<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(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, 2000
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)
Delaware 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 23,055,000 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on August 11, 2000.
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VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
----
Part 1 Financial Information
------
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis 10-15
Part II Other Information 16
-------
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Signatures 18
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
ASSETS June 30, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,616,865 $ 214,639
Accounts receivable, net of allowance of $55,000 in 2000 249,942 93,955
Receivables from related parties 213,423 142,415
Inventory 47,272 -
Prepaids and other current assets 175,458 75,913
--------------- -----------------
Total Current Assets 6,302,960 526,922
--------------- -----------------
Property and Equipment, less accumulated depreciation
of $564,886 in 2000 and $439,465 in 1999 550,833 274,117
--------------- -----------------
Other Assets:
Notes receivable from Develcon Electronics Ltd., less allowance of
$2,386,386 in 2000 and $1,000,000 in 1999 - 624,828
Intangibles arising from acquisitions, net of accumulated
amortization of $1,490,982 in 2000 and $340,484 in 1999 5,308,928 6,631,533
Technology licenses, net of accumulated amortization
of $195,825 in 2000 and $112,500 in 1999 790,722 874,047
Other 356,500 6,500
--------------- -----------------
Total Other Assets 6,456,150 8,136,908
--------------- -----------------
$ 13,309,943 $ 8,937,947
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 7,495 $ 27,799
Accounts payable and accruals 1,577,873 3,635,652
Convertible notes payable 541,250 513,750
Demand notes payable 50,000 50,000
Note payable - bank 1,000,000 -
Loans payable - related parties 40,782 2,184,387
--------------- -----------------
Total Current Liabilities 3,217,400 6,411,588
--------------- -----------------
Convertible Notes Payable (noncurrent) 1,125,000 1,125,000
--------------- -----------------
Shareholders' Equity:
Common shares, $0.001 par value; 100,000,000 shares
authorized; 22,839,813 and 14,678,309 shares, issued and
outstanding, respectively 22,839 14,678
Subscription receivable (500) (500)
Additional paid-in capital 31,443,290 19,275,589
Warrants issued 10,717,050 5,001,211
Unearned fees (372,915) (745,830)
Accumulated deficit (32,842,221) (22,143,789)
--------------- -----------------
Total Shareholders' Equity 8,967,543 1,401,359
--------------- -----------------
$ 13,309,943 $ 8,937,947
=============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 514,738 $ - $ 633,692 $ -
Interest and other income 70,677 35,787 114,814 70,687
------------- ----------- ------------- --------------
585,415 35,787 748,506 70,687
------------- ----------- ------------- --------------
Costs and Expenses:
Cost of goods sold 143,313 - 157,556 -
Selling, general and administrative 3,520,033 270,831 5,533,147 500,581
Research and development 512,882 - 1,652,441 -
Provision for loss - Develcon 1,936,386 - 2,386,386 -
Depreciation and amortization 680,675 22,500 1,359,011 45,000
Interest 33,259 58,155 358,397 58,155
------------- ----------- ------------- --------------
6,826,548 351,486 11,446,938 603,736
------------- ----------- ------------- --------------
Loss From Continuing Operations (6,241,133) (315,699) (10,698,432) (533,049)
------------- ----------- ------------- --------------
Loss From Discontinued Operations - (454,619) - (454,619)
------------- ----------- ------------- --------------
Net Loss $ (6,241,133) $ (770,318) $ (10,698,432) $ (987,668)
============= =========== ============== ==============
Loss per share - basic and diluted:
Continuing operations $ (0.28) $ (0.04) $ (0.56) $ (0.10)
Discontinued operations - (0.06) - (0.08)
------------- ----------- -------------- --------------
Loss per share - basic and diluted $ (0.28) $ (0.10) $ (0.56) $ (0.18)
============= =========== ============== ==============
Weighted average number of shares outstanding 21,990,809 7,264,952 19,210,859 5,464,285
============= =========== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Six Months Ended
------------------------------------
June 30, 2000 June 30, 1999
---------------- ---------------
<S> <C> <C>
Net Cash Used In Operating Activities $ (7,156,680) $ (711,672)
---------------- ---------------
Investing Activities:
Loans to Infinop Holdings, Inc. - (350,000)
Proceeds from sale of marketable securities - 739,955
Security deposits (350,000) (70,265)
Other acquisition costs - (291,870)
Capital expenditures (402,137) (23,723)
Other (46,008) -
---------------- ---------------
Net Cash (Used In) Provided By Investing Activities (798,145) 4,097
---------------- ---------------
Financing Activities:
Issuance of common stock and warrants 13,374,385 5,203
Repayment of convertible notes payable - (200,000)
Subscriptions receivable - 990,000
Other (17,334) 12,617
---------------- ---------------
Net Cash Provided By Financing Activities 13,357,051 807,820
---------------- ---------------
Effect of exchange rate changes - 20,593
---------------- ---------------
Net Increase In Cash And Cash Equivalents 5,402,226 120,838
Cash and Cash Equivalents, beginning 214,639 13,856
---------------- ---------------
Cash and Cash Equivalents, end $ 5,616,865 $ 134,694
================ ===============
Supplemental Disclosures of Cash Flow Information
Cash paid for interest $ 95,887 $ 81,104
================ ===============
Cash paid for taxes $ 46,422 $ -
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
June 30, 2000 June 30, 1999
---------------- ---------------
<S> <C> <C>
Noncash Transactions:
Conversion of notes payable into common stock $ 2,146,575 $ 2,739,272
================ ===============
Conversion of Series A Convertible Preferred Stock
into common stock $ - $ 1,000,000
================ ===============
Acquisition of Develcon Electronics, Ltd.:
Fair value of assets acquired $ - $ 12,226,306
Liabilities assumed - (9,692,412)
Common stock - (2,533,894)
---------------- ---------------
Cash paid for acquisition $ - $ -
================ ===============
Issuance of common stock and warrants $ 1,288,125 $ -
================ ===============
Issuance of common stock for debt (Develcon creditors) $ - $ 921,878
================ ===============
Issuance of common stock for services $ 90,937 $ 75,000
================ ===============
Issuance of warrants to placement agents $ 5,569,408 $ -
================ ===============
Issuance of common stock and warrants in return for
loan receivable from Develcon Electronics, Ltd. $ 750,000 $ -
================ ===============
Reduction of liabilities assumed in connection with
acquisition $ 172,106 $ -
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
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<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-QSB
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-KSB as at
December 31, 1999.
The consolidated financial statements include the accounts of Vianet
Technologies, Inc. (Vianet) and its wholly owned subsidiaries, Vianet Labs, Inc.
and Vianet Access, Inc. (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated.
In June 2000, the Company reincorporated under the laws of the State of
Delaware.
2. Related Party Transactions:
Credit Facility:
In 1999, the Company entered into a $3,000,000 secured credit facility (the
"Facility") with an entity that during 1999, was controlled by the President and
Chief Executive Officer. In March 2000, the Facility was converted into
1,430,559 shares of common stock and 4,291,617 warrants to purchase common
stock.
Fees and expenses:
For the six months ended June 30, 2000, the Company paid $97,750 to WorldCorp
Management Group, Inc., an affiliated entity, for services rendered.
Employment / Consulting Agreements:
Effective January 1, 2000, Vianet entered into three-year consulting agreements
with CFM Capital Limited, an entity owned and controlled by Vianet's President
and Chief Executive Officer, and Xelix Capital Limited, an entity owned and
controlled by Vianet's Chairman. Fees of $286,666 were paid to these affiliated
entities in the six months ended June 30, 2000.
In March 2000, Vianet's Board of Directors approved a two-year employment
agreement with an executive, effective November 24, 1999. In addition, the
employment agreement provided for Vianet to issue four-year options to purchase
shares of common stock, which fully vest on November 1, 2000. Effective June
2000, the executive ceased his employment with Vianet, but continues as a
consultant to the Company through July 31, 2001 under similar terms and
conditions.
Joint Venture:
In April 2000, Vianet entered into a Joint Venture (the "Venture") with Opicom
Co., Ltd., an entity controlled by a shareholder of Vianet. Vianet contributed
$500,000 as part of its initial investment into the Venture. The Venture
purchased a license from Vianet for certain technology for a single, one-time
fee in the amount of $1,000,000 (subject to withholding tax imposed by the
Korean Government). The Company received a net fee of $890,000. The Company
accounts for its investment under the equity method of accounting and
accordingly, $390,000 has been recorded as income and the balance as a reduction
of the Company's investment in the Joint Venture to reflect the elimination of
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<PAGE>
the intercompany profit. In consideration of the license fee, Vianet provided
the Venture with an unlimited license for Wavelet compression products in the
Korean Market.
3. Inventories:
Inventories consist of finished goods and are valued at the lower of cost
(first-in, first-out) or market.
4. Acquisition and Subsequent Disposition of Develcon Electronics, Ltd:
Acquisition:
On February 12, 1999, the Company entered into an Arrangement Agreement (the
"Arrangement") to acquire all the outstanding shares of Develcon Electronics,
Ltd (Develcon). The Arrangement became effective on May 17, 1999. The former
shareholders and creditors of Develcon were issued 2,585,488 shares of the
Company's common stock. 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. 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.
Disposition:
On December 31, 1999, the Company completed the sale of Develcon to an entity
controlled by the President of Develcon, Thorpe Bay Corporation (Thorpe Bay).
Under the terms of the agreement Thorpe Bay acquired all the issued and
outstanding shares of Develcon for $2,500,000. The $2,500,000 is payable by
Develcon at the end of five years without interest (recorded at present value
with interest imputed at 9% of $1,624,828). The Company recorded an allowance of
$1,000,000 at December 31, 1999. The Company is contingently liable for bank
debt of Develcon of CDN$1,500,000 (approximately US$1,000,000). The statements
of operations and cash flows for the three and six-months ended June 30, 1999
reflect Develcon as a discontinued operation.
Provision for loss:
The Company has re-evaluated the recoverability of its receivables from Develcon
and has determined that an additional allowance is required for the outstanding
balances. The carrying value of such receivables at June 30, 2000, were $661,386
(inclusive of imputed interest of $36,558) pertaining to the disposition and
$275,000 pertaining to the note receivable exchanged for common stock (see
Note 5). In addition, a contingency loss of $1,000,000 has been recored with
respect to the bank debt guaranty and such liability has been reflected as Note
Payable - Bank in the accompanying balance sheet. Accordingly, the provision
for loss was $1,936,386 and $2,386,386 for the three months and six months ended
June 30, 2000, respectively.
5. Common Stock
In January 2000, Vianet completed additional closings of the private placement
offering with Aegis Capital Corp. (Aegis) as placement agent, in which 983,314
shares of common stock and 2,949,942 common stock purchase warrants were sold
resulting from the sale of an aggregate of 14.75 units to accredited investors
for net proceeds to Vianet of approximately $1,333,000. Each unit consisted of
an aggregate of 66,666 shares of common stock and 66,666 Class A, 66,666 Class B
and 66,666 Class C common stock purchase warrants, which are exercisable for
five years at $2.00, $2.50 and $3.00 per share, respectively. A portion of
Aegis' commission of $33,000 relating to these closings was reinvested into 0.33
units (21,997 shares of common stock and 65,991 common stock purchase warrants).
In addition, Aegis received warrants to purchase an aggregate of 3.45 units (or
an aggregate of 230,215 shares of common stock and 230,215 class A, B and C
warrants, respectively), which are exercisable at a price of $100,000 per unit.
In January 2000, the Company issued 50,000 warrants to purchase common stock for
services. The warrants have a two-year term and each warrant is exercisable at
$5.00. In addition, the Company issued 20,000 common shares in exchange for
legal services.
In February 2000, pursuant to a private placement offering the Company sold
1,163,121 shares of common stock and 3,489,363 common stock purchase warrants.
The private placement offering, which was completed with Donald & Co. (Donald)
as placement agent, resulted in the sale of an aggregate of 17.448 units to
accredited investors for net proceeds to Vianet of approximately $1,410,000.
Each unit consisted of an aggregate of 66,666 shares of common stock and 66,666
-8-
<PAGE>
Class A, 66,666 Class B and 66,666 Class C common stock purchase warrants, which
are exercisable for five years at $2.00, $2.50 and $3.00 per share,
respectively. Donald received warrants to purchase an aggregate of approximately
1.25 units (or an aggregate of 83,649 shares of common stock and 83,649 class A,
B and C warrants, respectively), which warrants are exercisable at a price of
$100,000 per unit. In addition, Aegis participated in this closing and a portion
of their commissions of $53,900 was reinvested into 0.539 units (or 35,933
shares of common stock and 107,799 common stock purchase warrants).
In March 2000, pursuant to a private placement offering the Company sold 326,666
shares of common stock and 489,999 Class D common stock purchase warrants,
exercisable for a three-year period at $4.50 per share. The private placement
offering resulted in the sale of an aggregate of 16.33 units to accredited
investors for net proceeds to Vianet of approximately $861,000.
In addition, the Company purchased a $1,000,000 (face amount) note receivable
from Develcon Electronics, Ltd. (a former Subsidiary) held by a creditor of
Develcon Electronics, Ltd. in exchange for the issuance of 250,000 shares of
common stock issued at $3.00 per share and 375,000 Class D common stock purchase
warrants, exercisable for a three-year period at $4.50 per share.
In April 2000, pursuant to stock purchase agreements, the Company issued
1,899,999 shares of common stock and 2,849,998 common stock purchase warrants,
exercisable for a three-year period at $4.50 per share for net proceeds to
Vianet of approximately $5,130,000. The placement agents associated with this
offering will receive warrants to purchase approximately 9.5 units (or
approximately 190,000 shares of common stock and approximately 285,000 class D
three year common stock purchase warrants). Each unit consisted of an aggregate
of 20,000 shares of common stock and 30,000 Class D common stock purchase
warrants, exercisable for a three-year period at $4.50 per share.
In April 2000, pursuant to a private placement offering the Company sold
1,606,195 shares of common stock and 2,409,292 Class D common stock purchase
warrants, exercisable for a three-year period at $4.50 per share. The private
placement offering resulted in the sale of an aggregate of 82.65 units to
accredited investors for net proceeds to Vianet of approximately $4,640,000.
In June 2000, the Company issued 370,000 shares of common stock to WorldCorp
Capital Management Group, Inc. (WCMG), an affiliated entity, in payment for
services rendered. The payment included 270,000 shares issued in connection with
the acquisitions of Vianet Labs and Vianet Access, which were accrued for in
1999. The Company also issued 40,000 shares of common stock and warrants to
purchase an additional 20,000 shares of common stock to three Directors of
Vianet for services rendered in 1999.
Thereafter, the Company issued 34,920 shares of common stock to shareholders
that participated in the Aegis and Donald private placements. The shares were
issued pursuant to the offering document as consideration for delayed
registration of the underlying securities purchased in the applicable private
placements.
6. Leases:
In April 2000, the Company entered into a lease agreement for office space in
Texas. The term of the lease is sixty-two months. The lease provides for rent,
including operating expenses and taxes, approximating $276,000 per annum. A
security deposit of $350,000 was paid in May 2000.
7. Subsequent Events:
As of August 8, 2000, the Company is obligated to issue 139,882 additional
shares of common stock to shareholders that participated in the Aegis and Donald
private placements. The shares will be issued pursuant to the offering document
as consideration for delayed registration of the underlying securities purchased
in the applicable private placements.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This quarterly report on Form 10-QSB 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
(Independent Local Exchange Carriers) 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-KSB for the year ended December 31, 1999. Vianet
Technologies, Inc. is referred to as "we," "us" or "our" in this report.
DESCRIPTION OF BUSINESS.
General
We design and market advanced data compression technology and computer
networking products that allow our customers to deliver integrated voice, video
and data communication services to be used for network access, value-added
services, and E-commerce applications.
Compression Technology Products, E-Commerce and Value Added Services
We develop and sell data compression technologies for software and hardware
applications, utilizing a patented Wavelet compression technique. Wavelet based
technologies deliver data, video and multimedia content faster than conventional
compression techniques. Furthermore, Wavelet compression uses dramatically less
bandwidth, costs less, and yields higher quality Internet video and still
imagery than conventional techniques. Our key products include the Lightning
Strike suite of products, which include LS Video Messenger, LS Video
Interactive, LS Power Zoom, and LS Video Stream. All of these products utilize
our Wavelet technology, and offer customers high quality desktop video
applications at high speeds. Our technology will serve as the foundation for our
value added services and E-commerce business.
Networking and Communications Products
We design, manufacture, and sell networking products and systems. We produce
fiber optic access equipment and specialize in the application of access and
exchange technologies to improve network efficiency and reliability. We focus on
the commercial multimedia communications and telecommunications markets by
providing equipment that interfaces carrier access and enterprise fiber optic
networks. Our current product lines, including the Starpoint fiber optic
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multiplexer, offer communications companies high bandwidth technology to reach
consumer markets more efficiently. We market these technologies to
communications companies seeking to interface carrier access and enterprise
fiber optic networks. In the future, we plan to integrate our proprietary
technology and technology exclusively licensed from our former subsidiary,
Develcon, to expand our network access product lines.
Background
Our predecessor, Vianet Technologies, Inc., was formed as a Delaware corporation
in March 1998 ("Vianet Delaware"). In March 1999, Vianet Delaware merged with
and into Radar Resources, Inc., a Nevada corporation ("Radar"). Upon completion
of Vianet Delaware's merger with Radar, Radar changed its name to Vianet
Technologies, Inc ("Vianet").
From its inception until March 1999, Radar did not engage in any business and
had no operational history. Radar was incorporated originally under the name
Radar, Inc. in the state of Utah on April 11, 1986. In December 1993, Radar
reorganized under the laws of Nevada, changing its domicile and forming a new
corporation in Nevada named Radar Resources, Inc. This new corporation acquired
the contractual obligations, shareholder rights and identity of the original
Utah Corporation, and the Utah Corporation was dissolved.
Prior to the Vianet Delaware's merger with Radar, Vianet Delaware's business
activities consisted primarily of planning to acquire Develcon Electronics
Limited, an Ontario, Canada corporation ("Develcon"). Develcon specializes in
networking products and systems. Vianet acquired Develcon on May 17, 1999.
Shortly thereafter, in October 1999, Vianet consummated a plan of merger with
Infinop Holdings, Inc. ("Infinop"), a Delaware corporation specializing in data
compression technology. Simultaneous with the merger, Infinop was renamed Vianet
Labs, Inc.
In December 1999, Vianet acquired PSI Communications Inc. ("PSI"), a privately
held Delaware corporation, pursuant to an option agreement they had entered into
earlier that year. In conjunction with the acquisition, PSI merged into a wholly
owned Delaware subsidiary of Vianet, and changed its name to Vianet Access, Inc
("Vianet Access").
In December 1999, we sold our Develcon subsidiary to Thorpe Bay Corporation, an
Ontario company. As part of the agreement, we retained an exclusive license to
market Develcon's Athena product lines to Fortune 100 companies based in the
United States, as well as a non-exclusive license to market all of Develcon's
product lines to other customers.
In June 2000, the Company reincorporated under the laws of the state of
Delaware.
In Process Research and Development
On acquisition, the Vianet Labs products were in the form of CODECS
(COmpressor/DECompressors) representing mathematical algorithms that had been
utilized in a "proof of concept" suite of products known as LS Interactive, LS
Messenger, LS Video Streaming, LS Power Zoom, and LS Facial recognition. These
products were in "pre alpha" form, worked only on one limited platform and were
extremely "buggy" causing computer lock-ups and worse. Since the acquisition,
Vianet's engineering effort has consisted of the design of professional Graphic
User Interfaces (GUI's), debugging and the integration across multiple platforms
as well the further enhancement and development of the basic CODECS.
LS Messenger has moved from a proof of concept to a product phase. LS Messenger
and LS Messenger Pro have been tested on Windows 98, Windows NT, and Windows
2000. Vianet has started marketing these products with a positive response.
LS Video Interactive point to point has moved past the alpha stage into beta.
Beta customers have started using LS Video Interactive in a limited fashion.
Vianet Technologies continues to develop and improve this product. Vianet has
started development of LS Video Interactive Multipoint. This product is in the
proof of concept stage.
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<PAGE>
Vianet Technologies launched major codec improvement initiatives in mid April
2000. The result of this research initiative is a codec with improved video
quality, as well as, the prototype version of Vianet's Pure Wavelet codec. The
Pure Wavelet codec has the capability of streaming video at multiple bandwidths
from the same file. As of the date of this filing, the image quality of the Pure
Wavelet codec is not as good as our traditional codecs. Additionally, the Pure
Wavelet codec requires more processor resources than our current codec
technology. Research continues with Vianet's Wavelet and Pure Wavelet codec
technologies.
Since March of this year, Vianet has resumed development of Power Zoom. Power
Zoom gives Web Developers the capability to server high-resolution images over
the Internet. By using a Power Zoom server, hosting sites give users the
capability to zoom in on the details of a high resolution image not seen with
traditional serving techniques. This product is entering its beta phase.
On acquisition of Vianet Access, the Starpoint product was also in a "proof of
concept" form. In February 2000, the product reached alpha stage and the main
engineering effort since then has focused on the development of a voice card and
the application of a Simple Network Management Protocol (SNMP) software
management system and related GUI.
Our Starpoint product has been developed to include a voice card and an SNMP
management system. The first version of the Starpoint product was released in
June of 2000. The initial release includes T1, E1, and V.35 interfaces in
addition to the Voice Interface.
No assurance can be given that these developments will be completed on schedule
or that a market will exist for the products once the development is completed.
Results of Operations
Three-month periods ended June 30, 2000 and June 30, 1999
Revenues
Revenues for the three-month period ended June 30, 2000 increased $549,628 to
$585,415, as compared to interest and other income of $35,787 during the three-
month period ended June 30, 1999. $124,738 of this increase was attributable to
sales of our Starpoint product prototypes, while $390,000 was generated from
software licensing of our Lightning Strike Suite of Products in the Korean
market. The remaining $70,677 was attributable to interest and other income.
Operating Expenses
Operating expenses for the three-month period ended June 30, 2000 increased
$5,841,783 to $6,112,614, as compared to operating expenses of $270,831 during
the three-month period ended June 30, 1999. The increase in operating expenses
was attributable to a $143,313 increase in cost of goods and services sold, a
$3,249,202 increase in selling, general and administrative expenses, a $512,882
increase in research and development costs and a $1,936,386 provision for
loss-Develcon. Selling, general and administrative expenses in the current
period include a one-time settlement charge for $191,000 and increased salaries
and administrative costs. These increases relate to the costs associated with
the operations of the Company's newly acquired subsidiaries, Labs and Access.
The Company currently has over 59 employees as compared to less than 10 during
the three months ended June 30, 1999.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the three-month period ended June 30,
2000 increased $658,175 to $680,675, as compared to amortization expense of
$22,500 during the three-month period ended June 30, 1999. The increase was
attributable to amortization of intangibles arising from acquisitions during
1999, depreciation of property and equipment and amortization of technology
licenses.
Interest Expense and Other Financing Charges
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Interest expense and other financing charges for the three-month period ended
June 30, 2000 was $33,259, as compared to $58,155 during the three-month period
ended June 30, 1999. The year 2000 expense was primarily attributable to
interest on notes payable, which decreased significantly as compared to June 30,
1999.
Six-month periods ended June 30, 2000 and June 30, 1999
Revenues
Revenues for the six-month period ended June 30, 2000 increased $677,819 to
$748,506, as compared to interest and other income of $70,687 during the
six-month period ended June 30, 1999. $169,358 of this increase was attributable
to sales of our Starpoint product prototypes, while approximately $74,334 was
attributable to OEM sales. $390,000 was generated from software licensing of our
Lightning Strike Suite of Products in the Korean market. The remaining $114,814
was attributable to interest and other income.
Operating Expenses
Operating expenses for the six-month period ended June 30, 2000 increased
$9,228,949 to $9,729,530, as compared to operating expenses of $500,581 during
the six-month period ended June 30, 1999. The increase in operating expenses was
attributable to a $157,556 increase in cost of goods and services sold, a
$5,032,566 increase in selling, general and administrative expenses, a
$1,652,441 increase in research and development costs and a $2,386,386 provision
for loss-Develcon. Selling, general and administrative expenses include a
one-time settlement for $191,000 and increased salaries and administrative
costs. This increase relates to the costs associated with the operations of the
Company's newly acquired subsidiaries, Labs and Access. The Company currently
has over 59 employees as compared to less than 10 during the six-month period
ended June 30, 1999.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the six-month period ended June 30,
2000 increased $1,314,011 to $1,359,011, as compared to amortization expense of
$45,000 during the six-month period ended June 30, 1999. The increase was
attributable to amortization of intangibles arising from acquisitions during
1999, depreciation of property and equipment and amortization of technology
licenses.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the six-month period ended June
30, 2000 was $358,397, as compared to $58,155 during the six-month period ended
June 30, 1999. The year 2000 expense was primarily attributable to interest on
convertible notes and the credit facility (including amortization of debt
discount), while the 1999 expense primarily relates to interest on notes
payable.
Inflation
Vianet has experienced minimal impact from inflation and changing prices on its
net sales and on its income from continuing operations for the periods it has
been engaged in business.
Liquidity And Capital Resources
For the six-month period ended June 30, 2000, the Company's cash position
increased by $5,402,226 from $214,639 to $5,616,865. The principal source of
cash was $13,374,385 that was generated from the Company's private placement
offerings. $7,156,680 of these funds were used in operating activities, $71,008
in loans to related parties, $402,137 in purchases of capital assets during the
period, $350,000 in security deposits, as well as, approximately $20,000 in
principal payments of long-term debt.
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<PAGE>
From January 1, 2000 through the date of this report, we have completed the
following financings:
o From December 1999 through February 2000, we completed a private
placement offering, with Aegis Capital, Inc. (Aegis) as placement
agent, in which we sold an aggregate of approximately 15 units for
gross proceeds of approximately $1,508,000. The units consisted of an
aggregate of (1) 1,005,311 shares of common stock, and (2) 1,005,311
class A, B and C warrants, respectively, to purchase shares of common
stock. The class A, B and C warrants are exercisable at $2.00, $2.50
and $3.00, respectively. In connection with such offering, as well a
the December 1999 offering, Aegis Capital received warrants to purchase
an aggregate of approximately 3.45 Units (or an aggregate of 230,215
shares of common stock and 230,215 class A, B and C warrants,
respectively), which warrants are exercisable at a price of $100,000
per unit.
o In 1999, the Company entered into a $3,000,000 secured credit facility
(the "Facility") with an entity that, at that time, was controlled by
the President and Chief Executive Officer. The terms of the facility
provided for interest at 10%, monthly fees of $15,000, the issuance of
warrants for 300,000 shares of common stock exercisable at prices of
$3.00 to $5.00 over five years, and the lender to have the option to
convert the amount due into 1,430,539 shares of common stock and
4,291,617 warrants to purchase common stock at prices ranging from
$1.50 to $3.00 per share. The conversion option was exercised in March
2000.
o In February 2000, Vianet completed a private placement offering in
which we sold an aggregate of approximately 18 units for gross proceeds
of approximately $1,800,000. The units consisted of an aggregate of (1)
1,199,054 shares of common stock, and (2) 1,199,054 class A, B and C
warrants, respectively, to purchase shares of common stock. The class
A, B and C warrants are exercisable at $2.00, $2.50 and $3.00,
respectively. In connection with such offering, Donald & Co. received
warrants to purchase an aggregate of approximately 1.25 Units (or an
aggregate of 83,649 shares of common stock and 83,649 class A, B and C
warrants, respectively), which warrants are exercisable at a price of
$100,000 per unit.
o In March 2000, we purchased a $1,000,000 (face amount) note receivable
from Develcon Electronics, Ltd. (a former Subsidiary) from a creditor
of Develcon Electronics, Ltd. in exchange for the issuance of 250,000
shares of common stock issued at $3.00 per share and 375,000 Class D
three year common stock purchase warrants, which are exercisable at
$4.50 per share.
o In March and April 2000, we completed a private placement in which we
sold an aggregate of approximately 98.98 units for gross proceeds to
Vianet of approximately $5,938,000. The units consisted of an aggregate
of 1,932,861 shares of common and 2,899,291 common stock purchase
warrants, which warrants are exercisable at $4.50.
o In April 2000, pursuant to stock purchase agreements, we issued an
aggregate of 1,899,999 shares of common stock and 2,849,998 common
stock purchase warrants for gross proceeds of $5,700,000. The warrants
are exercisable at $4.50. In connection with such offering, the
Placement Agents will receive warrants to purchase an aggregate of
approximately 9.5 units (or an aggregate of approximately 190,000
shares of common stock and approximately 285,000 class D warrants).
Each unit consisted of an aggregate of 20,000 shares of common stock
and 30,000 Class D three-year common stock purchase warrants, which are
exercisable at $4.50 per share.
Contingent Liability
We have guaranteed a term loan from Royal Bank of Canada ("RBCC") to Develcon in
the amount of approximately $1,000,000 (CDN$1,500,000), which is due and payable
in three installments on or before December 31st of 2000, 2001 and 2002,
respectively. There can be no assurance that Develcon will be able to repay
RBCC, which could cause us to be liable to pay RBCC. RBCC are shareholders and
warrant holders of the Company. At June 30, 2000, the entire $1,000,000
liability has been included in Bank Notes Payable on Vianet's consolidated
balance sheet.
Potential Future Sources of Capital
In addition to the financings completed in the second quarter of 2000, we had a
total of 29,145,725 warrants and options outstanding as at the date of this
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<PAGE>
filing at an average issue price of $3.01. In the event that these warrants and
options are all exercised we would receive approximately $89,612,000 in cash
proceeds. The exercise of these warrants and options will depend on, among other
things, the liquidity and price for our common shares. We do not control the
exercise of these warrants and options and therefore no assurances can be given
that any warrants will be exercised.
We have used and intend to continue to use the proceeds from the financings
described above to consolidate and build our sales and marketing team and to
purchase inventory and capital equipment. Our ability to become a serious
competitor in the network access, Internet, E-commerce, and value-added services
markets may be dependent upon obtaining additional financing.
Future Sources of Revenue
As of the date of this filing, we have completed several distribution agreements
and trial sales that could generate future revenues. While we anticipate
significant revenues from these agreements and others that we will complete in
the future, there can be no guarantees these revenues will be realized. Should
the contracts be cancelled or if our customers do not generate revenues
utilizing our products, our future expected revenues could be adversely
affected. In June, a major customer effectively cancelled a purchase order for
our Starpoint product destined for the Korean market. Vianet expects that future
sales will be made to this same customer although no assurances can be given
that this will occur.
Summary
As of August 10, 2000 our cash balances amounted to approximately $3,400,000.
Our best estimate is that we have sufficient cash to fund our operations for
five months assuming that no revenues are generated and commensurate expense
reductions are made. After this period we may require additional funds unless we
generate revenues to fund our expenses.
We have no current arrangements in place with respect to financing other than
those described above. We are currently seeking additional financing
arrangements to provide the additional capital in order to fund our current
operations, expand our scope of operations and our business strategy. Our
management believes that upon full implementation of our 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 our expected
revenues will be realized at sufficient levels and profitability to fund our
operations without additional capital. Such inability could have a materially
adverse effect on our 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.
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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
The Company's Annual Meeting of Shareholders was held
on June 1, 2000 in Dallas, Texas. The Company's shareholders voted on,
and approved, the following six items:
1. The Company's shareholders elected the following six
(6) directors to serve until the 2001 Annual Meeting.
The result of the vote was as follows:
MEMBER FOR AGAINST ABSTENTIONS
------ --- ------- -----------
Jeremy T.G. Posner 12,482,516 - 171,416
Peter Leighton 12,482,516 - 171,416
Robert H. Bailey 12,469,534 - 184,398
Darrell J. Elliott 12,469,534 - 184,398
Timothy P. Sullivan 12,459,534 - 194,398
F. Paul Whitlock 12,469,534 - 184,398
2. The Company's shareholders approved the adoption of
a classified board of directors with staggered terms.
The result of the vote was as follows:
For 12,624,632
Against 22,000
Abstentions 7,300
3. The Company's shareholders approved an amendment to
the Company's Articles of Incorporation to authorize a class of
preferred stock to be designated by the Board of Directors.
The result of the vote was as follows:
For 12,462,910
Against 186,622
Abstentions 4,400
4. The Company's shareholders approved the Company's
1999 Employee Stock Option Plan and the reservation of up to 5,000,000
shares of Common Stock for issuance thereunder.
The result of the vote was as follows:
For 12,413,147
Against 236,185
Abstentions 4,600
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<PAGE>
5. The Company's shareholders approved a change in the
state of incorporation of the Company from the state of Nevada to the
state of Delaware. The result of the vote was as follows:
For 12,646,706
Against 26
Abstentions 7,200
6. The shareholders ratified the appointment of Edward
A. Isaacs & Company LLP as the Corporation's independent auditors for
the fiscal year ending December 31, 2000.
The result of the balloting was as follows:
For 12,467,173
Against 183,659
Abstentions 3,100
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
None.
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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)
/S/ Vincent Santivasci
Date: August 11, 2000 _____________________________
Vincent L. Santivasci
Chief Financial Officer
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