Digital Lava is a provider of "rich" mixed media software products and services for use in corporate training, communications and sales and marketing applications. Each of these markets (e.g. sales, training) represents multibillion expenditures each year by Fortune 1000 companies. We are positioned within the developing streaming media industry.
Rich media is defined as streaming video and streaming audio technology. Streaming technology allows an Internet or intranet user to access information in a file before the file is completely downloaded. As a result, large files containing audio and video can be heard or seen almost immediately even with slower connections. By combining streaming audio and video with traditional media assets of slides, graphics, text animation and web links, we have created the next generation category of rich mixed media that can be delivered via compact discs, the Internet or intranets.
Our current product line includes Digital Lava View, vPublisher, Publishing Services, HotFoot, HotFoot Host, and FireStream Encoding Station(TM). Digital Lava View is a proprietary viewer that allows the user to access the content published in the unique Digital Lava structure. Digital Lava View replaces our VideoVisorProfessional and VideoVisorWeb applications. vPublisher is a proprietary authoring software tool that allows the integration of text, data, voice, video and web links into a Digital Lava View. Digital Lava Views are accessed on CD-ROMs, corporate intranets, or the Internet. Digital Lava View allows the user to individually manage, manipulate and navigate the synchronized information. This allows the user to experience full integration of, and interaction with, differing media types on their computer screen both at home and in the office. All Publishing Services result in Digital Lava Views as the end product(s). HotFoot for PowerPoint(TM) allows users to add streaming audio to Microsoft PowerPoint presentations and deliver them electronically to single or multiple recipients via email or hosting. FireStream Encoding Station(TM) allows users to encode media from a single source into multiple formats and bit rates simultaneously and in real time.
We believe these technologies represent a significant market opportunity to shift activity and revenue from classic methods of communicating product information, financial results, training content and general information to a more interactive and effective software application. By utilizing the development of streaming technology and the growth of the Internet, we believe corporations across all business sectors will be able to increase the effectiveness of their sales and marketing efforts, enhance corporate communications and deliver effective financial reporting while eliminating the high cost of travel and executive down time.
Our customers include large corporations and business enterprises, such as:
Our products and services have been recognized in terms of quality, technology, focus and delivery. We have received the following industry awards:
- Platinum Award for MPEG and Streaming Products from Video Multimedia Producer in May 2000;
- Readers' Choice Award, also from Video Multimedia Producer, in January 2000; 4
- awards from Multimedia.com including the September 1999 People's Choice Award, the August 1999 Best New Streaming Service Award, and the March 1999 Best New Streaming Product Award;
- October 1998 People's Choice Award from Networked Multimedia; and
- April 1998 Best New Streaming Product Award, also from Networked Multimedia.
In October 2000, we were named to the "Los Angeles Technology Fast 50" program by Deloitte & Touche.
INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
We believe the demand for our software applications in the corporate training, communications and distance learning markets will be led by trends and technologies that enable computer-based and Internet-based video training and communications to be used increasingly as substitutes for videotapes, instructor-led training, live meetings and other traditional forms of communications and training. These trends and technologies include:
- the increasing geographic dispersion and globalization of workforces and client bases;
- the inherent cost and complexity of product launches for technical products;
- the growth of multimedia-capable computers and sophisticated computer networks;
- advances in personal computer processing power;
- high speed communications capabilities;
- the emergence of the Internet and corporate intranets for a wide variety of business applications; and
- the continued growth of streaming media applications.
Streaming technology enables the transmission and playback of continuous "streams" of multimedia content, such as audio and video, over a computer network. The introduction of streaming media technology from companies such as RealNetworks, Inc., Microsoft Corporation and Apple Computer, Inc. are now providing software developers the opportunity to efficiently deliver significant media content and applications over the Internet and corporate intranets. On the Internet, many businesses and content providers now offer audio, video and other multimedia information. RealNetworks broadcasts thousands of hours per week of live audio and video content over the Internet using its streaming technology, with a substantially greater amount of recorded media already stored and available on the Internet.
We believe that the use of streaming media and related richmedia applications by businesses and other users is growing. According to a 2000 study by U.S. Bancorp Piper Jaffray, expenditures in the streaming market will grow to $13 billion in 2001 and over $20 billion by 2004. WR Hambrecht & Co. estimates that the online learning market alone will be over $11 billion by 2003.
The build-out of fiber optical technologies will begin to provide increased bandwidth to the core network. Cable modem and DSL penetration to the home consumer market is still relatively small, although Forrester Research estimates that penetration will grow to over 15 million homes by 2005. The near term revenue opportunity is serving the enterprise corporate worker. According to the Cahners In-Stat Group, 70% of the U.S. workforce has high-speed Internet access at the office.
The Gartner Group estimates that by 2005, 70% of new application investment and 50% of new information technology infrastructure will focus on richmedia-based solutions. Forrester Research surveys indicate that 47% of enterprises plan to start developing broadband content in the next 12 to 24 months.
According to Training Magazine, corporations save between 50-70% when replacing instructor-led training with electronic content delivery. These factors, among others, increase the demand for easy access to complex information in an integrated, interactive format, on demand and accessible through a variety of media options. We believe our products and services are poised to satisfy this growing market need. 5
We believe that our technology can take advantage of the growing demand for business, video training, communications and distance learning applications. Our software and services provide a rapid, flexible, and low-cost alternative to videotapes, instructor-led training, live meetings, and other traditional forms of communications and training.
DIGITAL LAVA'S SOLUTION
Today, most streaming video applications provide the user with a passive experience, similar to watching videotape. The ability to search within the video stream for the location of desired information is limited. The user may have to make several attempts before the correct information is found. When viewing a Digital Lava View, the user can simultaneously see a video track, hear an audio track, and view supporting slides, text and other graphics all on his computer. Additionally, the user can watch the video content in either a linear format or individually choose sections of the presentation via a table of contents or a search engine. This allows the user to have complete control of the content, order and frequency of the presentation.
By deploying the Digital Lava solution, users can instantly and seamlessly navigate through the video, text and graphics to find and view the desired information. The time that was previously spent searching is now applied to the learning process. We believe this personalized experience will increase the effectiveness of the user to understand and utilize the information that is presented.
As employees struggle to maintain contact with their work through e-mail, pagers, cellular systems and hand-held devices, they are facing ever-increasing demands on their available time. Users of the Digital Lava solution can access the information when they want it, how they want it and as often as they want it. This can improve the ability for a company to get its critical message across to an employee or customer.
Clients provide us with their content and media assets. Using our vPublisher tool, we then publish this content as a Digital Lava View which the customer can choose to deploy either on the Internet, corporate intranet or via compact discs.
Our software products support the current streaming standards provided by Microsoft Windows Media Technology and RealNetworks. The implementation of a standards-based technology allows clients complete flexibility in their choice of video hosting servers and architecture. Our solution maximizes a client's previous technological decisions without an additional hardware investment.
PRODUCTS AND SERVICES
We generate revenues through both services and software licensing (including maintenance and support), as described below:
Publishing Services. Publishing Services currently comprises the largest portion of our revenues. Our Publishing Services group utilizes clients' traditional media assets -- including audio, video, text, graphics and other assets -- and converts them into fully synchronized and searchable web and desktop presentations. We receive content from our clients, transcribe and translate the audio into one or more languages, index and encode the media, and then publish the presentation in the Digital Lava View presentation format. The Digital Lava View presentation is delivered to the client for distribution via the Internet, intranet, CD-ROM, or any combination thereof.
Consulting and Custom Services. We provide a range of consulting and custom services. We consult with the client, advising the client on the best practices for publishing richmedia communications. When a client wishes to engage us for consulting services, we also advise on the best practices for instructional design (i.e., the most efficient and effective way to use richmedia communications for training purposes in light of the client's business and industry). Moreover, we train our clients to maximize the benefits of our proprietary software.
vPublisher. Early in 2000, we began licensing our proprietary authoring software, vPublisher, to our large-enterprise customer base. This vPublisher application is the same high-end publishing solution used 6
by our Publishing Services group for internal production, and is therefore, we believe, time-tested and proven to be the most efficient, powerful and robust solution of its kind in the market today.
The vPublisher application provides our clients with several specific benefits. The system simplifies the publishing process so that producers no longer need to be proficient in the use of programming, scripting or authoring languages. We believe that vPublisher decreases production time, regardless of user experience, enabling the creation of compelling richmedia at very low cost relative to other authoring tools.
Client Interfaces and Digital Lava View. The output from either our Publishing Services or vPublisher software is the same -- an elegant richmedia presentation called Digital Lava View. The Digital Lava View is a standards-based graphical interface (java in a browser window such as Explorer or Netscape), comprising major media players (Windows Media, Real, or MPEG), graphics of any type including MacroMedia Flash animations, indexing, searchability, and more, packaged as a single interactive experience. Our proprietary java application synchronizes and controls all of this content completely invisible to the user, and will run on any Windows system that supports Java Virtual Machine (JVM) -- which is included in virtually all PCs today.
Prior to introducing Digital Lava View, we produced output in the form of vvWeb for Internet and intranet delivery, or vvPro for CD-ROM delivery (with greater functionality than vvWeb). Digital Lava View replaces both of these applications.
HotFoot and HotFoot Host. In April 2000, we introduced our HotFoot suite of software products for the desktop. The initial product was HotFoot for PowerPoint, which is a downloadable plug-in for Microsoft PowerPoint. HotFoot allows users to add audio to a PowerPoint file and subsequently produce a searchable, synchronized richmedia presentation at the push of a button. This presentation can then be distributed as an executable attachment to an e-mail message or by streaming over the Internet using our HotFoot Host ASP subscription service.
PowerPoint 97 or PowerPoint 2000 users can create and disseminate this interactive streaming content right from their desktops. Utilizing a pull-down menu built into PowerPoint, users easily add and/or edit audio for each slide in any of the PowerPoint slide views. Recipients of a HotFoot presentation require Microsoft Windows Media Player but do not need any additional software or even Microsoft PowerPoint to open and interact with the presentation. Because it was specifically designed for use with Microsoft PowerPoint, HotFoot is our only application that is limited to use with Windows Media.
HotFoot Host is a web-based service that allows creators of HotFoot presentations to store, manage and deploy their presentations to one or multiple viewers via the Internet. Using HotFoot Host, HotFoot presentations are streamed to the viewer rather than sent as an e-mail attachment, which alleviates concerns regarding network security and large file attachments.
FireStream Encoding Station. In the third quarter of 2000, we introduced the FireStream Encoding Station to augment our vPublisher offering. The FireStream Encoding Station allows the user to control tape decks, encode simultaneously into Real, Microsoft, and MPEG, and provide extensive additional functionality related to encoding. This product was originally developed for usage by our Publishing Services group. The release of FireStream to the general market was intended to augment a more complete vPublisher sale and provide a stand-alone encoding solution for high-volume encoding.
STRATEGIC RELATIONSHIPS
GE Capital IT Solutions Educations Services (GECITS). We were selected to provide custom training technology to GECITS. GECITS is an independent IT solutions provider which designs, creates, and manages IT infrastructure for business. We are part of the complete solution that GECITS presents to clients through our direct sales efforts and web-based marketing. We anticipate that this relationship will begin to realize its potential in fiscal 2001. 7
Question Mark Corporation. Question Mark is one of the leading providers of test, quiz, tutorial, survey and assessment solutions. We integrate Question Mark Perception(TM) technology within Publishing Services in order to create richmedia assessment environments for distance learning and training.
Activate. Activate is a leading live-event webcasting providers and streaming Content Delivery Network, offering services ranging from production to hosting. We have a strategic relationship with Activate to provide our customers with end-to-end delivery solutions for our services.
Mini Mercial. We integrate Mini Mercial production, scripting, and talent into our Publishing Services (and vice-versa) in order to provide a complete product launch, sales training, or related Digital Lava View service.
Microsoft and RealNetworks. We support both Microsoft and RealNetworks media players. In order to maintain complete compatibility with these disparate streaming architectures, we work extensively with both companies to ensure seamless integration.
- Microsoft. We are a Microsoft Windows Media Services Independent Software Vendor. Windows Media Services is the collective name for Microsoft's proprietary software to serve, distribute, report, and view streaming media over the Internet and intranets. We also license Microsoft's Internet Explorer Administration Kit under a royalty free license and distribution agreement. This agreement permits us to customize Microsoft's Internet Explorer web browser for integration into Digital Lava View and other products. These integrated products allow end users to view streamed video content that is linked with other Web browser content.
- RealNetworks. We have entered into a consulting and development agreement with RealNetworks, Inc. under which RealNetworks has developed custom software to allow us to integrate RealNetworks' RealPlayer software with Digital Lava View and other applications.
COMPETITION
The market for software and services for the Internet and intranets is relatively new, constantly evolving and intensely competitive. We expect that competition will intensify in the future. Our principal competitors include Eloquent, Inc., IVT, Inc, Media1st, Inc., and SeeItFirst, Inc.
We also compete or may compete with live interactive streaming software companies including Akamai Technologies, Inc., Centra Software, Inc., Mshow.com, Placeware, Inc., and SeeItFirst, Inc.
We also compete or may compete with consumer publishing software companies including Adobe Systems, Inc., Macromedia, Inc., Microsoft Corp., RealNetworks, Inc., and Ulead Systems, Inc.
We also compete or may compete indirectly with audio and video indexing companies including Convera, Inc., MediaSite, Inc., and Virage, Inc.
We also compete or may compete with presentation and slideshow companies including Presenter, Inc. and BrainShark, Inc.
We also compete or may compete with encoding solution companies including AnyStream, Inc., LoudEye Technologies, Inc., and Pinnacle Systems, Inc.
Our Digital Lava View also competes indirectly with delivery systems for multimedia content other than audio and video, such as Flash by Macromedia and Enliven by Narrative Communications Corp.
Many of our competitors have longer operating histories, greater name recognition and significantly greater financial, technical and marketing resources than us. As a result, these competitors may be able to develop products comparable or superior to ours or adapt more quickly to new technologies or evolving customer requirements. 8
Competitive factors in these markets include:
- the quality and reliability of software;
- features for creating, editing and publishing video;
- ease of use and interactive user features;
- cost per user; and
- compatibility with the user's existing network components and software systems.
To expand our user base and further enhance the user experience, we must continue to innovate and improve the performance of our software. We are committed to the continued market penetration of our brand, products and services. We may, as a strategic response to changes in the competitive environment, implement pricing, licensing, service or marketing changes designed to extend our current brand and technology franchise. For example, we may elect to reduce the price for select versions of our software or even make select versions available for download free of charge. Continued price concessions or other actions in response to the emergence of new pricing or distribution strategies by our competitors may reduce our future revenues, earnings and cash flows and our business may be harmed.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our proprietary software and other intellectual property. To protect our proprietary rights, we rely generally on patent, copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and license agreements with consultants, vendors and customers. Despite these protections, a third party could copy or otherwise obtain and use our products or technology, or develop similar technology independently.
We currently have seven patents pending in the U.S. relating to our product architecture and technology. The pending patent applications may not be granted, or, if granted, may not provide any competitive advantages to us. Many of our current and potential competitors dedicate substantially greater resources to protection and enforcement of intellectual property rights, especially patents. If a patent has issued or issues in the future which covers our products, we would need to either obtain a license or design around the patent. We may not be able to obtain a license on acceptable terms, if at all, nor design around the patents.
We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. However, we have not conducted and do not conduct comprehensive patent or trademark searches to determine whether we infringe patents or other proprietary rights held by third parties.
If discovered that our products violated third-party proprietary rights, there can be no assurance that we would be able to obtain licenses to continue offering our products without substantial reengineering or that reengineering would be successful, that a license would be available on commercially reasonable terms, if at all, or that litigation could be avoided or settled without substantial expense and damage awards. Any claims against us relating to the infringement of third-party proprietary rights, even if without merit, could result in the expenditure of significant financial and managerial resources and in injunctions preventing us from distributing certain products.
To license many of our products, we rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. As with other software products, our products are susceptible to unauthorized copying and uses that may go undetected, and policing unauthorized use is difficult. In general, our efforts to protect our intellectual property rights may not be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to or competitive with those we develop. Our failure or inability to protect our proprietary rights could materially adversely affect our business, financial condition and results of operations.
We also rely on certain technology that we license from third parties, including software that is integrated with internally developed software and used in our products, to perform key functions. In the future, third- 6 9
party technology licenses may not be available to us on commercially reasonable terms. The loss of any of these technologies could have a material adverse effect on our business, financial condition and results of operations.
CORPORATE HISTORY
We originally operated as LAVA, L.L.C., a New Jersey limited liability company that was formed in July 1995. In November 1996, LAVA, L.L.C. merged into Digital Lava Inc., a Delaware corporation. We completed our initial public offering of common stock in February 1999.
HUMAN RESOURCES
We currently have 72 full-time employees and two part time employees, including 17 in product development, 30 in customer service, 16 in sales and marketing and 11 in finance and administration. Employees are based at varying locations nationwide, but principally at our facilities in Marina del Rey, California.
We have entered into an employment agreement with Robert Greene, our Chief Executive Officer, which expires in July 2002, and Joshua Sharfman, our President, which expires in December 2001. Mr. Greene currently receives an annual base salary of $300,000, and Mr. Sharfman currently receives an annual base salary of $263,000. None of our employees is subject to a collective bargaining agreement, and we believe that our relations with our employees are good. In March 2001, we reduced our workforce by 22%.
