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UNITED STATES
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
For the year ended December 31, 2001.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________to____________.
Commission File Number (000-30928)
PATH 1 NETWORK TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization
3636 NOBEL DRIVE, SUITE 400, SAN DIEGO, CALIFORNIA 92122
(858) 450-4220
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 31, 2002 was approximately US$11.0 million (based on the
closing price for shares of the registrant's Common Stock as reported by the OTC
Bulletin for the last trading day prior to that date). Shares of Common Stock
held by each officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, US$0.001 par
value, as of March 31, 2002 was 8,420,257.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2002 Annual Meeting of Stockholders are incorporated herein by reference
into Part III of this Report. This definitive Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the
registrant's fiscal year ended December 31, 2001.
PATH 1 NETWORK TECHNOLOGIES INC.
FORM 10-K
For the Year Ended December 31, 2001
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act*
Item 11. Executive Compensation*
Item 12. Security Ownership of Certain Beneficial Owners and Management*
Item 13. Certain Relationships and Related Transactions*
*Incorporated by reference from our definitive Proxy Statement relating to the
2002 Annual Meeting of Stockholders scheduled for June 14, 2002, which we will
file with the Securities and Exchange Commission within 120 days after our
December 31, 2001 fiscal year end.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
PART I
Item 1. Business
Forward Looking Statements
Our disclosure and analysis in this report may contain forward-looking
statements. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to publicly update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
Readers are also urged to carefully review and consider the various disclosures
made by us which attempt to advise interested parties of the factors which
affect our business, including without limitation the disclosures made under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and under the caption "Risk Factors" included herein. These are
factors that we think could cause our actual results to differ materially from
expected and historical events.
The following comments should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements
contained herein.
OVERVIEW
Path 1 Network Technologies Inc., a Delaware corporation, was incorporated in
January 1998 as Millenium Network Technologies Inc. We changed our name to Path
1 Network Technologies Inc. in March 1998. Our headquarters are located in the
Nobel Corporate Plaza at 3636 Nobel Drive, Suite 400, San Diego, California
92122.
We design and sell products, using proprietary technology that enables the
real-time transmission of audio, video and voice data over a single Internet
Protocol (IP) network with end-to-end high quality of service (QoS). Our
products make it possible for packet-switched IP networks to provide
high-quality, real-time transmissions by coordinating the transport of packets
across these networks in a way that eliminates or minimize delays and unreliable
delivery. We believe our products can make available the best of both worlds -
the reliability and speed of circuit-switched networks, such as traditional
telephone networks, along with the data carrying capability and low cost of IP
networks.
At the core of our suite of products is our patented, patent-pending and
copyrighted technology, including our TrueCircuit(R) technology which is a
software and hardware-based solution for managing network traffic that is, at
its essence, a method (or algorithm) for the transmission of data on a real-time
basis over IP networks and several trade secrets and intellectual property in a
variety of areas dealing with the transport and distribution of data, voice and
video over packet-based networks. Our technology addresses the inherent
deficiencies of packet switching as applied to transmission of real-time signals
by superimposing a circuit-switched infrastructure on standard IP networking,
while maintaining full compatibility with existing IP networks. We believe that
our technology combined with our other proprietary know-how, is capable of
supporting the efficient transmission of all communications over a single
network, thus bringing high-level QoS and real-time audio, video and telephony
capabilities to the Internet and to standard IP networks.
Our customers and prospective customers include telecommunications companies,
cable television operators, wireless service providers, new competitive service
providers, broadcasters, government agencies, systems integrators and
semi-conductor companies. We offer long haul video, voice and data products,
video-on-demand transmission products, and design and engineering services to
support these products.
We are focusing our efforts on Internet Protocol (IP)-based offerings for
broadcasters and the cable industry, Digital Subscriber Line (DSL) offerings for
the communications industry and integrated solutions for systems integrators
worldwide. Until recently, the resources of our Video Systems business unit were
devoted primarily to research and development. However, we now have products in
limited production and deployment. In the video transport market, for example,
our Path 1 Cx1000 IP Video Gateway, which is a video gateway device designed to
provide high quality video transmission capabilities to diversified media
companies, television broadcasters, movie and broadcasting studios, is currently
in production and in the early stages of deployment by a small number of
customers. Our second product in the video transport market, the Path 1 Cx1400
IP Video Multiplexer, which is a video-on-demand gateway device designed to
provide high quality video transmission capability to cable television
operators, is undergoing beta-test field evaluation with BarcoNet, N.V., a
wholly-owned subsidiary of Scientific-Atlanta, Inc. BarcoNet is marketing a
version of the Cx1400 IP Video Multiplexer in Europe under the name "iMux".
INDUSTRY BACKGROUND
We believe that the growth in broadband communications and multiple service
communication networks will provide a foundation for enabling the information
needs of businesses and consumers worldwide. The rapid growth of the Internet is
driving the need to transport voice, video and data over a converged network
infrastructure. Further, we believe that new applications such as digital video,
video conferencing, video e-mail, video-on-demand, distance learning and others
will drive the need for a high quality multimedia transmission over networks.
Convergence and Real-Time, High-Quality Transmission of Video, Audio and
Telephony Transmissions - An Internet Market Opportunity
Convergence: There are strong incentives for companies to merge all of their
communication activities (e.g. data, audio and video) over a network of wires.
Currently, companies employ several separate networks, such as telephone,
computer and security networks, throughout an enterprise. By combining these, an
organization would incur the cost of installing and maintaining only one
network, rather than several separate networks, each of which would require
capital outlay and staffing. However, there is currently degradation in audio
and video data transported over computer networks, as these networks have been
used in the past primarily to transport non-real-time data, and lack the ability
to provide the quality of service (QoS) necessary to make real-time audio, video
and voice transmissions feasible.
Known as "convergence," a shift to a single network would allow companies to
take full advantage of the significant cost savings and increased throughput
that computer networks provide. Network convergence technology enables the
merging of disparate digital information such as full-motion video, still video
images, audio, telephony and business data over the same network infrastructure.
The emergence of this network convergence technology has largely been made
possible by the move from analog to digital technology in all forms of media.
The Need for QoS in Real-Time Delivery of Video, Audio and Telephony Data: We
intend that "convergence" products developed using our technology provide
enhanced quality to IP networks in businesses and, eventually, at home by
enabling real-time audio, video and telephony to be delivered over a single IP
network with the equivalent of "circuit-switched"1 QoS. QoS, a recognized
industry term, is simply a statement of a technology's capabilities in
transporting information across a network. The term "QoS" can pertain to one or
more factors (e.g. latency, jitter or throughput) relating to quality of data
transported across a network. Our "circuit-switched" QoS specifications address
the following issues:
o jitter, which is large variations in transmission time that causes the
recipients of audio or video transmissions to experience jerky or otherwise
imperfect signals or lengthy download times;
o latency, which is the delay in transmission of an information packet from
source to destination across a network;
o reliability, which is defined as the percentage of packets that are
delivered across the network; o sequence, which is defined as delivery
of packets of information in the correct order; and o throughput,
which is the consistent transport and delivery of a certain specified
level of information packets per second.
Thus, when we state that our technology can support products with
"circuit-switched" QoS, we mean that our products are being designed to minimize
jitter and latency and provide sufficient sequence, reliability and throughput
capabilities so as to make it possible to transmit (i) DVD-quality video in
real-time over IP networks, and (ii) DVD-quality video, CD-quality audio,
telephony and other time-critical information simultaneously, alongside
non-real-time data, over a single IP network.
The Need For A Solution
As it operates today, IP (which is simply a common set of procedures,
conventions and rules to link together computers and information across the
world) fragments information into packets of data and automatically routes these
packets to their correct destination via intermediate switching nodes called IP
routers. This process, known as "packet-switching", does not ensure that packets
will arrive in the same order in which they were sent, or that they will arrive
at their destinations in a timely manner. The delays and delivery problems that
IP networks currently experience when transmitting voice, audio and other
real-time data are the result of packet "collisions" when network traffic volume
is high. Congestion of information packets at points of contention (bottlenecks
in a network), results in QoS failures, as these information packets are forced
to "queue" at those points of contention rather than proceeding without delay to
their destinations. The greater the bandwidth demanded by a particular traffic
stream, the higher the potential for service degradation, with packet collisions
rising as the network utilization increases. Service degradation includes delays
and degradation of the images, sound and other real-time data that are
transmitted. In a simple analogy, the packets can be likened to cars competing
for space on a crowded freeway leading to their destination. Collisions and
delays are difficult to avoid in such circumstances; however, timing and control
systems such as express lanes, ramp meters which time the cars' access to the
freeway and changeable message signs that coordinate more expeditious routing
can substantially reduce delays and collisions.
Packet switching is sufficient for transmission of computer data, which is
tolerant of packet re-ordering, jitter and other QoS problems because computer
data does not require real-time delivery; it does not matter when or in what
order the packets arrive. In contrast, real-time services (e.g. voice, audio and
live, interactive video) require timely, predictable and consistent delivery. As
a result of current network systems' packet-switching jitter and other QoS
problems, multimedia and other time-critical transmissions experience long
delays and degradation. Therefore, IP network systems cannot currently provide
companies that wish to converge real-time voice, audio, and live, interactive
video services with computer data over a single network with the level of QoS
that they require to make such convergence practical, efficient and
cost-effective.
However, despite its existing deficiencies, IP has become the de facto standard
for computer networks. Within local area networks (LANs) such as those used
across an enterprise, the vast majority of computers communicate via IP
networks, such as Ethernet2, the most prevalent of local IP networks. Within
wide area networks (WANs), most computers communicate using IP switching over
ATM/SONET links, which are circuit-switched networks.
Because bandwidth demands continue to grow due to technological innovations and
new applications, unless bandwidth supply significantly exceeds bandwidth
demand, there will always be bottlenecks if packet traffic flow is not
coordinated. As more and more high-speed corporate LANs connect to slower
external WANs, and as newer high-speed networks link to existing, slower ones,
bottlenecks will continue to rise at points of ingress from the faster networks
to the slower ones. These networks will saturate, again resulting in increased
congestion. And within LANs shared by many users, competing demands for
bandwidth causes packet collisions that degrade the quality of service provided
over the network. Therefore, increases in bandwidth supply notwithstanding,
there will continue to be a need for technology that provides the timing,
channels and coordination that eliminate or minimize the delays and collisions
of packets across the network from source to destination.
Our Solution
Our current and intended real-time data delivery products address the growing
demand for packet-switched IP networks to provide high-quality, real-time
transmissions by supporting real-time transport of packets across IP networks
with high QoS levels. Our technology provides for a coordinated flow of
real-time packets to avoid points of network contention, thus eliminating or
minimizing delays and unreliable delivery. We believe our technology can make
available the best of both worlds - the reliability and speed of
circuit-switched networks along with the data carrying capability and low cost
of IP networks.
At the core of our suite of products is our patented, patent-pending and
copyrighted technology. Our network operating system software is developed to
interface with the specific hardware and infrastructure systems on which it will
be hosted. For example, the software can be tailored to operate with a wireless
infrastructure, twisted pair telephone wiring or fiber optic cable. Our
technology addresses the fundamental issue of network traffic management by
creating a separate dedicated channel within existing bandwidth for each
real-time stream -- isolating each stream from other real-time streams and the
non-real-time data traffic. These dedicated, end-to-end channels provide a means
of carrying real-time data and providing fast, regular and timely delivery of
packets end-to-end across the network. In addition, our technology has a dynamic
allocation system, which sets up channels for the bandwidth required for a
specific stream of data, and then "eliminates" the channel when it is no longer
needed. This allocation scheme maximizes the productivity of a network,
providing bandwidth only as required, as compared with systems that allocate
fixed bandwidth, which cannot adapt to continuously changing data transmission
requirements.
Our technology, which has been designed to adhere to existing industry standards
and protocols, is compatible with the existing wiring of a standard IP network
and with existing legacy equipment. This compatibility would benefit our
potential customers because we have designed our products and proposed products
to have the ability to provide "circuit-switched" QoS for the transmission of
real-time signals within an IP network and to allow our customers to retain
their existing networks, thus avoiding the cost of installing an entirely new
network to achieve real-time video, audio and voice delivery or convergence with
QoS. When IP networks that are shared across a corporation (such as Ethernet
LANs) are conditioned with our technology, collisions for real-time traffic
should be eliminated or minimized, thereby unlocking the full potential of the
existing IP/Ethernet computer network infrastructure.
We also plan to design certain products that could offer significant advantages
to prospective customers, such as ISPs, by making new billing approaches
possible, such as call-based and/or class-based billing, rather than the
packet-based or flat-rate billing systems that are currently in use. The fast,
automatic set-up and tear-down of dedicated end-to-end communication channels
allows ISPs to adopt a telephone company billing model based on actual usage, if
desired. Furthermore, the products we intend to develop for this market could be
used to provide an immediate measurement of the true cost of an end-to-end
channel as the sum of the per-link utilization of a route. This potential
metering capability could not only provide a mechanism for ISPs to offer new
toll services, but also provide the practical basis for economic rationing of
toll services.
MARKET AND PRODUCTS
Our Markets
We believe our markets are as follows:
o The video transport market: Our two initial products are both targeted
toward this market, which is comprised of diversified media companies,
television broadcasting studios, movie and video production companies,
and cable, satellite and other network operators. The Cx1000 IP Video
Gateway is designed to provide broadcast-quality video transport over
existing IP networks and is targeted toward the broadcast transmission
infrastructure segment of this market (e.g. television broadcasting
studios). The Cx1400 IP Video Multiplexer is designed to address the
demand for video-over-IP network solutions and is targeted at the
video-on-demand infrastructure segment of this market (e.g. cable
operators).
o Engineering and integration services: We market and sell continuing
engineering and integration services for purchasers of our products
sold into the video transport market.
The Video Transport Market
The video transport market consists of three sub-segments: the studio
infrastructure, broadcast transmission infrastructure and video-on demand
infrastructure markets.
Studio Infrastructure Market. We define the studio infrastructure segment of the
video transport market to include those companies that use equipment for the
editing, processing and transport of video "within the walls" of the studio
environment. Potential customers in the studio infrastructure segment of the
video transport market include:
o diversified media companies,
o television broadcasting studios, and
o movie and video production companies.
Customers need to move both live and stored high quality digital video
throughout their production plants, and the transmission of video streams
through existing IP networks is an efficient and cost effective manner of doing
so. Our channel partner in the studio infrastructure market segment is Leitch
Technology Corporation. We entered into a Technology License Agreement with
Leitch in April 2000 pursuant to which Leitch invested US$10 million in cash in
us and gave us 200,000 shares of Leitch common stock. In return, we provided
Leitch an exclusive license, even as to us, to make and sell products
incorporating our TrueCircuit(R) technology into the studio infrastructure
segment of the video transport market.
Broadcast Transmission Infrastructure Market. We define the broadcast
transmission infrastructure market segment of the video transport market to
include entities that transmit video from the studio to another location, e.g.,
an editing location or distribution location. Any transport of video over a wide
area network (WAN), IP backbone or long-haul distribution system would be
included in this segment of the video transport market. Potential customers in
this market segment are those entities that use telecommunications networks to
bring content into the studio and to transmit content out to distribution
entities and end consumers (a process that is called "contribution and
distribution"). Companies that engage in "contribution and distribution"
include:
o diversified media companies;
o television broadcasters (e.g. a television network); and
o movie and broadcasting studios.
Traditionally, "contribution and distribution" was accomplished by shipping
film, tapes or CDs, transmission by satellite, and/or transmission over leased
circuits. We are currently providing and developing solutions that can provide
high-quality, real-time transmission over IP networks. For example, our Cx1000
IP Video Gateway is designed to enable the transport of broadcast quality video
from point-to-point over an IP/Ethernet network. We have conducted trials with
several key players in the broadcast industry pursuant to which we have used the
Cx1000 IP Video Gateway to transport broadcast quality video over IP without the
latency or jitter typically associated with IP video transport. CNN recently
used our Cx1000 IP Video Gateways to support a live, worldwide broadcast, as a
temporary decrease in available bandwidth forced CNN to rely on our technology
to effectively utilize existing bandwidth to enable the real-time transmission
capabilities that CNN required. We are actively marketing the Cx1000 IP Video
Gateway and have already received several initial orders for small quantities of
this product.
Local area networks (LANs), which share data across an organization, represent a
large potential market for our technology. Our Cx1000 IP Video Gateway and
related technology can benefit LANs, such as Internet service providers (ISPs),
local area business networks, hotels and apartment buildings, by managing the
flow of integrated real-time and data services (e.g., video, audio, telephony
and Internet access). Our technology enables these LANs to tie together all
major communications services - video, telephone and Internet access - through
existing telephone or cable wiring.
Our Cx1000 IP Video Gateway and related technology have the potential to be used
as a "bridge" from the LAN to an ATM WAN in the business enterprise market. Such
a bridge would convert transmissions between business LANs and ATM/SONET, T1/E1,
xDSL, and cable modem infrastructures. Our technology could also be used as a
"bridge" to bring real-time multimedia to home users wishing to access real-time
multimedia over their IP networks.
Video-on-Demand Infrastructure Market. Potential customers in the
video-on-demand infrastructure segment of the video transport market include
cable, television, satellite and other network operators that want to deliver
movies and video programming to their customers in a user controlled environment
commonly called "video-on-demand". This objective can be effectively implemented
using video transmission over IP networks. We intend to leverage our expertise
in managing video streams and our experience in MPEG stream management and IP
stream management to obtain market share in the video-on-demand market. At a
cable trade show in April 2001, we demonstrated the capability to transmit MPEG
over IP other than by means of direct MPEG-2 transport. Direct MPEG-2 transport
does not provide the routing capabilities of IP, and MPEG-2 requires the
broadcasting of all video-on-demand program streams to all nodes, thus severely
limiting MPEG-2's scalability as the demand for video-on-demand services
increases. Furthermore, IP provides the cable infrastructure to directly support
internal services over the same network.
The product we have developed to address this video-on-demand infrastructure
market is the Cx1400 IP Video Multiplexer. This product was co-developed by us
and BarcoNet, N.V., a Belgian company specializing in cable television products
and services, pursuant to a February 2001 joint development agreement. BarcoNet
chose us to co-develop a "video-on-demand" gateway device that provides high
quality video transmission capability to transmit (3-4 megabit) movies to cable
set top boxes by breaking down large numbers of IP data streams into the
individual movie streams requested by the viewer. The movie arrives at the home
when it is requested with no waiting time for file downloads. The Cx1400 IP
Video Multiplexer is currently being marketed by BarcoNet under the name "iMUX"
and is currently in initial product deployment in Europe. BarcoNet, which was
recently acquired by Scientific-Atlanta, Inc., can manufacture this gateway
device under license from us, in accordance with the joint development
agreement. Under this agreement, we have rights to manufacture and sell the
gateway as well as receive royalties of US$500 per gateway unit on any worldwide
gateway unit sales by BarcoNet.
Engineering and Integration Services Market
With each customer's implementation of our video products, we offer continuing
engineering and integration services for project assessment, network analysis
and network management. We have established a product and services offerings
that includes, along with the hardware purchased by the customer, services such
as application configurations (unicast, multicast, MPEG, SDI and others),
network performance measurements and verification, and training services. These
offerings are a practical way to add new revenue-generating services. Our goal
is to make initial services simple to deploy and use and to leave room for more
complex feature add-ons as markets grow and as customers come to appreciate and
value the flexibility of new IP video services. We project a modest amount of
sales of our video products beginning early in 2002, but as these product sales
grow, we anticipate that sales from engineering services, support and training
will increase as well.
STRATEGY
There are five components to our strategic framework:
o Target Certain "Early Adopters". We-plan to, directly and through
our strategic marketing relationship with Leitch, target early
adopters within the video transport market.
o Obtain Strategic Product Development Funds from Customers. In
February 2001, we negotiated and concluded a development agreement
with BarcoNet N.V., recently acquired by Scientific-Atlanta, Inc.,
pursuant to which we received US$1.7 million in product
development funds and revenue in return for development of the
Cx1400 IP Video Multiplexer, which BarcoNet is selling under the
name "iMUX". We will continue to seek such arrangements as the
opportunities arise, as an inability to obtain R&D funding would
increase our reliance on our operational funds to support the R&D
necessary to remain competitive in our industry.
o Establish Strategic Marketing Relationships. We intend to seek
strategic marketing relationships primarily with original
equipment manufacturers (OEMs), system integrators and cable,
television and other network operators that are focused on the
convergence of digital media.
o Target markets where our intellectual property gives us a
competitive advantage. Our corporate strategy has been to target
markets where we believe our intellectual property and know-how
give us an edge. For instance, in the video transport market, we
believe our technology's ability to meet the low jitter
requirements within IP/Ethernet networks that are necessary to
make real-time audio and video transmission a reality provides us
with a competitive advantage. We will continue to leverage any
advantages provided by our products and technology to gain market
share in our target markets.
o Continue Adherence To Industry Standards For QoS. All of our
technology development efforts will strictly conform to applicable
industry standards and protocols currently in use to provide for
the broadest possible application.
COMPETITION
We face competition in each of the target markets for our products, services and
products in development. There are a number of established and development-stage
companies in these markets that offer similar or alternative technological
solutions for convergence of real-time data (e.g. audio and video) over IP
networks as well as high-quality transmission of video-over-IP. We anticipate
that we will face increased competition in the future as competitors enhance
their product offerings and new competitors emerge. Many of our competitors have
greater resources, higher name recognition, more established reputations within
the industry and stronger manufacturing, distribution, sales and customer
service capabilities than we do.
We believe we will compete in our target markets principally based on: (i)
product capabilities such as the ability to converge multiple forms of real-time
data over a single network, and the ability to transmit such data over existing
IP networks and provide high levels of QoS, (ii) quality, reliability and ease
of use, (iii) pricing, (iv) customer support, and (v) product reputation.
SALES
Our primary channel of distribution in into our markets segment is direct sales.
All current sales and pending sales are a result of the efforts of our own
marketing and sales staff, which currently consists of four people. We intend to
build and enhance our own marketing and sales capabilities by adding product
managers and direct salespeople.
Our distribution plan requires tailored sales strategies for each target market.
Our initial distribution plans call for us to cultivate relationships with
systems integrators and ISPs that may incorporate our technology into their
systems. Depending on the specific requirements of our customers, these
distribution plans could call for us to provide these proposed customers with
hardware embedding our technology, or licenses to our technology. To date, we
have been beta testing our products and proposed products with our initial
customers and our first system integrator. Some of these are local, San
Diego-based companies who can provide essential early feedback on our products
and strategies.
We are also selling through select distributors. We currently have a
distribution agreement with Radiant Corporation for the distribution on the East
Coast of the Cx1000 IP Video Gateway, the Cx1400 IP Video Multiplexer and any
other products that in the future become commercially ready for sale into the
video transport market.
INTELLECTUAL PROPERTY
Patents
We have patented and continue to patent our core technology. On October 31,
2000, the U. S. Patent and Trademark Office (USPTO) issued us a U.S. patent for
our TrueCircuit(R) technology multi-layer network switch. On April 10, 2001, the
USPTO issued us a U.S. patent called "Methods and apparatus for providing
quality of service guarantees in computer networks" covering Path 1's
TrueCircuit(R) technology that enables video, voice and other time-critical
traffic to share conventional IP (Internet Protocol) computer networks with
normal data traffic. On June 12, 2001, the USPTO issued us a third U.S. patent
that was a continuation of the second. Each of these patents will expire at the
earlier of 17 years after its issue date or 20 years after the priority date of
record. On January 16, 2001, May 8, 2001 and May 31, 2001, we submitted
additional patent applications with the USPTO on topics surrounding our core
technologies. We have also filed patent applications in several foreign
countries. We cannot be certain that any of these additional patent applications
will be granted, that our existing patents will be sufficiently broad to fully
protect our interests, or that any patents that are granted will not be
challenged, invalidated or circumvented. In addition, no assurance can be given
that our products and technologies will not infringe patents or other
intellectual property rights of others or that any license required would be
made available under any such patents or intellectual property rights on terms
acceptable to us, or at all.
Trade Secrets
In addition to the protection afforded by patent law, implementations of our
technology contain trade secrets. These trade secrets cover areas of fast
context switching in embedded operating systems, real-time embedded
architectures, signal processing techniques for artifact-free signals, and
low-latency software drivers. We protect our trade secrets by requiring each
external party that obtains access to our technology to sign
confidentiality/non-disclosure agreements. We also require each of our employees
to sign a confidentiality and inventions assignment agreement upon commencement
of employment with us. No assurance can be given, however, that these measures
will prevent the unauthorized disclosure or use of such trade secrets.
Trademarks
We have trademarked the name TrueCircuit(R) technology for a portion of our
technology to describe its fundamental functionality. TrueCircuit(R) technology
establishes the equivalent of "true" hardwired "circuits" over the traditionally
packet-switched Internet Protocol. We expect also to trademark other technology
and product names, as we deem it appropriate.
Employees
As of March 31, 2002, we had 24 employees in the United States, of whom 15 were
engineers, 3 were in marketing and sales, 4 were in finance and administration
and 2 were in operations. We also had 28 employees in Romania, almost all of
whom are engineers, as part of our Sistolic business unit. We disposed of this
business unit on April 1, 2002. Our employees are not represented by any
collective bargaining unit. We have never experienced a work stoppage.
Disposal of Sistolic
In March 2002, a large semiconductor company, with whom we entered into a
non-exclusive licensing agreement and an engineering services agreement in
December 2001 valued at approximately US$5.4 million, informed us that they were
terminating their agreements. We are in a payment dispute with this customer and
are reviewing our alternatives. As a result of this action, we decided to
dispose of our Sistolic business unit. On April 1, 2002, we disposed of the
assets of this business unit back to Metar SRL and Michael Florea by eliminating
the remaining obligations by us to Metar SRL, including the payable of
US$686,000, the return of all stock options granted to Michael Florea and the
Romanian employees, a confirmation that performance criteria specified in
Michael Florea's employment agreement related to a potential US$4 million bonus
with us was never met by him and a limited use license to the Metar ADC
intellectual property in favor of us. Michael Florea resigned on March 27, 2002,
as an officer in anticipation of this transaction.
Risk Factors
The risks ands uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our operations. Our business and
results of operations could be seriously harmed by the occurrence of any of the
following risk factors. The trading price of our common stock could decline due
to occurrence of any of these risks, and you may lose part or all of your
investment.
We are dependent upon additional funding to meet current commitments, continue
development of our business and limit uncertainty as to our ability to continue
as a going concern; the prospect of obtaining such funding is uncertain.
We need additional funding to meet current commitments and continue development
of our business. At this writing, we are in an immediate cash crisis. If we do
not receive additional funding, our ability to continue as a going concern
cannot be assured.
To this end, we have initiated a cost reduction program to reduce our negative
cash burn from approximately US$600,000 per month to approximately US$250,000 -
US$300,000 per month. We are reducing costs in all areas of our operating plan
until sufficient capital is raised to support growth and more substantial orders
materialize. In the event we do not receive additional funding, we plan to: 1)
further reduce our costs and focus on selling existing products and services; 2)
sell our assets through a merger or acquisition; or, 3) seek protection under
bankruptcy. Even with our cost reduction plan, we need to raise additional
funding to continue as a going concern.
To help meet our funding requirements, we have entered into a common stock
purchase agreement with DTKA Holdings Limited pursuant to which we may draw down
on an equity line with DTKA Holdings and require it to purchase up to US$10
million of our common stock over a period of twenty-four (24) months. However,
we cannot draw down on any funds under this facility until we have filed a
registration statement with the Securities and Exchange Commission registering
enough shares to cover the shares of common stock to be issued pursuant to such
draw down, and such registration statement has been declared effective. We do
not intend to file this registration statement until we have completed a private
placement offering. Also, if we are unable to meet certain requirements set
forth in the common stock purchase agreement, we may be unable to draw down on
any or all of the funds available there under. In addition, we cannot sell
additional securities through private placements, without DTKA Holdings'
consent, whether or not we are able to draw down on the equity line, without
incurring a penalty of US$100,000. This consent requirement or penalty payment
could further hamper our ability to secure the additional funds we need.
In addition to the DTKA equity line, we are seeking to obtain additional working
capital through a private placement of common stock and warrants to accredited
investors. We believe that up to US$ 6 million could be raised in this private
placement. If we are not able to raise a minimum of US$1 million by April 30,
2002, we will need to seek alternative debt or equity financing arrangements
immediately or we will be required to further reduce our operating expenditures,
which could have adverse effect on our ability to execute our operating plan.
If we receive at least US$2 million from the private placement offering, or
equivalent funding from another source or sources and are able to access the
US$10 million equity line, we project that we should have sufficient resources
to fund operations through 2002. If we do not receive at least US$2 million in
proceeds from the private placement or we are not able to secure sufficient
additional funds, either through our equity line or otherwise, we may not be
able to continue as a going concern. Even if we can continue operations, a lack
of sufficient funding would significantly limit our ability to take advantage of
potential opportunities, develop or enhance products or otherwise respond to
competitive pressures. We cannot assure you that additional financing will be
available on terms favorable to us, if at all.
Any additional funding will be used to expand our marketing and sales
capabilities, support the manufacture of customer orders, develop an operational
infrastructure and develop new or enhanced services or products. In addition, we
will support the growing need to provide demonstrations of our technology to
potential customers and to finance the commercialization of the products we
develop. If we raise additional funds through the issuance of equity or
equity-linked securities, the percentage ownership of our stockholders would be
reduced. In addition, these securities may have rights, preferences or
privileges senior to the rights of the securities held by our current
stockholders.
We have incurred losses since inception and may never be profitable.
We have incurred operating losses since our inception in January 1998, and we
expect to incur losses and negative cash flow for at least the next few
quarters. As of December 31, 2001, our accumulated deficit was approximately
US$24.5 million. Our management expects us to continue to incur significant
operating expenses and research and development expenses and, as a result, we
will need to generate significant revenues to achieve profitability. Even if we
do achieve profitability, we cannot assure you that we can sustain or increase
profitability on a quarterly or annual basis in the future.
The market price of our common stock has fluctuated in the past and is likely to
continue to do so, thereby increasing the risk that you may lose all or part of
your investment.
The market price for our common stock is susceptible to a number of internal and
external factors including:
o quarterly variations in operating results and overall financial condition;
o economic and political developments affecting technology spending
generally and adoption of new technologies and products such as ours;
o changes in IT spending patterns;
o product sales progress, both positive and negative;
o stock price changes in the previous quarter resulting in large increases
or decreases in reported stock-based compensation expenses, causing our
overall net income/loss to be highly volatile and unpredictable;
o technological innovations by others;
o the introduction of new products or changes in product pricing policies
by us or our competitors;
o proprietary rights disputes or litigation;
o changes in earnings estimates by analysts or other factors;
o additions or departures of key personnel; and
o sales of substantial numbers of shares of our common stock or
securities convertible into or exercisable for our common stock.
These and other factors may make it difficult for our stockholders to sell their
shares into the open market if and when eligible to do so. In addition, stock
prices for many technology companies, especially development-stage companies
such as ourselves, fluctuate widely for reasons that may be unrelated to
operating results. These fluctuations, as well as general economic, market and
political conditions such as interest rate increases, recessions or military or
political conflicts, may materially and adversely affect the market price of our
common stock, thereby causing you to lose some or all of your investment.
We recently launched our initial commercial products and services, and these
products and services and our products still in development, may not gain
customer acceptance.
We have launched two commercial products for sale into the video transport
market: the Path 1 Cx1000 IP Video Gateway targeted toward the broadcast
transmission infrastructure segment of the video transport market, and the Path
1 Cx1400 IP Video Multiplexer targeted toward the video-on-demand infrastructure
segment of the video transport market. These products are in the early stages of
commercial deployment and are subject to all the risks attendant to new product
introductions, including the possible presence of undetected hardware or
software defects in our products, manufacturing and distribution limitations,
unforeseen delays in product installation and customer dissatisfaction. There
can be no assurance that either of these initial products, or our products still
in development, will achieve acceptance by our targeted markets at all, or in
time to assist in funding cash flow shortfalls.
We have limited product sales experience and we are relying primarily
on one dominant customer.
We have only a brief history of sales orders for our products and
services. As a result, potential customers may decline to purchase our initial
products or services due to our lack of an established "track record," the level
of our products' technological sophistication, price, our financial condition or
other factors. Further reasons why prospective customers may decline to invest
in our products and services, or may decide to purchase competitors' products
and services, include:
o introduction of competitive technologies, products and services that
may render our products and services obsolete;
o development or manufacturing delays that prevent the timely introduction of
our products to the market;
o failure by us to establish strong sales,marketing, distribution and
customer service capabilities;
o reluctance to commit capital to new products and services; and o general
economic conditionsaffecting rates of adoption of new technologies, new
technology purchases and services associated with such new technologies.
In the event that our products and services are not adopted at the rates we
currently anticipate, or do not receive a significant acceptance from our
primary targeted dominant customer, our operating plan will be negatively
affected and our capital requirements and cash flow shortfalls will be greater
than currently anticipated.
To date, there has been only a limited public market for our common stock and
there is no assurance that an active trading market for our common stock will
ever exist.
To date, there has been only a limited public market for our securities and
there can be no assurance that a broad public market for our securities will
develop in the future, or if such a broad market does develop, that it will
last. Our common stock is presently quoted for trading on the OTC Bulletin
Board, a quotation service that displays real-time quotes and other information
about over-the-counter (OTC) equity securities, and on the Third Segment of the
Frankfurt Stock Exchange. Trading activity in our common stock on the OTC
Bulletin Board is limited and trading activity in our common stock on the
Frankfurt Stock Exchange is dormant. In addition, we may be unable to attract
and maintain good-quality market makers. In the event a liquid market for our
common stock does develop, there can be no assurance that the market will be
strong enough to absorb all of the common stock currently owned by our
stockholders and any common stock that may be issued in the future, restricted
shares of our common stock that are eligible for resale under Rule 144, combined
with (i) the shares (and warrants to purchase shares) that we anticipate selling
in our current private placement offering, (ii) shares that we may issue to DTKA
Holdings pursuant to our equity line with them, (iii) shares of common stock
owned by Leitch Technology Corporation that Leitch, pursuant to its demand
registration rights, may require us to register for resale into the public
market, and (iv) shares issued or issuable pursuant to our stock option plans,
have the potential to create a supply/demand imbalance that could adversely
affect our stock price. In addition, subsequent issuances of equity or
equity-linked securities may further saturate the market for our common stock.
The resale of substantial amounts of our common stock will have an adverse
effect on the market price of our stock.
The rate of market adoption of our technology is uncertain and we could
experience long and unpredictable sales cycles, especially if the slowdown in
the telecommunications industry persists.
As ours is a new technology, it is extremely difficult to predict the timing and
rate of market adoption of our proposed products as well as of related new video
applications, and thus difficult to predict when we might begin to realize
revenue from product sales. We are providing new and highly technical products
and services to enable new applications. Thus, the duration of our sales efforts
with prospective customers in all market segments is likely to be lengthy as we
seek to educate them on the uses and benefits of our products. This sales cycle
could be lengthened even further by potential delays related to product
implementation as well as delays over which we have little or no control,
including:
o the length or total dollar amount of our prospective customers' planned
purchasing programs in regard to our products;
o changes in prospective customers' capital equipment budgets or purchasing
priorities;
o prospective customers' internal acceptance reviews; and o the
complexity of prospective customers' technical needs.
These uncertainties, combined with the worldwide slowdown in the
telecommunications business, which began in 2001, and the slowdown in corporate
spending on technology generally as well as new technologies such as ours,
substantially complicate our planning and reduce prospects for sales of our
products. If our prospective customers curtail or eliminate their purchasing
programs, decrease their capital budgets or reduce their purchasing priority,
our results of operations could be adversely affected.
Leitch Technology Corporation may not be an active, participating partner for us
in the professional broadcast video studio market.
In April 2000, we entered into a strategic marketing relationship with Leitch
Technology Corporation, a Canadian public company and international distributor
of professional video products that owns approximately one-third of our
outstanding common stock. As part of this strategic marketing relationship,
Leitch invested US$10 million in us and gave us 200,000 shares of Leitch common
stock in consideration of our entering into a Technology License Agreement with
Leitch, dated April 10, 2000 granting Leitch (i) a non-exclusive license to sell
and otherwise use our proprietary TrueCircuit(R) technology; and (ii) a
worldwide, exclusive license, even as to us, to sell and otherwise exploit our
TrueCircuit(R) technology in connection with commercial activities directed to
the professional broadcast video studio market. The non-exclusive license has a
term of five years (unless earlier terminated by us or Leitch) and is
automatically renewable for additional five-year periods (unless earlier
terminated by us or Leitch). The duration of the exclusive license with Leitch
is one year and, thereafter, automatically renews for five consecutive one-year
periods, provided we receive the minimum aggregate monies and other
consideration from Leitch required for that year. The minimum fees to be paid by
Leitch to maintain its exclusive license for the five-year exclusive term
escalate annually and total US$32 million, exclusive of royalties. After this
initial five-year term, provided the exclusive license is still in effect, the
minimum yearly thresholds would be negotiated, within certain parameters, by us
and Leitch. Leitch is not obligated to pay us royalties until March 2006 for any
of the TrueCircuit(R)-based products sold by Leitch or its sub-licensees under
the exclusive license.
In April 2001, Leitch's exclusive license was automatically renewed for another
year. We are currently discussing with Leitch the renewal terms and conditions
for this exclusive license for the 12 month-period beginning April 2002. We
believe that, according to the terms of the Technology License Agreement, Leitch
is required to pay us US$2 million in cash or other consideration in order for
Leitch's exclusive license to be renewed until April 2003 (Leitch's failure to
pay the required consideration would cause Leitch's exclusive license to
automatically convert to a non-exclusive license). Leitch does not agree with
our position. There can be no assurance that we will come to a mutually
acceptable resolution with Leitch regarding this potential payment dispute.
Furthermore, if it is found that Leitch is required to pay us the 12
month-period beginning April 2002 requires them to pay us US$2 million to
maintain its exclusive license, we believe that Leitch will decline to remit
such payment and will allow it's exclusive license to convert into a
non-exclusive license.
Until the exclusive license expires, we are precluded from selling our
TrueCircuit(R) technology-enabled products directly into the professional
broadcast video studio market without Leitch's consent. Consequently, for the
time being, we are relying on Leitch to sell these TrueCircuit(R) technology
enabled products into this market area or allow us to work with them to
penetrate this market, and we are focusing our marketing efforts on the
enterprise, video-on-demand market and broader broadcast video transport
markets. We also intend to develop non-TrueCircuit(R) technology-enabled
products, which are outside the scope of our agreement with Leitch. As a result
of our agreements with Leitch, our ability to profit from the professional
broadcast video studio market presently depends heavily upon the motivation and
success of Leitch in developing, manufacturing, launching and marketing
TrueCircuit(R) technology-based products in this field or our ability to
develop, manufacture, launch and market non-TrueCircuit(R) technology enabled
products for this market segment. Management believes that the more successful
Leitch's marketing and sales effort, regardless of whether it retains its
exclusive license, the more royalties we will ultimately receive following
expiration of the royalty-free period, and the more receptive the professional
broadcast video market would be to introduction by us of additional products
that do not impinge upon Leitch's exclusive license, should it still be in
effect. Although we entered into this strategic marketing relationship with
Leitch with the expectation that Leitch, as an established company in the
professional video products field and an experienced manufacturer and
distributor of video products, would provide us with a significantly enhanced
ability to manufacture, sell and distribute our initial products in this field,
no assurance can be given that Leitch will be successful in selling
TrueCircuit(R) technology-based products into the professional broadcast video
market or other markets. If difficulties arise upon introduction of these
products to the professional broadcast video studio market, sales of our
products in this and other markets could be adversely affected. In addition, any
deterioration in our relationship with Leitch could adversely affect Leitch's
ability and motivation to market and sell our TrueCircuit(R) technology-based
products into the professional broadcast video studio market. This deterioration
would be especially damaging should Leitch retain its exclusive license, as
Leitch might fail to commit the necessary technical, financial and other
resources to successfully market our products into the professional broadcast
studio video market, yet still prevent us from doing so. Should Leitch lose its
exclusive license, we could then sell TrueCircuit(R) technology-based products
into this market, but if Leitch declines to assist us, we would be required to
do so without the benefit of Leitch's established reputation as a video products
vendor and its manufacturing and distribution capabilities.
In January 2002, Leitch notified us that they were giving consideration to the
appropriateness of the valuation of their investment in us as held on their
balance sheet and subsequently wrote-down their investment in us. On March 28,
2002, Reginald J. Tiessen resigned as the Company's Chairman, Leitch's director
representative on the Board and member of the Company's Audit Committee. With
the December 2001 resignation of John A. MacDonald from the Company's Board of
Directors, this leaves Leitch without current Board representation. Mr. Cary,
our President and Chief Executive Officer, succeeded Mr. Tiessen as Chairman of
the Board. Also, on March 28, 2002, Leitch informed us of their intention to
write-off the remaining value of their investment in us. As of the date of this
writing, we do not believe that Leitch will be an active partner in developing
the professional broadcast video studio market for us.
We recently decided to dispose of the assets of our Silicon Systems group.
In October 2000, we agreed to purchase the assets of Metar ADC, an application
specific integrated circuit (ASIC) design and development company based in
Bucharest, Romania from Metar SRL. We organized these assets into our Silicon
Systems business unit, which we named "Sistolic Inc.". Pursuant to the terms of
the asset purchase agreement, we incurred a contingent obligation to make
payments in October 2002 and October 2003 in an aggregate amount of US$850,000
to complete this acquisition.
In December 2001, Sistolic entered into a non-exclusive licensing agreement and
an engineering services agreement with a large semiconductor company pursuant to
which Sistolic was to provide front-end design services. We anticipated that the
maximum amount of revenue we could realize from this arrangement was
approximately US$5.4 million. In March 2002, after considerable work had been
performed by us under the agreements, the large semiconductor company informed
us that they were summarily terminating these agreements.
Due to this material and adverse turn of events, we believe that we can no
longer sustain the negative cash flow from the Silicon Systems business unit. On
April 1, 2002, we sold all of the assets of this business unit back to Metar SRL
and Michael Florea. The facility lease and employment contracts transferred as
well, in exchange for the elimination of all remaining obligations by us to
Metar SRL, the return of all stock options granted to Michael Florea and the
Romanian employees, a confirmation that performance criteria specified in
Michael Florea's employment agreement related to a potential US$4 million bonus
with us was never met by him and a limited use license to the Metar ADC
intellectual property in favor of us. Michael Florea resigned on March 27, 2002,
as an officer in anticipation of this sale agreement. We are investigating our
available legal options with regard to the large semiconductor company's abrupt
termination of our agreements with it.
We may be unable to obtain full patent protection for our core technology and
there is a risk of infringement.
On January 16, 2001, May 8, 2001 and May 31, 2001, we submitted additional
patent applications on topics surrounding our core technologies to supplement
our existing patent portfolio. However, there can be no assurance that these or
other patents will be issued to us, or, if additional patents are issued, that
they or our three existing patents will be broad enough to prevent significant
competition or that third parties will not infringe upon or design around such
patents to develop competing products. In addition, we have filed patent
applications in several foreign countries. There is no assurance that these or
any future patent applications will be granted, or if granted, that they will
not be challenged, invalidated or circumvented.
In addition to seeking patent protection for our products, we intend to rely
upon a combination of trade secret, copyright and trademark laws and contractual
provisions to protect our proprietary rights in our products. There can be no
assurance that these protections will be adequate or that competitors have not
or will not independently develop technologies that are substantially equivalent
or superior to ours.
There has been a trend toward litigation regarding patent and other intellectual
property rights in the telecommunications industry. Although there are currently
no lawsuits pending against us regarding possible infringement claims, there can
be no assurance such claims will not be asserted in the future or that such
assertions will not materially adversely affect our business, financial
conditions and results of operations. Any such suit, whether or not it has
merit, would be costly to us in terms of employee time and defense costs and
could materially adversely affect our business.
If an infringement or misappropriation claim is successfully asserted against
us, we may need to obtain a license from the claimant to use the intellectual
property rights. There can be no assurance that such a license will be available
on reasonable terms if at all.
We face competition from established and developing companies, many of which
have significantly greater resources than us, and we expect such competition to
grow.
The markets for our products, proposed products and services are very
competitive. We face direct and indirect competition from a number of
established companies and development stage companies, and we anticipate that we
shall face increased competition in the future as existing competitors seek to
enhance their product offerings and new competitors emerge. Many of our
competitors have greater resources, higher name recognition, more established
reputations within the industry and stronger manufacturing, distribution, sales
and customer service capabilities than we do.
The technologies that our competitors and we offer are expensive to design,
develop, manufacture and distribute. Competitive technologies may be owned and
distributed by established companies that possess substantially greater
financial, technical and other resources than we do.
Competitive technologies that offer a similar or superior capacity to converge
and transmit audio, video and telephonic data on a real-time basis over existing
networks may currently exist or may be developed in the future. We cannot assure
you that any technology currently being developed by us is not being developed
by others or that our technology development efforts will result in products
that are competitive in terms of price and performance. If our competitors
develop products or services that offer significant price or performance
advantages as compared to our current and proposed products and services, or if
we are unable to improve our technology or develop or acquire more competitive
technology, our business could be adversely affected. See "Business -
Competition."
We may not be able to profit from growth if we are unable to effectively manage
the growth.
Assuming we receive adequate funding to conduct our business as presently
proposed to be conducted, we anticipate that we will grow rapidly in the future.
This anticipated growth will place strain on our managerial, financial and
personnel resources. The pace of our anticipated expansion, together with the
complexity of the technology involved in our products and the level of expertise
and technological sophistication incorporated into the provision of our design,
engineering, implementation and support services, demands an unusual amount of
focus on the operational needs of our future customers for quality and
reliability, as well as timely delivery and post-installation and
post-consultation field and remote support. In addition, new customers,
especially customers that purchase novel and technologically sophisticated
products such as ours, generally require significant engineering support.
Therefore, adoption of our platforms and products by customers would increase
the strain on our resources. To reach our goals, we will need to hire rapidly,
while, at the same time investing in our infrastructure. We expect that we will
also have to expand our facilities. In addition, we will need to:
o successfully train, motivate and manage new employees;
o expand our sales and support organization;
o integrate new management and employees into our overall operations; and
o establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that growth would
impose on our systems, procedures and structure. If we fail to effectively
manage our expansion, our business may suffer.
We may not be able to hire and assimilate key employees.
Our future success will depend, in part, on our ability to attract and retain
highly skilled employees, including management, technical and sales personnel.
Significant competition exists for employees in our industry and in our
geographic region. We may be unable to identify and attract highly qualified
employees in the future. In addition, we may not be able to successfully
assimilate these employees or hire qualified personnel to replace them.
We are dependent on our key employees for our future success.
Our success depends on the efforts and abilities of our senior management,
specifically Frederick A. Cary, Ronald D. Fellman, Douglas A. Palmer, Richard B.
Slansky, David A. Carnevale, Bernard J. Tyler, Yendo Hu and other senior
managers and certain other key personnel. If any of these key employees leaves
or is seriously injured and unable to work and we are unable to find a qualified
replacement, then our business could be harmed.
Unanticipated delays or problems in introducing our intended products or
improvements to our intended products may cause customer dissatisfaction or
deprive us of the "first to market" advantage.
Delays in the development of products and the launch of commercial products are
not uncommon in high tech industries such as ours. If we experience problems
related to the introduction or modification of our intended products or the
reliability and quality of such products, which problems delay the introduction
of our intended products or product improvements by more than a few months, we
could experience reduced product sales and adverse publicity. We believe the
company first to market with viable products will gain a significant advantage
with customers; delays could prevent us from being the company that gains this
advantage.
The issuance of common stock to DTKA Holdings under our equity line and to
purchasers of units in our current private placement offering would cause
significant dilution to our stockholders, and the resale of such shares by DTKA
and the purchasers in the private placement may depress the price of our common
stock.
In January 2002, we entered into a common stock purchase agreement with DTKA
Holdings Limited, a British Virgin Islands company, for the potential future
issuance and sale of up to US$10 million of common stock, which is required to
be registered. Under this arrangement, we, at our sole discretion, may, from
time to time, draw down on this facility (otherwise known as an "equity line"),
requiring DTKA Holdings to purchase shares of our common stock at prices
calculated on the basis of discounts ranging from 6.5% to 8.5% from the daily
volume weighted average price of our common stock on the principal exchange or
trading market on which our common stock is trading on the date of the draw
down. We may not draw down on this facility until we have filed a registration
statement with the Securities and Exchange Commission to register enough shares
of common stock to cover the shares to be issued pursuant to such draw down, and
this registration statement has been declared effective.
The issuance of shares of common stock to DTKA Holdings pursuant to this equity
line could result in significant dilution to our stockholders. In addition, the
resale by DTKA Holdings and the purchasers in a private offering of common stock
purchased under the equity line or pursuant to a private placement, as the case
may be, or the prospect of such resale, could have a significant depressive
effect on the market for our shares. Also, the ongoing issuance of shares to
DTKA Holdings will continually reduce your percentage ownership in us and could
have an adverse effect on the market price of our common stock.
Stockholders worried about the depressive effect of continued issuances of our
shares may seek to sell their shares, which would contribute to a downward
movement in the price of our common stock. Moreover, the perceived risk of a
drop in our stock price could encourage investors to engage in short sales of
our common stock. By increasing the number of shares offered for sale, material
amounts of short selling could further contribute to progressive price declines
in our common stock.
We offer stock options to our employees, non-employee directors, consultants and
advisors, which could result in ongoing dilution to all stockholders, including
investors in this offering.
We maintain two equity compensation plans: (i) the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), pursuant to which we may issue options and
common stock to employees, officers, directors, consultants and advisors, and
(ii) the 2001 Employee Stock Purchase Plan (the "Purchase Plan"), approved by
our stockholders in February 2002, pursuant to which our employees are provided
the opportunity to purchase our stock through payroll deductions. As of March
31, 2002, there were options outstanding to purchase 3,986,435 shares of common
stock under our 2000 Plan; 257,502 shares of common stock will remain available
for issuance under the 2000 Plan. All of the outstanding option grants under the
2000 Plan have been approved by the Board of Directors; option grants
representing 3,886,435 shares of common stock are subject to stockholder
approval and will expire if such approval is not granted within 12 months of the
options' respective grant dates. A maximum of 250,000 shares of common stock
have been authorized for issuance under the Purchase Plan.
In addition, as of March 31, 2002, there were 612,043 shares of common stock
subject to outstanding options granted other than under the 2000 Plan or
Purchase Plan. These non-plan options were granted to various employees,
directors, consultants and advisors.
We plan to continue to provide our employees opportunities to participate in the
Purchase Plan. We also plan to issue options, either under the 2000 Plan or
otherwise, to purchase sizable numbers of shares of common stock to new and
existing employees, officers, directors, advisors, consultants or other
individuals as we deem appropriate and in our best interests. These ongoing
purchases of our common stock (as well as future option grants by us and
subsequent exercises of options) could result in substantial dilution to all
stockholders and increased control by management.
The number of shares of common stock subject to currently outstanding options
under the 2000 Plan, as well as shares of common stock subject to options
granted other than under the 2000 Plan, exceeds 30% of the total number of
shares of our currently outstanding common stock. The California Department of
Corporations has issued regulations for companies seeking qualification of stock
option plans, which regulations require that the total number of shares issuable
upon exercise of all options shall not exceed 30% of such companies' outstanding
shares, unless a percentage higher than 30% is approved by at least two-thirds
of the outstanding shares entitled to vote. We unsuccessfully sought to obtain
this two-thirds supermajority vote of the outstanding shares pursuant to a
written consent solicitation of our stockholders under a Proxy Statement filed
with the Securities and Exchange Commission on December 31, 2001. We will
attempt once more to obtain this supermajority vote at our 2002 Annual
Stockholder Meeting to be held June 14, 2002. Although we anticipate that we
will receive the requisite two-thirds stockholder approval to exceed this 30%
ceiling at this Annual Stockholder Meeting, the issuance of further stock
options and shares under the 2000 Plan requires qualification, or exemption from
qualification, of the securities under the "blue sky" securities provisions of
the California Corporations Code. In the event we do not receive the requisite
stockholder approval, our ability to grant options and stock as a means of
attracting and retaining employees and directors will be materially impaired.
We are subject to local, state and federal regulation, as well as the rules of
any stock exchanges on which our securities might trade.
Legislation affecting us (or the markets in which we compete) could adversely
impact our ability to implement our business plan on a going-forward basis. The
telecommunications industry is heavily regulated and these regulations are
subject to frequent change. Future changes in local, state, federal or foreign
regulations and legislation pertaining to the telecommunications field may
adversely affect prospective purchasers of telecommunications equipment, which
in turn would adversely affect our business. Also, our stock is traded on the
OTC Bulletin Board and the Third Segment of the Frankfurt Stock Exchange and as
such we are subject to their rules and regulations. If we cease to comply with
the OTC Bulletin Board's rules and regulations, the OTC Bulletin Board may cease
to quote our stock, in which case the trading market for our common stock would
be disrupted or otherwise adversely affected. We do not believe that we will be
adversely impacted if our stock ceases to be traded on the Third Segment of the
Frankfurt Stock Exchange.
Our executive officers, directors and 5% stockholders currently maintain
substantial voting control over us and possess certain rights of first offer and
first refusal in regard to offers and sales of our securities.
As of March 31, 2002, a small number of our executive officers, directors and 5%
stockholders, beneficially own, in the aggregate, approximately 51% of our
outstanding common stock; these stockholders are, Leitch Technology Corporation,
Ronald D. Fellman and Douglas A. Palmer. As a result, these stockholders (or
subgroups of them) retain substantial control over matters requiring approval by
our stockholders, such as the election of directors and approval of significant
corporate transactions. Pursuant to the terms of a stockholders' agreement with
Leitch, dated April 10, 2000, Ronald D. Fellman and Douglas A. Palmer, who
together hold approximately 15% of our outstanding common stock, have agreed to
vote all securities of Path 1 held by them in favor of designees of Leitch for
two positions on our seven-person Board of Directors, for as long as Leitch
continues to hold at least 20% of our capital stock (on an as-converted,
as-exercised, fully-diluted basis). As of March 31, 2002, Leitch held
approximately one-third of our outstanding common stock.
Under this Stockholders' Agreement, Leitch Technology Corporation also has
rights of first refusal to purchase (i) any equity securities offered in a
private sale by Dr. Fellman, Dr. Elliott and Dr. Palmer at the dollar value of
the consideration offered in connection with such sale, and (ii) its pro rata
share of any capital stock, or rights, options, warrants or to purchase capital
stock issued by us, on the same terms and at the same price offered by us to the
third party or parties. These rights of first refusal and the voting agreement
give Leitch the potential to maintain or expand its substantial equity position
in us and exert significant influence over matters of corporate governance. The
right of first refusal with respect to securities offerings by us could, in
certain circumstances, serve as a deterrent to future acquirors, especially if
Leitch does not approve of a proposed merger or acquisition, and could give
Leitch the leverage to condition its consent to offerings of our securities on
our adoption of policies favored by Leitch. In addition, Leitch maintains demand
registration rights pursuant to which it can require us to register its shares
of our common stock with the Securities and Exchange Commission for resale into
the public market. Such registration and resale could adversely affect the price
of our common stock.
Our equity compensation plans give wide latitude to the plan administrator --
our Board of Directors or committee thereof -- to make option grants or stock
issuances to our officers and directors and to grant broad auxiliary rights in
connection with such option grants or stock issuances (e.g. full or partial
acceleration of vesting upon change of control or upon attainment of certain
performance milestones). In January 2002, our executive officers and employees
were granted stock options under our 2000 Stock Option/Stock Issuance Plan in
return for their agreement to voluntarily reduce their salaries for a period of
90-days. Additional option grants to our officers and directors would serve to
increase their equity ownership of the company and would allow these officers
and directors, should they choose to exercise their options, to exert increased
control over us.
Our charter documents contain provisions that could discourage a
takeover.
Our Certificate of Incorporation and Bylaws contain provisions that may have the
effect of making more difficult or delaying attempts by others to obtain control
of us, even when these attempts may be in the best interests of the
stockholders. Our Certificate of Incorporation authorizes our Board of
Directors, without further stockholder approval, to issue one or more series of
preferred stock. Any such series of preferred stock could have rights, including
voting rights, superior to that of our common stock, and rights to elect
directors as a class. Grant of such rights could provide the preferred stock
holders with significant control over matters of corporate governance.
In addition, our Bylaws state that special meetings of the stockholders may only
be called by 20% or more of the outstanding stock entitled to vote at such
meeting, and also require that all significant transactions, even those that
would not otherwise require a vote of the Board of Directors, be reviewed and
approved by the Board. These Bylaws provisions may defer the calling of a
meeting at which a change of control might be effected and may serve to deter
potential acquirers.
We do not intend to pay cash dividends.
We have never paid cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future.
Item 2. Properties
We lease approximately 11,000 square feet of office space within one facility
under three separate leases in San Diego, California. The San Diego offices are
used for research and development, prototype production, sales and marketing and
administration. The leases for our San Diego offices expire between May 2002 and
July 2002. We believe that we will be able to extend our San Diego office leases
or obtain new leases elsewhere in the immediate area with no adverse financial
effects. We also maintain a month-to-month lease for approximately 6,000 square
feet of office space in Bucharest, Romania. The Romanian offices are used for
research, development and administration. However, as part of the Letter of
Intent dated March 25, 2002 with Metar SRL/Michael Florea to sell the assets of
Metar ADC back to Metar SRL/Michael Florea we have provided notice of
termination on the Romanian lease. We believe our current U.S. facilities are
adequate to meet our near-term space requirements.
Item 3. Legal Proceedings
In November 2001, we entered into a private equity financing agreement with R&S
Invest/Meeuwi de Kraker for the purchase of 700,000 shares of Class A Common
Stock for US$5.00 per share. For each share purchased, we agreed to also issue
this investor a warrant to purchase one share of Class A Common Stock for
US$5.00 per share, exercisable over two years. The shares of Class A Common
Stock and warrants to purchase Class A Common Stock were sold pursuant to
Section 4(2) of the Securities Act of 1933, as amended. Payments to us under the
terms of the financing agreement were scheduled in five (5) equal monthly
installments of US$500,000 (with the first installment due and payable on
November 26, 2001) with a final US$1 million payment due on April 15, 2002. The
payment obligation was evidenced by a promissory note, with the Class A Common
Stock and warrants to serve as collateral for the promissory note upon their
issuance to the investor. Notwithstanding the above, no shares of Class A Common
Stock, or warrants to purchase such shares, have been issued to this investor
because the investor has failed to honor the terms of the promissory note and
has failed to remit any of the payments due to us. On March 26, 2002, we filed a
complaint in San Diego County Superior Court against Meeuwi J. de Kraker.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the OTC Bulletin Board under the symbol "PNWK."
The following table sets forth the range of high and low bid prices on the OTC
Bulletin Board of our Class A Common Stock (which we simply renamed "common
stock" in 2002) for the periods indicated. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
High (US$) Low (US$)
----------------- ---------------
2000:
First Quarter 13.38 8.75
Second Quarter 16.60 8.05
Third Quarter 11.25 6.44
Fourth Quarter 19.13 5.38
2001:
First Quarter 11.66 5.69
Second Quarter 10.20 4.95
Third Quarter 6.05 2.45
Fourth Quarter 8.90 3.75
As of March 31, 2002, there were approximately 200 holders of record of our
common stock. We have never paid cash dividends on our common stock and have no
present intention to do so.
Item 6. Selected Financial Data
In the table below, we provide you with our summary historical financial data.
We have prepared this information using our financial statements, for the
consolidated years ended December 31, 2001, 2000 and 1999 as well as the period
from January 30, 1998 (inception) to December 31, 1998. When you read this
summary historical financial data, it is important that you read along with it
the historical financial statements and related notes included herein (in
thousands, except per share data (US Dollars)):
Period from
January 30, 1998
Years ended December 31, (Inception) to
------------------------------------------
2001 2000 1999 December 31, 1998
------- ------ ------- ------------------
Statement of Operations Data:
Revenues $2,219 $ - $ - $ -
Operating expenses:
Research and development 4,235 3,679 1,046 589
Sales and marketing 637 1,184 359 291
General and administrative 4,298 2,784 984 298
Litigation settlement (650) 1,400 - -
Stcok-based compensation (3,111) 4,421 1,611 1,493
Impairment of acquired technology 689 - - -
Restructuring charge 221 - - -
-------- ------- ------- -------
Total operating expenses (6,319) (13,468) (4,000) (2,671)
Other income (expense):
Interest income, net 93 449 20 7
Loss on investment (677) (101) (34) -
-------- -------- -------- -------
Net loss $(4,684) $(13,120) $(4,014) $(2,664)
-------- -------- -------- -------
-------- -------- -------- -------
Loss per common share - basic and diluted $ (0.57) $ (1.78) $ (0.71) $(0.57)
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average common shares outstanding 8,228 7,383 5,679 4,712
======== ======== ======== =======
December 31,
---------------------------------------------------------------
2001 2000 1999 1998
------- ------ ------ -------
Balance Sheet Data:
Cash, cash equivalents and
marketable securities $1,733 $11,484 $454 $119
Working capital 271 8,971 258 74
Total assets 3,418 12,304 712 312
Total stockholders equity 1,349 9,614 430 256
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the Years Ended December 31, 2001 and 2000
Revenue. Revenues consist of engineering services and beta sales related to the
Company's products. During 2001, the Company recorded engineering service
revenue of US$1.7 million and product sales of US$519,000. No revenues were
recorded during the year ended December 31, 2000.
Research and Development. Our research and development expenses increased from
US$3.7 million in 2000 to US$4.2 million in 2001. The increase in our research
and development expenses is primarily due to increased payroll costs and
prototype material expenses as the Company transitioned from a development stage
company to an operating company as well as the added cost of the Sistolic
business unit that was completed in January 2001 and the engineering support
required for the development contract with BarcoNet. We also began a series of
commercial tests with our technology and prototype products that led to the
development of our Cx1000 and Cx1400 products.
Sales and Marketing. Our sales and marketing expenses decreased from US$1.2
million in 2000 to approximately US$637,000 in 2001 due a shifting if resources
from marketing and sales to research and development, and general and
administration expenses. As a result of market feedback in 2000, we re-focused
our efforts on product development to provide for a technological solution for
legacy systems, not just TrueCircuit(R) technology enabled systems; therefore,
we reduced advertising, tradeshows and other sales and marketing expenditures.
General and Administrative. Our general and administrative expenses increased
from US$2.8 million in 2000 to US$4.3 million in 2001. We reclassified US$1.4
million of the previously reported general and administrative expenses in 2000
of US$4.2 million to reflect litigation settlement expense. The increase in
expenses of approximately US$1.5 million can be primarily attributed to:
amortization of acquired technology of approximately US$560,000; the recruiting
costs of securing upper level management; severance and consulting payments to
our former chief executive officer Michael Elliott; and, payments to key upper
level management for an entire year (2000 represented only a partial year of
payments to upper level management).
Stock-based Compensation. Stock-based compensation expense is a non-cash item
that is recognized in association with stock options having exercise prices
below estimated fair value. Stock-based compensation expense is calculated as
the difference between exercise price and estimated fair market on the date of
grant or subsequent measurement date. If the options are subject to variable
accounting treatment, then each quarter additional compensation expense, either
positive or negative, is recognized based on the fair market value of our common
stock in accordance with the provisions of variable stock option accounting. We
recognized US$4.4 million in stock-based compensation expense in 2000. In 2001,
we recorded a stock compensation benefit of approximately US$3.1 million due to
a lower stock price than previous years. Stock-based compensation expense may
continue to fluctuate, in material amounts, as the fair market value of our
common stock increases or decreases; however, in October 2001, we exchanged all
Class B Common Stock options for Class A Common Stock options (this Class A
Common Stock was subsequently reclassified as "common stock" in February 2002).
As options for the Class B Common Stock had been subject to variable accounting
treatment, the effect of this option exchange was to provide a final measurement
date for employee options and fix previously expensed consultant. The net effect
was to minimize the effect of variable accounting treatment on our stock
options.
Interest Income. Our interest income decreased from US$449,000 in 2000 to
US$93,000 in 2001. The decrease in interest income was due to lower cash
balances than previous years, as well as lower interest rates.
Impairment of Acquired Technology. In June 2001, we decided to explore strategic
alternatives for our Silicon Systems business unit. These alternatives included
strategic investment by a third party, formation of a joint venture with a third
party or the sale of all the assets or a majority interest of the business. We
did not record a loss based on the strategic alternatives it is exploring as we
believe that the fair value of the assets are in excess of their book value;
however, we re-evaluated our investment in acquired technology and wrote-down
the value at December 31, 2001 to US$686,000, after the cancellation of a
material contract with a large semi-conductor customer in March 2002.
Restructuring Charge. During the third quarter of 2001, we recorded
restructuring charges totaling US$221,000, primarily due to severance costs
related to a workforce reduction and subsidy costs related to subletting certain
excess office space. We implemented the restructuring plan as a result of the
completion of a certain third party funded development project and as a prudent
cash flow measure in order to improve its overhead cost structure.
The workforce reduction resulted in the involuntary termination of six employees
of which four were from our engineering research and development staff and two
were from our management and administrative staff. The total charge recognized
by us for the involuntary termination was approximately US$93,000.
Loss on Sale. Our loss on sale of securities increased from US$101,000 in 2000
to US$677,000 in 2001. This increase was due to losses recognized from the our
sale of shares of Leitch common stock.
For the Years Ended December 31, 2000 and 1999
Research and Development. Our research and development expenses increased from
US$1.0 million in 1999 to US$3.7 million in 2000. The increase in our research
and development expenses was primarily due to higher expenses for consulting,
increases in engineering staff, and an increase in prototype material related to
the development of certain proposed products and the technology underlying these
products.
Sales and Marketing. Our sales and marketing expenses increased from US$359,000
in 1999 to US$1.2 million in 2000. The increase in our sales and marketing
expenses was due to an increase in promotional and marketing expenses primarily
relating to our attendance at the 2000 National Association of Broadcasters
(NAB) convention, the addition of new sales and marketing personnel, and
increased travel and demonstration expenses.
General and Administrative. Our general and administrative expenses increased
from US$984,000 in 1999 to US$4.2 million in 2000. The increase in our general
and administrative expenses was primarily due to US$2.2 million of legal fees
and settlement costs related to our litigation with Dr. Franklin Felber, a
former officer and director of ours. We also incurred higher personnel costs as
we added or filled key management and staff positions, including the positions
of Chief Executive Officer, Chief Financial Officer and Corporate Controller,
along with other general, human resource, information systems and administrative
positions. We also incurred higher consulting, legal and financial expenses
related to our obligations as a new SEC reporting company and re-establishment
of our position on the OTC Bulletin Board.
Stock-based Compensation. Stock-based compensation expense is a non-cash item
that is recognized in association with stock options having exercise prices
below estimated fair value. Stock-based compensation expense is calculated as
the difference between exercise price and estimated fair market on the date of
grant or subsequent measurement date. If the options are subject to variable
accounting treatment, then each quarter additional compensation expense, either
positive or negative, is recognized based on the fair market value of our common
stock in accordance with the provisions of variable stock option accounting. We
recognized US$1.6 million in 1999 and US$4.4 million in 2000 of stock-based
compensation charges, respectively. Stock-based compensation expense may
continue to fluctuate, in material amounts, as the fair market value of our
common stock increases or decreases.
Interest Income. Our interest income increased from US$20,000 in 1999 to
US$449,000 in 2000. The increase in interest income was due to significantly
higher average cash balances during 2000, which included proceeds from a private
placement with Leitch completed in April of 2000 and a private placement with
other investors completed in May 2000.
Other Expense. Our other expense increased from US$34,000 in 1999 to US$101,000
in 2000. The increase in other expense was due to a decline in fair market value
of marketable securities we hold in Jyra Research, Inc., considered to be other
than temporary.
Liquidity and Capital Resources
Since our inception on January 30, 1998, we have financed our operations
primarily through the sale of common equity securities to investors and
strategic partners. The funds we received through these sales are currently
invested in U.S. Treasury and government agency obligations and investment-grade
corporate obligations.
At December 31, 2001, we had cash and cash equivalents of US$1,181 million,
marketable securities of US$552,000 and net working capital of US$271,000. For
the next several years, we expect to make substantial additional expenditures
associated with research and development and incur increased costs associated
with staffing for management, sales and marketing, manufacturing and operations
and administration functions.
Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. The cash crisis is very serious. We currently
anticipate a negative cash position to occur during June 2002 unless additional
cash is received from the sale of our equity securities or from revenue
arrangements. Our independent auditors' expressed doubt about our ability to
continue as a going concern. However, we are currently seeking additional
funding to enable us to continue our activities and to expand our marketing and
sales, research and development and manufacturing and operations activities and
our infrastructure. In the event we do not receive additional funding, we plan
to: 1) further reduce our costs in all areas of our operating plan and focus on
selling existing products and services until sufficient capital is raised to
support growth and more substantial orders materialize; 2) sell our assets
through a merger or acquisition; or, 3) seek protection under bankruptcy.
Cash used for operating activities for the years ended December 31, 2001 and
December 31, 2000, totaled US$7.7 million and US$6.3 million, respectively. The
relative increase in cash used for operating activities for the years ended
December 31, 2001 compared to the prior year, was primarily due to amortization
expense related to our acquisition of Metar ADC assets in October 2000 and our
restructuring charge of US$221,000. The increase for the year ended December 31,
2001 was partially offset by a decrease in the common stock issued for services.
Cash provided by investing activities for the year ended December 31, 2001 was
US$1.4 million compared to a use of cash of US$1.5 million as of December 31,
2000. Cash provided for the year ended December 31, 2001 is primarily a result
of the sale of Leitch Technology Corporation stock that we obtained when Leitch
invested in us in 2000.
Cash provided by financing activities for the years ended December 31, 2001 and
December 31, 2000, totaled US$236,000 and US$14.6 million, respectively. This
change was primarily due to the fact that we did not issue any stock for cash in
2001.
At December 31, 2001, we have no material commitments other than our operating
leases and our payable to Metar SRL. Our future capital requirements will depend
upon many factors, including the timing of research and product development
efforts, the expansion of our general and administrative functions and sales and
marketing efforts, the development of prototype systems demonstrating our
technology and the need to finance the manufacturing of commercial products that
we may develop and launch. We expect to continue to expend significant amounts
on research and development staffing, infrastructure and computer equipment to
support on-going research and development activities.
We are pursuing a number of alternatives to raise additional funds, including
borrowings; lease arrangements; collaborative research and development
arrangements with technology companies; the licensing of product rights to third
parties; or additional public and private financing. There can be no assurance
that funds from these sources will be available on favorable terms, or at all.
If we raise additional funds through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or such equity securities may provide for rights,
preferences or privileges senior to those of the holders of our common stock.
Critical Accounting Policies and Estimates.
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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. On an on-going basis, we evaluate our estimates and
judgments, including those related to customer revenues, bad debts, inventories,
intangible assets, income taxes, restructuring costs and contingencies and
litigation. We base our estimates and judgments on our experience and on various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
We record revenue from product sales upon shipment, or when delivery
requirements and risk of loss passes to the customer, if later. Revenue from
services is recorded when earned and no significant acceptance criteria exist.
Revenue on engineering design contracts, including technology development
agreements, is recognized using the percentage-of-completion method, based on
costs incurred to date compared with total estimated costs, subject to
acceptance criteria. Billings on uncompleted contracts in excess of incurred
cost and accrued profits are classified as deferred revenue. License fees are
recognized when delivery requirements have been met, collection is probable and
no further obligations exist. Royalty revenue is recorded as earned in
accordance with the specific terms of each license agreement when reasonable
estimates of such amounts can be made.
Bad Debt
As we had limited product shipment in 2001, we did not maintain an allowance for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments.
Inventory
We record inventory, which consists primarily of raw materials used in the
production of our video gateways and related products, at the lower of cost or
market. Cost is determined principally on the average cost method. Provisions
for potentially obsolete or slow-moving inventory are made based on our analysis
of inventory levels and future sales forecasts.
Acquired Technology Impairment
In assessing the recoverability of our intangibles, we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets not previously recorded. On December 31, 2001, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
and Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting
for the Impairment or Disposal of Long-Lived Assets. We re-evaluated our
investment in acquired technology and wrote-down the value at December 31, 2001
to US$686,000, after the cancellation of a material contract with a large
semi-conductor customer in March 2002.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from our marketable
securities and investments in certain available-for-sale securities. Under our
current policies, we do not use interest rate derivative instruments to manage
exposure to interest rate changes. A hypothetical 100 basis point adverse move
in interest rates along the entire interest rate yield curve would not
materially affect the fair value of interest sensitive financial instruments at
December 31, 2001.
Item 8. Financial Statements
The Company's financial statements at December 31, 2001, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 2001, 2000, and 1999, are included in
this report on pages F-1 through F-8.
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 will be set forth under the captions
"Election of Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Compliance" in our definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 2002 Annual Meeting of
Stockholders (the "Proxy Statement"), which is incorporated by reference herein.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Certain Transactions."
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of This Report
1. The following financial statements are filed as a part of
this report under Item 8 - Financial Statements and
Supplementary Data:
Report of Ernst &Young LLP, Independent Auditors
-Consolidated Balance Sheets
-Consolidated Statements of Operations
-Consolidated Statements of Stockholders' Equity
-Consolidated Statements of Cash Flows
-Notes to Consolidated Financial Statements
2. Financial statement schedules: none.
3. Exhibits: The following exhibits are filed with this
report, or incorporated by reference as noted.
Exhibit
Number Description
2.1 Sale Purchase Agreement among us, Metar ADC and
Michael Florea, Dated October 13, 2000. (1)
3.1 Certificate of Incorporation, as amended. (2)
3.1.1* Certificate of Amendment of Certificate of Incorporation, as
filed with the Delaware Secretary of State on February 28,
2002.
3.2 Amended and Restated Bylaws. (2)
10.1 Lease Agreement between us and Spieker Properties, dated
April 10, 1999. (2).
10.2 Stockholders' Agreement, by and among us, Leitch Technology
Corporation, Ronald D. Fellman, Douglas A. Palmer and
Michael T. Elliott, dated April 7, 2000. (2)
10.3+ Technology License Agreement between us and Leitch Technology
corporation, dated April 10, 2000. (2)
10.4# Terms of Employment between us and Richard B. Slansky, dated
May 5, 2000. (3)
10.5# Employment Agreement with Michael Florea, dated October 13,
2000, as amended by Amendment No. 1 to the Employment
Agreement of Michael Florea, dated December 19, 2000. (4)
10.6 Settlement Agreement and Mutual Release among Path 1 Network
Technologies Inc., Douglas A. Palmer, Ronald D. Fellman,
Linda Palmer, Franklin Felber and Merril Felber dated
January 4, 2001. (5)
10.7 Path 1 Network Technologies Inc. 2000 Stock Option/Stock
Issuance Plan. (6)
10.8 Form of Notice of Grant under the 2000 Stock Option/Stock
Issuance Plan. (6)
10.9 Form of Stock Option Agreement under the 2000 Stock
Option/Stock Issuance Plan. (6)
10.10 Employment Separation/Consulting Agreement and General
Release between us and Michael Elliott dated April
4, 2001. (7)
10.11# Employment Agreement between us and Frederick A. Cary,
dated September 7, 2001. (8)
10.12* Subscription Agreement between us and Meewui de Kraker, dated
October 24, 2001
10.13* Promissory Note between us and Meewui de Kraker dated,
October 24, 2001
10.14* Stock Pledge Agreement between us and Meewui de Kraker,
dated October 24, 2001
10.15* Technology License Agreement between us and Visionary
Solutions dated December 11, 2001.
10.16* Separation and General Release between us and Alan Remen
dated January 8, 2002.
10.17* Consulting Agreement between us and Alan Remen dated
January 8, 2002.
10.18 Common Stock Purchase Agreement between us and DTKA Holdings
Limited, dated January 17, 2002. (9)
10.20 Registration Rights Agreement between us and DTKA Holdings
Limited, dated January 17, 2002.
10.21* Path 1 Network Technologies 2001 Employee Stock Purchase Plan.
23.1* Consent of Ernst & Young LLP.
(1) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Form 8-K filed with the Commission on October 30, 2000.
(2) This exhibit was filed as a part of, and is hereby incorporated by reference
to, our Registration Statement on Form 10 filed with the Securities and Exchange
Commission (the "Commission") on May 23, 2000, as amended by Form 10/A filed
with Commission on June 19, 2000.
(3) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed with the Commission on March 29, 2001.
(4) This exhibit was previously filed as a part of, and is hereby the
incorporated by reference to, our Annual Report on Form 10-K for the year ended
December 31, 2000, filed with the Commission on March 29, 2001.
(5) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Current Report on Form 8-K, filed with the Commission on
January 31, 2001.
(6) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Registration Statement on Form S-8, filed with the
Commission on September 21, 2001.
(7) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed with the Commission on August 14, 2001.
(8) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q or the quarter ended
September 30, 2001, filed with the Commission on November 13, 2001.
(9) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, Our Current Report on Form 8-K, filed with the Commission on
January 29, 2002.
+ Confidential Treatment Requested
# Management Compensation Agreement
* Filed Herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 12, 2002
Path 1 Network Technologies Inc.
By: /s/ Frederick A. Cary
Frederick A. Cary
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Frederick A. Cary President and Chief Executive Officer April 12, 2002
- ---------------------- and Director (Principal Executive Officer)
Frederick A. Cary
/s/ Richard B. Slansky Chief Financial Officer and Secretary April 12, 2002
- ---------------------- (Principal Financial Officer and Principal Accounting
Richard B. Slansky Officer)
/s/ Ronald D. Fellman Director April 12, 2002
- ---------------------
Ronald D. Fellman
/s/ Robert L. Packer Director April 12, 2002
- --------------------
/s/ John J. Splavec Director April 12, 2002
- -------------------
John J. Splavec
/s/ James A. Bixby Director April 12, 2002
- ------------------
James A. Bixby
Exhibit
Number Description
2.1 Sale Purchase Agreement among us, Metar ADC and Michael Florea,
Dated October 13, 2000. (1).
3.1 Certificate of Incorporation, as amended. (2).
3.1.1* Certificate of Amendment of Certificate of Incorporation, as
filed with the Delaware Secretary of State on February 28,
2002.
3.2 Amended and Restated Bylaws. (2).
10.1 Lease Agreement between us and Spieker Properties, dated
April 10, 1999. (2).
10.2 Stockholders' Agreement, by and among us, Leitch
Technology Corporation, Ronald D. Fellman, Douglas A. Palmer
and Michael T. Elliott, dated April 7, 2000. (2).
10.3+ Technology License Agreement between us and Leitch Technology
corporation, dated April 10, 2000. (2).
10.4# Terms of Employment between us and Richard B. Slansky, dated
May 5, 2000. (3).
10.5# Employment Agreement with Michael Florea, dated
October 13, 2000, as amended by Amendment No. 1 to the
Employment Agreement of Michael Florea, dated
December 19, 2000. (4).
10.6 Settlement Agreement and Mutual Release among Path 1 Network
Technologies Inc., Douglas A.Palmer, Ronald D. Fellman,
Linda Palmer, Franklin Felber and Merril Felber dated
January 4, 2001.(5).
10.7 Path 1 Network Technologies Inc. 2000 Stock Option/Stock
Issuance Plan. (6).
10.8 Form of Notice of Grant under the 2000 Stock Option/Stock
Issuance Plan. (6).
10.9 Form of Stock Option Agreement under the 2000 Stock
Option/Stock Issuance Plan. (6).
10.10 Employment Separation/Consulting Agreement and General
Release between us and Michael Elliottdated April 4, 2001. (7).
10.11# Employment Agreement between us and Frederick A. Cary, dated
September 7, 2001. (8).
10.12* Subscription Agreement between us and Meewui de Kraker dated
October 24, 2001
10.13* Promissory Note between us and Meewui de Kraker dated
October 24, 2001
10.14* Stock Purchase Agreement between us and Meewui de Kraker dated
October 24, 2001
10.15* Technology License Agreement between us and Visionary Solutions
dated December 11, 2001.
10.16* Separation and General Release between us and Alan Remen dated
January 8, 2002.
10.17* Consulting Agreement between us and Alan Remen dated
January 8, 2002.
10.18 Common Stock Purchase Agreement between us and DTKA Holdings
Limited, dated January 17, 2002. (9).
10.19 Registration Rights Agreement between us and DTKA Holdings
Limited, dated January 17, 2002.
10.20* Path 1 Network Technologies 2001 Employee Stock Purchase Plan.
23.1* Consent of Ernst & Young LLP.
(1) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Form 8-K filed with the Commission on October 30, 2000.
(2) This exhibit was filed as a part of, and is hereby incorporated by reference
to, our Registration Statement on Form 10 filed with the Securities and Exchange
Commission (the "Commission") on May 23, 2000, as amended by Form 10/A filed
with Commission on June 19, 2000.
(3) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, filed with the Commission on March 29, 2001.
(4) This exhibit was previously filed as a part of, and is hereby the
incorporated by reference to, our Annual Report on Form 10K for the year ended
December 31, 2000, filed with the Commission on March 29, 2001.
(5) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Current Report on Form 8-K, filed with the Commission on
January 31, 2001.
(6) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Registration Statement on Form S-8, filed with the
Commission on September 21, 2001.
(7) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, filed with the Commission on August 14, 2001.
(8) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, our Quarterly Report on Form 10-Q or the quarter ended
September 30, 2001, filed with the Commission on November 13, 2001.
(9) This exhibit was previously filed as a part of, and is hereby incorporated
by reference to, Our Current Report on Form 8-K, filed with the Commission on
January 29, 2002.
+ Confidential Treatment Requested
# Management Compensation Agreement
* Filed Herewith
- --------
1 Traditional telephone networks use "circuit-switching" to meet the needs of
real-time audio signals. Circuit switching ensures that a communications signal
always has a consistent, fixed point-to-point path, or "channel", from source to
destination. Because circuit switching maintains a constant route, it minimizes
end-to-end delays and jitter. However, traditional circuit switching is not
practical for many of today's Internet uses due to its relatively rigid and
inflexible structure.
2 Ethernet (the name commonly used for Institute for Electrical and Electronic
Engineering (IEEE) 802.3 CSMA/CD, which is a standard that defines the
implementation of an Ethernet network) is the dominant cabling and low-level
data delivery technology used in LANs and is also used for MANs and WANs. First
developed in the 1970s, it was published as an open standard by DEC, Intel, and
Xerox (or DIX) and later described as a formal standard by the IEEE.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Path 1 Network Technologies Inc. Page
Report of Ernst & Young LLP, Independent Auditors............................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.................F-3
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999.............................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2001, 2000 and 1999 ......................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999.............................................................F-8
Notes to Consolidated Financial Statements...................................F-9
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Path 1 Network Technologies Inc.
We have audited the accompanying consolidated balance sheets of Path 1 Network
Technologies Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Path 1 Network Technologies
Inc. at December 31, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Path 1
Network Technologies Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses, has an
accumulated deficit of US$24.5 million and needs to raise additional capital to
fund its operations in 2002. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
San Diego, California
February 15, 2002,
except for Note 13, as to which the date is
April 11, 2002
F-2
Path 1 Network Technologies Inc.
Consolidated Balance Sheets
(in thousands, US dollars, except for share data)
December 31, December 31,
2001 2000
----------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,181 $ 7,171
Marketable securities, available for sale 552 4,313
Accounts receivable 322 70
Other current assets 285 107
----------------------- ---------------------
Total current assets 2,340 11,661
Property and equipment, net 482 459
Acquired technology, net 585 -
Other assets 11 184
----------------------- ---------------------
Total assets $ 3,418 $ 12,304
======================= =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,584 $ 2,175
Accrued compensation and benefits 485 191
Deferred revenue - 324
----------------------- ---------------------
Total current liabilities 2,069 2,690
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. 10,000,000 shares authorized
at December 31, 2001 and 2000, no shares issued and
outstanding at December 31, 2001 and 2000 - -
Common stock, $0.001 par value;
Class A - 20,000,000 shares authorized; 8,299,126 8 8
and 8,183,901 shares issued and outstanding at
December 31, 2001, and December 31, 2000 respectively
Additional paid-in capital 26,801 32,295
otes receivable from stockholders
N (86) (114)
Deferred compensation (276) (3,005)
ccumulated other comprehensive (loss) income
A (616) 228
Accumulated deficit (24,482) (19,798)
----------------------- ---------------------
Total stockholders' equity 1,349 9,614
----------------------- ---------------------
$ 3,418 $ 12,304
======================= =====================
See accompanying notes to the consolidated financial statements.
F-3
Path 1 Network Technologies Inc.
Consolidated Statements of Operations
(in thousands, US dollars, except for per share data)
Years Ended
December 31,
2001 2000 1999
-------------------------------------------------
Revenues: $ 2,219
- -
-------------------------------------------------
Operating expenses:
Engineering research and development $ 4,235 $ 3,679 $1,046
Sales and marketing 637 1,184 359
General and administrative 4,298 2,784 984
Litigation settlement (650) 1,400 -
Stock-based compensation (*) (3,111) 4,421 1,611
Impairment of acquired technology 689 - -
Restructuring charge 221 - -
-------------------------------------------------
Total operating expenses (6,319) (13,468) (4,000)
Interest income, net 93 449 20
Loss on sale of securities (677) (101) (34)
-------------------------------------------------
Net loss $ (4,684) $ (13,120) $ (4,014)
=================================================
Loss per common share - basic and diluted $ (0.57) $ (1.78) $ (0.71)
=================================================
Weighted average common shares outstanding - basic and diluted 8,228 7,383 5,679
=================================================
(*) The following table shows how the Company's stock-based compensation
would be allocated to the respective department expense line items:
Research and development $ (1,308) $ 1,251 $302
Sales and marketing (554) 485 -
General and administrative (1,249) 2,685 1,309
-------------------------------------------------
$ (3,111) $ 4,421 $ 1,611
=================================================
See accompanying notes to the consolidated financial statements.
F-4
Path 1 Network Technologies Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, US dollars, except for per share data)
For the years ended December 31, 2001, 2000 and 1999
Series A Convertible Common Stock Additional
Preferred Stock Class A Paid-in
----------------------------- ------------------------------
Shares Amount Shares Amount Capital
-------------- ------------- -------------- -------------- -----------------
Balance at December 31, 1998 1 $ - 5,264 $ 5 $ 3,604
Issuance of common stock at $4.00 per share
for cash, net of issuance costs of $82 - - 420 1 1,595
Issuance of common stock at $8.00 per share
for cash, net of issuance costs of $52 - - 127 - 962
Conversion of Series A preferred stock into
common stock (1) - 277 - -
Issuance of stock options to consultants
for services - - - - 311
Deferred compensation related to employee
stock options - - - - 3,791
Amortization of deferred compensation - - - - -
Comprehensive loss:
Net loss for the year ended December 31,
1999 - - - - -
Reversal of unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net comprehensive loss - - - - -
============================================ -------------- ------------- -------------- -------------- -----------------
Balance at December 31, 1999 $ - $ - $ 6,088 $ 6 $ 10,263
============================================ ============== ============= ============== ============== =================
Path 1 Network Technologies Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, US dollars, except for per share data)
For the years ended December 31, 2001, 2000 and 1999
Notes Accumulated
Receivable Comprehensive Total
from Income Deferred Accumulated Stockholders
Stockholders (Loss) Compensation Deficit Equity
--------------- -------------- -------------- ------------- ---------------
Balance at December 31, 1998 $ - (19) $ (670) $ (2,664) $ 256
Issuance of common stock at $4.00 per share
for cash, net of issuance costs of $82 - - - - 1,596
Issuance of common stock at $8.00 per share
for cash, net of issuance costs of $52 - - - - 962
Conversion of Series A preferred stock into
common stock - - - - -
Issuance of stock options to consultants
for services - - - - 311
Deferred compensation related to employee
stock options - - (3,791) - -
Amortization of deferred compensation - - 1,300 - 1,300
Comprehensive loss:
Net loss for the year ended December 31,
1999 - - - (4,014) (4,014)
Reversal of unrealized loss on investment
in Jyra Research, Inc. - 19 - - 19
Net comprehensive loss - - - - (3,995)
============================================ --------------- -------------- -------------- ------------- --------------
Balance at December 31, 1999 $ - $ - $ (3,161) $ (6,678) $ 430
============================================ =============== ============== ============== ============= ==============
See accompanying notes to the consolidated financial statements.
F-5 (continued)
Series A Convertible Common Stock Additional
Preferred Stock Class A Paid-in
----------------------------- -----------------------------
Shares Amount Shares Amount Capital
-------------- -------------- -------------- ------------- ----------------
Issuance of common stock at $8.00 per share
for cash, net of issuance costs of $379 - - 600 1 4,421
Issuance of common stock at $8.00 per share
for $10,120 in cash and 200,000 shares
of Leitch common stock valued at $3.1
million, net of issuance costs of $100 - - 1,286 1 13,221
Exercise of options to purchase common stock
for cash - - 20 - 12
Exercise of options to purchase common stock
in exchange for shareholder notes - - 190 - 114
Issuance of stock options to consultants
for services - - - - 2,202
Deferred compensation related to employee
stock options - - - - 2,062
Amortization of deferred compensation - - - - -
Comprehensive loss:
Net loss for the year ended December 31,
2000 - - - - -
Unrealized gain on marketable securities - - - - -
Net comprehensive loss - - - - -
=================================================== -------------- -------------- -------------- ------------- ----------------
Balance at December 31, 2000 - $ - $ 8,184 $ 8 $ 32,295
=================================================== ============== ============== ============== ============= ================
See accompanying notes to the consolidated financial statements.
F-6
Path 1 Network Technologies Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, US dollars, except for per share data)
For the years ended December 31, 2001, 2000 and 1999
Notes Accumulated
Receivable Comprehensive Total
from Income Deferred Accumulated Stockholders
Stockholders (Loss) Compensation Deficit Equity
--------------- -------------- -------------- ------------- ---------------
Issuance of common stock at $8.00 per share
for cash, net of issuance costs of $379 - - - - 4,422
Issuance of common stock at $8.00 per share
for $10,120 in cash and 200,000 shares
of Leitch common stock valued at $3.1
million, net of issuance costs of $100 - - - - 13,222
Exercise of options to purchase common stock
for cash - - - - 12
Exercise of options to purchase common stock
in exchange for shareholder notes (114) - - - -
Issuance of stock options to consultants
for services - - - - 2,202
Deferred compensation related to employee
stock options - - (2,062) - -
Amortization of deferred compensation - - 2,218 - 2,218
Comprehensive loss:
Net loss for the year ended December 31,
2000 - - - (13,120) (13,120)
Unrealized gain on marketable securities - 228 - - 228
Net comprehensive loss - - - - (12,892)
============================================ --------------- -------------- -------------- ------------- --------------
Balance at December 31, 2000 (114) $ 228 $(3,005) $ (19,798) $ 9,614
============================================ =============== ============== ============== ============= ==============
See accompanying notes to the consolidated financial statements.
F-6 (continued)
Path 1 Network Technologies Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, US dollars, except for per share data)
For the years ended December 31, 2001, 2000 and 1999
Series A Convertible Common Stock Additional
Preferred Stock Class A Paid-in
----------------------------- -----------------------------
Shares Amount Shares Amount Capital
-------------- -------------- -------------- ------------- -----------------
Exercise of options to purchase common stock
for cash 50 65
Repayment of Stockholder loans
Exercise of options to purchase common stock
in exchange for stockholder notes 66 143
Issuance of stock options to consultants
for services - (774)
Deferred compensation related to employee
stock options (5,235)
Amortization of deferred compensation -
Modification of employee stock options 169
Issuance of warrants to consultants 138
Comprehensive loss:
Net loss for the year ended December 31,
2001
Unrealized loss on marketable securities
Net comprehensive loss
=================================================== -------------- -------------- -------------- ------------- -----------------
Balance at December 31, 2001 - $ - 8,300 $ 8 $ 26,801
=================================================== ============== ============== ============== ============= =================
See accompanying notes to the consolidated financial statements.
F-7
Path 1 Network Technologies Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, US dollars, except for per share data)
For the years ended December 31, 2001, 2000 and 1999
Notes Accumulated
Receivable Comprehensive Total
from Income Deferred Accumulated Stockholders
Stockholders (Loss) Compensation Deficit Equity
--------------- -------------- -------------- ------------- ---------------
Exercise of options to purchase common stock
for cash 65
Repayment of Stockholder loans 171 171
Exercise of options to purchase common stock
in exchange for stockholder notes (143) -
Issuance of stock options to consultants
for services (774)
Deferred compensation related to employee
stock options 5,235 -
Amortization of deferred compensation (2,506) (2,506)
Modification of employee stock options 169
Issuance of warrants to consultants 138
Comprehensive loss:
Net loss for the year ended December 31,
2001 (4,684) (4,684)
Unrealized loss on marketable securities (844)
Net comprehensive loss (5,528)
============================================ --------------- -------------- -------------- ------------- --------------
Balance at December 31, 2001 $ (86) $ (616) $ (276) $ (24,482) $1,349
============================================ =============== ============== ============== ============= ==============
See accompanying notes to the consolidated financial statements.
F-7 (continued)
Path 1 Network Technologies Inc.
Consolidated Statements of Cash Flows
(in thousands, US dollars, except for per share data)
Years ended December 31,
2001 2000 1999
--------------- --------------- -----------------
Cash flows from operating activities:
Net loss $ (4,684) $ (13,120) $ (4,014)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 920 143 12
Impairment of acquired technology 689
Amortization of deferred compensation (3,111) 2,218 1,300
Warrants issued for recruiting services 138 -
Common stock issued for services - 2,202 311
Restructuring charge 221
Loss on investment 5 101 34
Changes in assets and liabilities:
Accounts Receivable (252)
Other current assets (178) (91) (76)
Other assets 168 (172) -
Accounts payable and accrued liabilities (1,547) 1,893 227
Accrued compensation and benefits 294 191 -
Deferred revenue (324) 324 -
--------------- --------------- -----------------
Cash used in operating activities (7,661) (6,311) (2,206)
Cash flows from investing activities:
Purchase of marketable securities - (209,668) -
Sale of marketable securities 2,917 208,679
Purchase of Metar ADC assets (1,099) -
Purchases of property and equipment (383) (543) (17)
--------------- --------------- -----------------
Cash provided by (used in) investing activities 1,435 (1,532) (17)
Cash flows from financing activities:
Issuance of common stock for options exercised, net 65 12 -
Cash from extinguishment of stockholder notes 171 -
Issuance of common stock for cash, net - 14,548 2,558
--------------- --------------- -----------------
Cash provided by financing activities 236 14,560 2,558
Increase (decrease) in cash and cash equivalents (5,990) 4,515 24
Cash and cash equivalents, beginning of period 7,171 454 119
--------------- --------------- -----------------
Cash and cash equivalents, end of period $ 1,181 $ 7,171 454
=============== =============== =================
Supplemental cash flow disclosures:
Issuance of common stock for marketable securities $ - $ 3,096 $ -
=============== =============== =================
Unrealized gain/(loss) in marketable securities $ (844) $ 228 $ -
=============== =============== =================
Exercise of stock options for stockholder notes $ 143 $ 114 $ -
=============== =============== =================
See accompanying notes to the consolidated financial statements.
F-8
Path 1 Network Technologies Inc.
Notes to Consolidated Financial Statements
Path 1 Network Technologies Inc.
Notes to Consolidated Financial Statements
December 31, 2001
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Path 1 Network Technologies Inc. (the Company) was incorporated in Delaware on
January 30, 1998 under the name Millennium Network Technologies, Inc. On March
16, 1998, the Company changed its name to Path 1 Network Technologies Inc.
The Company is engaged in the development of proprietary, internet protocol
("IP") and Ethernet-based network technology which will manage and alleviate
network traffic congestion, enabling simultaneous, real-time data, telephone and
video transmissions over an IP/Ethernet network with improved quality of
service. During 2001, the Company emerged from the development stage.
Principles of Consolidation
The Company's consolidated financial statements include its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Basis of Presentation
In the period from January 30, 1998 (inception) through December 31, 2001, the
Company incurred losses totaling US$24.5 million. The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. This basis of accounting contemplates the recovery of the Company's
assets and the satisfaction of its liabilities in the normal course of
conducting business. Management does not believe that the Company's existing
capital resources will enable the Company to fund operations for the next twelve
months. Management's plans are to reduce costs in all areas of its operating
plan until sufficient capital is raised to support growth and more substantial
orders materialize; however, even with its cost reduction plan, the Company
needs to raise additional funding to continue as a going concern. In the event
the Company does not receive additional funding, the Company plans to: 1)
further reduce costs and focus on selling existing products and services; 2)
sell the Company's assets through a merger or acquisition; or, 3) seek
protection under bankruptcy. Without additional financing, the Company will be
required to further delay, reduce the scope of, or eliminate one or more of its
research and development projects and significantly reduce its expenditures on
product deployment, and may not be able to continue as a going concern.
F-9
1. Organization and Summary of Significant Accounting Policies (continued)
Management Estimates and Assumptions
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 at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other highly
liquid investments with maturities of three months or less when purchased. The
carrying value of these instruments approximates fair value. The Company
generally invests its excess cash in debt instruments of the U.S. Treasury,
government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates.
Marketable Securities
The Company determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. Available-for-sale securities are stated at fair value as determined
by the most recently traded price of each security at the balance sheet date.
The net unrealized gains or losses on available-for-sale securities are reported
as a component of comprehensive income. The specific identification method is
used to compute the realized gains and losses on debt and equity securities.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable investments, inventory,
accounts payable, and accrued liabilities approximates their fair value.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from two to five years, using the
straight-line method.
F-10
1. Organization and Summary of Significant Accounting Policies (continued)
Long Lived Assets
In accordance with Statement of Financial Accounting standard No. 121, the
Company reviews the carrying value on long-lived assets for evidence of
impairment through comparison of undiscounted cash flows generated from those
assets to the related carrying amounts of the assets. During the year ended
December 31, 2001, the company recorded an impairment charge of US$689,000
related to the acquired technology in the Metar acquisition.
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the difference between the financial statement bases and the tax bases
of assets and liabilities using enacted tax rates. A valuation allowance is
established to reduce a deferred tax asset to the amount that is expected more
likely than not to be realized.
Revenue Recognition
Revenue from platform and prototype (hardware and software) product sales is
recorded upon shipment, or when delivery requirements and risk of loss passes to
the customer, if later. Revenue from services is recorded when earned and no
significant acceptance criteria exist. Revenue on engineering design contracts,
including technology development agreements, is recognized using the
percentage-of-completion method, based on costs incurred to date compared with
total estimated costs, subject to acceptance criteria. Billings on uncompleted
contracts in excess of incurred cost and accrued profits are classified as
deferred revenue. License fees are recognized when delivery requirements have
been met, collection is probable and no further obligations exist. Royalty
revenue is recorded as earned in accordance with the specific terms of each
license agreement when reasonable estimates of such amounts can be made.
Research and Development Expenses
Research and development expenditures are charged to expense as incurred. The
Company expenses amounts paid to obtain patents or acquire licenses, as the
ultimate recoverability of the amounts paid is uncertain.
Advertising Expense
Advertising expenditures are charged to expense as incurred. The Company
expensed US$43,000, US$219,000, and US$57,000 for the years ended December 31,
2001, 2000, and 1999, respectively.
F-11
1. Organization and Summary of Significant Accounting Policies (continued)
Stock Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion ("APB") 25,
Accounting for Stock Issued to Employees, Statement of Financial Accounting
Standards (SFAS), Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans, and SFAS Interpretation
No 38, Determining the Measurement Date for Stock Option, Purchase, and Award
Plans involving Junior Stock. The Company also complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
In March 2000, the Financial Accounting Standards Board, (FASB), released FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, and interpretation of APB Opinion No. 25," (FIN 44) which provides
clarification of APB 25 for certain issues such as the determination of who is
an employee, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. We believe that
our practices are in conformity with this guidance and therefore FIN 44 had no
impact on our financial statements.
The Company accounts for equity instruments issued to non-employees using the
fair value method in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Issue No. 96-18, Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Equity instruments issued to non-employees that are fully vested and
non-forfeitable are measured at fair value at the issuance date and expensed in
the period over which the benefit is expected to be received. Equity instruments
issued to non-employees which are either unvested or forfeitable, for which
counter-party performance is required for the equity instrument to be earned,
are measured initially at the fair value and subsequently adjusted for changes
in fair value until the earlier of: 1) the date at which a commitment for
performance by the counter-party to earn the equity instrument is reached; or,
2) the date on which the counter-party's performance is complete.
F-12
1. Organization and Summary of Significant Accounting Policies (continued)
Net Loss per Share
Basic and diluted net loss per share has been computed in accordance with SFAS
No. 128, Earnings Per Share, using the weighted-average number of shares of
common stock outstanding during the period including any dilutive common stock
equivalents. Common stock equivalents for the twelve months ended December 31,
2001 and 2000 consisting of options outstanding to purchase approximately
4,275,000 and 3,355,000 shares of common stock, respectively, were not included
in the calculation of diluted earnings per share because of the anti-dilutive
effect.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98,
common shares, if any, issued in each of the periods presented for nominal
consideration would be included in the per share calculations as if they were
outstanding for all periods presented. No such shares have been issued.
New Accounting Standards
In June 2001, FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. Management re-evaluated its investment in acquired
technology and wrote-down the value at December 31, 2001 to US$686,000.
In October 2000, FASB issued Statement of Financial Accounting Standards No. 144
(FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS
144 establishes a single model to account for impairment of assets to be held or
disposed, incorporating guidelines for accounting and disclosure of discontinued
operations. FAS 144 is effective for fiscal years beginning after December 15,
2001 and, generally, its provisions are to be applied prospectively. Management
believes the impact on the financial statements of the Company will be
immaterial.
Reclassifications
Certain reclassifications have been made to prior period financial statements to
conform to current year presentation.
F-13
2. Metar Acquisition
In October 2001, the Company agreed to purchase the assets of Metar ADC, a
Bucharest, Romania-based integrated circuit design company from Metar SRL. In
February 2001, the Company concluded the purchase of assets of Metar ADC. Under
the terms of the purchase agreement, the Company is to pay US$2 million in cash
for the assets of Metar ADC. The first US$1 million was paid in February 2001.
The second US$1 million is payable over a three-year period on the anniversary
date of technology acceptance as follows: US$150,000 in year one, US$250,000 in
year two and US$600,000 in year three. In October 2001, the Company paid the
scheduled payment of US$150,000. As of December 31, 2001, the Company had
accrued the present value of the future payments of US$686,000 as acquisition
payable.
3. Restructuring Charges
During the year ended December 31, 2001, the Company recorded restructuring
charges totaling US$221,000, primarily due to severance costs related to a
workforce reduction and subsidy costs related to subletting certain excess
office space. The Company implemented the restructuring plan as a result of the
completion of a certain third party funded development project and as a prudent
cash flow measure in order to improve its overhead cost structure.
The workforce reduction resulted in the involuntary termination of six
employees, of which four were from the Company's engineering research and
development staff and two were from the Company's management and administrative
staff. The total charge recognized by the Company for the involuntary
termination was approximately US$93,000, of which approximately US$81,000 had
been paid prior to the end of the year.
In conjunction with the workforce reduction, the Company reduced its operating
overhead by consolidating its office space. The Company has sublet most of the
vacated office space on a month-to-month basis at rates lower than its cost and
is currently seeking to sublet the remaining vacated office space. The Company
is doubtful that it will be able to sublet the space for the remaining term of
the lease or sublet the remaining unoccupied space, accordingly it has accrued
the cost to exit the leases. The total amount accrued as of December 31, 2001 is
approximately US$83,000.
F-14
4. Composition of Certain Balance Sheet Captions
December 31,
2001 2000
--------------------------------------
(in thousands, US dollars)
Other current assets:
Prepaid expenses and other $ 133 $ 107
Receivable from escrow 152 -
--------------------------------------
$ 285 $ 107
======================================
December 31,
2001 2000
--------------------------------------
(in thousands, US dollars)
Property and equipment:
Computer equipment $ 602 $ 441
Test equipment 357 146
Furniture and fixtures 57 46
--------------------------------------
1,016 633
Less accumulated depreciation (534) (174)
--------------------------------------
$ 482 $ 459
======================================
Depreciation expense for the Company's Property and Equipment total US$360,000,
US$143,000 and US$12,000 for the years ended December 31, 2001, 2000 and 1999.
December 31,
2001 2000
----------------------------------------
(in thousands, US dollars)
Accounts payable and other accrued liabilities:
Accounts payable $122 $564
Reserve for litigation 446 1,400
Acquisition payable 686 -
Other 330 211
----------------------------------------
$1,584 $2,175
========================================
F-15
5. Marketable Securities
Marketable securities available for sale consist primarily of corporate stock
and corporate debt securities. The costs and estimated fair market value as of
December 31, 2001 are as follows (in thousands, US dollars):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------
Short-term investments available for sale:
Equity securities 1,168 616 552
-----------------------------------------------------------------------------
$ 1,168 $ 0 $ 616 $ 552
=============================================================================
As of December 31, 2001, the Company had investments in equity securities and
corporate debt securities of approximately US$552,000 available for sale. The
Company uses the specific identification method in determining cost on these
investments. For the year ended December 31, 2001 the Company had gross realized
gains and losses from the sale of securities of US$696,000 and US$19,000,
respectively. For the year ended December 31, 2000 the Company had no gross
realized gains or losses from the sale of securities. In January 2002, the
Company sold its equity securities for a net loss of US$586,000.
2000 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------
Cash 490 - - 490
Commercial paper 6,646 11 - 6,657
Money market fund 24 - - 24
-----------------------------------------------------------------------------
$7,160 $11 $0 $7,171
=============================================================================
F-16
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------
Short-term investments available for sale:
Corporate debt securities 996 - - 996
Equity securities 3,100 217 - 3,317
-----------------------------------------------------------------------------
$4,096 $217 - $4,313
=============================================================================
6. Commitments
The Company leases its office facilities and certain office equipment under
operating lease agreements that expire at various times through June 2003. The
leases are payable in monthly installments of approximately US$15,000, subject
to annual rate increases. Rent expense totaled US$288,000 for the year ended
December 31, 2001, US$124,000 for the year ended December 31, 2000 and
US$126,000 for the year ended December 31, 1999.
Annual future minimum lease obligations for operating leases as of December 31,
2001 are as follows (in thousands, US dollars):
Year Ended December 31, Amount
---------------------- ----------------
2002 79
2003 4
----------------
$83
================
7. Stockholders' Equity
On April 13, 1999, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of Class B Common Stock with a par value of US$0.001
per share, and reclassify the Company's existing common stock as Class A Common
Stock.
In October 2001, the Company effected its "option revision program" pursuant to
which all outstanding options to purchase Class B Common Stock were surrendered
at the election of the holders in exchange for new options to purchase shares of
Class A Common Stock under the 2000 Stock Option/Stock Issuance Plan which new
options have identical material provisions (e.g. exercise price and vesting
schedule) to the surrendered Class B Common Stock options.
F-17
Convertible Preferred Stock
On December 7, 1999, Jyra Research, Inc. converted ten shares of the Company's
Series A Preferred Stock, which was authorized on March 15, 1998 by the
Company's Board of Directors, into 277,018 shares of the Company's Class A
Common Stock. In April 2000, the Company amended its Certificate of
Incorporation to eliminate all reference to the Preferred Stock. As of December
31, 2000 and December 31, 2001 there were no authorized shares of preferred
stock.
Private Placement Offerings
In April 1999, the Company completed a private placement offering under which it
sold 419,500 shares of common stock at US$4.00 per share to accredited
investors, resulting in net cash proceeds totaling approximately US$1.6 million.
In connection with the offering, the Company granted options for the purchase of
20,975 shares of Class A common stock with an exercise price of US$4.00 per
share through May 2009, to brokers as payment for finders fees and incurred
other offering related expenses of US$82,000.
In December 1999, the Company completed a private placement offering under which
it sold 126,800 shares of common stock at US$8.00 per share to accredited
investors, resulting in net cash proceeds totaling approximately US$962,000.
These shares were purchased in an arms length transaction by private and
institutional investors, none of whom had a significant beneficial interest
before the placement. Further, none of these investors are affiliates of the
Company. These shares were also subject to resale restrictions for one year as
they were purchased in a private transaction. The cash proceeds of US$8.00 per
share were the highest price the Company was able to negotiate and still attract
the funds. The resulting discount in price from the average price of
OTC-Bulletin Board transactions for the period represents the associated
discount for the resale restriction and the block of stock being offered. In
connection with the offering, the Company granted options to purchase of 6,250
shares of Class A common stock with an exercise price of US$8.00 per share
through December 2006, to brokers as payment for finders fees and incurred other
offering related expenses of US$52,000.
Between January 1, 2000 and May 31, 2000, the Company sold 600,000 shares of
Class A Common Stock at US$8.00 per share to accredited investors pursuant to a
private placement offering that commenced in 1999, resulting in net cash
proceeds totaling approximately US$4.4 million. In connection with the offering,
the Company granted options to purchase 30,000 shares of Class A Common Stock at
an exercise price of US$8.00 per share through February 2007 as payment for
finder's fees, and incurred other offering expenses of US$379,000.
F-18
7. Stockholders' Equity (continued)
In November 2001, the Company entered into a private equity financing agreement
with R&S Invest/Meeuwi de Kraker for the purchase of 700,000 shares of Class A
Common Stock for US$5.00 per share. For each share purchased, the Company agreed
to also issue this investor a warrant to purchase one share of Class A Common
Stock for US$5.00 per share, exercisable over two years. Payments to us under
the terms of the financing agreement were scheduled in five (5) equal monthly
installments of US$500,000 (with the first installment due and payable on
November 26, 2001) with a final US$1 million payment due on April 15, 2002. The
payment obligation was evidenced by a promissory note, with the Class A Common
Stock and warrants to serve as collateral for the promissory note upon their
issuance to the investor. Notwithstanding the above, no shares of Class A Common
Stock, or warrants to purchase such shares, have been issued to this investor
because the investor has failed to honor the terms of the promissory note and
has failed to remit any of the payments due to the Company. The Company is
currently in a payment dispute with this investor.
Warrants
In September 2001, the Company granted warrants to purchase 27,000 shares of
Class A Common Stock at a strike price of $US3.91 per share to an executive
placement agency for fees relating to the procurement of our president and CEO,
Frederick A. Cary. In connection with the issuance of the warrants, the Company
recorded general and administrative expenses of US$138,000 based on the fair
value of the warrants as determined by the Black-Scholes pricing model.
1999 Stock Option/Stock Issuance Plan
On August 3, 1999, the Company adopted the 1999 Stock Option/Stock Issuance Plan
(the "1999 Plan") that provides for the grant of incentive and non-statutory
stock options for the purchase of Class B Common Stock to employees, directors
or consultants of the Company. The 1999 Plan, as amended, authorizes the Company
to issue up to 3,500,000 shares of Class B common stock. The 1999 Plan provides
that incentive stock options will be granted at no less than the fair value of
the Company's Class B common stock as determined by the Board of Directors at
the date of the grant. The options generally vest and become exercisable either
immediately or over one to four years. Generally, any unvested shares underlying
unexercised options will be canceled in the event of termination of employment
or engagement. Options expire no more than ten years after the date of grant, or
earlier if the employment terminates or as determined by the Board of Directors.
F-19
7. Stockholders' Equity (continued)
In October 2001, the Company effected its "option exchange program" pursuant to
which all outstanding options to purchase Class B Common Stock were surrendered
at the election of the holders in exchange for new options to purchase shares of
Class A Common Stock under the 2000 Stock Option/Stock Issuance Plan, thus
effectively eliminating the 1999 Stock Option/Stock Issuance Plan.
2000 Stock Option/Stock Issuance Plan
Prior to the adoption of the 1999 Plan and outside of any existing stock option
plan, the Company granted non-statutory stock options for the purchase of Class
A Common Stock to employees, directors or consultants of the Company. On August
21, 2000, the Company adopted the 2000 Stock Option/Stock Issuance Plan (the
"2000 Plan") that provides for the grant of incentive and non-statutory stock
options for the purchase of Class A Common Stock to employees, directors or
consultants of the Company. The 2000 Plan, as approved by the Board, authorizes
the Company to issue up to 4,260,000 shares of Class A Common Stock (now known
as "Common Stock"). The options generally vest and become exercisable either
immediately or over one to four years. Options expire no more than ten years
after the date of grant, or earlier if the employment terminates or as
determined by the Board of Directors.
The following table summarizes all options outstanding and exercisable as of
December 31, 2001 (in thousands, US dollars, except year and per share data):
Weighted
average Weighted Weighted
remaining average average
Exercise Number contractual exercise Options exercise of
price outstanding life (years) price exercisable exercisable
- ----------------------------------------------------------------------------------------------
$0.60 561 3.58 $0.60 534 $0.60
$2.00 267 5.06 $2.00 175 $2.00
$2.50 6 3.75 $2.50 5 $2.50
$3.91 650 6.75 $3.91 41 $3.91
$4.00 1 4.33 $4.00 1 $4.00
$4.35 2,385 5.45 $4.35 1,418 $4.35
$5.48 200 6.92 $5.48 4 $5.48
$6.09 60 6.92 $6.09 1 $6.09
$8.00 46 5.32 $8.00 29 $8.00
$10.00 99 5.89 $10.00 83 $10.00
- ----------------------------------------------------------------------------------------------
4,275 5.47 $3.89 2,291 $3.54
==============================================================================================
F-20
7. Stockholders' Equity (continued)
The following stock option activity includes the 1999 Plan and 2000 Plan as well
as 626,074 options issued outside of the Plans. All stock option transactions
are summarized as follows (in thousands, US dollars, except per share data):
Class A Weighted Class B Weighted
Stock Average Stock Average
Option Exercise Option Exercise
Shares Price Shares Price
-------------------------------------------------------------
Balance at January 1, 1999 802 $0.66 $ - $ -
Granted 128 1.70 495 2.33
Exercised - - - -
Cancelled (39) 2.00 (169) 2.00
-------------------------------------------------------------
Balance at December 31, 1999 891 0.75 326 2.51
Granted 51 8.00 2,546 4.35
Exercised (210) 0.60 - -
Cancelled - - (249) 4.35
-------------------------------------------------------------
Balance at December 31, 2000 732 1.25 2,623 4.12
Granted 910 3.91 661 4.35
Exercised (106) 0.60 (10) 4.33
Cancelled (22) 0.60 (513) 4.35
Converted to A shares 2,761 4.35 (2,761) 4.35
-------------------------------------------------------------
Balance at December 31, 2001 4,275 $3.89 - $ -
=============================================================
Exercisable at December 31, 2001 2,291 $3.54 - $ -
=============================================================
Stock Based Compensation
During the twelve months ended December 31, 2001, the Company granted
approximately 1,571,000 stock options to employees and consultants with vesting
periods ranging from immediate to four years. The options were for the purchase
of 661,000 shares of Class B Common Stock at an exercise price of US$4.35 and
910,000 shares of Class A Common Stock granted with an exercise price equal to
the fair value at the date of grant. In October 2001, all options to purchase
shares of Class B Common Stock were exchanged for options to purchase the
corresponding amount of shares of Class A Common Stock. The conversion of the
Class B common stock options to Class A common stock options caused the final
measurement date for all Class B options issued to employees and all Class B
vested options issued to consultants. During the year ended December 31, 2001,
the Company recaptured previously recorded stock-based compensation expense of
approximately US$3.1 million related to the final measurement of Class B options
and previously recorded deferred compensation associated with Class A options
outstanding to employees and consultants.
F-21
7. Stockholders' Equity (continued)
The Company has adopted the disclosure-only provision of SFAS No. 123,
Accounting for Stock Based Compensation. Accordingly, no compensation expense
has been recognized for the stock options issued to employees or directors in
accordance with SFAS No. 123. If compensation expense had been determined
consistent with SFAS No. 123, as compared to the intrinsic method in accordance
with APB 25, the Company's net loss would have been changed to the following pro
forma amounts (in thousands, US dollars except per share data):
2001 2000 1999
---------------------------------------------
Net loss; as reported $ (4,684) $(13,120) ($4,014)
Net loss; pro forma (6,310) (16,907) ($4,147)
Net loss per share; as reported (0.57) (1.78) (0.71)
Net loss per share; pro forma (0.77) (2.29) (0.73)
The effects are not likely to be representative of the effects on pro forma net
income or loss in future years.
The fair value of options granted in 2001, 2000 and 1999 are estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life of three to four years; expected
dividend yield of zero percent; expected volatility of 86.1 percent, 100 percent
and 100 percent for 2001, 2000 and 1999 respectively; and risk-free interest
rate of six percent for 2001, 2000 and 1999.
Common Shares Reserved for Future Issuance
At December 31, 2001, common shares reserved for future issuance under the 2000
Plan and non-Plan outstanding stock options consist of the following (in
thousands):
2001 2000
-------------------------------
Stock options issued and outstanding 4,275 3,355
Shares reserved for future issuance 600 1,157
Common stock warrants 27 -
-------------------------------
Total reserved 4,902 4,512
===============================
F-22
8. Income Taxes
Significant components of the Company's deferred tax assets are shown below. A
valuation allowance of approximately US$9,348,000 has been recognized at
December 31, 2001 to offset the deferred tax assets as realization of such
assets is uncertain (in thousands, US dollars):
2001 2000
-------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $7,922 $5,360
Research and development credits carryforwards 953 591
Deferred compensation 393 1,889
Other, net 80 43
-------------------------------
Total Deferred tax assets 9,348 7,883
Valuation allowance (9,348) (7,883)
-------------------------------
Net deferred tax assets $ - $ -
===============================
At December 31, 2001, the Company has federal and California net operating loss
carryforwards of approximately US$19,000,000 and US$16,500,000, respectively.
The federal and California tax loss carryforwards will begin expiring in 2019
and 2007, respectively, unless previously utilized. The Company also had federal
and California research tax credit carryforwards of approximately US$645,000 and
US$465,000, respectively, which will begin to expire in 2019 unless previously
utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss carryforwards may be limited in the event of a
cumulative change in ownership of more than 50%, which occurs within a three
year period.
F-23
9. Legal Proceedings
On September 20, 1999, the Company filed a complaint against certain
stockholders and their affiliates for breach of oral contract, professional
negligence, breach of fiduciary duty, constructive trust, breach of the covenant
of good faith and fair dealing and unfair business practice, primarily in
connection with the allocation of founders stock of the Company. On November 29,
1999, Franklin Felber, a former officer and director of the Company, who was a
defendant in the September 20, 1999 complaint, filed a cross-complaint against
the Company, certain of the Company's directors and Jyra Research, Inc. alleging
fraud, breach of fiduciary duty, breach of the covenant of good faith and fair
dealing, and misrepresentation in connection with the exercise by Jyra's
assignees of Jyra's arrangement to purchase from him for US$4.00 per share,
30,000 shares of our Class A Common Stock in February 1999 and 225,640 shares of
the Company's Class A Common Stock in July 1999. In April 2000, this complaint
and all counterclaims arising out of it were settled as to all parties other
than Mr. Felber. Other than with respect to Mr. Felber, the parties released the
original complaint and all counterclaims against each other and certain
directors of Path 1.
Under a Settlement Agreement and Mutual Release dated January 4, 2001, the
Company settled the lawsuits and signed a mutual general release with Mr.
Felber. Each party agreed that the settlement was not to be construed as an
admission of any liability or wrongdoing by anyone. Pursuant to this Settlement
Agreement and Mutual Release, the Company paid Mr. Felber US$300,000 and placed
in escrow an additional US$200,000 as well as 400,000 shares of Common Stock. On
January 10, 2002, Mr. Felber received from escrow 100,000 shares of Common Stock
and US$55,000, since for the thirty (30) trading days immediately preceding
January 10, 2002, the average closing price ("ACP") of the Company's Common
Stock was between US$4.00 per share and US$5.99 per share. Approximately
US$145,000 of the cash and 300,000 shares of Common Stock were returned to Path
1. The Company recorded a reserve for settlement costs of US$1.4 million at
December 31, 2000 and reversed US$650,000 of the reserve at December 31, 2001
based on the finalization of the payments during 2002.
10. Employee Benefits
In November 2000, the Company adopted a voluntary deferred compensation plan
under Section 401(k) of the Internal Revenue Code. Employees who are at least 21
years of age are eligible to participate in the plan. Under the terms of the
plan, the Company matches thirty percent of the employee's contribution, up to
six percent of their annual salary. Matching contributions made by the Company
for the year ended December 31, 2001 and 2000 were approximately US$32,000 and
US$2,000, respectively.
F-24
11. Segments
Reportable Operating Segments
The Company is a network communications technology company enabling simultaneous
delivery of broadcast quality and interactive video transmissions and other
real-time data streams over Internet Protocol (IP) Ethernet networks. For the
purpose of applying Statement of Financial Accounting Standards (SFAS) No. 131,
management determined that it has two operating segments based on the two
distinct areas of technical expertise and the deployment of the Company's
patented core TrueCircuit(R) technology.
The Video Systems business unit is engaged in the development of system
solutions that enable broadcast quality video over IP. Utilizing TrueCircuit(R)
technology and other developed technologies and network traffic techniques, the
group has been able to transport broadcast quality video over an IP network
while significantly reducing the amount of latency and jitter associated with
the high speed transmission of data. At December 31, 2001, the Video Systems
business unit employs 15 engineers plus support and administrative personnel and
operates primarily from our San Diego, California USA facility.
The Silicon Systems business unit ("Sistolic"), formerly known as Metar ADC, is
engaged in the development and deployment of 1 Gigabit Media Access Controller
(MAC), 10 Gigabit MAC, Ethernet switches and related technology. By employing
network traffic management techniques and the patented TrueCircuit(R)
technology, the business unit is in the process of developing application
specific integrated circuits (ASIC) solutions that foster the high-speed
transmission of data over existing networks. At December 31, 2001, Sistolic
consisted of two engineers in the Company's San Diego, California USA facility
and 24 engineers plus support and administrative personnel in the Company's
Romanian facility.
Following is a table that reconciles the Company's revenues, operating expenses
and net identifiable fixed assets between the two reportable segments as of and
for the year ended December 31, 2001. The development of two separate operating
segments did not occur until the Company completed the acquisition of the assets
of Metar ADC in February 2001. Accordingly, there is no segment disclosure as of
and for the year ended December 31, 2000.
F-25
11. Segments (Continued)
Year Ended
Revenue, Operating Expenses and December 31, 2001
- -------------------------------- -----------------
Net loss (in thousands, US dollars)
- --------
Revenue Expenses Net loss
Video Solutions $1,969 $2,261 ($292)
Sistolic 250 1,390 (1,140)
Corporate - 3,252 (3,252)
--------------------------------------------------------------
$2,219 $6,903 ($4,684)
==============================================================
Net Identifiable Fixed Assets: December 31, 2001
- ------------------------------ -----------------
(in thousands, US
dollars)
Video Solutions $324
Sistolic 117
Corporate 41
--------------------
$482
====================
F-26
12. Summary of Quarterly Results of Operations (unaudited)
1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------------
2001
- ----
Income (Loss) From Operations ($3,604) $808 ($56) ($1,248)
Net Income (Loss) (3,555) 862 (235) (1,756)
Basic and Diluted Income (Loss) Per Share ($0.43) $0.11 ($0.03) ($0.21)
Weighted Average Shares Used In Calculation 8,191 8,157 8,227 8,245
- ----------------------------------------------------------------------------------------------------------------
2000
- ----
Loss From Operations ($2,935) ($6,217) ($361) ($3,955)
Net Loss (2,966) (6,140) (186) (3,828)
Basic and Diluted Loss Per Share ($0.47) ($0.82) ($0.02) ($0.48)
Weighted Average Shares Used In Calculation 6,325 7,513 7,932 7,985
- ----------------------------------------------------------------------------------------------------------------
13. Subsequent Events
In January 2002, the Company entered into a common stock purchase agreement with
DTKA Holdings Limited pursuant to which it may draw down on an equity line with
DTKA Holdings and require it to purchase up to US$10 million of the Company's
common stock over a period of twenty-four (24) months. However, the Company
cannot draw down on any funds under this facility until it has filed a
registration statement with the Securities and Exchange Commission registering
enough shares to cover the shares of common stock to be issued pursuant to such
draw down, and such registration statement has been declared effective.
In February 2002, the Company received stockholder approval to adopt an
amendment to the Company's Certificate of Incorporation authorizing (i) an
increase in the number of shares of Class A Common Stock from 20,000,000 shares
to 40,000,000 shares, (ii) the reclassification of each share of Class A Common
Stock as a share of "Common Stock", (iii) the elimination of the Class B Common
Stock, and (iv) the creation of 10,000,000 shares of Preferred Stock. The
Certificate of Incorporation authorizes the Company's Board of Directors,
without further stockholder approval, to issue one or more series of preferred
stock. Any such series of preferred stock could have rights, including voting
rights, superior to that of the Company's common stock, and rights to elect
directors as a class.
F-27
In February 2002, the stockholders also approved and adopted the Company's 2001
Employee Stock Purchase Plan (the "Plan"). The Plan was adopted by the Company's
stockholders on February 26, 2002 and is effective as of that date. Shares
issued pursuant to the Plan will qualify as shares issued pursuant to an
"employee stock purchase plan". The Plan was adopted to provide employees of the
Company with an opportunity to purchase shares (via payroll deduction) of the
Company's common stock at a discount from market value through accumulated
payroll deductions. Employees of the Company, employed on an offering
commencement date, with certain exceptions, are eligible to participate in the
Plan. Employees must complete and deliver a Subscription Agreement to
participate. The purchase price per share for shares purchased under the Plan
shall be an amount equal to eighty-five percent (85%) of the fair market value
of a share of common stock. The amount of payroll deduction must be between 5%
and 25% of base pay. No interest will accrue on payroll deduction funds. A
maximum of 250,000 shares of common stock is available for issuance under the
Plan.
In March 2002, a large semiconductor company, with whom the Company entered into
a non-exclusive licensing agreement and an engineering services agreement in
December 2001 valued at approximately US$5.4 million, informed the Company that
they were terminating their agreements. The Company is in a payment dispute with
this customer and is reviewing its alternatives. As a result of this action, the
Company decided to dispose of its Sistolic business unit. On April 1, 2002, the
Company disposed of the assets of this business unit back to Metar SRL and
Michael Florea by eliminating the remaining obligations by the Company to Metar
SRL, including the payable of US$686,000, the return of all stock options
granted to Michael Florea and the Romanian employees, a confirmation that
performance criteria specified in Michael Florea's employment agreement related
to a potential US$4 million bonus with the Company was never met by him and a
limited use license to the Metar ADC intellectual property in favor of the
Company. Michael Florea resigned on March 27, 2002, as an officer of the Company
in anticipation of this transaction.
In March 2002, the Company filed a complaint in San Diego County Superior Court
against Meeuwi J. deKraker for breach of contract. In November 2001, the Company
entered into a private equity financing agreement with R&S Invest/Meeuwi de
Kraker. No shares of Class A Common Stock, or warrants to purchase such shares,
have been issued to this investor because the investor has failed to honor the
terms of the promissory note and has failed to remit any of the payments due.
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