
where we maintain operations. We may not be able to retain or attract key
personnel in the future. None of our employees are represented by a labor union.
We have not experienced any work stoppages and consider our relations with
employees to be good.
Our business and the value of our shares is subject to numerous risks. Some
of these risks are described above and certain additional risks are described
below.
Risk Factors
We are currently undergoing a business transition that may adversely affect our
business.
In March, 2001, we announced that we disposed of our consumer electronics
business and our Internet appliance business and that we are seeking strategic
alternatives for our business. In the past, the consumer electronics business
did not generate material sales or profit for us and the Internet appliance
business generated significant sales but no profit for us.
The internal and external changes that have and will result from the sale
of our consumer electronics business and Internet appliance business and our
announcement concerning strategic alternatives may disrupt our employees,
partners, distributors, stockholders and customers and may create a prolonged
period of uncertainty, which could have a material adverse effect on our
business, prospects and financial condition. The disposition of our consumer
electronics business and Internet appliance business has resulted in substantial
changes including, among other things, the reduction of our workforce and our
product offerings and has created the need for us to seek a new strategic focus.
Many factors may impact our ability to implement a new strategic direction for
our business including our ability to locate strategic partners, finalize
agreements with other companies, manage the implementation internally in an
effective manner, sustain the productivity of our workforce, reduce operating
expenses and quickly respond to and recover from unforeseen events associated
with our business transition. As a result of this business transition, it will
be difficult to forecast our financial performance. We expect that both sales
and operating income may be adversely affected and we expect to report operating
losses in fiscal 2001.
In addition, as a result of the disposition of our consumer electronics
business and our Internet appliance business, approximately 89 of our former
employees, including developers, salespeople and employees involved in general
and administrative functions, have terminated their employment with us and have
accepted employment with the purchaser of the consumer electronics business, the
purchaser of the Internet appliance business or elsewhere. We currently have 27
employees in research and development, 22 employees in sales and marketing and
27 in administration. We believe that we may need to hire additional employees,
particularly in the area of research and development, in order to create a more
diversified product offering and implement a new strategic focus that will be
successful for us.
Our March announcement regarding our search for strategic alternatives and
the sale of our Internet appliance business and consumer electronics business
may adversely affect our existing relationships with our partners and
distributors and the perception of our company among our customers.
As part of the sale of our Internet appliance business and consumer
electronics business, approximately 89 of our employees have accepted employment
with Phoenix Technologies and STMicroelectronics. These employees were dedicated
primarily to research and development activities. The reduction in our research
and development workforce will result in fewer new products being offered by us.
The reduction in our salesforce may result in our sales being adversely
affected.
Consequently, we may have declining levels of business through our
traditional distribution channels as a result of negatively impacted
relationships with our partners, distributors and customers. There can be no
guarantees that
17
we can maintain or re-establish such relationships or forge new customer,
partner and distributor relationships in a timely manner, or at all, to overcome
any loss of business resulting from our business transition.
We depend upon management to identify appropriate strategic alternatives
Our ability to identify an appropriate strategic alternative for our
business is substantially dependent upon certain key management personnel,
particularly our President and Chief Executive Officer, Mr. Francis Wilde, and
our Chief Financial Officer, Mr. Thomas Fogarty. The loss of such key management
personnel could have a material adverse effect on our ability to identify
appropriate strategic alternatives and consummate the associated transactions,
if any.
The success of any strategic alternatives we pursue are speculative
While we intend to seek a variety of strategic alternatives, there can be
no assurance that we will be successful in finding a beneficial strategic
alternative for our stockholders or that we will find any suitable strategic
alternatives. In the event that we choose a new strategic direction for our
company, the success of the resulting business will depend, to a great extent,
on the operations, financial condition and management of the resulting business
and other factors beyond our control. There can be no assurance that we will
find or consummate a strategic alternative that is beneficial to our
stockholders.
There are few, if any, strategic alternatives available to us and there is
intense competition to find beneficial strategic alternatives
We are and will continue to be an insignificant participant in the market
of companies seeking strategic alternatives. A large number of established and
well financed entities, including venture capital firms, are active in
transactions involving strategic alternatives being considered by us, including
mergers with, or the acquisition of, business entities that may be desirable
candidates for a strategic combination with us. Such competitors may have
significantly greater financial resources, technical expertise, managerial
capabilities and other resources than we do. As a result, we may be at a
competitive disadvantage in identifying and attracting possible strategic
alternatives and successfully completing any related transactions.
The Securities Exchange Act of 1934 imposes significant disclosure requirements
which may deter potential strategic partners from consummating a transaction
with us
The Securities Exchange Act of 1934 requires companies subject to its
provisions to provide certain information about significant acquisitions,
including certified financial statements for the acquired company or entity,
covering one or two years depending on the size of the acquisition. In the
event that we pursue a business combination with another entity, the time and
additional costs that may be incurred by the target entity to prepare such
statements may significantly delay or preclude consummation of an otherwise
desirable acquisition by us or delay or preclude consummation of a desirable
acquisition of our company or business. Acquisition prospects that do not have
or are unable to obtain the required audited financial statements may not be
appropriate for acquisition so long as the reporting requirements of the
Securities Exchange Act of 1934 are applicable.
We currently have a limited product offering and may not have a diversified
business after a strategic transaction, if any
Due to the disposition of our consumer electronics business and our Internet
appliance business, we currently have a limited offering of products that can be
used only in personal computers. Pursuant to the terms of our agreement with
STMicroelectronics, we may not participate in significant aspects of the
consumer electronics market prior to March 2006. In the event that we consummate
a market combination with only one other business entity, our ability to
diversify our business into a number of areas may be limited. As a result, we
will be subject to
18
economic pressures within a limited industry which may result in a material
adverse effect on our business and financial condition.
Certain strategic alternatives may result in a change in control and management
of our company
In the event that we consummate a business combination transaction
involving the issuance of our common stock, such business combination may result
in a third party obtaining a controlling interest in the Company. Any such
business combination may require our management to sell or transfer all or a
portion of their shares of common stock of the Company, or resign as directors
and officers of the Company. In addition, the issuance of shares of our common
stock in connection with a business combination involving the Company would
result in the reduction in percentage of shares of our common stock owned by our
current stockholders.
We have a limited operating history and our historical financial information is
of limited value in projecting our future operating results or evaluating our
operating history
As a result of our relatively brief operating history and because our
business model has changed significantly since inception, we believe that
comparing different periods of our operating results is not meaningful and you
should not rely on the results for any period as an indication of our future
performance. In addition, fluctuations in our operating results have caused, and
may in the future continue to cause us to perform below the expectations of
public market analysts and investors. If our results continue to fall below
market expectations, the price of our common stock may continue to fall
significantly. Our limited operating results have varied widely in the past, and
we expect that they will continue to vary significantly from quarter-to-quarter
as we attempt to establish our products in the market and transition to a new or
different business model.
You should expect our quarterly operating results to fluctuate in future
periods and they may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
Our revenues and operating results will vary significantly from quarter-to-
quarter due to a number of factors, including:
. variations in demand for our products and services, which are relatively
few in number;
. the timing of sales of our products and services and the timing of new
releases of personal computer systems and semiconductors that
incorporate our products;
. delays in introducing our products and services;
. changes in our pricing policies or the pricing policies of our
competitors;
. the timing and accuracy of royalty reports received from our customers,
which we have not audited to date;
. the timing of large contracts that materially affect our operating
results in a given quarter;
. changes in the usage of digital media;
. our ability to develop and attain market acceptance of enhancements to
our products;
. new product introductions by competitors;
. the mix of license, hardware service and revenues;
19
. unanticipated customer demands which impact on our ability to deliver
our products and ultimately recognize revenue;
. the mix of domestic and international sales;
. costs related to acquisitions of technologies or businesses;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
administrative and product management personnel;
. our ability to expand our operations; and
. global economic conditions as well as those specific to personal
computer, peripherals and semiconductor manufacturers and other
providers of digital video and audio stream management solutions.
We receive either a flat fee from OEMs or a license royalty for each
personal computer or peripheral sold that contains our products and a royalty
for each silicon device sold by a semiconductor manufacturer that incorporates
our technology. In collecting these fees, preparing our financial reports,
projections and budgets and in directing our sales efforts and product
development, we rely on our customers to accurately report the number of units
sold. We have never undertaken an audit of any of our customers to verify that
their reported sales unit numbers were accurate. These reports are subject to
potential revision by these manufacturers. If any of our customers revised their
product sales reports, we might be required to adjust our revenues for
subsequent periods, which could harm our business and the price of our common
stock.
We determine our operating expenses largely on the basis of anticipated
revenue trends and a high percentage of our expenses are fixed in the short term
and are significant. As a result, any delay in generating or recognizing revenue
could cause significant variations in our operating results from quarter-to-
quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. In future quarters, our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may fall significantly.
We face inventory risks that may be increased by our business shift away from
the Internet appliance business.
As of December 31, 2000, we have approximately $21 million of inventory,
the majority of which was acquired from May through October 2000 to support
production of our Internet appliance hardware designs. This inventory was
purchased to accommodate long lead times for components in order to meet the
anticipated demand for our Internet appliance products (the Internet screen
phone, set-top box, and Nuelco platform). The sale of our Internet appliance
business included the assignment of our Internet appliance customer contracts,
but not the inventory to support production of the associated products. While we
have obtained assurances that we will be the preferred supplier of inventory to
Phoenix Technologies Ltd. for these products, we may not be able to sell all of
the inventory that we currently have. Furthermore, even if our efforts to sell
this inventory are successful, we may not be able to recover the full cost of
the inventory due to market price fluctuations and other market conditions.
We have never been profitable and may never achieve profitability in the future
We had a net loss of $40.5 million for the year ended December 31, 2000. We
incurred net losses of $8.1 million for the year ended December 31, 1999 and
$13.7 million for the year ended December 31, 1998. To date, we have not
achieved profitability on an annual basis and revenues from our software and
hardware design solutions may not result in sufficient revenues to sustain
profitability in any future period. In addition, we cannot be certain that we
can increase profitability, particularly to the extent that we face price
competition. As a result, we will need to generate significant revenues to
attain profitability.
Increasing competition may cause our prices to decline, which would harm our
operating results
We expect our prices for our digital entertainment products to decline over
the next few years. We expect to face increased competition in markets where we
license our digital entertainment products, which will make it more difficult to
maintain our prices and profit margins even if our sales volumes increase. If
anticipated increases in sales volume do not keep pace with anticipated pricing
pressures, our revenues would decline and our business could be harmed. Despite
our efforts to introduce enhancements to our products, we may not be successful
in maintaining our pricing.
20
Our business significantly depends upon our CineMaster products, and it is
uncertain whether the market will continue to accept these products
In the year ended December 31, 2000, we derived approximately 75% of our
license revenues from sales of devices incorporating our CineMaster products. We
expect that license revenues from our CineMaster products will continue to
account for a significant portion of our revenues for the foreseeable future. In
particular, our business will be harmed if our existing manufacturing customers
do not continue to incorporate our CineMaster products or if we are unable to
obtain new customers for our CineMaster products. In seeking market acceptance,
it may be difficult for our digital solutions to displace incumbent solutions
employed by manufacturers not currently licensing our CineMaster products.
Manufacturers that are using other solutions would need to invest in additional
training and development tools and convert software for existing hardware
solutions in order to change to a new digital solution. Accordingly, potential
customers may not accept our digital solutions, which could limit our growth
opportunities and harm our prospects.
The loss of a single customer could significantly harm our business because a
majority of our revenues is derived from a small number of customers
A substantial portion of our license revenues comes from three customers,
Gateway, Inc., Hewlett-Packard Company, and Dell Computer. In the year ended
December 31, 2000, Gateway, Inc., Hewlett-Packard Company, and Dell Computer
accounted for 19%, 11%, and 7% of our total revenues and 35%, 18%, and 13% of
our gross profit, respectively. We expect a relatively small number of customers
to account for a majority of our revenues and gross profit, if any, for the
foreseeable future. The loss of any of these or other primary customers, or a
material decrease in revenue from these customers, would immediately harm our
business. As a result of the asset sales by us to STMicroelectronics and
Phoenix, we lost several customers in the consumer electronics market including
Microsoft, Funai, and Cyberdrive. Customers lost in the Internet appliance
market included IPM, Wongs Electronics, and PlanetWorks.
Since most of our revenue is derived from a small number of customers, problems
those customers experience will directly impact our business
As a result of our concentrated customer base, problems that our customers
experience could materially harm our business. These risks are beyond our
control. For example, because we do not control the business practices of our
customers, we do not influence the degree to which they promote our technology
or set the prices at which the products incorporating our technology are sold to
end users. Risks that may influence the success or failure of the personal
computer manufacturers that are our customers include:
. the competition the manufacturer faces and the market acceptance of its
products;
. the engineering, marketing and management capabilities of the manufacturer
and the technical challenges unrelated to our technology that it faces in
developing its products;
. the financial and other resources of the manufacturer;
. new governmental regulations or changes in taxes or tariffs applicable to
the manufacturer; and
. the failure of third parties to develop and introduce content for digital
entertainment applications in a timely fashion.
The inability of our customers or us to successfully address any of these risks
could harm our business.
21
Since our customers have not executed long-term contracts with us, our revenues
could decline significantly with little or no notice
Our agreements with our customers are typically of limited duration and do
not contain minimum purchase commitments or are terminable with little or no
notice. Rather than long-term contracts, we typically enter into licensing
agreements with one-year terms that automatically renew each subsequent year
unless either party receives a written cancellation. As a result, many of our
customers could elect not to renew these agreements and we could have little
warning of this election. Also, since our agreements with our customers do not
include minimum purchase requirements, the demand for our products is
unpredictable. As a result of competition or fluctuations in demand, we could be
required to reach an accommodation with our customers with respect to
contractual provisions such as price or delivery time in order to obtain
additional business and maintain our customer relationships. Any termination,
decrease in orders or election not to renew a contract by our principal
customers would harm our business.
We depend upon technology licensed from third parties, and if we do not maintain
these license arrangements, we will not be able to ship many of our products and
our business will be seriously harmed
We license technology that is used in our products from third parties under
agreements with a limited duration and we may not be able to maintain these
license arrangements. If we fail to maintain our license arrangements, we would
not be able to ship many of our digital entertainment products and our business
would be seriously harmed. For example, we have a license agreement with Dolby
Laboratories Licensing Corporation for the audio format that is used in all of
our DVD-related products. Without this technology, we could not ship product for
DVD markets. In addition, we license encryption and decryption software
technology from Matsushita Electric, which must also be included in any DVD
products we ship. The license for the Dolby Digital technology is for a term
expiring at the expiration of the patent covered thereby with the furthest
expiration date from the date of the license. The license for the encryption and
decryption technology may be terminated by Matsushita at any time upon written
notice. We may not be able to renew either license. If we failed to renew either
of these licenses, we would not be able to ship products for the DVD market, and
we would accordingly lose a substantial portion of our revenue.
The loss of any of our strategic relationships would make it more difficult to
keep pace with evolving industry standards and to design products that appeal to
the marketplace
We rely on strategic relationships, such as those with ATI Technologies
Inc., Dolby Laboratories, Intel Corporation, STMicroelectronics, Inc. and
Phoenix Technologies, Ltd. to provide us with state of the art technology,
assist us in integrating our products with leading industry applications and
help us make use of economies of scale in manufacturing and distribution.
Through our relationships with our strategic partners, we gain valuable insights
on evolving industry standards and trends. For example, we may be able to learn
about future product lines in advance so that we can more efficiently design
products that our customers find valuable. However, we do not have written
agreements with all of our strategic partners that can ensure these
relationships will continue for a significant period of time. All of our
agreements with these partners are informal, and may be terminated by them at
any time. The loss of any one of these relationships could harm our business.
Delays in providing our products to our customers may affect how much business
we receive
Our product development efforts may not be successful and we may encounter
significant delays in bringing our products to market. Since the product life
cycle in the personal computer industry can be as short as six to twelve months
or less, if our product development efforts are not successful or are
significantly delayed, our business will be harmed. In the past, we have failed
to deliver new products, upgrades or customizations on time, including
customization projects for DVD products that are requested from time to time by
our customers. In the
22
future, our efforts to remedy this situation may not be successful and we may
lose customers as a result. Delays in bringing to market new products,
enhancements to old products or interfaces between existing products and new
models of personal computers could be exploited by our competitors. If we were
to lose market share as a result of lapses in our product management, our
business would be harmed.
Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed
Our ability to compete depends substantially upon our internally developed
technology. We have a comprehensive program for securing and protecting rights
in patentable inventions, trademarks, trade secrets and copyrightable materials.
If we are not successful in protecting our intellectual property, our business
could be substantially harmed.
Our pending patents may never be issued, and even if issued, may provide us with
little protection.
We regard the protection of patentable inventions as important to our
future opportunities. We currently have six U.S. patent applications pending
relating to our digital video stream management technology. However, none of our
technology is patented outside of the United States nor do we currently have any
international patent applications pending. It is possible that:
. our pending patent applications may not result in the issuance of
patents;
. our patents may not be broad enough to protect our proprietary rights;
. any issued patent could be successfully challenged by one or more
third parties, which could result in our loss of the right to prevent
others from exploiting the inventions claimed in those patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our
patents; and
. effective patent protection, if any, may not be available in every
country in which we do business.
We rely upon trademarks, copyrights and trade secrets to protect our proprietary
rights, which are only of limited value
We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently have
two pending trademark applications for the marks "RAVISENT" and "RAVISENT
Technologies". We also have an issued U.S. trademark for the mark "CineMaster,"
and have a number of pending trademark applications for "RAVISENT" in foreign
countries. Moreover, despite any precautions which we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. other companies may claim common law trademark rights based upon state
or foreign law which precede our federal registration of such marks;
23
. current federal laws that prohibit software copying provide only
limited protection from software "pirates," and effective trademark,
copyright and trade secret protection may be unavailable or limited in
certain foreign countries;
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we are unable to determine the extent
to which piracy of our products and trademarks may occur, particularly
overseas;
. we have provided our source code for our products to a few of our
customers as part of our licensing arrangements with them and the
procedures and practices implemented under the terms of these licenses
may not be sufficient to prevent them from exploiting the source code;
and
. the tamper-resistant copy protection codes in our software have been
broken in the past and may not be successful in preventing
unauthorized use of our software in the future.
We may become involved in costly and time-consuming litigation over proprietary
rights
Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software and hardware in our industry may be
increasingly subject to third party infringement claims as the number of
competitors grows and the functionality of products in different areas of the
industry overlap. Third parties may currently have, or may eventually be issued,
patents that would be infringed by our products or technology. We cannot be
certain that any of these third parties will not make a claim of infringement
against us with respect to our products and technology.
Any litigation, brought by others or by us, could result in the expenditure
of significant financial resources and the diversion of management's time and
efforts. In addition, litigation in which we are accused of infringement may
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements even before the issue
of infringement has been decided on the merits. If any litigation were not to be
resolved in our favor, we could become subject to substantial damage claims and
be prohibited from using the technology at issue without a royalty or license
agreement. These royalty or license agreements, if required, might not be
available on acceptable terms, or at all, and could result in significant cost
and, harm our business. If a successful claim of infringement is made against us
and we can not develop non-infringing technology or license the infringed or
similar technology on a timely and cost-effective basis, our business could be
significantly harmed.
We have received notices of claims that may result in litigation.
From time to time, we have received, and we expect to continue to receive,
notice of claims of infringement of other parties' proprietary rights. For
example:
. Our digital video stream management solutions comply with industry DVD
specifications, which incorporates technology known as MPEG-2 that
governs the process of storing a video input in digital form. We have
received notice from two of our largest customers that a third party
with a history of litigating its proprietary rights and which has
substantial financial resources has alleged that aspects of MPEG-2
technology infringe upon patents held by the third party. These
customers may in the future seek compensation or indemnification from
us arising out of the third party claims and we may be required to
agree to indemnify them to secure future business or otherwise.
Moreover, we may be required to pay license fees in connection with
the use of the third party's technology in the future.
24
. A group of companies has formed a consortium known as MPEG-LA to
enforce the proprietary rights of other holders of patents covering
essential aspects of MPEG-2 technology that are incorporated into our
products. MPEG-LA has notified a number of personal computer
manufacturers, including our customers, that patents owned by members
of the consortium are infringed by the personal computer manufacturers
in their distribution of products that incorporate the MPEG-2
technology. MPEG-LA has requested that these personal computer
manufacturers pay license fees for the use of the technology covered
by MPEG-LA patents. These personal computer manufacturers may in the
future seek compensation or indemnification from us arising out of the
MPEG-LA claims, and we may be required to pay license fees in
connection with the use of MPEG-2 technology in the future.
. Another group of companies has formed a consortium known as "6C"
(formerly DVD Patent Licensing Program) to enforce the proprietary
rights of other holders of patents covering essential aspects of DVD
technology that are incorporated into our products. 6C has notified
us, as well as a number of computer manufacturers and other companies
manufacturing or licensing DVD-related products, including our
customers, that patents owned by members of the consortium are
infringed by products that incorporate the DVD technology. 6C has
requested that these personal computer manufacturers pay license fees
for using the 6C patents. We may be required to pay license fees in
connection with the use of such DVD technology in our products in the
future as a result of such claims. Further, a court could determine
that we infringe any such patents and we would be liable for resulting
damages. In addition, our customers who have been contacted by the 6C
may in the future seek compensation or indemnification from us arising
out of the 6C claims, and we may be required to pay license fees on
their behalf in connection with the use of such DVD technology in the
future.
. A third party has asserted that the parental control features of our
CineMaster products infringe patents held by the third party. A court
could determine that such parental control features do infringe these
patents and we could be liable for resulting damages. In addition, our
customers could seek compensation or indemnification from us arising
out of such third party's claims.
. Another consortium of companies, commonly known as "3C", notified a
number of DVD product manufacturers that the members of the consortium
hold patents that are essential to DVD technology, and have requested
that such companies pay license royalties for the use of the
technology covered by the 3C patents. In addition, our customers may
seek compensation or indemnification from us as a result of the 3C
claims. 3C members may in the future seek compensation or
indemnification from us arising out of the consortium's claims.
. A letter dated September 12, 2000 from a third party to one of our
customers who distributes our product claims infringement of a
Japanese utility model patent regarding Internet terminal which can be
coupled to a television set. This third party is seeking a license
agreement as a resolution. We have requested more time to respond and
are accumulating prior art to invalidate the utility model patent.
Any of these notices could result in litigation, which would include all of
the risks discussed above.
We may not be able to profit from growth in our business if we are unable to
effectively manage such growth
Our ability to successfully offer our products and services in rapidly
evolving markets requires an effective planning and management process. We have
limited experience in managing rapid growth. In the last several months, we have
hired new engineering, sales, marketing, administrative and other management
personnel. Our business will suffer dramatically if we fail to manage our
growth. On December 31, 2000 we had a total of
25
165 employees compared to a total of 140 employees on December 31, 1999. Upon
the closing of the sale of our Internet appliance and consumer electronics
business, we have a total of approximately 76 full-time employees, 27 of whom
are engaged in research and development, 22 in sales and marketing and 27 in
administration. The growth we have experienced so far has placed strains on our
managerial, financial and personnel resources. We expect these strains to
continue in the future. The combination of growth and the complexity of the
technology involved in our products, demands an unusual amount of focus upon the
operational needs of our customers for quality, reliability, timely delivery and
post-installation field support. Our existing licenses rely heavily on our
technical expertise in customizing our digital solutions to their new products.
In addition, relationships with new manufacturing customers generally require
significant engineering support. Therefore, any increases in the adoption of our
products by existing or new customers will increase the strain on our resources,
especially our engineers. To reach our goals, we will need to continue hiring
while, at the same time, investing in our infrastructure. We will also need to
increase the scale of our operations. In addition, we will need to:
. successfully train, motivate and manage new employees;
. expand our sales and support organization;
. integrate new management and employees into our overall operations;
and
. adopt and staff an investor relations program.
We may not succeed in anticipating all of the changing demands that growth,
if any, will impose on our systems, procedures and structure. Our failure to
effectively manage our expansion may result in a material adverse effect on our
business financial condition and results of operations.
We may not be able to successfully make acquisitions of or investments in other
companies
We have very limited experience in acquiring or making investments in
companies, technologies or services. From time to time we have had discussions
with companies regarding our acquiring, or investing in, their businesses,
products or services. In the future, we may make acquisitions or investments in
other companies, products or technologies. Acquisitions in our industry are
particularly difficult to assess because of the rapidly changing technological
standards in our industry. If we make any acquisitions, we will be required to
assimilate the personnel, operations and products of the acquired businesses and
train, retain and motivate key personnel from the acquired businesses. However,
the key personnel of the acquired company may decide not to work for us.
Moreover, acquisitions may cause disruptions in our operations and divert
management's attention away from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners. We
may be unable to maintain uniform standards, controls, procedures and policies
if we fail in our efforts to assimilate acquired businesses which could result
in a material adverse effect on our business.
We are dependent upon our key management for our future success, and few of our
managers are obligated to stay with us
Our success depends on the efforts and abilities of our senior management
and certain other key personnel. Many of our key employees are employed at will.
26
If any of these or other key employees left or was seriously injured and unable
to work and we were unable to find a qualified replacement, then our business
could be harmed. We have recently hired new managers and may hire key management
personnel as needed. We may not be able to successfully assimilate our recently
hired managers or to hire qualified key management personnel to replace them.
We may not be able to hire and retain qualified employees, which would impair
our ability to grow.
As a result of our asset sales to Phoenix Technologies and
STMicroelectronics, our workforce has been reduced by approximately 89
employees, including 70 employees in our research and development department and
9 employees in our sales and marketing department. Although our need for
employees has been reduced as a result of the disposition of our consumer
electronics business and our Internet appliance business, we have vacancies in
several positions in our research and development group. Competition for
these individuals is intense, and we may not be able to attract, assimilate or
retain additional highly qualified personnel in the future. Hiring qualified
personnel, particularly sales, marketing, engineering and product management
personnel, is very competitive in our industry due to the limited number of
people available with the necessary technical skills and understanding of the
digital video and audio stream management industry. In addition, we are
headquartered in Malvern, Pennsylvania and we maintain operations in San Jose,
California. We have in the past and expect in the future to face difficulties
locating qualified personnel in these locations. We have had, and expect to
continue having greater difficulty attracting such personnel with equity
incentives as a public company than we did as a privately held company.
We may be subject to product returns, product liability claims and reduced sales
because of defects in our products
Our products are very complex and frequently contain undetected errors. The
likelihood of errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as a result of
defects in the products into which our products are incorporated. Despite our
extensive quality assurance process, we have in the past shipped product
releases with some defects, and have discovered other errors in our products
after their commercial shipment. Despite our quality assurance process and that
of our customers, defects and errors may be found in new products or in new
versions or enhancements of existing products after commercial shipment has
begun. We may be required to devote significant financial resources and
personnel to correct any defects. Known or unknown errors or defects that affect
the operation of our products could result in the following, any of which could
harm our business:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. failure of our products to achieve market acceptance;
. increased service and warranty costs; and
. litigation costs.
Although some of our licenses with customers contain provisions designed to
limit our exposure to potential product liability claims, these contractual
limitations on liability may not be enforceable. In addition, our product
27
liability insurance may not be adequate to cover our losses in the event of a
product liability claim resulting from defects in our products and may not be
available to us in the future.
Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability
During the year ended December 31, 2000 and December 31, 1999, we derived
approximately 41% and 23% of our revenues, respectively, from sales to foreign
companies, and we may derive an increasing amount of our revenue from sales
outside North America in the future. We have limited experience in marketing and
distributing our products internationally. In addition, there are many risks
inherent in doing business internationally including, among others:
. legal uncertainty regarding liability;
. tariffs, trade barriers and other regulatory barriers;
. problems in collecting accounts receivable;
. political and economic instability;
. changes in diplomatic and trade relationships;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. the impact of recessions in economies outside the United States; and
. complexity and unexpected changes in local laws and regulations.
Our licensees are subject to many of the risks described above with respect
to their manufacturing or end-user customers. Currently, all of our
international sales are denominated in U.S. dollars; therefore, a strengthening
of the dollar could make our products less competitive in foreign markets. We do
not use derivative instruments to hedge foreign exchange risk. In the future, we
may conduct sales in local currencies, in which case, changes in exchange rates
could adversely affect our operating results. In addition, if we conduct sales
in local currencies, we may engage in hedging activities, which may not be
successful and could expose us to additional risks.
28
It may be difficult to raise needed capital in the future, which could
significantly harm our business
We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 2000. Our
capital requirements will depend on many factors, including:
. the results of our search for strategic alternatives;
. acceptance of and demand for our products;
. the number and timing of acquisitions;
. the costs of developing new products;
. the costs associated with our expansion; and
. the extent to which we invest in new technology and research and
development projects.
To the extent that the proceeds from our initial public offering and the
dispositions of our consumer electronics and Internet appliance businesses are
exhausted, and if our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your percentage ownership
in RAVISENT would be reduced. Additional financing may not be available when
needed and, if such financing is available, it may not be available on terms
favorable to us.
Because of their significant stock ownership, our officers and directors can
exert significant control over our future direction
Our officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately seventeen percent (17%) of our
outstanding common stock. These stockholders, if acting together, would be able
to significantly influence all matters requiring approval by our stockholders,
including the election of directors, the approval of mergers or other business
combination transactions or a sale of all or substantially all of our assets.
Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to shareholders
The board of directors has the authority without any further vote or action
on the part of the stockholders to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it is ever issued,
may have preference over and harm the rights of the holders of common stock.
Although the issuance of this preferred stock will provide us with flexibility
in connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
Our certificate of incorporation and by-laws include provisions that may
have the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control.
29
Our revenues are dependent upon acceptance of products that incorporate our
digital entertainment technology only in the personal computer industry
We rely on the personal computer industry, which has risks and uncertainties
that are beyond our control.
The personal computer industry is presently the only market for our digital
entertainment solutions. In addition, we are subject to a non-competition
agreement with STMicroelectronics pursuant to which we have agreed to not
compete in significant aspects of the consumer electronics market until March
2006. As a result, our results of operations will depend almost entirely on
consumer acceptance of the personal computer. Our dependence on these industries
involves several risks and uncertainties, including:
. whether semiconductor manufacturers developing silicon devices for
personal computer manufacturers will design our digital solutions into
their devices and successfully introduce these devices;
. changes in consumer requirements and preferences for personal
computers;
. the small number of product manufacturers in the personal computer
industry and the short product life cycles which can be six months or
less; and
. the difficulty in predicting the level of consumer interest in and
acceptance of many digital product applications employing our products
that employ our technology.
Any general economic, business or industry conditions that cause customers
or potential customers to reduce or delay their investments in personal computer
systems could have a negative effect on our strength and profitability. For
example, a softening of demand for computer systems may result in decreased
revenues (or at least declining revenue growth rates) for computer manufacturers
in general which could have a corresponding negative impact on our sales. In
turn, a decrease in our sales could result in pricing pressures for our
products, which could have a negative effect on our revenues and profitability.
Recently, personal computer manufacturers have experienced a slowdown in sales
of personal computers, which may result in a material adverse affect on the
sales of our products.
We are subject to a non-competition agreement prohibiting us from selling
products in significant aspects of the consumer electronics market.
Our agreement with STMicroelectronics, pursuant to which we sold our
consumer electronics market, provides that we may not compete in significant
aspects of the consumer electronics business until March 2006. International
Data Center surveys indicate that U.S. consumers, by a two-to-one margin, would
prefer to receive electronic information and entertainment services through
their television sets, rather than their personal computers. In recognition of
this trend, traditional consumer electronics manufacturers have introduced
stand-alone Internet access devices for the television. Recently, personal
computer manufacturers have announced major initiatives in providing their own
versions of stand-alone Internet devices in an effort to combat the consumer
electronic manufacturers initiatives. An increase in the demand for certain
consumer electronics products may result in a corresponding decrease in the
demand for personal computer products employing our technology which may have a
material adverse effect on our business and financial condition.
We currently depend upon demand for digital entertainment products, which may
not be sustained.
30
Our success currently depends upon continued demand for digital
entertainment products in the personal computer market. All of our revenues in
1998 and 1999 resulted from sales of digital entertainment products. In 2000 a
significant portion of our revenues were derived from sales of digital
entertainment products. In addition to the risks inherent in the personal
computer industry, the market for digital entertainment products also contains
risk and uncertainties, including:
. the development and marketing of content by third party content
providers for end-user systems such as desktop computers in a format
compatible with our digital solutions; and
. the potential for declining demand for DVD solutions in lower price
personal computers.
Factors negatively affecting the personal computer industry in general or
the DVD market in particular could harm our business. Moreover, to the extent
that the performance, functionality, price and power characteristics of our
digital solutions fail to satisfy customers who have a critical need for
specific digital applications, the use of our digital solutions could become
confined to a limited segment of these industries.
Competition in our markets is likely to continue to increase and could harm our
business
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing and which are characterized by short product
life cycles and price erosion. Our principal competitors in the software-based
digital solution market are Mediamatics, Inc. (a subsidiary of National
Semiconductor, Inc.), MGI Software Corp., Intervideo Inc. and RealNetworks, Inc.
Our principal competitors in the hardware-based digital solution market are
Sigma Designs, Inc. and Zoran Corporation. We also compete against several
smaller companies and with the internal research and development departments of
other software companies as well as those of personal computer, peripherals, and
semiconductor manufacturers who are in the market for specific digital video or
audio software applications. Many of our competitors have a larger customer
base, greater name recognition, greater financial, technical, managerial and
other resources than us. Numerous other major personal computer manufacturers,
software developers and other companies are focusing significant resources on
developing and marketing products and services that will compete with our
CineMaster products. Companies such as Liberate Technologies, Spyglass, Inc.,
Planetweb, Inc. and WebTV also compete indirectly with us by providing digital
video and other solutions to Internet appliance manufacturers who compete with
our customers or personal computer manufacturers. At least two semiconductor
manufacturers, including C-Cube Microsystems and Zoran, are positioning their
products as offering hardware-based digital video and audio management
capabilities and marketing such products as equal or superior to our CineMaster
products. In the future, operating system providers with a larger established
customer base, such as Microsoft, may enter the digital video or audio stream
management markets by building video or audio stream management applications
into their operating systems. For example, Microsoft currently markets a basic
MPEG-1 compliant digital solution that is bundled into its operating system,
which is used by a substantial number of personal computer users. If Microsoft
were to successfully develop or license a DVD-compliant digital video solution
and incorporate the solution into its operating system, our revenues could be
substantially harmed.
We anticipate continued growth and competition in the personal computer
industry and the entrance of new competitors into our market, and accordingly,
the market for our products will remain intensely competitive. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may have
significantly more personnel or greater financial, technical, marketing and
other resources than either we or our current competitors do. Furthermore, our
current and future competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements than we can. Also,
future competitors may have greater name recognition and more extensive customer
bases that they can leverage. Increased competition could result in price
reductions, fewer customer orders, reduced gross profit margins and loss of
market share, any of which could harm our business.
31
If we fail to manage technological change, respond to evolving industry
standards or enhance our products' interoperability with the products of our
customers, demand for our products will decrease and our business will suffer
Future versions of software and hardware platforms employing new
technologies or the emergence of new industry standards could render our
products obsolete or uncompetitive. The market for digital video and audio
solutions is characterized by rapid technological change and evolving industry
standards, such as standards for DVD audio, DVD random access memory and DTV as
well as other digital entertainment applications. If we fail to respond to
evolving industry standards, our products could rapidly become obsolete, which
would harm our business. If the characteristics of our digital solutions are not
compatible with the requirements of specific system or program applications, the
likelihood that our customers will design our products into their systems and
devices will decrease and our business will be harmed.
We may not be able to respond to rapidly changing consumer preferences
Our results of operations will depend on the extent to which our products
are incorporated into the products of leading personal computer, peripherals and
semiconductor manufacturers. Their willingness to incorporate our products
depends upon whether we succeed in developing enhancements and new generations
of our software and hardware that satisfy consumer preferences in their markets
and introducing these new technologies to the marketplace in a timely manner. We
must constantly modify and improve our products to keep pace with changing
consumer preferences. For example, DVD drives became widespread on new personal
computers in the last two years. It is particularly difficult to keep pace with
changing consumer preferences in the personal computer industry as a result of a
number of factors, including:
. the difficulty of anticipating and responding in a timely manner to
the latest consumer trends and requirements;
. the introduction by our competitors of new products embodying popular
new technologies or features that appeal to consumers; and
. the significant investment that is often required before commercial
viability is achieved to market a new feature or function.
Any failure by us to adequately address these risks could render our
existing digital solutions obsolete and could harm our business. In addition, we
may not have the financial and other resources necessary to develop any
enhancements or new generations of technology that generate revenue in
excess of the costs of development.
We face risks from the uncertainties of any future governmental regulation
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally. However, due to the increasing popularity and use of digital delivery
mediums, it is possible that future laws and regulations may be adopted that
regulate the digital media market or other markets in which our products are
sold. Future regulatory measures may include, among other things:
. pricing;
. content;
. copyrights;
32
. export controls (particularly regarding data encryption);
. distribution; and
. characteristics and quality of products and services.
The growth and development of the digital media market may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business in this segment. The adoption of any
additional laws or regulations may decrease the expansion of this market and
harm our business. Our business could be harmed by any new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the digital media market.
ITEM 2. Properties
As part of the sale of our consumer electronics assets to
STMicroelectronics in March 2001, STMicroelectronics assumed the lease for our
corporate headquarters which includes approximately 47,000 square feet of space
in an office complex located in Malvern, Pennsylvania. In April 2001, we will
move our principal offices in Malvern to another building within the same office
complex as our current offices. The lease for our new corporate headquarters is
for approximately 14,000 square feet of space which expires in November 2002. As
a result of our move, our future minimum required lease payments for our
corporate headquarters facilities were reduced by a total of approximately $6.8
million. We also lease approximately 9,000 square feet of office space under a
five-year lease expiring in March 2005 in San Jose, California, with sales
offices and personal computer engineering facilities. We believe these
facilities will be adequate to fulfill our needs for the forseeable future.
ITEM 3. Legal Proceedings
Legal Proceedings
On or about August 10, 2000 Corum Group, Ltd. filed an action against us
and Cinax Designs Inc. in the United States District Court for the Western
District of Washington (No. C00-132D). Corum, a business consultant, alleges
that it had an agreement with Cinax whereby Cinax would pay Corum an 8%
"transaction fee" in the event Corum located a purchaser for Cinax. We acquired
Cinax by agreement dated as of July 13, 2000 for compensation of $3.5 million in
cash and an aggregate of 825,000 shares of our common stock and no par,
non-voting exchangeable preferred stock of Ravisent British Columbia Inc., an
indirectly owned subsidiary, which preferred stock is exchangeable, on a
one-for-one basis, into shares of our common stock. In the complaint Corum
alleges that it introduced us to Cinax and that it is therefore entitled to
$281,362 and 66,000 shares of our common stock. As part of our acquisition of
Cinax, the shareholders of Cinax agreed to indemnify us for 50% of any liability
stemming from the Corum claim and an aggregate of 53,500 shares of our common
stock and non-voting exchangeable preferred stock of Ravisent British Columbia
Inc. have been placed in escrow to secure this indemnification obligation. The
parties attended a voluntary mediation session on January 22, 2001, and a trial
date has been set for October 9, 2001.
33
Between February and April 2000, eleven class action lawsuits were filed
against us and certain of our current and former officers and directors in the
United States District Court for the Eastern District of Pennsylvania. On May
25, 2000, the cases were consolidated under Civil Action No. 00-CV-1014, and
entitled "In re RAVISENT Technologies, Inc. Securities Litigation". Pursuant to
the court's consolidation order, a consolidated and amended class action
complaint was filed on June 14, 2000 with an alleged class period of July 15,
1999 through April 27, 2000. This complaint alleges violations of the federal
securities laws, specifically Sections 11 and 15 of the Securities Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seek unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are awaiting a
hearing date to be set for the motion.
Certain of our employees and certain holders of 5% or more of our common
stock are members of the putative classes alleged in these actions and therefore
may have interests adverse to us with respect to the alleged claims in these
actions.
We believe that such lawsuits or claims are without merit and that we have
meritorious defenses to the actions. We plan to vigorously defend the
litigation. However, failure to successfully defend these actions could
substantially harm our results of operations, liquidity and financial condition.
From time to time, we have received, and expect to continue to receive,
notices of claims of infringement of other parties' proprietary rights and other
claims in the ordinary course of our business. See "Risk Factors--We may become
involved in costly and time consuming litigation over proprietary rights."
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
34
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the NASDAQ National Market under the
symbol RVST since our initial public offering in July 1999. Prior to such time,
there was no public market for our common stock. On March 23, 2001, RAVISENT
Technologies Inc. had 17,464,756 outstanding shares of common stock. Of those,
15,383,241 shares of common stock were held by non- affiliates. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the NASDAQ National Market.
Year 2000
- -----------------------------------------------------------------------------
High Low
---- ---
- -----------------------------------------------------------------------------
First Quarter............................... $42.13 $12.13
- -----------------------------------------------------------------------------
Second Quarter.............................. $14.44 $ 5.41
- -----------------------------------------------------------------------------
Third Quarter............................... $ 8.56 $ 2.75
- -----------------------------------------------------------------------------
Fourth Quarter.............................. $ 3.50 $ 1.53
- -----------------------------------------------------------------------------
PRIVATE ISSUANCE OF STOCK
On August 11, 2000, in connection with the acquisition of Cinax Designs,
Inc., we issued an aggregate of 825,0000 shares of our common stock and shares
of no par, non-voting exchangeable preferred stock of Ravisent British Columbia
Inc., an indirectly-owned subsidiary, which non-voting exchangeable preferred
stock is exchangeable at the option of the holder, on a one-for-one basis, into
shares of common stock of Ravisent Technologies Inc.. The transfer of the
securities issued and issuable is restricted as necessary for the availability
of the Section 4(2) exemption. No underwriters or placement agents were involved
in connection with the issuance of the shares to Cinax.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and we do not
anticipate declaring or paying cash dividends in the foreseeable future. We
anticipate that we will retain all future earnings, if any, for use in our
operations and the expansion of our business. Payments of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. Moreover, pursuant
to agreements with our lender, we are prohibited from declaring or paying
dividends without the prior written consent of the lender. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
SALES OF UNREGISTERED SECURITIES
None.
35
USE OF PROCEEDS
On July 15, 1999, our registration statement on Form S-1 covering the
offering of 5,750,000 shares of our common stock, commission file number 333-
77269 was declared effective. From the effective date to December 31, 2000 the
amount of expenses incurred for the issuer's account in connection with the
issuance and distribution of the securities registered was incurred as follows:
Underwriting discounts and commissions................. $4,830,000
Finders Fees........................................... ---
Expenses paid to or for underwriters................... ---
Other expenses......................................... $2,748,000
----------
Total Expenses......................................... $7,578,000
==========
The offering was underwritten by Bear Stearns & Co. Inc, SG Cowen
Securities Corporation, and Volpe Brown Whelan & Company, LLC.
The net proceeds of the offering (after deducting the foregoing expenses)
were $61,422,000. From the effective date of the registration statement to
December 31, 2000, the net proceeds have been used for the following purposes:
Construction of building and facilities................................................ $ 167,266
Purchase and installation of machinery and equipment................................... 4,474,991
Acquisitions of other businesses....................................................... 8,311,670
Repayment of indebtedness.............................................................. --
Working Capital........................................................................ 38,853,165
Temporary investments, including cash and cash equivalents............................. 9,614,908
Other purposes (for which at least $100,000 has been used), including:
Investments, including debt instruments of the United States Government and its
Agencies and in high quality corporate Issuers......................................... --
------------
$ 61,422,000
============
All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates: (ii) persons owning ten
percent (10%) or more of our common stock; or (iii) affiliates.
36
ITEM 6. Selected Consolidated Financial Data
Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- ---------- ----------
(In thousands, except share and per share data)
Consolidated Statement of Operations Data:
Revenues:
License and services................................. $ 14,226 $ 13,678 $ 3,447 $ 1,445 $ 825
Hardware............................................. 6,628 15,740 26,841 5,376 3,370
----------- ---------- ---------- ---------- ----------
Total revenues......................................... 20,854 29,418 30,288 6,821 4,195
Cost of revenues:
License and services................................. 4,107 2,133 354 331 472
Hardware............................................. 7,897 13,732 24,192 8,072 2,664
----------- ---------- ---------- ---------- ----------
Total cost of revenues................................. 12,004 15,865 24,546 8,403 3,136
----------- ---------- ---------- ---------- ----------
Gross profit........................................... 8,850 13,553 5,742 (1,582) 1,059
Research and development
Non-cash compensation................................ 801 200 139 -- --
Other research and development expense............... 10,187 8,107 3,121 1,828 1,034
Sales and marketing
Non-cash compensation and other expense.............. 6,311 -- -- -- --
Other sales and marketing expense.................... 10,863 5,296 1,964 1,158 731
General and administrative
Non-cash compensation................................ 467 308 -- 1,408 --
Other general and administrative expense............. 15,221 5,079 4,673 1,710 1,198
Depreciation and amortization.......................... 5,897 1,886 906 86 46
Acquired in-process research and development........... 1,373 1,888 7,900 -- --
----------- ---------- ---------- ---------- ----------
Operating loss (42,270) (9,211) (12,961) (7,772) (1,950)
Interest expense (income), net......................... (1,792) (1,192) 722 197 105
Other income........................................... 51 -- -- 716 --
----------- ---------- ---------- ---------- ----------
Loss before income taxes............................. $ (40,427) $ (8,019) $ (13,683) $ (7,253) $ (2,055)
Provision for income taxes........................... 40 52 -- -- --
----------- ---------- ---------- ---------- ----------
Net loss............................................... $ (40,467) $ (8,071) $ (13,683) $ (7,253) $ (2,055)
=========== ========== ========== ========== ==========
Accretion of discount on mandatory redeemable
preferred stock....................................... -- 659 754 -- --
Net loss attributable to common stockholders........... $ (40,467) $ (8,730) $ (14,437) $ (7,253) $ (2,055)
=========== ========== ========== ========== ==========
Basic and diluted net loss per common share............ $ (2.44) $ (1.02) $ (4.94) $ (3.52) $ (1.19)
=========== ========== ========== ========== ==========
Weighted average shares outstanding used
in per common share calculation (basic and diluted) .. 16,606,795 8,532,140 2,920,677 2,060,668 1,720,922
=========== ========== ========== ========== ==========
See Note 1 of the Notes to the Consolidated Financial Statements for a detailed
explanation of the determination of the shares used to compute basic and diluted
net loss per share.
37
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview and Recent Events
For the year ended December 31, 2000, we designed, developed, licensed and
marketed innovative modular software solutions that enable digital video and
audio stream management in personal computer systems, consumer electronics
devices and Internet appliances. We also licensed supporting hardware designs
to select customers, provided customization services and customer support. In
addition, we also sold Internet appliances and components to telecommunications
companies, Internet service providers and others. Our product offerings
included a software or hardware Internet set-top box solution, which included
all of the intellectual property, software, hardware design and manufacturing
design necessary for a manufacturer or Internet service provider to launch an
affordable product, and Nucleo, a hardware reference design based on our ARM-
7500 processors with e-Surfer(TM) - a thin customizable browser designed
specifically for Internet appliances.
Effective as of March 23, 2001, and pursuant to an Asset Acquisition
Agreement dated as of March 21, 2001, we sold our Internet appliance business to
Phoenix Technologies, Ltd., a Delaware corporation, for approximately $18
million in cash consideration, of which $1.8 million is being held in escrow by
a third party for indemnification purposes for 12 months. The assets sold
include certain of the contracts, equipment, intangible assets, intellectual
property, prepaid expenses, and other assets primarily related to the operation
of the Internet appliance business. Under the agreement, Phoenix Technologies
purchased our e-Surfer embedded software Internet browser and related hardware
designs for the Internet Appliance market. In addition, in connection with this
asset sale, 13 of our employees, associated with the Internet appliance business
accepted employment with Phoenix. With the exception of the expected sales in
2001 of inventory not included in the transaction, we expect only nominal sales
attributable to our Internet appliance business in 2001.
In 2000, revenue from our Internet appliance product line was approximately
$7.5 million, or 36% of total revenues, while gross margin was approximately
$1.4 million, or 16% of the total gross margin. These amounts are not
necessarily indicative of the results that would have been obtained for any
future period.
Effective as of March 1, 2001, and pursuant to an Asset Acquisition
Agreement dated as of January 18, 2001, RAVISENT Technologies Inc. and certain
of its subsidiaries, Ravisent I.P., Inc., Ravisent Operating Company, Inc., and
VIONA Development Hard and Software Engineering GmbH & Co. KG, sold and licensed
certain assets related to our consumer electronics business to
STMicroelectronics, NV, a Dutch corporation, STMicroelectronics, Inc., a
Delaware corporation and STMicroelectronics GmbH (collectively,
"STMicroelectronics"). The assets sold and licensed include certain of the
contracts, equipment, intangible assets, intellectual property, prepaid
expenses, accounts receivable and other assets primarily related to the
operation of the consumer electronics business. In addition, approximately 76 of
our employees, most of whom were associated with the consumer electronics
business, accepted employment with STMicroelectronics in connection with the
asset sale. Pursuant to the terms of the Asset Acquisition Agreement,
STMicroelectronics paid approximately $55.1 million in cash consideration, of
which $0.8 million is being held by a third party in escrow for a period of 18
months for indemnification purposes. In connection with the asset sale, we
granted to STMicroelectronics certain non-exclusive rights to license and
distribute certain of our technology used in our Internet appliance products and
our personal computer products. In addition, we agreed not to compete in
significant aspects the consumer electronics market until March 1, 2006.
Revenues and gross margin for the consumer electronics business totaled
approximately $1.6 million, or 8% of total revenues, and $1.2 million, or 14% of
total gross profit, respectively, for the year ended December 31, 2000. These
amounts are not necessarily indicative of the results that would have been
obtained for any future period.
We now design, develop, license and market innovative modular software
solutions that enable digital video and audio stream management primarily for
personal computer systems. We also license supporting
38
hardware designs to selected customers and provide customization services and
customer support. Our solutions enable decoding and encoding of multimedia
formats such as DVD, DBS/DVB and HDTV primarily on personal computer platforms.
Our digital solutions incorporate industry standards for video and audio
compression and are independent of operating systems and silicon components.
During the year ending December 31, 2000, our customers consisted primarily
of personal computer, consumer electronics, and Internet appliance manufacturers
and distributors. In addition, we supplied our software solutions and hardware
designs to selected peripherals providers and semiconductor manufacturers.
Approximately $14.2 million or 68% of our 2000 revenues were from licenses and
services. Revenues from personal computer and peripheral manufacturers were
derived primarily from Software CineMaster, Hardware CineMaster and our Internet
appliance device. In March 2000, we introduced CineMaster 2000, which included
an encoder application.
By entering into manufacturing and license agreements with third parties,
under which we no longer manufacture Hardware CineMaster, we have substantially
completed the transformation of our PC business model from a hardware revenue
base to a license revenue base. Once the transition to a PC licensing business
model is completed, we will receive either a per unit license fee or a flat fee
on sales of the CineMaster products. As a result, the mix between license and
service revenues and hardware revenues may vary according to future sales of
these inventories, and correspondingly, the cost of revenues associated with
these revenues streams will also vary.
In 2000, our revenues were composed of hardware revenues, license revenues
and services revenues. Hardware revenues, consisting primarily of direct sales
of hardware subsystems to personal computer and peripherals manufacturers and
Internet appliances, have represented the majority of our total revenues in the
past. Hardware sales to personal computer and peripherals manufacturers were
nominal in 2000, totaling approximately $0.9 million of which $0.8 million was
sold to one customer and represents the final sell through of all consigned
inventory at December 31, 1999. The balance of total hardware revenue in 2000
was attributable to hardware commitments to customers of Teknema, Inc.
("Teknema") that were in existence prior to their acquisition by us in November
1999. During 2000, hardware revenues included sales of Hardware CineMaster
products and Internet appliances. For the year ended December 31, 2000, revenue
generated by the sale of our hardware products was approximately $6.6 million.
In 2001 hardware revenues are expected to increase while we sell our current
inventory.
License revenues consist of fees paid on a per unit basis, or sometimes
with new customers in advance, each time a manufacturer ships a product that
incorporates our software solutions or software with supporting hardware
designs. Services revenues now consist of engineering fees from personal
computer, peripheral and semiconductor manufacturers for custom engineering
services. During 2000, we also earned service revenues from consumer
electronics, and Internet appliance manufacturers for custom engineering.
However, we disposed of this portion of our service business pursuant to the
March 2001 asset sales to Phoenix Technologies and STMicroelectronics. Services
are generally billed on either a time and material basis or on a project or
contract basis. License revenues are recognized when earned, which is generally
based on receiving notification from a licensee detailing the shipments of
products incorporating our technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers. Our
license agreements generally have a term of one year or less, and typically
require payment within 45 or 60 days after the end of the calendar quarter in
which the product is shipped. Some of our contracts may also require payment of
an up-front license fee. License fees paid in advance, with no further future
commitment, are recognized in the period that the license agreement is signed,
the technology is delivered and accepted, and collectibility is probable.
The amount and timing of some fixed fees could cause our operating results
to vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated revenue.
In cases where a fixed or lump-sum license fee is associated with the delivery
of multiple
39
elements, and vendor-specific objective evidence of fair value cannot be
established for the individual elements, the entire fee from the arrangement is
deferred until the earlier of the establishment of vendor-specific objective
evidence of fair value or the delivery of all the elements of the arrangement.
In cases where a license grants a customer unspecified upgrade rights, the fixed
or lump-sum license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from the customers in excess of revenue
recognized are recorded as deferred revenue. Services revenues are recognized
upon delivery of the service in the case of time and material contracts or on a
percentage completion basis in the case of project-based contracts. Hardware
product sales are recognized upon shipment of the product to the manufacturer or
end user.
In April 1998, we acquired Viona, a German engineering services company.
Prior to the acquisition, we had contracted with Viona to co-develop its
products and a significant portion of its software and systems architecture. The
purchase price was approximately $11.4 million, and the acquisition was recorded
under the purchase method of accounting. The results of operations of Viona have
been included in our operating results since the date of acquisition. In
connection with the acquisition, we expensed $7.9 million of the purchase price
as acquired in-process research and development. The remaining portion of the
purchase price was attributable to acquired assets, which were primarily fixed
assets and accounts receivable, recorded at fair market value, in the amount of
$0.5 million, and intangible assets totaling $3.5 million less, liabilities
acquired of $0.6 million. The intangible assets consisted of goodwill valued at
$3.5 million and workforce in place valued at $0.04 million. We transferred most
of the intellectual property used in the consumer electronics business that we
acquired from VIONA to STMicroelectronics in March 2001. The remaining
unamortized book value of the goodwill recorded in connection with the
acquisition of Viona, which was being amortized over its estimated useful life
of four years, and the net book value of all of Viona's furniture and equipment
will be included in the net gain on sale of assets.
In November 1999, we acquired Teknema, an Internet technology company
involved in the development of products for the emerging market in information
appliances for an aggregate of approximately $14.9 million in cash, common stock
and options to purchase common stock. Prior to the acquisition we loaned Teknema
$1 million. The acquisition was recorded under the purchase method of
accounting. In connection with the acquisition, we expensed $1.8 million of the
purchase price as acquired in-process research and development. We sold all of
the intellectual property that we acquired from Teknema to Phoenix Technologies
in March 2001, as described above. The remaining unamortized book value of the
goodwill recorded in connection with the acquisition of Teknema, which was being
amortized over its estimated useful life of four years, will be included in the
net gain on sale of assets.
In August 2000, we acquired all of the outstanding capital stock of Cinax
Designs Inc. ("Cinax"), a company located in British Columbia, Canada involved
in the development of digital video software products based on MPEG audiovisual
compression for approximately $3.5 million in cash and an aggregate of 825,000
shares of our common stock and shares of no par, non-voting exchangeable
preferred stock of our subsidiary, Ravisent British Columbia Inc., which shares
of preferred stock are exchangeable, at the option of the holder, on a one-for-
one basis, into shares of our common stock. The acquisition was recorded under
the purchase method of accounting. In connection with the acquisition, we
expensed $1.3 million of the purchase price as acquired in-process research and
development. Goodwill and other intangible assets of $3.2 million has been
recorded and is being amortized on a straight-line basis over a period of four
years. None of this intellectual property was transferred or sold as a result of
the STMicroelectronics or Phoenix transaction.
In 2000, operating expenses increased by $28.4 million due to a number of
reasons including the amortization expense associated with warrants issued to
American Trading S.A., additional amortization expense for our Teknema and Cinax
acquisitions, adjustments to our receivable reserves for acquired receivables
from Teknema, the pursuit of strategic initiatives, and additional operating
expenses associated with Teknema. Also contributing to the increase were
increases in headcount associated with sales and marketing, research and
development and general and administrative functions. We do not expect these
trends to continue in 2001 as
40
significant portions of our business operations were recently sold to ST
Microelectronics and Phoenix Technologies Ltd.
In February and March 2000, six (6) securities class action lawsuits were
filed against us and certain of our current and former officers and directors in
the United States District Court for the Eastern District of Pennsylvania. The
complaints allege violations of the federal securities laws. We believe that
such lawsuits or claims are without merit and that we have meritorious defenses
to the actions. We plan to vigorously defend the litigation.
In 2001, we plan to continue to focus on the PC market. In general the PC
DVD market continues to be a very competitive place. Our focus will be to
continue to sell our PC DVD, DTV and DVR IP solutions. We plan to exploit our
technology by enhancing our product offering, building new products, expanding
our partnerships globally and building market share. Our organization continues
to see opportunity for our PC products in the marketplace and we have confidence
in the prospects of our products being released in 2001.
We are well positioned to move forward with key distribution partnerships
such as that with Phoenix Technologies, the strength of our balance sheet, our
managerial expertise and our core intellectual property. As part of our efforts
in 2001, we will continue to evaluate alternative strategic directions for the
organization. Please see "Risk Factors" above.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in our consolidated
statements of operations:
Year Ended December 31,
2000 1999 1998
----- ---- ----
Revenues:
License and services 68.2% 46.5% 11.3%
Hardware 31.8 53.5 88.7
------ ------ ------
Total revenues 100.0 100.0 100.0
Cost of revenues:
License and services 19.7 7.2 1.2
Hardware 37.9 46.7 79.8
------ ------ ------
Total cost of revenues 57.6 53.9 81.0
------ ------ ------
Gross profit 42.4 46.1 19.0
Research and development
Non-cash compensation 3.8 0.7 0.5
Other research and development expense 48.8 27.6 10.3
Sales and marketing
Non-cash compensation and other expense 30.3 -- --
Other sales and marketing expense 52.1 18.0 6.5
General and administrative
Non-cash compensation 2.2 1.0 --
Other general and administrative expense 73.0 17.3 15.4
Depreciation and amortization 28.3 6.4 3.0
Acquired in-process research and development 6.6 6.4 26.1
------- ------ ------
Operating loss (202.7) (31.3) (42.8)
Interest (income) expense, net (8.6) (4.0) (2.4)
Other income 0.2 -- --
------- ------ ------
Net loss (193.9)% (27.3)% (45.2)%
======= ====== ======
41
Years Ended December 31, 2000 and 1999
Revenues. Total revenues decreased 29% from $29.4 million for the year
ended December 31, 1999 to $20.9 million for the year ended December 31, 2000.
The decrease in revenue was due to a change in business strategy by which we
have chosen to emphasize licensing technology, including technology related to
our hardware products, rather than manufacturing and selling our hardware
products to our customers. Accordingly, as a result of our decision to
concentrate on licensing, hardware revenues have declined while license and
services revenues have increased. However, as a result of the recent sales of
our consumer electronics and Internet appliance businesses, revenues in 2001 are
expected to be less than 2000 as we focus on our PC products and evaluate our
strategic alternatives.
License and service revenues increased 4% from $13.7 million for the year
ended December 31, 1999 to $14.2 million for the year ended December 31, 2000,
due primarily to increased service fees from our consumer electronics product
offerings and increased license revenues from our CineMaster product line.
Hardware revenues decreased 58% from $15.7 million for the year ended December
31, 1999 to $6.6 million for the year ended December 31, 2000, due primarily to
the discontinuance of our Hardware CineMaster product line.
In 2000 and 1999, we sold our products directly to personal computer,
consumer electronics, and Internet appliance manufacturers in North America,
Europe, South America and the Pacific Rim. For the year ended December 31, 2000,
companies based in the Pacific Rim and North America accounted for a majority of
our revenues. Sales outside of the United States have been primarily through
U.S. manufacturers that distribute their products to end users overseas.
Our revenues are derived from primarily three product lines. For the year
ended December 31, 2000, our personal computer software and hardware, consumer
electronics software, and Internet appliance software and hardware revenues as a
percentage of total revenues were 56%, 8% and 36%, respectively. For the year
ended December 31, 1999, our personal computer software and hardware, consumer
electronics software, and Internet appliance software and hardware revenues as a
percentage of total revenues were 83%, 3% and 14%, respectively.
Cost of revenues. Cost of revenues consist primarily of costs of hardware
components sold to manufacturing firms, and license fees paid to third parties
for technologies incorporated into our products, including Dolby Digital
technology. Cost of revenues decreased 24% from $15.9 million for the year ended
December 31, 1999 to $12 million for the year ended December 31, 2000. The
decrease in cost of revenues was primarily due to decreased hardware product
sales and the related costs associated with the manufacturing of our hardware
products.
Cost of revenues for hardware decreased approximately $5.8 million or 42%
from $13.7 million in 1999 to $7.9 million in 2000. Included in the $7.9 million
of hardware costs were approximately $1.7 million of inventory reserves for
obsolete inventory. Excluding the effect of these inventory reserves, the
decrease in cost of sales associated with hardware revenue would have been 55%
and in line with the 58% decline in hardware sales. Cost of revenues from
licensing and services increased approximately $2.0 million from $2.1 million in
1999 to $4.1 million in 2000. The increase in license and services cost of
revenues was a result of a greater portion of licensing revenue incorporating
Dolby Digital technology as well as an increase in the volume of service
revenues, which have lower margins than license revenues.
42
Gross Profit. Gross profit decreased from $13.6 million for the year ended
December 31, 1999 to $8.9 million for the year ended December 31, 2000, due
primarily to lower licensing revenues not incorporating Dolby Digital, $1.7
million reserve for inventory obsolescence, and the discontinuance of hardware
Cinemaster. As a result of the inventory reserves noted above, gross profit on
hardware revenue was ($1.3) million. For the year ended December 31, 2000, 68%
of total revenue was derived from license and services revenues and 32% of total
revenue was derived from hardware revenue, in comparison to 47% and 53%
respectively, for the comparable period in the previous year. As a percentage of
total revenues, gross profit decreased from 46% for the year ended December 31,
1999 to 42% for the year ended December 31, 2000 as a result of increased
hardware costs and increases in the cost of Dolby Digital.
Research and Development Expenses. Research and development expenses,
excluding non-cash compensation, consist primarily of engineering and related
costs associated with the development of new products, customization of existing
products for customers, quality assurance and testing. Research and development
expenses increased 26%, from $8.1 million for the year ended December 31, 1999
to $10.2 million for the year ended December 31, 2000. As a percentage of total
revenues, research and development expenses increased from 28% to 49%. The
increase in research and development expenses as a percentage of total revenues
resulted from both the decline in hardware revenues and increases in research
and development spending.
The increase in research and development expenses in absolute dollars and
as a percentage of revenues was due primarily to the increased requirements of
supporting development for an expanded product base. Approximately 65% or $1.4
million of the total increase in research and development was from increased use
of consultants primarily utilized for development of our Internet appliance
product line.
The remainder of the growth in research and development expenses was
primarily attributable to expenses associated with the inclusion of research and
development expenses from our Teknema subsidiary (acquired in November 1999) for
twelve months in 2000 and the inclusion of research and development expenses
from our Cinax subsidiary, acquired in August 2000. As a result of the sales of
our consumer electronics and Internet appliance businesses in March 2001, we
expect research and development expenses to decrease in absolute dollars in 2001
compared to 2000.
Non-Cash Compensation Research and Development expense. Non-cash
compensation relates both to stock-based compensation as well as stock-based
acquisition related compensation. The 300% increase over the prior year is due
primarily to the additional non-cash compensation in connection with our Cinax
acquisition. The stock-based grants from 1999 and stock-based acquisition
related compensation from 2000 are amortized as non-cash compensation expense
over the vesting periods, ranging from 3 to 48 months.
Sales and Marketing Expenses. Sales and marketing expenses excluding non-
cash compensation and other expense, consist primarily of employment costs,
travel expenses and costs associated with trade shows, advertising and other
marketing efforts, as well as sales support costs. Sales and marketing expenses
increased 105% from $5.3 million for the year ended December 31, 1999 to $10.9
million for the year ended December 31, 2000. As a percentage of total revenues,
sales and marketing expenses increased from 18% to 52%. The increase in sales
and marketing expenses as a percentage of total revenues resulted from both
lower hardware revenues and increases in selling and marketing spending.
The largest portion of the increase was due to funding $2.4 million in
marketing expenses in accordance with a distribution rights agreement. The
remaining increase was due to increased staffing associated with the building of
sales and marketing teams in the United States as well as the full year impact
of the Teknema acquisition. As a result of the sales of the consumer electronics
and Internet appliance businesses in March 2001, we expect selling and marketing
expenses to decrease in absolute dollars in 2001 compared to 2000.
Non-cash Compensation and other Sales and Marketing expense. Non-cash
compensation and other expense relates primarily to warrants issued to strategic
partners and options issued to employees. The increase is primarily related to a
warrant valued at $5.6 million, which was recorded in connection with a
distribution agreement with a South American distributor of our Internet
appliances. The $5.6 million expense is composed of $2.8 million of amortization
expense and a $2.8 million impairment charge for the write-off of capitalized
distribution rights obtained in connection with a warrant issued in connection
with the distribution rights agreement, in June 2000, to acquire 1.5 million
shares of common stock. The remainder of the increase is due to stock-based
compensation for employees. Stock-based compensation for the year ended December
31, 2000 included a grant of options with an aggregate intrinsic value of $0.7
million to certain employees. This grant and the grants from 1999 are amortized
as non-cash compensation expense over the vesting periods of the options,
ranging from 18 to 48 months. Also included in this expense for the year ended
December 31, 2000 is a one-time charge for stock compensation of $0.4 million to
a former employee and a former consultant.
General and Administrative Expenses. General and administrative expenses,
excluding non-cash compensation, consist primarily of personnel and support
costs for our finance, human resources, information systems, legal and other
management departments. Total general and administrative expenses increased 200%
from $5.1 million for the year ended December 31, 1999, to $15.2 million for the
year ended December 31, 2000. As a percentage of total revenues, general and
administrative expenses increased from 17% to 73%. The increase in general and
administrative expenses as a percentage of total revenues resulted from both
lower hardware revenues and increases in general and administrative spending.
43
The increase in absolute dollars was primarily due to bad debt associated
with accounts receivable acquired in the Teknema acquisition. In addition,
professional fees for our shareholder litigation suit, pursuit of several
strategic initiatives and recent sales of the consumer electronics and Internet
appliance assets also contributed to the increase in general and administrative
expenses. Finally, increases in expenditures on administrative infrastructure to
support our growing business operations were also incurred in 2000. We expect
general and administrative expenses to decrease in absolute dollars in 2001
compared to 2000 as a result of the sales of our consumer electronics and
Internet appliance businesses and due to the non-recurring nature of the
expenses described previously.
Non-Cash Compensation General and Administrative expense. The stock-based
grants, granted at less than fair value, from 2000 are amortized as non-cash
compensation expense over the vesting periods, ranging from 18 to 48 months.
Amortization of Goodwill. We recorded amortization of goodwill of $5.2
million for the year ended December 31, 2000, related to the goodwill recorded
as part of the Viona, Teknema, and Cinax acquisitions. See "--Acquired In-
Process Research and Development Expense."
Interest Income/Expense. Interest Income/Expense consists of interest
income generated from investment of the Company's excess cash balances and
interest expense from interest paid on obligations outstanding under equipment
leases and notes payable to partially fund its operations and capital purchases.
For the year ended December 31, 1999, we recorded net interest income of $1.2
million in comparison to net interest income of $1.8 million for the year ended
December 31, 2000. The increase in interest income was due to interest income
generated by investment of our excess cash balances primarily generated from the
proceeds of our initial public offering of its common stock in July 1999. The
net proceeds from the offering were approximately $64.2 million.
Years Ended December 31, 1999 and 1998
Revenues. Total revenues decreased 3% from $30.3 million for the year ended
December 31, 1998, to $29.4 million for the year ended December 31, 1999. The
decrease in revenue was due to a change in business strategy by which we have
chosen to emphasize licensing technology, including technology related to our
hardware products, rather than manufacturing and selling our hardware products
to our customers. Accordingly, as a result of our decision to concentrate on
licensing, hardware revenues have declined while license and services revenues
have increased.
License and service revenues increased to $13.7 million for the year ended
December 31, 1999, due primarily to growth in license fees associated with our
Software CineMaster 98 product, introduction of Software CineMaster 99,
increased customization services and licenses granted to customers to allow
manufacturing and distribution related to our consumer electronics business.
Software CineMaster 98 was introduced during the year ended December 31, 1998.
Software CineMaster 99 was introduced during the third quarter of 1999. Hardware
revenues decreased 41% from $26.8 million for the year ended December 31, 1998
to $15.7 million for the year ended December 31, 1999, due to the change in the
Company's strategy of focusing on licensing technology.
44
Cost of Revenues. Cost of revenues consist primarily of manufacturing costs
of the Company's Internet appliance and Hardware CineMaster98 products. Cost of
sales associated with license and service revenues are primarily costs
associated with shipment of Software CineMaster products and license fees paid
to third parties for technologies incorporated into our products, including
Dolby Digital technology.
Cost of revenues decreased 35% from $24.5 million for the year ended
December 31, 1998, to $15.9 million for the year ended December 31, 1999. The
decrease in cost of revenues was primarily due to decreased hardware product
sales and the related costs associated with the manufacturing of our hardware
products. Cost of revenues for hardware decreased approximately $10.5 million or
43% from $24.2 million in 1998 to $13.7 million in 1999. The 43% decrease in
cost of revenue for hardware sales was in line with the 41% decline in hardware
sales. Cost of revenues from licensing and services increased approximately $1.7
million from $0.4 million in 1998 to $2.1 million in 1999. The growth in license
and services cost of revenues was due to the corresponding growth in revenues
from license and services.
Gross Profit. For the year ended December 31, 1999, as a result of our
transition to a business model based on licensing our technology rather than
direct sales of hardware products, 47% of total revenue was derived from license
and services revenues and 53% of total revenue was derived from hardware
revenue, in comparison to 11% and 89%, respectively, for the comparable period
in 1998. Due to the change in the composition of revenue, gross profit increased
from $5.7 million for the year ended December 31, 1998, to $13.6 million for the
year ended December 31, 1999. Similarly, because the gross profit for license
and services is much higher than that from hardware sales for the year ended
December 31, 1999, the gross profit for hardware was approximately 13% of
revenue, while the gross profit for license and services was approximately 84%
of revenues.
Research and Development Expenses. Research and development expenses,
excluding non-cash compensation, consist primarily of engineering and related
costs associated with the development of new products, customization of existing
products for customers, quality assurance and testing. Research and development
expenses increased 160%, from $3.1 million for the year ended December 31, 1998,
to $8.1 million for the year ended December 31, 1999. As a percentage of total
revenues, research and development expenses increased from 10% to 28%.
The increase in research and development expenses in absolute dollars and
as a percentage of revenues was due primarily to supporting an expanded customer
base. Approximately 47% or $2.3 million of the total increase in research and
development of approximately $5.0 million was from increased domestic salaries,
payroll taxes and employee benefits not including the effect of our subsidiary
Teknema. The increase in domestic salaries, payroll taxes and employee benefits
was due to the growth in average headcount that went from approximately 18 in
1998 to approximately 44 in 1999.
The remainder of the growth in research and development expenses were
primarily attributable to expenses associated with the inclusion of research and
development expenses from our German subsidiary Viona for twelve months in 1999
and inclusion of research and development expenses from our subsidiary Teknema,
acquired in November 1999. Expenses associated with Viona increased research and
development expenses approximately $1.4 million in 1999. Expenses associated
with Teknema increased research and development expenses approximately $.9
million in 1999.
Non-Cash Compensation Research and Development expense. The stock-based
grants, granted at less than fair value, from 1998 and 1999 are amortized as
non-cash compensation over the vesting periods, ranging from 18 to 48 months.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, travel expenses and costs associated with trade shows,
advertising and other marketing efforts, as well as technical support costs.
Sales and marketing expenses increased 170% from $2.0 million for the year ended
December 31, 1998 to $5.3 million for the year ended December 31, 1999. As a
percentage of total revenues, sales and marketing expenses increased from 7%
to 18%. The increase in absolute dollars and as a percentage of revenues, was
primarily due to the building of the sales and marketing teams in the United
States.
45
During 1999, average sales and marketing headcount increased approximately
81% from the prior year. Accordingly, salaries, payroll taxes, commissions and
employee benefits, not including the effect of consolidating expenses from
Teknema, increased approximately $1.2 million, representing 37% of the total
year-over-year increase in sales and marketing expenses. Expenses associated
with the inclusion of our subsidiary Teknema accounted for approximately $0.8
million representing 23% of the total year-over-year increase in sales and
marketing expenses. The remaining portion of the increase in sales and marketing
expenses was due to travel, trade show, marketing and public relations expenses.
General and Administrative Expenses. General and administrative expenses,
excluding non-cash compensation, consist primarily of personnel and support
costs for our finance, human resources, information systems, legal and other
management departments. Total general and administrative expenses increased 9%
from $4.7 million for the year ended December 31, 1998 to $5.1 million for the
year ended December 31, 1999. As a percentage of total revenues, general and
administrative expenses increased from 15% to 17%. The increase in absolute
dollars was primarily due to expenditures on administrative infrastructure to
support our growing business operations. General and administrative expenses
increased as a percentage of total revenues primarily due to our decreased
revenue base.
Non-Cash Compensation General and Administrative expense. The stock-based
grants, granted at less than fair value, from 1999 are amortized as non-cash
compensation over the vesting periods, ranging from 18 to 48 months.
Amortization of Goodwill. We recorded amortization of goodwill of $1.5
million for the year ended December 31, 1999 related to the goodwill recorded as
part of the Viona and Teknema acquisitions. See "--Acquired In-Process Research
and Development Expense."
Interest Expense/Income. Interest Expense/Income consists of interest
income generated from investment of the company's excess cash balances and
interest expense from interest paid on obligations outstanding under equipment
leases and notes payable to partially fund its operations and capital purchases.
For the year ended December 31, 1998, the Company recorded net interest expense
of $0.7 million in comparison to net interest income of $1.2 million for the
year ended December 31, 1999. The increase in interest income was due to
interest income generated by investment of our excess cash balances primarily
generated from the proceeds of our initial public offering of its common stock
in July 1999. The net proceeds from the offering were approximately $64.2
million.
46
Quarterly Results of Operations
The following table presents certain unaudited quarterly consolidated statements
of operations data for the eight quarters ended December 31, 2000. In the
opinion of management, this information has been presented on the same basis as
the audited consolidated financial statements appearing elsewhere in this Annual
Report, and all necessary adjustments have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in conjunction
with the our audited consolidated financial statements. Results of operations
for any quarter are not necessarily indicative of the results to be expected for
the entire fiscal year or for any future period.
Mar. 31, June 30, September Dec. 31,
1999 1999 30, 1999 1999
---- -------- -------- ----
Revenues:
License and services................... $ 2,290 $ 3,238 $4,235 $ 3,915
Hardware............................... 8,522 4,441 1,003 1,774
------- ------- ------ -------
Total revenues...................... 10,812 7,679 5,238 5,689
Cost of revenues:...................... 7,399 4,637 992 2,837
------- ------- ------ -------
Gross profit........................ 3,413 3,042 4,246 2,852
Research and development
Non-cash compensation................... 50 50 50 50
Other research and development
expense.............................. 1,394 1,443 1,633 3,637
Sales and marketing
Non-cash compensation and other
expense.............................. - - - -
Other selling and marketing expense.. 1,062 1,066 1,172 1,996
General and administrative
Non-cash compensation................ 21 50 85 152
Other general and administrative
expense.............................. 837 1,146 911 2,185
Depreciation and amortization.......... 314 372 364 836
Acquired in-process
research and development............... - - - 1,888
------- ------- ------ -------
Operating income (loss)................ (265) (1,085) 31 (7,892)
Interest (income) expense, net......... 45 65 (573) (729)
Provision for income taxes............. - - 74 (22)
------- ------- ------ -------
Net income (loss)...................... $ (310) $(1,150) $ 530 $(7,141)
======= ======= ====== =======
Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
---- ---- ---- ----
Revenues:
License and services................... $ 2,921 $ 3,299 $ 3,753 $ 4,253
Hardware............................... 2,789 1,547 475 1,817
------- ------- -------- --------
Total revenues...................... 5,710 4,846 4,228 6,070
Cost of revenues:...................... 3,643 2,341 1,263 4,757
------- ------- -------- --------
Gross profit........................ 2,067 2,505 2,965 1,313
Research and development
Non-cash compensation................ 50 50 50 651
Other research and development
expense.............................. 2,143 2,970 2,686 2,388
Sales and marketing
Non-cash compensation and other
expense.............................. 345 97 1,514 4,355
Other sales and marketing expense.... 1,882 2,602 4,298 2,081
General and administrative
Non-cash compensation................ 86 132 127 122
Other general and administrative
expense.............................. 2,343 3,367 2,182 7,329
Depreciation and amortization.......... 1,356 1,385 1,489 1,667
Acquired in-process
research and development............... - - 1,373 -
------- ------- -------- --------
Operating loss......................... (6,138) (8,098) (10,754) (17,280)
Interest (income) expense, net......... (616) (598) (433) (196)
Provision for income taxes............. 15 23 7 (5)
------- ------- -------- --------
Net loss............................... $(5,537) $(7,523) $(10,328) $(17,079)
======= ======= ======== ========
47
Acquired In-Process Research and Development
In August 2000, we completed the acquisition of Cinax Designs Inc., a
company located in Vancouver, British Columbia, dedicated to the development of
digital video software products based on MPEG audiovisual compression. We paid
$3.5 million in cash, 178,262 shares of our common stock and 646,734 shares of
no par, non-voting exchangeable preferred stock of one of our subsidiaries,
Ravisent British Columbia Inc., which shares of preferred stock are
exchangeable, on a one-for-one basis at the option of the holder, into shares of
our common stock.
As of the acquisition date, Cinax was conducting ongoing research and
development into new products in the form of two projects, including
enhancements to the existing products previously developed by Cinax. At the date
of acquisition, these projects had not reached technological feasibility and
there was no alternative future use for them. The two research and development
projects included:
48
WinVCR version 2. This product enables computer users to record real-time
MPEG video straight to their hard drives. The current upgrade includes a
substantial amount of new features such as better programmability as well as
faster, embedded encoding capabilities with MPEG-2. At the time of acquisition,
this development project was approximately 75% complete.
MediaLock. This product is designed for rights management of video
distribution over digital networks. This product is expected to allow content
producers to easily protect their copyrights prior to distribution given its
frame scrambling, playtime decryption and unique password system capabilities.
At the time of acquisition, this development project was approximately 50%
complete.
In November 1999, we completed the acquisition of Teknema, Inc., a company
located in Palo Alto, California, dedicated to developing software and solutions
for the emerging market for information appliances. We paid $2.5 million in
cash, issued 266,169 shares of our common stock and options to acquire 537,582
shares of common stock with a combined value of $12.4 million and incurred
transaction costs of $0.9 million. Prior to the acquisition, we loaned Teknema
$1 million with an annual interest rate of 10%. On the date of the closing of
the transaction, we paid certain employees of Teknema for joining the Company
sign-on bonuses totaling approximately $1.3 million. The bonuses are recorded in
general and administrative expense in our December 31, 1999 financial
statements.
The acquisition of Teknema was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of $1.9 million to our
operations in November 1999. The in-process research and development technology
was valued using the cash flow model, under which projected income and expenses
attributable to the purchased technology were identified, and potential income
streams were discounted using a 20%-30% discount rate for risks, probabilities
and uncertainties, including the stage of development of the technology,
viability of target markets, and other factors.
As of the acquisition date, Teknema was conducting ongoing research and
development into three new projects including enhancements to products
previously developed by Teknema. At the date of acquisition, these projects had
not reached technological feasibility and there was no alternative future use
for them. The three research and development projects included:
Advance Set-Top Box/Technology. This product was a customized television
set-top box which incorporated an easy-to-use Web browser and electronic mail
("e-mail") consumer application. This product was enhanced with secure
transaction, SmartCard application and JavaScript capabilities, as well as V.90
modem and broadband capabilities. Subsequent enhancements included an Internet
integration platform, scripting and graphic capabilities of an embedded Web
Brower. At the time of acquisition, the primary development efforts were focused
on developing a full-featured advanced set-top box (and associated technology
that can be licensed to third parties) that will be a complete redesign of an
existing Teknema product using a new operating system, a new, faster processor
and adding multimedia capabilities. Some of the development efforts include
developing or utilizing:
. Chat and messaging functions for its Internet integration platform;
. Network interfaces and LCD displays for its Internet integration
platform;
49
. Multimedia functions such as digital video and audio streaming and
decoding and bi-directional video communication capabilities;
. A faster processor, broadband network interface, video engine chip and a
POSIX-compliant operating system which provides native application
programming interfaces for the development of browser plug-ins; and
. A port for hardware expansion.
At the time of acquisition, this development project was approximately 30%
complete.
Telephony. Teknema was developing an expansion of its Internet appliance
platform for the Internet telephony market. The product would leverage its
current set-top box platform into a multimedia platform capable of offering
video, data and voice over the Internet for video conferencing-over-the-
Internet. At the time of acquisition, this development project was approximately
50% complete.
Home & Industrial. Teknema was developing various products for the home
automation and consumer products market. Teknema was in the early stages of
developing a graphical, interactive control system for home appliances such as
televisions. In addition, Teknema was developing a DVD player with Internet
capabilities. At the time of acquisition, this development project was
approximately 15% complete.
In March 2001, we sold all of the Intellectual property that we acquired
from Teknema to Phoenix Technologies as described above. The remaining
unamortized book value of the goodwill recorded in connection with the
acquisition of Teknema, which was being amortized over its estimated useful life
of four years, will be included in the net gain on sale of assets.
In April 1998, we completed the acquisition of Viona, a company
specializing in the development of digital video technology. We paid $6.1
million in cash, of which $2.6 million was paid at closing, $2.1 million was
paid during 1999, and $1.4 million will be paid in equal installments at the end
of each of the next three fiscal years, issued 1,204,820 shares of our common
stock valued at $4.8 million and incurred transaction costs of $0.8 million. For
accounting purposes, payments due in future periods have been discounted. In
January 2001 the final installment was paid.
The acquisition of Viona was recorded under the purchase method of
accounting. A portion of the purchase price was allocated to in-process research
and development technology, which resulted in a charge of approximately $7.9
million to our operations in April 1998. The in-process research and development
technology was valued using a cash flow model, under which projected income and
expenses attributable to the purchased technology were identified, and potential
income streams were discounted using a 30%-35% discount rate for risks,
probabilities and uncertainties, including the stage of development of the
technology, viability of target markets, and other factors.
As of the acquisition date, Viona was conducting significant ongoing
research and development into five new software and hardware products including
enhancements to the existing digital video and audio system solutions previously
developed by us. At the date of acquisition, these projects had not reached
technological feasibility and there was no alternative future use for them. The
five research and development projects included:
CineMaster LC Hardware DVD Decoder, a single circuit board or card that can
be added to a personal computer to allow the personal computer to process
digital video signals. At the time of the acquisition, Viona was conducting
research and development to integrate this product into a single chip-based
design in an effort to reduce manufacturing costs and to improve playback
performance quality. This research and development project
50
had completed only alpha testing and was approximately 80% complete at the date
of acquisition. Viona had incurred approximately $117,000 of research and
development expense and estimated that $35,000 would be required to complete the
development of the project. Development was completed during 1998. Intellectual
property relating to this product was not transferred to STMicroelectronics.
CE DVD Set-top Player/Portable Player, a DVD playback set-top reference
design for equipment manufacturers which was expected to provide full DVD
playback capabilities such as fast forward, rewinding, multi-language and
surround sound audio. At the time of the acquisition, this project had not yet
completed alpha testing and there was significant uncertainty of completion. We
estimated that the project was approximately 5% complete. Viona had incurred
approximately $30,000 of research and development expense and estimated that
$500,000 would be required to complete the development of the project. During
2000 the development effort culminated in several consumer electronics
manufacturers shipping products (both set-top and portable) based upon this
completed development effort. The development team has moved on porting this
technology to the next generation of DVD hardware designs for our customers.
This intellectual property was transferred to STMicroelectronics in March 2001.
DVD Software Encoder, a software solution to enable the processing of
digital video signals which is designed to eliminate the need for a DVD encoder
chip or circuit board by utilizing software to record DVD and video streams on a
personal computer. At the time of the acquisition, this project had not yet
completed alpha testing and there was significant uncertainty of completion. We
estimated that the project was approximately 40% complete. Viona had incurred
approximately $121,000 of research and development expense and estimated that
$203,000 would be required to complete the development of the project. This core
technology was completed in the second quarter of 2000 and was released in
our CinePlayer(TM) DVR product for use by PC OEMs and IHVs. Portions of
this intellectual property as it relates to the consumer electronics market was
transferred to STMicroelectronics in March 2001.
HDTV Hardware Decoder, a circuit board or card that could enable personal
computers to process HDTV signals. At the time of the acquisition, this project
had not yet completed alpha testing and there was significant uncertainty of
completion. We estimated that the project was approximately 35% complete. Viona
had incurred approximately $63,000 of research and development expense and
estimated that $111,000 would be required to complete the development of the
project. This effort was re-targeted to provide HDTV tuner support for the HDTV
Software Decoder development effort. This development effort was completed by
the end of 1999 and the technology integrated into the HDTV Software Decoder
project and our partner's HDTV tuner hardware and software driver
implementations. Intellectual property relating to this product was not
transfered to STMicrolectronics.
HDTV Software Decoder, a software solution designed to allow a personal
computer to process HDTV signals without the need for a hardware solution. At
the time of the acquisition, this project had not yet completed alpha testing
and there was significant uncertainty of completion. We estimated that the
project was approximately 15% complete. Viona had incurred approximately $15,000
of research and development expense and estimated that $150,000 would be
required to complete the development of the project. Development is expected to
be completed within the next nine months for the release of an Audio/Video
decoding solution and a separate following release that adds Data decoding. This
project is currently approximately 75% complete. Intellectual property relating
to this product was not transferred to STMicroelectronics.
The efforts required to develop the acquired in-process technology into
commercially viable products principally relate to the completion of all
planning, designing and testing activities that are necessary to establish that
the products can meet their design requirements, including function, features
and technical performance requirements.
We based our determination of the acquired in-process technology allocation
on recently issued guidance by the Securities and Exchange Commission and
considered such factors as degree of completion, technological uncertainties,
costs incurred and projected costs to complete. Acquired in-process technology
projects continue to progress, in all material respects, consistent with
management's original assumptions used to value the acquired in-process
technology. See note 5 of notes to consolidated financial statements.
In March 2001, we transferred to STMicroelectronics intellectual property
that we used in the consumer electronics business that we acquired from VIONA.
The remaining unamortized book value of the goodwill recorded in connection with
the acquisition of Viona, which was being amortized over its estimated useful
life of four years, and, the net book value of all of Viona's furniture and
equipment will be included in the net gain on sale of assets.
Liquidity and Capital Resources
51
Since inception, we have financed our operations primarily through the
issuance and sale of debt and equity securities to investors including our
initial public offering which was completed July 16, 1999. As of December 31,
2000, we had approximately $9.6 million in cash and cash equivalents.
Net cash used in operating activities for the year ended December 31, 2000
was $35.3 million, and for the years ended December 31, 1999 and 1998 was $9.3
million and $9.7 million, respectively. Cash used in operating activities was
primarily the result of net losses, adjusted for non-cash items, including
depreciation and amortization, non-cash compensation expense, and in 2000, 1999
and 1998, acquired in-process research and development expense.
Net cash used in investing activities for the year ended December 31, 2000
was $4.8 million. Net cash used in investing activities for the years ended
December 31, 1999 and 1998 was $5.3 million and $4 million respectively. Cash
used in investing activities in each period consisted of purchases of furniture
and equipment of approximately $3.2 million, $1.1 million, and $0.8 million,
respectively and the acquisitions of Cinax, for approximately $2.8 million in
2000, Teknema, for approximately $3.3 million in 1999, and Viona, for
approximately $3.2 million in 1998.
Net cash provided by financing activities for the years ended December 31,
2000, 1999, and 1998 was $1 million, $62.4 million and $14.2 million,
respectively. Cash provided by financing activities was primarily attributable
to net proceeds from the issuance of debt and equity securities to investors.
As of December 31, 2000, our principal commitments consisted of obligations
outstanding under capital leases to fund our capital purchases. The equipment
leasing arrangements consist primarily of paying rental fees to third party
leasing providers at interest rates between 8% to 18% that maintain title to the
leased equipment. In most cases, there are no obligations for us to purchase the
equipment at the end of the term. In addition, we have approximately $0.4
million at December 31, 2000 of payments due to the former owners of Viona. This
amount was paid in the quarter ending March 31, 2001.
As of December 31, 2000, we had a $5 million line of credit with Silicon
Valley Bank. Under the terms of the line of credit, borrowings are subject to a
percentage of "eligible" accounts receivable, as defined in the loan and
security agreement, and bear interest at the bank's prime rate (9.5% at December
31, 2000). At December 31, 2000, there were two letters of credit outstanding
totaling approximately $1.8 million. In addition, we must:
. maintain a tangible net worth as defined in the loan and security
agreement, of at least $40 million;
. maintain a quick ratio, excluding deferred revenue, of at least 2.0 to
1.0;
. supply Silicon Valley Bank within 45 days after the end of each quarter,
quarterly, unaudited financial statements and compliance certificates.
At December 31, 2000, no borrowings against this line of credit were
outstanding and no amounts were available under the line of credit. At December,
31 2000, and prior to the completion of the consumer electronics asset sale the
Company was not in compliance with its debt covenants, but received a waiver of
the covenants from the bank through January 31, 2001. With the completion of our
consumer electronics and Internet appliance asset sales in March 2001, the
Company will be in compliance with all of its covenants as of March 31, 2001.
This line of credit expires in July 2001. Silicon Valley Bank has senior
security interest in substantially all of our assets.
52
We believe that our current cash and cash equivalents balance and cash
anticipated to be provided by operations, if any, together with borrowings
available under our line of credit, will be adequate to meet our cash needs for
at least the next twelve months.
On July 16, 1999, we commenced an initial public offering of our common
stock. The managing underwriters of the offering were Bear, Stearns & Co. Inc.,
SG Cowen Securities Corporation and Volpe Brown Whelan & Company, LLC. We sold
an aggregate of 5,750,000 shares of our common stock to the public in the
offering. After deducting underwriting discounts and commissions but before
deducting any offering expenses, proceeds from the offering were approximately
$64.2 million. We used a portion of the net proceeds to repay all outstanding
amounts owed by us on our bank line of credit and invested the remaining portion
of the proceeds in short-term interest bearing, investment grade securities. See
Item 5 above for a breakdown of our use of the proceeds of the offering as of
December 31, 2000.
In November, 1999, we acquired Teknema, Inc. for $2.5 million in cash and
issued 266,169 shares of our common stock and options to acquire approximately
537,000 shares of our common stock. Prior to the acquisition, we loaned Teknema
$1 million with an annual rate of 10% for three years. Teknema was an Internet
technology company dedicated to developing software and solutions for the
emerging market for Internet appliances. The company sold Internet television
set-top hardware and software technology through intellectual property licenses
and OEM agreements with telecommunication companies and Internet service
providers. Teknema served the emerging market for information appliances that
connect users to the Internet. The acquisition has been accounted for as a
purchase and the estimated excess of the purchase price over the fair value of
the net assets acquired of approximately $16 million was recorded as goodwill
and other intangible assets. As a result of the asset sale to Phoenix
Technologies in March 2001, the remaining unamortized book value of the goodwill
recorded in-connection with the Teknema acquisition, which was being appreciated
over four years will be included in the net gain on sale of assets as of the
date of sale.
On August 11, 2000, we completed the acquisition of all of the outstanding
capital stock of Cinax Designs Inc. Under the terms of the agreement, we paid
$3.5 million in cash, issued 178,262 shares of our common stock, and 646,734
shares of no par, non-voting exchangeable preferred stock of one of our
subsidiaries, Ravisent British Columbia Inc., which shares of preferred stock
are exchangeable, on a one-for-one basis at the option of the holder, into
shares of our common stock.
Effective as of March 1, 2001, and pursuant to an Asset Acquisition
Agreement dated as of January 18, 2001, RAVISENT Technologies Inc. and certain
of its subsidiaries, Ravisent I.P., Inc. a Nevada corporation, Ravisent
Operating Company, Inc., a Delaware corporation and VIONA Development Hard and
Software Engineering GmbH & Co. KG, a German limited partnership (collectively,
"Ravisent"), sold and licensed certain assets related to Ravisent's consumer
electronics business to STMicroelectronics, NV, a Dutch corporation,
STMicroelectronics, Inc., a Delaware corporation and STMicroelectronics GmbH
(collectively, "STMicroelectronics"). The assets sold and licensed include
certain of the contracts, equipment, intangible assets, intellectual property,
prepaid expenses, accounts receivable and other assets primarily related to the
operation of the consumer electronics business. Pursuant to the terms of the
Asset Acquisition Agreement, STMicroelectronics paid approximately $55.1 million
in cash consideration, of which $0.8 million is being held by a third party in
escrow for a period of 18 months for indemnification purposes.
Effective as of March 23, 2001, and pursuant to an Asset Acquisition
Agreement dated as of March 21, 2001, we sold the assets of our Internet
appliance business, excluding inventory, to Phoenix Technologies, Ltd., a
Delaware corporation for approximately $18 million in cash consideration, of
which $1.8 million is being held in escrow by a third party until March 23, 2002
for indemnification purposes. The assets sold and licensed include certain of
the contracts, equipment, intangible assets, intellectual property, prepaid
expenses, and other assets primarily related to the operation of the Internet
appliance business.
53
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures About Market Risk
We develop products in the United States and sell such products in North
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our products less competitive in
foreign markets. We do not use derivative instruments to hedge our foreign
exchange risk. Our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
ITEM 8. Financial Statements and Supplementary Data
RAVISENT TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
RAVISENT Technologies Inc.
- ------------------------------------------------------------------------------------------------------
Page
---------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Independent Auditors' Report................................................................ 56
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets, December 31, 2000 and 1999..................................... 57
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations, Years ended December 31, 2000, 1999, and 1998........ 58
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 2000,
1999, 1998................................................................................. 59
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows, Years ended December 31, 2000, 1999, and 1998....... 61
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements................................................. 62-88
- ------------------------------------------------------------------------------------------------------
54
[THIS PAGE INTENTIONALLY LEFT BLANK]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
RAVISENT Technologies Inc.:
We have audited the accompanying consolidated balance sheets of RAVISENT
Technologies Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended 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 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 RAVISENT
Technologies Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Philadelphia, Pennsylvania
February 28, 2001
56
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
--------------------------------
2000 1999
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$1,806 in 2000 and $525 in 1999............................................. $ 9,615 $ 48,776
Short-term investments........................................................ - 1,018
Accounts receivable, net of allowance for doubtful accounts of $2,405 in 2000
and $319 in 1999............................................................ 5,901 15,597
Inventories, net.............................................................. 20,883 1,323
Prepaid expenses.............................................................. 963 1,085
Loans receivable - officers................................................... 662 340
Other current assets.......................................................... 547 216
-------- --------
Total current assets....................................................... 38,571 68,355
Furniture and equipment, net.................................................... 3,995 1,598
Goodwill and other intangibles, net of accumulated amortization of $7,425 in
2000 and $2,190 in 1999....................................................... 17,530 19,357
Loan receivable--officer........................................................ 25 138
Other assets.................................................................... 72 300
-------- --------
Total assets............................................................... $ 60,193 $ 89,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 11,088 $ 5,743
Deferred revenue.............................................................. 1,473 4,332
Accrued expenses.............................................................. 2,147 3,672
Other current liabilities..................................................... 588 539
Current installments of obligations under capital leases...................... 38 40
-------- --------
Total current liabilities.................................................. 15,334 14,326
Deferred revenue, less current portion.......................................... - 327
Other long-term liabilities..................................................... 31 472
Obligations under capital leases, excluding current installments................ - 38
-------- --------
Total liabilities............................................................ 15,365 15,163
-------- --------
Commitments and contingencies (note 15)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized in 2000 and
1999, none issued or outstanding
Common stock, $.001 par value 50,000,000 authorized; 17,594,429 shares issued
in 2000 and 16,052,866 in 1999................................................ 17 16
Additional paid-in capital.................................................... 121,330 109,460
Deferred stock compensation................................................... (3,241) (1,678)
Accumulated deficit........................................................... (72,380) (31,913)
Accumulated other comprehensive income........................................ (178) (80)
Note receivable............................................................... - (500)
Treasury stock at cost, 200,000 shares........................................ (720) (720)
-------- --------
Total stockholders' equity................................................. 44,828 74,585
-------- --------
Total liabilities and stockholders' equity................................. $ 60,193 $ 89,748
======== ========
See accompanying notes to consolidated financial statements.
57
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
December 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
License and services.............................. $ 14,226 $ 13,678 $ 3,447
Hardware.......................................... 6,628 15,740 26,841
----------- ---------- ----------
Total revenues................................. 20,854 29,418 30,288
Cost of revenues:
License and services.............................. 4,107 2,133 354
Hardware.......................................... 7,897 13,732 24,192
----------- ---------- ----------
Total cost of revenues......................... 12,004 15,865 24,546
----------- ---------- ----------
Gross profit................................... 8,850 13,553 5,742
Research and development
Non-cash compensation............................. 801 200 139
Other research and development expense............ 10,187 8,107 3,121
Sales and marketing
Non-cash compensation and other expense........... 6,311 -- --
Other sales and marketing expense................. 10,863 5,296 1,964
General and administrative
Non-cash compensation............................. 467 308 --
Other general and administrative expense.......... 15,221 5,079 4,673
Depreciation and amortization....................... 5,897 1,886 906
Acquired in-process research and development........ 1,373 1,888 7,900
----------- ---------- ----------
Operating loss............................... (42,270) (9,211) (12,961)
Other (income) expense:
Interest (income) expense, net.................... (1,792) (1,192) 722
Other (income) expense............................ (51) -- --
----------- ---------- ----------
Loss before income taxes............................ (40,427) (8,019) (13,683)
----------- ---------- ----------
Provision for income taxes........................ 40 52 --
----------- ---------- ----------
Net loss............................................ (40,467) (8,071) (13,683)
----------- ---------- ----------
Accretion of discount on mandatory redeemable
preferred stock..................................... - 659 754
----------- ---------- ----------
Net loss attributable to common stockholders........ $ (40,467) $ (8,730) $ (14,437)
=========== ========== ==========
Basic and diluted net loss per common share......... $ (2.44) $ (1.02) $ (4.94)
=========== ========== ==========
Weighted average shares outstanding used in per
common share calculation (basic and diluted)........ 16,606,795 8,532,140 2,920,677
=========== ========== ==========
See accompanying notes to consolidated financial statements.
58
RAVISENT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Additional
Common stock paid-in
-------------------------
Shares Amount capital
------------- ---------- ----------
Balances as of December 31, 1997................................................. 2,103,653 $ 2 $ 4,073
---------- ---- --------
Issuance of warrants in connection with debt financing........................... -- -- 68
Issuance of warrants in connection with the sale of Series B preferred stock,
net of transaction costs........................................................ -- -- 3,754
Issuance of common stock to acquire Viona........................................ 1,204,820 1 4,770
Repurchase of common stock....................................................... -- -- --
Deferred stock compensation related to stock options............................. -- -- 799
Amortization of deferred stock compensation...................................... -- -- --
Compensation related to stock options............................................ -- -- 139
Issuance of common stock as consideration for interest payments.................. 12,962 -- 65
Issuance of common stock upon exercise of warrants............................... 199,416 -- 183
Accretion of discount on mandatory redeemable preferred stock.................... -- -- (754)
Foreign currency translation adjustment.......................................... -- -- --
Net loss......................................................................... -- -- --
---------- ---- --------
Balances as of December 31, 1998................................................. 3,520,851 $ 3 $ 13,097
---------- ---- --------
Issuance of Series B preferred stock and stock subscription receivable........... -- -- 125
Transaction costs related to sale of Series C preferred stock.................... -- -- (30)
Issuance of common stock upon exercise of options................................ 83,061 -- 129
Conversion of subordinated notes payable upon initial public offering........... -- -- 625
Issuance of common stock upon exercise of warrants............................... 926,002 1 54
Accretion of discount on mandatory redeemable preferred stock.................... -- -- (659)
Initial public stock offering, net............................................... 5,750,000 6 61,416
Conversion of preferred stock to common stock upon public offering............... 5,508,207 6 20,460
Deferred stock compensation related to stock options............................. -- -- 1,371
Amortization of deferred stock compensation...................................... -- -- --
Compensation related to stock options............................................ -- -- 470
Issuance of common stock to acquire Teknema...................................... 264,745 -- 12,402
Foreign currency translation adjustment.......................................... -- -- --
Net loss......................................................................... -- -- --
---------- ---- --------
Balances as of December 31, 1999................................................. 16,052,866 $ 16 $109,460
---------- ---- --------
Repayment of stock subscription receivable....................................... -- -- --
Issuance of common stock upon exercise of options................................ 888,272 1 1,040
Issuance of common stock upon exercise of warrants............................... 405,298 -- 20
Deferred compensation related to stock options................................... 33,647 -- 890
Amortization of deferred stock compensation...................................... -- -- --
Issuance of equity securities to acquire Cinax................................... 138,455 -- 3,725
Issuance of warrants under distribution rights agreement and other services...... -- -- 5,724
Foreign currency translation adjustment.......................................... -- -- --
Unrealized loss on available-for-sale investment................................. -- -- --
Issuance of common stock for employee stock purchase plan........................ 75,891 -- 471
Net loss......................................................................... -- -- --
---------- ---- --------
Balances as of December 31, 2000................................................. 17,594,429 $ 17 $121,330
========== ==== ========
Accumulated
Deferred other
stock Accumulated comprehensive
compensation deficit income
------------- ----------- -------
Balances as of December 31, 1997................................................. $ -- $ (10,159) $ --
------- --------- --------
Issuance of warrants in connection with debt financing........................... -- -- --
Issuance of warrants in connection with the sale of Series B preferred stock,
net of transaction costs........................................................ -- -- --
Issuance of common stock to acquire Viona........................................ -- -- --
Repurchase of common stock....................................................... -- -- --
Deferred stock compensation related to stock options............................. (799) -- --
Amortization of deferred stock compensation...................................... 50 -- --
Compensation related to stock options............................................ -- -- --
Issuance of common stock as consideration for interest payments.................. -- -- --
Issuance of common stock upon exercise of warrants............................... -- -- --
Accretion of discount on mandatory redeemable preferred stock.................... -- -- --
Foreign currency translation adjustment.......................................... -- -- (25)
Net loss......................................................................... -- (13,683) --
------- --------- --------
Balances as of December 31, 1998................................................. $ (749) $ (23,842) $ (25)
------- --------- --------
Issuance of Series B preferred stock and stock subscription receivable........... -- -- --
Transaction costs related to sale of Series C preferred stock.................... -- -- --
Issuance of common stock upon exercise of options................................ -- -- --
Conversion of subordinated notes payable upon initial public offering........... -- -- --
Issuance of common stock upon exercise of warrants............................... -- -- --
Accretion of discount on mandatory redeemable preferred stock.................... -- -- --
Initial public stock offering, net............................................... -- -- --
Conversion of preferred stock to common stock upon public offering............... -- -- --
Deferred stock compensation related to stock options............................. (1,371) -- --
Amortization of deferred stock compensation...................................... 442 -- --
Compensation related to stock options............................................ -- -- --
Issuance of common stock to acquire Teknema...................................... -- -- --
Foreign currency translation adjustment.......................................... -- -- (55)
Net loss......................................................................... -- (8,071) --
------- --------- --------
Balances as of December 31, 1999................................................. $(1,678) $ (31,913) $ (80)
------- --------- --------
Payment of stock subscription receivable......................................... -- -- --
Issuance of common stock upon exercise of options................................ -- -- --
Issuance of common stock upon exercise of warrants............................... -- -- --
Deferred compensation related to stock options................................... (758) -- --
Amortization of deferred stock compensation...................................... 1,271 -- --
Issuance of equity securities to acquire Cinax................................... (2,076) -- --
Issuance of warrants under distribution rights agreement and other services...... -- -- --
Foreign currency translation adjustment.......................................... -- -- (11)
Unrealized loss on available-for-sale investment................................. -- -- (87)
Issuance of common stock for employee stock purchase plan........................ -- -- --
Net loss......................................................................... -- (40,467) --
------- --------- --------
Balances as of December 31, 2000................................................. $(3,241) $ (72,380) $ (178)
======= ========= ========
Total
stockholders'
Treasury Note equity Comprehensive
stock receivable (deficiency) loss
----- ---------- ----------- ----
Balances as of December 31, 1997................................................. $ -- $ -- $ (6,084) $ (7,253)
------ ------ -------- --------
Issuance of warrants in connection with debt financing........................... -- -- 68 --
Issuance of warrants in connection with the sale of Series B preferred stock,
net of transaction costs........................................................ -- -- 3,754 --
Issuance of common stock to acquire Viona........................................ -- -- 4,771 --
Repurchase of common stock....................................................... (720) -- (720) --
Deferred stock compensation related to stock options............................. -- -- -- --
Amortization of deferred stock compensation...................................... -- -- 50 --
Compensation related to stock options............................................ -- -- 139 --
Issuance of common stock as consideration for interest payments.................. -- -- 65 --
Issuance of common stock upon exercise of warrants............................... -- -- 183 --
Accretion of discount on mandatory redeemable preferred stock.................... -- -- (754) --
Foreign currency translation adjustment.......................................... -- -- (25) (25)
Net loss......................................................................... -- -- (13,683) (13,683)
------ ------ -------- --------
Balances as of December 31, 1998................................................. $ (720) $ -- $(12,236) $(13,708)
------ ------ -------- --------
Issuance of Series B preferred stock and stock subscription receivable........... -- (500) (375) --
Transaction costs related to sale of Series C preferred stock.................... -- -- (30) --
Issuance of common stock upon exercise of options................................ -- -- 129 --
Conversion of subordinated notes payable upon initial public offering........... -- -- 625 --
Issuance of common stock upon exercise of warrants............................... -- -- 55 --
Accretion of discount on mandatory redeemable preferred stock.................... -- -- (659) --
Initial public stock offering, net............................................... -- -- 61,422 --
Conversion of preferred stock to common stock upon public offering............... -- -- 20,466 --
Deferred stock compensation related to stock options............................. -- -- -- --
Amortization of deferred stock compensation...................................... -- -- 442 --
Compensation related to stock options............................................ -- -- 470 --
Issuance of common stock to acquire Teknema...................................... -- -- 12,402 --
Foreign currency translation adjustment.......................................... -- -- (55) (55)
Net loss......................................................................... -- -- (8,071) (8,071)
------ ------ -------- --------
Balances as of December 31, 1999................................................. $ (720) $ (500) $ 74,585 $ (8,126)
------ ------ -------- --------
Payment of stock subscription receivable......................................... -- 500 500 --
Issuance of common stock upon exercise of options................................ --
Issuance of common stock upon exercise of warrants............................... -- -- 1,041 --
Deferred compensation related to stock options................................... -- -- 20 --
Amortization of deferred stock compensation...................................... -- -- 132 --
Issuance of equity securities to acquire Cinax................................... -- -- 1,271 --
Issuance of warrants under distribution rights agreement and other services...... -- -- 1,649 --
Foreign currency translation adjustment.......................................... -- -- 5,724 --
Unrealized loss on available-for-sale investment................................. -- -- (11) (11)
Issuance of common stock for employee stock purchase plan........................ -- -- (87) (87)
Net loss......................................................................... -- -- 471 --
-- -- (40,467) (40,467)
------ ------ -------- --------
Balances as of December 31, 2000................................................. $ (720) $ -- $ 44,828 $(40,565)
====== ====== ======== ========
See accompanying notes to consolidated financial statements.
59
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss................................................................................... $ (40,467) $ (8,071) $ (13,683)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................................. 5,897 1,886 906
Gain on sale of furniture and fixtures.................................................... - (17) -
Non-cash compensation and other expenses.................................................. 7,327 937 414
Acquired in-process research and development.............................................. 1,373 1,888 7,900
Changes in items affecting operations:
Accounts receivable..................................................................... 9,787 (231) (10,112)
Inventory............................................................................... (19,560) 260 (677)
Loans receivable--officers.............................................................. (209) (418) (60)
Prepaid expenses and other current assets............................................... (220) (1,042) (34)
Other assets............................................................................ 152 - -
Accounts payable........................................................................ 4,980 (10,152) 5,241
Deferred revenue........................................................................ (3,186) 4,486 (126)
Accrued expenses and other current liabilities.......................................... (1,205) 1,136 549
------ ----- -----
Net cash used in operating activities....................................................... (35,331) (9,338) (9,682)
------ ----- -----
Cash flows from investing activities:
Capital expenditures....................................................................... (3,204) (1,139) (813)
Proceeds from sale of furniture and equipment.............................................. 141 129 --
Proceeds from (Investment in) short-term investment........................................ 1,018 (1,018) --
Acquisition, net of cash acquired.......................................................... (2,763) (3,267) (3,231)
----- ----- -----
Net cash used in investing activities....................................................... (4,808) (5,295) (4,044)
----- ----- -----
Cash flows from financing activities:
Repayment of note receivable............................................................... 500 - -
Borrowings (repayments) under capital lease obligations.................................... (40) 60 (18)
Repayments under other liabilities......................................................... (441) (2,321) (90)
Secured borrowings (repayments)............................................................ -- -- (278)
Proceeds from bridge loans................................................................. -- -- 3,320
Payments for convertible securities........................................................ -- (30) --
Net proceeds from issuance of common stock................................................. -- 61,422 183
Net proceeds from Series B and C preferred stock........................................... -- 3,125 12,769
Net proceeds from exercise of stock options and warrants................................... 970 184 --
Net borrowings (repayments) under bank line of credit...................................... -- -- (998)
Repurchase of common stock................................................................. -- -- (720)
------ ------ ------
Net cash provided by financing activities................................................... 989 62,440 14,168
------ ------ ------
Effect of exchange rate changes on cash and cash equivalents................................ (11) (55) (25)
------ ------ ------
Net increase (decrease) in cash and cash equivalents........................................ (39,161) 47,227 417
Cash and cash equivalents:
Beginning of year.......................................................................... 48,776 1,024 607
------ ------ ------
End of year................................................................................ $ 9,615 $ 48,776 $ 1,024
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................................ $ 33 $ 356 $ 683
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations...................................... -- 109 --
Issuance of warrants in connection with bank line of credit and bridge loans............ -- - 68
Issuance of warrants and options in connection with equity transactions and grants
below fair value...................................................................... 8,253 1,437 139
Amortization of deferred stock compensation............................................. 1,271 442 50
Bridge loans converted to Series B preferred stock...................................... -- -- 4,820
Issuance of common stock as consideration for interest.................................. -- -- 65
See accompanying notes to consolidated financial statements.
60
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RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Description of Business (Note 22)
RAVISENT Technologies Inc. ("the Company"), which changed its name
from Divicore Inc. in June 1999 and from Quadrant International, Inc. in May
1999, designs, develops, licenses and markets core-based modular software
solutions that enable digital video and audio stream management in personal
computer systems, consumer electronics devices, and Internet appliances. The
Company also provides supporting hardware designs to selected customers as well
as customization services and customer support. The Company's solutions enable
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk (DVD); direct broadcast satellite (DBS) and high-
definition television (HDTV) on existing personal computers and, during 2000,
consumer electronics platforms. The Company's customers consist principally of
personal computer manufacturers.
During 2000 the Company's revenues were substantially generated from
selling digital video solutions and Internet appliance devices to personal
computer, consumer electronics, and Internet appliance original equipment
manufacturers. During 1999 and 1998 the Company's revenue was substantially
generated from selling hardware-based digital video solutions to personal
computer and consumer electronics original equipment manufacturers. The Company
changed its strategic focus during 1999 from selling hardware-based digital
video solutions to licensing its proprietary technology to provide software-
based digital video solutions to primarily personal computer and consumer
electronics original equipment manufacturers. In November of 1999, the Company
acquired Teknema Inc., which expanded the Company's product offerings to the
Internet appliance market (note 5). In August 2000, the Company acquired Cinax
Designs Inc. (note 5), which has enhanced the Company's digital video product
line.
The Company was incorporated in Pennsylvania in April 1994 and
reincorporated in Delaware as RAVISENT Technologies Inc. in 1999.
The Company has sustained significant net losses and negative cash
flows from operations since its inception. For the years ended December 31,
2000, 1999 and 1998, the Company's net losses were $40.5 million, $8.1 million,
and $13.7 million, respectively. The Company plans on investing heavily in
product development, and sales and marketing, and to a lesser degree in
operations and administrative areas. There can be no assurances that the Company
will be able to generate sufficient revenues necessary to achieve or sustain
profitability in the short or long term. However, management believes that the
current cash and cash equivalent amounts will be sufficient to sustain the
Company's operations through December 31, 2001. See note 22 for sale of assets.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents and Short-term Investments
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents. Short-term investments represented a bank
certificate of deposit, with an original maturity greater than three months.
(d) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out method (FIFO). Inventory is net of
reserves of approximately $3,799,000 and $556,000 at December 31, 2000 and 1999,
respectively.
62
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
(e) Furniture and Equipment
Furniture and equipment is stated at cost. Equipment under capital
leases is stated at the lower of the present value of the minimum lease payments
or the fair value of the equipment. Depreciation and amortization on furniture
and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Equipment under capital leases is amortized
straight-line over the lease term or the estimated useful lives of the assets.
The estimated useful lives of the assets are as follows:
-----------------------------------------------------------------------
Purchased software 3-5 years
-----------------------------------------------------------------------
Computer equipment 3-5 years
-----------------------------------------------------------------------
Research and development equipment 5 years
-----------------------------------------------------------------------
Furniture and equipment 7 years
-----------------------------------------------------------------------
(f) Goodwill and Other Intangibles
Goodwill and other intangibles are amortized using the straight-line
method from the date of acquisition over the expected period to be benefited,
estimated at four years. The Company assesses the recoverability of goodwill, as
well as other long-lived assets, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, which requires the Company
to review for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. When such an
event occurs, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the undiscounted
expected future cash flows are less than the carrying amount of the asset, an
impairment loss is recognized.
(g) Revenue Recognition
The Company recognizes software revenues in accordance with the
American Institute of Certified Public Accountants' (AICPA) Statement of
Position 97-2, Software Revenue Recognition (SOP 97-2). License revenues for
one-time license fees and up-front license fees are recognized in the period in
which the license agreement is signed, the fee is fixed and determinable,
delivery of the technology has occurred requiring no significant production
modification or customization and collectibility is probable. The up-front
license fee terms generally provide an agreed-upon level of sales of a
licensee's products below which a licensee will not be obligated to remit
royalty payments. Additionally, the up-front fees are nonrefundable even in the
event such level is not attained. License revenues consisting of fees paid on a
per unit basis are recognized when earned, which is generally based on receiving
notification from licensees stating the number of products sold which
incorporate the licensed technology from the Company and for which license fees,
based on a per unit basis, are due. The terms of the license agreements
generally require the licensees to give notification to the Company within 45 to
60 days of the end of the quarter during which the sales of the licensees'
products take place. In a number of cases, the revenue recorded by the Company
will occur in the quarter following the sale of the licensee's products to its
customers.
In cases where a license fee is associated with the delivery of
multiple elements and vendor-specific objective evidence cannot be established
for each of the individual elements, the entire fee from the arrangement is
deferred until the earlier of the establishment of vendor-specific objective
evidence or the delivery of all the elements of the arrangement. In cases where
a license grants a customer unspecified upgrade rights, the license fee is
deferred and recognized ratably over the term of the arrangement. Billed amounts
due from the customers in excess of revenue recognized are recorded as deferred
revenue.
Hardware revenues are recognized upon shipment of products to
customers. The Company's sales to original equipment manufacturers do not
provide a right of return unless in the event of manufacturing defect, which is
the responsibility of the Company's third party contract manufacturers.
Revenues related to services are recognized upon delivery of the
service in the case of time and material contracts. Revenues related to
development contracts involving
63
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
significant modification or customization of hardware or software under
unilateral or joint development arrangements are recognized using the
percentage-of-completion method, based on performance milestones specified in
the contract where such milestones fairly reflect progress toward contract
completion. In other instances, progress toward completion is based on
individual contract costs incurred to date compared with total estimated
contract costs. Losses on contracts are recognized for the entire anticipated
loss, if any, as soon as the loss becomes evident.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $2,527,000, $139,000 and $51,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
(j) Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.
(k) Financial Instruments
The Company's financial instruments principally consist of cash,
short-term investments, accounts receivable, accounts payable and capital lease
obligations that are carried at cost, which approximates fair value.
(l) Stock Options
SFAS No. 123, Accounting for Stock-based Compensation, provides
companies the alternative to adopt the fair value method for expense recognition
of employee stock options and stock-based awards or to continue to account for
such items using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) with pro forma disclosures of results of operations as if the fair value
method had been applied. The Company applies APB 25 for stock options and stock-
based awards to employees and has disclosed pro forma net loss as if the fair
value method had been applied (note 14).
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(n) Long-Lived Assets
The Company reviews for impairment of long-lived assets, including
furniture and equipment, identifiable intangibles and goodwill, whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of the Company's long-
lived assets, an evaluation of the probability that future undiscounted net cash
flows will be less than the carrying amount of our assets is performed.
Impairment is measured based on the difference between the carrying amount of
the assets and their fair value.
(o) Foreign Currency Translation
64
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
All assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
equity (deficiency) in the accompanying consolidated financial statements.
(p) Computation of Net Loss Per Share
The Company computes earnings per share in accordance with SFAS No.
128, Computation of Earnings Per Share. In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method), and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the if-
converted method). Common equivalent shares are excluded from the calculation if
their effect is anti-dilutive.
(q) Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
(r) Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(2) Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
65
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
-------------------------------------------------------------------------------------------------------------
Years ended December 31,
------------------------
-------------------------------------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
-------------------------------------------------------------------------------------------------------------
Net loss $(40,467) $ (8,071) $(13,683)
-------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (11) (55) (25)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Unrealized loss on available-for-sale investment (87) - -
-------- -------- --------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Comprehensive loss $(40,565) ($8,126) $(13,708)
======== ======== ========
-------------------------------------------------------------------------------------------------------------
66
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
(3) Furniture and Equipment
Furniture and equipment consist of the following at December 31, 2000
and 1999 (in thousands):
2000 1999
------ ------
Furniture and fixtures.......................................... $1,321 $ 546
Leasehold improvements.......................................... 326 129
Computer equipment.............................................. 1,926 1,176
Research and development equipment.............................. 1,664 407
Software........................................................ 329 259
------ ------
5,566 2,517
Less: accumulated depreciation and amortization................. 1,571 919
------ ------
Furniture and equipment, net.................................... $3,995 $1,598
====== ======
Assets recorded under capital leases are approximately $166,000 as of
December 31, 2000 and 1999 and related accumulated amortization is approximately
$113,000 and $69,000 as of December 31, 2000 and December 31, 1999,
respectively. Depreciation expense was approximately $666,000 and $351,000 for
the years ended December 31, 2000 and 1999, respectively. Included in
depreciation expense is amortization of assets recorded under capital leases of
approximately $44,000 for each of the years ended December 31, 2000 and 1999.
(4) Restricted Cash
As of December 31, 2000 the Company issued letters of credit to
vendors under the Company's line of credit facility (note 7) totaling
approximately $1,806,000. Under the terms of the loan and security agreement the
Company was required to secure the letters with cash in amounts equal to the
amount of the outstanding letters of credit.
On November 8, 1999 the Superior Court in the Commonwealth of Massachusetts
approved an attachment of funds for $525,000 to be held in trust pending the
settlement of a complaint by a former supplier. In connection with the
settlement agreement, on June 1, 2000, the attachment was vacated and the funds
were returned to the Company (note 15).
(5) Acquisitions
(a) Cinax Designs Inc.
In August 2000, the Company acquired all of the outstanding capital
stock of Cinax Designs Inc. ("Cinax"), a company located in British Columbia,
Canada involved in the development of digital video software products based on
MPEG audiovisual compression.
The Company paid $2.7 million in cash, issued 138,455 shares of the
Company's common stock and 225,928 shares of no par, non-voting exchangeable
preferred stock of a subsidiary having a total fair market value of $1.6 million
on the date of acquisition, and incurred transaction costs of $0.3 million. The
exchangeable preferred stock is exchangeable into shares of the Company's common
stock on a one-for-one basis at any time at the option of the holder, is non-
voting, has an automatic redemption date of August 1, 2005, and contains certain
dividend restrictions as defined.
The Company also paid $0.8 million in cash, issued 39,807 shares of
the Company's common stock, and issued 420,806 shares of no par, non-voting
exchangeable preferred stock of a subsidiary in connection with the acquisition.
The cash is held in escrow for the former employees of Cinax, who became
employees of the Company, for a period of one year measured from the date of
acquisition. If an employee leaves the Company during the next year, all
unvested cash for such employees will be forfeited back to the Company. The cash
escrow will be released 25% on each quarterly anniversary of the date of
acquisition. As of December 31, 2000 no cash has been forfeited. The Company
recorded $0.8 million of prepaid compensation expense in connection with the
escrowed cash that will be amortized ratably over the one-year period. These
common and exchangeable preferred shares are also held in escrow for the
67
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
former employees and former non-employee stockholders of Cinax. The former Cinax
employees who became employees of the Company are required to be employed by the
Company during the next three-year period, measured from the date of
acquisition, in order for the shares to be released from escrow. The shares held
in escrow for the former non-employee stockholders of Cinax are for Company
indemnification purposes and are not subject to post-acquisition employment
requirements. All of the escrowed shares will be released as follows: 50% on the
one-year anniversary of the acquisition and one-eighth per quarter thereafter.
If an employee leaves the Company voluntarily during the next three-year period,
all unvested shares for such employees will be forfeited back to the Company. As
of December 31, 2000, no shares have been forfeited. The Company recorded $2.1
million of deferred stock compensation in connection with the forfeitable common
and exchangeable preferred shares that will be amortized ratably over the three-
year vesting period.
As of December 31, 2000, 138,455 shares of the Company's common stock
issued for this transaction are recorded as issued and outstanding for financial
reporting and earnings per share purposes. As the applicable contingencies
related to the contingently issuable shares described above lapse, such shares
will be recognized as issued and outstanding.
The acquisition of Cinax was recorded under the purchase method of
accounting. The results of operations of Cinax have been included in the
Company's consolidated financial statements from August 11, 2000. A portion of
the purchase price was allocated to in-process research and development (IPR&D)
technology, which resulted in a charge of approximately $1.4 million to the
Company's operations in August 2000. At the date of acquisition, Cinax had two
development projects that had not reached technological feasibility and for
which there was no alternative future use. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 2, Accounting for Research and
Development Costs, and FASB interpretation No. 4, Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method, amounts assigned to
IPR&D technology meeting the above stated criteria must be charged to expense as
part of the allocation of purchase price of a business combination. The IPR&D
technology was valued using the income approach, a cash flow model under which
projected income and expenses attributable to the purchased technology were
identified, and potential income streams were discounted using a 25% discount
rate for risks, probabilities and uncertainties, including the stage of
development of the technology, viability of target markets and other factors.
The two development projects were 50% and 75% complete at the date of
acquisition.
The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $3.2 million has been recorded as goodwill and other intangible assets and is
being amortized on a straight-line basis over four years. The results of
operations of Cinax were not material to the Company.
The purchase price was allocated as follows (in thousands):
---------------------------------------------------------------------
Fair value of assets acquired $ 347
---------------------------------------------------------------------
Goodwill 3,234
---------------------------------------------------------------------
Workforce in place 80
---------------------------------------------------------------------
In-process research and development technology 1,373
---------------------------------------------------------------------
Liabilities acquired (276)
------
---------------------------------------------------------------------
---------------------------------------------------------------------
Total $4,758
======
---------------------------------------------------------------------
(b) Teknema Inc.
68
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements--(Continued)
In November 1999, the Company acquired all of the outstanding capital
stock of Teknema, Inc. ("Teknema"), a company located in Palo Alto, California
involved in the development of products for the emerging market in information
appliances.
The Company paid $2.5 million in cash, issued 266,169 shares of the
Company's common stock and options to acquire approximately 537,000 shares of
common stock with a combined value of $12.4 million and incurred transaction
costs of $0.9 million. Prior to the acquisition, the Company loaned Teknema $1
million with an annual interest rate of 10%. On the date of the closing of the
transaction, the Company paid certain employees of Teknema for joining the
Company sign-on bonuses totaling $1,280,000. The bonuses were recorded in
general and administrative expense in the Company's December 31, 1999
consolidated financial statements.
The acquisition of Teknema was recorded under the purchase method of
accounting. The results of operations of Teknema were included in the Company's
consolidated financial statements from November 8, 1999. In connection with the
acquisition, we expensed $1.9 million of the purchase price as acquired in-
process research and development. At the date of acquisition, Teknema had three
development projects that had not reached technological feasibility and for
which there was no alternative future use. The in-process research and
development technology was valued using a cash flow model, under which projected
income and expenses attributable to the purchased technology were identified,
and potential income streams were discounted using a 20%-30% discount rate for
risks, probabilities and uncertainties, including the stage of development of
the technology, viability of target markets and other factors. The three
development projects ranged in percentage of completion at the date of
acquisition from 15% to 50%.
The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $16.2 million has been recorded as goodwill and other intangible assets and
is being amortized on a straight-line basis over four years.
The purchase price was allocated as follows (in thousands):
Fair value of assets acquired $ 5,018
Goodwill 16,031
Workforce in place 190
In-process research and development technology 1,888
Liabilities acquired (7,343)
-------
$15,784
=======
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Teknema as if the acquisition
occurred on January 1, 1998, after giving effect to certain adjustments,
primarily amortization of goodwill, excluding the $1.9 million write-off of
acquired in-process research and development and excluding the $1.3 million
sign-on bonuses. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
acquisition been completed on January 1, 1998.
Year ended
December 31,
(in thousands except per
share data)
-----------------------------
1999 1998
-----------------------------
Revenues.................................................................. $ 37,091 $ 35,363
Net loss.................................................................. $(14,618) $(19,000)
Net loss per common share (basic and diluted)............................. $ (1.67) $ (6.03)
69
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
(c) Viona Development Hard & Software Engineering GmbH
In April 1998, the Company completed the acquisition of Viona
Development Hard & Software Engineering GmbH (Viona) a company located in
Karlsruhe, Germany specializing in the development of digital video technology
(Note 22).
The Company paid a total of $11.4 million consisting of: $5.8 million
in cash, of which $2.6 million was paid at closing, $2.1 million was paid during
1999, and $1.35 million, recorded at a discounted value of $1.1 million, to be
paid in equal installments at the end of each of the next two fiscal years;
issued 1,204,820 shares of the Company's common stock valued at $4.8 million;
and incurred transaction costs of $0.8 million.
The acquisition of Viona was recorded under the purchase method of
accounting. The results of operations of Viona were included in the Company's
consolidated financial statements from April 1, 1998. A portion of the purchase
price was allocated to in-process research and development technology, which
resulted in a charge of approximately $7.9 million to the Company's operations
in April 1998. At the date of acquisition, Viona had five development projects
that had not reached technological feasibility and for which there was no
alternative future use. The in-process research and development technology was
valued using a cash flow model, under which projected income and expenses
attributable to the purchased technology were identified, and potential income
streams were discounted using a 30%-35% discount rate for risks, probabilities
and uncertainties, including the stage of development of the technology,
viability of target markets and other factors. The five development projects
ranged in percentage of completion at the date of acquisition from 5% to 80%.
The excess of the purchase price over the fair value of the net
identifiable assets and in-process research and development technology acquired
of $3.5 million was recorded as goodwill and other intangibles and is being
amortized on a straight-line basis over four years. The purchase price was
allocated as follows (in thousands):
Fair value of assets acquired...................................................... $ 542
Goodwill........................................................................... 3,503
Workforce in place................................................................. 42
In-process research and development technology..................................... 7,900
Liabilities acquired............................................................... (557)
-------
$11,430
=======
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Viona as if the acquisition
occurred on January 1, 1998, after giving effect to certain adjustments,
primarily amortization of goodwill and excluding the $7.9 million write-off of
acquired in-process research and development. The unaudited pro forma financial
information for the year ended December 31, 1998 (in thousands except per share
data) does not necessarily reflect the results of operations that would have
occurred had the acquisition been completed on January 1, 1998.
Year ended
December 31,
(in thousands except
per share data)
-------------------
1998
-------------------
Revenues......................................................... $30,288
Net loss......................................................... $(5,978)
Net loss per common share (basic and diluted).................... $ (2.03)
(6) Inventories
70
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements--(Continued)
Inventories consist of the following at December 31, 2000 and 1999 (in
thousands):
- -----------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------
2000 1999
------- -------
- -----------------------------------------------------------------------------------------------
Raw materials $17,369 $ 300
- -----------------------------------------------------------------------------------------------
Products in process 762 -
- -----------------------------------------------------------------------------------------------
Finished products 2,752 1,023
------- ------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Inventories, net $20,883 $1,323
======= ======
- -----------------------------------------------------------------------------------------------
Raw materials include advance components, which represent the cost of
integral components procured by the Company for its contract manufacturers,
primarily for use in the contract manufacturers' assembly of the Company's
licensed Internet appliance products. The components will be sold at cost to the
contract manufacturers for assembly of the manufactured products.
(7) Bank Line of Credit
In June 2000, the Company renewed its loan and security agreement with
a commercial bank that provides the Company a line of credit in the amount of
the lesser of $5 million or the borrowing base, as defined (limited to a
percentage of eligible accounts receivable). The line of credit provides for the
Company to issue a maximum of $2 million in the form of letters of credit that
reduces the amount of available borrowings under the line of credit. The line of
credit matures in June 2001 and bears interest at the bank's prime rate (9.5% at
December 31, 2000). The line of credit is collateralized by substantially all of
the assets of the Company. The Company is required to comply with quarterly
financial covenants, as defined in the loan and security agreement. At December,
31 2000 and prior to the completion of the consumer electronics sale, the
Company was not in compliance with certain covenants, but received a waiver of
the covenants from the bank through January 31, 2001. With the completion of our
consumer electronics and Internet appliance asset sales in March 2001 (note 22),
the Company will be in compliance with all of its covenants as of March 31,
2001. No amounts were available through January 31, 2001 under the terms of the
waiver. There was no amount outstanding under the line of credit at December 31,
2000. At December 31, 2000, there were two letters of credit outstanding
totaling approximately $1.8 million (note 4).
A bank, in connection with a previous line of credit, was provided
warrants (note 14) to acquire 62,500 shares of the Company's common stock at an
exercise price of $3.56 per share. The estimated fair value of the warrants
issued was $56,500 and was recorded as debt issuance costs. This amount was
amortized over the term of the line of credit.
(8) Bridge Financing
In February, March and April 1998, the Company entered into various
agreements to borrow additional amounts of short-term bridge loans aggregating
$3.3 million. The terms of the debt were substantially identical with the amount
borrowed in December 1997. The Company issued warrants (note 14) to acquire
48,182 shares of the Company's common stock at an exercise price equal to the
price per share at the time of closing of the Company's round of equity
financing in April 1998. The estimated fair value of the warrants issued was
approximately $46,000 and has been recorded as additional interest expense
through the date of the conversion of the bridge loans into Series B preferred
stock.
In December 1997, the Company entered into an agreement to borrow $1.5
million of short-term bridge loans. The loans bear interest at 6% with an
original maturity date of March 31, 1998. The term of the debt was extended to
April 30, 1998, and the interest rate was increased to 15%. In connection with
this financing, the Company issued warrants (note 14) to acquire 45,000 shares
of the Company's common stock. The estimated fair value of the warrants issued
was approximately $23,000. This amount was recorded as debt issuance costs and
was amortized over the term of the debt.
The $4.8 million of short-term bridge loans were converted to Series B
preferred stock in April 1998 (note 13).
71
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
(9) Accrued Expenses
Accrued expenses consist of the following:
December 31,
--------------------------------------
2000 1999
--------------------------------------
Payroll and related costs............ $ 397 $ 584
Accrued Dolby royalties.............. 664 684
Legal and professional fees.......... 290 1,219
Warranty............................. 361 449
Other................................ 435 736
------- -------
$ 2,147 $ 3,672
======= =======
(10) Loans Receivable--Officers
In November 2000, the Company entered into an agreement to loan an officer
of the Company $50,000. The loan is secured by any personal or real property
acquired with the funds and by all of the Company's stock held or subsequently
acquired by the officer. The loan bears interest at 9% per annum and will be
forgiven in November 2002 including all accrued and unpaid interest, or is due
immediately if the officer's employment is terminated by the Company for cause
or by the officer for any reason.
From September to November 2000, the Company advanced $189,510 to an
officer of the Company. The loan is payable on demand.
In August and September 2000, the Company entered into agreements to loan
an executive officer of the Company $52,000 and $96,000, respectively, for an
aggregate loan amount of $148,000. The loans are secured by all of the Company's
stock held or subsequently acquired by the officer. The loans bear interest at
5% per annum and were originally due and payable on December 31, 2000, including
all accrued and unpaid interest. The payment terms of the loans will be extended
to June 30, 2001.
In January 2000, the Company entered into an agreement to loan a former
officer of the Company $160,000. The loan is secured by all of the Company's
stock held or subsequently acquired by the former officer and any proceeds from
the disposition of the stock. The loan bears interest at 5% per annum and was
due December 31, 2000. The former officer committed to paying $50,000 of the
balance by March 2001 and the balance in full by June 30, 2001.
In November 1999, the Company entered into an agreement to loan an officer
of the Company approximately $288,800. The loan shall be repaid in twenty-four
monthly installments of approximately $13,000, and bears an interest rate of 8%.
The agreement also provides for a monthly bonus to the officer in an amount
equal to the monthly loan repayment. The loan is not secured, and becomes due
immediately if the officer's employment is terminated by the Company for cause
or by the officer for any reason.
In November 1999, the Company loaned an officer of the Company $200,000.
The term of the loan was for three months with an interest rate of 8%. The note
was secured by all options to purchase Company stock granted to the officer
following the date of the loan. The loan was repaid in June 2000.
At December 31, 1998, the Company had a loan receivable in the amount of
$60,000 due from an officer of the Company. The term of the loan receivable was
three years and was non-interest bearing. In accordance with the terms of the
loan, the entire amount was forgiven in 1999 following the Company's initial
public offering.
(11) Other Liabilities
72
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
In connection with the Company's acquisition of Viona during 1998 (note 5),
$1.35 million of the purchase price, recorded at a present value of $1.1
million, is payable in equal annual installments from 1999 to 2001. The final
installment of $0.4 million is due in 2001 and is included in other current
liabilities.
(12) Subordinated Notes Payable
Subordinated notes payable at December 31, 1998, consisted of $625,000 of
various subordinated notes payable to NEPA Venture II, L.P. (NEPA) due May 4,
2003 to November 29, 2003 with a 9% interest rate. The notes were converted into
920,006 shares of common stock in connection with the Company's initial public
offering in July 1999.
The notes were part of two transactions entered into in May 1995 and March
1996 to provide financing to the Company. Interest on the notes was payable
quarterly. In connection with the issuance of the notes, the Company issued
warrants to acquire a total of 920,006 shares of the Company's Series A
mandatory redeemable convertible preferred stock at exercise prices of $0.60-
$0.75 per share (note 14). The estimated fair value of the warrants issued was
$30,010 and was amortized over the term of the related debt. In accordance with
the terms of the agreement the warrants were converted into preferred shares
which were automatically converted into the Company's common stock in connection
with the Company's initial public offering in July 1999.
(13) Equity Transactions and Capital Stock
Capital Stock and Stock Splits
In 1999, the Company's articles of incorporation were amended and restated.
The Company is authorized to issue 50,000,000 shares of $.001 par value common
stock and 5,000,000 shares of $.001 par value undesignated preferred stock.
On July 15, 1999, the Company effected a one-for-six reverse stock split.
All shares and per share amounts in the consolidated financial statements have
been restated to reflect the reverse stock split.
Initial Public Offering
On July 15, 1999, the Company consummated an initial public offering of its
common stock. The Company sold 5,750,000 shares of its common stock at an
initial public offering price of $12.00 per share. After deducting the
underwriters' discount and other offering expenses, the net proceeds to the
Company were approximately $61.4 million. Contemporaneous with the offering,
5,508,207 shares of preferred stock were converted into common stock.
Treasury Stock
In April 1998, the Company purchased 200,000 shares of common stock for
$3.60 per share or $720,000 in the aggregate from the former Chief Executive
Officer of the Company.
Preferred Stock
Upon the closing of the Company's initial public offering in July 1999, all
of the outstanding shares of mandatory redeemable preferred stock, including the
shares under the stock subscription below, were converted into shares of common
stock on a one for one basis.
In April 1999, the Company completed a financing in which it issued
convertible securities to an affiliate of Intel for $4.7 million and entered
into a license agreement covering certain Intel technology. The purchase price
received from Intel consisted of cash consideration of $3.0 million and, in
addition, the Company was granted a
73
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
license for Intel technology valued at $1.7 million. The Intel license permits
the Company to incorporate the Intel digital content receiver technology into
the Company's products on a royalty free basis as the Company's products are
subsequently licensed to its customers. The Company has capitalized the $1.7
million and will amortize this cost as products are delivered over its estimated
economic life. The convertible securities were converted into 549,650 shares of
the Company's Series C preferred stock in May 1999.
In April 1998, the Company sold 3,728,916 shares of Series B mandatory
redeemable convertible preferred stock ("Series B") for an aggregate amount of
approximately $18.6 million including the conversion of $4.82 million of bridge
notes (note 8). In addition, the investors in the Series B received an aggregate
1,517,668 warrants (note 14) to acquire common stock at an exercise price of
$0.06. The estimated fair value of the warrants of $5.7 million was recorded as
additional paid-in capital.
In April 1998, in connection with the Company's sale of Series B, the
Company paid $1.1 million in cash, issued 108,856 shares of the Company's Series
B and issued 44,304 warrants (note 14) to acquire common stock at an exercise
price of $0.06 to the Company's placement agent as consideration for services
provided in connection with the equity transaction. The shares and warrants had
an estimated fair value of $542,100. The above amounts as well as $0.3 million
of other transaction costs were recorded as costs of the equity transaction and
charged against additional paid-in capital.
Preferred Stock Subscription
In March 1998, the Company entered into a subscription and technology
license agreement. This agreement provides, among other things, for the Company
to license certain technology to an unrelated third party (the licensee). In
connection with the agreement, the licensee is required to pay a minimum of
$750,000 at the end of each calendar quarter during the first year and a minimum
of $900,000 at the end of each calendar quarter during the second year. Included
in the first year quarterly payments is $125,000 per quarter that was applied
towards the purchase of the Company's Series B preferred stock at $4.98 per
share. The quarterly payment for the fourth quarter of the second year included
$500,000 that was to be applied towards the purchase of the Company's Series B
preferred stock at $4.98 per share. The purchase of the preferred stock under
this agreement is on the same terms as the licensee's purchase of Series B
preferred stock in April 1998. As of December 31, 1998, the Company had issued
75,301 shares of Series B preferred stock under this agreement. In April 1999
the Company issued 25,100 shares of Series B preferred stock under the preferred
stock subscription agreement. In addition, the Company amended this agreement
and issued 100,402 shares of Series B preferred stock and warrants for the
purchase of 40,863 shares of common stock in exchange for which it received a
promissory note with an aggregate value of $500,000 due in April 2000. The
$500,000 note reflects the payment due in the fourth quarter of the second year
of the above agreement. The note was satisfied in June 2000.
(14) Stock Options, Stock Purchases and Warrants
(a) Stock Options
The Company adopted the 1995 Stock Option Plan (the 1995 Plan) in May
1995. The 1995 Plan provides for the grant of incentive stock options and non-
qualified stock options to employees, consultants, advisors to the Company, and
members of the board of directors to purchase shares of common stock. Prior to
the adoption of the 1995 Plan, 43,258 options were granted to employees. Under
the terms of the 1995 Plan, authorized options are granted at estimated fair
value. The options generally vest over a period ranging from 2 to 5 years and
expire 5 to 10 years from the grant date. In 1998 the board of directors
approved an amendment to the Company's 1995 Plan in which the total number of
options available for grant was increased to 8,500,000. In April 1999, the
Company, with the approval of the board of directors, adopted the 1999 Stock
Incentive Plan (1999 Plan) as a successor to the 1995 Plan. The 1999 Plan has
reserved 2,725,000 shares. The 1999 Plan has three separate programs which
include; the discretionary option grant program under which employees may be
granted options to purchase shares of common stock; the stock issuance program
under which eligible employees may be granted shares of common stock; and the
74
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
automatic grant program whereby eligible non-employee board members are granted
options to purchase shares of common stock.
In May 2000, the Company granted 78,500 options to purchase common stock to
employees, with an exercise price of $0.01 per share. The Company has recorded
approximately $633,000 of deferred stock compensation in connection with these
options that is being amortized over the option vesting periods, ranging from 18
to 24 months. In June 2000 the Company granted 17,500 options to purchase common
stock, with an exercise price of $0.01 per share. The Company has recorded
approximately $112,000 of deferred stock compensation in connection with these
options that will be amortized over the option vesting period of 24 months.
In February 2000, subsequent to the original dates of grant, the portion of
an employment agreement for an employee relating to stock option vesting was
amended. The amendment was considered a modification of the original terms of
the awards, requiring a new measurement date as if the right were newly granted.
The amount of compensation expense recognized was determined by calculating the
total number of options that would have vested at the end of the six-month post-
termination period multiplied by the difference between the fair market value on
the date of modification and the original exercise price. Because subsequent to
the modification the individual was no longer an employee, there is no service
period and the intrinsic value of the modified options of approximately $346,000
was expensed immediately.
In November 1999, the Company, in accordance with the terms of the Teknema
acquisition agreement assumed approximately 537,000 of Teknema's outstanding
options. These options ranged in price from $.10 to $.94, and vest over a four-
year period, consistent with the Company's option plan.
In June 1999, the Company granted 481,555 options, with an exercise price
of $10.20 per share. The Company has recorded $866,800 of deferred stock
compensation in connection with these options that is being amortized over the
option vesting period.
In February 1999, the Company granted 144,688 options, with an exercise
price of $2.52 per share. The Company has recorded $503,514 of deferred stock
compensation in connection with these options that is being amortized over the
option vesting period.
In September 1998, the Company granted 783,333 options, outside the 1995
Plan, to employees of Viona at an exercise price of $1.50 that was below the
estimated fair value of the Company's common stock on the date of grant. The
Company recorded deferred stock compensation of $799,000 in connection with
these options that is being amortized over the options' vesting period.
On September 23, 1998, the Company, with the approval of the board of
directors, repriced all of the outstanding employee stock options that were in
excess of $2.52 to $2.52.
A summary of stock option activity follows:
2000 1999 1998
------------------------------- -------------------------- ------------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price Options price Options price
-------------- --------------- ------------ ------------ ------------- ----------------
Balance as of beginning of year 3,479,316 $ 5.09 2,113,952 $ 1.80 974,764 $ 3.60
Options granted 933,254 6.35 986,563 13.95 1,149,513 1.74
Options assumed - 537,560 0.53 -- --
Options forfeited (468,980) 11.05 (75,697) 2.64 (10,325) (0.90)
Options exercised (888,272) 1.17 (83,062) 1.55 -- --
--------- ------ --------- ------ --------- ------
3,055,318 $ 5.69 3,479,316 $ 5.09 2,113,952 $ 1.80
========= ====== ========= ====== ========= ======
75
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
At December 31, 2000, 1,347,354 options with a weighted-average
exercise price of $3.65 were fully vested and exercisable.
The following summarizes information about the Company's stock
options outstanding at December 31, 2000:
Options outstanding Options exercisable
------------------------------------------- ---------------------------------
Number Weighted Number
Outstanding average Weighted Outstanding Weighted
at remaining average at Average
December 31, contractual exercise December 31, exercise
Range of exercise prices 2000 life (years) price 2000 price
- -------------------------------------------------------------------------------------- --------------------------------
$ 0.01-3.88.................... 1,798,835 3.2 $ 1.72 1,149,103 $ 1.76
$ 3.89-7.75.................... 508,854 9.5 5.95 3,471 6.64
$ 7.76-11.63.................... 480,948 4.8 9.66 144,544 10.20
$ 11.64-15.50.................... 72,781 8.8 14.88 22,210 14.88
$ 15.50-17.36.................... 87,050 9.2 15.94 1,128 15.94
$ 34.88-38.75.................... 106,850 9.0 38.75 26,898 38.75
--------- --- ------ --------- ------
Totals 3,055,318 5.0 $ 5.69 1,347,354 $ 3.65
========= === ====== ========= ======
The Company applies APB 25 and related interpretations in accounting
for its stock option plan. Had compensation cost been recognized pursuant to
SFAS No. 123, the Company's loss would have been increased to the pro forma
amounts indicated below (in thousands, except per share data):
2000 1999 1998
------------- ------------- ------------
Loss attributable to common stockholders:
As reported................................ $(40,467) $ (8,730) $(14,437)
Pro forma.................................. $(45,005) $(10,758) $(14,919)
Loss per common share:
As reported................................ $ (2.44) $ (1.02) $ (4.94)
Pro forma.................................. $ (2.71) $ (1.26) $ (5.11)
The per share weighted-average fair value of stock options issued by
the Company during 2000, 1999 and 1998 was $6.56, $10.63, and $1.08
respectively, on the date of grant.
The following range of assumptions were used by the Company to
determine the fair value of stock options granted using a minimum value
option-price model:
2000 1999 1998
---------- ---------- ---------
Dividend yield......................................... 0% 0% 0%
Expected volatility.................................... 167% 119% 0%
Average expected option life........................... 4 years 4 years 4 years
Risk-free interest rate................................ 5.71% 5.51% 5.15%
(b) Employee Stock Purchase Plan
In April 1999, the Company, with the approval of the board of
directors, adopted an Employee Stock Purchase Plan and reserved 500,000 shares
of common stock for issuance thereunder. The purchase plan permits eligible
employees to acquire shares of the Company's common stock through periodic
payroll deductions of up to 15% of total compensation. Each offering period will
have a maximum duration of twenty-four months. The price at which the common
stock may be purchased is 85% of the lesser of the fair market value of the
Company's common stock on the first day of the applicable offering period or on
the last day of the respective purchase interval. The initial offering period
commenced on the effectiveness of the Company's initial public offering and will
end on the last business day of July 2001.
76
RAVISENT TECHNOLOGIES INC.
Notes to Consolidated Financial Statements--(continued)
(c) Warrants
The warrants issued by the Company generally contain customary
provisions requiring proportionate adjustment of the exercise price in the event
of a stock split, stock dividend, or dilutive financing in the case of the
warrants for preferred stock.
A summary of warrant activity follows:
------------------------------------- -------------------------------------
Preferred Common
------------------------------------- -------------------------------------
Number Weighted Weighted
of Average Number of average
warrants exercise price warrants exercise price
-------------- -------------------- --------------------- -----------------
Balance as of December 31, 1997 920,006 $ 0.60 146,785 $ 2.37
Warrants granted -- -- 1,660,802 0.24
Warrants canceled -- -- -- --
Warrants exercised -- -- (199,416) 0.92
-------- ------- -------- -------
Balance as of December 31, 1998 920,006 $ 0.60 1,608,171 $ 0.35
======= ======= ========= =======
Warrants granted -- -- 51,079 .06
Warrants canceled -- -- - -
Warrants exercised (920,006) $ 0.60 (926,936) 0.10
-------- ------- -------- -------
Balance as of December 31, 1999 -- -- 732,314 $ 0.65
======== ======= ========= =======
Warrants granted 1,509,166 6.98
Warrants canceled - -
Warrants exercised (405,847) 0.18
--------- -------
Balance as of December 31, 2000 1,835,633 $ 5.96
========= =======
The warrants for preferred stock were all exercised and converted to
common stock on a one for one basis in connection with the Company's initial
public offering in July 1999.
In June 2000, the Company entered into a one-year distribution rights
agreement (the Agreement) with American Trading S.A. ("ATSA") for exclusive
distribution of the Company's Internet television set-top box product in Brazil.
Upon the signing of the Agreement the Company issued a warrant to purchase
1,500,000 shares of the Company's common stock to ATSA with an exercise price of
$7.00 per share, which approximated fair market value on the date of grant. The
warrant was fully vested and non-forfeitable on the date of grant, had a two-
year term, and contained certain exercise restrictions as described in the
warrant agreement. At June 30, 2000, the Company recorded the estimated fair
value of the warrant of $5.6 million as an intangible prepaid distribution
rights fee and additional paid-in capital. On March 28, 2001, pursuant to the
January 2001 settlement and release agreement with ATSA canceling the Agreement,
the warrant was canceled (note 15).
(15) Commitments and Contingencies
(a) Leases
The Company is obligated under certain equipment capital leases that
expire at various dates during 2001. The Company leases its office facilities
and various equipment under operating leases that expire during the next five
years. The following is a schedule by year of future minimum lease payments (in
thousands) relating to noncancelable capital and operating leases as of December
31, 2000. The schedule includes the effects of the assumption by
STMicroelectronics, effective March 1, 2001, of the Company's corporate
headquarters lease (note 22), which expires in May 2007. As a result our future
minimum required lease payments were reduced by approximately $6.8 million. In
addition, this schedule includes the Company's obligations for its new corporate
headquarters lease commencing in March 2001 for approximately 14,000 square feet
of office space in Malvern, PA at approximately $20,000 per month and expiring
in November 2002.
77
RAVISENT TECHNOLOGIES INC.
Notes to Consolidated Financial Statements--(continued)
Capital Operating
leases leases
---------- -----------
Year ending December 31,
2001.................................................................... $ 40 $841
2002.................................................................... - 716
2003.................................................................... -- 524
2004.................................................................... -- 484
2005.................................................................... -- 114
---- -----
Total minimum lease payments....................................... 40 2,679
Less: amount representing interest................................. 2 =====
----
Present value of net minimum capital lease payments.......................... 38
Less: current installments of obligations under capital leases............... 38
----
Obligations under capital leases excluding current installments.............. $ -
====
Total rent expense for the years ended December 31, 2000, 1999, and
1998, respectively, was approximately $1,633,000, $667,000 and $328,000,
respectively.
(b) Royalties
Under various licensing agreements, the Company is required to pay
royalties, generally on a per unit basis, on the sales of certain products that
incorporate licensed technology. Royalty expense under such agreements was
approximately $3,245,000, $1,678,000, and $651,000 for the years ended December
31, 2000, 1999 and 1998, respectively, and is included in cost of revenues in
the consolidated statements of operations.
(c) Contingencies
Litigation
On or about August 10, 2000, Corum Group, Ltd. filed an action against us
and Cinax Designs Inc. in the United States District Court for the Western
District of Washington (No. C00-1352D). Corum, a business consultant, alleges
that it had an agreement with Cinax whereby Cinax would pay Corum an 8%
"transaction fee" in the event Corum located a purchaser for Cinax. We acquired
Cinax by agreement dated as of July 13, 2000 for compensation of $3.5 million in
cash and an aggregate of 825,000 shares of our common stock and non-voting
exchangeable preferred stock of one of our subsidiaries, Ravisent British
Columbia Inc., which preferred stock is exchangeable, on a one-for-one basis,
into shares of our common stock. In the complaint Corum alleges that it
introduced us to Cinax and that it is therefore entitled to $281,362 and 66,000
shares of our common stock. As part of our acquisition of Cinax, the
shareholders of Cinax agreed to indemnify us for 50% of any liability stemming
from the Corum claim and an aggregate of 53,500 shares of our common stock and
non-voting exchangeable preferred stock of Ravisent British Columbia Inc. have
been placed in escrow to secure this indemnification obligation. The parties
attended a voluntary mediation session on January 22, 2001, and a trial date has
been set for October 9, 2001.
Between February and April 2000, eleven class action lawsuits were filed
against Ravisent and certain of its officers and directors in the United States
District Court for the Eastern District of Pennsylvania. On May 25, 2000, the
cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In re
RAVISENT Technologies Inc. Securities Litigation". Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Act of 1933, Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder and seek unspecified damages on behalf of a purported class of
purchasers of our stock during the period stated above. On July 3, 2000, we
filed a motion to dismiss the consolidated and amended class action complaint.
The motion is presently fully briefed and the parties are awaiting a hearing
date to be set for the motion. In connection with the Company's initial public
offering, the Company purchased directors and officers insurance that provides
the Company with
78
RAVISENT TECHNOLOGIES INC.
Notes to Consolidated Financial Statements--(continued)
protection from claims made against officers, directors or the Company arising
from claims including but not limited to any written demand for damages and any
civil, criminal, administrative, or regulatory proceedings and appeals.
Certain of our employees and certain holders of 5% or more of our
common stock are members of the putative classes alleged in these actions and
therefore may have interests adverse to us with respect to the alleged claims in
these actions. We believe that such lawsuits or claims are without merit and
that we have meritorious defenses to the actions. We plan to vigorously defend
the litigation. However, failure to successfully defend these actions could
substantially harm our results of operations, liquidity and financial condition.
In the opinion of management, the amount of the ultimate liability with
respect to the above claims will not materially affect the Company's financial
position, results of operations, or cash flows.
On May 25, 1999, a complaint was filed against the Company in the
Superior Court of California, Santa Clara County, by a former supplier, alleging
breach of oral and written contract and other claims totaling approximately $1.2
million. The complaint was removed to federal court and, on September 23, 1999
the Company filed a counterclaim against the supplier for the damages the
Company incurred as a result of the supplier's failure to timely ship the
Company non-defective parts. On June 30, 2000, the parties entered into a
confidential settlement agreement and mutual release in full settlement of any
claims under the complaint. The amount of the settlement was accrued as of
December 31, 1999.
On November 4, 1999, a complaint was filed against the Company in the
Commonwealth of Massachusetts, Norfolk Superior Court Department, alleging
breach of agreements to allow a former supplier to purchase an undetermined
number of shares of the Company's common stock at $1.00 per share. The complaint
was removed to federal court on December 3, 1999. The Company disputed the claim
as being wholly without merit. To that end, on December 14, 1999, the Company
filed a Motion to Dismiss, which was denied on January 13, 2000. On May 17,
2000, pursuant to a confidential settlement agreement, the case was dismissed
under a joint motion for dismissal. The amount of the settlement was accrued as
of December 31, 1999. On November 8, 1999, the Superior Court in the
Commonwealth of Massachusetts approved an attachment of funds for $525,000 to be
held in trust pending the settlement of the complaint by a former supplier. In
connection with the settlement agreement, on June 1, 2000, the attachment was
vacated and the funds were returned to the Company.
Distribution Rights Agreement
In June 2000, the Company entered into a one-year distribution rights
agreement (the Agreement) with American Trading S.A. ("ATSA") for exclusive
distribution of the Company's Internet television set-top box product in Brazil.
Upon the signing of the Agreement the Company issued a warrant to purchase
1,500,000 shares of the Company's common stock to ATSA with an exercise price of
$7.00 per share, which approximated fair market value on the date of grant. The
warrant is fully vested and non-forfeitable on the date of grant, has a two-year
term, and contains certain exercise restrictions as described in the warrant
agreement. At June 30, 2000, the Company recorded the estimated fair value of
the warrant of $5.6 million as an intangible prepaid distribution rights fee
(the Fee) and additional paid-in capital and was amortizing this estimated fair
value over the one-year contract term, which was the expected period to be
benefited. The fair value of the warrant was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 6.12%, volatility factor of 96%, no dividend factor,
and an expected life of the warrant of 2 years. For the year ended December 31,
2000, the Company recorded $2.8 million of amortization expense related to the
warrant, which was included as non-cash compensation expense in sales and
marketing expense in the consolidated statement of operations.
Due to the parties' differing interpretations of the terms of the
Agreement, in January 2001 the parties entered into a settlement and release
agreement (the Release). The Release provides for the immediate termination of
the
79
RAVISENT TECHNOLOGIES INC.
Notes to Consolidated Financial Statements--(continued)
Agreement, including the right for RAVISENT to terminate the warrant and a
royalty-free right in 2001 for Ravisent to use the mark "WWWTV," which RAVISENT
will own after December 31, 2001. Because the Agreement has been terminated, no
sales will take place under it. As a result, the Company determined that, as of
December 31, 2000, the carrying amount of the Fee was not recoverable and the
excess of the carrying amount of the Fee over the fair value of the Fee of $2.8
million was recorded as an impairment loss. The loss is included in non-cash
sales and marketing expense in the consolidated statement of operations for
the year ended December 31, 2000. In addition, in January 2001 the Company is
required to pay $1.27 million to ATSA in exchange for the settlement and release
and an additional minimum finder's fee of $1 million in January 2002 for sales
of the Internet set-top box in Brazil in 2001. These amounts are expected to be
expensed in the quarter ended March 31, 2001, net of the fair value of the
warrant issued to ATSA in June 2000 that was canceled March 28, 2001.
From time to time, the Company has received, and expects to continue to
receive, notices of claims of infringement of other parties' proprietary rights
and other claims in the ordinary course of business. Management believes the
amount of the ultimate liability with respect to these claims will not
materially affect the Company's financial position, results of operation, or
cash flows.
(d) Employment Agreements
The Company has entered into employment agreements with certain
officers and employees of the Company. The agreements are generally for two to
three year periods, generally provide for annual bonuses and incentive stock
options as determined by the board of directors, and covenants not-to-compete
during the employment term and for two years thereafter. The employment
agreements also generally provide for six months severance in the event the
individual is terminated without cause. The employment offer letter to the chief
executive, dated August 20, 1997, states in pertinent part: "Upon the successful
sale of [Ravisent] at a minimum valuation of $80 million, [Ravisent] agrees to
issue to you a total of 2.5% of the proceeds or $2,000,000 cash. Payment will be
made thirty days following the receipt of proceeds from the sale."
(16) Business Risks and Credit Concentration
The Company licenses and sells its products principally in the
intensely competitive personal computer and consumer electronics original
equipment manufacturers industry. This industry has been characterized by price
erosion, rapid technological change, short product life cycles, cyclical market
patterns and heightened foreign and domestic competition. Significant
technological changes in the industry would adversely affect operating results.
The Company's customers, including its major customers disclosed in
note 20, have not executed long-term contracts and are not required to purchase
minimum quantities from the Company. As such, the Company's operating results
could be materially affected by a decrease in business with these customers.
The Company performs ongoing credit evaluations of its customers'
financial condition, and generally no collateral is required. The Company had
three customers representing, in the aggregate, 44% and 57% of accounts
receivable at December 31, 2000 and 1999, respectively.
The Company uses several contract manufacturers to make its hardware
products. If the Company is unable to continue its relationship with these
manufacturers, it believes it could establish similar relationships with other
companies in a reasonable period of time. Because of the competitive nature of
the technology industry, the Company believes it could ultimately obtain terms
as beneficial as those currently in effect.
(17) Income Taxes:
The income tax expense of $40 as of December 31, 2000, relates to
foreign taxes. No federal, foreign, or state income taxes are due as of December
31, 2000.
The table below reconciles the U.S. federal statutory income tax rate
to the recorded income tax provision (in thousands):
- -------------------------------------------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------
Income tax (benefit) at U.S. federal statutory rate $ (13,745) $ (2,726) $ (4,659)
- ------------------------------------------------------------------------------------------------------------------------------
State income taxes (benefit), net of federal tax benefit (1,966) (524) (1,256)
- ------------------------------------------------------------------------------------------------------------------------------
In-process research and development expenses and goodwill 2,221 1,005 -
- ------------------------------------------------------------------------------------------------------------------------------
Foreign income taxes 40 52 -
- ------------------------------------------------------------------------------------------------------------------------------
Warrant and option expense (1,271) - -
- ------------------------------------------------------------------------------------------------------------------------------
Change in valuation allowance 13,047 2,180 5,848
- ------------------------------------------------------------------------------------------------------------------------------
Other 1,714 65 67
---------- --------- ---------
- ------------------------------------------------------------------------------------------------------------------------------
$ 40 $ 52 $ -
========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------
The components of the net deferred tax assets as of December 31, 2000
and 1999, consists of the following (in thousands):
- -----------------------------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------------------------
2000 1999
---- ----
- -----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
- -----------------------------------------------------------------------------------------------------------------
Net operating losses $ 20,452 $ 9,987
- -----------------------------------------------------------------------------------------------------------------
Reserves and accruals not currently deductible 2,296 182
- -----------------------------------------------------------------------------------------------------------------
Depreciation/Amortization 3,152 3,190
- -----------------------------------------------------------------------------------------------------------------
Deferred items related to acquired stock options 1,843 1,036
- -----------------------------------------------------------------------------------------------------------------
Deferred revenue and other - 301
- -----------------------------------------------------------------------------------------------------------------
27,743 14,696
- -----------------------------------------------------------------------------------------------------------------
Valuation allowance (27,743) (14,696)
-------- --------
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
======== ========
- -----------------------------------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
temporary differences representing net future deductible amounts become
deductible. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax assets, the deferred tax assets are fully offset by
a valuation allowance at December 31, 2000 and 1999.
As of December 31, 2000, the Company had approximately $52.5 million of
federal and $40.3 million of state net operating loss carryforwards available to
offset future taxable income. These carryforwards will begin expiring in 2011
and 2006, respectively, if not utilized. In addition, approximately $32.6
million of the state net operating loss carryforwards are subject to a $2
million annual limitation.
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss carryforward is limited following a greater than 50% change
in ownership. Due to the Company's prior and recent transactions (note 5 and
note 22), the Company's net operating loss carryforwards may be subject to an
annual limitation. Any unused annual limitation may be carried forward to future
years for the balance of the net operating loss carryforward period. The Company
is currently in the process of determining the amount of annual limitation.
80
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RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
(18) Related-Party Transactions
(a) Guaranty
In November 2000, the Company entered into a guaranty arrangement with
an officer whereby the Company has guaranteed certain accounts of the
officer to a maximum of $450,000.
(b) Officers loans
The Company has made loans to certain of its officers with outstanding
balances totaling approximately $687,000 as of December 31, 2000 (note
10).
(c) Severance
The Company paid severance to former officers of the Company totaling
approximately $158,000, zero and $125,000 for the years ended
December 31, 2000, 1999 and 1998, respectively
(19) Defined Contribution Plan
The Company has a defined contribution plan for qualified employees as
defined in the plan. Participants may contribute up to 20% of pre-tax
compensation, as defined. Under the plan, the Company can make discretionary
contributions. To date, the Company has not made any contributions to the plan.
(20) Segment and Major Customer Information
The Company operates in a single industry segment, which is the
development and licensing of its technology.
The Company had the following customers that combined represented in
excess of 49%, 65% and 91% of revenues for the years ended December 31, 2000,
1999 and 1998, respectively (in thousands):
Customer Years ended December 31,
-------- -----------------------------------
2000 1999 1998
-----------------------------------
1 .............................. $ 4,019 $ 15,689 $ 25,624
2 .............................. $ 3,900 $ 2,461 $ 1,900
3 .............................. $ 2,292 $ 1,213 $ 151
The Company sells and licenses its technology to customers primarily in
North America, Asia-Pacific and Europe. The loss for all periods presented is
derived primarily from the company's North American operations, which generates
revenues from the following geographic regions (in thousands):
82
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
Country/Geographic Region 2000 1999 1998
---- ---- ----
- ------------------------------------------------------------------------------------------------------------
North America:
- ------------------------------------------------------------------------------------------------------------
United States $ 9,235 $18,279 $21,410
- ------------------------------------------------------------------------------------------------------------
Canada 2,972 4,437 2,250
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
Total - North America 12,207 22,716 23,660
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Europe:
- ------------------------------------------------------------------------------------------------------------
Italy 2,312 131 -
- ------------------------------------------------------------------------------------------------------------
Germany 878 1,977 23
- ------------------------------------------------------------------------------------------------------------
Ireland - - 4,642
- ------------------------------------------------------------------------------------------------------------
France 75 1,137 587
- ------------------------------------------------------------------------------------------------------------
Netherlands - - 442
- ------------------------------------------------------------------------------------------------------------
Turkey 62 105 -
- ------------------------------------------------------------------------------------------------------------
Spain 20 - -
- ------------------------------------------------------------------------------------------------------------
Other 51 1,471 81
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
Total - Europe 3,398 4,821 5,775
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Asia-Pacific:
- ------------------------------------------------------------------------------------------------------------
Taiwan 4,020 1,230 -
- ------------------------------------------------------------------------------------------------------------
Japan 841 631 249
- ------------------------------------------------------------------------------------------------------------
Malaysia - - 604
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
Total - Asia-Pacific 4,861 1,861 853
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
South America - Other 383 - -
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Australia and New Zealand - Other 5 20 -
------- ------- -------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total $ 20,854 $ 29,418 $ 30,288
======= ======= =======
- ------------------------------------------------------------------------------------------------------------
(21) Segment Reporting
Segment information is presented in accordance with Statement of
Financial Account Standards No. 131 ("SFAS 131"), "Disclosures About Segments Of
An Enterprise And Related Information." This standard requires segmentation
based upon the Company's internal organization and disclosure of revenue and
operating income based upon internal accounting methods. The Company has three
reportable segments: Personal Computer ("PC"), Consummer Electronics ("CE") and
Internet Appliance ("IA") (note 22).
83
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
PC: This group designs, develops, licenses and markets core-based
modular software solutions that enable digital video and audio stream management
in personal computer systems. The Company also provides supporting hardware
designs to selected customers as well as customization services and customer
support. The Company's solutions enable decoding (playback) and encoding
(recording) of multimedia formats such as digital versatile disk (DVD); direct
broadcast satellite (DBS) and high-definition television (HDTV) on existing
personal computers.
CE: This segment designs, develops, licenses and markets core-based
modular software solutions that enable digital video and audio stream management
in consumer electronics devices. The Company also provides supporting hardware
designs to selected customers as well as customization services and customer
support. The Company's solutions enable decoding (playback) and encoding
(recording) of multimedia formats such as digital versatile disk (DVD); direct
broadcast satellite (DBS) and high-definition television (HDTV) on existing
consumer electronics platforms (note 22).
IA: The Company's Internet technology group is involved in the
development of products for the emerging market in information appliances. The
Company sells Internet appliance hardware reference designs and software
technology through intellectual property licenses and agreements with Internet
service providers. This group provides the Company with a number of Internet-
related products, including an efficient web browser, and several Internet
Appliance reference designs including a Web Pad design, Internet ready TV and
Monitor designs and an Internet-ready screenphone (note 22).
The Company evaluates operating segment performance based on revenue
and gross margin. It has not historically evaluated segment performance based on
operating income nor allocated assets to its individual operating segments.
Prior to 1999 the Company's internal organization did not report information
relating to gross profit by segment.
----------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------
(In thousands)
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
PC $11,739 $24,460 $29,463
----------------------------------------------------------------------------
CE 1,614 986 825
----------------------------------------------------------------------------
IA 7,501 3,972 --
------- ------- -------
----------------------------------------------------------------------------
Total $20,854 $29,418 $30,288
======= ======= =======
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit:
----------------------------------------------------------------------------
PC $ 6,259 $10,270 --
----------------------------------------------------------------------------
CE 1,211 637 --
----------------------------------------------------------------------------
IA 1,380 2,646 --
------- -------
----------------------------------------------------------------------------
Total $ 8,850 $13,553
------- -------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(22) Subsequent Events
(a) Sale of Consumer Electronics Business
On March 1, 2001, the Company sold substantially all of the assets and
liabilities of its Consumer Electronics (CE) business to STMicroelectronics NV
(STM), including the assets of the Company's wholly owned subsidiary, Viona
(note 5). The assets sold include certain contracts, accounts receivable
furniture and equipment, intangible assets, intellectual property, prepaid
expenses and other assets primarily related to the operations of the CE
business. In connection with the sale, the Company and STM entered into certain
agreements with STM including an Assignment and Assumption of Lease with respect
to the present RAVISENT facility located in Malvern, Pennsylvania and certain
license agreements. Certain employees of the Company entered into employment
agreements with STM. Under the terms of the agreement, the Company received
approximately $55.1 million in cash consideration from STM with an additional
contingent payment of $0.8 million, held in escrow for indemnification purposes,
to be
84
RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements - (Continued)
made to the Company by July 2002. STM intends to retain substantially all
employees of the CE business and will integrate the business' activities.
The unaudited pro forma consolidated statement of operations for the
year ended December 31, 2000 has been prepared to give effect to the sale of
substantially all the assets and liabilities of our consumer electronics
business, including substantially all of the assets and liabilities of our
wholly owned subsidiary, Viona Development Hard and Software Engineering GmbH,
to STMicroelectronics NV as if it had occurred on January 1, 2000. The unaudited
pro forma consolidated balance sheet as of December 31, 2000 has been prepared
to give effect to the disposition as if it had occurred on such date. The
unaudited pro forma consolidated financial statements are not necessarily
indicative of the results that would have been obtained had the disposition been
completed as of the dates presented or for any future period. The unaudited pro
forma consolidated financial statements should be read in conjunction with our
Consolidated Financial Statements and notes thereto included in this Form 10-K.
RAVISENT Technologies Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet
December 31, 2000
(In thousands)
RAVISENT
Pro Forma
---------
Current assets:
Cash and cash equivalents $ 63,917
Accounts receivable, net 4,898
Inventory, net 20,883
Prepaid expenses and other current assets 2,000
---------
Total current assets 91,698
---------
Furniture and equipment net, 1,927
Goodwill and intangibles, net and other
assets 16,511
---------
Total assets $ 110,136
=========
Current liabilities:
Accounts payable $ 10,924
Accrued liabilities 8,936
Deferred revenue 1,473
Other current liabilities 626
---------
Total current liabilities 21,959
---------
Non-current liabilities:
Other liabilities 30
---------
Total liabilities 21,989
Total stockholders' equity 88,147
---------
Total liabilities and stockholders'
equity $ 110,136
=========
85
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RAVISENT TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements -- (Continued)
RAVISENT Technologies Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2000
(In thousands, except per share data)
RAVISENT
Pro Forma
---------
Revenues:
License and Services $ 12,612
Hardware 6,628
---------
Total revenues 19,240
---------
Costs of revenues:
License and services 4,752
Hardware 6,849
---------
Total cost of revenues 11,601
---------
Gross profit 7,639
---------
Research and develepment
Non-cash compensation 601
Other research and development expense 5,773
Sales and marketing
Non-cash compensation 6,311
Other sales and marketing expense 9,144
General and administrative
Non-cash compensation 389
Other general and administrative expense 13,692
Depreciation and amortization 4,710
Acquired in-process research and development 1,373
---------
Total operating expenses 41,993
---------
Operating loss (34,354)
Interest (income) expense, net (1,859)
---------
Loss before income taxes (32,495)
Provision for income taxes 40
---------
Net loss $ (32,535)
=========
Basic and diluted net loss per weighted
average share of common stock outstanding $ (1.96)
=========
Weighted average shares outstanding used in
per common share calculation (basic and diluted) 16,607
=========
87
RAVISENT TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(b) Sale of Internet Appliance Business
Effective as of March 23, 2001, and pursuant to an Asset Acquisition
Agreement dated as of March 21, 2001, RAVISENT Technologies Inc. and certain of
its subsidiaries, RAVISENT Technologies Internet Appliance Group, Inc., Ravisent
I.P. Inc. and Ravisent Operating Company, Inc. sold substantially all of the
assets of its Internet appliance business excluding inventory, to Phoenix
Technologies, Ltd., a Delaware corporation, for approximately $18 million in
cash consideration of which $1.8 million is being held by a third party in
escrow for 12 months for indemnification purposes. The assets sold include
certain of the contracts, equipment, intangible assets, intellectual property,
prepaid expenses, and other assets primarily related to the operation of the
Internet appliance business. Under the agreement, Phoenix Technologies
purchased, among other things, the e-Surfer embedded software Internet browser
and related hardware designs for the Internet Appliance market. In addition, in
connection with this asset sale, 13 of our employees, associated with the
Internet appliance business have accepted employment with Phoenix.
88
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference to our
Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed by
RAVISENT with the Securities and Exchange Commission on or before April 30,
2001.
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to our
Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed by
RAVISENT with the Securities and Exchange Commission on or before April 30,
2001.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to our
Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed by
RAVISENT with the Securities and Exchange Commission on or before April 30,
2001.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to our
Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed by
RAVISENT with the Securities and Exchange Commission on or before April 30,
2001.
89
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Report
(1) CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements and related Notes thereto as set forth
in Item 8 of this Annual Report on Form 10-K are incorporated herein by
reference.
(2) Financial Statement Schedules
Report of Independent Auditors
The Board of Directors and Stockholders
RAVISENT Technologies Inc.:
Under date of February 28, 2001, we reported on the consolidated balance sheets
of RAVISENT Technologies Inc. and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule. The consolidated financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 28, 2001
91
The following consolidated financial statement schedule of RAVISENT
Technologies Inc. for each of the years ended December 31, 1998, 1999 and 2000,
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto.
RAVISENT Technologies, Inc. and Subsidiaries
Schedule of Valuation and Qualifying Accounts
- ----------------------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning of Costs and Balance at End
Year Expenses Deductions of Year
- ----------------------------------------------------------------------------------------------------------------------
Accounts receivable
- -------------------
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998 $ 466,600 $ 48,347 $ (250,097) $ 264,850
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999 $ 264,850 $ 165,268 $ (111,163) $ 318,955
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000 $ 318,955 $ 4,966,407 $(2,879,928) $ 2,405,434
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Inventory
- ---------
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998 $ 400,000 $ 70,000 $ (295,565) $ 174,435
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999 $ 174,435 $ 409,936 $ (28,785) $ 555,586
- ----------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000 $ 555,586 $ 3,331,891 $ (88,100) $ 3,799,377
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(b) CURRENT REPORTS ON FORM 8K DURING THE QUARTER ENDED DECEMBER 31, 2000.
None.
Schedules other than the one listed above are omitted because they are
not required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto contained in this Annual
Report on Form 10-K.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Malvern,
Commonwealth of Pennsylvania on this 2nd day of April 2001.
Ravisent Technologies Inc.
By: /s/ Francis E. J. Wilde III
---------------------------------
Francis E.J. Wilde III
Chief Executive Officer and
President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below in so signing also makes, constitutes and appoints jointly and severally
Francis E.J. Wilde III and Ned Barlas, and each one of them, his true and lawful
attorney-in-fact and agents, each with full power of substitution for him and in
his name, place and stead in any and all capacities, to execute and cause to be
filed with the Securities and Exchange Commission additional reports or filings
for the same period covered by this Annual Report and all amendments to this
report, and in each case to file the same, with all exhibits thereto and other
documents in connection therewith, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming that each of said attorneys-in-fact or
agents or any of them or his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Annual Report has been signed by the persons whose signatures appear below,
which persons have signed such Annual Report in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Francis E. J. Wilde III Chief Executive Officer, April 2, 2001
- -------------------------------------- President and Director
Francis E.J. Wilde III (Principal Executive Officer)
/s/ Thomas J. Fogarty Chief Financial Officer and April 2, 2001
- -------------------------------------- Senior Vice President,
Thomas J. Fogarty Corporate Services and
Secretary (Principal Accounting Officer)
/s/ Frederick J. Beste III Director April 2, 2001
- --------------------------------------
Frederick J. Beste III
/s/ Peter X. Blumenwitz Director April 2, 2001
93
- --------------------------------------
Peter X. Blumenwitz
/s/ Walter L. Threadgill Director April 2, 2001
- --------------------------------------
Walter L. Threadgill
/s/ Paul A. Vais Director April 2, 2001
- --------------------------------------
Paul A. Vais
94
Exhibit
Number Exhibit Title
-------------
2.1 Sales Agreement Concerning Shares, dated January 16, 1998, by and
among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO
Vermogensverwaltungs GmbH and RAVISENT.(1)
2.2 Appendix to Sales Agreement Concerning Shares, dated January 16,
1998, by and among Ulrich Sigmund, Hendrik Horak, Jorg Ringelberg,
Erste CINCO Vermogensverwaltungs GmbH and RAVISENT.(1)
2.3 Agreement and Plan of Merger, by and between Divicore Inc., a
Pennsylvania corporation, and RAVISENT.(1)
2.4 Agreement and Plan of Reorganization, dated as of October 8, 1999,
by and among RAVISENT, Merger Sub, Teknema, Inc. and certain
security holders of Teknema, Inc. identified therein. (3)
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Form of RAVISENT's Specimen Common Stock Certificate.(1)
4.2 Registration Rights Agreement dated April 30, 1998, by and among
RAVISENT and parties listed on Schedule A therein. (1)
4.3 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between RAVISENT and
Progress Capital, Inc. for the purchase of up to 75,000 shares of
common stock.(1)
4.4 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between RAVISENT and
Progress Capital, Inc. for the purchase of up to 200,000 shares of
common stock.(1)
4.5 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated July 30, 1998, by and between RAVISENT and
Progress Capital, Inc. for the purchase of up to 100,000 shares of
common stock.(1)
4.6 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated June 11, 1996, by and between RAVISENT and
Meridian Bank.(1)
4.7 Quadrant International, Inc. Common Stock Purchase Warrant
Certificate, dated March 15, 1996, by and between RAVISENT and
Meridian Bank.(1)
4.8 Subordinated Note and Warrant Purchase Agreement, dated March 18,
1996, by and between RAVISENT and NEPA Venture Fund II, L.P.(1)
4.9 Convertible Debenture and Warrant Purchase Agreement, dated December
17, 1997, by and between RAVISENT and Atlantic Coastal Ventures,
L.P.(1)
4.10 Convertible Debenture and Warrant Purchase Agreement, dated February
17, 1998, by and between RAVISENT and Donald Horton and Marty
Horton, as community property.(1)
4.11 Quadrant International, Inc. Convertible Debenture and Warrant
Purchase Agreement, dated April 7, 1998, by and between RAVISENT and
the parties who are signatories thereto.(1)
4.12 Convertible Debenture and Warrant Purchase Agreement, dated March
31, 1998, by and among RAVISENT and the parties who are signatories
95
thereto.(1)
4.13 Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995,
by and between RAVISENT and NEPA Venture Fund II, L.P.(1)
4.14 Convertible Promissory Note Purchase Agreement, dated as of April
26, 1999, among RAVISENT and the parties who are signatories
thereto.(1)
4.15 Registration Rights Agreement, dated as of April 26, 1999, among
RAVISENT and the parties listed on Schedule A thereto.(1)
4.16 Revolving Demand Note, dated July 21, 999 from Divico, Inc. in favor
of Liuco, Inc. (4)
10.1 RAVISENT's 1999 Stock Incentive Plan.(1)
10.2 RAVISENT's 1999 Employee Stock Purchase Plan.(1)
10.3 Form of Directors' and Officers' Indemnification Agreement.(1)
10.4 Letter Agreement, dated October 28, 1997, by and between RAVISENT
and Dell Products, L.P. (1)
10.5@ License Agreement, dated June 30, 1998, by and between RAVISENT and
ST Microelectronics, Inc.(1)
10.6 Source and Object Code License Agreement, dated September 1, 1998,
by and between RAVISENT and Microsoft Corporation.(1)
10.7 Development and License Agreement, dated March 2, 1998, by and
between RAVISENT and ATI Technologies, Inc.(1)
10.8@ Sti5505 Development Contract, dated February 1, 1999, by and between
RAVISENT and ST Microelectronics, S.A.(1)
10.9@ Digital Audio System License Agreement: Consumer Products-Decoder
Hardware, dated May 20, 1997, by and between RAVISENT and Dolby
Laboratories Licensing Corporation.(1)
10.10 Agreement of Lease, dated June 5, 1998, by and between RAVISENT and
Liberty Property Limited Partnership.(1)
10.11 Form of Software License Agreement.(1)
10.12 Silicon Valley Bank Loan and Security Agreement, dated July 14,
1998, by and between RAVISENT and Silicon Valley Bank.(1)
10.13 Commercial Rental Agreement, dated October 18, 1995, between Viona
Development Hard & Software Engineering GmbH & Co. KG and
Deutsche-Bernanten-Lebensversicherung AG.(1)
10.14 Letter Agreement, dated August 20, 1997, by and between RAVISENT and
Francis E.J. Wilde III.(1)
10.15+ Employment Agreement, dated November 12, 1997, by and between
RAVISENT and Michael Harris.(1)
10.16+ Employment Agreement, dated November 12, 1997, by and between
RAVISENT and Jason Liu.(1)
10.17+ Employment Agreement, dated December 11, 1997, by and between
RAVISENT and Leonard Sharp.(1)
10.18+ Employment Agreement, dated January 12, 1998, by and between
RAVISENT and Robert Russell.(1)
10.19+ Employment Agreement, dated December 15, 1997, by and between
RAVISENT and Gregg Garnick.(1)
10.20+ Amendment to Employment Agreement dated March 19, 1998, by and
between RAVISENT and Gregg Garnick.(1)
10.21@ Software License Agreement, dated as of April 23, 1999, by and
between RAVISENT and Intel Corporation.(1)
96
10.22 Amended and Restated CSS Interim License Agreement, dated November
28, 1997, by and between RAVISENT and Matsushita Electric Industrial
Co., Ltd.(1)
10.23 Intangible Property License Agreement, dated July 21, 1999 by and
between DVA, Inc. and Divico, Inc. (4)
10.24 Tax Sharing Agreement, dated July 21, 1999, by and between RAVISENT
and its subsidiaries, Liuco, Inc., and Divico, Inc. (4)
10.25+ Employment Agreement, dated June 2, 1999, by and between RAVISENT
and Ned Barlas.(1)
10.26+ Employment Agreement, dated March 1, 1999, by and between RAVISENT
and Sharon K. Taylor.(2)
10.27+ Employment Agreement, dated March 1, 1999, by and between RAVISENT
and E. Joseph Vitetta, Jr. (2)
10.28+ Employment Agreement, dated March 1, 1999, by and between RAVISENT
and William H. Wagner.(2)
10.29 Assignment of Intellectual Property Rights, dated July 21, 1999,
from RAVISENT to DVA, Inc. (4)
10.30 Bill of Sale, Assignment and Assumption Agreement, dated July 21,
1999, between RAVISENT and Divico, Inc. (4)
10.31@ Distribution Rights Agreement, dated June 30, 2000, by and between
American Trading S.A. and RAVISENT. (5)
10.32*+ Employment Agreement, dated April 17, 2000 by and between RAVISENT
and Thomas J. Fogarty.
21.1* Subsidiaries of RAVISENT.
23.1* Consent of KPMG LLP, Independent Auditors.
24.1* Power of Attorney. (reference is made to page 68)
99 Acquisition Agreement dated July 13, 2000. (6)
(1) Incorporated by reference to identically numbered exhibit to
RAVISENT's registration statement on Form S-1 declared effective
with Securities and Exchange Commission on July 15, 1999 (File NO.
333-77269).
(2) Incorporated by reference to identically numbered exhibit to
RAVISENT's quarterly report on Form 10-Q for the quarterly period
ended September 30, 1999.
(3) Incorporated by reference to identically numbered exhibit to
RAVISENT's current report on Form 8-K dated November 8, 1999, as
filed with the Securities and Exchange Commission on November 22,
1999 (File No. 000-26287).
(4) Incorporated by reference to identically numbered exhibit to
RAVISENT's annual report on Form 10-K for the period ended December
31, 1999.
(5) Incorporated by reference to identically numbered exhibit to
RAVISENT's quarterly report on Form 10-Q for the quarterly period
ended June 30, 2000.
(6) Incorporated by reference to identically numbered exhibit to
RAVISENT's quarterly report on Form 10-Q for the quarterly period
ended September 30, 2000.
@ Confidential treatment granted for portions of this agreement
+ Compensation plans and arrangements for executives and others
* filed herewith
97