<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 SEPTEMBER 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.)
6509 Windcrest Drive, Suite 160
Plano, TX 75024
(Address of principal executive offices, zip code)
(972) 543-2700
(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 24,901,988 shares of the registrant's Common Stock, par
value $.001 per share, outstanding on November 20, 2000.
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VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part 1 Financial Information
------
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations for the three and nine months ended September
30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and
1999 (Unaudited) 5-6
Notes to Consolidated Financial Statements (Unaudited) 7-11
Item 2 Management's Discussion and Analysis 12-18
Part II Other Information 19
-------
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 20
</TABLE>
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<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31,
2000 1999
ASSETS (UNAUDITED)
----------------------- -------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,787,471 $ 214,639
Accounts receivable, net of allowance of $58,245 in 2000 14,616 93,955
Receivables from related parties 412,067 142,415
Inventory 175,508 -
Prepaids and other current assets 100,293 75,913
-------------- --------------
Total Current Assets 2,489,955 526,922
-------------- --------------
Property and Equipment, less accumulated depreciation
of $696,683 in 2000 and $439,465 in 1999 863,251 274,117
-------------- --------------
Other Assets:
Intangibles arising from acquisitions, net of accumulated
amortization of $2,055,924 in 2000 and $340,484 in 1999 4,743,986 6,631,533
Technology licenses, net of accumulated amortization
of $237,487 in 2000 and $112,500 in 1999 749,060 874,047
Capitalized software development costs, net of accumulated
amortization of $24,169 in 2000 and nil in 1999 258,799 -
Notes receivable from Develcon Electronics Ltd., less
allowance of $2,386,386 in 2000 and $1,000,000 in 1999 - 624,828
Other 206,500 6,500
-------------- --------------
Total Other Assets 5,958,345 8,136,908
-------------- --------------
$ 9,311,551 $ 8,937,947
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 7,495 $ 27,799
Accounts payable and accruals 2,406,916 3,635,652
Convertible notes payable 555,000 513,750
Demand notes payable 50,000 50,000
Note payable - bank 1,000,000 -
Loans payable - related parties 86,595 2,184,387
-------------- --------------
Total Current Liabilities 4,106,006 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; 24,333,821 and 14,678,309 shares, issued
and outstanding, respectively 24,333 14,678
Subscription receivable (500) (500)
Additional paid-in capital 31,461,869 19,275,589
Warrants issued 10,717,050 5,001,211
Unearned fees (186,458) (745,830)
Accumulated deficit (37,935,749) (22,143,789)
-------------- --------------
Total Shareholders' Equity 4,080,545 1,401,359
-------------- --------------
$ 9,311,551 $ 8,937,947
============== ==============
</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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 14,166 $ - $ 647,858 $ -
Interest and other income 30,494 3,785 145,308 74,472
------------- ------------- -------------- -------------
44,660 3,785 793,166 74,472
------------- ------------- -------------- -------------
Costs and Expenses:
Cost of goods sold 7,306 - 164,862 -
Selling, general and administrative 3,036,992 1,587,005 8,570,139 2,087,586
Research and development 1,285,328 - 2,937,769 -
Provision for loss - Develcon - - 2,386,386 -
Depreciation and amortization 762,805 22,500 2,121,816 67,500
Interest 45,757 45,000 404,154 103,155
------------- ------------- -------------- -------------
5,138,188 1,654,505 16,585,126 2,258,241
------------- ------------- -------------- -------------
Loss From Continuing Operations (5,093,528) (1,650,720) (15,791,960) (2,183,769)
------------- ------------- -------------- -------------
Loss From Discontinued Operations - (1,494,528) - (1,949,147)
------------- ------------- -------------- -------------
Net Loss $ (5,093,528) $ (3,145,248) $ (15,791,960) $ (4,132,916)
============= ============= ============== =============
Loss per share - basic and diluted:
Continuing operations $ (0.22) $ (0.23) $ (0.77) $ (0.40)
Discontinued operations - (0.21) - (0.36)
------------- ------------- -------------- -------------
Loss per share - basic and diluted $ (0.22) $ (0.43) $ (0.77) $ (0.76)
============= ============= ============== =============
Weighted average number of shares outstanding 23,296,778 7,264,952 20,572,832 5,464,285
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statement
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<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Net Cash Used In Operating Activities $ (10,272,133) $ (1,773,873)
-------------- -------------
Investing Activities:
Loans to Infinop Holdings, Inc. - (724,000)
Loans to PSI Communications, Inc. (300,000)
Proceeds from sale of marketable securities - 739,955
Security deposits - (70,265)
Receivables from related parties (244,652) (201,084)
Deferred costs of Infinop Holdings, Inc. acquisition - (159,132)
Other acquisition costs - (291,870)
Capital expenditures (846,352) (24,414)
Capitized software development costs (282,968) -
-------------- -------------
Net Cash Used In Investing Activities (1,373,972) (1,030,810)
-------------- -------------
Financing Activities:
Issuance of common stock and warrants 13,190,458 555,203
Repayment of convertible notes payable - (200,000)
Proceeds from convertible notes payable - -
Subscriptions receivable - 990,000
Loan payable to related party 48,783 1,480,328
Other (20,304) 5,350
-------------- -------------
Net Cash Provided By Financing Activities 13,218,937 2,830,881
-------------- -------------
Effect of exchange rate changes - (1,073)
-------------- -------------
Net Increase In Cash And Cash Equivalents 1,572,832 25,125
Cash and Cash Equivalents, beginning 214,639 13,856
-------------- -------------
Cash and Cash Equivalents, end $ 1,787,471 $ 38,981
============== =============
Supplemental Disclosures of Cash Flow Information
Cash paid for interest $ 105,227 $ 81,104
============== =============
Cash paid for income taxes $ 46,502 $ -
============== =============
</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>
Nine Months Ended September 30,
---------------------------------------
2000 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 $ 1,488,125 $ -
================ ===============
Issuance of common stock for debt (Develcon creditors) $ - $ 921,878
================ ===============
Issuance of common stock for services $ 94,937 $ 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
-6-
<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., Vianet Access, Inc. and Visual Reach, 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. In addition, the Company founded Visual Reach, Inc. Visual Reach,
Inc., a wholly owned subsidiary, is a Media Service Provider within the
business-to-business markets focusing specifically on visual media services.
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
1,430,560 shares of common stock and 4,291,680 warrants to purchase common
stock.
Note receivable and expenses:
For the nine months ended September 30, 2000, the Company paid $97,750 to
WorldCorp Management Group, Inc. (WMG), an affiliated entity, for services
rendered.
WMG agreed to convert its 1,200,000 warrants at exercise prices of $3, $6, $9
and $12 into 450,000 shares of the Company's common stock and 506,666 warrants
at exercise prices of $1.375 and $1.7188 into 380,000 shares of the Company's
common stock prior to December 31, 2000. In connection with this agreement, the
Company advanced WMG $250,000 in July 2000. During the third quarter 2000, the
Company received payments totaling $75,000 from WMG. The remaining $175,000 is
included in Receivables from Related Parties on the accompanying September 30,
2000 balance sheet.
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 $374,165 were paid to these affiliated
entities in the nine months ended September 30, 2000.
-7-
<PAGE>
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
the inter-company 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. Software Development Costs:
Software development costs, which are required to be capitalized pursuant to
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed," are being
amortized on a straight-line basis over three years, the estimate useful life
of the software products. Amortization for the three and nine months ended
September 30, 2000 was $24,169.
5. 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 nine-months ended September 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 September 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 6). In addition, a contingency loss of $1,000,000 has been
recorded with respect to the bank debt guaranty and such liability (the "Bank
Debt") has been reflected as Note Payable
-8-
<PAGE>
- Bank in the accompanying balance sheet. Accordingly, the provision for loss
was nil and $2,386,386 for the three months and nine months ended September 30,
2000, respectively.
On November 9, 2000 the Company settled the contingent Bank
Debt by the issuance of 500,000 restricted common shares to Royal Bank Capital
Corp. (the "Bank") and is obligated to issue as many as 500,000 additional
shares of common stock in December 2001 in the event that the Company's shares
trade below $3 in the period prior to December 2001. In return, the Bank
assigned its entire interest in Develcon's indebtedness to the Bank to the
Company.
6. 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 approximately 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
were 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 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 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 approximately 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 Class A, 66,666 Class B and 66,666 Class C common stock purchase
warrants, which were 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 approximately 16.33 units to
accredited investors for net proceeds to Vianet of approximately $861,000. 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 addition, in March 2000, 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 received 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.
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<PAGE>
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 approximately 82.65
units to accredited investors for net proceeds to Vianet of approximately
$4,640,000. 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 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.
In June 2000, the Company issued 34,920 shares of common stock to shareholders
that participated in the Aegis and Donald private placements. In August 2000, an
additional 1,245,512 shares of common stock were issued to the shareholders that
participated in the Aegis and Donald private placements. The shares were issued
as consideration for delayed registration of the underlying securities purchased
in the private placements, as well as for adjustments required due to a decrease
in the market value of the Company's stock on the effective date of the
registration statement relating to the securities purchased in the private
placements. In addition, the exercise prices of the Class A, B and C common
stock purchase warrants have changed from $2.00, $2.50 and $3.00, respectively,
to $1.5312, $1.9140 and $2.2968, respectively.
In September 2000, the Company issued 4,000 shares of common stock to
shareholders in lieu of making interest payments on monies borrowed and repaid
during the year. In addition, the Company issued 44,496 shares of common stock
to shareholders pursuant to warrant agreements exercised during the period.
Also, the Company exercised its right, pursuant to the lease agreement for
office space in Texas, to issue 200,000 shares of the Company's common stock to
be held in escrow for up to five years in exchange for the $350,000 cash deposit
made at the lease commencement.
7. Leases:
In April 2000, the Company entered into a lease agreement for office space in
Plano, Texas. The term of the lease is sixty-two months. The lease provides for
rent, including operating expenses and taxes, of approximately $276,000 per
annum. A cash security deposit of $350,000 was paid in May 2000. In September
2000, the Company exercised its right, pursuant to the lease agreement, to issue
200,000 shares of the Company's common stock to be held in escrow for up to five
years in exchange for the release of the $350,000 cash security deposit made in
May.
8. Subsequent Events:
In October 2000, the Company proposed a tender offer to the holders of its class
A, B, and C common stock purchase warrants either currently outstanding or
issuable upon exercise of outstanding warrants (the "Tender Offer"). Pursuant to
the Tender offer the Company has proposed to:
o reduce the exercise price of 100% of the class A common stock purchase
warrants from $1.53 to $0.01, and to reduce the exercise price of 50%
of the class B common stock purchase warrants from $1.91 to $0.01
As consideration for the Tender offer, the Company is requiring the holders of
such securities to:
o exercise 100% of the reduced price class A and B common stock purchase
warrants, and cancel the remaining class B and C common stock purchase
warrants which they currently hold or one entitled to receive.
In addition, the terms of the Tender offer provide that 50% of the shares of
common stock to be issued upon the exercise of the reduced price class A and B
common stock purchase warrants shall be freely tradeable at such time as a
registration covering the sale of the common stock underlying the class A and B
warrants is declared effective by the
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<PAGE>
Securities and Exchange Commission and the 50% balance of such shares of common
stock shall be subject to a lock-up expiring on the earlier of (i) one hundred
twenty (120) days after the date of issuance of such shares, or (ii) sixty (60)
days after the effectiveness of any registration statement covering the resale
of any shares sold in a private placement offering conducted by the Issuer.
Additionally, in October 2000, the Company issued 68,167 shares of common stock
to a vendor in exchange for services.
-11-
<PAGE>
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
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.
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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 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., 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 June 2000, the Company founded a wholly owned subsidiary, Visual Reach, Inc.
("Visual Reach"). Visual Reach is a Media Service Provider within the
business-to-business markets focusing specifically on visual media services.
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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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 in its beta phase. Power Zoom is
certified on IBM's Netfinity product line, and is available for general release.
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.
Intellectual Property
Vianet has become aware of the fact that a potential competitor has received a
patent for the transmission of video e-mail messages with an encapsulated
player.
This competitive patent does not directly relate to Vianet's core compression
technology, for which the company is seeking its own patent protection. However,
there is a possibility that it might relate to the way in which the core
technology is incorporated into Vianet's specific software applications. The
Company's engineering staff have developed a technical approach which it
believes will ensure that there is clearly no encroachment on the third party
patent. This approach is currently under review by the Company's patent
attorneys.
Results of Operations
Three-month periods ended September 30, 2000 and September 30, 1999
Revenues
Revenues for the three-month period ended September 30, 2000 increased $40,875
to $44,660, as compared to interest and other income of $3,785 during the
three-month period ended September 30, 1999. $14,166 of this increase was
attributable to software licensing of our Lightning Strike Suite of Products in
the Korean market. The remaining $30,494 was attributable to royalty, interest
and other income.
Operating Expenses
Operating expenses for the three-month period ended September 30, 2000 increased
$2,742,621 to $4,329,626, as compared to operating expenses of $1,587,005 during
the three-month period ended September 30, 1999. The increase
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in operating expenses was attributable to a $7,306 increase in cost of goods
and services sold, a $1,449,987 increase in selling, general and administrative
expenses and a $1,285,328 increase in research and development costs. Selling,
general and administrative expenses include 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 72 employees as compared to less than 15 during the
three months ended September 30, 1999.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the three-month period ended
September 30, 2000 increased $740,305 to $762,805, as compared to amortization
expense of $22,500 during the three months period ended September 30, 1999. The
increase was attributable to amortization of intangibles arising from
acquisitions during 1999, depreciation of property and equipment as well as
amortization of technology licenses and capitalized assets.
Interest Expenses
Interest expense for the three-month period ended September 30, 2000 was
$45,757, as compared to $45,000 during the three-month period ended September
30, 1999. The year 2000 expense consisted of $32,007 relating to the convertible
notes payable and $13,750 interest on notes payable. The 1999 expense was
entirely interest on notes payable.
Nine-month periods ended September 30, 2000 and September 30, 1999
Revenues
Revenues for the nine-month period ended September 30, 2000 increased $718,694
to $793,166, as compared to interest and other income of $74,472 during the
nine-month period ended September 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. $404,166 was generated from software
licensing of our Lightning Strike Suite of Products in the Korean market. The
remaining $145,308 was attributable to interest and other income.
Operating Expenses
Operating expenses for the nine-month period ended September 30, 2000 increased
$9,585,184 to $11,672,770, as compared to operating expenses of $2,087,586
during the nine-month period ended September 30, 1999. The increase in operating
expenses was attributable to a $164,862 increase in cost of goods and services
sold, a $6,482,553 increase in selling, general and administrative expenses, a
$2,937,769 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 72 employees as compared to less than 15 during the nine-month period
ended September 30, 1999.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses for the nine-month period ended September
30, 2000 increased $2,054,316 to $2,121,816, as compared to amortization expense
of $67,500 during the nine-months period ended September 30, 999. The increase
was attributable to amortization of intangibles arising from acquisitions during
1999, depreciation of property and equipment as well as amortization of
technology licenses and capitalized assets.
Interest Expense and Other Financing Charges
Interest expense and other financing charges for the nine-month period ended
September 30, 2000 was $404,154, as compared to $103,155 during the nine-month
period ended September 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.
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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 nine month period ended September 30, 2000, the Company's cash position
increased by $1,572,832 from $214,639 to $1,787,471. The principal source of
cash was $13,190,458 that was generated from the Company's private placement
offerings. Other sources of cash include $25,000 from notes receivable and
$48,783 from related parties. $10,272,133 of these funds were used in operating
activities, $94,652 in loans to related parties, $846,352 in purchases of
capital assets during the period, $282,968 attributable to capitalized video
products, $175,000 in notes receivable, as well as, $20,304 in principal
payments of long-term debt.
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 were 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 1,430,560 shares of common stock and
4,291,680 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 were 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. 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.
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 received warrants to purchase an
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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.
o In June 2000, the Company issued 34,920 shares of common stock to
shareholders that participated in the Aegis and Donald private
placements. In August 2000, an additional 1,245,512 shares of common
stock were issued to the shareholders that participated in the Aegis
and Donald private placements. The shares were issued as consideration
for delayed registration of the underlying securities purchased in the
private placements, as well as for adjustments required due to a
decrease in the market value of the Company's stock on the effective
date of the registration statement relating to the securities
purchased in the private placements. In addition, the exercise prices
of the Class A, B and C common stock purchase warrants have changed
from $2.00, $2.50 and $3.00, respectively, to $1.5312, $1.9140 and
$2.2968, respectively.
o In September 2000, the Company issued 44,496 shares of common stock to
shareholders pursuant to warrant agreements exercised during the
period.
In addition to the foregoing, in October 2000, the Company proposed a tender
offer to the holders of its class A, B, and C common stock purchase warrants
either currently outstanding or issuable upon exercise of outstanding warrants
(the "Tender Offer"). Pursuant to the Tender offer the Company has proposed to:
o reduce the exercise price of 100% of the class A common stock purchase
warrants from $1.53 to $0.01, and to reduce the exercise price of 50%
of the class B common stock purchase warrants from $1.91 to $0.01
As consideration for the Tender offer, the Company is requiring the holders of
such securities to:
o exercise 100% of the reduced price class A and B common stock purchase
warrants, and cancel the remaining class B and C common stock purchase
warrants which they currently hold or one entitled to receive.
In addition, the terms of the Tender offer provide that 50% of the shares of
common stock to be issued upon the exercise of the reduced price class A and B
common stock purchase warrants shall be freely tradeable at such time as a
registration covering the sale of the common stock underlying the class A and B
warrants is declared effective by the Securities and Exchange Commission and the
50% balance of such shares of common stock shall be subject to a lock-up
expiring on the earlier of (i) one hundred twenty (120) days after the date of
issuance of such shares, or (ii) sixty (60) days after the effectiveness of any
registration statement covering the resale of any shares sold in a private
placement offering conducted by the Issuer.
If the Tender offer is accepted by all of the holders of the Company's class A,
B and C warrants, the Company shall receive an aggregate of approximately
$82,000 from the exercise of its class A and B warrants.
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<PAGE>
Potential Future Sources of Capital
In addition to the financings completed in the second quarter of 2000, we had a
total of 30,033,220 warrants and options outstanding as at the date of this
filing at an average issue price of $2.73. In the event that these warrants and
options are all exercised we would receive approximately $81,894,000 in cash
proceeds. Notwithstanding the foregoing, if the Tender offer is accepted by all
of the holders of the Company's class A, B and C warrants, the Company shall
receive an aggregate of approximately $82,000 from the exercise of its class A
and B warrants, and the aggregate cash proceeds of all warrants and options
currently outstanding will be reduced to approximately $50,268,442. 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 November 20, 2000, we are attempting to obtain additional equity and/or
debt financing in the amount of $10,000,000 or greater. We intend to complete
any equity financing by issuing securities at prices equal to the current market
value on the date of such financing. In addition, we anticipate that we will be
required to issue equity securities in consideration of obtaining any such debt
financing. However, no assurance can be given that we will be successful in
completing any financing. If the Company is unsuccessful in completing any
financing, we will not be able to fund our current expenses.
We have no current arrangements in place with respect to financing other than
those described above. We are currently seeking sources of additional financing
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
On October 10, 2000, the Company filed a report on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIANET TECHNOLOGIES, INC.
--------------------------
(Registrant)
/S/ Vincent Santivasci
Date: November 20, 2000 --------------------------
----------------------------------- Vincent L. Santivasci
Chief Accounting and Compliance
Officer
