UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition Period from _______________ TO _______________.
033-55254-19
(Commission File Number)
VIANET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA 87-0434285
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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83 MERCER STREET
NEW YORK, NEW YORK 10012
(Address of principal executive offices)
(212) 219-7680
(Registrants' telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
There were 8,801,386 shares of the registrant's Common Stock, par value
$.001 per share, outstanding on August 20, 1999.
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VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
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PAGE
Part I - Financial Information
Item I - Financial Statements
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Independent Auditors' Report 3
Consolidated Balance Sheet at June 30, 1999 4
Consolidated Statements of Operation
for the six months ended June 30, 1999 5
Consolidated Statement of Shareholders' Equity
for the six months ended June 30, 1999 6
Consolidated Statement of Cash Flows
for the six months ended June 30, 1999 7-8
Notes to Consolidated Financial Statements 9-27
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 28-33
Item 3 Quantitative and Qualitative Disclosures About Market Risk 34
Item 6 Exhibits and Reports
Exhibit 1 - Financial Data Schedule 37
Part 2 Legal and Capital Transactions 35
Signatures 36
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Vianet Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Vianet
Technologies, Inc. and subsidiary as of June 30, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the six months then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vianet Technologies, Inc.
and subsidiary as of June 30, 1999, and the results of its operations and cash
flows for the six months then ended, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has sustained significant operating losses, is
unable to pay its suppliers within normal trade terms and has a significant
working capital deficiency. The Company is in default of certain debt
obligations and related covenants, including nonpayment of principal and
interest on its debt, which allows the lenders to demand repayment of existing
debt. No such demands have been made. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Edward Isaacs & Company LLP
New York, New York
September 29, 1999
3
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VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
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ASSETS
Current Assets:
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Cash and cash equivalents ................................................................... $ 134,694
Accounts receivable, net of allowance of $306,000 ........................................... 1,444,687
Inventories ................................................................................. 2,461,890
Prepaids and other current assets ........................................................... 188,388
-----------
TOTAL CURRENT ASSETS .......................................................... 4,229,659
-----------
PROPERTY AND EQUIPMENT ......................................................................... 2,263,658
-----------
OTHER ASSETS:
Loans due from Infinop Holdings, Inc. ....................................................... 350,000
Intangibles arising from acquisition of business, net of accumulated amortization of $117,500 5,898,161
Technology license, net of accumulated amortization of $67,500 .............................. 382,500
Security deposits ........................................................................... 70,265
-----------
TOTAL OTHER ASSETS ............................................................ 6,700,926
-----------
$ 13,194,243
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit ......................................................................... $ 339,675
Current portion of long-term debt ........................................................... 1,996,983
Accounts payable and accruals ............................................................... 3,942,828
Demand loans payable - related parties ...................................................... 1,029,887
-----------
TOTAL CURRENT LIABILITIES ..................................................... 7,309,373
-----------
LONG-TERM DEBT ................................................................................. 64,555
-----------
SHAREHOLDERS' EQUITY:
Common shares, $0.001 par value, 100,000,000 shares authorized;
8,801,386 shares, issued and outstanding ............................................. 8,801
Subscription receivable ..................................................................... (500)
See Independent Auditors' Report and notes to financial statements .............................
Additional paid-in capital .................................................................. 7,270,946
Accumulated deficit ......................................................................... (1,479,525)
Accumulated other comprehensive income ...................................................... 20,593
-----------
TOTAL SHAREHOLDERS' EQUITY .................................................... 5,820,315
-----------
$ 13,194,243
============
</TABLE>
See Independent Auditors' Report and notes to financial statements.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
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REVENUE:
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Net sales $ 892,477
Interest and other income 106,022
---------
998,499
---------
COSTS AND EXPENSES:
Cost of goods sold 460,720
General and administrative 637,859
Selling and marketing 249,569
Research and development 265,519
Product support 76,228
Depreciation and amortization 211,000
Interest 85,272
---------
1,986,167
---------
NET LOSS $ (987,668)
==========================
LOSS PER SHARE - BASIC AND DILUTED $ (0.18)
==========================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,464,285
==========================
</TABLE>
See Independent Auditors' Report and notes to financial statements.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
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Accumu
lated
Other Total Compre
Convertible Additional Subscrip- Accumu- Compre Share hensive
Preferred Stock Common Stock Paid-In tion lated hensive holders' Income
Shares Amount Shares Amount Capital Receivable Deficit Income Equity (Loss)
-------- --------- --------- ----- --------- -------- ----------- ------ --------- ---------
BALANCES at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning 250,000 $1,000,000 2,400,000 $2,400 $ 2,100 $(990,500) $(491,857) $ - $(477,857) -
Issuance of common
stock for services - - 75,000 75 74,925 - - - 75,000 -
Issuance of common
stock in connection
with Develcon merger - - 2,585,488 2,585 3,453,187 - - - 3,455,772 -
Conversion of preferred
stock (250,000)(1,000,000) 1,000,000 1,000 990,000 990,000 - - 990,000 -
Conversion of notes
payable - - 2,739,272 2,739 2,736,533 - - - 2,739,272 -
Exercise of stock
options - - 1,626 2 5,201 - - - 5,203 -
COMPREHENSIVE INCOME (LOSS):
Net Loss - - - - - - (987,668) - (987,668)(987,668)
Other comprehensive income:
Foreign currency
translation adjustments - - - - - - - 20,593 20,593 20,593
-------- --------- --------- ----- --------- -------- ----------- ------ --------- --------
BALANCES at 6/30/99 - - 8,801,386 8,801 7,270,946 (500) (1,479,525) 20,593 5,820,315
======== ========= ========= ===== ========= ======== =========== ====== =========
COMPREHENSIVE LOSS (967,075)
=========
</TABLE>
See Independent Auditors' Report and notes to financial statements.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
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OPERATING ACTIVITIES:
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Net loss $ (987,668)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 211,000
Gain on sale of marketable securities (70,687)
Increase (decrease) in cash attributable to changes in
operating assets and liabilities:
Prepaids and other receivables 57,123
Accounts receivable (34,383)
Inventory 96,391
Accounts payable, accruals and other 16,552
---------
NET CASH USED IN OPERATING ACTIVITIES (711,672)
---------
INVESTING ACTIVITIES:
Loans to Infinop Holdings, Inc. (350,000)
Proceeds from sale of marketable securities 739,955
Capital expenditures (23,723)
Security deposits (70,265)
Other acquisition costs (291,870)
---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,097
---------
FINANCING ACTIVITIES:
Proceeds from subscriptions receivable 990,000
Repayment of convertible notes payable (200,000)
Principal payments of long-term debt (17,383)
Proceeds from convertible notes payable 30,000
Issuance of common stock 5,203
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 807,820
---------
EFFECT OF EXCHANGE RATE CHANGES 20,593
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 120,838
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998 13,856
---------
CASH AND CASH EQUIVALENTS AT JUNE 30, 1999 $ 134,694
==================
</TABLE>
See Independent Auditors' Report and notes to financial statements.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
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NONCASH TRANSACTIONS:
ACQUISTION OF DEVELCON:
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Fair value of assets acquired 12,226,306
Liabilities assumed (9,692,412)
Common stock issued (2,533,894)
Net cash paid for acquistion -
Cash acquired in acquistion -
Cash paid for acquistion -
======================
Issuance of Common stock for debt (Develcon creditors) $ 921,878
======================
Issuance of Common Stock for consulting services $ 75,000
======================
Conversion of notes payable into common stock $ 2,739,272
======================
Conversion of Series A Convertible Preferred Stock into
common stock $ 1,000,000
======================
</TABLE>
See Independent Auditors' Report and notes to financial statements.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
1. ORGANIZATION AND BUSINESS
Vianet Technologies, Inc. ("Old Vianet") was incorporated in the State of
Delaware, U.S. on March 20, 1998 initially to acquire Develcon Electronics
Limited. ("Develcon") and a license to utilize SPS Technology ("SPS") developed
by NewCom Technologies, Inc.
Develcon designs high quality products and implements innovative services
based on a wide range of flexible and modular communications platforms. Develcon
products integrate diverse LAN, legacy and voice applications using technologies
such as frame relay, ISDN, PPP and packet switching.
SPS is a technology developed to exploit the convergence of
telecommunications and data transmission methods. The Company plans to integrate
the SPS technology into Develcon's product lines and to develop other
adaptations to further expand the product capabilities of Develcon.
MERGER WITH VIANET TECHNOLOGIES, INC. (FORMERLY, RADAR RESOURCES, INC.)
On March 16, 1999, the Company, a Nevada Corporation, entered into a Merger
Agreement with Vianet Technologies, Inc. ("Old Vianet") under the terms of which
the Company and Old Vianet merged through an exchange of shares (the "Merger").
Subject to the terms and conditions of this Merger Agreement, on March 23, 1999,
the Company issued to the shareholders of Old Vianet, four shares of fully paid
and nonassessable shares of the Company's common stock, $.001 par value ("Common
Stock") per share in exchange for each share of Old Vianet's outstanding common
stock. The existing common shareholders of Old Vianet received 1,400,000 shares
of common stock of the Merged Company in exchange for the 350,000 shares then
outstanding. All shares of Old Vianet's Series A Convertible Preferred Stock
issued and outstanding immediately prior to the Merger were deemed to have been
converted into an aggregate of 250,000 shares of Old Vianet's common stock and
the Series A Convertible Preferred shareholders received 1 million shares of
Common Stock of the Company. Further, Old Vianet convertible demand notes
payable holders received 2,739,272 shares of common stock. For accounting
purposes, Old Vianet was considered to be the acquirer in a reverse acquisition
accounted for as a purchase. All share amounts have been retroactively restated
to reflect the reverse acquisition.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
2. GOING CONCERN
The Company has sustained significant operating losses, is unable to pay
its suppliers within normal trade terms and has a significant working capital
deficiency. The Company is in default on certain debt agreements, including
nonpayment of principal and interest, and violation of financial covenants which
allows the lenders to demand repayment. No such demands have been made.
Management believes that its operating losses are primarily due to inadequate
financing and is dependent on its ability to obtain additional sources of
financing to fund its working capital requirements. The Company is considering
several alternatives to fund these requirements. There is no assurance the
Company will be able to obtain continuing adequate funding on acceptable terms
and no assurance that once obtained such additional funding will result in the
Company's profitable operation.
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of Vianet
Technologies, Inc. (Vianet) and its wholly-owned subsidiary, Develcon and its
subsidiaries (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated.
FOREIGN CURRENCY:
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year-end rate of exchange and statements of earnings items are
translated at the weighted average exchange rates for the year. The resulting
translation adjustments are reported as a component of comprehensive income.
Gains and losses from foreign currency transactions, such as those resulting
from the settlement of foreign receivables or payables, are included in the
consolidated statements of earnings.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash held in banks and time deposits
having original maturities of three months or less.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT IN MARKETABLE EQUITY SECURITIES:
The Company accounts for its investments in equity securities that have
readily determinable fair values under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Marketable
equity securities consist of shares of common stock and are stated at market
value. Management has identified the Company's marketable equity securities as
trading securities and, accordingly, unrealized gains and losses on such
securities are recorded in the statement of operations.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated over their
estimated useful lives, which range from five to fifteen years. Long-lived
assets are reviewed for impairment whenever the facts and circumstances indicate
that the carrying amount may not be recoverable.
TECHNOLOGY LICENSE:
The technology license consists of purchased technology, amortized by the
straight-line method over a period of five years, the initial term of the
license agreement.
GOODWILL:
The excess of the cost over the fair value of net assets of its purchased
business is recorded as goodwill and is amortized on a straight-line basis over
its estimated useful life of six years.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK OPTION PLAN:
The Company accounted for stock options issued to employees in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to continue to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 and provide pro forma net income disclosures for employee
stock option grants as if the fair value based method, as defined in SFAS No.
123, had been applied. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.
COMPREHENSIVE INCOME:
The Company reports and presents comprehensive income and its components in
accordance with SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
requires only additional disclosures in the financial statements; it does not
affect the Company's financial position or results of operations.
NET LOSS PER SHARE:
Basic loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consists of incremental
common shares issuable upon exercise of stock options and warrants. Computation
of diluted loss per share is not reflected, because including potential common
shares will result in an anti-dilutive per share amount due to the loss in the
period.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards ("SFAS") No.107, Disclosures
About Fair Value of Financial Instruments, requires disclosure of the fair value
of certain financial instruments for which it is practicable to estimate fair
value. For purposes of the disclosure requirements, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation. Fair value of financial instruments classified as current assets or
liabilities (except Demand Loans Payable) approximates carrying value due to the
short-term maturity of underlying financial instruments. It was not practical to
estimate the fair value of the Company's Demand Loans Payable because quoted
market prices do no exist and comparable securities were not available.
INCOME TAXES:
The Company accounts for income taxes under the asset and liability method
as required by SFAS No. 109, Accounting for Income Taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial reporting and income tax bases of assets and liabilities
and are measured using the enacted tax rates and laws expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
SEGMENT REPORTING:
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
superceded FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
effect the results of operations, financial position, or the disclosure of
segment information because the Company operates only in one segment.
4. ACQUISITION OF DEVELCON ELECTRONICS, LTD.
On February 12, 1999, the Company entered into an Arrangement Agreement
(the "Arrangement") to acquire all the outstanding shares of Develcon. The
Arrangement was approved by the Supreme Court of British Columbia, the
Securityholders and Debentureholders of Develcon.
The Arrangement provided for Develcon shareholders to receive one share of
common stock of the Company for every 30.75 shares of Develcon. The Arrangement
also provided that the Develcon convertible notes payable be converted into
5.9963 Develcon shares for each $1.00 principal amount of notes payable and that
interest accrued on the convertible notes payable but not paid shall be
forgiven. These shares were converted into Vianet shares in the ratio of one
share of the Company for every 30.75 shares of Develcon. Additionally, certain
other creditors of Develcon agreed to either accept common stock of Vianet as
payment for amounts or portions of amounts owed to them and have restructured
the repayment schedule.
In exchange for restructuring the repayment schedule of its debt, a lender
of Develcon was granted warrants to purchase 150,000 shares of Vianet stock at
$6.00 per share. Since such debt had not been repaid by June 30, 1999, these
warrants were issued August 1, 1999 and are exercisable through June 2002. The
Arrangement became effective on May 17, 1999. Accordingly, the assets and
liabilities have been consolidated as of the date of acquisition and the results
of operations have been included from May 17, 1999 to June 30, 1999.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
4. ACQUISITION OF DEVELCON ELECTRONICS, LTD. (Continued)
As a result of the closing of the Arrangement, the former shareholders and
creditors of Develcon hold 2,585,488 shares of the 8,801,386 shares of common
stock the Company has outstanding.
The acquisition was accounted by the purchase method of accounting. Assets
acquired and liabilities assumed have been recorded at their estimated fair
values. The excess of cost over the estimated fair value of the net assets
acquired was allocated to goodwill and will be amortized on a straight-line
basis over six years.
The purchase price of Develcon was determined by the number of shares
issued by the Company to effect the acquisition and the amount of loans provided
to Develcon. The total acquisition amounted to $7,034,000 including $6,015,000
for goodwill.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition had been made at the beginning of the six month
period ending June 30, 1999:
Net sales $ 4,001,534
Net loss $ (4,782,980)
Loss per share $ (.80)
The pro forma consolidated results of operations give effect to certain
adjustments, including amortization of goodwill and depreciation based upon fair
market value of the property acquired. The unaudited pro forma information is
not necessarily indicative of the results of operations that would have occurred
had the purchase been made at the beginning of the period presented or the
future results of the combined operations.
5. ACQUISITION OF INFINOP HOLDINGS, INC.
On May 19, 1999, the Company entered into a letter of intent to acquire
100% of Infinop Holdings, Inc. ("Infinop") of Denton, Texas, a privately held
corporation, in exchange for common shares of Vianet. As part the agreement the
Company agreed to advance Infinop $640,000 ($350,000 was advanced as at June
30,1999, and the balance of $290,000 was advanced in July and August 1999) in
loans. If completed the Company will issue 2,164,167 common shares to Infinop's
shareholders and option holders and the loans will
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
5. ACQUISITION OF INFINOP HOLDINGS, INC. (Continued)
be forgiven. In August 1999, the Company signed a definitive agreement with
Infinop and certain major shareholders of Infinop to proceed with the
transaction.
Infinop develops advanced compression technologies for a wide range of
software and hardware applications. Infinop's patented compression technology
dramatically improves compression ratios, increases transmission speeds and
improves image quality.
6. SPS TECHNOLOGY LICENSE
The Company purchased a license for the SPS technology from NewCom
Technologies, Inc. (the "Licensor") for $450,000. The license entitles the
Company to use certain intellectual property rights. This "right to use"
includes any patents associated with the SPS technology along with the current
preferred embodiment of the patent. Royalty payments of 2.5% of Net Cash
Received, as defined in the license agreement, on products manufactured and
sold, licensed or services rendered by Vianet during the term of the license are
due to the licensor. The Company may, at its option, pay a one-time royalty fee
of $2.1 million at any time during the term. If such one time payment is made,
the license shall become perpetual and no further royalties will be due under
the license.
The license provides the Company with all the source code and documentation
required to allow the Company to integrate the technology into its products. The
license provides for quarterly updates from NewCom of the hardware/firmware for
the initial five year term of the agreement.
7. INVENTORIES
Inventories consist of:
Raw materials $ 553,421
Work-in-process 421,220
FINISHED GOODS 1,487,249
------------
$ 2,461,890
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
8. PROPERTY AND EQUIPMENT
Property and equipment consist of:
Land $ 135,870
Building 305,708
Machinery and equipment 1,846,667
LEASEHOLD IMPROVEMENTS 23,777
--------------
2,312,022
LESS: ACCUMULATED DEPRECIATION 48,364
$ 2,263,658
9. BANK LINE OF CREDIT
The Company has a line of credit facility with a bank in the amount of
$339,675, which was fully utilized at June 30, 1999. The line bears interest at
1-1/4% above the bank's prime rate and is secured by the assets of a subsidiary
of Develcon and is personally guaranteed by a shareholder of the Company. The
line expires on November 30, 1999 and cannot be extended.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of:
<S> <C>
Note payable to bank, in three annual installments of $339,675
commencing December 2000. Interest at 8.5% payable
semi-annually beginning December 1999 (a) $ 1,019,025
Note payable to a Canadian government entity in monthly principal
installments of $7,913, plus interest at 3% maturing November 1999 (b) 317,899
10.5% note payable in equal monthly installments of $4,925,
inclusive of interest, maturing February 2000, secured by land and
building in Saskatoon, Saskatchewan. 266,346
8% note payable, due November 1999, plus accrued interest. 351,903
Capital lease obligations for equipment payable in monthly installments with
INTEREST RANGING FROM 10% TO 14%, MATURING THROUGH 2005. 106,365
-------------
2,061,538
LESS: CURRENT MATURITIES 1,996,983
$ 64,555
</TABLE>
(a) On July 30, 1999, the Company entered into an amended loan agreement
with the bank which, among other matters, extended the maturities of the debt.
The note is secured by a general security interest on all assets of the Company,
subject to a $339,675 preference relating to the bank operating line of credit.
The noteholder is a shareholder of the Company. The loan agreement contains
certain financial covenants and at June 30, 1999, the Company was in violation
of several of these covenants. Consequently, the debt is in default and the
lender has the option to demand that the entire balance become immediately due
and payable. As such, the entire balance is included in current maturities of
long-term debt.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
10. LONG-TERM DEBT (Continued)
(b) At June 30, 1999, the Company was in violation of certain covenants
under the loan agreement and the lender has the option to demand that the entire
balance become immediately due and payable. As such, the entire balance is
included in current maturities of long-term debt.
Annual maturities of long-term debt at June 30, 1999 are as follows:
2000 $ 1,996,983
2001 30,910
2002 20,122
2003 9,293
2004 3,384
THEREAFTER 846
----------------
$ 2,061,538
11. SERIES A CONVERTIBLE PREFERRED STOCK
The authorized Series A convertible preferred stock of the Company consists
of 1,000,000 shares, of which 250,000 shares were issued and outstanding at
December 31, 1998. On March 23, 1999 the Series A preferred stock was converted
into common stock at a rate of four for one. As a result, the Series A preferred
shareholders received 1,000,000 shares of common stock of the Company.
12. RELATED PARTY TRANSACTIONS
CONVERTIBLE DEMAND NOTES PAYABLE:
ON MARCH 23, 1999, CONVERTIBLE DEMAND NOTES PAYABLE OF $2,909,272 TO
ENTITIES CONTROLLED BY TWO OFFICERS AND DIRECTORS OF THE COMPANY WERE CONVERTED
INTO 2,739,272 SHARES OF COMMON STOCK AT A RATIO OF ONE SHARE FOR EVERY $1 OF
PRINCIPAL AMOUNT. DURING THE SIX MONTHS ENDED JUNE 30, 1999, the Company repaid
$200,000 and additional convertible demand notes of $30,000 were issued.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
12. RELATED PARTY TRANSACTIONS (Continued)
DEMAND LOANS PAYABLE:
Demand loans payable consist of non-interest bearing loans payable to two
affiliated entities and one of the Company's shareholders.
DEFERRED COMPENSATION:
Deferred compensation payable to an officer of Develcon in the amount of
$200,000 is included in accounts payable and accruals.
FEES AND EXPENSES:
The Company accrued consulting fees aggregating approximately $12,000 to a
company owned by two shareholders who are also officers of the Company for
engineering and other services.
13. PENSION PLAN
A subsidiary of Develcon maintains a defined contribution plan for its
employees under which eligible employees can contribute up to 5% of earnings, as
defined, and the Company matches the employee contribution in full.
Contributions under the plan were $8,589 for the six months ended June 30, 1999.
14. INCOME TAXES
The difference between the statutory Federal income tax rate and the
Company's effective tax rate for the period ended June 30, 1999 is principally
due to the Company incurring net operating losses for which no tax benefit was
recorded.
For Federal income tax purposes, Vianet has unused net operating loss
carryforwards of approximately $1,054,000 expiring through year 2014. The
availability of the net operating loss carryforwards to offset income in the
future years, if any, may be limited by the Internal Revenue Code Section 382 as
a result of certain ownership changes.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
14. INCOME TAXES (Continued)
Develcon has Federal and foreign net operating loss carryforwards as of
June 30, 1999 of approximately $7,000,000 and $14,000,000, respectively.
Develcon's Federal loss carryforwards expire through 2012 and their utilization
is subject to certain limitations as defined in section 382 of the United States
Internal Revenue Code. The foreign loss carryforwards include $5,000,000 which
expires at various times through 2006 and $9,000,000 which have no expiration
date. Also, there are approximately $1,500,000 in foreign investment tax credits
which expire at various times through 2007.
The tax effects of the temporary differences that give rise to significant
portions of deferred tax assets at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
VIANET DEVELCON
DEFERRED TAX ASSETS:
<S> <C> <C>
Federal and state net operating loss carryforwards $ 421,000 $ 2,800,000
Foreign net operating loss carryforward - 5,320,000
Foreign investment tax credit - 1,500,000
UNREALIZED FOREIGN EXCHANGE LOSS (8,000) -
------------ -----------
413,000 9,620,000
LESS: VALUATION ALLOWANCE (413,000) (9,620,000)
------------ ------------
DEFERRED TAX ASSET $ - $ -
============ ============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. The valuation allowance was recorded due to the uncertainty in the
utilization of the net operating loss carryforwards and credits.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
15. STOCK INCENTIVE PLAN
The Company adopted a Stock Incentive Plan for employees (the Plan). The
Plan permits the issuance of stock options to selected employees, officers and
directors of the Company. Options granted may be either nonqualified or
incentive stock options.
The Company has assumed options granted under Develcon's Option Plans
(Acquired Options). The Acquired Options were assumed by the Company outside of
its stock option plan, and they are administered as if issued under their
original plans. All of the Acquired Options have been adjusted to effectuate the
conversion under the terms of the Arrangement between the Company and Develcon.
The Acquired Options generally become exercisable over a three-year period and
generally expire ten years from the date of grant. No additional options will be
granted under Develcon's plans.
The following table summarizes stock option activity for the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
Number of Weighted
Shares Subject Average Exercise
STOCK OPTION ACTIVITY to Options Price Per Share
<S> <C> <C> <C> <C>
Outstanding, December 31, 1998 440,000 $1.00
Granted 470,000 6.40
Assumed from Develcon plans 61,951 10.21
Cancelled (200,000) 1.00
Exercised (1,626) 3.20
------------
Outstanding June 30, 1999 770,325 5.04
============
</TABLE>
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
15. STOCK INCENTIVE PLAN (Continued)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise Exercise
Price Number of Contractual Price Number of Price
Per Share Shares Life (Years) Per Share Shares Per Share
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 to 4.80 384,715 9.5 $ 1.20 264,715 $ 1.29
$ 6.00 to 10.00 371,625 3.3 8.17 21,625 6.87
$18.00 to 27.60 13,985 6.8 27.31 13,985 27.31
--------- ------ ------ -------- -------
770,325 6.6 $ 5.04 300,325 $ 2.91
======= ===== ====== ======== =======
</TABLE>
The following table reflects pro forma net loss and loss per share had
compensation cost been determined based on the fair value at the grant date for
awards granted in the six months ended June 30, 1999 consistent with the
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation":
<TABLE>
<CAPTION>
Net loss:
<S> <C>
As reported $ (987,668)
Pro forma $ (1,044,678)
Basic loss per share:
As reported $ (.18)
Pro forma $ (.19)
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
15. STOCK INCENTIVE PLAN (Continued)
The estimated fair value of each option granted included in the pro forma
results is calculated using the minimum value calculation for the options issued
prior to the Company becoming publicly traded, and the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants subsequent to the Company becoming publicly traded: no common stock
dividends paid; expected volatility of 56%; risk-free interest rates of 5.0%;
and expected lives of 6.6 years. The weighted average fair values of options at
their grant date during 1999 was $3.09.
16. GEOGRAPHIC AND CUSTOMER INFORMATION
The Company's activities represent one industry segment, the design and
manufacture of sophisticated electronics data communications equipment. The
Company operates in a worldwide market place.
The Company's net sales for the six months ended June 30, 1999
(representing Develcon's net sales from May 17, 1999 - June 30, 1999) are from
the following geographic areas:
United Arab Emirates $ 362,441
United States 188,758
United Kingdom 170,749
Canada 49,756
OTHER 120,773
------------
$ 892,477
============
The Company's long-lived assets as of June 30, 1999 are in the following
geographic areas:
Canada $ 1,951,450
OTHER 312,208
-------------
$ 2,263,658
Sales from one customer represented approximately 40% of the Company's
sales. Receivables from two major customers constitute 41% of total receivables.
Purchases from one vendor approximated 57% of total raw material purchases.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
17. COMMITMENTS AND CONTINGENCIES
LEASES:
The Company leases office and warehouse space along with equipment under
capital and operating leases extending to 2005. The leases provide for payment
by the Company of taxes and other expenses. The lease for office and warehouse
facilities which expires March 31, 2002 has an option to renew for five-years at
market rent.
Rent expense for the six months ended June 30, 1999 was $64,100.
Minimum rental payments under noncancellable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, OPERATING CAPITAL
<S> <C> <C> <C>
2000 $ 77,000 $ 49,000
2001 72,000 37,000
2002 53,000 24,000
2003 1,000 11,000
2004 - 4,000
THEREAFTER - 1,000
--------- -------
$ 203,000 126,000
=========
LESS: AMOUNT REPRESENTING INTEREST 20,000
-------
$ 106,000
=======
</TABLE>
Net book value of equipment under capital leases included in property and
equipment was approximately $143,000 at June 30, 1999.
MANUFACTURING AND SERVICE AGREEMENT:
On April 12, 1999, Develcon entered into a three-year agreement with a
vendor to provide finished goods under an exclusive manufacturing outsourcing
arrangement. Develcon has agreed to minimum purchase commitments of
approximately $3.4 million, $4.0 million and $4.7 million in years one, two and
three of the contract, respectively. Cost to Develcon will be manufacturer's
cost plus 25%.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
18. SUBSEQUENT EVENTS
OPTION TO PURCHASE PSI COMMUNICATIONS, INC.:
On July 26, 1999, the Company entered into an agreement whereby it would
provide PSI Communications, Inc. (PSI) with $500,000 of interim financing in
exchange for an option, expiring December 31, 1999, to acquire PSI for
consideration consisting of 1,200,000 shares of the Company's common stock,
discharge of PSI's liability for the interim financing, repayment of certain
liabilities to PSI shareholders and employees, and additional payments and
issuance of stock based upon PSI's performance. If the Company does not exercise
the option it may elect (1) to receive a non-exclusive indefinite license to
utilize PSI's current and future technology, subject to a royalty of five
percent of revenues; (2) have the interim financing remain as debt due from PSI
in which case it shall be due on June 30, 2000 with interest payable at 6% per
annum commencing January 1, 2000. If unpaid at June 30, 2000, the Company may
elect to convert the debt to up to 10% of the common equity of PSI depending on
the amount unpaid.
PRIVATE PLACEMENT OFFERING:
In July 1999, pursuant to a private placement offering, the Company issued
100,000 shares of common stock for $550,000 and 55,000 three-year warrants
exercisable at $6.60 per share. The placement agent received $50,000 and 10,000
shares of common stock in connection with the transaction.
CONSULTING AGREEMENTS:
In August 1999, the Company entered into consulting agreements with two
investor relations firms which provide for monthly fees of $12,000 and the
issuance of 100,000 shares of common stock and 450,000 warrants to purchase
common stock at $6 - $8 per share.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
19. YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Data-sensitive systems may recognize the
Year 2000 as 1900 or some other date, resulting in errors when information using
Year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on or after
January 1, 2000 and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure that could
affect an entity's ability to conduct normal business operations. Although the
Company has addressed its internal Year 2000 readiness, it is not possible to be
certain that all aspects of the Year 2000 issue affecting the Company, including
those related to the efforts of customers, suppliers, or other third parties,
will be fully resolved.
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
INTRODUCTION
The following discussion of the financial condition and results of
operations of Vianet should be read in conjunction with the Financial Statements
and Notes thereto included elsewhere in this report. This document contains
certain forward-looking statements including, among others, anticipated trends
in Vianet's financial condition and results of operations and Vianet's business
strategy. These forward-looking statements are based largely on Vianet's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating such forward-looking statements include (i)
changes in external competitive market factors or in Vianet's internal budgeting
process which might impact trends in Vianet's results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in
Vianet's business strategy or an inability to execute its strategy due to
unanticipated changes in the industries in which it operates; and (iv) various
competitive factors that may prevent Vianet from competing successfully in the
marketplace.
GENERAL
Our predecessor, Vianet Technolgies, Inc., a Delaware corporation ("Vianet
Delaware"), was formed in March 1998. In March 1999, Vianet Delaware consummated
a merger (the "Vianet Merger") with Radar Resources, a Nevada corporation
("Radar"), pursuant to which Vianet Delaware merged with and into Radar, with
Radar as the surviving corporation. Upon completion of the Vianet Merger, Radar
changed its name to Vianet Technologies, Inc.
From its inception to March 1999, Radar had engaged in no business and had
no operational history. Radar was originally incorporated under the name Radar,
Inc. in the state of Utah on April 11, 1986. In December 1993, Radar was
reorganized under the laws of Nevada. Pursuant to this reorganization, Radar
changed the state of its domicile, and Radar formed a new corporation in Nevada,
Radar Resources, Inc., which acquired all of the contractual obligations,
shareholder rights and identity of the original Utah corporation, and then the
Utah corporation was dissolved.
Prior to the Vianet Merger , Vianet Delaware's business activities
consisted primarily of entering into a plan of arrangement to acquire Develcon
Electronics Limited, an Ontario, Canada corporation specializing in networking
products and systems ("Develcon"), and obtaining a licensing agreement for
Synchronous Packet Switching Technology ("SPS") from NewCom Technologies, Inc.,
a Delaware corporation ("NewCom").
Subsequent to the Vianet Merger, on May 17, 1999, Vianet acquired Develcon.
<PAGE>
RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED JUNE 30, 1999
During the six months ended June 30, 1999, Vianet completed several
significant transactions.
In March 1999, the Company's predecessor, Vianet Delaware, consummated a
merger with Radar Resources, Inc. pursuant to which Vianet Delaware merged with
and into Radar, with Radar as the surviving corporation. Vianet Delaware is
considered to be the accounting acquirer in a reverse acquisition, and the
merger was accounted for as a purchase. Accordingly, Vianet Delaware's financial
statements have become the historical financial statements of the combined
company.
In May, 1999, Vianet acquired Develcon Electronics Ltd. The acquisition was
accounted for as a purchase, and the purchase price of Develcon was determined
by the number of shares issued by Vianet to effect the acquisition and the
amount of loans provided to Develcon.
As a result of the foregoing transactions, Vianet's consolidated financial
statements as of and for the six month period ended June 30, 1999 include the
following:
o The results for the Company and Vianet Delaware prior to completion of
the Vianet Merger;
o A consolidation of the assets and liabilities of the company and Develcon
as of the date of the Develcon acquisition; and
o The results operations of Develcon from the date of the acquisition to
June 30, 1999.
The following is a discussion of the operations for Vianet and Develcon
during this period.
VIANET
Prior to completion of the merger, Vianet (then known as Radar) was an
inactive company, and, accordingly, it did not have any revenues from
operations. At the time of the consummation of the merger, Radar had no assets
and no liabilities.
VIANET DELAWARE
Vianet Delaware was incorporated in March 1998. From its incorporation
through the date of consummation of the Vianet Merger, Vianet had been primarily
focused on development and implementation of its business plan, including the
following:
o Acquiring a license for SPS technology; and
o Entering into an Agreement to acquire Develcon Electronics
<PAGE>
However, during such period, Vianet Delaware incurred an operating loss of
($491,857), all of which consisted of selling, general and administrative
expenses associated with development activities of Vianet Delaware.
DEVELCON
Develcon was incorporated under The Companies Act of Saskatchewan on August
15, 1974, continued under The Business Corporations Act of Saskatchewan on May
14, 1980 and continued under the CBCA on March 6, 1985. Prior to its acquisition
by Vianet, Develcon had been primarily focused on designing, manufacturing and
marketing a range of networking products and systems, each of which is designed
to provide a specific communications solution for the integration and
consolidation of corporate data processing and data communications equipment.
SALES
Vianet had net sales of $892,477 for the six months ended June 30, 1999.
Vianet acquired Develcon on May 17, 1999 and, accordingly, the sales recorded
are only for the six week period to June 30, 1999. Vianet does not expect a
significant increase in sales until the first quarter of 2000. Other revenues
consisted of interest on cash deposits and a gain on the sale of marketable
securities of $106,022.
COST OF GOODS SOLD AND GROSS PROFIT
Vianet's cost of sales was $460,720 representing margins of 48% which is
below historical margins for Develcon's products due to difficulties in shipping
economic quantities of products given limited working capital. Vianet expects
margins to improve to historic levels of approximately 52% by the end of the
first quarter of the year 2000 based upon a more a stable financial operating
environment, although no assurances can be given that the margin improvement can
be achieved.
GENERAL AND ADMINISTRATIVE
General and administrative expenses amounted to $637,859. This amount was
comprised primarily of legal, professional fees and investor relations expenses
of Vianet, which totaled $500,608. The Vianet portion of these expenses are
expected to reduce significantly in the first quarter of the year 2000 after the
Vianet Labs acquisition is completed.
SELLING AND MARKETING/PRODUCT SUPPORT
Selling and marketing amounted to $249,569 and product support totaled
$76,288. Vianet has continued a high level of spending relative to sales during
the period of adjustment under new ownership. Vianet expects more traditional
ratios of sales to expenditures to be achieved by the end of the first quarter
of the year 2000 although no assurances can be given that this will be achieved.
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development amounted to $265,519, which consists primarily
expenditures on Orbitor and Athena Access product lines. Vianet expects more
traditional ratios of sales to research and development expenditures to be
achieved by the end of the first quarter of the year 2000 although no assurances
can be given that this will be achieved.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to $211,000 and represents the
amortization of Vianet's SPS Technology License ($45,000) over five years,
depreciation on Develcon's property and equipment ($48,500) and amortization of
intangibles on the acquisition of Develcon over a period of six years
($117,500).
THREE MONTH PERIOD ENDED JUNE 30, 1999
SALES
Vianet had net sales of $892,477 for the six months ended June 30, 1999.
Vianet acquired Develcon on May 17, 1999 and, accordingly, the sales recorded
are only for the six week period to June 30, 1999. Vianet does not expect a
significant increase in sales until the first quarter of 2000. Other revenues
consisted of interest on cash deposits and a gain on the sale of marketable
securities of $71,122.
COST OF GOODS SOLD AND GROSS PROFIT
Vianet's cost of sales was $460,720 representing margins of 48% which is
below historical margins for Develcon's products due to difficulties in shipping
economic quantities of products given limited working capital. Vianet expects
margins to improve to historic levels of approximately 52% by the end of the
first quarter of the year 2000 based upon a more a stable financial operating
environment, although no assurances can be given that the margin improvement can
be achieved.
GENERAL AND ADMINISTRATIVE
General and administrative expenses amounted to $408,109. This amount was
comprised primarily of legal, professional fees and investor relations expenses
of Vianet, which totaled $270,858.
<PAGE>
SELLING AND MARKETING/PRODUCT SUPPORT
Selling and marketing amounted to $249,569 and product support totaled
$76,288. Vianet has continued a high level of spending relative to sales during
the period of adjustment under new ownership. Vianet expects more traditional
ratios of sales to expenditures to be achieved by the end of the first quarter
of the year 2000 although no assurances can be given that this will be achieved.
RESEARCH AND DEVELOPMENT
Research and development amounted to $265,519, which consists primarily
expenditures on Orbitor and Athena Access product lines. Vianet expects more
traditional ratios of sales to research and development expenditures to be
achieved by the end of the first quarter of the year 2000 although no assurances
can be given that this will be achieved.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization amounted to $188,500 and represents the
amortization of Vianet's SPS Technology License ($22,500) over five years,
depreciation on Develcon's property and equipment ($48,500) and amortization of
intangibles on the acquisition of Develcon over a period of six years
($117,500).
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of the merger between Radar and Vianet Delaware,
both Radar and Vianet Delaware had limited working capital and their prospects
were severely limited. Upon completion of the Vianet merger, Vianet Delaware
ceased to exist and Radar changed its name to Vianet Technologies, Inc. Up until
the completion of the Vianet Merger, Vianet Delaware had sustained its
operations from its inception (March 1998) primarily from the sale of equity.
Specifically, in December 1998, Vianet sold 1,000,000 shares of common stock for
an aggregate of $1,000,000 in cash.
Subsequent to June 30,1999 Vianet has completed the following financings
and/or debt restructurings:
On July 17, 1999 Vianet borrowed $285,000 from certain private investors.
On July 30, 1999 Vianet issued 100,000 common shares to certain non-US
investors for cash of $550,000
In September 1999, certain of Develcon's creditors agreed to exchange an
aggregate of $613,365 of accounts payable for a total of 215,051 shares of
Vianet's common stock.
In addition to the foregoing, in august 1999, Vianet amended its banking
arrangements with the royal bank of canada. In connection with the
implementation of such new facilities, Vianet issued 120,000 shares and warrants
to purchase an additional 150,000 shares, exercisable at $6.00 per share, to
<PAGE>
RBC. The current banking facilities provided by RBC consist of a CDN$1,500,000
term loan. As of September 1, 1999, Vianet has CDN$1,500,000 outstanding on the
term loan facility. The term loan is payable in three CDN.$500,000 installments
due on or before December 31st of 2000, 2001 and 2002, respectively. Interest
charged on Vianet's RBC facilities is calculated at 8.5% per year. Furthermore,
all indebtedness of Vianet under the RBC facilities is secured by Develcon's
assets and a corporate guarantee executed by Vianet.
Vianet's working capital deficit at June 30, 1999 was ($3,079,714).
The Company intends to consolidate and build our sales and marketing team,
to purchase inventory and capital equipment, and to fund the purchase of PSI.
Our ability to become a serious competitor in the network access, Internet,
E-commerce, and value-added services markets is dependent upon obtaining
additional financing.
Except for a private placement offering and the existing CDN$1,500,000 term
loan facility with Royal Bank of Canada, Vianet has no other current
arrangements in place with respect to financing. Vianet is currently seeking new
financing arrangements to provide the necessary capital to fully fund our
operations and pursue our business strategy. There can be no assurances that
additional financing will be available on acceptable terms, if at all. Moreover,
no assurance can be given that the intended offering will be achieved. If the
intended offering is not successfully completed and additional financing
arrangements are not obtained, we may be unable to fully fund our operations,
pursue our business strategy, take advantage of new opportunities, develop or
enhance our products, or respond to competitive pressures and financial or
marketing hurdles. Such inability could have a materially adverse effect on
Vianet's business, operating results and financial condition. Moreover, the
estimated cost of the proposed expansion of our production and marketing
activities is subject to numerous uncertainties, including the problems,
expenses, difficulties, complications and delays, many of which are beyond our
control, frequently encountered in connection with the establishment and
development of new business activities, and may be affected by the competitive
environment in which we are operating. Accordingly, there can be no assurance
that we will complete the proposed expansion of our production and marketing
activities described herein.
Vianet's management believes that upon full implementation of Vianet's
business plan, sufficient revenues will be generated to meet operating
requirements. However, no assurance can be given that such goal will be obtained
or that any expected revenues will be realized.
YEAR 2000
Many computer systems used today may be unable to interpret data correctly
after December 31, 1999, because they allow only two digits to indicate the year
in a date. Vianet has been engaged in assessing this Year 2000 issue as it
relates to its business. This review covers both Vianet's own operating systems
and the systems of Vianet's third party vendors and manufacturers. This project,
along with developing and implementing solutions to the Year 2000 issue is
continuing. Management currently anticipates that the project will be
substantially completed before the end of calendar year 1998. While Vianet is
currently unable to quantify the costs associated with implementing solutions to
the Year 2000 issue, it does not believe that such costs will not have a
material impact on Vianet's financial results or position.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to foreign currency exchange rate risk relating to receipts
from customers, payments to suppliers. We do not consider the market risk
exposure relating to foreign exchange to be material.
We do not have financial instruments which are subject to interest rate
risk and accordingly our exposure to interest rate risk is not material.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
On October 28, 1999, the Company filed a report on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
VIANET TECHNOLOGIES, INC.
DATE: NOVEMBER 15, 1999 BY: /S/VINCENT SANTIVASCI
-------------------------
Vincent Santivasci
Chief Financial Officer
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