SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File No. 33-55254-19
VIANET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0434285
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
83 Mercer Street, New York
New York 10012-4437
(Address of principal executive offices, zip code)
(212) 219-7680
(Registrant's telephone number, including area code)
------------------------
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 12,039,428 shares of the registrant's Common Stock, par value
$.001 per share, outstanding on November 14, 1999.
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
Part 1 Financial Information
Item 1 Financial Statements
<S> <C>
Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998
(audited) 3
Consolidated Statements of Operations for the three months ended September 30, 1999
and 1998 (unaudited) 4
Consolidated Statements of Operations for the nine months ended September 30, 1999 and
1998 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and
1998 (unaudited) 6-7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2 Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 6 Exhibits and Reports
Exhibit 1 - Financial Data Schedule 25
Part 2 Legal and Capital Transactions 23
Signatures 24
</TABLE>
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------
(Unaudited) (Audited)
September 30, December 31,
1999 1998
------------------ -----------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents ............................................................. $ 38,981 $ 13,856
Marketable securities ................................................................. -- 669,268
Accounts receivable, net of $306,000 allowance ........................................ 1,072,308 --
Inventories ........................................................................... 2,588,997 --
Receivable from related party ......................................................... 201,084 --
Prepaids and other current assets ..................................................... 177,310 --
------------ ------------
Total Current Assets ............................................................ 4,078,680 683,124
------------ ------------
Property and Equipment, net of accumulated depreciation of $140,927 ........................ 2,174,925 --
------------ ------------
Other Assets:
Loans due from Develcon Electronics, Ltd. ............................................ -- 1,506,800
Loans due from Infinop Holdings, Inc. ................................................ 724,000 --
Loans due from PSI Communications, Inc. .............................................. 300,000 --
Deferred costs arising from the acquisition of Infinop Holdings, Inc. ................ 159,132 --
Intangibles arising from acquisition of business, net of accumulated amortization of
$ 364,432 5,654,075 --
Technology license, at cost less accumulated amortization of 1999: $90,000 and 1998:
$ 22,500 360,000 427,500
Other ................................................................................ 58,212 65,375
------------ ------------
Total Other Assets .............................................................. 7,255,419 1,999,675
============ ============
$ 13,509,024 $ 2,682,799
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Bank line of credit .................................................................... $ 340,135 --
Current portion of long-term debt ...................................................... 1,999,701 --
Accounts payable and accruals .......................................................... 4,430,034 251,384
Convertible demand notes ............................................................... -- 2,909,272
Demand loans payable - related parties ................................................. 2,510,215 --
Deferred compensation .................................................................. 226,360 --
Payable to Director of the Company ..................................................... 1,000 1,000
------------ ------------
Total Current Liabilities ....................................................... 9,507,445 3,161,656
------------ ------------
Long-Term Debt ............................................................................. 56,828 --
------------ ------------
Shareholders' Equity (Deficiency):
Series A convertible preferred shares (1998: authorized, issued and outstanding 250,000)
-- 1,000,000
Common shares, $0.001 par value, 100,000,000 shares authorized. 9,140,886 issued and
outstanding at September 30, 1999 (1998-1,400,000) .................................. 9,141 1,400
Subscription receivable ................................................................ (500) (990,500)
Additional paid in capital ............................................................. 8,561,956 2,100
Accumulated deficit .................................................................... (4,624,773) (491,857)
Accumulated other comprehensive income (loss) .......................................... (1,073) --
------------ ------------
Shareholders' Equity (Deficiency) ............................................... 3,944,751 (478,857)
------------ ------------
$ 13,509,024 $ 2,682,799
============ ============
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
---------------------------------------------------
1999 1998
----------------------- ------------------------
Revenue:
<S> <C> <C>
Net sales $1,019,766 $ -
Interest and other income 6,666 43,583
----------------------- ------------------------
1,026,432 43,583
----------------------- ------------------------
Costs and Expenses:
Cost of goods sold 645,398 -
General and administrative 1,595,841 334,366
Selling and marketing 445,537 -
Research and development 521,037 -
Product support 112,971 -
Depreciation and amortization 355,061 -
Interest 142,960 -
----------------------- ------------------------
3,818,805 334,366
----------------------- ------------------------
Loss Before Extraordinary Item (2,792,373) (290,783)
Extraordinary Loss on Extinguishment of Debt (352,875) -
----------------------- ------------------------
Net Loss $(3,145,248) $(290,783)
======================= ========================
Loss per share- basic and diluted:
Loss Before Extraordinary Item $(0.31) $(0.21)
---------------------- -----------------------
Net Loss
$(0.35) $(0.21)
----------------------- ------------------------
Weighted average number of shares outstanding 8,985,875 1,400,000
----------------------- ------------------------
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------------------
1999 1998
----------------------- ------------------------
Revenue:
<S> <C> <C>
Net sales $1,912,243 $
-
Interest and other income 112,688 43,583
----------------------- ------------------------
2,024,931 43,583
----------------------- ------------------------
Costs and Expenses:
Cost of goods sold 1,106,118 -
General and administrative 2,233,700 399,732
Selling and marketing 695,106 -
Research and development 786,556 -
Product support 189,199 -
Depreciation and amortization 566,061 -
Interest 228,232 -
----------------------- ------------------------
5,804,972 399,732
----------------------- ------------------------
Loss Before Extraordinary Item (3,780,041) (356,149)
Extraordinary Loss on Extinguishment of Debt (352,875) -
----------------------- ------------------------
Net Loss $(4,132,916) $(356,149)
======================= ========================
Loss per share- basic and diluted:
Loss Before Extraordinary Item $(0.57) $(0.25)
---------------------- -----------------------
Net Loss
$(0.62) $(0.25)
----------------------- ------------------------
Weighted average number of shares outstanding 6,646,293 1,400,000
----------------------- ------------------------
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------------
1999 1998
---------------------- --------------------
Operating Activities:
<S> <C> <C>
Net loss $(4,132,916) $(356,149)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and Amortization 566,061 -
Gain on sale of Marketable securities (70,687) -
Issuance of common stock for services 388,475 -
Extraordinary loss on extinguishment of debt 352,875 -
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Prepaids and other receivables 80,323 -
Accounts receivable 337,926 -
Inventory (30,716) -
Deferred compensation 25,272 -
Accounts payable, accruals and other 709,514 373,381
---------------------- --------------------
Net cash (used in) provided by operating activities (1,773,873) 17,232
---------------------- --------------------
Investing Activities:
Loans to PSI Communications, Inc. (300,000) -
Loans to Infinop Holdings, Inc. (724,000) -
Proceeds from sale of marketable securities 739,955 -
Deferred costs of Infinop Holdings, Inc. acquisition (159,132) -
Receivable from related party (201,084) -
Security Deposits (70,265) -
Capital expenditures (24,414) -
Other acquisition costs (291,870) -
---------------------- --------------------
Net cash used in investing activities (1,030,810) -
---------------------- --------------------
Financing Activities:
Repayment of Convertible notes payable (200,000) -
Loan payable to related parties 1,480,328 -
Bank indebtedness 460 -
Principal payments of long-term debt (25,110) -
Proceeds from convertible notes payable 30,000 -
Issuance of common stock 555,203 -
Proceeds from subscription receivable 990,000 -
---------------------- --------------------
Net cash provided by financing activities 2,830,881 -
---------------------- --------------------
Effect of exchange rate changes (1,073) -
Net increase in cash and cash equivalents 25,125 17,232
Cash and cash equivalents, beginning 13,856 -
====================== ====================
Cash and cash equivalents, end $38,981 $17,232
====================== ====================
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
---------------------------------------------
1999 1998
---------------------- --------------------
Noncash Transactions:
Acquisition of Develcon:
<S> <C> <C>
Fair value of assets acquired $12,226,306 -
Liabilities assumed (9,692,412) -
Common stock issued (2,533,894) -
---------------------- --------------------
Net cash paid for acquisition - -
Cash acquired in acquisition - -
---------------------- --------------------
Cash paid for acquisition - -
====================== ====================
Issuance of common stock for debt (Develcon creditors) $921,878 -
====================== ====================
Conversion of notes payable into common stock $2,739,272 -
====================== ====================
Conversion of Series A Convertible Preferred Stock into common stock $1,000,000 -
====================== ====================
</TABLE>
(The accompanying notes are an integral part of these financial statements)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's Form 10-K as at December
31, 1998, as well as in conjunction with the audited financial statements
included in the Company's Form 10-Q as at June 30, 1999.
The consolidated financial statements for the year 1999 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.
2. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $ 727,646
Work-in-process 536,930
Finished goods 1,324,421
---------
$ 2,588,997
=========
</TABLE>
3. Acquisitions
Merger with Radar Resources
Vianet Technologies, 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.
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
<PAGE>
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 September 30, 1999.
The former shareholders and creditors of Develcon hold 2,707,114 shares of
the 9,140,886 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 nine month
period ending September 30, 1999:
Net sales $ 5,021,300
Loss before extraordinary item $(7,575,353)
Net loss $(7,928,228)
Loss per share before extraordinary item $(0.98)
Loss per share after extraordinary item $(1.02)
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition had been made at the beginning of the nine month
period ending September 30, 1998:
Net sales $ 9,121,535
Net loss $(3,883,996)
Loss per share $(0.68)
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.
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. The Company has advanced
Infinop $724,000 in loans as at September 30, 1999. The acquisition, which will
be accounted for as a purchase, was completed on October 12, 1999, the
outstanding loans were forgiven, and 2,878,542 common shares of the Company were
issued to Infinop's shareholders and option holders.
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.
<PAGE>
4. Related Party Transactions
Demand loans payable consists of approximately $1,960,000 payable to two
affiliated entities and one of the Company's shareholders bearing interest at
10% per annum. In addition, non-interest bearing loans payable to four of the
Company's shareholders and entities controlled by Shareholders approximated
$550,000.
Non-interest bearing receivables from a related party totaled $201,084 as of
September 30, 1999.
5. Changes in Capital Stock
On August 5, 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, with a fair value of $38,750, in connection with the
transaction.
In conjunction with a modification of the banking facilities with Royal Bank of
Canada (RBC), the Company issued 120,000 shares of common stock, with a fair
value of $352,875, to RBC and warrants to purchase additional 150,000 common
shares, exercisable at $6.00 per share (see note 8).
Additionally, throughout the third quarter, the Company issued 109,500
shares of common stock, with a fair value of $349,725, in exchange for services
rendered.
6. Accumulated Other Comprehensive Income
The Company reports and presents comprehensive income (loss) 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.
Foreign currency translation adjustments for the nine months ended September 30,
1999 were ($1,073).
The following table reconciles net loss to total comprehensive loss:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1999
------------------ ------------------
<S> <C> <C>
Net loss (3,145,248) (4,132,916)
Other Comprehensive Loss -Foreign currency translation adjustments
(21,666) (1,073)
------------------ ------------------
Total Comprehensive Loss (3,166,914) (4,133,989)
================== ==================
</TABLE>
7. 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 consist 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.
The following table reconciles the number of common shares outstanding with the
number of common shares used in computing net loss per share:
<PAGE>
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------------- ------------------- ----------------- ----------------
Basic and Diluted Loss Per Share
<S> <C> <C> <C> <C>
Common shares outstanding 9,140,886 1,400,000 9,140,886 1,400,000
Effect of using weighted average (155,011) - (2,494,593) -
===================== =================== ================= ================
Weighted average number of shares outstanding
8,985,875 1,400,000 6,646,293 1,400,000
===================== =================== ================= ================
</TABLE>
In March 1999, in connection with a merger agreement, which resulted in a
reverse acquisition, there was a 4 for 1 exchange of shares. All shares and per
share data have been restated to reflect the reverse acquisition.
8. Debt Agreements
The Company is in default on certain debt agreements, including nonpayment of
principal and interest, and in violation of financial covenants, which allow the
lenders to demand repayment. As such, the balances with respect to these debt
agreements are included in current maturities of long-term debt. During August
1999, the Company modified its banking arrangement with RBC which provided for
the issuance of common shares and warrants (see Note 5) in exchange for RBC
agreeing not to exercise its option to demand immediate payment of the debt
because of violation of certain financial covenants, until June 30, 2000. The
modified banking arrangement has substantially different terms from the original
debt instrument and as a result is recorded at its fair value, with an
extraordinary loss of US$352,875 recorded on the extinguishment of the original
debt instrument. The current banking facilities provided by RBC consist of a
CDN$1,500,000 term loan. 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 the Company's RBC facilities is calculated at
8.5% per year. Furthermore, all indebtedness of the Company under the RBC
facilities is secured by Develcon's assets and a corporate guarantee executed by
the Company. The company is also in violation of its agreement with respect to a
note payable with a Canadian government entity (CDN$344,087). The lender has the
option to demand that the entire outstanding balance become immediately due and
payable. No such demand has 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.
9. 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 to $8 per share.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
This quarterly report on Form 10-Q contains forward-looking statements that are
subject to risks and uncertainties, which could cause actual results to differ
materially from those expressed or implied in the statements. Forward-looking
statements (including oral representations) are statements about future
performance or results, and include any statements using the words "believe",
"expect", "anticipate" or similar words. All forward-looking statements are only
predictions or statements of current plans, which we are constantly reviewing.
All forward-looking statements may differ from actual future results due to, but
not limited to, changes in the local and overall economy, the nature and pace of
technological changes, the number and effectiveness of competitors in the
Company's markets, success in overall strategy, changes in legal and regulatory
policy, relations with ILECs and their ability to provide delivery of services
including interoffice trunking, implementation of back office service delivery
systems, the Company's ability to identify future markets and successfully
expand existing ones and the mix of products and services offered in the
Company's target markets. You should consider these important factors in
evaluating any statement contained in this report and/or made by us or on our
behalf. We have no obligation to update or revise forward-looking statements.
The following information has not been audited. You should read this
information in conjunction with the condensed financial statements and related
notes to financial statements included in this report. In addition, please see
our Management Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 1998, as well as our
Management Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements included in the Company's Form 10-Q
as at June 30, 1999.Vianet Technologies, Inc. is referred to as "we", "us" or
"our" in this report.
Significant Transactions
The Company is transitioning through a period of completing transactions. The
costs and other effects of these programs and activities are adversely impacting
current results for intended benefits of improving revenues, operating
performance and financial results in future reporting periods. Prior to
September 30, 1999, the Company completed one acquisition, Develcon, and
subsequent to September 30, 1999, the Company completed the acquisition of
Vianet Labs (formerly Infinop Holdings, Inc.). The Company intends on completing
the acquisition of PSI Communications, Inc. prior to December 31, 1999. Details
behind the aforementioned acquisitions and intended acquisition are as follows:
Our predecessor, Vianet Technologies, 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").
Develcon Electronics Ltd.
The Develcon Product Portfolio consists of two main platforms, the Athena
Enterprise Communications System and the Orbitor family of access routers.
<PAGE>
The Athena platform is a powerful enterprise communications system that offers
high-speed edge switching for backbone networks and large-scale aggregation for
Central Site locations. A flexible, scaleable platform, Athena seamlessly
integrates switching, routing and network access services. By combining
switching and routing in the same platform and adding advanced traffic
management capabilities such as prioritization, alternate routing and bandwidth
on demand, Athena delivers superior networking functionality.
Athena Access, a new flexible voice/data solution designed for remote branch
offices, incorporates the most innovative voice compression algorithms in the
industry to offer top-rated voice quality and optimized bandwidth utilization.
Built to satisfy the total communication requirements of today's multi-media
branch office environment, Athena Access provides a cost effective alternative
to dedicated phone lines.
The Orbitor product family includes a complete line of Ethernet Access routers
designed for SOHO (small office, home office), branch office and central site
applications. The Orbitor portfolio delivers cost-effective access to a wide
variety of network services including leased lines, ISDN, public frame relay
networks and the Internet.
The Company believes the new Orbitor 530 Branch Office Router is the only
product available in today's market that combines the features and performance
of a large branch office router, while still keeping the product small in both
size and price. In the Orbitor 530, Develcon has developed a versatile
full-featured router that is targeted specifically to the needs of small
offices.
With the rapid advancement of the information age and the explosion of business
services based on networking technologies, the speed and reliability of data
transmission has reached paramount importance. Develcon's new Orbitor 5100
modular access router delivers maximum performance and reliability for branch
offices through a rich feature set that offers automatic ISDN backup of main
network connections and bandwidth on demand for guaranteed transmission times.
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 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 September 30, 1999.
The former shareholders and creditors of Develcon hold 2,707,114 shares of
the 9,140,886 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.
Infinop Holdings, Inc.
Infinop is an industry leader in the development of 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. Infinop offers a
unique approach, which has the capability to generate an entire spectrum of
compression products for every type of data.
On May 19, 1999 the Company entered into a letter of intent to acquire 100% of
Infinop Holdings, Inc. ("Infinop"), a privately held corporation located in
Denton, Texas, in exchange for common shares of Vianet. As part the agreement
the Company agreed to advance Infinop $640,000 in loans. Additional loans of
$84,000 were provided during the month of September. On October 12, 1999, the
acquisition was completed and the Company issued 2,878,542 common shares to
Infinop's shareholders and option holders and the loans were forgiven.
<PAGE>
On October 12, 1999, Infinop Holdings, Inc. changed its name to Vianet Labs.
PSI Communications, Inc.
PSI is a designer and manufacturer of fiber optic access equipment and
specializes in the application of advanced technologies that help Access and
Exchange networks operate and interact efficiently and reliably. Serving the
emerging commercial multimedia communications markets, PSI focuses on providing
equipment to interface for carrier access and enterprise fiber optic networks
with their DLC Mux product. PSI has built a product for the weakest chain in the
Internet/Intranet link - the last mile, also known as the local loop.
The DLC system has the capability to transport Bellcore and ITU-T standard and
data interfaces over fiber optic T-1, E-1 and V.35 with plans to add broadband
Internet interfaces including ISDN, BRI/PRI, xDSL, IP video and Frame Relay.
This combination will result in the first true integrated V5.2 DLC fiber optics
multiplexer. This technology solves a long time telco concern: how to reach the
consumer market with high bandwidth capabilities.
On July 15, 1999, the Company signed an option agreement (which was amended in
November 1999) to acquire 100% of PSI Communications, Inc. ("PSI"), a privately
held Delaware corporation, in exchange for common shares of Vianet. As part the
agreement the Company agreed to fund PSI $500,000 in loans. If the agreement is
consummated the Company will issue a minimum of 2,500,000 common shares to PSI's
shareholders and option holders and the loans will be forgiven. In the event
that the Company decides not to exercise its option to acquire PSI, it will be
entitled to non-exclusive license for PSI's products. The Company currently
intends to exercise its option to acquire PSI.
The Company expects this acquisition to be completed in the fourth quarter of
1999.
The Company believes that the combined product portfolio of PSI, Develcon, and
Infinop provides a broad range of solutions aimed at the high growth of domestic
network buildout fueled by the e-commerce boom and leaves Vianet well positioned
to address the Internet Service Provider and CLEC market.
Results of Operations
Nine Month Period Ended September 30, 1999
During the nine months ended September 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 nine month period ended September 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
September 30, 1999.
The following is a discussion of the operations for Vianet and Develcon during
this period.
<PAGE>
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 acquiring a
license for SPS technology and entering into an Agreement to acquire Develcon
Electronics.
During the period of March 1998 to December 1998, 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 $1,912,243 for the nine months ended September 30, 1999.
Vianet acquired Develcon on May 17, 1999 and, accordingly, the sales recorded
are only for the period May 17, 1999, to September 30, 1999. Sales and operating
performance have been negatively impacted by working capital constraints. 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 $112,688.
Cost of Goods Sold and Gross Profit
Vianet's cost of sales was $1,106,118, representing margins of 42%, which are
below historical margins for Develcon's products due to difficulties in shipping
economical 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 $2,233,700. This amount was
comprised primarily of legal, professional fees and investor relations expenses
of Vianet, which totaled $1,779,711. These expenses are expected to lessen
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 $695,106 and product support totaled $189,199.
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 $786,556, 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 $566,061 and represents the
amortization of Vianet's SPS Technology License ($67,500) over five years,
depreciation on Develcon's property and equipment ($134,129) and amortization of
intangibles on the acquisition of Develcon over a period of six years
($364,432).
Three Month Period Ended September 30, 1999
Sales
Vianet had net sales of $1,019,766 for the three months ended September 30,
1999. Sales and operating performance have been negatively impacted by working
capital constraints. Vianet does not expect a significant increase in sales
until the first quarter of 2000. Interest on cash deposits and other income
amounted to $6,666.
Cost of Goods Sold and Gross Profit
Vianet's cost of sales was $645,398, representing margins of 37%, which are
below historical margins for Develcon's products due to difficulties in shipping
economical 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 $1,595,841. This amount was
comprised primarily of legal, professional fees and investor relations expenses
of Vianet, which totaled $1,279,103. 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 $445,537 and product support totaled $112,971.
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 $521,037, 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 $355,061 and represents the
amortization of Vianet's SPS Technology License ($22,500) over five years,
depreciation on Develcon's property and equipment ($85,629) and amortization of
intangibles on the acquisition of Develcon over a period of six years
($246,932).
<PAGE>
Year 2000
The Year 2000 (Y2K) issue is the result computer programs, microprocessors and
date reliant systems that may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculation causing disruption in business operations.
In an effort to assess our Y2K state of readiness we performed a complete
inventory assessment and test of all of our internal systems and external
interfaces. All of our financial, message processing and office support systems
are currently Year 2000 compliant.
The Company has communicated with all of its major customers and suppliers
to determine the extent to which the Company's interface systems are vulnerable
to any failure by third parties to upgrade their own software. The Company
believes that its customers and suppliers are addressing the issues and will
timely adjust their systems. If such modifications are not made by customers or
suppliers, or are not completed in a timely manner, the Company's operations
will not be affected.
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 for
obtaining capital 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 September 30,1999 the Company has completed the following
financings:
On October 12, 1999, Vianet Technologies, Inc. (the "Company")
consummated its acquisition of all of the issued and outstanding stock
of Infinop Holdings, Inc. ("Infinop"), in exchange for the issuance of
up to 2,878,542 shares of Common Stock of the Company, as described
below. The transaction was completed in accordance with the terms of
the Agreement and Plan of Merger, dated August 31, 1999, by and among
the Company, Vianet Labs, Inc., a Delaware corporation ("Vianet Labs"),
which is a wholly owned subsidiary of the Company, Infinop and Paul
Fisher, Howard Fisher and Craig Fisher (collectively, the "Principal
Stockholders").
Infinop is engaged, through its subsidiaries, Computer and Information
Science, Inc., and INFInet Op., Inc., in the business of developing and
marketing data compression and pattern recognition software. Its key
products, all of which incorporate its proprietary wavelet technology,
are Lightning Strike, a product designed to effectuate still imagery
compression, LSVideoN and LSVideoR, products designed to effectuate
video or moving image processing, LSBio, a product that facilitates the
compression of scanned documents for long-term data storage, and
LSStorm, a product that reduces the bulk of information moving through
a network.
As a result of the completion of this transaction, Infinop has become a
wholly-owned subsidiary of Vianet and all of the outstanding shares of
Infinop Common Stock have been cancelled and converted into shares of
Vianet's Class A Common Stock, par value $0.001 per share (the "Vianet
Common Stock"). In addition, the Infinop shareholders have the right to
receive additional consideration in the form of shares of common stock
of the Company (or, upon the election of the Principal Stockholders, in
the form of cash, subject to a maximum cash limit of $3,200,000) (the
"Additional Consideration"). The Additional Consideration will be based
on royalties actually received by Vianet during the four year period
(the "Additional Payment Period") following the closing of the Merger
(the "Closing") under the terms of the following two Software License
Agreements: (i) the Software License Agreement dated June 25, 1998
between Infinop Op, Inc. and Video Stream International (now doing
business as "Teraglobal") (the "Teraglobal Contract"); and (ii) the
Software License Agreement dated October 15, 1998 between Infinop Op,
Inc. and Transwire, Inc. (now doing business as "Prism") (the "Prism
Contract").
The Additional Consideration payable in respect of each outstanding
share of Infinop Common Stock will represent each share's pro rata
portion of a fixed percentage of the cumulative royalties in excess of
$4 million received by Vianet during the Additional Payment Period. The
percentage upon which those payments will be based will represent the
aggregate of 50% of the royalty received from the Teraglobal Contract
and 40% of the royalties received under the Prism Contract. All
<PAGE>
Additional Consideration will be payable in shares of Vianet Common
Stock, unless the Principal Stockholders elect to receive cash (subject
to an aggregate limit of $3.2 million in cash). The Additional
Consideration payable in respect of each share of Infinop Common Stock
will be distributed within 30 days of the end of each annual period
during the Additional Payment Period. For purposes of determining the
number of shares of Vianet Common Stock payable as Additional
Consideration, the Vianet Common Stock will be valued at the average
closing price of Vianet Common Stock for the five trading days
immediately preceding the end of the related annual period.
Additional details regarding this transaction are included within a
report on Form 8-K reporting the acquisition of Infinop Holdings, Inc.
This report was filed on October 28, 1999.
o On October 29, 1999, the Company borrowed $5,000 from Mr. B.M. Arnstein,
an Officer of the Company.
o On November 1, 1999, the Company issued 20,000 shares of common stock in
exchange for legal services.
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.
We have entered into a credit facility (the "Facility") with an affiliated
company controlled by the President of the Company. The Facility is for a
maximum of $3,000,000, bears interest at 10% per annum and monthly fees of
$15,000 and is secured on the Company's investments in Develcon, Vianet Labs and
it's loans to PSI. The Facility is repayable in the event that the company
raises more than $8,000,000 in equity financing and in any event no later than
March 31, 2000. In the event that the company defaults on the Facility we may
lose the ownership of our principal assets. As at September 30, 1999 we had
drawn $1,959,000 against the Facility and have drawn a further $432,000 in the
period from September 30, 1999 to the date of this filing.
POTENTIAL FINANCING
We are currently seeking new equity financing arrangements to provide the
necessary capital to fully fund our operations and pursue our business strategy.
Specifically, we have engaged Aegis Capital Corp. (the "Placement Agent") of 70
East Sunrise highway, Suite 45, Valley Stream, New York, New York 11581-1264 to
raise between $1,000,000 and $3,000,000 in equity financing (the "Offering")
with private qualified investors.
The following is a brief description of the Units offered by the Company in the
Offering.
Units
Each Unit offered hereby is comprised of 33,333 Common Shares, 33,333 Class A
Warrants, 33,333 Class B Warrants and 33,333 Class C Warrants. The number of
Common Shares included with a Unit was determined by dividing the per Unit
purchase price of $100,000 by $3.00. For each Common Share included within a
Unit, one Class A Warrant, one Class B Warrant and one Class C Warrant were also
included.
At the time that 50% of the Common Stock becomes publicly saleable (either
pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), or because a registration statement filed
under the Securities Act covering such shares is declared effective by the
Securities and Exchange Commission (the "SEC")), (the "First Measuring
Date") and at the expiration of any Lock-up Period (the "Second Measuring
Date") if closing prices of the Common Stock (as reported by the Bulletin
Board, The NASDAQ Stock Market or a securities exchange, depending upon
where the Company's Common Stock is then traded or listed) (the "Later
Market Value") is less than $4.29 per share (the "Base Market Value"), the
Investor shall be entitled to receive additional Warrants as if the
Offering had been based upon the Later Market Value (rounded up to the next
whole cent) (but in no event more than an additional 100% of the original
shares of Common Stock and Warrants issued). For example, if on either
Measuring Date the price of the Common Stock is $4.00, then the investors
will receive such number of shares of Common Stock so as to make the
assumed Offering Price per share $2.80 (a 30% discount from $4.00).
In addition, in the event that the closing price of the Company's Common Stock
is less than $5.00 on the effective date of the Company's next registration
statement, then the Exercise Price of the Warrants shall be adjusted as to
reflect the closing price of the Common Stock on that day, which shall be deemed
the new Exercise Price.
<PAGE>
Any such readjustment in the Exercise Price or number of the Warrants shall only
apply to the unexercised portion of the Warrants. The right to receive
additional Warrants shall not be deemed attached to the purchased Common Stock
and Warrants, and shall not be considered transferred to any person who acquires
such originally purchased Common Stock and Warrants.
Common Shares
The holders of the Common Shares have no preemptive or subscription rights in
later offerings of Common Shares and are entitled to share ratably (i) in such
dividends as may be declared by the Board of Directors out of funds legally
available for such purpose and (ii) upon liquidation, in all assets of the
Company remaining after payment in full of all debts and obligations of the
Company. The Company has not paid any dividends on the Common Shares, and no
dividends are contemplated in the foreseeable future. See "Dividend Policy."
Warrants
Each Class A Warrant, Class B Warrant and Class C Warrant is exercisable until
the fifth anniversary of the Initial Closing, subject to earlier redemption,
under certain circumstances, as discussed below.
The Class A Warrants are exercisable at a price of $5.00 per share; the Class B
Warrants are exercisable at a price of $6.25 per share; and the Class C Warrants
are exercisable at a price of $7.50 per share. The respective exercise prices
were determined based upon the Assumed Market Price. The exercise prices of the
Class B Warrants and Class C Warrants are equal to 125% and 150% respectively,
of the Class A Exercise Price ($5.00). In the event that the closing price of
the Company's common Stock is less than $5.00 on the effective date of the
Company's next registration statement, then the Exercise Price of the Warrants
shall be adjusted as to reflect the closing price of the Common Stock on that
day, which shall be deemed the new Exercise Price. Any such readjustment in the
exercise prices of the Warrants shall only apply to the unexercised portion of
the Warrants.
Other Warrants
The Placement Agent is entitled to receive five-year warrants to purchase up to
10% of the number of Units sold in the Offering, which could range from 33,333
to 99,999 of each of the Common Stock and Class A, B, and C Warrants.
Registration Rights
Vianet has granted the holders of the Units certain registration rights under
the Registration Rights Agreement. Vianet has agreed to prepare and file a
registration statement under the Securities Act of 1933 (the "Registration
Statement"), as amended, for all Common Shares underlying each Unit (including
the Common Stock underlying the Warrants which are part of each Unit), within
one-hundred twenty (120) days of the Final Closing (the "120 Day Period"). In
the event that the Registration Statement is not effective at the close of
business on the last day of the 120 Day Period, Vianet has agreed to pay to the
holders of the securities purchased in this Offering (the "Holders") an
aggregate of, one percent (1%) of all securities sold in the Offering, upon
expiration of the first thirty (30) days after the 120 Day Period, and two
percent (2%) of such securities for every 30 day period thereafter that the
Registration Statement has not been declared effective (the "Penalty Shares").
In addition, Vianet has agreed to place nine months worth of Penalty Shares in
escrow with Sichenzia, Ross & Friedman LLP, a New York law firm, upon the final
closing of this offering.
Purchasers of the Units offered herein agree not to sell fifty percent (50%) of
the Common Stock underlying the Units for a period of six months from the
effective date of the Registration Statement or upon NASDAQ listing, whichever
occurs first (the "Lock-Up Period"). In any event, the Lock-Up Period will
expire twelve (12) months from the date the securities offered herein were
issued. The Holder may sell the balance of the Common Stock (fifty percent
(50%)) upon effectiveness of the Registration Statement or at such time as the
securities are available for resale under Rule 144, whichever occurs first.
<PAGE>
By executing the Registration Rights Agreement, each investor will be granting
power-of-attorney to a duly authorized officer of the Placement Agent to
negotiate the terms and condition of the Lock-Up agreements of the holder of
Registrable Securities and any other restrictions on the right of such holder to
sell his or its shares of Common Stock which shall be imposed by any underwriter
in connection with any proposed public offering or by NASDAQ in connection with
any application for listing of the Registrable Securities made by Vianet to
NASDAQ (including, without limitation, the length of the Lock-Up Period, and the
other rights of the holder of Registrable Securities to sell his or its
Registrable Securities).
The Placement Agent also has certain registration rights with respect to the
securities underlying the Agent's Options.
We currently expect an initial closing on the Offering on or before November 30,
1999. However, there can be no assurances that this or any other additional
financing will be available on acceptable terms, if at all. 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.
ADDITIONAL LIQUIDITY DISCUSSION
Vianet's working capital deficit at September 30, 1999 was ($5,428,765). As a
result, the Company is in default on certain debt agreements, including
nonpayment of principal and interest, and in violation of financial covenants,
which allows the lenders to demand repayment. No such demands have been made.
Management believes that its operating losses are in part 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.
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.
The Company is considering several financing alternatives to fund its medium and
longer-term financing requirements, including anticipated accounts receivable
and inventory requirements and future R&D needs. While the Company has, in the
past, been able to maintain access to adequate external financing sources on
acceptable terms, no assurances can be given that such access will continue. If
the Company is unable to obtain short-term and long-term funding on acceptable
terms from existing financing sources or through secure new sources, the
Company's ongoing operations could be adversely impacted.
The Company is currently in negotiations with several other potential investors
to fund its cash requirements. No assurances can be given that the Company will
be successful in completing these financings.
CONCLUSION
The Company has operational, financial and product introduction plans which, if
achieved, will result in profitability and cash equilibrium in early 2000.
Considering the available financial resources, current business prospects, the
outlook for cash available from customer collections, the outlook for cash to be
used in operations and investing, and actions to control spending, the Company
believes it has or can obtain the financial resources to meet its business
requirements for the balance of the current year. There can be no assurance,
however, that the assumptions and projections underlying or supporting this
outlook will be realized. The Company has incurred significant operating losses
and negative cash flows from operations in since its inception in March 1998.
The cash flows were funded by proceeds from borrowings under credit facilities
and by sales common stock. The Company expects operating losses and negative
operating cash flow to continue at least through the end of 1999. It is
uncertain when, if ever, the Company will report operating income or positive
cash flow from operations. If cash needs exceed available resources, there also
can be no assurance that additional capital will be available through public or
private equity or debt financings. The financial statements have been prepared
assuming the Company will continue as a going concern and do not include any
adjustments that might result from the unfavorable outcome of such an
uncertainty.
<PAGE>
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS
Future operating results may be impacted by a number of factors, including
worldwide economic and political conditions, industry specific factors, the
Company's ability to maintain access to external financing sources and its
financial liquidity, the Company's ability to timely develop and produce
commercially viable products at competitive prices, the availability and cost of
components, the Company's ability to manage expense levels, the continued
financial strength of the Company's dealers and distributors, and the Company's
ability to accurately anticipate customer demand.
The Company's future success is highly dependent upon its ability to develop,
produce and market products that incorporate new technology are priced
competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be commercially successful or
technically advanced due to the rapid improvements in information technology and
resulting product obsolescence. There is also no assurance that the Company will
be able to deliver commercial quantities of new products in a timely manner. The
success of new product introductions is dependent on a number of factors,
including market acceptance, the Company's ability to manage risks associated
with product transitions, the effective management of inventory levels in line
with anticipated product demand and the timely manufacturing of products in
appropriate quantities to meet anticipated demand. The Company competes with
established equipment manufacturers with greater financial resources and more
developed channels of distribution. No assurances can be given that the Company
will be successful in competing in this environment.
<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.
Item 6. Exhibits and Reports
(a) Exhibit.
I - Financial Data Schedule
(b) Reports on Form 8-K:
On March 23, 1999, the Company filed a report on Form 8-K
reporting the merger with Vianet Technologies, Inc.
On August 18, 1999 the Company filed a report on Form 8-K/A
reflecting the audited financial statements as at December 31,
1998. The submission was amended on September 8, 1999.
On September 10, 1999 the Company filed a report on Form
8-K/A reflecting the change in the Registrant's Certifying
Accountant.
On September 24, 1999 the Company filed a report on Form
8-K/A reflecting a letter from the Registrant's previous
Certifying Accountant.
On October 28, 1999, the Company filed a report on Form 8-K
reporting the acquisition of Infinop Holdings, Inc.
<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.
<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. (Registrant)
Date: November 16, 1999 /s/ VINCENT L. SANTIVASCI
Vincent L. Santivasci
Chief Financial Officer
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