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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 fiscal year ended December 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-30928
PATH 1 NETWORK TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
(State of incorporation) (I.R.S. Employer Identification No.)
6215 FERRIS SQUARE, SUITE 140
SAN DIEGO, CALIFORNIA 92121
(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes[ ] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price of the Common Stock on June 28, 2002,
was approximately $10.1 million. 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, $0.001 par
value, as of March 7, 2003 was 9,576,346.
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 2003 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, 2002.
PATH 1 NETWORK TECHNOLOGIES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
INDEX
PAGE
PART I
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant* 27
Item 11. Executive Compensation* 27
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters* 27
Item 13. Certain Relationships and Related Transactions* 27
PART IV
Item 14. Statement on Disclosure, Controls and Procedures 27
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures 31
Financial Statements
*Incorporated by reference from our definitive Proxy Statement relating to the
2003 Annual Meeting of Stockholders, which we will file with the Securities and
Exchange Commission within 120 days after our December 31, 2002 fiscal year end.
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 and are subject to risks, uncertainties and assumptions that are
difficult to predict. 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 update publicly any of the
forward-looking statements for any reason 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, as well as in our recent reports on Forms 10-K, 10-Q and 8-K,
each as it may have been amended from time to time.
BUSINESS
OVERVIEW
We are an industry leader in developing and supplying products that enable the
transportation and distribution of real-time, high-quality video over Internet
Protocol (IP) networks, such as the networks that comprise the Internet. Our
products are currently used in two different segments of the video market. Our
products are used by cable companies to supply video-on-demand services. Our
products are also used by a variety of providers to transmit high-quality,
real-time video to one or more locations throughout the United States or the
world (which we refer to as "long-haul transmission"). Since our products
transmit video content using IP communication networks, our customers can use
existing infrastructure, thus lowering their costs and permitting them greater
flexibility in the delivery of video content. Our customers include cable,
broadcast and satellite companies, movie studios, carriers and government and
educational institutions. Collectively, we refer to these customers as
communication service providers, or simply as providers.
INDUSTRY BACKGROUND
Current delivery of real-time, high-quality video
Current technologies for transmitting real-time, high-quality video over long
distances require establishment and full dedication of a circuit for the
duration of a transmission, regardless of whether the circuit is being used by
the end-user. The concept is similar to a traditional telephone network - a call
is placed, a circuit between two (or multiple) points is established and
thereafter remains open for the duration of the call (regardless of whether
anyone is speaking).
Current technologies for long distance video transport typically require
procuring expensive, dedicated bandwidth that remains open at all times
regardless of usage. This bandwidth is often priced on a monthly basis,
requiring significant expenditures regardless of usage.
For those delivering programming to the viewer, such as cable and satellite
companies, current technologies typically require that all available packages of
programs be broadcast to every subscriber. As a result, limited bandwidth
remains available for video on demand and similar interactive services requiring
two-way communication. As a result, such services are currently available only
on a limited basis and in select markets. Satellite companies are unable to
deliver services that require two-way communications.
The rise of IP networks
The advent of IP networks has resulted in a dramatic increase in the
transmission and exchange of data, information and ideas. IP networks chop data
into small packets that are addressed to and received by designated addresses.
These packets are capable of being transmitted over networks independent of one
another. Divided and reassembled by switches and directed from source to
destination by routers, IP networks minimize wasted bandwidth by using bandwidth
in quick bursts and only when needed. In addition, IP networks were designed to
overcome failure of any particular portion of the network. In the event a
particular pathway on the network failed, alternate routes to the same
destination were available. Because, however, each packet travels independent of
the others and possibly by a different pathway, certain packets can be delayed
or delivered out of order relative to others, or may not ever arrive at the
intended destination.
The impact of late or missing packets on a transmission depends in large part on
the form of communication. With respect to written text, for instance, delay in
the arrival of packets will likely not be noticed by the recipient. For this
reason, email is an ideal form of communication for IP networks.
For transmissions that must be delivered continuously, such as real-time,
high-quality video, even a few milliseconds of delay may be noticeable by the
viewer. As the majority of video consumers have become accustomed to
high-quality delivery, new service offerings must provide quality at least as
good as that to which the target viewing audience has become accustomed. Thus,
IP networks have not been well-suited for delivery of real-time, high-quality
video. While it is currently possible to view video clips (such as movie
trailers) over the Internet, the inability of current IP networks to deliver
real-time, broadcast quality video requires that the clips first be downloaded,
and then played. This download-and-play approach has limited application
because, for instance, a 2.5-hour movie may generally take 6 hours to download
over a T1 or DSL line.
THE PATH 1 SOLUTION
By enabling the transportation and distribution of real-time, high-quality video
over existing IP networks, our products provide significant benefits to those
with a need to distribute video. Our products perform three primary functions.
First, they process and prepare multiple video feeds for delivery over an IP
network. Second, at the receiving end, our products combine video streams
arriving over the IP network into single streams for delivery to the end-viewer.
Third, and perhaps most important, our products condition the video data to
avoid impairments or disruptions that would otherwise deteriorate the quality of
the video signal. The benefits to providers who use our products include the
following:
o Feasibility - IP offers wider bandwidths than are currently
available on alternate video transmission methods (such as
satellite and DS-3);
o Efficiency - by using bandwidth only when needed, a greater
amount of content can be passed over a provider's network. For
example, a Russian television network is using our product to
deliver live television in both directions from Moscow to New
York using UUNet's internet service;
o Content on demand - no longer compelled to broadcasting content
uniformly to all end-users, providers can send specific content
to only those requesting it, further reducing bandwidth
constraints (both into the home and within the network);
o Decreased capital costs - the extensive installed base of IP
networks and the equipment used to support them results in
economies of scale and the availability of cost-effective
products;
o Decreased operations costs - IP networks, designed to be
fault-tolerant and self-correcting, reduce the need for redundant
back-up networks and significantly reduce maintenance and support
costs; and
o Customization and flexibility - the software architecture
underpinning our products allows providers to increase the volume
of video traffic being delivered simply by the remote activation
of additional ports or features within our products, rather than
incurring costs associated with new equipment installation.
We believe our technology can be used for a wide variety of purposes by
communication service providers. Specific services and applications our
technology can enable include the following:
Cable Companies
The versions of our Chameleon vidX product line designed for cable companies
allows them to use existing digital set-top boxes already in consumer homes to
provide video-on-demand services, a significant competitive advantage over
satellite providers. The more efficient use of existing bandwidth (both into the
home and within the network) allows cable companies to increase the volume of
content (whether movies, television or live events) available for delivery
whenever requested by the cable subscriber, or to increase the number of
subscribers served with existing content volume. We believe that the desire for
video-on-demand - indeed, all content-on-demand - will continue to rise as
consumers become increasingly aware of its availability and benefits, and as IP
networks enabled by our products provide access to significant amounts of
interactive programming previously unavailable. Cable companies currently using
our products include companies such as Time-Warner and Cablevision.
Additionally, our products will provide cable companies with flexibility to
deliver high definition television, which could potentially overwhelm the
bandwidth capacity of current delivery technologies. High definition television
requires at least five times the bandwidth currently required for standard
television transmissions. Using our products, providers can avoid incurring
significant capital expenditures to increase the capacity of existing
infrastructure, and can avoid significant recurring costs to maintain and
support the expanded networks resulting from high definition television and
increased numbers of channels. Should these providers use existing methods of
transmission, they might eventually be forced to decrease programming or other
services to conserve bandwidth.
Long Haul Service
Broadcasters and news organizations need to move high quality video over long
distances. Typically, they use satellite links or procure dedicated bandwidth on
fiber lines, both of which are very expensive and usually require multi-year
contracts. Our products allow the same video to be moved over existing IP
networks at significantly reduced cost.
Currently, Level (3) offers full and part-time video services using our Cx1000
product to deliver broadcast video in key US and European cities. Wiltel/Vyvx
has moved video operations centers into networking facilities to merge IP video,
voice and data services that use our Cx1000 product for video.
Satellite Providers
Satellite providers broadcast signals to earth from satellites 22,000 miles
above sea level. Because of the coverage area (or "footprint") from that
altitude, satellite broadcasts are capable of reaching vast areas. Uplinking
content to the satellite for subsequent broadcast back to Earth, however, must
be done at earth stations located in areas with characteristics favorable for
uplinking. Currently, many satellite providers collect content at these uplink
earth stations. As a result, information often "hops" from its source to and
from the Earth via interim earth stations and satellites until its reaches the
uplink earth station positioned to deliver the content to the end-user.
Satellites have a maximum 15-year useful life, requiring satellite providers to
periodically revisit the extreme expense of launching and maintaining a
satellite in orbit.
Our Cx 1000 product line allows satellite providers to gather content at uplink
earth stations without the need to hop the content through interim satellites,
reducing the strain on, and cost of, satellite networks and their maintenance.
In addition to the cost-savings, collecting information at uplink earth stations
via IP networks, as opposed to satellite hops, increases the speed by which
information moves from source to consumer. Use of our products enables satellite
providers to avoid the delay associated with "live" satellite feeds. Each
satellite hop introduces a half-second delay whereas an existing Level (3)
12-hop international circuit has less than a quarter-second delay. PanAmSat uses
our Cx1000 on the Level (3) backbone to interconnect earth stations for video
routing with the least delay.
Movie Studios and Government Agencies
Certain industries require delivery of exceptionally high resolution, real-time
video. Military and other government units require a unique level of sound and
picture quality upon which they can make critical, high-consequence decisions.
Movie studios demand similar standards upon which to make artistic or editorial
decisions regarding their multi-million dollar productions.
To attain the level of resolution required by studios and for government
applications requires data to be delivered uncompressed. Compression, a common
means for transporting high-resolution data, is designed to eliminate what would
typically be redundant or unnecessary information, or to allow data to fit on
satellites' limited bandwidth. Because of the unerring detail required by these
industries, what is generally acceptable TV-quality degradation becomes
unacceptable. The opposing requirements of exceptionally high resolution and
high bit-rate make most delivery methods (such as satellite) unusable. Our
Cx1000 enables the delivery of exceptionally high resolution, high bit-rate, and
real-time video. Our products are currently being used by DreamWorks SKG for
domestic and international creative collaborations using high-definition video
cameras. Additionally, C-Span uses our products to televise real-time,
interactive classrooms between Washington, D.C. and the University of Denver.
OUR TECHNOLOGY
Product Architecture
We employ a unique network-processor-based architecture. Most existing product
designs are based largely on hardware or less flexible chipsets, which require
hands-on manipulation in the field to correct errors or provide upgrades. We use
a mixed architecture that relies on a network processor for more complex tasks
and hardware for more basic functions. This approach speeds product development
times and reduces both development and production costs when compared to designs
that are based largely on hardware.
Our network-processor-based architecture also allows us to offer feature
upgrades to our customers without requiring return of equipment. For example, a
customer may begin with a 4 port software-enabled version of our Chameleon
products. The same hardware platform supports from one to eight inputs and
outputs in IP networks with feature sets licensed by the customer. Over time the
customer can choose to software-enable additional input ports, increase video
stream counts or rates, or add output port capability - all without returning
the installed equipment. Alternatively, our products can be licensed to
transport only standard definition TV or both standard definition and high
definition TV over IP networks.
Our products are also capable of assuming a larger role in the delivery of
real-time, high-quality video. The process by which video is transmitted to the
end viewer or user is complex and involves numerous networks, systems and
components. The flexible architecture of our products allow them to easily
perform functions such as file caching and serving, whereby files can be
temporarily stored in our products for quick delivery to the consumer or user
without the need to access large video servers. Today, separate large and
expensive video servers are necessary to provide video on demand services to a
discreet number of homes. By implementing caching and serving capabilities, our
products can move some of the necessary functions of video delivery to the
periphery of networks, thus reducing the strain on core portions of networks,
and reducing the need for numerous expensive video servers.
Our products easily integrate into existing networks enabling real-time,
high-quality video service in IP access networks.
Product Development
Our product development efforts are continuous and based on customer
requirements for increased performance, flexibility and functionality. To
increase performance, we will move to next generation network processor designs
developed by Intel as needed to provide increased throughput and processing
capabilities. To increase flexibility, we will bring to market new products that
provide scaleable solutions that can be deployed under initial conditions of
throughput and other critical parameters, yet grow as requirements change due to
increases in demand or number of subscribers. To increase functionality, we will
evaluate logical additions to our products that will better fit customers'
evolving needs. For example, our Chameleon product line has already changed from
a pure multiplexer/demultiplexer family of products delivering video-on-demand
to one that also delivers regular broadcast channels over IP networks.
OUR STRATEGY
We believe that our technology and our products can be used in many different
applications by communication services providers. Our strategy is to
aggressively pursue (within our financial and other means) resources that
introduce our products into the market. We intend to pursue strategic
relationships with major equipment providers and content providers, as well as
building a direct sales and marketing staff within the company. We are a small,
cohesive company, able to react quickly to changes in market conditions. Our
flexibility has in the past enabled us to successfully redirect our efforts as
circumstance required.
COMPETITION
We face competition in each of the target markets for our products, services and
products in development. A number of established and development-stage companies
in these markets offer similar or alternative technological solutions for
convergence of real-time data, such as audio and video, over IP networks as well
as real-time, high-quality transition of video over IP networks. We anticipate
that we will face increased competition in the future as competitors enhance
their product offerings and new competitors emerge. For example, our largest
customer, Scientific Atlanta, has a product that competes with our Chameleon
vidX product line. Scientific Atlanta has significant greater resources and
industry clout and, therefore, could threaten the viability of our business. And
historically as our largest customer, any change in the level of business that
we do with Scientific-Atlanta could have an adverse material impact on our
business.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, certain of these competitors may be able to develop products that
directly compete with ours and may be able to succeed with inferior product
offerings. These competitors may also be able to adapt to new or emerging
technologies and changes in customer requirements more readily, take advantage
of acquisition and other opportunities more effectively, devote greater
resources to the marketing and sale of their products and adopt more aggressive
pricing policies than we can. In addition, these competitors have entered and
will likely continue to enter into joint ventures or consortiums to provide
additional value-added services competitive with those provided by us.
INTELLECTUAL PROPERTY
We rely on a combination of trademark, copyright and trade secret laws in the
United States and other jurisdictions as well as confidentiality procedures and
agreements to protect our proprietary technology and brands. We also rely on
patent protection. We have been issued three patents and have several other
patent applications pending.
We have trademarked the name TrueCircuit(R), which identifies technology used in
certain of our products. We expect also to trademark other technology and
product names, as we deem it appropriate. We rely on trade secrets to protect
certain areas of our technology, including the 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. In addition, we rely on three issued patents covering aspects of our
technology and have filed applications for several additional patents. We
believe that factors such as the creativity and technological skills of our
personnel, new product developments, frequent product enhancements, reliable
customer service and product maintenance are more essential to establishing and
maintaining a technology leadership position.
Our policy is to enter into confidentiality and invention assignment agreements
with all employees and consultants, and nondisclosure agreements with all other
parties to whom we disclose confidential information. These protections,
however, may not be adequate to protect our intellectual property rights.
EMPLOYEES
As of December 31, 2002, we had 23 employees in the United States, of whom 11
were engineers, 5 were in marketing and sales, 5 were in finance and
administration and 2 were in operations. Our employees are not represented by
any collective bargaining unit. We have never experienced a work stoppage.
PROPERTIES
We lease approximately 15,000 square feet of office space within one facility.
The San Diego offices are used for research and development, prototype
production, sales and marketing and administration. We believe our current U.S.
facilities are adequate to meet our near-term space requirements.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
WEBSITE ACCESS TO SEC FILINGS
We maintain an Internet website at www.path1.com. We make available free of
charge on our Internet website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
RISK FACTORS
Investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below together with all of the other
information included in this prospectus before making an investment decision.
The risks and uncertainties described below are not the only ones we face. If
any of the following risks actually occurs, our business, financial condition or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE DEPENDENT UPON ADDITIONAL FUNDING TO MEET CURRENT COMMITMENTS, CONTINUE
DEVELOPMENT OF OUR BUSINESS AND MAINTAIN OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. THE CASH CRISIS IS VERY SERIOUS. Our
independent auditors' opinion expresses substantial doubt about our ability to
continue as a going concern.
We need additional funding to meet current commitments and continue development
of our business. We currently have the cash resources to continue our business
at its current levels only for our immediate needs. If we do not receive
additional funding, our ability to continue as a going concern cannot be
assured. See "Liquidity and Capital Resources."
OUR LIMITED SALES HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS.
We were founded in January 1998 and have only been selling our products
commercially since 2002, which makes an evaluation of our prospects difficult.
Because of our limited sales history, we have limited insight into trends that
may emerge and affect our business. In addition, the revenues and income
potential of our business and market are unproven. An investor in our securities
must consider the challenges, expenses and difficulties we face as our sales and
marketing efforts mature.
WE RECENTLY LAUNCHED OUR INITIAL COMMERCIAL PRODUCTS AND SERVICES AND THEY MAY
NOT GAIN CUSTOMER ACCEPTANCE.
In 2002, we launched our two primary commercial products into the video
transport market and announced the deployment of our Chameleon vidX product line
in our first quarter of 2003. These products are in the early stages of
commercial deployment or are still in development. We may not be able to gain
customer acceptance of any of our products due to our lack of an established
track record, our financial condition, competition, price or a variety of other
factors. If our products and services are not accepted by potential customers,
or if these customers do not purchase our products and services at the levels we
anticipate, our operating results may be materially adversely affected.
WE FACE COMPETITION FROM ESTABLISHED AND DEVELOPING COMPANIES, MANY OF WHICH
HAVE SIGNIFICANTLY GREATER RESOURCES, AND WE EXPECT SUCH COMPETITION TO GROW.
The markets for our products, future products and services are intensely
competitive. We face direct and indirect competition from a number of
established companies, including Scientific-Atlanta, as well as 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 and, as a result, such
companies may be able to develop their products more rapidly and market their
products more extensively than we can.
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 or 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. In addition, competitors
with greater financial and other resources than we have may be able to leverage
such resources to gain wide acceptance of products inferior to ours.
OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR KEY
CUSTOMERS WOULD HARM OUR BUSINESS.
Historically, a significant majority of our sales have been to relatively few
customers, including Scientific-Atlanta. We expect that sales to relatively few
customers will continue to account for a significant percentage of our net sales
for the foreseeable future. Almost all of our sales are made on a purchase order
basis, and none of our customers has entered into a long-term agreement
requiring it to purchase our products. The loss of, or any reduction in orders
from, a significant customer would harm our business.
OUR CRITICAL RELATIONSHIP WITH SCIENTIFIC-ATLANTA AS BOTH A CUSTOMER AND AS A
COMPETITOR MAY JEOPARADIZE OUR SUCCESS.
Historic Sales. In 2002, approximately 66% of our revenues were from sales to
Scientific-Atlanta and its subsidiary, BarcoNet N.V. Should our level of
business with Scientific-Atlanta change, our results could be negatively
impacted.
Competitive Proprietary Technology . Our technology uses non-proprietary
industry standard interfaces and designs for video transport (known as
IP/gigabit Ethernet). We are aware that Scientific-Atlanta has developed a
product line that operates with Resilient Packet Ring (or "RPR"), an alternative
to the open industry standard of IP/gigabit Ethernet.
We believe transporting video directly over a proprietary standard such as RPR
eliminates the flexibility offered through open standards such as IP/gigabit
Ethernet. Nonetheless, Scientific-Atlanta's development, marketing and sale of
its RPR-based products may compete directly with our development, marketing and
sales efforts. Since Scientific-Atlanta has greater financial and other
resources than we do, Scientific-Atlanta may be able to develop its RPR-based
products more rapidly and market its RPR-based products more extensively than we
can. Because of Scientific-Atlanta's name recognition, industry-reputation and
other reasons, Scientific-Atlanta's RPR-based products could become the standard
for delivery of real-time, broadcast-quality video, in which case the sale of
our products could materially suffer. RPR-based products may be superior to ours
in terms of price or performance, or inferior to ours but backed by superior
marketing and support capabilities. As a result, we may not be able to compete
successfully with Scientific-Atlanta, and our ability to gain market share for
our products could be adversely affected.
Our relationship with Scientific Atlanta, as both a significant customer and a
significant competitor, may have adverse consequences to our business. While
general risks are associated with any competitor and any customer, the
conflicting interests of Scientific-Atlanta, as a result of being both,
magnifies these risks with respect to Scientific-Atlanta as both a customer and
competitor. Scientific-Atlanta may decide to pursue its proprietary RPR-based
products and discontinue its relationship with us, as both a reseller and an
outside manufacturer. Loss of sales to Scientific-Atlanta and its distribution
network to communication service providers could adversely affect our business.
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WILL LIKELY NOT BE PROFITABLE FOR
THE NEXT SEVERAL QUARTERS.
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 several
quarters. As of December 31, 2002, our accumulated deficit was approximately
$30.6 million. We expect to continue to incur significant operating, sales,
marketing, research and development and general and administrative 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.
OUR QUARTERLY FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results are difficult to predict and may fluctuate
significantly from period to period, particularly because our sales prospects
are uncertain and our sales are made on a purchase order basis. In addition, we
have not proven our ability to execute our business strategy with respect to
establishing and expanding sales and distribution channels. Fluctuations may
result from decreased spending on new products such as ours by communication
service providers or their suppliers, the timing of new product offerings,
acquisitions, licenses or other significant events by us or our competitors, our
ability to establish a productive sales force or partner with communication
service providers or their suppliers, demand and pricing of the products we
offer, consumer acceptance of the services our products enable, interruption in
the manufacturing or distribution of our products and general economic and
market conditions, including war, and other conditions specific to the
telecommunications industry. As a result, we may experience significant,
unanticipated quarterly losses.
THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON ESTABLISHING AND EXPANDING SALES AND
DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
Third-Party Collaborations. We intend to partner with the leading suppliers to
communication service providers, including Scientific-Atlanta, to promote and
distribute our products, both as an outside equipment manufacturer to suppliers
and with suppliers acting as resellers of our products. We may not be able to
identify adequate partners, and even if identified, we may not be able to enter
into agreements with these entities on commercially reasonable terms, or at all.
To the extent that we enter into any such agreements with third parties, any
revenues we receive from sales of our products in those markets will depend upon
the efforts of such third parties, which in most instances will not be within
our control. If we are unable to effectively leverage a partner to market our
products more broadly than we can through our internal sales force, our business
could be adversely affected.
Internal Sales Force. We have limited experience in marketing and selling our
products. We intend to expand our direct sales force domestically and
internationally for the promotion of each of our Cx1000, Cx1410 and Chameleon
vidX product lines and other future products to suppliers to and communication
service providers of all kinds. Competition for quality sales and marketing
personnel is intense. In addition, new employees, particularly new sales and
marketing employees, will require training and education concerning our products
and will also increase our operating expenses. There can be no assurance that we
will be successful in attracting or retaining qualified sales and marketing
personnel. As a result, there can be no assurance that the sales force we are
able to build will be of a sufficient size or quality to effectively market our
products.
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.
Our products are based on new technology and, as a result, it is extremely
difficult to predict the timing and rate of market adoption of our products, as
well the rate of market adoption of applications enhanced by our products such
as video-on-demand. Accordingly, we have limited visibility into when we might
realize substantial 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 that 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 may reduce prospects for sales of our
products. If our prospective customers curtail or eliminate their purchasing
programs, decrease their budgets or reduce their purchasing priority, our
results of operations could be adversely affected.
WE WILL DEPEND ON CABLE, BROADCASTING AND SATELLITE INDUSTRY SPENDING FOR A
SUBSTANTIAL PORTION OF OUR REVENUE AND ANY DECREASE OR DELAY IN SPENDING IN
THESE INDUSTRIES WOULD NEGATIVELY IMPACT OUR RESOURCES, OPERATING RESULTS AND
FINANCIAL CONDITION.
Demand for our products will depend on the magnitude and timing of spending by
cable television operators, broadcasters, satellite operators and carriers for
adopting new products for installation with their networks.
These spending patterns are dependent on a variety of factors, including:
o access to financing;
o annual budget cycles;
o the status of federal, local and foreign government regulation of
telecommunications and television broadcasting;
o overall demand for communication services and the acceptance of new
video, voice and data services;
o evolving industry standards and network architectures;
o competitive pressures;
o discretionary customer spending patterns;
o general economic conditions.
Recent developments in capital markets have reduced access to funding for
potential and existing customers causing delays in the timing and scale of
deployments of our equipment, as well as the postponement of certain projects by
our customers. The timing of deployment of our equipment can be subject to a
number of other risks, including the availability of skilled engineering and
technical personnel.
WE NEED TO DEVELOP AND INTRODUCE NEW AND ENHANCED PRODUCTS IN A TIMELY MANNER TO
REMAIN COMPETITIVE.
Broadband communications markets are characterized by continuing technological
advancement, changes in customer requirements and evolving industry standards.
To compete successfully, we must design, develop, manufacture and sell new or
enhanced products that provide increasingly higher levels of performance and
reliability. However, we may not be able to successfully develop or introduce
these products if our products:
o are not cost effective,
o are not brought to market in a timely manner,
o are not in accordance with evolving industry standards and
architectures, or
o fail to achieve market acceptance.
In order to successfully develop and market certain of our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. We cannot assure you that we will be
able to enter into any necessary technology development or licensing agreement
on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to
develop and market new products and, accordingly, could materially and adversely
affect our business and operating results.
DELIVERY OF REAL-TIME, BROADCAST-QUALITY VIDEO VIA IP NETWORKS IS A NEW MARKET
AND SUBJECT TO EVOLVING STANDARDS.
Delivery of real-time, broadcast-quality video over IP networks is novel and
evolving and it is possible that communication service providers or their
suppliers will adopt alternative architectures and technologies for delivering
real-time, broadcast-quality video over IP networks that are in compatible with
our current or future products. If we are unable to design, develop, manufacture
and sell products that incorporate or are compatible with these new
architectures or technologies, our business could suffer.
CHANGES IN THE MIX OF OUR PRODUCT SALES, PRODUCT DISTRIBUTION MODEL OR CUSTOMER
BASE COULD NEGATIVELY IMPACT OUR SALES AND MARGINS.
We may encounter a shift the mix of the various products that we sell - products
that have varying selling prices based in part on the type of product sold,
applicable sales discounts, licensed product feature sets, whether we sell our
products as an OEM, and whether the sale is a direct sale or an indirect channel
sale through our VARs and resellers. Any change in any of these variables could
result in a material adverse impact on our gross sales, gross margins and
operating results.
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. 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 RELY ON SEVERAL KEY SUPPLIERS OF COMPONENTS, SUB-ASSEMBLIES AND MODULES THAT
WE USE TO MANUFACTURE OUR PRODUCTS, AND WE ARE SUBJECT TO MANUFACTURING AND
PRODUCT SUPPLY CHAIN RISKS.
We purchase components, sub-assemblies and modules from a limited number of
vendors and suppliers that we use to manufacture and test our products. Our
reliance on these vendors and suppliers involves several risks including, but
not limited to, the inability to purchase or obtain delivery of adequate
supplies of such components, sub-assemblies or modules, increases in the prices
of such items, quality, and overall reliability of our vendors and suppliers.
Although in many cases we use standard parts and components for our products,
certain components are presently available only from a single source or limited
sources. Some of the materials used to produce our products are purchased from
foreign suppliers. We do not generally maintain long-term agreements with any of
our vendors or suppliers. Thus we may thus be unable to procure necessary
components, sub-assemblies or modules in time to manufacture and ship our
products, thereby harming our business.
We also recently signed an agreement with a leading parts vendor to provide
turn-key outsourced manufacturing services. To reduce manufacturing lead times
and to ensure adequate component supply, we may instruct our vendor to procure
inventory based on criteria and forecasts as defined by us. If we fail to
anticipate customer demand properly, an oversupply of parts, obsolete components
or finished goods could result, thereby adversely affecting our gross margins
and results of operations.
We may also be subject to disruptions in our manufacturing and product-testing
operations that could have a material adverse affect on our operating results.
UNANTICIPATED DELAYS OR PROBLEMS ASSOCIATED WITH OUR PRODUCTS AND IMPROVEMENTS
MAY CAUSE CUSTOMER DISSATISFACTION OR DEPRIVE US OF OUR "FIRST TO MARKET"
ADVANTAGE.
Delays in developing and releasing products and improvements are not uncommon in
the industry in which we compete. In the event of performance problems with our
product offerings, delays of more than a few months in releasing improvements
could result in decreased demand for a particular product and adverse publicity,
which could further reduce demand for particular products or our products
generally.
PRODUCT QUALITY PROBLEMS MAY NEGATIVELY AFFECT OUR REVENUES AND RESULTS FROM
OPERATIONS.
We produce highly complex products that incorporate leading edge technology
including both hardware, software and embedded firmware. Our software and other
technology may contain "bugs" that can prevent our products from performing as
intended. There can be no assurance that our pre-shipment testing programs will
be adequate to detect all defects either in individual products or which could
affect numerous shipments that, in turn, could create customer dissatisfaction,
reduce sales opportunities, or affect gross margins if the cost of remedying the
problems exceed our reserves established for this purpose. Our inability to cure
a product defect may result in the failure of a product line, serious damage to
our reputation, and increased engineering and product re-engineering costs that
individually or collectively would have a material adverse impact on our
revenues and operating results.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHEN NEEDED, WHICH
COULD PREVENT US FROM GROWING.
We must raise additional capital to fund our operations and planned growth. We
cannot be certain that any such financing will be available on acceptable terms,
or at all, and our failure to raise capital when needed could seriously harm our
business. In addition, additional equity financing may dilute our stockholders'
interest, and debt financing, if available, may involve restrictive covenants
and could result in a substantial portion of our operating cash flow being
dedicated to the payment of principal and interest on debt. If adequate funds
are not available, we may need to curtail our operations significantly.
WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IF WE ARE UNABLE TO EFFECTIVELY MANAGE
THE GROWTH.
We anticipate that we will need to grow 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 successfully train, motivate and manage new employees;
expand our sales and support organization; integrate new management and
employees into our overall operations; and 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.
Despite the recent economic slowdown, 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. The loss of services of any of our key personnel, the
inability to attract or retain key personnel in the future, or delays in hiring
required personnel, particularly engineering and sales personnel, could make it
difficult to meet key objectives such as timely and effective product
introductions.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
We may attempt to acquire businesses or technologies that we believe are a
strategic fit with our business. We currently have no commitments or agreements
for any material acquisition and no material acquisition is currently being
pursued. We believe that any future acquisition may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for ongoing development of our
business. Since we will not be able to accurately predict these difficulties and
expenditures, it is possible that these costs may outweigh the value we realize
from a future acquisition. Future acquisitions could result in issuances of
equity securities that would reduce our stockholders' ownership interest, the
incurrence of debt, contingent liabilities or amortization of expenses related
to goodwill or other intangible assets and the incurrence of large, immediate
write-offs.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS.
Our success depends on the efforts and abilities of our senior management 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 and results of operations could be materially
harmed.
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 in which we operate 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.
RISKS RELATED TO INVESTMENT IN OUR SECURITIES
THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE AND YOUR INVESTMENT COULD
SUFFER A DECLINE IN VALUE.
The market price for our common stock is likely to be volatile and could be
susceptible to wide price fluctuations due to a number of internal and external
factors, many of which are beyond our control, 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 customer demand or acceptance of our products and solutions;
o short-selling programs;
o changes in IT spending patterns and the rate of consumer acceptance of
video-on-demand;
o product sales progress, both positive and negative;
o the stock market's perception of the telecommunications equipment
industry as a whole;
o technological innovations by others;
o cost or availability of components, sub-assemblies and modules used in
our products;
o the introduction of new products or changes in product pricing
policies by us or our competitors;
o proprietary rights disputes or litigation;
o initiation of or changes in earnings estimates by analysts;
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 early-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.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS WILL BE ABLE TO EXERCISE
SUBSTANTIAL CONTROL OVER ALL MATTERS REQUIRING SHAREHOLDER APPROVAL.
As of December 31, 2002, a small number of our executive officers, directors and
5% stockholders, beneficially own, in the aggregate, approximately 45% of our
outstanding common stock. 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 dated April 10,
2000 with Leitch Technology Corporation ("Leitch"), Ronald D. Fellman and
Douglas A. Palmer, have agreed to vote all securities of Path 1 held by them in
favor of designees of Leitch for two positions on our 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 December 31, 2002,
Leitch did not hold at least 20% of our stock on an as-converted, as-exercised,
fully-diluted basis and thus is not entitled to designate director nominees.
THE ISSUANCE OF COMMON STOCK TO LAURUS FUNDS IN CONNECTION WITH OUR CONVERTIBLE
NOTE TO THEM WOULD CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS, AND THE
RESALE OF SUCH SHARES BY LAURUS MAY DEPRESS THE PRICE OF OUR COMMON STOCK.
In May 2002, we issued a 12% convertible note in the principal amount of
$1,250,000. The note is convertible at a price of $1.40 per share and is payable
on a monthly basis over 15 months. We also issued 125,000 warrants in connection
with this note.
On November 7, 2002, the Company issued a 12% convertible note in the principal
amount of $300,000. The note is convertible at a price of $.85 per share and is
payable on a monthly basis over 18 months.
In connection with the issuance of the 12% convertible note in November 2002,
the Company issued warrants to purchase 75,000 shares of common stock at $.85
per share. The 75,000 warrants issued in connection with the November 7, 2002
convertible note are fully vested and expire in November 2009.
As part of the November 7, 2002 convertible note transaction, the Company also
repriced the conversion price of the May 2002 convertible note and the 125,000
warrants (which had been purchased by the same investor) to $.85 per share. The
term of the May 2002 note was extended to May 7, 2004.
The convertible note financing that we have in place with Laurus Funds may have
a material dilutive impact on our shareholders, as well as a negative impact on
our financial results.
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 December
31, 2002, there were options outstanding to purchase 3,619,587 shares of common
stock under our 2000 Plan; 620,931 shares of common stock 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 and stockholders. A
maximum of 250,000 shares of common stock have been authorized for issuance
under the Purchase Plan.
In addition, as of December 31, 2002, there were 539,713 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. Therefore, the
issuance of further stock options and shares under the 2000 Plan to persons
other than officers, directors and previous optionees requires qualification, is
restricted under the "blue sky" securities provisions of the California
Corporations Code. As a result, our ability to grant options and stock as a
means of attracting and retaining employees and directors will be materially
impaired.
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 15,000 square feet of office space within one facility
under in San Diego, California. The San Diego office is used for research and
development, prototype production, sales and marketing and administration. The
lease for our San Diego office expires April 2005.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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 ($) Low ($)
----------------- ---------------
2002:
First Quarter 5.80 3.10
Second Quarter 3.00 1.25
Third Quarter 2.10 1.04
Fourth Quarter 1.17 0.86
2001:
First Quarter 10.72 5.69
Second Quarter 9.65 5.05
Third Quarter 5.95 3.20
Fourth Quarter 7.90 3.80
As of March 7, 2003, there were approximately 348 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, 2002, 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 also read the
consolidated historical financial statements and related notes included herein
(in thousands, except per share data):
Period from
January 30, 1998
Years ended December 31, (inception) to
---------------------------------------------------------------------------
2002 2001 2000 1999 December 31, 1998
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 2,722 $ 1,969 $ - $ - $ -
Gross profit $ 1,209 $ 596 $ - $ - $ -
Operating loss $ (4,228) $ (2,050) $(13,468) $ (4,000) $ (2,671)
Loss from continuing operations $ (5,837) $ (2,855) $(13,120) $ (4,014) $ (2,664)
Discontinued operations $ (317) $ (1,829) $ - $ - $ -
Net loss $ (6,154) $ (4,684) $(13,120) $ (4,014) $ (2,664)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 396 $ 1,733 $ 11,484 $ 454 $ 119
Working capital $ (769) $ 271 $ 8,971 $ 258 $ 74
Total assets $ 1,633 $ 3,418 $ 12,304 $ 712 $ 312
Total stockholders' (deficit) equity $ (539) $ 1,349 $ 9,614 $ 430 $ 256
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition contains certain statements
that are not strictly historical and are "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and involve a
high degree of risk and uncertainty. Our actual results may differ materially
from those projected in the forward-looking statements due to risks and
uncertainties that exist in our operations, development efforts, and business
environment, including those set forth under the Section entitled "Risk Factors"
in Item 1, and other documents we file with the Securities and Exchange
Commission. All forward-looking statements included in this report are based on
information available to us as of the date hereof, and we assume no obligation
to update any such forward-looking statement.
OVERVIEW
In 2002, we began a transition toward being a true products-based company as
opposed to an engineering and research development-stage company. Although we
still fit the profile of an emerging company, this transition is evident in many
aspects of our operations. Our 2002 Statement of Operations results reflect
this, just as our 2001 results reflected an earlier phase of the transition. As
part of our continuing transition, we outsourced our manufacturing operations in
January 2002.
In 2001, we acquired our Silicon Systems ("Sistolic") business unit. After
making a significant investment in Sistolic, we decided in April 2002 to
discontinue and sell Sistolic. Our resources did not allow us to continue to
operate both Sistolic and our core video solutions business due principally to
the cash burn rate of both businesses and our limited resources. Our decision
cut our losses on Sistolic was also spurred by disappointments in Sistolic's
business progress, our recognition of the difficultly in managing a
Romanian-based business unit, and our judgment that focusing our limited
resources on our core video solutions business would provide a better return for
our stockholders.
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, as well as from the issuance of convertible notes. From
January 30, 1998 through December 31, 2002, we incurred losses totaling $30.6
million. We do not believe that our existing capital resources will enable us to
fund operations for the next twelve months. At December 31, 2002, we had
negative working capital of $769,000, and a decrease of $785,000 in cash and
cash equivalents compared to December 31, 2001. Our existing capital resources
are insufficient to enable us to continue operations as currently conducted. THE
CASH CRISIS IS VERY SERIOUS. Our independent auditors' opinion expresses
substantial doubt about our ability to continue as a going concern.
Many emerging companies' operating results are affected by charges for stock
based compensation. In 2000 and 2001, these effects were particularly large for
us due to our decision to issue stock options for Class B Common Stock, which
was "junior common stock". All options overlying junior common stock are subject
to variable accounting treatment, and require a new measurement date each
quarter. By October 2001, we had issued an unusually high number of options
compared to many other publicly traded companies, and almost all of such options
were for Class B Common Stock. Accordingly, when our stock price rose (as it did
in 2000), we recorded very large amounts of stock-based compensation expense.
When our stock price fell (as it did in 2001), we reversed earlier charges and
recorded very large amounts of stock-based compensation benefit, or "negative
expense". Because the wide fluctuations were found undesirable, we instituted a
program in which we issued 2,636,148 new Class A Common Stock options in October
2001 in exchange for all outstanding Class B Common Stock options. Class A
Common Stock, which is now known simply as our Common Stock, is not junior
common stock. The October 2001 transaction, while not insulating us from all
future fluctuations in stock-based compensation changes arising from variable
accounting treatment, is expected to reduce the size of such fluctuations
significantly from what they would have been if we had continued with Class B
Common Stock options.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUE
Total 2002 revenues were $2.7 million, representing an increase of approximately
38% over 2001 revenues of $1.96 million. Revenues in 2002 consist of product
sales, contract service revenue and license fees. During 2002, the Company
recorded product revenues of $2.4 million, engineering service revenue of
$116,000 and license revenue of $190,000. Revenues in 2001 consisted of $1.45
million in engineering services revenue and $519,000 in product sales revenue.
COST OF REVENUES
Cost of revenues was $1.5 million in 2002, representing an increase of 10% over
cost of revenues in 2001 of $1.37 million. In 2002, our cost of product sales
was $1.48 million, and our cost of engineering services was $33,000. In 2001,
our cost of product sales was $156,000, and our cost of engineering services was
$1.2 million. Our cost of revenues increased at a rate slower than our revenues
reflecting our transition to selling our video gateway products.
RESEARCH AND DEVELOPMENT
Our research and development expenses decreased approximately 16% to $1.5
million in 2002 from $1.78 million in 2001. The decrease in our research and
development expenses is primarily due to a decrease in payroll costs and
prototype material expenses as the Company transitioned to a products company
from an engineering development stage company. The decline in our R&D expenses
also resulted from our efforts in 2002 to reduce our operating costs.
SALES AND MARKETING
Our sales and marketing expenses increased nearly 69% to $639,000 in 2002 from
$378,000 in 2001. The increase in sales and marketing expenses reflects the
company's transition to a products-based company, costs incurred for marketing
and sales campaigns and materials, trade shows and establishing product channels
and reseller arrangements.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses decreased nearly 35% to $2.6 million in
2002 from $3.99 million in 2001. This decline is principally a result of our
cost reduction programs implemented in 2002 that included headcount reductions,
and lower overall spending for general and administrative functions.
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
and/or which overlie junior common stock. Stock-based compensation expense is
calculated as the difference between exercise prices 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. In 2002, we recorded a non-cash compensation charge of
$253,000 related to stock options, compared to a non-cash stock compensation
benefit of approximately $3.1 million in 2001. Stock-based compensation expense
may continue to fluctuate, in material amounts, as the fair market value of our
common stock increases or decreases. In October 2001, we issued 2,636,148 Class
A Common Stock options in exchange for all 2,636,148 of the outstanding Class B
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 because Class B Common Stock was
junior common stock, the effect of this option exchange was to provide a final
measurement date for employee options and fix previously expensed consultant
options. The net effect was to minimize the future effect of variable accounting
treatment on our stock options.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 82% to $461,000 from 253,000 in
2001, predominantly as a result of amortization of capitalized loan fees in
connection with our financings in 2002.
INTEREST INCOME/(EXPENSE)
Interest expense totaled $1 million in 2002, compared to $93,000 interest income
in 2001. The increase in interest expense predominantly consists of the
amortization of deferred interest and debt discount related to our European note
and convertible note borrowings in 2002.
RESTRUCTURING CHARGE
In 2001, we recorded restructuring charges totaling $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 funded development project funded by
BarcoNet, now a subsidiary of Scientific-Atlanta. The workforce reduction in
2001 resulted in the involuntary termination of six employees. The total charge
recognized by us for the involuntary termination was approximately $93,000.
LOSS ON SALE OF SECURITIES
We recorded a loss on sale of securities totaling $590,000 in 2002, compared to
a loss of $677,000 in 2001, reflecting our sale of securities that we held in
various companies, especially Leitch Technology Corporation. We no longer hold
any portfolio securities.
DISCONTINUED OPERATIONS
We decided to dispose of our Silicon Systems business unit ("Sistolic") after a
large semiconductor company, with whom we entered into a non-exclusive licensing
agreement and an engineering services agreement related to Sistolic's
technology, informed us that they were terminating their agreements in March
2002. Due to this material and adverse turn of events, we decided that we could
no longer sustain the negative cash flow from Sistolic. On April 3, 2002, we
disposed of the assets of this business unit back to Metar SRL and its President
("Executive") in exchange for the elimination of our remaining obligations to
Metar SRL and its affiliates, including the payable of $686,000, the return of
all stock options granted to the Executive and the Romanian employees, and a
confirmation that performance criteria specified in the Executive's employment
agreement with us related to a potential $4 million bonus were never met by him.
We also received a limited use license to the business unit's intellectual
property. In addition, the Romanian facility lease was transferred to Metar SRL
and the Romanian employment contracts were terminated. Metar SRL was permitted
to hire any and all Romanian employees. Metar SRL also received 35,000 shares of
our common stock. The Executive resigned on March 27, 2002, as an officer of the
Company in anticipation of this transaction.
Sistolic's results of operations for 2002 and 2001 have been included in
discontinued operations. We recorded a loss of $317,000 from discontinued
operations for 2002. Our loss from discontinued operations for 2001 was
$1,829,000.
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE
Total revenue in 2001 was $1.96 million, primarily from engineering services on
the BarcoNet development project. No revenue was reported in 2000.
COST OF REVENUE
Total cost of revenue in 2001 was $1.37 million. No cost of revenue was reported
in 2000.
RESEARCH AND DEVELOPMENT
Research and development expense decreased to $1.8 million in 2001 from $3.5
million in 2000, representing a 49% decrease year on year. The decrease in our
research and development expenses was primarily due to lower expenses for
consulting, reduced engineering staff, and associated prototype material
expenditures related to the development of certain proposed products and the
technology underlying these products.
SALES AND MARKETING
Sales and marketing expense decreased 68% to $378,000 in 2001 from $1.2 million
in 2000. The decrease in our sales and marketing expenses in 2001 was due to our
efforts at focusing on development activities and away from promotional and
sales efforts associated with securing contract development opportunities in
2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased nearly 43% to $3.9 million in 2001
from $2.8 million in 2000. The increase reflects increases in amortization of
acquired technology, recruiting costs for senior level executives, severance and
consulting payments to our former CEO and payments to key upper management for
the entire 2001 year as compared to a partial year in 2000.
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
and/or which overlie junior common stock. Stock-based compensation expense is
calculated as the difference between exercise prices 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 a $3.1 million non-cash benefit in 2001 due to
a lower stock price relative to the previous year, versus a $4.4 million
non-cash charge in 2000. In October 2001, we issued 2,636,148 Class A Common
Stock options in exchange for all 2,636,148 of the outstanding Class B 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 because Class B Common Stock was
junior common stock, the effect of this option exchange was to provide a final
measurement date for employee options and fix previously expensed consultant
options. The net effect was to minimize the future effect of variable accounting
treatment on our stock options.
LITIGATION SETTLEMENT
In January 2001, we settled litigation with Franklin Felber, one of our
founders. We paid Mr. Felber 100,000 shares of Common Stock and $48,000 cash. We
recorded a charge of $1,400,000 in 2000 related primarily to the stock issuance,
and recorded a $650,000 credit in 2001 related to the resolution of a
contingency that would have required us to pay additional cash.
INTEREST INCOME
Our interest income decreased to $93,000 in 2001 from $449,000 in 2000. The
decrease in interest income was due to significantly lower average cash balances
in 2001 versus 2000, as well as lower interest rates on deposits.
LOSS ON SALE OF SECURITIES
Our loss from the sale of securities increased to $677,000 in 2001 from $101,000
in 2000. The increase related principally to the loss recognized on the sale of
Leitch common stock in 2001.
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, as well as from the issuance of convertible notes.
From January 30, 1998 through December 31, 2002, we incurred losses totaling
$30.6 million. The accompanying financial statements have been prepared assuming
that we will continue as a going concern. This basis of accounting contemplates
the recovery of our assets and the satisfaction of our liabilities in the normal
course of conducting business. We do not believe that our existing capital
resources will enable us to fund operations for the next twelve months. At
December 31, 2002, we had negative working capital of $769,000, and a decrease
of $785,000 in cash and cash equivalents compared to December 31, 2001.
Our plans are to reduce costs in all areas of our operating plan until
sufficient capital is raised to support our growth and more substantial product
orders materialize; however, even with our cost reduction plans, we need to
raise additional funding to continue as a going concern. In the event we do not
receive additional funding, our plans may include, but are not necessarily
limited to: 1) further reducing costs and focusing on selling existing products
and services; 2) selling the Company's assets through a merger or acquisition;
or 3) seeking protection under bankruptcy statutes. Without additional
financing, we may be required to further delay, reduce the scope of, or
eliminate one or more of our research and development projects and significantly
reduce our expenditures on product deployment, and we may not be able to
continue as a going concern.
In 2002, the Company received approximately $1,031,000 from a private placement
of convertible notes with European investors (the "Euro notes") who were
existing Company stockholders. The notes carry a 4% annual coupon, paid
quarterly in cash or stock, at our discretion, and are convertible for a
one-year conversion term at a price of $1.20 per share. In addition, upon
conversion, the note holder will be issued warrants equal to the number of
shares to be issued.
Because the Euro notes' conversion price was below the trading market price of
stock on the day the Euro notes were issued, this resulted in an embedded,
beneficial conversion element. As a result, we recorded a debt discount of
$301,000 and this will be accreted over the life of the debt or sooner in the
event of conversion. Through December 31, 2002, approximately 76% of the note
holders converted their notes into the Company's common stock. Upon conversion,
the Company expensed warrants to purchase 674,654 shares of common stock at
$1.60 per share for $293,000. The warrants are fully vested and expire in June
2007. In 2002, we recorded non-cash interest expense of $573,000 relating to
amortization of debt discount and issuance of common stock warrants related to
the Euro notes.
During 2002, the Company issued two convertible notes to The Laurus Master Fund
("Laurus"). In May 2002, we issued Laurus a 12%, 15-month convertible note in
the principal amount of $1,250,000. The note is convertible at a price of $1.40
per share. The Company secured a three-month deferral of principal and interest
under the note. In connection with the issuance of the 12% convertible note in
May 2002, we issued to Laurus warrants to purchase 125,000 shares of common
stock at $1.68 per share. The warrants are fully vested and expire on May 2009.
On November 7, 2002, we issued Laurus a 12% convertible note in the principal
amount of $300,000. The note is convertible at a price of $.85 per share and is
payable on a monthly basis over 18 months. In connection with the issuance of
the 12% convertible note in November 2002, the Company issued warrants to
purchase 75,000 shares of common stock at $.85 per share.
Because the Laurus notes' conversion prices were below the trading market prices
of the Company's stock on the dates of issue, this resulted in an embedded
beneficial conversion element. We recorded a debt discount of $779,000 and this
will be accreted over the life of the debt or sooner in the event of conversion.
In 2002, we recorded non-cash interest expense of $421,000 relating to the
accretion of debt discount and conversions related to the Laurus notes. The
price at which these Laurus notes convert into our stock generally varies
monthly in proportion to the price of our stock at the time of conversion, and
is based generally on a trailing market price.
As part of the November 7, 2002 convertible note transaction, the Company also
repriced the conversion price of the May 2002 convertible note and the 125,000
warrants (which had been purchased by the same investor) to $.85 per share. The
term of the May 2002 note was extended to May 7, 2004. The reprice resulted in a
non-cash charge of $130,000 in the fourth quarter ended December 31, 2002
related to debt conversion expense. The Company will incur additional non-cash
debt conversion expense in the future upon the conversion of both notes.
For the foreseeable future, we expect to incur substantial additional
expenditures associated with cost of sales and with research and development, in
addition to increased costs associated with staffing for management,
manufacturing, sales and marketing and administration functions. Additional
capital is required to implement our business strategies and fund our plan for
future growth and business development. We are continuing to seek other sources
of additional capital to fund operations until we are able to fund operations
through internal cash flow.
At December 31, 2002, we had no material commitments other than our operating
leases. Our future capital requirements will depend upon many factors, including
the timing of research and product development efforts, the possible need to
acquire new technology, the expansion of our sales and marketing efforts, and
our expansion internationally. We expect to continue to expend significant
amounts in all areas of our operations.
As noted above, we will need additional financing in 2003. We may pursue 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 equity financing. There can be no assurance that
funds from these sources will be available on favorable terms, if at all. If we
raise additional funds through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced or significantly diluted, or such
equity securities may provide for rights, preferences or privileges senior to
those of the holders of our common stock.
Our existing capital resources are insufficient to enable us to continue
operations as currently conducted. THE CASH CRISIS IS VERY SERIOUS. Our
independent auditors' opinion expresses substantial doubt about our ability to
continue as a going concern.
Cash used in operations was $4.1 million for the year ended December 31, 2002
compared to $7.2 million for the same period in 2001, despite a much larger net
loss from continuing operations in 2002 versus 2001. The decrease in cash used
in operations the year ended December 31, 2002, compared to the prior year was
primarily due to lower engineering and general and administrative expenses.
Cash provided by investing activities for the year ended December 31, 2002, was
$414,000, compared cash provided of $1.4 million as of December 31, 2001. Cash
provided for the year ended December 31, 2002 was primarily the result of our
sale of marketable securities in early 2002.
Cash provided by financing activities for the year ended December 31, 2002 was
$3.2 million, compared to cash provided of $236,000 at December 31, 2001. This
change was primarily due to Euro note financing and convertible note financings
with The Laurus Funds in 2002.
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:
Product Revenue
Revenue from product sales is recognized when title and risk of loss transfer to
the customer, generally at the time the product is delivered to the customer.
Revenue is deferred when customer acceptance is uncertain or when undelivered
products or services are essential to the functionality of delivered products.
The estimated cost of warranties is accrued at the time revenue is recognized.
Contract Service Revenue
Revenue from support or maintenance contracts, including extended warranty
programs, is recognized ratably over the contractual period. Amounts invoiced to
customers in excess of revenue recognized on support or maintenance contracts
are recorded as deferred revenue until the revenue recognition criteria are met.
Revenue on engineering design contracts, including technology development
agreements, is recognized on a percentage-of-completion method, based on costs
incurred to date compared to total estimated costs, subject to acceptance
criteria. Billings on uncompleted contracts in excess of incurred costs and
accrued profits are classified as deferred revenue.
License Revenue
Revenues from license fees are recognized when persuasive evidence of a sales
arrangement exists, delivery and acceptance have occurred, the price is fixed or
determinable, and collectability is reasonably assured.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our ownership, if
any, of 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. At December 31, 2002,
we did not have any marketable securities or investments in available-for-sale
securities, nor did we have any sales denominated in a currency other than the
United States dollar.
We do not believe that inflation has had a material impact on our business or
operating results during the periods presented.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements at December 31, 2002, 2001 and
2000 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 2002, 2001, and 2000,
are included in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 30, 2002, we announced that we engaged the accounting firm of Swenson
Advisors, LLP as our independent accountants for the remainder of the year ended
December 31, 2002.
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 2003 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 Relationships and Related Transactions".
ITEM 14. STATEMENT ON DISCLOSURE CONTROLS AND PROCEDURES
(A) EVALUATION OF CONTROLS AND PROCEDURES
Within 90 days before the filing of this report, our Chief Executive Officer,
Mr. Cary, and Chief Financial Officer, Mr. Zavoli, carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, Mr. Cary and Mr. Zavoli concluded that
our disclosure controls and procedures are effective in causing material
information to be collected, communicated and analyzed by management of the
Company on a timely basis and to ensure that the quality and timeliness of the
Company's public disclosures comply with its SEC disclosure obligations.
(B) CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls after the date of our most recent
evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-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 Swenson Advisors LLP, Independent Accountants
Report of Ernst & Young LLP, Independent Accountants
-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.
3. Exhibits: The exhibits filed with this report, or
incorporated by reference herein, are set forth on the
Exhibit Index included herein.
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)
3.2 Amended and Restated Bylaws. (2)
10.1* Consent to Sublease Agreement with Pointe Camino Windell, LLC and Qualcomm Inc. dated June 6,
2002.
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 Agreement of Purchase and Sale by and between us and Leitch Technology Corporation, dated April
10, 2000. (2)
10.4+ Technology License Agreement between us and Leitch Technology corporation, dated April 10,
2000. (2)
10.5 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. (6)
10.6 Path 1 Network Technologies Inc. 2000 Stock Option/Stock Issuance Plan. (7)
10.7 Form of Notice of Grant under the 2000 Stock Option/Stock Issuance Plan. (7)
10.8 Form of Stock Option Agreement under the 2000 Stock Option/Stock Issuance Plan. (7)
10.9 Employment Agreement between us and Yendo Hu dated August 31, 1999. (2)
10.10 Employment Agreement between us and Michael T. Elliott dated April 7, 2000. (2)
10.11 Employment Separation/Consulting Agreement and General Release with Michael Elliott dated April
4, 2001. (8)
10.12* Agreement with James Bixby, Director, dated December 22, 2000.
10.13* Employment Agreement with Alan Remen dated May 5, 2000.
10.14 Separation and General Release between us and Alan Remen dated January 8, 2002. (3)
10.15 Consulting Agreement between us and Alan Remen dated January 8, 2002. (3)
10.16# 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. (5)
10.17 Separation and Sale Agreement among us, Metar ADC SRL, and Michael Florea, dated as of April 1,
2002 but executed and delivered April 3, 2002. (14)
10.18 Letter of resignation from Douglas A. Palmer dated May 24, 2002. (13)
10.19 Consulting Agreement with Douglas A. Palmer dated May 24, 2002. (13)
10.20* Letter Agreement with Douglas A. Palmer dated December 27, 2002.
10.21# Employment Agreement with Richard B. Slansky dated May 5, 2000. (3)
10.22 Separation and General Release with Richard B. Slansky dated July 8, 2002. (13)
10.23# Employment Agreement with Frederick A. Cary, dated September 7, 2001. (8)
10.24* Agreement with Robert Packer, Director, dated September 28, 2001.
10.25* Employment Agreement with David A. Carnevale dated November 6, 2001.
10.26* Consulting Agreement with Robert Clasen dated July 20, 2002, as amended by Consulting Agreement
Addendum dated September 16, 2002.
10.27* Consulting Agreement with Moshe Nazarathy dated September 25, 2002.
10.28* Agreement with Moshe Nazarathy, Director, dated September 25, 2002.
10.29* Employment Agreement with John R. Zavoli dated October 16, 2002.
10.30* Severance Agreement and Technology License Agreement with Ronald D. Fellman dated January 7,
2003.
10.31* Employment Agreement with Pat Bohana dated February 21, 2003.
10.32* Consulting Agreement with Del Mar Consulting Group, Inc. dated November 27, 2002.
10.33* Non-Qualified Stock Option Agreement with Del Mar Consulting Group, Inc. dated November 30,
2002.
10.34 Subscription Agreement between us and Meewui de Kraker dated, October 24, 2001. (3)
10.35 Promissory note between us and Meewui de Kraker, dated October 24, 2001. (3)
10.36 Stock Pledge Agreement between us and Meewui de Kraker, dated October 24, 2001. (3)
10.37* Default Judgement obtained against Meeuwi deKraker filed on October 21, 2002.
10.38 Technology License Agreement between us and Visionary Solutions dated December 11, 2001. (3)
10.39 Common Stock Purchase Agreement between us and DTKA Holdings Limited, dated January 17, 2002.
(9)
10.40 Registration Rights Agreement between us and DTKA Holdings Limited, dated January 17, 2002. (9)
10.41 Path 1 Network Technologies 2001 Employee Stock Purchase Plan. (6) (14)
10.42 Private Placement of up to $5 million in Unregistered Securities and Warrants dated January 13,
2002. (14)
10.43 Securities Purchase Agreement with the April and May European investors. (12)
10.44 Form of Convertible Note issued to the April and May European investors. (12)
10.45 Form of Warrant issued to the April and May European investors. (12)
10.46 Securities Purchase Agreement between us and Laurus Master Fund, Ltd. (10)
10.47 $1,250,000 convertible promissory note issued to Laurus Master Fund, Ltd. (10)
10.48 125,000 warrants issued to Laurus Master Fund, Ltd. (10)
10.49 Securities Purchase Agreement dated November 7, 2002 by and between Path 1 and Laurus Master
Fund, Ltd. (11)
10.50 Allonge to Convertible Note Dated May 16, 2002 dated November 7, 2002 with Path 1 and Laurus
Master Fund, Ltd. (11)
10.51 Allonge to Warrant Dated May 16, 2002 dated November 7, 2002 with Path 1 and Laurus Master
Fund, Ltd. (11)
10.52* Purchase and Security Agreement dated February 13, 2003 with Laurus Master Fund, Ltd.
10.53* Registration Rights Agreement dated February 13, 2003 with Laurus Master Fund, Ltd.
10.54* Allonge to Convertible Note Dated May 16, 2002 and November 7, 2002 with Laurus Master Fund,
Ltd. dated February 13, 2003.
10.55* Form of Convertible Note with Laurus Master Fund, Ltd. dated February 13, 2002.
10.56* Form of Warrant with Laurus Master Fund, Ltd. dated February 13, 2002.
10.57* Reseller Agreement with Internet Photonics, Inc. dated October 11, 2002.
10.58* Product Development and Supply Agreement dated September 9, 2002.
21 List of subsidiaries. (10)
23.1* Consent of Swenson Advisors LLP.
23.2* Consent of Ernst & Young LLP.
99.1* Section 906 Certification of the Chief Executive Officer Filed Herewith
99.2* Section 906 Certification of the Chief Financial Officer Filed Herewith
* Filed Herewith
# Indicates management contract or compensatory plan or arrangement.
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the SEC without the Mark pursuant to the
Company's Application Requesting Confidential Treatment under Rule 24b-2 under
the Securities Exchange Act of 1934.
(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 the
incorporated by reference to, our Annual Report on Form 10K for the
year ended December 31, 2001, filed with the Commission on April 15,
2002.
(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 and our Registration
Statement on Form S-8, filed with the Commission on August 28, 2002.
(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 for 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.
(10) This exhibit was previously filed as part of, and is hereby
incorporated by reference to, our Registration Statement on Form SB-2,
filed with the commission on June 7, 2002.
(11) This exhibit was previously filed as part of, and is hereby
incorporated by reference to, our Quarterly Report on Form 10-Q, filed
with the Commission on November 18, 2002.
(12) This exhibit was previously filed as part of, and is hereby
incorporated by reference to, our Registration Statement on Form SB-2
filed on August 7, 2002, and Form SB-2/A filed on August 26, 2002
(13) This exhibit was previously filed as part of, and is hereby
incorporated by reference to, our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, filed with the Commission on August 14,
2002.
(14) This exhibit was previously filed as part of, and is hereby
incorporated by reference to, our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, filed with the Commission on May 15,
2002.
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: March 31, 2003
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 Chairman, President and Chief Executive Officer March 31, 2003
Frederick A. Cary and Director (Principal Executive Officer)
/s/ John R. Zavoli Chief Financial Officer and Secretary March 31, 2003
John R. Zavoli (Principal Financial Officer and Principal
Accounting Officer)
/s/ Robert L. Packer Director March 31, 2003
Robert L. Packer
/s/ Robert Clasen Director March 31, 2003
Robert Clasen
/s/ James A. Bixby Director March 31, 2003
James A. Bixby
/s/ Moshe Nazarathy Director March 31, 2003
Moshe Nazarathy
CERTIFICATIONS
I, Frederick A. Cary, certify that:
1. I have reviewed this annual report on Form 10-K of Path 1 Network
Technologies Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. eva