<PAGE>
As filed with the Securities and Exchange Commission on February 14, 2000
Registration No. 33- [ ]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
VIANET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Nevada 7371 87-0434285
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
</TABLE>
--------------------
83 Mercer Street, 3rd Floor
New York, New York 10012
(212) 219-7680
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
--------------------
Peter Leighton
President and Chief Executive Officer
83 Mercer Street, 3rd Floor
New York, New York 10012
(212) 219-7680
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copies to:
Richard A. Friedman, Esq.
SICHENZIA, ROSS & FRIEDMAN LLP
135 West 50th Street, 20th Floor
New York, New York 10020
(212) 664-1200
--------------------
Approximate date of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Dollar Offering Aggregate Amount of
Class of Securities Amount to be Price Per Offering Registration
to be Registered Registered Security(1) Price(1) Fee
---------------- ---------- ----------- -------- ---
<S> <C> <C> <C> <C>
Common Stock, $.001
par value 5,720,500 $ 7.00(2) $40,043,500 $ 10,571.48
Common Stock, $.001
par value(3) 500,000 $ 0.01 5,000 1.32
Common Stock, $.001
par value(3) 393,914 $ 0.011 4,333.05 1.14
Common Stock, $.001
par value(3) 194,682 $ 0.0219 4,263.54 1.13
Common Stock, $.001
par value(3) 9,871 $ 0.2632 2,598.05 0.67
Common Stock, $.001
par value(3) 253,333 $ 1.10 278,666.30 73.57
Common Stock, $.001
par value(3) 253,333 $ 1.375 348,332.87 91.96
Common Stock, $.001
par value(3) 253,334 $ 1.7188 435,430.00 114.95
Common Stock, $.001
par value(3) 342,145 $ 1.50 513,217 135.49
Common Stock, $.001
par value(3) 3,807,548 $ 2.00 7,615,096 2,010.39
Common Stock, $.001
par value(3) 3,807,548 $ 2.50 9,518,870 2,512.98
Common Stock, $.001
par value(3) 4,257,548 $ 3.00 12,772,644 3,371.98
Common Stock, $.001
par value(3) 325,000 $ 4.00 1,300,000 343.20
Common Stock, $.001
par value(3) 82,520 $ 5.00 412,600 108.93
Common Stock, $.001
par value(3) 150,000 $ 6.00 900,000 237.60
-------------- ------------
Totals 74,154,550.81 $ 19,576.79
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(d) under the Securities Act of 1933.
(3) Issuable upon exercise of options, together with such indeterminate number
of securities as may be issuable by reason of anti-dilution provisions
contained therein.
----------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Preliminary Prospectus Subject to Completion, Dated February 14, 2000
VIANET TECHNOLOGIES, INC.
5,720,500 Shares of Common Stock
and
14,630,776 Shares of Common Stock
Issuable Upon Exercise of
Common Stock Purchase Warrants
<TABLE>
<CAPTION>
Vianet Technologies, Inc.: The Offering:
<S> <C>
o Vianet develops, manufactures and sells o This prospectus relates to the possible
computer networking products, electronic sale, from time to time, by certain
communications technologies and value stockholders, the "selling stockholders"
added services. of Vianet of up to 5,720,000 shares of
common stock, and 14,630,776 shares of
common stock underlying common stock
purchase warrants.
o 83 Mercer Street, 3rd Floor o There is no underwriter or coordinating
New York, New York 10012 broker acting in connection with the
(212) 219-7680 offering of common shares by the selling
stockholders.
o NASD OTC Electronic Bulletin Board o Vianet will not receive any proceeds
Symbol: VTNK from sales by the selling stockholders,
except when warrantholders choose to
exercise their warrants, in which case
Vianet will receive the exercise price
of the warrants. See "Plan of
Distribution" for further details
concerning the possible sale of these
shares.
</TABLE>
--------------------------------------------------
Your investment in our common stock involves a high degree of risk. Before
investing in our common stock, you should consider carefully the risks described
under "Risk Factors" beginning on page 6.
--------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved our common stock, or determined that this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
--------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements that appear elsewhere in this prospectus. This summary is not
complete and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus carefully,
including the risk factors and financial statements.
References in this prospectus to "Vianet," "We," "Our," and "Us," refer to
Vianet Technologies, Inc., a Nevada corporation, together with its subsidiaries
and their predecessors.
VIANET TECHNOLOGIES, INC.
Our Business
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.
Our Market
Our principal target markets are Internet service providers and
E-commerce enterprises seeking to differentiate themselves from competitors.
Consequently, we believe that our markets are inextricably tied to the progress
and development of the Internet itself. Statistics indicate that this growth is
currently extraordinary, and that it appears to be continuing. We believe that
this tremendous growth will require a similar growth in software and hardware to
support the systems used by Internet service providers, E-commerce businesses
and individual end users, as well as tools to more efficiently communicate over
these systems. We feel our products will fill this role for Internet service
providers, E-commerce enterprises and end-users alike.
2
<PAGE>
Internet , E-commerce and Value Added Services
Our data compression technology provides the foundation for our
Internet, E-commerce and value added services sales. We believe that our
products, by utilizing wavelet technology, provide flexible tools for the
following applications:
o E-retail zooming;
o real time streaming video;
o IP video conferencing;
o video mail;
o image compression; and
o multimedia communication/storage value added services.
We also believe that these advanced differentiators have great sales
potential in the burgeoning Internet, E-commerce and value added services
marketplaces.
Network Access
Our products and services provide the foundation for our network access
sales. We intend to focus on Inter-networking companies seeking bandwidth
expansion, high throughput communications and system expansion capability. In
addition, we will continue to service public networks that require high
performance operations and infrastructure expansion.
Our Market Opportunity
As the Internet continues to develop as a communications and business
tool, we believe that both business and home Internet users will adopt enhanced
services that require additional bandwidth and web functionality. We intend to
serve these market segments by providing networking and data compression
technology, as well as value added services to provide our customers with the
competitive edge they need. We believe our products will enable communications
across broadband networks that efficiently combine voice, data, graphics and
video across geographic locations with high throughput, protocol flexibility,
and system expandability.
Our Growth Strategy
Our objective is to become a leading provider of enabling technology
and applications that allow customers to capitalize on the Internet's rapid
growth as a commercial forum. We intend to utilize our broad market position,
advanced technology, and ability to respond quickly to market changes and become
a leading supplier of integrated voice, video and data communication products
for network access, value-added services, and E-commerce applications.
Our offices are located at 83 Mercer Street, New York, New York 10012;
our telephone number is (212)219-7680.
3
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common stock offered by the
Selling Shareholders........... 5,720,500 shares of common stock and 14,630,776 shares of common stock
underlying common stock purchase warrants.
Common stock outstanding............ 16,658,576 shares.
Use of Proceeds..................... Vianet will not receive any proceeds form the sale of securities by the selling
stockholders, although it could realize as much as $29,812,861.81 if all of the
common stock purchase warrants being registered hereby are exercised. The
proceeds from the exercise of the warrants will be used for working capital and
general corporate purposes.
Risk factors........................ Investing in these securities involves a high degree of risk and immediate
substantial dilution of your investment. As an investor, you should be able to
bear a complete loss of your investment. See "Risk Factors" for a more detailed
discussion.
NASD OTC Electronic Bulletin
Board Symbol................... VTNK
</TABLE>
The 16,658,576 shares of common stock to be outstanding excludes:
o 2,000,000 shares of common stock reserved for issuance pursuant to our
Stock Option Plan.
o 11,422,644 shares of common stock issuable upon the exercise of all
class A, B, and C warrants as well as Placement Agent Warrants, all of
which are currently exercisable.
o 5,670,482 shares of common stock issuable upon the exercise of
additional warrants and options all of which are currently
exercisable.
o 177,316 shares of common stock issuable upon the conversion of
debentures.
Our trading symbol does not imply that a liquid and active market for
our securities will be available or sustained upon completion of this offering.
4
<PAGE>
Summary Financial Information
The information set forth below for the period from March 20, 1998
(Inception) to December 31, 1998 and for the nine months ended September 30,
1999 and 1998 are derived from and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto and other financial information, appearing elsewhere in this
registration statement. The summary financial data set forth below for the
interim periods ended September 30, 1999 and 1998 has been prepared from our
books and records and reflects, in Management's opinion, all adjustments
necessary for a fair presentation of our financial position, results of
operations, and cash flows, as at the periods indicated therein. The selected
interim financial data presented below do not necessarily indicate the operating
results or performance of the Company for the full year.
<TABLE>
<CAPTION>
Nine Months
Ended
Period Ended September 30, Nine Months Ended
March 20, 1998 (Inception) 1998 September 30, 1999
-December 31, 1998 (Unaudited) (Unaudited)
------------------------------- --------------- -----------------------------
Historical Pro Forma Historical Historical Pro Forma
(1) (1)
------------- -------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating Revenues $ - $ 916,733 $ - $ - $ 768,553
Operating Loss (558,198) (2,102,778) (399,732) (1,934,471)
(3,574,239)
Loss from Continuing Operations (491,857) (1,920,668) (356,149) (1,824,541) (3,354,634)
Loss from Discontinued - - - (2,308,375) -
Operations
Net Loss (491,857) (1,920,668) (356,149) (4,132,916) (3,354,634)
Basic and Diluted Net Loss Per
Common Share:
Continuing Operations (0.35) (0.26) (0.25) (0.27) (0.35)
Discontinued Operations - - - (0.35) -
Net Loss $(0.35) $(0.26) $(0.25) $(0.62) $(0.35)
Weighted average common shares
outstanding 1,400,000 7,392,884 1,400,000 6,646,293 9,480,919
September 30, 1999
----------------------------------------------------------
December 31, Historical Pro Forma Pro Forma
1998 (1) As Adjusted
Historical (2)
--------------- -------------------- --------------- ---------------
Balance Sheet Data:
Working capital (deficit) $(2,478,532) $(3,331,458) $(4,472,350) $ 73,989
Net Assets of Discontinued Operations - 5,726,577 - -
Total assets 2,682,799 1,492,910 4,411,194 4,411,194
Long-term debt - - 15,796 15,796
Convertible debentures (non current) - - 1,125,000 1,125,000
Shareholders' equity (deficit) (478,857) 3,944,751 (1,465,477) 3,080,862
</TABLE>
(1) Gives effect to the acquisition of Infinop and the disposition of Develcon.
(2) Gives effect to issuance of 3,465,403 shares of common stock at $1.50 in
private placement offerings completed in February 2000. The net proceeds
amounting to approximately $4,546,339 were used to reduce current
obligations. The placement included the issuance of 3,465,403 each of Class
A, Class B and Class C warrants at $2.00, $2.50 and $3.00, as well as
placement agent warrants of 342,145 at $1.50.
5
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of
the other information set forth in this prospectus before deciding to invest in
shares of our common stock. Some of the following risks relate principally to
our business in general and the industry in which we operate. Other risks relate
principally to the securities markets and ownership of our stock. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks that generally apply to publicly traded companies, that are not
yet identified or that we currently think are immaterial, may also impair our
business operations and adversely affect our business.
If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be
materially adversely affected. In such a case, the trading price of our common
stock could decline, and you may lose all or part of you investment.
Our Limited Operating History Makes it Difficult For You to Evaluate
Our Business and Prospects
We have only been engaged in our current and proposed business
operations since March 1998. As a result, we have only a limited operating
history upon which you may evaluate our proposed business and prospects. Our
proposed business operations will be subject to numerous risks associated with
early stage enterprises generally and the development, manufacture, and sale of
enterprise networking products specifically. These risks, expenses and
difficulties apply particularly to us because the markets for data compression
technology and computer networking products are new and rapidly evolving.
We Have a History of Losses and We May Never Achieve Profitability
We had a consolidated net loss of $4,132,916 for the nine months ended
September 30, 1999 and a net loss of $491,857 for the year ended December 31,
1998. We expect to continue to incur significant operating losses and to
generate negative cash flow from operating activities during the foreseeable
future as a result of the implementation and operation of our business plan and
from increased marketing expenses as we attempt to expand our customer base.
There can be no assurance that we will achieve or sustain profitability or
positive cash flow from operating activities in the future. If we cannot achieve
operating profitability or positive cash flow from operating activities, we may
not be able to meet our working capital requirements or debt service.
We Are Dependent upon the Continued Availability of Adequate Financing
to Fund Our Operations and Expand Our Business
We have historically funded our business and operations through equity
and debt financings. We do not presently have adequate cash from operations or
financing activities to meet our long-term needs. In order to meet our cash
needs to fund our operations, we must either generate cash from operations or
obtain additional financing. In the event that we are unable to generate
sufficient cash or obtain additional financing, we may be unable to pay our
obligations as they come due or implement our plans to expand our operations. As
a result, our business, financial condition and results of operations may be
materially adversely affected.
We may not be able to obtain the financing and capital required to
maintain and grow our business
As a result of our historical financial condition, our independent
certified public accountants issued a report on our financial statements as of
June 30, 1999 and for the six months then ended, which stated that we have
sustained significant operating losses, are unable to pay our suppliers within
normal trade terms and have a significant working capital deficiency. Further,
as of June 30, 1999, we were in default of certain debt obligations and related
covenants, including non-payment of principal and interest on our debt, which
allows our lenders to demand repayment of existing debt. These factors raised
substantial doubt about our ability to continue as a going concern as at June
30, 1999.
6
<PAGE>
In December 1999 we sold Develcon, and in February 2000 we completed an
equity financing in which we raised an aggregate of approximately $4,563,339 net
of offering costs. As a result of these transactions, we are no longer in
default of any debt. However, we may require substantial additional funds in the
future, and there can be no assurance that the our future financial statements
will not include a similar explanatory paragraph if we are unable to raise
sufficient funds or generate sufficient cash flow from operations to cover the
cost of our operations. The existence of the explanatory paragraph may
materially adversely affect our relationship with prospective lenders, customers
and suppliers, and therefore could have a material adverse effect on our
business, financial condition and results of operations.
We may have difficulty developing and managing our expanding business
operations
Our ability to integrate our interests successfully depends upon, among
other things, our ability to bring to market technologies that are currently in
the development stage coupled with our ability to attract sufficient capital
financing to sustain this process. In addition, growth in the scope of our
business operations would require the expansion of our management, financial and
accounting resources, with consequential demands on the need for qualified
personnel. Our need to manage our growth successfully will require us to
implement appropriate operational, financial and management information systems
and controls. Failure to make such a transition to a larger scale enterprise
would have a material adverse effect on our business, financial condition and
results of operations.
Our Quarterly Financial Results May Fluctuate Significantly
Our quarterly revenues and operating results may vary significantly in
the future due to a number of factors, including:
o the timing and amount of orders for our products and services,
particularly large orders from our key resellers, OEMs and other
significant customers;
o unexpected product returns or the cancellation or rescheduling of
significant orders;
o our ability to develop, introduce, ship and support new products
and product enhancements and manage product transitions;
o announcements and new product introductions by our competitors;
o the expected rapid erosion of the average selling prices of our
products;
o our ability to achieve required cost reductions;
o our ability to obtain sufficient supplies of sole or limited
source components for our products;
o unfavorable changes in the prices of the components we purchase;
o our ability to attain and maintain production volumes and quality
levels for our products;
o the mix of products sold and the mix of distribution channels
through which they are sold;
o costs relating to possible acquisitions and integration of
technologies or businesses; and
o the Internet access market conditions and economic conditions
generally.
7
<PAGE>
We plan to significantly increase our operating expenses to expand our
sales and marketing activities, broaden our customer support capabilities,
develop new distribution channels, fund increased levels of research and
development and build our operational infrastructure. We base our operating
expenses on anticipated revenues and trends, and a high percentage of our
expenses are fixed in the short term. As a result, any delay in generating or
recognizing revenue could cause significant variations in our operating results
and could result in substantial operating losses. Orders at the beginning of
each quarter typically do not equal expected revenue for that quarter and are
generally cancelable at any time. Accordingly, we depend upon obtaining orders
in a quarter for shipment in that quarter to achieve our revenue objectives. In
addition, the timing of product releases, purchase orders and product
availability could result in significant product shipments at the end of a
fiscal quarter. Failure to ship such products by the end of a quarter may
adversely affect our operating results. Furthermore, our customer agreements
typically provide that the customer may delay scheduled delivery dates and
cancel orders within specified time frames without significant penalty.
Due to the foregoing factors, we believe that period-to-period
comparisons of our operating results cannot be relied upon as an indicator of
our future performance. It is likely that in some future quarter, our operating
results may be below the expectations of public market analysts or investors. If
this occurs, the price of our common stock would likely decrease.
We face Intense Competition in the Internet Access Equipment Market
from Larger and more well-established companies and we may not be able to
effectively compete with these companies
The market for Internet access equipment is dominated by a few large
companies, particularly Bay Networks, Cabletron Systems, Cisco Systems and 3Com.
We expect to face increased competition, particularly price competition, from
these and other equipment and technology providers. These vendors may develop
products with functionality similar to our's or provide alternative access
solutions. In addition, our supplier may compete with us with their current
products or products they may develop, and with the products they purchase from
us.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger customer base,
than us. As a result, these competitors are able to devote greater resources to
the development, promotion, sale and support of their products. In addition,
competitors with a large customer base may have a significant competitive
advantage over us.
Because of the intense competition within the Internet access industry,
the market is subject to frequent product introductions with improved
price/performance characteristics, significant price reductions, rapid
technological change and continued emergence of new industry standards. It is
also common in the Internet access industry for competitors to acquire other
companies as a means of introducing new products or emerging technologies. If a
new technology or product emerges that displaces our product lines, competitors
that have large market capitalizations or cash reserves would be better
positioned than us to acquire such new technology or product. Any failure by us
to effectively introduce new products and enhancements on a timely basis would
materially adversely affect our business, operating results and financial
condition.
Our Market is Subject to Rapid Technological Change, and If We Do Not
Introduce New Products in a Timely Manner Our Products May Become Obsolete
The Internet access equipment market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The introduction of new products,
market acceptance of products based on new or alternative technologies, or the
emergence of new industry standards, could render our existing products
obsolete. We cannot assure you that our technological approach will achieve
broad market acceptance or that other technologies or devices will not supplant
our approach. In addition, when we announce new products or product enhancements
that have the potential to replace or shorten the life cycle of our existing
products, customers may defer purchasing our existing products. These actions
could materially adversely affect our operating results by decreasing sales,
increasing our inventory levels of older products and exposing us to greater
risk of product obsolescence. To remain competitive, we need to introduce
products in a timely manner that incorporate or are compatible with these new
technologies as they emerge.
8
<PAGE>
We are dependent upon the Market Acceptance of Our Technology
Much of the technology developed and acquired by us, particularly
wavelet compression technology is based upon recent advances in technology and
there can be no assurance that this technology will gain broad market
acceptance. Systems integrators, manufacturing partners and other customers may
not adopt our products unless they determine, based on experience, testing and
other factors, that our products are superior alternatives to other available
products. To date, wavelet technology has only been demonstrated in and utilized
by a limited number of applications. An inability to sell commercial quantities
of products using wavelet technology would have a material adverse effect on our
business, financial condition and results of operations. Furthermore, shifts in
market acceptance of our products' performance, cost effectiveness, or our sales
methods could materially adversely affect our business, operating results and
financial condition.
We Expect the Average Selling Prices of Our Products to Erode Rapidly,
Which May Impact Gross Margins Negatively
The Internet access equipment industry has experienced rapid erosion of
average selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Our failure to develop and introduce new products
and product enhancements on a timely basis while reducing product costs would
materially adversely affect our business, operating results and financial
condition.
Our Products Have a Lengthy Sales Cycle
The timing of our sales revenue is difficult to predict because of our
reliance on indirect sales channels and the length and variability of our sales
cycle. Some of our products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise regarding
its communications infrastructure. Accordingly, the purchase of some of our
products typically involve lengthy internal procedures associated with the
evaluation, testing, implementation and acceptance of new technologies,
typically ranging from three months to longer than a year. While our customers
are evaluating our products and before they may place an order with us, we may
incur substantial sales and marketing expenses and expend significant management
effort. Consequently, failure to realize forecasted sales from a specific
customer in a fiscal quarter could materially adversely affect our operating
results for that quarter.
Our Products Must Comply with Evolving Industry Standards and
Government Regulations
In the United States, our products must comply with various
regulations and standards defined by the Federal Communications Commission and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications authorities
in various countries as well as with recommendations of the International
Telecommunication Union. Failure to comply with existing or evolving industry
standards or to obtain timely domestic or foreign regulatory approvals or
certificates could materially adversely affect our business, operating results
and financial condition.
9
<PAGE>
Undetected Software or Hardware Errors Could Have a Material Adverse
Effect on Us
Network products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. We expect that
such errors will be found from time to time in new or enhanced products after
commencement of commercial shipments. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems. The occurrence of hardware and software errors, whether
caused by our product or another vendor's products, could result in the delay or
loss of market acceptance of our products, and any necessary revisions may
result in the incurrence of significant expenses. The occurrence of any such
problems would likely have a material adverse effect on our business, operating
results and financial condition.
We May Not Adequately Protect Our Intellectual Property, and Our
Products May Infringe on the Intellectual Property Rights of Third Parties
We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect its intellectual property
rights. We have filed a U.S. patent application relating to compression
technology. There can be no assurance that this application will be approved,
that any issued patent will protect our intellectual property or that we will
not be challenged by third parties. Furthermore, there can be no assurance that
others will not independently develop similar or competing technology or design
around any patent that we may be issued.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
The Internet access industry is characterized by the existence of a
large number of patents and frequent claims and related litigation regarding
patent and other intellectual property rights. From time to time, third parties
may assert exclusive patent, copyright, trademark and other intellectual
property rights to technologies that are important to us. Although we have not
been party to any claims alleging infringement of intellectual property rights,
we cannot assure you that we will not be subject to such claims in the future.
In addition, there can be no assurance that third parties will not assert claims
or initiate litigation against us or our manufacturers, suppliers or customers
with respect to existing or future products. Any such claims, with or without
merit, could result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. In the event of a
successful claim of infringement and our failure or inability to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, our business, operating results and financial condition could be
materially adversely affected.
10
<PAGE>
We Need to Expand Our Sales and Support Organizations to Increase
Market Acceptance of Our Products
We have recently expanded our sales force and plan to hire additional
sales personnel. Competition for qualified sales personnel is intense, and we
might not be able to hire the kind and number of sales personnel we are
targeting. In addition, we currently have a small customer service and support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. The employment market for customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of customer service and support
personnel we are targeting. Our inability to hire qualified sales, customer
service and support personnel may materially adversely affect our business,
operating results and financial condition.
We Depend on Key Personnel Who May Leave us at any Time
Our success substantially depends on the continued employment of our
executive officers and key employees, particularly, Peter Leighton, our chairman
of the board and chief executive officer. The loss of services of Mr. Leighton
or any of our other executive officers or key employees could harm our business.
Limitations on Director Liability
Our Certificate of Incorporation provides, pursuant to Nevada law, that
our directors shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of us against any
director. In addition, our By-Laws provide for indemnification of directors and
officers to the fullest extent permitted by Nevada law.
Potential Change to OTC Bulletin Board Listing Qualifications May
Result in De-listing of our Common Stock from the OTC Bulletin Board or May
severely Limit the trading Activity of our Securities
NASD Regulation, Inc. recently introduced a rule limiting quotations on
the OTC Bulletin Board to the securities of issuers that make current filings
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"). In order
to comply with such rule, we intend to file registration statement with the
Securities and Exchange Commission in order to become a "reporting company"
under the Securities Exchange Act of 1934, as amended. If we are unable to
complete the registration process prior to the end of March 2000, our Common
Stock may become de-listed from the OTC Bulletin Board. NASD Regulation, Inc.
has also proposed rules that would require members to review current issuer
financial statements prior to recommending a transaction to a customer in an OTC
Bulletin Board security and to deliver a disclosure statement to a customer
prior to an initial purchase of an OTC equity security. Such proposed rule
changes may severely limit the trading activity of our securities.
We are Currently Unable to Have Our Common Shares Listed on Nasdaq
Stock Market
Our Common Shares are currently traded on the OTCBB. In order for
Common Shares to be listed on the Nasdaq SmallCap Market, we will be required to
have, among other things, all of the following:
o either net tangible assets (i.e., assets, net of goodwill, less
liabilities) of $4,000,000, or market capitalization of
$50,000,000, or net income in latest fiscal year or two of the
last three fiscal years of $750,000;
o minimum market value of public float of $5,000,000; and
o minimum bid price of $4.00 per share.
Nasdaq also requires that we have at least two independent directors
and an Audit Committee, a majority of whose members must also be independent
directors.
No assurances can be given that we will be able to obtain a Nasdaq
listing.
11
<PAGE>
The market for our securities may not be sustained
Prior to this offering our common stock has been quoted on the OTCBB, a
regulated quotation service that captures and displays real-time quotes and/or
indications of interest in securities not listed on Nasdaq or any U.S. exchange.
Although our securities are currently eligible for quotation on the OTCBB, there
can be no assurance that an active market for the securities will be sustained.
If a trading market is not maintained, holders of our common stock may
experience difficulty in reselling such common stock or may be unable to resell
them at all. Any such market may be discontinued at any time. In addition, there
is no assurance that the price of the common stock in the market will be equal
to or greater than the offering price hereof.
"Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Stock, which may affect the ability of holders of our common
stock to sell their shares
The Securities and Exchange Commission (the "SEC") has adopted
regulations that generally define "penny stock" to be any equity security that
has a market price of less than $5.00 per share. Our common shares may be
subject to rules that impose additional sales practice requirements should the
price of our common shares fall below $5.00 per share. For transactions covered
by these rules, the broker-dealer must make a special suitability determination
for the purchase of the common shares and must have received the purchaser's
written consent to the transaction prior to the purchase. The "penny stock"
rules also require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose:
o the commission payable to both the broker-dealer and the
registered representative,
o current quotations for the securities, and
o if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control
over the market.
Finally, monthly statements must be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks.
These rules apply to sales by broker-dealers to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), unless our common shares trade above $5.00 per share.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common shares, and may affect the ability to sell the common shares
in the secondary market as well as the price at which such sales can be made.
Also, some brokerage firms will decide not to effect transactions in "penny
stocks" and it is unlikely that any bank or financial institution will accept
"penny stock" as collateral.
Effect of Issuance of Common Stock Upon Exercise Price of Our Warrants
We have an aggregate of approximately 16,658,576 shares of common stock
outstanding and 14,630,776 shares of common stock reserved for issuance upon
exercise of outstanding warrants. The exercise of the warrants and the sale of
the underlying shares of common stock (or even the potential of such exercise or
sale) may have a depressive effect on the market price of our securities.
Moreover, the terms upon which we will be able to obtain additional equity
capital may be adversely affected since the holders of outstanding warrants can
be expected to exercise them, to the extent they are able, at a time when we
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to we than those provided in the Warrants.
12
<PAGE>
We May Issue of Additional Securities in connection with Future
Acquisitions, which may have the effect of diluting the equity interest and
voting power of holders of our common stock
Our Board of Directors will have authority to issue further common
stock or other securities without the consent or vote of our shareholders. The
issuance of additional common stock by our management, whether in respect of a
transaction involving a business opportunity or otherwise, may have the effect
of further diluting the proportionate equity interest and voting power of
holders of common stock, including investors under this offering.
In addition, as part of our business strategy, we expect to review
acquisition prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We acquired Develcon in May 1999 and a
license for SPS technology in September 1998. In addition, we acquired Vianet
Labs (formerly known as Infinop Holdings, Inc.) and Vianet Access, in October
and December of this year, respectively. We may acquire other businesses,
products or technologies in the future. In the event of such future
acquisitions, we could:
o issue equity securities which would dilute current stockholders' percentage
ownership; o incur substantial debt; or o assume contingent liabilities.
Such actions by us could materially adversely affect our operating
results and/or the price of our common stock. Acquisitions also entail numerous
risks, including:
o difficulties in the assimilation of acquired operations, technologies or
products; o unanticipated costs associated with the acquisition; o diversion of
management's attention from other business concerns; o adverse effects on
existing business relationships with suppliers and customers; o risks associated
with entering markets in which we has no or limited prior experience; and o
potential loss of key employees of acquired organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our business,
operating results and financial condition.
13
<PAGE>
Risk of Loss Greater for Investors Pursuant to This Offering Than For
Present Owners of Shares
Most of the present owners of shares of our issued and outstanding
common stock have acquired a controlling interest in us at a cost substantially
less than that which the investors pursuant to this offering may purchase their
securities. Therefore, the investors pursuant to this offering will bear a
substantial portion of the risk of loss, while control of Vianet will remain in
the hands of our current management.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among other
things, our expansion and acquisition strategy, business development, use of
proceeds, projected capital expenditures, liquidity, and our development of
additional revenue sources. These statements may be found in the sections of
this Prospectus entitled "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in this Prospectus generally. The
forward-looking statements are based on our current expectations and are subject
to risks, uncertainties and assumptions, including those described in the "Risk
Factors" and under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." We base these forward-looking
statements on information currently available to us, and we assume no obligation
to update them. Our actual results may differ materially from the results
anticipated in these forward-looking statements, due to various factors,
including all of the risks discussed in "Risk Factors" and elsewhere in this
Prospectus.
14
<PAGE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. Those reports, proxy statements and other
information may be obtained:
o At the public reference room of the Commission, Room 1024 -
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549;
o At the public reference facilities at the Commission's
regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 or Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661;
o By writing to the Commission, Public Reference Section,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549;
o At the offices of The Nasdaq Stock Market, Reports Section,
1735 K Street, N.W., Washington, D.C. 20006; or
o From the Internet site maintained by the Commission at
http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding
issuers that file electronically with the Commission.
We have filed with the Commission a registration statement under the
Securities Act of 1933, as amended, with respect to the common stock offered
hereby. This prospectus, which is a part of the registration statement, does not
contain all the information set forth in, or annexed as exhibits to, such
registration statement, certain portions of which have been omitted pursuant to
rules and regulations of the Commission. For further information with respect to
Vianet and the common stock, reference is made to such registration statement,
including the exhibits thereto, copies of which may be inspected and copied at
the aforementioned facilities of the Commission. Copies of such registration
statement, including the exhibits, may be obtained from the Public Reference
Section of the Commission at the aforementioned address upon payment of the fee
prescribed by the Commission. Information regarding the operation of the
Commission's public reference facilities may be obtained by calling the SEC at
1-800-SEC-0330.
We intend to distribute to our stockholders annual reports containing
financial statements audited and reported upon by our independent public
accountants after the close of each fiscal year, and will make such other
periodic reports as we may determine to be appropriate or as may be required by
law. Our fiscal year ends December 31st of each year.
15
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of securities by the
selling stockholders. We intend to use the proceeds received from the exercise
of any common stock purchase warrants for working capital and general corporate
purposes. The maximum amount of proceeds that we could receive upon the exercise
of all common stock purchase warrants is $29,812,861.81. There can be no
assurance that any or all of the common stock purchase warrants will be
exercised and that Vianet will receive any proceeds therefrom. This is our best
estimate of the use of proceeds generated from the possible exercise of common
stock purchase warrants based on the current state of our business operations,
our current plans and current economic and industry conditions. Any changes in
the projected use of proceeds will be made at the sole discretion of our Board
of Directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Vianet as of
September 30, 1999 and Pro Forma Capitalization as of September 30, 1999 to give
effect to the acquisition of Infinop and the disposition of Develcon, and
adjusted Pro Forma Capitalization to give effect to the Private Placement
Offering of Common Stock completed in January 2000. This table should be read in
conjunction with our historical consolidated financial statements, including the
notes thereto, and our pro forma financial statements, including the notes
thereto, included elsewhere herein. See "Index to Financial Statements and Other
Financial Information."
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------------------
Actual Pro Forma (1) Pro Forma As
Adjusted (2)
----------------- ------------------- ------------------
<S> <C> <C> <C>
Long-Term Debt $ - $ 15,796 $ 15,796
----------------- ------------------- ------------------
Convertible debentures - noncurrent - 1,125,000 1,125,000
----------------- ------------------- ------------------
Shareholders' Equity:
Common Shares, $0.001 par value,
100,000,000 shares authorized, 9,140,886 shares
issued and outstanding (actual), 10,859,000 (shares
issued and outstanding (pro forma(1)), 14,324,403
(pro forma(2)) 9,141 10,859 14,324
Subscription receivable (500) (500) (500)
Additional Paid-In Capital 8,561,956 19,569,824 24,112,698
Accumulated Deficit (4,624,773) (21,044,587) (21,044,587)
Accumulated Comprehensive Income
(1,073) (1,073) (1,073)
----------------- ------------------- ------------------
Total Shareholders' Equity 3,944,751 (1,465,477) 3,080,862
================= =================== ==================
Total Capitalization $ 3,944,751 $ (324,681) $ 4,221,658
================= =================== ==================
</TABLE>
(1) Includes the proforma acquisition of Infinop and the disposition of
Develcon.
(2) Gives effect to issuance of 3,465,403 shares of common stock at $1.50 in
private placement offerings completed in February 2000. The net proceeds
amounting to approximately $4,546,339 were used to reduce current
obligations. The placement included the issuance of 3,465,403 each of Class
A, Class B and Class C warrants at $2.00, $2.50 and $3.00, as well as
placement agent warrants of 342,145 at $1.50.
17
<PAGE>
MARKET FOR SECURITIES
Prior to the consummation of the Vianet Merger, there was no trading
market for Vianet's common stock. Vianet's Common Shares, $0.001 par value per
share, are currently traded on the NASD OTC Electronic Bulletin Board (the
"Bulletin Board") under the symbol "VNTK."
The following table sets forth the high and low closing bid prices for
Vianet's Common Shares as reported by the Bulletin Board for the periods
indicated:
Closing Trading Prices
Month High ($) Low ($)
-------------------------------------------- ---------------
March, 1999 11.25 10.125
April, 1999 9.25 6.5
May, 1999 11.6875 7 .875
June, 1999 9.25 7.375
July, 1999 7.75 6.125
August, 1999 6.5625 5.4375
September, 1999 6.75 4.75
October, 1999 4.75 3
November, 1999 3.5625 1.25
December, 1999 4.4688 2
January, 2000 (1) 6.00 3.625
February,2000
---------------
(1) Through February 9, 2000.
On February 9, 2000, the closing sale price for our Common Shares, as
reported by the Bulletin Board, was $6.875 per share.
As of February 9, 2000, there were 16,658,576 shares of Common Stock
outstanding, there were approximately 950 registered holders of our Common
Stock.
18
<PAGE>
DIVIDEND POLICY
We have never paid any cash dividends on its capital stock and do not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. We intend to retain future earnings to fund ongoing operations and
future capital requirements of its business. Any future determination to pay
cash dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board deems relevant.
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the period from March
20, 1998 (Inception) to December 31, 1998 and for the nine months ended
September 30, 1999 and 1998 are derived from and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto and other financial information, appearing elsewhere in this
registration statement. The summary financial data set forth below for the
interim periods ended September 30, 1999 and 1998 has been prepared from our
books and records and reflects, in Management's opinion, all adjustments
necessary for a fair presentation of our financial position, results of
operations, and cash flows, as at the periods indicated therein. The selected
interim financial data presented below do not necessarily indicate the operating
results or performance of the Company for the full year.
<TABLE>
<CAPTION>
Nine Months
Ended
Period Ended September 30, Nine Months Ended
March 20, 1998 (Inception) 1998 September 30, 1999
-December 31, 1998 (Unaudited) (Unaudited)
------------------------------- --------------- -----------------------------
Historical Pro Forma Historical Historical Pro Forma
(1) (1)
------------- -------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating Revenues $ -- $ 916,733 $ -- $ -- $ 768,553
Operating Loss (558,198) (2,102,778) (399,732) (1,934,471)
(3,574,239)
Loss from Continuing Operations (491,857) (1,920,668) (356,149) (1,824,541) (3,354,634)
Loss from Discontinued -- -- -- (2,308,375) --
Operations
Net Loss (491,857) (1,920,668) (356,149) (4,132,916) (3,354,634)
Basic and Diluted Net Loss Per
Common Share:
Continuing Operations (0.35) (0.26) (0.25) (0.27) (0.35)
Discontinued Operations -- -- -- (0.35) --
Net Loss $ (0.35) $ (0.26) $ (0.25) $ (0.62) $ (0.35)
Weighted average common shares
outstanding 1,400,000 7,392,884 1,400,000 6,646,293 9,480,919
September 30, 1999
----------------------------------------------------------
December 31, Historical Pro Forma Pro Forma
1998 (1) As Adjusted
Historical (2)
--------------- -------------------- --------------- ---------------
Balance Sheet Data:
Working capital (deficit) $(2,478,532) $(3,331,458) $(4,472,350) $ 73,989
Net Assets of Discontinued Operations - 5,726,577 - -
Total assets 2,682,799 1,492,910 4,411,194 4,411,194
Long-term debt - - 15,796 15,796
Convertible debentures (non current) - - 1,125,000 1,125,000
Shareholders' equity (deficit) (478,857) 3,944,751 (1,465,477) 3,080,862
</TABLE>
(1) Gives effect to the acquisition of Infinop and the disposition of Develcon.
(2) Gives effect to issuance of 3,465,403 shares of common stock at $1.50 in
private placement offerings completed in February 2000. The net proceeds
amounting to approximately $4,546,339 were used to reduce current
obligations. The placement included the issuance of 3,465,403 each of Class
A, Class B and Class C warrants at $2.00, $2.50 and $3.00, as well as
placement agent warrants of 342,145 at $1.50.
20
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this registration statement are not purely
historical statements, but rather include what we believe are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
These include statements about our expectations, beliefs, intentions or
strategies for the future, which are indicated by words or phrases such as
"anticipate," "expect," "intend," "plan," "will," "we believe," "the company
believes", "management believes" and similar words or phrases. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including factors set forth in
the following discussion and in the discussions under "Risk Factors" and
"Business." Our actual results could differ materially from results anticipated
in these forward-looking statements. All forward-looking statements included in
this document are based on information available to us on the date hereof, and
we assume no obligation to update any such forward-looking statements.
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.
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").
21
<PAGE>
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., a Texas 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.
Results of Operations
The discussion of the proforma summary financial information below
should be read in conjunction with our historical financial statements and
should not be considered to be a discussion or a representation of actual
results that would have occurred if the transactions had occurred on the dates
indicated.
Period ended March 20, 1998 (inception) to December 31, 1998 - Historical
Results are for the reference period as previously reported. We had not
completed any of our acquisitions in this period although we had made a loan to
Develcon. For the twelve months ended December 31, 1998, we had no revenues, and
our operating expenses were $557,276 consisting primarily of legal and due
diligence costs, thereby resulting in an operating loss of $557,276 for the
period. Interest income was $66,341 earned on our loan to Develcon and cash
deposits and, together with other charges of $922, resulted in a net loss of
$491,857 or $0.35 per share for the twelve month period ended December 31, 1998.
Weighted average shares amounted to 1,400,000 representing the initial
shares issued to our founders all of whom were officers and/or directors of the
company.
22
<PAGE>
Period ended March 20, 1998 (inception) to December 31, 1998 - Pro Forma
Results are for the reference period restated as though we had acquired
Infinop as at March 20, 1998. Operating revenues, consisting primarily of
engineering fees charged by Infinop, amounted to $916,733. Selling, general and
administrative and other charges amounted to $1,537,570, research and
development costs totaled $969,597 and depreciation amounted to $415,584.
Interest income (primarily on our loan to Develcon) amounted to $182,110 and
interest expense (on Infinop's convertible debentures) to $96,760.
The net loss from operations amounted to $1,920,688 or $0.26 per share.
Weighted average shares outstanding amounted to 7,392,884 which includes the
proforma issuance of shares for the acquisition of Develcon and Infinop.
Nine months ended September 30, 1998 - Historical
Results are for reference period and reflect our operations prior to any of
our acquisitions. For the nine months ended September 30, 1998, we had no
revenues, and our operating expenses were $399,732 consisting primarily of legal
and due diligence costs, interest income was $43,583, thereby resulting in a net
loss of $356,149 or $0.25 per share for the period.
Weighted average shares amounted to 1,400,000 representing the initial
shares issued to our founders all of whom were officers and/or directors of the
company.
Nine months ended September 30, 1999 - Historical (Restated)
Results are for the reference period with the results of Develcon reflected
as a discontinued operation. For the nine months ended September 30, 1999, we
had no operating revenues, and our operating expenses were $1,934,471 consisting
primarily of legal and due diligence costs, thereby resulting in a loss of
$1,824,541 from continuing operations or $0.27 per share for the period.
Discontinued operations consisted of the operations of Develcon from May
17, 1999 to September 30, 1999 and amount to a loss of $2,308,375. Sales totaled
$1,912,243, cost of sales $1,106,118, selling, general and administrative
$1,338,294, research and development $786,556 , interest expense $174,386,
depreciation and amortization $465,148, loss on extinguishment of debt $352,875
and other income of $2,759. Due to our inability to access sufficient capital 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. Accordingly, the historical financial statements have been
restated to reflect Develcon as a discontinued operation.
Nine months ended September 30, 1999- Pro Forma
Results are for the reference period restated as though we had disposed of
Develcon and had acquired Infinop as at January 1, 1999. Operating revenues,
consisting primarily of engineering fees charged by Infinop, amounted to
$768,553. Selling, general and administrative and other charges amounted to
$2,686,437, research and development costs totaled $864,469 and depreciation
amounted to $529,677. Interest income (primarily on our loan to Develcon)
amounted to $219,605 and interest expense (on Infinop's convertible debentures)
to $196,041.
The net loss from operations amounted to $3,354,634 or $0.35 per share.
Weighted average shares outstanding amounted to 9,480,919 which includes the
proforma issuance of shares for the acquisition of Develcon and Infinop.
23
<PAGE>
Liquidity and Capital Resources
We have sustained our operations from the inception of our predecessor,
Vianet Technologies, Inc, a Delaware corporation (March 1998), primarily from
the sale of equity and borrowings. Specifically, we have completed the following
financings:
o In December 1998, Vianet Delaware sold 250,000 shares of Series A
convertible preferred stock for an aggregate of $1,000,000 in cash to
accredited investors. In December 1998, $10,000 was received for the
stock, the remaining subscription receivable outstanding, $990,000,
was paid subsequent to December 31, 1998. On March 23, 1999 the Series
A preferred stock was converted into common stock at a rate of four
for one. As a result, the Series A preferred shareholders received
1,000,000 shares of common stock of the Company;
o In July, 1999 we issued 100,000 common shares to certain non-US
investors for cash of $550,000;
o In September 1999, certain of Develcon's creditors agreed to exchange
an aggregate of $613,365 of accounts payable for a total of 215,051
shares of our common stock.
o In July 1999, we entered into a credit facility (the "Facility") with
an entity controlled by our President and Chief Executive Officer. The
Facility is in the amount of $3,000,000, of which approximately
$2,700,000 has been drawn down as of the date of this Registration
Statement. The Facility bears interest at 10% per annum and monthly
fees of $15,000. In addition, we issued Mr. Leighton's company 300,000
warrants exercisable at price of $3.00 to $5.00 in consideration for
the Facility. The Facility is secured by all of our major assets,
including the shares of Vianet Labs and Vianet Access, and is
repayable on March 31, 2000. Vianet currently does not have the funds
to repay the Facility and will not be able to repay the Facility
without raising additional capital. We intend to negotiate an
extension to the Facility but no assurances can be given that we will
be able to complete such an extension on terms acceptable to us
o In December 1999 and January 2000, we completed three closings of a
private placement offering, with Aegis Capital, Inc. as placement
agent, in which we sold an aggregate of 32.535 units for gross
proceeds to Vianet of approximately $3,250,000. The units consisted of
an aggregate of (1) 2,168,952 shares of common stock, and (2)
2,168,952 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.
o In December 1999 we sold our subsidiary, Develcon, thereby effectively
eliminating approximately $4,200,000 of debt.
We have guaranteed a term loan from Royal Bank of Canada ("RBCC") to
Develcon in the amount of CDN$1,500,000, which is due and payable in three
CDN$500,000 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.
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.
24
<PAGE>
Our best estimate is that we have sufficient cash to fund our
operations for six months. After this period we may require additional funds
unless we generate revenues to fund our expenses. Except for the existing
$3,000,000 Facility described above which is substantially drawn upon, we have
no other current arrangements in place with respect to financing. We are
currently seeking new financing arrangements to provide the necessary capital to
fund our operations and pursue our business strategy. There can be no assurances
that additional financing will be available on acceptable terms, if at all. If
additional financing arrangements are not obtained, we may be unable to fully
fund our operations, pursue our business strategy, take advantage of new
opportunities, develop or enhance our products, or respond to competitive
pressures and financial or marketing hurdles. Such inability could have a
materially adverse effect on 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.
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 any
expected revenues will be realized.
25
<PAGE>
HISTORY OF VIANET
Our business began as Vianet Technologies, Inc., a Delaware corporation
formed in March 1998 ("Vianet Delaware"). In March 1999, Vianet Delaware merged
with and into Radar Resources, Inc., a Nevada corporation ("Radar"). Radar was
incorporated in the state of Utah under the name Radar, Inc. n April 1986. In
December 1993, Radar reorganized as a Nevada corporation named Radar Resources,
Inc., retained the contractual obligations, shareholder rights and identity of
the original Utah corporation and dissolved the Utah corporation. From its
inception until March 1999, Radar had no business operations or history. Upon
completion of Vianet Delaware's merger with Radar, Radar changed its name to
Vianet Technologies, Inc ("Vianet") and began operating as our company.
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
subsequent on May 17, 1999.
Shortly thereafter, in October 1999, Vianet consummated a plan of
merger with Infinop Holdings, Inc., a Texas 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.
26
<PAGE>
BUSINESS
Overview
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.
Our data compression products are designed to utilize patented wavelet
compression techniques that allow for the delivery of high quality video,
multimedia content and data over the Internet with less expense, delay and
bandwidth usage. We believe that this technology allows us to provide our
customers with a competitive advantage by providing high quality desktop video
applications at high data transfer rates. We intend to utilize this technology
as the foundation for our value added services, Internet and E-commerce
business, and we expect this technology to serve as our main focus for future
expansion. Our objective is to become a leading provider of enabling technology
and applications that allow customers to capitalize on the Internet's rapid
growth as a commercial forum.
We also develop, manufacture and sell computer fiber optic networking
products, communications technologies. Our networking products use proprietary
technology as well as technology licensed from our former subsidiary, Develcon
Electronics, Ltd. These products enable efficient inter- and intra- networking
with high-throughput communications, and they provide a global customer base in
our targeted network access markets.
We believe that our combined product portfolio will allow us to excel
in the network access, Internet, E-commerce, and value added services market
segments. We intend to continue our development as a serious competitor in these
and other niche market segments in the burgeoning communications marketplace.
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. In addition, this technology is
flexible enough to be used in a variety of compression products for many types
of data. Our key products include the Lightning Strike suite of products that
include the following:
o LS Video Messenger - a product that enables users to send V-Mail,
which consist of the E-mailing of a video file;
o LS Video Interactive - a Video Conferencing product;
o LS Power Zoom - a product that allows a user to zoom and pan on still
images; and
o LS Video Stream - a streaming video product that allows users to view
video on demand.
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.
We intend to market these products to the Internet, E-Commerce and
value added services market segments in unique applications such as video mail,
video on demand streaming, real time streaming video and IP video conferencing.
We believe that these value added services afford customers a distinct
competitive edge by allowing high quality desktop video applications to be
delivered at high speeds.
27
<PAGE>
Networking and Communications Products
We also 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.
Industry Background
In the last several years, personal computers have become a mainstay in
the home and workplace. This growth has increased the need to share information
among users and has given rise to a rapidly expanding data networking and
communications industry.
Our data networking products supply multiprotocol information transport
platforms that manage and distribute voice, data and video streams across fiber
optic networks. These types of products are typically utilized by public
networks, telecommunications and cable companies, but are the future for all
business and home data, voice and video communication.
Our data compression products include hardware and software designed to
allow high quality transmission of data using less bandwidth. Data compression
techniques use mathematical and processing routines to reduce the amount of data
required to represent an image. In compression, the pixels of an image are
decorrelated from each other, coded using a mathematical set of values and
decoded back to the original image. Data compression products aim to rapidly
obtain maximum compression with minimum loss of data upon restoration. Efficient
data compression is increasingly important as transmissions include more still
and moving images. This is compounded in an E-commerce environment that is
dependant upon the detail of images and customers' ability to manipulate images
for a "virtual" shopping experience.
Our Strategy
We intend to develop a global company that focuses in three key areas
of public and private networks:
o Network Access;
o Value-added services, and
o E-Commerce applications.
We have built, and continue to build, a foundation to support these key
objectives through our acquisitions of Vianet Access, Inc. and Vianet Labs, Inc.
These acquisitions have provided us with advanced technologies that help access
networks and exchange networks operate and interact efficiently and reliably. In
addition, they have positioned us to supply the emerging commercial
telecommunications with innovative and cost effective integrated access device
(IAD) solutions to public access providers and private network and enterprise
network operators.
Our short term plans focus on the following key areas:
o integrating our subsidiaries' operations into our overall operations; o
completing to delivery of an initial product line; and o increasing the market
penetration of our Internet access, video and bandwidth products.
28
<PAGE>
Our long-term plans focus on the following key areas:
o integrating product development, manufacturing and marketing between
our subsidiaries;
o seeking and identifying potential acquisition targets; and
o raising additional capital to fund our proposed activities.
As the portfolio of our products and technologies evolves, we will
focus on potential acquisition targets to provide enabling technologies for
video server companies, multimedia integrators and developers, as well as
additional access technologies.
Products and Services
The following is a summary of the products and services that we are
currently provide, or are developing, in our target markets of network access,
value added services and E-commerce:
<TABLE>
<CAPTION>
Vianet Product and Service Areas By Market Segment
- --------------------------------------------------------------------------------------------------------------------
Network Access Value Added Services E-Commerce
- --------------------------------------- -------------------------------------- -------------------------------------
<S> <C> <C>
Fiber Access Nodes Image Compression Image Zooming
Voice over IP Voice and Data Streaming Image Compression
ADSL, ISDN Real Time Streaming Video Voice and Data Streaming
T1, E1, V.35 Video Mail Real Time Streaming Video
Voice over IP Video Mail
Facial Recognition Voice over IP
</TABLE>
In addition to the foregoing, we have an exclusive license to market
products and source code for the product lines of our former subsidiary,
Develcon. Such license covers the 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 worldwide. In the future, we plan to
integrate our proprietary technology and the technology that we have exclusively
licensed from our former subsidiary, Develcon, to expand our network access
product lines.
Compression Technologies and Products
Our patented wavelet compression techniques deliver video, multimedia
and data at higher compression ratios, increased transmission speeds, improved
image quality rate and lower cost than similar products currently on the market.
Wavelet technology provides a flexible tool for the following applications:
o E-retail zooming;
o real time streaming video;
o IP video conferencing;
o video mail;
o image compression; and
o multimedia communication and storage value added services.
We believe that these value added services afford customers a competitive edge
by allowing unparalleled desktop video applications to be delivered at high
speeds.
29
<PAGE>
We currently provide the following visual and compression technologies
for bandwidth-conscious multimedia enterprises seeking efficient Inter- and
Intranets for their business:
<TABLE>
<CAPTION>
Visual and Compression Technology Products
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Store and Forward Video Video Conferencing- Imagery-
Mail and Visual Notification IP-based wavelet 24 Bit Color
Facial Recognition 323 video conferencing Grey
Enhanced Zooming Real Time Video Non-Uniform
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Our key products include the Lightning Strike suite of products that
include the following:
o LS Video Messenger - a product that enables users to send V-Mail,
which consist of the E-mailing of a video file;
o LS Video Interactive - a Video Conferencing product;
o LS Power Zoom - a product that allows a user to zoom and pan on still
images; and
o LS Video Stream - a streaming video product that allows users to view
video on demand.
These product lines serve as the foundation for our value added
services, Internet and E-commerce business, and are currently our main focus for
future expansion. We intend to develop similar video and data compression
products to differentiate customers from their competitors and capitalize on the
Internet's commercial potential.
We design and sell fiber optic networking products that carry a myriad
of voice, data and video streams. We offer a full line of multiprotocol
information transport platforms for SDH/SONET optical backbones in public and
private networks. These products include add-drop multiplexers ranging from
STM-4/OC-12 to STM-1/OC-3 bandwidths, as well as Digital Loop Carriers (DLC's).
Starpoint
Our main fiber optic networking products is the "Starpoint," a
full-feature DLC that incorporates V5.2 compliance, a Cross Connect and add/drop
multiplexer functionality in one unit. This fiber optic multiplexer allows
efficient transmission of voice, data and video channels from backbone equipment
to network users. The product uses the latest V5.2 standards, as established by
the International Telecommunications Union, and offers more network node
locations than any other competitor, at a significantly lower price. Starpoint
supports communication using Bellcore and ITU-T standard voice and data
interfaces over fiber optic T1 and E1 connections and has the ability to add
interfaces, such as ISDN, BRI/PRI, xDSL, Ethernet, POTS (voice), Payphon and
video, with an upgrade path to a full SONET/SDH compliance. In addition, because
it is the first SONET/SDH/V5.2 compliant product to use cross-connects and slick
96 based DLC architecture, its small footspace permits installation in more
confined areas than normally required for such units.
30
<PAGE>
Our product line serves as the foundation for our public and private
network access business. We intend to expand this business, particularly in
foreign markets where we believe demand for such products is increasing.
Computer Networking Products
Athena Product Lines - Edge and Central Site Communications and
Multi-Protocol Access
We have an exclusive license to market Athena products and the source
code for the Athena product line to Fortune 100 companies based in the United
States.
The Athena platform, introduced in 1994, is an edge and central site
communications system that offers a flexible, scalable platform for the
integration of switching, routing and network access services. Athena supports
various computing environments and networking technologies and allows clients to
optimize and expand existing networks cost effectively. Athena can
simultaneously support Ethernet and Token Ring LAN interfaces, IP/IPX routing,
transparent bridging, legacy protocols and services such as Frame Relay, X.25,
PPP and ISDN. Network carriers often adopt Athena as an Edge Switch for the
periphery of existing higher-speed networks, including branch office networks
supporting mission critical applications.
Athena Access, released in 1998, is a voice/data communication product
for branch office access. Athena Access utilizes advanced voice compression
technologies to transport voice traffic over public frame relay networks, or IP
networks such as the Internet. The product affords clients exceptional voice
clarity and significant long distance cost savings over public telephone
networks. Like all Athena products, Athena Access has integrated routing
functionality, frame relay switching, X.25 switching, legacy protocol access and
ISDN capabilities.
Orbiter Product Lines - Ethernet Access Routers
We also have a non-exclusive license to market the Orbiter product
lines worldwide. Develcon's Orbitor family of Ethernet Access Routers provides
routing solutions for small- to medium-sized offices.
The Orbitor 500 allows small office and home office users to combine
data and voice traffic over a single ISDN access line for cost-effective access
to the Internet, corporate Intranets and remote corporate computing facilities.
The Orbitor 530 provides the full-featured performance and
functionality of large office access routers in a compact platform priced for
small office budgets. The Orbitor 530 provides access to both frame relay and IP
networks such as the Internet.
The Orbitor 5100 is modular access router designed to provide safe,
secure, and reliable network access for branch office locations. The Orbitor
5100 offers advanced link management features to deliver maximum performance and
uptime in critical network environments.
The Orbitor 6100 Central Site Router is a central office router that
supports up to fourteen lines using any combination of frame relay, leased line
or ISDN services.
We plan to integrate our proprietary technology with the technology
exclusively licensed from our former subsidiary, Develcon, to expand our network
access product lines.
31
<PAGE>
Manufacturing
We intend to manufacture our products through a full service
manufacturing partner with facilities and daily operations employing Bellcore
reliabilty standards. Our engineering is responsible for interpreting all
specifications for products built by the manufacturing subcontractors and
resolves all manufacturing issues with customers. Our Quality Assurance is
responsible for the certification of all our operations and our subcontractor's
quality standards. We establish workmanship specifications, certify personnel,
and maintain the necessary audits to monitor total compliance. In addition, we
determine the best methods to monitor quality indices and will implement closed
loop corrective actions. This monitoring extends to all levels of our company.
Customers
While our subsidiaries do not currently share customers, we plan to
create a national accounts organization to represent all of our product lines to
distribution channels.
Our customers include Internet Service Providers, Video Conferencing
Providers and Specialized Service Providers. These customers employ our
technology to provide multi-media services and I/P videoconferencing to
broadband ISP customers.
We plan to use a combination of distribution channels, including
value-added OEM Integration, private label agreements, high volume distribution
and high-end direct account sales.
Competition
We expect to face increased competition, particularly price
competition, from other telecommunications equipment and technology providers.
These vendors may develop products with functionality similar to our products or
may provide alternative network solutions. Our OEMs may also compete with us by
selling their own current products or products that they may develop, as well as
selling products that they purchase from us. In addition, current and potential
competitors may establish cooperative relationships among themselves or with
third parties to develop and offer competing products.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than us. Consequently, these competitors can devote greater
resources to the development, promotion, sale and support of their products. In
addition, competitors with a large installed customer base may have a
significant competitive advantage over us. Accordingly, these potential
customers may not consider or evaluate our products
We believe that we must invest significant resources in developing new
products, enhancing current products and maintaining customer satisfaction to
remain competitive. If we fail to do so, our products may not compete favorably
with our competitors' products, and our business could be materially adversely
affected.
It is also common in the networking industry for competitors to acquire
companies to introduce new products or emerging technologies. Consequently,
competitors with larger market capitalizations or cash reserves than us will be
better positioned to acquire new technology or products capable of displacing
our product lines. If we fail to effectively introduce new products and
enhancements on a timely basis, our business may be materially adversely
affected.
Marketing, Sales and Distribution
Sales
We market our compression technology products to the following market
segments:
o high speed quality image delivery in closed or open (Java)
environments;
32
<PAGE>
o enhanced zooming to E-Commerce enterprises, particularly retail
merchandise companies selling products in an electronic commerce
environment; and
We have a direct sales and marketing force of seven persons. We intend
to increase this number in the first two quarters of 2000 as we release our
products.
We utilize five in-house sales specialists to develop sales through
distribution network channels and direct accounts. Our initial sales strategy
focuses sales coverage to key accounts in the following principal target market
segments:
o Asia Pacific telecommunications companies,
o power utilities,
o metropolitan fiber optic networks,
o private business, and
o military facilities.
We believe that deregulation in the Asia Pacific and Latin American
countries will play a key role in our sales in the years 1999 and 2000. As these
countries update and upgrade their telecommunications systems we believe digital
loop carrier products will be essential to deliver services to end users. In
addition, we are currently cultivating customer relationships through customer
funding programs and development projects with an Asian Pacific
telecommunications provider.
Distribution
We utilize a multi-channel strategy in distributing our products and
services. In general, these channels include:
o Value-Added OEM Integration;
o Private Label Agreements;
o High Volume Distribution; and
o High-End Direct Account Sales.
We currently have distribution channels in North America and Asia, and
are seeking additional distribution channels in Western Europe, Mexico and South
America.
We intend to sell our compression technology products using partners,
joint ventures, OEM arrangements, integrators and direct sales.
We are currently positioning ourselves internationally through OEM,
Private Label and High Volume Distribution partners. To that end, the subsidiary
has partnered with the following distribution outlets:
o Opicom Co., Ltd., a major supplier of telecommunications and DLC
test equipment in Korea;
o BOCOM, a major supplier of telecommunications and DLC test
equipment in China;
o Customer Premise Equipment (CPE) suppliers of T1, voice and data
interface equipment in and
o Large System suppliers such as Harris, TRW, Hughes, SAIC,
Phillips and Singapore Technologies.
We are also pursuing relationships with distribution channels in
Australia, Mexico and Malaysia/Singapore. Domestically, we intend to target
Inter-Exchange Carriers and suppliers of wireless communications equipment.
33
<PAGE>
Product Liability Insurance
We carry product liability insurance coverage on its products in the
amount of $2,000,000.
Employees
As of January 1, 2000, we employed 44 full-time employees, one
part-time employee and seven consultants.
Facilities
Our executive offices are located at 83 Mercer Street, 3rd Floor, New
York, NY 10012.
Vianet Labs' headquarters are located at a 9,000 square foot leased
facility in Denton, Texas. Vianet Labs' lease on the facility ends in June
2000.Vianet Labs intends to renew such lease upon its expiration.
Vianet Access is headquartered in Plano, Texas, and leases a 5,000
square foot facility. Vianet Access' lease on the facility ends on December 31,
2000. Vianet Access intends to renew such lease upon its expiration.
Legal Proceedings
We are not a party to any material legal proceedings.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers, directors and key executives of Vianet, and their ages
as of January 1, 1999, are as follows.
NAME AGE POSITION
---- --- --------
Jeremy T.G. Posner 53 Chairman of the Board, Vianet
Peter Leighton 46 President, Chief Executive Officer,
Director, Vianet
Bruce Arnstein 43 Chief Operating Officer, Vianet
Vincent Santivasci 28 Chief Financial Officer, Vianet
Robert H. Bailey 56 Director, Vianet
Darrell J. Elliot 49 Director, Vianet
F. Paul Whitlock 56 Director, Vianet
Set forth below is a biographical description of each director and senior
executive officer of Vianet based on information supplied by each of them.
Peter Leighton, a co-founder of Vianet, has been President and Chief
Executive Officer of Vianet since its inception. From 1989 to 1997, he was the
Chief Executive Officer of Intelect Communications, Inc. While he was with the
company, he and Mr. Posner oversaw a series of restructurings, acquisitions,
financings and dispositions that transitioned Intelect from the firearms
industry to the technology sector. He has over fifteen years of experience
working with companies in the US, Europe and South America. He holds a Chartered
Accountant of the Canadian Institute of Chartered Accountants and has a B.Sc.
Engineering Science degree from Exeter University in England.
Jeremy Posner, a co-founder of Vianet, has been the Chairman of Vianet
since its inception. From 1988 to 1997, Mr. Posner was a Senior Vice President
and Director of Intelect Communications Inc. During this period, Mr. Posner
worked closely with Mr. Leighton to reposition the company in the technology
sector. Prior to joining Intelect, Mr. Posner headed an international investment
group where he assisted emerging companies, raised venture capital and assisted
with the development of companies. Mr. Posner holds a MBA form York University,
Toronto Canada, and a Bachelors of Law from the University of Birmingham,
England.
Bruce M. Arnstein joined Vianet as Chief Operating Officer in May 1999.
From 1988 to 1999 Mr. Arnstein managed the Business and Information Consulting
Divisions of the following accounting firms; Edward Isaacs & Company LLP,
Mahoney Cohen & Company and David Berdon & Co LLP. Prior to that Mr. Arnstein
was the Director of Operations of the Goelet Corporation, an investment company,
and managed the Consulting Practice for one of Arthur Andersen's offices. He
holds a Bachelor of Science in Industrial Engineering from Lehigh University.
Vincent Santivasci joined Vianet as Chief Financial Officer in August
1999. He is a member of the American Institute of Certified Public Accountants
and is registered with the National Association of Securities Dealers in the
United States of America as a General Securities Representative and a General
Securities Principal. Mr. Santivasci acted as Director, Officer and General
Securities Principal for three international investment companies while serving
as an Account Manager for Leeds Management Services Limited in Bermuda from July
1997 to July 1999. Prior to his employment at Leeds Management, Mr. Santivasci
held a supervisory audit position with Arthur Andersen LLP. Arthur Andersen LLP
employed him in 1993, upon completion of his Bachelor of Science in Accounting
from the University at Albany.
35
<PAGE>
Robert H. Bailey has been a Director of Vianet since inception. For
more than ten years, Mr. Bailey has been Vice President of AMS Planning &
Research Corporation, a consulting firm specializing in the planning and
development of arts and entertainment facilities, market research and strategic
and long range planning.
Darrell J. Elliot has been a Director of Vianet since inception. Mr.
Elliot is also the President and Chief Executive Officer of Isuma Strategies
Inc., a financial consulting firm. Previously, Mr. Elliott was Vice President of
Western Region of Royal Bank Capital Corporation, a venture capital subsidiary
of the Royal Bank of Canada.
F. Paul Whitlock has been a Director of Vianet since inception. Mr.
Whitlock is the founder and Director of NetGain Consulting Limited, a UK based
firm providing management consulting and project management services to the
telecommunications industry. He was previously a Director of Consultancy
Services, Nortel Europe and Business Planning Manager for Nortel Integrated
Networks.
In addition, the following have joined Vianet as of the completion of
the respective acquisitions:
Director and Executive Compensation
Each Director's term of office lasts until the next annual meeting of
stockholders where a successor is elected and qualified or until the Director's
earlier death, resignation or removal from office. Executive Officers hold
office until their successors are chosen and qualified, subject to earlier
removal by the Board of Directors.
During the fiscal year ended December 31, 1998, no remuneration was
paid by Radar to any of its officers or directors, except that they were
entitled to receive reimbursement for actual, demonstrable out-of-pocket
expenses, including travel expenses if any, made on Radar's behalf in the
investigation of business opportunities. None of the individuals who were
officers or directors of Radar prior to the Vianet/Radar Merger are currently
officers or directors of Vianet.
The following table sets out annual compensation, long-term
compensation and all other compensation awarded to Vianet Delaware's Chief
Executive Officer and the other most highly compensated executive officers (the
"Named Executive Officers"), during its fiscal year ended December 31, 1999 and
1998. The Named Executive Officers of Vianet Delaware are currently the
executive officers of Vianet.
36
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------- ------------- --------------------------------------- ----------------- --------------
Annual Compensation Long Term
Compensation
- ----------------------------- ------------- --------------------------------------- ----------------- --------------
Name and Principal Position Year Ended Salary Bonus Other Annual Securities All Other
December 31 Compensation under Options Compensation
Granted, (#) (2)
- ----------------------------- ------------- ------------ ---------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Peter Leighton, 1999 $125,000 $ ------ $ ------ ------- ------
President and Chief 1998 $------ (1) $ ------ $ ------ 200,000 ------
Executive Officer
- ----------------------------- ------------- ------------ ---------- --------------- ----------------- --------------
Jeremy Posner, 1999 $ 75,000 $ ------ $ ------ ------- ------
Chairman 1998 $------ (2) $ ------ $ ------ 200,000 ------
- ----------------------------- ------------- ------------ ---------- --------------- ----------------- --------------
</TABLE>
(1) As of July 1, 1999, Mr. Leighton's annual salary from Vianet is $250,000
and Mr. Posner's annual salary from Vianet is $150,000.
(2) The number of securities under options granted reflects the number of
Vianet Shares that may be purchased upon the exercise of such options.
Employment Agreements
Messrs. Leighton and Posner's salaries from Vianet for the fiscal year
ending December 31, 1999 are $125,000 and $75,000, respectively, and for the
fiscal year ending December 31, 2000 (subject to Board approval) will be
$250,000 and $150,000, respectively. Except for the foregoing terms, Vianet has
not entered into other employment agreements with any of the Named Executive
Officers.
In connection with the PSI acquisition, the Company entered into two
year employment agreements with PSI's principal shareholders which provides for
aggregate annual compensation of $675,000.
Stock Option Plans
Vianet
Our Board of Directors has adopted, subject to shareholder approval, an
Employee Stock Incentive Program (the "Program"), which will be administered by
our Board of Directors. The Program provides for the granting of options to key
employees, directors and officers of Vianet to purchase shares of common stock
of Vianet at prices equal to the market value of the Vianet's common stock on
the business day immediately preceding the date on which an option is granted or
at any other price the Board of Directors of Vianet may determine. The Program
provides for the granting of options as incentive stock options under the United
States Internal Revenue Code.
As of December 1, 1999, options to purchase 200,000 Common Shares were
issued, subject to shareholder approval. Nominal consideration was received by
us for the granting of options. No options to purchase Common Shares have been
exercised under the Program since its inception. The Program requires that the
exercise price be paid in full at the time of exercise.
37
<PAGE>
Vianet Delaware
Vianet Delaware's Employee Stock Incentive Program (the "Program") was
administered by Vianet Delaware's Board of Directors. The Program provided for
the granting of options to key employees, directors and officers of Vianet
Delaware to purchase shares of common stock of Vianet Delaware at prices equal
to the market value of the Vianet Delaware's common stock on the business day
immediately preceding the date on which the option was granted or at any other
price the Board of Directors of Vianet Delaware may have determined. The Program
provided for the granting of options as incentive stock options under the United
States Internal Revenue Code.
As a result of the Vianet Delaware's merger with Radar, the outstanding
options to purchase shares of Vianet became options to purchase an aggregate of
560,000 shares of Vianet's common stock. Such options were outstanding and held
by an aggregate of six directors and employees at the time of the Vianet Merger.
Nominal consideration was received by Vianet Delaware for the granting of the
options. To date, none of the options to purchase Vianet shares have been
exercised. The options require that the exercise price be paid in full at the
time of exercise.
The following table sets out certain information with respect to
options to purchase Vianet Shares (after taking into consideration the effect of
Vianet Delaware's merger with Radar) granted by Vianet Delaware to the Named
Executive Officers of Vianet Delaware during the fiscal year ended December 31,
1998:
<TABLE>
<CAPTION>
% of Total Market Value of
Securities Options Granted Securities
Under to Employees in Exercise Price Underlying Options
Options Financial Year ($/Security) on the Date of Grant
Name Granted ($/Security) Expiration Date
- ------------------- -------------- ------------------- ---------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Peter Leighton 200,000 45.5% $1.00 $1.00 December 31, 2009
Jeremy Posner 200,000 45.5% $1.00 $1.00 December 31, 2009
</TABLE>
38
<PAGE>
Principal Stockholders
The following table sets forth the beneficial ownership of the Common
Stock of Vianet, as of February 9, 2000, for (a) each person who is known by
Vianet to beneficially more than five percent (5%) of Vianet's Common Stock; (b)
each of Vianet's directors; and (c) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
Outstanding Common Stock Beneficially Owned
- --------------------------------------------------------------------------------------------------------------------
Name and Address of
Beneficial Owner** Number of Shares of Common Stock Percentage of Voting Stock
----------------- -------------------------------- --------------------------
<S> <C> <C>
Jeremy T.G. Posner 2,280,829(1) 14.3%
Peter Leighton 2,300,000(2) 14.5%
Bruce Arnstein 48,899(4) *
Vincent Santivasci 6,666(5) *
Elizabeth Disiere 40,000(6) *
Robert H. Bailey 470(3) *
Darrell J. Elliot 0(3) 0
F. Paul Whitlock 0(3) 0
</TABLE>
* Less than one percent.
** The addresses for each Officer and Director is c/o Vianet Technologies, Inc.,
83 Mercer Street, 3rd Floor, New York, N.Y. 10012.
(1) Includes (i) an aggregate of 2,048,309 shares owned by entities
controlled by Jeremy Posner, and (ii) 232,520 shares which may be
issued pursuant to warrants and options owned by Mr. Posner, which
options are currently exercisable.
(2) Includes (i) 1,800,000 shares owned by entities controlled by Peter
Leighton and his wife, and (ii) 500,000 shares that may be issued
pursuant to warrants and options owned by Mr. Leighton, which options
are currently exercisable.
(3) Does not include 40,000 shares which may be issued under outstanding
stock options, which shares are not exercisable and subject to a three
year vesting period.
(4) Does not include 150,000 shares which may be issued under outstanding
stock options, which shares are not exercisable and subject to a three
year vesting period.
(5) Does not include 50,000 shares which may be issued under outstanding
stock options, which shares are not exercisable and subject to a three
year vesting period.
(6) Includes 40,000 shares which may be issued under outstanding stock
options. These outstanding options are fully vested.
39
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Vianet at February 9, 2000 on a pro forma basis adjusted to reflect
the issuance of (i)11,422,644 shares upon the exercise of outstanding class A, B
and C common stock purchase warrants and (ii)3,208,132 shares upon the exercise
of other outstanding warrants and options, all of which shares are included in
this prospectus.
<TABLE>
<CAPTION>
Shares Shares
beneficially beneficially
owned owned
prior to Shares after
Selling stockholders the offering offered the offering
-------------------- ------------ ------- ------------
<S> <C> <C> <C>
Adrienne Grossman 33,332 33,332 --
Amy Kuriloff 66,664 66,664 --
Blvd. Anesthesia Associates P.C. Pension 66,664 66,664 --
Plan DTD 1/1/89 FBO Dr. Alex Weingarten
Blvd. Anesthesia Associates P.C. Pension 66,664 66,664 --
Plan DTD 1/1/89 FBO Dr. Stuart Wollman
E.C.G. Pension Plan 133,332 133,332 --
Eric Fessler 133,332 133,332 --
Hallman and Lorber Profit Sharing Plan 66,664 66,664 --
Harry Adjm 133,332 133,332 --
Herbert Spielman 66,664 66,664 --
Holzer Family Trust 133,332 133,332 --
Jeffrey S. Podell Retirement Plan 66,664 66,664 --
Keith Kantowitz 66,664 66,664 --
Kenard G. Strauss 66,664 66,664 --
Kerry Propper 66,664 66,664 --
L.C. Quick Jr. Descendants Trust, Under 133,332 133,332 --
Agreement Dated March 11, 1993, F.B.O. Peter
Quick, Raymond A. Vogel Trustee
Leonard Novick 66,664 66,664 --
Leslie C. Quick, III 266,664 266,664 --
Louis Calderone 66,664 66,664 --
Bear, Stearns Securities Corp. 33,332 33,332 --
F.B.O. Malcolm Basner
Marc Berger 66,664 66,664 --
Matthew Silverman; Susan A. Silverman 66,664 66,664 --
Michele Pesner 33,332 33,332 --
Midas Finance, Inc. 533,328 533,328 --
Bear, Stearns Securities Corp. 66,664 66,664 --
F.B.O. Norman Basner
Bear, Stearns Securities Corp. 133,332 133,332 --
F.B.O. Phyllis Charash
Richard Hahn & Birget Feldman Hahn JTWROS 133,332 133,332 --
Richard Rostholder 66,664 66,664 --
Robert Eide 66,664 66,664 --
Bear, Stearns Securities Corp. 66,664 66,664 --
F.B.O. Robert Frome
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially beneficially
owned owned
prior to Shares after
Selling stockholders the offering offered the offering
-------------------- ------------ ------- ------------
<S> <C> <C> <C>
Roger Fisher 66,664 66,664 --
Ruth Greenwald 66,664 66,664 --
Stacey Cohen 66,664 66,664 --
Steve Rotter 133,332 133,332 --
Susan Zoref 133,332 133,332 --
Robert Eide 44,000 44,000 --
Robert Eide 14,520 14,520 --
Howard Lorber 14,520 14,520 --
Martin Bier 2,204 2,204 --
Frederic Greenwald 6,376 6,376 --
Malcolm Basner 6,376 6,376 --
Bruce Arnstein 133,332 133,332 --
Peter Ianace 199,996 199,996 --
William Bossung 333,328 333,328 --
John Schaunfield Family Limited Partnership 533,328 533,328 --
Herbert Spielman 33,332 33,332 --
Bear, Stearns Securities Corp. 33,332 33,332 --
F.B.O. Malcolm Basner
Marc Berger 66,664 66,664 --
Matthew Silverman & Susan A. Silverman 66,664 66,664 --
Richard Rostholder 66,664 66,664 --
Robert Eide 66,664 66,664 --
Blvd. Anesthesia Associates P.C. Pension 66,664 66,664 --
Plan DTD 1/1/89 FBO Dr. Chunil Ruder
Blvd. Anesthesia Associates P.C. Pension 66,664 66,664 --
Plan DTD 1/1/89
Robert T. Martin 33,332 33,332 --
Kenneth T. Lurich, Jr. and Madolyn Lurich, 66,664 66,664 --
JT TEN
Richard Arnstein 66,664 66,664 --
Tehan Oh 799,992 799,992 --
Chris Chon 266,664 266,664 --
Chris K. Kim 79,996 79,996 --
Seong K. Kim 66,664 66,664 --
Young-kon Lee 66,664 66,664 --
Jin-soo In 53,332 53,332 --
Thomas F. Grassi 66,664 66,664 --
Ted Grassi 66,664 66,664 --
Bear Stearns Securities Corp F.B.O. Vincent 66,664 66,664 --
G. Chase IRA
John Romano 66,664 66,664 --
Julie Assael 33,332 33,332 --
A.G. Edwards C/F Michael S. Weber 133,332 133,332 --
Georgetown Vianet Partnership 1,066,656 1,066,656 --
Louis Calderone 66,664 66,664 --
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially beneficially
owned owned
prior to Shares after
Selling stockholders the offering offered the offering
-------------------- ------------ ------- ------------
<S> <C> <C> <C>
R.P. Associates, LLC 133,332 133,332 --
Kerry Propper 66,664 66,664 --
Kenneth Perlman 66,664 66,664 --
Louis Perlman 66,664 66,664 --
Robert Eide 61,596 61,596 --
Howard Lorber 17,596 17,596 --
Malcolm Basner 8,796 8,796 --
Vincent Testaverde 266,664 266,664
Mark D. Bosses 66,664 66,664 --
Blvd. Anesthesia Associates P.C. Pension 33,332 33,332 --
Plan DTD 1/1/89 FBO Dr. Stuart Wollman
Blvd. Anesthesia Associates P.C. Pension 33,332 33,332 --
Plan DTD 1/1/89 FBO Dr. Alex Weingarten
Blvd. Anesthesia Associates P.C. Pension 33,332 33,332 --
Plan DTD 1/1/89 FBO Dr. C.B. Ruder
MKB Associates Inc. 33,332 33,332 --
Martin Orenstein and Marjorie Orenstein 33,332 33,332 --
JTWROS
Fred Greco and Marcia Greco JTWROS 33,332 33,332 --
Thorpe Bay Corporation 533,328 533,328 --
Dermot Grady 53,332 53,332 --
Lee Richardson 26,664 26,664 --
Bruce Arnstein 13,332 13,332 --
Elizabeth Disiere 13,332 13,332 --
Lisa Jasicob 13,332 13,332 --
J.E. Shaunfield Limited Partnership 266,664 266,664 --
Todd Grassi 53,332 53,332 --
Keith W. Abell 99,996 99,996 --
Accurate Office Supply, Inc. 39,996 39,996 --
Charles P. Adkins 79,996 79,996 --
Thomas Barnett Revocable Trust U.A.D. 3/18/7 133,332 133,332 --
Harvey Bibicoff 199,996 199,996 --
Lori A. Bonaldi 39,996 39,996 --
Benjamin Brafman 119,996 119,996 --
E.B.M. Associates, Inc. 19,996 19,996 --
E.B.M. Associates, Inc. 33,996 33,996 --
Richard Etra and Kenneth Etra, JTWROS 59,996 59,996 --
Fairthorne Trading Limited 106,664 106,664 --
James Favia 79,996 79,996 --
Mikhail A. Filimonov 31,996 31,996 --
Andrew Finkelstein 39,996 39,996 --
Eileen Freeman 39,996 39,996 --
Marc Freeman 79,996 79,996 --
Murray H. Gross 31,996 31,996 --
HK Partners 23,996 23,996 --
Anthony Heller 186,664 186,664 --
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially beneficially
owned owned
prior to Shares after
Selling stockholders the offering offered the offering
-------------------- ------------ ------- ------------
<S> <C> <C> <C>
Mark Honigsfeld Revocable Living Trust 59,996 59,996 --
Vivian Ingrassia 79,996 79,996 --
Vadim M. Iosilevich 13,332 13,332 --
J.G. King 59,996 59,996 --
Otto R. Kozak 19,996 19,996
Lester Levine 119,996 119,996 --
Louis Libin 51,996 51,996 --
David Loewenstein 119,996 119,996 --
Melissa Mason 39,996 39,996 --
Kenneth J. McLeod 106,664 106,664 --
Lawrence and Ellen Newman JTWROS 95,996 95,996 --
David Manning Pate 186,664 186,664 --
Natalia Oblonsky 26,664 26,664 --
Clinton T. Rubin 186,664 186,664 --
SGJ Limited 119,996 119,996 --
Steven & Lise Shankman JTWROS 23,996 23,996 --
Dimitri Sogoloff 26,664 26,664 --
Dana Stetson 39,996 39,996 --
David L. Stetson 119,996 119,996 --
Susanne Tierney 39,996 39,996 --
Paul G. Tonon 51,996 51,996 --
Anthony Philip Towell 119,996 119,996 --
Boris Volman 146,664 146,664 --
Ronald I. Wagner 39,996 39,996 --
Nancy Harvard 266,664 266,664 --
Vincent Santivasci 26,664 26,664 --
William A. Tollestrup 39,996 39,996 --
Cleopas Angaye 35,185 35,185 --
Hua Chai 19,244 19,244 --
Hongyang Chao 37,471 37,471 --
Hong Chen 13,360 13,360 --
Siyuan Chen 30,232 30,232 --
Wanlong Li 10,293 10,293 --
Hongbing Lian 22,155 22,155 --
Clint Miller 9,871 9,871 --
Ming Wei 28,548 28,548 --
Lei Xuan 3,292 3,292 --
Dick Snyder 153,552 153,552 --
Dick Laible 26,323 26,323 --
John Senko 4,387 4,387 --
David Turnbull 65,808 65,808 --
Justine B. Mattos 2,194 2,194 --
Todd Viegut 51,550 51,550 --
Hongyu Li 3,290 3,290 --
Todd Viegut 43,872 43,872 --
Ann Bingham 548 548 --
Paul Taube 5,484 5,484 --
Paul Fisher 13,162 13,162 --
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
beneficially beneficially
owned owned
prior to Shares after
Selling stockholders the offering offered the offering
-------------------- ------------ ------- ------------
<S> <C> <C> <C>
Mat Fisher 2,194 2,194 --
John Senko 4,387 4,387 --
Marcus Butler 2,194 2,194 --
Michael S. Webber 4,387 4,387 --
Jennifer Hamlet 548 548 --
Xaiodong Wu 2,194 2,194 --
Chris Brooks 548 548 --
Cheng Ni 2,194 2,194 --
Royal Bank Capital Corp. 420,000 420,000 --
Neil Jamieson 147,966 147,966 --
Jeremy Posner 32,520 32,520 --
Socordia Limited 180,000 180,000 --
Valtrie Marketing 27,551 27,551 --
Ascom Zelcom A.G. 7,500 7,500 --
Andrew Kurkulis 41,130 41,130 --
Shelton Stillman 32,904 32,904 --
Jennifer Flink 153,552 153,552 --
Robert Reilly 8,226 8,226 --
Albinias Kurkulis 16,452 16,452 --
Daniel Murphy 8,226 8,226 --
Carl Chaleff 8,226 8,226 --
Richard Berg 16,452 16,452 --
Gary Elkins 8,226 8,226 --
Richard Snyder 65,808 65,808 --
Paul Fisher 359,750 359,750 --
Howard Fisher 269,812 269,812 --
Craig Fisher 269,812 269,812 --
Stephen Libowsky 8,226 8,226 --
Patrick McClain 21,936 21,936 --
Mort Meyerson 32,904 32,904 --
Mark Slezak 115,886 115,886 --
C2, LLC 28,963 28,963 --
Vision Capital Partners LLC 28,963 28,963 --
Pete Ianace 40,000 40,000 --
AJC Equities 400,000 400,000 --
Sichenzia, Ross & Friedman 20,000 20,000
WorldCorp Management Group 760,000 760,000 --
Mull & Paige 100,000 100,000 --
Midas Finance Inc. 300,000 300,000 --
Simmonds Capital Limited 250,000 250,000 --
</TABLE>
44
<PAGE>
PLAN OF DISTRIBUTION
Sales of the shares may be effected by or for the account of the
selling stockholders from time to time in transactions (which may include block
transactions) on the NASD OTC Electronic Bulletin Board, in negotiated
transactions, through a combination of such methods of sale, or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale or at negotiated prices. The selling stockholders may effect such
transactions by selling the shares directly to purchasers, through
broker-dealers acting as agents of the selling stockholders, or to
broker-dealers acting as agents for the selling stockholders, or to
broker-dealers who may purchase shares as principals and thereafter sell the
shares from time to time in transactions (which may include block transactions)
on the NASD OTC Electronic Bulletin Board, in negotiated transactions, through a
combination of such methods of sale, or otherwise. In effecting sales,
broker-dealers engaged by a selling stockholder may arrange for other
broker-dealers to participate. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the shares for whom such
broker-dealers may act as agents or to whom they may sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling stockholders and any broker-dealers or agents that
participate with the selling stockholders in the distribution of the shares may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933.
Any commissions paid or any discounts or concessions allowed to any such
persons, and any profits received on the resale of the shares purchased by them
may be deemed to be underwriting commission or discounts under the Securities
Act of 1933.
We have agreed to bear all expenses of registration of the shares other
than legal fees and expenses, if any, of counsel or other advisors of the
selling stockholders. The selling stockholders will bear any commissions,
discounts, concessions or other fees, if any, payable to broker-dealers in
connection with any sale of their shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933 or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect thereof.
45
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Vianet
On March 23, 1999, convertible demand notes payable of $2,909,272 to
entities controlled by two officers and directors of the Company were converted
into 2,739,272 shares of common stock at a ratio of one share for every $1 of
principal amount. During the six months ended June 30, 1999, the Company repaid
$200,000 and additional convertible demand notes of $30,000 were issued.
In July 1999, we entered into a credit facility (the "Facility") with
an entity controlled by our President and Chief Executive Officer. The Facility
is in the amount of $3,000,000, of which approximately $2,700,000 has been drawn
down as of the date of this Registration statement. The Facility bears interest
at 10% per annum and monthly fees of $15,000. In addition, we issued Mr.
Leighton's company 300,000 warrants exercisable at price of $3.00 to $5.00 in
consideration of the Facility. The Facility is secured on all of our major
assets, including the shares of Vianet Labs and Vianet Access, and is repayable
on March 31, 2000. Vianet currently does not have the funds to repay the
Facility and will not be able to repay the Facility without raising additional
capital. We intend to negotiate an extension to the Facility but no assurances
can be given that we will be able to complete such an extension on terms
acceptable to us.
Vianet Delaware
On December 31, 1998, Peter Leighton of Hamilton, Bermuda (formerly a
director and officer of Vianet Delaware) transferred to Vianet Delaware
ownership of 83,333 common shares of Take Two Interactive Software Inc. (having
an original acquisition cost of US$458,332) at their market value as of that
date of US$469,272. In consideration, Mr. Leighton received a Convertible Demand
Promissory Note from Vianet of equal value. The Convertible Demand Promissory
Note was convertible into Vianet Shares (after taking into consideration the
Vianet/Radar Merger) at a price of US$1.00 per share (after taking into
consideration the Vianet/Radar Merger) and, effective March 25, 1999, was
converted into Vianet Shares.
On December 31, 1998 Jeremy Posner of Jerusalem, Israel (formerly a
director and officer of Vianet Delaware) transferred to Vianet Delaware
ownership of a Promissory Note issued by Develcon on December 12, 1997 in the
amount of US$530,000. In consideration, Mr. Posner received a Convertible Demand
Promissory Note from Vianet of equal value. The Convertible Demand Promissory
Note was convertible into Vianet Shares (after taking into consideration the
Vianet/Radar Merger) at the price of US$1.00 per share and, effective March 25,
1999, was converted into Vianet Shares.
Develcon
On December 2, 1997, Neil M. Jamieson, at the time a director of
Develcon, loaned Develcon the amount of $750,000 and, on December 12, 1997,
Jeremy Posner, at the time a director of Develcon, loaned Develcon the amount of
US$530,000, in each case to provide funds required by Develcon to finance
working capital to fund expected growth in revenues. Each such loan had an
original term of one year, bears interest at the rate of prime plus 1.5%
annually and is secured by a charge against all present and after-acquired
personal property of Develcon. Develcon may, at any time commencing five months
after the date of the advance of such loans, repay all or any part of the loans
without penalty.
46
<PAGE>
In consideration for providing these loans, Develcon issued to each of
Mr. Jamieson and Mr. Posner Develcon Warrants exercisable to purchase an
aggregate of 1,000,000 Develcon Shares, at a price of $0.25 per share, for a
period of five years. Develcon has the right to require the holders of these
warrants to exercise such warrants in the event that the closing price of the
Develcon Shares on the TSE exceeds $0.50 per share on each day of any period of
20 consecutive trading days. In addition, in the event that, at any time within
six months after the date of the advance of the loans, Develcon raises aggregate
gross proceeds of at least $2,000,000 in one or more financings and repays the
full amount then outstanding under the loans, 500,000 of the Develcon Warrants
held by each of the lenders will be cancelled.
Effective December 2, 1998, Mr. Posner and Develcon entered into a debt
extension agreement pursuant to which, among other things, Mr. Posner agreed to
the postponement of Develcon's obligation to repay the US$530,000 debt owed to
him by Develcon from December 12, 1998 to the earlier of January 5, 1999 and the
demand by Mr. Posner for repayment of such debt.
On December 31, 1998, Mr. Posner assigned to Vianet Delaware his loan
to Develcon. Mr. Posner did not demand the repayment of such loan prior to its
assignment and neither Vianet Delaware nor Vianet has demanded the repayment of
such loan since its assignment, pending the completion of a business combination
between Develcon and Vianet. The original terms of the loan from Mr. Posner to
Develcon were not formally amended when the loan was assigned to Vianet
Delaware.
Effective December 7, 1998, Mr. Jamieson and Develcon entered into a
debt extension agreement pursuant to which, among other things, Mr. Jamieson
agreed to the postponement of Develcon's obligation to repay the balance of
approximately $634,000 (including principal in the amount of $575,000) then
owing to him by Develcon from December 2, 1998 to January 5, 1999.
By agreement dated January 10, 1999, Mr. Jamieson agreed to the further
postponement of the repayment of the amount owing to him by Develcon from
January 5, 1999 to April 30, 1999, provided that Mr. Jamieson is satisfied,
acting reasonably, that either Develcon and Vianet are working to enter into a
merger agreement or Develcon makes principal payments to Mr. Jamieson of
$150,000 at the time of the advance of the Loan, $200,000 on March 15, 1999 and
$225,000 on April 30, 1999. Develcon made the required payments of $150,000 and
$200,000. In connection with the further postponement of the repayment of
Develcon's debt to Mr. Jamieson, Vianet agreed, subject to the completion of its
business combination with Develcon, to grant Mr. Jamieson warrants to purchase
75,000 Vianet Shares at a price of US$4.00 per share for a period of two years.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The company has an authorized capital stock consisting of 100,000,000
Common Shares, $.001 par value, of which 16,658,576 shares are issued and
outstanding.
Common Shares
The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by the shareholders. The holders of
common stock are entitled to receive dividends ratably, when, as and if declared
by the Board of Directors, out of funds legally available. See "Dividend
Policy." In the event of a liquidation, dissolution or winding-up of the
Company, the holders of common stock are entitled to share equally and ratably
in all assets remaining available for distribution after payment of liabilities
and after provision is made for each class of stock, if any, having preference
over the common stock.
The holders of shares of common stock, as such, have no conversion,
preemptive, or other subscription rights and there are no redemption provisions
applicable to the common stock. All of the outstanding shares of common stock
are validly issued, fully-paid and nonassessable.
Class A, B, and C Warrants
As of February 9, 2000, Vianet had fully vested and exercisable
outstanding Class A, B, and C warrants to acquire a total of approximately
10,396,209 shares of common stock,. The Class A Warrants are exercisable at a
price of $2.00 per share; the Class B Warrants are exercisable at a price of
$2.50 per share; and the Class C Warrants are exercisable at a price of $3.00
per share. The exercise prices of the Class B Warrants and Class C Warrants are
equal to 125% and 150% respectively, of the Class A Exercise Price ($2.00). In
the event that the closing price of the Company's common Stock is less than
$2.00 on the effective date of this registration statement, then the Exercise
Price of the Warrants shall be adjusted as to reflect the closing price of the
Common Stock on that day, which shall be deemed the new Exercise Price. Any such
readjustment in the exercise prices of the Warrants shall only apply to the
unexercised portion of the Warrants.
In addition, Vianet has placement agent warrants to purchase up to
approximately 5.1 units, each unit consisting of 66,666 shares of common stock
and a like number of Class A, B, and C Warrants.
Other Warrants and Options
As of February 9, 2000, Vianet had other outstanding warrants and
options to acquire approximately 5,670,482 (including options to purchase
598,467 common shares in connection with the acquisition of Infinop) shares of
common stock, exercisable at prices ranging between $0.01 and $8.00.
Transfer Agent
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004, will act as transfer agent and registrar for Vianet's securities.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Shares Outstanding And Freely Tradable After Offering.
The Company currently has 16,658,610 shares of common stock outstanding
of which approximately 2,000,000 shares are currently freely tradable. A further
approximate 1,300,000 shares are freely tradable but subject to the terms of a
lock up under which 20% become available for resale every six months. The
14,630,776 shares issuable upon the exercise of the warrants being registered
in this prospectus by the Selling Shareholders from time to time in this
offering will be freely tradable without restriction or limitation under the
Securities Act, except for any such shares held by "affiliates" of the Company,
as such term is defined under Rule 144 of the Securities Act, which shares will
be subject to the resale limitations under Rule 144. All of the remaining
14,976,169 outstanding shares are "restricted securities" within the meaning
of Rule 144 and may be publicly sold only if registered under the Securities Act
or sold in accordance with an applicable exemption from registration, such as
Rule 144. All of these restricted shares of common stock will become eligible
for resale under Rule 144 one year from the date that the securities offered
herein are declared "effective" by the Securities & Exchange Commission.
Purchasers of units offered in Vianet's private placement, completed
between December 1999 and February 2000, have agreed not to sell fifty percent
(50%) of the common stock underlying their units for a period of six months from
the effective date of this registration statement or upon Nasdaq listing,
whichever occurs first (the "Lock-Up Period"). In any event, the Lock-Up Period
will expire twelve (12) months from the date the securities offered therein were
issued. Such purchasers may sell the balance of the common stock (fifty percent
(50%)) upon effectiveness of this registration statement or at such time as the
securities are available for resale under Rule 144, whichever occurs first.
Rule 144
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year, including an affiliate of the Company, would be entitled to
sell, within any three-month period, that number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
13,490,736 shares after this offering) and the average weekly trading volume in
the common stock during the four calendar weeks immediately preceding the date
on which the notice of sale is filed with the Commission, provided certain
manner of sale and notice requirements and requirements as to the availability
of current public information about the Company are satisfied. In addition,
affiliates of the Company must comply with the restrictions and requirements of
Rule 144, other than the one-year holding period requirement, in order to sell
shares of common stock. As defined in Rule 144, an "affiliate" of an issuer is a
person who, directly or indirectly, through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
Certain United States Federal Income Tax Considerations
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the common stock and
the warrants and upon the exercise, redemption or expiration of the warrants by
a warrant holder, that is a citizen or resident of the United States or a United
States domestic corporation or that otherwise will be subject to United States
federal income tax. This summary is based on the United States Internal Revenue
Code of 1986, as amended, administrative pronouncements, judicial decisions and
existing and proposed treasury regulations, changes to any of which subsequent
to the date of this prospectus may affect the tax consequences described herein.
This summary discusses only the principal United States federal income tax
consequences to those beneficial owners holding the securities as capital assets
within the meaning of Section 1221 of the Code and does not address the tax
treatment of a beneficial owner that owns 10% or more of the common stock. It
does not address the consequences applicable to certain specialized classes of
taxpayers such as certain financial institutions, insurance companies, dealers
in securities or foreign currencies, or United States persons whose functional
currency (as defined in Section 985 of the Code) is not the United States
dollar. Persons considering the purchase of these securities should consult
their tax advisors with regard to the application of the United States and other
income tax laws to their particular situations. In particular, a U.S. Holder
should consult his tax advisor with regard to the application of the United
States federal income tax laws to his situation.
49
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for the
Company by Sichenzia, Ross & Friedman LLP, New York, New York.
EXPERTS
The financial statements of Vianet Technologies Inc., as of December
31, 1998 and for the period from March 20, 1998 (inception) to December 31, 1998
included in this registration statement have been audited by Edward Isaacs &
Company LLP, independent public accountants, as stated in their report appearing
herein and are so included herein in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of Infinop Holdings, Inc., as of June 30, 1999
and 1998 and for the years then ended included in this registration statement
have been audited by Edward Isaacs & Company LLP, independent public
accountants, as stated in their report appearing herein and are so included
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of Develcon Electronics, Ltd., as of August
31, 1998 and 1997 and for the years then ended, included in this registration
statement have been audited by KPMG LLP, independent public accountants, as
stated in their report appearing herein and are so included herein in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
Changes in and Disagreements with Accountants
In May 1999, Vianet and KPMG LLP mutually agreed to terminate their
business relationship. The agreement to terminate the business relationship was
determined to be final and effective as of June 30, 1999 only after discussions
between the parties, which were completed on or about July 8, 1999. Vianet
subsequently engaged Edward Isaacs & Company LLP as auditors. The Company's
independent Audit Committee and Board of Directors unanimously approved the
decision to retain Edward Isaacs & Company.
KPMG was the principal accountants for Vianet from April 28, 1999 until
June 30, 1999. During the time that KPMG was the Company's principal
accountants, KPMG never issued a report on the financial statements of Vianet.
Furthermore, during the time that KPMG was the Company's principal accountants,
there were no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
them to make reference in connection with their opinion to the subject matter of
the disagreement in connection with any report KPMG might have issued, except
that the Form 8-K filed by the Company on June 7, 1999 did not include the
opinion of the Company's principal accountants, and KPMG notified the Company
that such report did not include disclosures regarding the fact that they
believed that there was substantial doubt about the ability of Vianet to
continue as a going concern. On August 17, 1999, Vianet filed a Form 8-K which
included the audited historical financial statements for Vianet and the report
of Edward Isaacs & Company LLP, the new principal accountants for Vianet, which
report stated that there was substantial doubt about the ability of Vianet to
continue as a going concern.
50
<PAGE>
Financial Statements and Supplementary Data.
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND
OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Historical Consolidated Financial Statements of
Vianet Technologies, Inc. and Subsidiary:
o Independent Auditors' Report F-2
o Consolidated Balance Sheets - December 31, 1998 and September 30,
1999 (Unaudited) F-3
o Consolidated Statements of Operations for the Period March 20,
1998 (inception) to December 31, 1998 and the Nine Months ended
September 30, 1999 and 1998 (Unaudited) F-4
o Consolidated Statements of Shareholders' Equity F-5
o Consolidated Statements of Cash Flows for the Period March 20,
1998 (inception) to December 31, 1998 and the Nine Months ended
September 30, 1999 and 1998 (Unaudited) F-6-7
o Notes to Consolidated Financial Statements
Historical Consolidated Financial Statements of Develcon Electronics, Ltd. and Subsidiaries: F-8-18
o Independent Auditors' Report F-19
o Consolidated Balance Sheets F-20
o Consolidated Statements of Operations F-21
o Consolidated Statements of Deficit F-22
o Consolidated Statements of Changes in Financial Position F-23
o Notes to Consolidated Financial Statements F-24-31
Historical Consolidated Financial Statements of Infinop Holdings, Inc. and Subsidiaries:
o Independent Auditors' Report F-32
o Consolidated Balance Sheets F-33
o Consolidated Statements of Operations F-34
o Consolidated Statements of Deficiency in Shareholders' Equity F-35
o Consolidated Statements of Cash Flows F-36
o Notes to Consolidated Financial Statements F-37-44
Pro Forma Financial Information:
o Unaudited ProForma Balance Sheets and notes thereto F-45-47
o Unaudited Pro Forma Statements of Operations and notes thereto F-48-49
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Vianet Technologies, Inc.
We have audited the accompanying balance sheet of Vianet Technologies, Inc. as
of December 31, 1998, and the related statements of operations, deficiency in
shareholders' equity and cash flows for the period from March 20, 1998
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vianet Technologies, Inc. as of
December 31, 1998, and the results of its operations and cash flows for the
period from March 20, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is a recently formed entity which is dependent
upon its ability to obtain additional sources of financing to fund its working
capital requirements. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/EDWARD ISAACS & COMPANY LLP
New York, New York
July 26, 1999
F-2
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------- -----------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 13,856 $ 15,617
Marketable securities 669,268 -
Receivable from related party - 201,084
---------------- ----------------
Total Current Assets 683,124 216,701
---------------- ----------------
Net Assets of Discontinued Operations - 5,726,577
---------------- ----------------
Other Assets:
Loans due from Develcon Electronics, Ltd. 1,506,800 -
Loans due from Infinop Holdings, Inc. - 724,000
Loans due from PSI Communications, Inc. - 300,000
Deferred costs arising from the acquisition of Infinop Holdings, Inc. - 159,132
Technology license, at cost less accumulated amortization of 1999: $90,000 and
1998: $22,500 427,500 360,000
Other 65,375 6,500
---------------- ----------------
Total Other Assets 1,999,675 1,549,632
---------------- ----------------
$ 2,682,799 $ 7,492,910
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accruals $ 251,384 $ 1,345,642
Convertible demand notes payable - related parties 2,909,272 -
Loans payable - related parties - 2,201,517
Payable to Director of the Company 1,000 1,000
---------------- ----------------
Total Current Liabilities 3,161,656 3,548,159
---------------- ----------------
Shareholders' Equity (Deficiency):
Series A convertible preferred shares (1998: authorized, issued and outstanding
250,000) 1,000,000 -
Common shares, $0.001 par value, 100,000,000 shares authorized - 1,400,000 and
9,140,886 shares issued and outstanding, respectively 1,400 9,141
Additional paid-in capital 2,100 8,561,956
Subscriptions receivable (990,500) (500)
Accumulated deficit (491,857) (4,624,773)
Accumulated other comprehensive loss (1,073)
-
---------------- ----------------
Total Shareholders' Equity (Deficiency) (478,857) 3,944,751
---------------- ----------------
$ 2,682,799 $ 7,492,910
================ ================
</TABLE>
See Independent Auditors' Report and notes to consolidated financial statements.
F-3
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
March 20, 1998
(Inception) to Nine Months Ended
December 31, September 30,
----------------------- --------------------------------------------
1998 1999 1998
----------------------- ------------------- -------------------
(Unaudited)
Revenue:
<S> <C> <C> <C>
Interest and other income $ 66,341 $ 109,930 $ 43,583
---------- ---------- ---------
Costs and Expenses:
Selling, general and administrative 557,276 1,779,711 399,732
Depreciation and amortization - 100,914 -
Interest and other 922 53,846 -
---------- ---------- ---------
558,198 1,934,471 399,732
---------- ---------- ---------
Loss from Continuing Operations (491,857) (1,824,541) (356,149)
Loss from Discontinued Operations - (2,308,375) -
---------- ---------- ---------
Net Loss $ (491,857) $(4,132,916) $ (356,149)
=========== ============ ===========
Loss per share - basic and diluted:
Loss from continuing operations $(0.35) $(0.27) $(0.25)
Loss from discontinued operations - ( 0.35) -
---------- ---------- ---------
Net Loss $(0.35) $(0.62) $(0.25)
=========== ============ ===========
Weighted average number of shares
Outstanding 1,400,000 6,646,293 1,400,000
=========== ============ ===========
</TABLE>
See Independent Auditors' Report and notes to consolidated financial statements.
F-4
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
---------------- ------------------ Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock 1,400,000 $1,400 $ 2,100 $(500)
Issuance of Preferred Stock 250,000 $1,000,000 $ (990,000)
------- --------- --------- ------ ---------- -------
Net loss
Balances at December 31, 1998
250,000 1,000,000 1,400,000 1,400 2,100 (990,500)
Comprehensive loss
Effect of merger with "old Vianet" 1,000,000 1,000 -
Issuance of common stock for services - - 194,500 195 463,280 -
Issuance of common stock 100,000 100 549,900
Issuance of common stock in
connection with Develcon transaction - - 2,705,488 2,705 3,805,942 -
Conversion of preferred stock (250,000) (1,000,000) 1,000,000 1,000 999,000 990,000
Conversion of notes payable - - 2,739,272 2,739 2,736,533 -
Exercise of stock options - - 1,626 2 5,201 -
Comprehensive loss:
Net loss - - - - - -
Other comprehensive loss:
Foreign currency translation
Adjustments - - - - - -
------- --------- --------- ------ ---------- -------
Balances at September 30, 1999
(Unaudited) - - 9,140,886 $9,141 $8,561,956 $ (500)
======= ========= ========= ====== ========== =======
Comprehensive loss
</TABLE>
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total Comprehensive
Accumulated Comprehensive Shareholder' Income
Deficit Income Equity (Loss)
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Issuance of Common Stock $3,000
Issuance of Preferred Stock 10,000
Net loss $ (491,857) (491,857) $(491,857)
---------- --------- -------- ---------
Balances at December 31, 1998
(491,857) - (478,857)
Comprehensive loss $(491,857)
=========
Effect of merger with "old Vianet" 1,000
Issuance of common stock for services - - 463,475
Issuance of common stock 550,000
Issuance of common stock in
connection with Develcon transaction - - 3,808,647
Conversion of preferred stock - - 990,000
Conversion of notes payable - - 2,739,272
Exercise of stock options - - 5,203
Comprehensive loss:
Net loss (4,132,916) - (4,132,916) $(4,132,916)
Other comprehensive loss:
Foreign currency translation
Adjustments - $ (1,073) (1,073) (1,073)
----------- -------- ---------- -----------
Balances at September 30, 1999
(Unaudited) $(4,624,773) $ (1,073) $3,944,751
=========== ======== ==========
Comprehensive loss $(4,133,989)
===========
</TABLE>
See Independent Auditors' Report and notes to consolidated financial statements.
F-5
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
March 20, 1998
(Inception) to Nine Months Ended
December 31, September 30,
-------------- --------------------------
1998 1999 1998
----------- ----------- -----------
(Unaudited)
Operating Activities:
<S> <C> <C> <C>
Net loss $ (491,857) $(4,132,916) $ (356,149)
Adjustments to reconcile net loss to net cash (used in) provided by
continuing operating activities:
Loss from discontinued operations -- 2,308,375 --
Depreciation and amortization 22,500 100,914 --
Unrealized loss from foreign currency transactions 73,200 -- --
Gain on sale of marketable securities -- (70,687) --
Issuance of common stock for services 2,500 463,475 --
Increase (decrease) in cash attributable to changes in operating assets and
liabilities:
Prepaids and other (65,375) 58,875 --
Accounts payable, accruals and other 251,384 929,710 373,381
----------- ----------- -----------
Net cash (used in) provided by continuing operations (207,648) (342,254) 17,232
Net cash used in discontinued operations -- (1,490,393) --
----------- ----------- -----------
Net cash (used in) provided by operating activities (207,648) (1,832,647) 17,232
----------- ----------- -----------
Investing Activities:
Loans to PSI Communications, Inc. -- (300,000) --
Loans to Develcon Electronics Ltd. (225,000) -- --
Loans to Infinop Holdings, Inc. -- (724,000) --
Purchase of SPS Technology License (450,000) -- --
Proceeds from sale of marketable securities -- 739,955 --
Deferred costs of Infinop Holdings, Inc. acquisition -- (159,132) --
Receivable from related party -- (201,084) --
----------- ----------- -----------
Net cash used in continuing operations (675,000) (644,261) --
Net cash used in discontinued operations -- (1,096,978) --
----------- ----------- -----------
Net cash used in investing activities (675,000) (1,741,239) --
----------- ----------- -----------
Financing Activities:
Repayment of convertible notes payable -- (200,000) --
Loan payable to related parties -- 2,201,517 --
Proceeds from convertible notes payable 885,004 30,000 --
Proceeds from issuance of convertible preferred shares 10,000 -- --
Issuance of common stock 1,500 555,203 --
Proceeds from subscription receivable -- 990,000 --
----------- ----------- -----------
Net cash provided by financing activities 896,504 3,576,720 --
----------- ----------- -----------
Effect of exchange rate changes -- (1,073) --
----------- ----------- -----------
Net increase in cash and cash equivalents 13,856 1,761 17,232
----------- ----------- -----------
Cash and cash equivalents, beginning -- 13,856 --
----------- ----------- -----------
Cash and cash equivalents, end $ 13,856 $ 15,617 $ 17,232
=========== =========== ===========
</TABLE>
See Independent Auditors' Report and notes to consolidated financial statements.
F-6
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Period
March 20, 1998
(Inception) to Nine Months Ended
December 31, September 30,
----------- ------------------------
1998 1999 1998
---------- ------------ --------
(Unaudited)
Noncash Transactions:
Acquisition of Develcon Electronics, Ltd.
<S> <C> <C> <C>
Fair value of assets acquired $ -- $ 12,226,306 $ --
Liabilities assumed -- (9,692,412) --
Common stock issued -- (2,533,894) --
---------- ------------ --------
Net cash paid for acquisition -- -- --
Cash acquired in acquisition -- -- --
---------- ------------ --------
Cash paid for acquisition $ $ -- $ --
========== ============ ========
Issuance of convertible demand notes payable in return for marketable
equity securities $ 669,268 $ -- $ --
========== ============ ========
Issuance of convertible demand notes payable in return for loan
receivable from Develcon $1,355,000 $ -- $ --
========== ============ ========
Issuance of common stock to RBCC $ -- $ 352,875 $ --
========== ============ ========
Issuance of common stock for debt (Develcon creditors) $ -- $ 921,878 $ --
========== ============ ========
Conversion of notes payable into common stock $ -- $ 2,739,272 $ --
========== ============ ========
Conversion of Series A Convertible Preferred Stock into common stock
$ -- $ 1,000,000 $ --
========== ============ ========
</TABLE>
See Independent Auditors' Report and notes to consolidated financial statements.
F-7
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
1. Organization and Business
Vianet Technologies, Inc. ("Old Vianet") was incorporated in the State
of Delaware, U.S. on March 20, 1998 initially to acquire Develcon
Electronics, Ltd. ("Develcon") (see Note 3) and a license to utilize
SPS Technology ("SPS") developed by NewCom Technologies, Inc. SPS is a
technology developed to exploit the convergence of telecommunications
and data transmission methods. Through the merger and acquisitions
described below, the Company is a publicly owned designer and marketer
of 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.
Merger with Radar Resources, Inc.:
In March 1999, Old Vianet, , entered into a Merger Agreement with Radar
Resources, Inc., a Nevada Corporation ("Radar"), under the terms of
which Radar and Old Vianet merged through an exchange of shares (the
"Merger"). Radar was a public company subject to reporting obligations
under Section 15(d) of the Securities Exchange Act of 1933, as amended,
and had not previously been engaged in any business activity or had any
assets or liabilities. Radar's authorized capital is 100,000,000 shares
of par value $0.001 per share, of which 1,000,000 shares were issued
and outstanding at the date of the merger. Subject to the terms and
conditions of this Merger Agreement, Radar issued to the shareholders
of Old Vianet, four shares of fully paid and nonassessable shares of
the company's common stock, $.001 par value ("Common Stock") per share
in exchange for each share of Old Vianet's outstanding common stock.
The existing common shareholders of Old Vianet received 1,400,000
shares of common stock of the Merged Company in exchange for the
350,000 shares then outstanding. All shares of Old Vianet's Series A
Convertible Preferred Stock issued and outstanding immediately prior to
the Merger were deemed to have been converted into an aggregate of
250,000 shares of Old Vianet's common stock and the Series A
Convertible Preferred shareholders received 1,000,000 shares of Common
Stock of the Company. Further, holders of Old Vianet convertible demand
notes payable received 2,709,272 shares of common stock. For accounting
purposes, Old Vianet was considered to be the acquirer in a reverse
acquisition accounted for as a purchase. All share amounts have been
retroactively restated to reflect the reverse acquisition. Upon
completion of the merger, Radar changed its name to Vianet
Technologies, Inc. References hereinafter to "Vianet" or "the Company,"
refer to Vianet Technologies, Inc., a Nevada corporation, together with
its subsidiaries.
Going Concern:
The Company is a recently formed entity which is dependent upon its
ability to obtain additional sources of financing to fund its working
capital requirements. The Company is considering several financing
alternatives to fund such requirements. While the Company has, in the
past, been able to maintain access to adequate external financing
sources on acceptable terms, no assurances can be given that such
access will continue.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
F-8
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
2. Significant Accounting Policies
Basis of Consolidation:
The consolidated financial statements include the accounts of Vianet
Technologies, Inc. (Vianet) and in 1999 its wholly-owned subsidiary,
Develcon and its subsidiaries (collectively, the "Company"). All
significant intercompany accounts and transactions have been
eliminated. Subsequent to September 30, 1999, Vianet sold Develcon (see
Note 3), accordingly, the financial statements have been restated to
reflect Develcon as a discontinued operation.
Foreign Currency:
All balance sheet accounts of foreign operations are translated into
U.S. dollars at the year-end rate of exchange and statements of
earnings items are translated at the weighted average exchange rates
for the year. The resulting translation adjustments are reported as a
component of comprehensive income. Gains and losses from foreign
currency transactions, such as those resulting from the settlement of
foreign receivables or payables, are included in the consolidated
statements of operations
Cash and Cash Equivalents:
Cash and cash equivalents include cash held in banks and time deposits
having original maturities of three months or less.
Investment in Marketable Equity Securities:
The Company accounts for its investments in equity securities that have
readily determinable fair values under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Marketable equity securities consist of shares of common stock and are
stated at market value. Management has identified the Company's
marketable equity securities as trading securities and, accordingly,
unrealized gains and losses on such securities are recorded in the
statement of operations.
Technology License:
The technology license consists of purchased technology, amortized by
the straight-line method over a period of five years, the initial term
of the license agreement.
Goodwill:
The excess of the cost over the fair value of net assets of its
purchased business is recorded as goodwill and is amortized on a
straight-line basis over its estimated useful life of six years.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-9
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
2. Significant Accounting Policies (Continued)
Stock Option Plan:
The Company accounted for stock options issued to employees in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25 and provide pro
forma net income disclosures for employee stock option grants as if the
fair value based method, as defined in SFAS No. 123, had been applied.
The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure required by SFAS No. 123.
Net Loss Per Share:
Basic loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted loss per share is
computed giving effect to all dilutive potential common shares that
were outstanding during the period. Dilutive potential common shares
consists of incremental common shares issuable upon exercise of stock
options and warrants. Computation of diluted loss per share is not
reflected, because including potential common shares will result in an
anti-dilutive per share amount due to the loss in the periods.
Comprehensive Income:
The Company reports and presents comprehensive income and its
components in accordance with SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires only additional disclosures in the
financial statements; it does not affect the Company's financial
position or results of operations.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No.107,
Disclosures About Fair Value of Financial Instruments, requires
disclosure of the fair value of certain financial instruments for which
it is practicable to estimate fair value. For purposes of the
disclosure requirements, the fair value of a financial instrument is
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation. Fair value of financial instruments classified as current
assets or liabilities (except convertible demand notes payable)
approximates carrying value due to the short-term maturity of
underlying financial instruments. The carrying value of the convertible
demand notes payable are reasonable estimates of their fair value since
they were convertible into the Company's common stock at a conversion
price equivalent to the conversion rights of the Company's Series A
convertible preferred shares.
Income Taxes:
The Company accounts for income taxes under the asset and liability
method as required by SFAS No. 109, Accounting for Income Taxes. Under
this method, deferred tax assets and liabilities are determined based
on the differences between the financial reporting and income tax bases
of assets and liabilities and are measured using the enacted tax rates
and laws expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
F-10
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
2. Significant Accounting Policies (Continued)
Research and Development:
Research and development costs are expensed as incurred.
Segment Reporting:
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 superceded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS
No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
adoption of SFAS No. 131 did not effect the results of operations,
financial position, or the disclosure of segment information because
the Company operates only in one segment.
Unaudited Interim Financial Statements:
The accompanying financial statements of the Company as of September
30, 1999 and for the nine months ended September 30, 1999 and 1998 are
unaudited. All adjustments (consisting only of normal recurring
adjustments) have been made which, in the opinion of management, are
necessary for a fair presentation thereof. Results of operations for
the nine months ended September 30, 1999 and 1998 are not necessarily
indicative of the results that may be expected for the full year or for
any future period.
3. 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.
The Arrangement was approved by the Supreme Court of British Columbia,
the Securityholders and Debentureholders of Develcon.
The Arrangement provided for Develcon shareholders to receive one share
of common stock of the Company for every 30.75 shares of Develcon. The
Arrangement also provided that the Develcon convertible notes payable
be converted into 5.9963 Develcon shares for each $1.00 principal
amount of notes payable and that interest accrued on the convertible
notes payable but not paid shall be forgiven. These shares were
converted into Vianet shares in the ratio of one share of the Company
for every 30.75 shares of Develcon. Additionally, certain other
creditors of Develcon agreed to either accept common stock of Vianet as
payment for amounts or portions of amounts owed to them or restructure
the repayment schedule.
F-11
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
3. Acquisition and Subsequent Disposition of Develcon Electronics, Ltd.
(Continued)
In exchange for restructuring the repayment schedule of its debt, a
lender of Develcon was granted warrants to purchase 150,000 shares of
Vianet stock at $6.00 per share. Since such debt had not been repaid by
June 30, 1999, these warrants were issued August 1, 1999, and are
exercisable through June 2002. The Arrangement became effective on May
17, 1999. Accordingly, the assets and liabilities have been
consolidated as of the date of acquisition and the results of
operations have been included from May 17, 1999, to September 30, 1999.
The former shareholders and creditors of Develcon hold 2,707,114 shares
of the 9,140,886 shares of common stock the Company has outstanding.
The acquisition was accounted by the purchase method of accounting.
Assets acquired and liabilities assumed have been recorded at their
estimated fair values. The excess of cost over the estimated fair value
of the net assets acquired was allocated to goodwill.
The purchase price of Develcon was determined by the number of shares
issued by the Company to effect the acquisition and the amount of loans
provided to Develcon. The total acquisition amounted to $7,034,000
including $6,015,000 for goodwill.
Unaudited pro forma consolidated results of operations as if the
acquisition had been made at the beginning of the nine months ended
September 30, 1999 is omitted due to the subsequent disposition of
Develcon described below.
Disposition:
On December 31, 1999, the Company completed the sale of Develcon, its
flexible and modular communication platform design and manufacturing
business segment, to an entity controlled by the President of Develcon,
Thorpe Bay Corporation (Thorpe Bay). Under the terms of the agreement
Thorpe Bay acquired the assets and liabilities of Develcon for
$2,500,000, thus acquiring Develcon's assets and liabilities excluding
$4,836,695 owed by Develcon to the Company. The $2,500,000 is payable
at the end of five years without interest and will be recorded at its
present value with interest imputed at 9%. The Company will be
contingently liable for bank debt of Develcon of CDN$1,500,000
(approximately US$1,000,000) and will issue 183,333 common shares and
warrants to purchase 400,000 common shares with an aggregate fair value
of $565,591 to Develcon's President. Separately, the Company entered
into a technology license agreement ("License Agreement") with Develcon
for royalty free future use of certain Develcon technology.
Consideration for the License Agreement will be the issuance by the
Company of warrants to purchase 650,000 common shares with a fair value
of $536,547.
F-12
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
3. Acquisition and Subsequent Disposition of Develcon Electronics, Ltd.
(Continued)
Disposition (Continued):
The balance sheet, statement of operations and statement of cash flows
as of and for the nine months ended September 30, 1999 have been
restated to reflect the discontinued operation. The extraordinary loss
on extinguishment of debt of $352,875, which was previously reported as
an extraordinary item, is included as part of the loss from
discontinued operations. The assets and liabilities of Develcon at
September 30, 1999 are as follows:
Assets:
Cash $ 23,364
Receivables 1,072,308
Inventories 2,588,997
Other Current Assets 229,022
Intangibles 5,654,075
Property and equipment 2,174,925
-----------
Total Assets 11,742,691
-----------
Liabilities:
Bank line of credit 340,135
Current portion of long-term debt 1,999,701
Notes payable 308,698
Accounts payable and accruals 3,310,752
Long-term debt 56,828
-----------
Total liabilities 6,016,114
-----------
Net assets of discontinued operations $ 5,726,577
===========
The Company expects to record a loss of approximately $1,500,000 from
operations and a loss of approximately $3,500,000 from the sale of
Develcon during the three months ended December 31, 1999.
F-13
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
4. Acquisition of Infinop Holdings, Inc.
On May 19, 1999, the Company entered into a letter of intent to acquire
100% of Infinop Holdings, Inc. ("Infinop") of Denton, Texas, a
privately held corporation, in exchange for common shares of Vianet.
The Company has advanced Infinop $724,000 in loans as at September 30,
1999. The acquisition, which will be accounted for as a purchase, was
completed on October 12, 1999, the outstanding loans were forgiven, and
1,494,454 common shares of the Company were issued to Infinop's
shareholders. Concurrent with the acquisition, Infinop was renamed
Vianet Labs, Inc. ("Vianet Labs"). In addition, Vianet issued options
to purchase an aggregate of 598,467 shares of its common stock upon
assumption of Infinop's Stock Option Plan.
Infinop develops advanced compression technologies for a wide range of
software and hardware applications. Infinop's patented compression
technology dramatically improves compression ratios, increases
transmission speeds and improves image quality.
5. Acquisition of PSI Communications, Inc.
On July 26, 1999, the Company entered into an agreement whereby it
would provide PSI Communications, Inc. (PSI) with $500,000 of interim
financing in exchange for an option to acquire PSI for consideration
consisting of 1,200,000 shares of the Company's common stock, discharge
of PSI's liability for the interim financing, repayment of certain
liabilities to PSI shareholders and employees, and additional payments
and issuance of stock based upon PSI's performance. If the Company does
not exercise the option it may elect (1) to receive a non-exclusive
indefinite license to utilize PSI's current and future technology,
subject to a royalty of five percent of revenues; (2) have the interim
financing remain as debt due from PSI in which case it shall be due on
June 30, 2000 with interest payable at 6% per annum commencing January
1, 2000. If unpaid at June 30, 2000, the Company may elect to convert
the debt to up to 10% of the common equity of PSI depending on the
amount unpaid.
The acquisition, which will be accounted for as a purchase, was
completed on December 30, 1999. The outstanding loans were forgiven,
2,500,000 common shares were issued to PSI's shareholders and $300,000
was paid in cash. Concurrent with the acquisition, PSI was renamed
Vianet Access, Inc., ("Vianet Access").
6. SPS Technology License
The Company purchased a license for the SPS technology from NewCom
Technologies, Inc. (the "Licensor") for $450,000. The license entitles
the Company to use certain intellectual property rights. This "right to
use" includes any patents associated with the SPS technology along with
the current preferred embodiment of the patent. Royalty payments of
2.5% of Net Cash Received, as defined in the license agreement, on
products manufactured and sold, licensed or services rendered by Vianet
during the term of the license are due to the licensor. The Company
may, at its option, pay a one-time royalty fee of $2.1 million at any
time during the term. If such one time payment is made, the license
shall become perpetual and no further royalties will be due under the
license.
The license provides the Company with all the source code and
documentation required to allow the Company to integrate the technology
into its products. The license provides for quarterly updates from
NewCom of the hardware/firmware for the initial five year term of the
agreement.
F-14
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
7. Series A Convertible Preferred Stock
The authorized Series A convertible preferred stock of the Company
consists of 1,000,000 shares, of which 250,000 shares were issued and
outstanding at December 31, 1998. Such shares were issued at $4 per
share. Of the issued and outstanding shares, 2,500 were fully paid at
December 31, 1998, the remaining subscription receivable outstanding,
$990,000, was paid subsequent to December 31, 1998. On March 23, 1999
the Series A preferred stock was converted into common stock at a rate
of four for one. As a result, the Series A preferred shareholders
received 1,000,000 shares of common stock of the Company.
8. Common Stock
On August 5, 1999, pursuant to a private placement offering, the
Company issued 100,000 shares of common stock for $550,000 and 55,000
three-year warrants exercisable at $6.60 per share. The placement agent
received $50,000 and 10,000 shares of common stock, with a fair value
of $38,750, in connection with the transaction.
In conjunction with a modification of the banking facilities with Royal
Bank Capital Corporation (RBCC), pertaining to Develcon, the Company
issued 120,000 shares of common stock, with a fair value of $352,875,
to RBCC and warrants to purchase additional 150,000 common shares,
exercisable at $6.00 per share.
For the nine months ended September 30, 1999, the Company issued
194,500 shares of common stock, with a fair value of $463,475, in
exchange for services rendered. Subsequent to September 30, 1999, the
Company issued 21,333 shares of common stock for legal services
rendered and 40,000 shares of common stock for services rendered in
connection with the acquisition of Infinop. The Company issued warrants
to purchase 3,067,350 shares of common stock at $0.01-$12.00 per share.
The warrants include 1,960,000 shares issued to a related entity and
warrants for 1,907,350 shares that were issued subsequent to September
30, 1999.
F-15
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
9. Related Party Transactions
Convertible Demand Notes Payable:
On March 23, 1999, convertible demand notes payable of $2,909,272 to
entities controlled by two officers and directors of the Company were
converted into 2,739,272 shares of common stock at a ratio of one share
for every $1 of principal amount. During the nine months ended
September 30, 1999, the Company repaid $200,000 and additional
convertible demand notes of $30,000 were issued.
Loans:
At September 30, 1999, loans payable to shareholders of the Company
were $241,517 and loans receivable from a related party were $201,084.
Such loans are non-interest bearing.
Credit Facility:
In July 1999, Vianet entered into a $3,000,000 credit facility (the
"Facility") with an entity controlled by the President and Chief
Executive Officer. At September 30, 1999, $1,960,000 was outstanding
under the facility. The Facility bears interest at 10% per annum and
monthly fees of $15,000. In addition, Vianet issued warrants for
300,000 shares of common stock exercisable at prices of $3.00 to $5.00
per share in consideration for the Facility. The Facility is secured by
all of Vianet's major assets, including the shares of Vianet Labs and
Vianet Access, and is repayable on March 31, 2000. Vianet currently
does not have the funds to repay the Facility and will not be able to
repay the Facility without raising additional capital. Vianet intends
to negotiate an extension to the Facility.
10. Income Taxes
The difference between the statutory Federal income tax rate and the
Company's effective tax rate for the period ended December 31, 1998 is
principally due to the Company incurring net operating losses for which
no tax benefit was recorded.
For Federal income tax purposes, the Company has unused net operating
loss carryforwards of approximately $416,500 expiring through year
2018. The availability of the net operating loss carryforwards to
offset income in the future years, if any, may be limited by the
Internal Revenue Code Section 382 as a result of certain ownership
changes. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at December 31, 1998
are as follows:
Deferred tax assets:
Net operating loss carryforward - current period $ 166,500
Unrealized foreign exchange loss 29,500
-----------
196,000
Less valuation allowance (196,000)
------------
Deferred tax asset $ -
============
F-16
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
10. Income Taxes (Continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the projected
future taxable income and tax planning strategies in making this
assessment. The valuation allowance was recorded due to the uncertainty
in the utilization of Federal net operating loss carryforwards.
11. Stock Incentive Plan
The Company adopted a Stock Incentive Plan for employees (the Plan).
The Plan permits the issuance of stock options to selected employees,
officers and directors of the Company. Options granted may be either
nonqualified or incentive stock options.
The Company has assumed options granted under Develcon's Option Plans
(Acquired Options). The Acquired Options were assumed by the Company
outside of its stock option plan, and they are administered as if
issued under their original plans. All of the Acquired Options have
been adjusted to effectuate the conversion under the terms of the
Arrangement between the Company and Develcon. The Acquired Options
generally become exercisable over a three-year period and generally
expire ten years from the date of grant. No additional options will be
granted under Develcon's plans.
The following table summarizes stock option activity for the period
March 20, 1998 (inception) to December 31, 1998 and the nine months
ended September 30, 1999:
<TABLE>
<CAPTION>
Number of Weighted
Shares Subject Average Exercise
Stock Option Activity to Options Price Per Share
-------------- -----------------
<S> <C> <C>
Granted-1998 440,000 $1.00
-----------
Outstanding, December 31, 1998 440,000 $1.00
Granted 470,000 6.40
Assumed from Develcon plans 61,951 10.21
Exercised (1,626) 3.20
-----------
Outstanding, September 30, 1999 970,325 $4.20
===========
</TABLE>
Subsequent to September 30, 1999, in connection with the Infinop
acquisition, the Company assumed options granted under Infinop's option
plan and also granted options for 200,000 shares of common stock to
employees exercisable at $1.50 - $2.375 per share under the Plan.
F-17
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and for the
Nine Months Ended September 30, 1999 and 1998 is Unaudited)
12. Commitments and Contingencies
Debt Agreements:
The Company is in default on certain debt agreements, including
nonpayment of principal and interest, and in violation of financial
covenants, which allow the lenders to demand repayment. As such, the
balances with respect to these debt agreements are included in current
maturities of long-term debt. During August 1999, the Company modified
its banking arrangement with RBCC which provided for the issuance of
common shares and warrants (see Note 3) in exchange for RBCC agreeing
not to exercise its option to demand immediate payment of the debt
because of violation of certain financial covenants, until June 30,
2000. The modified banking arrangement has substantially different
terms from the original debt instrument and as a result is recorded at
its fair value, with an extraordinary loss of US$352,875 recorded on
the extinguishment of the original debt instrument. The current banking
facilities provided by RBCC consist of a CDN$1,500,000 term loan. The
term loan is payable in three CDN$500,000 installments due on or before
December 31st of 2000, 2001 and 2002, respectively. Interest charged on
the Company's RBCC facilities is calculated at 8.5% per year.
Furthermore, all indebtedness of the Company under the RBCC facilities
is secured by Develcon's assets and a corporate guarantee executed by
the Company. The company is also in violation of its agreement with
respect to a note payable with a Canadian government entity
(CDN$344,087). On December 31, 1999 the Company sold Develcon as
described in Note 3. The Company continues to guarantee the term loan
from RBCC to Develcon in the amount of CDN$1,500,000, which is due and
payable in three CDN$500,000 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. RBCC is a shareholder and warrant
holder of the Company.
Consulting Agreements:
The Company entered into consulting agreements with several investor
relations firms. The agreements, as amended, resulted in the issuance
of 100,000 shares of common stock and 500,000 warrants to purchase
common stock at $3.00 to $4.58 per share.
13. Subsequent Events (unaudited)
Financing:
In December 1999, pursuant to a private placement offering, Vianet sold
an aggregate of 1,275,672 shares of common stock and 3,827,016 common
stock purchase warrants. In January 2000, Vianet completed an
additional closing of the private placement offering in which 984,014
shares of common stock and 2,952,042 common stock purchase warrants
were sold. The private placement offering, which was completed with
Aegis Capital Corp. (Aegis) as placement agent, resulted in the sale of
an aggregate of 33.875 units to accredited investors for net proceeds
to Vianet of approximately $2,908,000. 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 at $2.00, $2.50 and $3.00 per share, respectively. In
connection with the private placement, Aegis received 42,598 shares of
common stock and 1,031,114 common stock purchase warrants, which are
exercisable at $1.50 to $3.00 per share.
In February 2000, pursuant to a private placement offering Vianet sold
1,163,153 shares and 3,489,459 common stock purchase warrants. The
private placement offering which was completed with Donald & Co.
(Donald) as placement agent, resulted in the sale in an aggregate of
17.45 units to accredited investors for net proceeds to Vianet of
approximately $1,613,000. 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 at $2.00,
$2.50 and $3.00 per share, respectively. Donald received 465,260 common
stock purchase warrants, which are exercisable at $1.50 - $3.00 per
share.
Employment Agreements:
In connection with the PSI acquisition, the Company entered into two
year employment agreements with PSI's principal shareholders which
provides for aggregate annual compensation of $675,000.
F-18
<PAGE>
Auditors' Report to Shareholders
We have audited the consolidated balance sheets of Develcon Electronics
Ltd. as at August 31, 1998 and 1997 and the consolidated statements of
operations, deficit and changes in financial position for the years then
ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted
our audits in accordance with generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statements presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Develcon Electronics Ltd.
as at August 31, 1998 and 1997 and the results of its operations and the
changes in its financial position for the years then ended in accordance
with generally accepted accounting principles.
/s/KPMG LLP
KPMG LLP
Chartered Accountants
Saskatoon, Canada
January 25, 1999
F-19
<PAGE>
DEVELCON ELECTRONICS LTD.
CONSOLIDATED BALANCE SHEETS
August 31, 1998 and 1997
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
1998 1997
---- ----
Assets
Current Assets
<S> <C> <C>
Trade accounts receivable $3,346 $3,999
Prepaids and other receivables 486 417
Investment tax credits receivable 190 527
Inventory (note 4) 4,600 5,452
--------------- ---------------
Total current assets 8,622 10,395
--------------- ---------------
Property, Plant and Equipment (note 5) 4,182 4,697
--------------- ---------------
Investment, at cost ? 223
--------------- ---------------
Deferred Financing Costs 343 230
--------------- ---------------
$13,147 $15,545
--------------- ---------------
Liabilities and Shareholders' Equity (Deficiency)
Current Liabilities
Bank indebtedness, secured $830 $588
Interim financing, secured 2,952 ?
Accounts payable and accrued liabilities 4,167 4,201
Current portion of deferred revenue ? 100
Current portion of long-term debt 5,022 464
--------------- ---------------
Total current liabilities 12,971 5,353
--------------- ---------------
Deferred Revenue ? 599
Long-term Debt (note 6) 377 5,103
Shareholders' Equity (Deficiency)
Capital stock (note 7) 25,535 25,453
Other paid in capital (note 6) 950 950
Deficit (26,686) (21,913)
--------------- ---------------
(201) 4,490
--------------- ---------------
$13,147 $15,545
--------------- ---------------
</TABLE>
Going concern (note 2)
Commitments (note 13)
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
DEVELCON ELECTRONICS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended August 31, 1998 and 1997
(thousands of Canadian dollars except per share amounts)
1998 1997
---- ----
Sales $ 19,158 $ 18,907
Cost of sales 10,419 9,623
-------- --------
Gross margin 8,739 9,284
-------- --------
Expenses
Selling and administration 7,437 6,250
Research and development 3,472 3,393
-------- --------
10,909 9,643
-------- --------
(2,170) (359)
-------- --------
Depreciation and finance charges
Amortization and impairment of goodwill (note 9) ? 9,972
Depreciation and amortization 1,362 1,194
Interest on long-term debt 650 499
Other finance charges 591 436
-------- --------
2,603 12,101
-------- --------
Net loss $ (4,773) $(12,460)
-------- --------
Loss per share (note 11) $ (.11) $ (.28)
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
DEVELCON ELECTRONICS LTD.
CONSOLIDATED STATEMENTS OF DEFICIT
Years Ended August 31, 1998 and 1997
(thousands of Canadian dollars)
1998 1997
---- ----
Balance, beginning of year $(21,913) $(9,453)
Net loss (4,773) (12,460)
--------------- ---------------
Balance, end of year $(26,686) $(21,913)
--------------- ---------------
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
DEVELCON ELECTRONICS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years Ended August 31, 1998 and 1997
(thousands of Canadian dollars)
<TABLE>
<CAPTION>
1998 1997
---- ----
Operating Activities
<S> <C> <C>
Net loss $ (4,773) $(12,460)
Items not requiring an outlay of cash
Amortization and impairment in value of goodwill ? 9,972
Depreciation and amortization 1,362 1,194
Non-cash portion of convertible debenture interest 169 121
Non-cash portion of other finance charges 55 43
-------- --------
(3,187) (1,130)
-------- --------
Cash provided by (utilized by) operating working capital (note 16) 1,739 (995)
-------- --------
Cash utilized by operating activities (1,448) (2,125)
-------- --------
Financing Activities
Proceeds of interim financing 2,952 ?
Issues of long-term debt ? 4,064
Retirement of long-term debt (337) (421)
Reduction of deferred revenue (699) (183)
Issue of share capital 86 ?
Expenses related to issues (173) (377)
-------- --------
Cash provided by financing activities 1,829 3,083
-------- --------
Investing Activities
Disposal of investment 223 ?
Purchase of property, plant and equipment (846) (1,387)
Disposal of equipment ? 193
-------- --------
Cash utilized by investing activities (623) (1,194)
-------- --------
Decrease in cash position (242) (236)
Cash position, beginning of year (588) (352)
-------- --------
Cash position, end of year $ (830) $ (588)
-------- --------
</TABLE>
Cash position consists of bank indebtedness.
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
DEVELCON ELECTRONICS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended August 31, 1998 and 1997
(all amounts stated in Canadian dollars)
1. NATURE OF OPERATIONS
The Company designs, manufactures and markets a sophisticated range of
products, systems and services that are designed to provide efficient
and cost effective enterprise network solutions. The Company focuses on
delivering end-to-end networking solutions that seamlessly integrate a
broad range of business applications, diverse computing environments
and communication technologies. The Company has made a strategic
decision to function as a global enterprise, operating its core
business functions with an international perspective, developing
solutions for global markets and establishing sales and support offices
around the world.
2. GOING CONCERN
The Company has incurred significant operating losses over the past
four years. At August 31, 1998 the Company has a cash deficiency, is
unable to pay its suppliers within normal trade terms and has a
significant working capital deficiency. The Company's ability to pay
its obligations will be further restricted by its bank's requirement
that the existing line of credit be repaid by May 31, 1999. The Company
is in default of certain covenants, including non-payment of principal
and interest, on long-term debt which allows the lenders to demand
repayment of existing debt.
The Company is negotiating a transaction with another company which
will provide cash to the Company and would result in the conversion of
approximately $6.0 million of existing debt into equity of the other
company. The Company hopes to finalize these arrangements in the near
future to avoid a demand for repayment of its debt, restore normal
payment term relationships with its suppliers and remedy defaults under
debt agreements. The Company must obtain approval from the majority of
its shareholders and its lenders as a condition of this financing.
These financial statements have been prepared on the going concern
basis, which assumes the realization of assets and liquidation of
liabilities in the normal course of business. The application of the
going concern concept is dependent on the Company's ability to complete
the required financing and restore and maintain profitable operations.
A failure to continue as a going concern would then require that stated
amounts of assets and liabilities be reflected on a liquidation basis
which could differ significantly from the going concern basis.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada.
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. A summary of the significant accounting
policies adopted by the Company is set out below.
Measurement Uncertainty: The Company operates in a market which is
price competitive and subject to rapid technological advancement. The
Company assesses the net realizable value of its inventory and goodwill
assets based on current market assessments. Significant changes in the
market for the Company's products may result in an impairment in value
of these assets.
Consolidation: The consolidated financial statements include the
accounts of Develcon Electronics Ltd. ("Develcon") and its wholly-owned
subsidiaries, Develcon Electronics Inc. and EDA Instruments Inc.
("EDA"), after elimination of all material intercompany accounts and
transactions.
F-24
<PAGE>
Foreign Exchange: Monetary assets and liabilities of the wholly-owned
US subsidiary are translated to Canadian currency at the exchange rate
prevailing at year end. Non-monetary assets are translated to Canadian
currency at exchange rates in effect when they were acquired. Revenues
and expenses are translated at the approximate average rate of exchange
for the year, except that provisions for depreciation and amortization
are translated at the rates used to translate related assets. The
resulting gains or losses on translation are included in the
consolidated statement of operations.
Depreciation and Amortization: The Company depreciates its plant on a
straight-line basis over a 15-year period and furniture and equipment
on a straight-line basis over a 5-year period. Product support service
replacement parts are depreciated on a straight-line basis over the
estimated product life cycle.
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
estimated life of such goodwill. The net book value of goodwill would
be written down if the value of goodwill were permanently impaired. The
Company assesses impairment by determining whether the unamortized
goodwill balance can be recovered through undiscounted future operating
cash flows of the acquired operation over its remaining life.
Deferred Financing Costs: Deferred financing costs are the legal and
other professional and transaction costs associated with long-term debt
financing. These costs are being amortized over the life of the related
loans and charged to other finance charges.
Research and Development Costs: Research costs are expensed in the year
incurred. The Company expenses development costs as incurred unless the
Company believes the development costs meet generally accepted
accounting principles for deferral and amortization. In the opinion of
management, no development costs incurred to date meet all criteria for
deferral and amortization. Therefore, all development costs to date
have been expensed as incurred. Research and development grants, when
earned, and investment tax credits where there is a reasonable
assurance they will be realized, are offset against the applicable
costs incurred.
Deferred Revenue: EDA entered into an agreement with one of its
customers whereby monies were received in advance for future shipment
of goods. The revenue under this agreement is recognized upon shipment
of goods. This liability was discounted and recorded at fair value,
based on anticipated future product delivery dates, upon acquisition of
EDA. The amount of the discount is charged as a financing expense as
the product is delivered.
4. INVENTORY
Work-in-progress and finished goods are valued at the lower of cost or
estimated net realizable value. Raw materials are valued at the lower
of cost or replacement cost. Cost is determined on a first-in,
first-out basis and includes materials, labour and manufacturing
overhead where applicable.
1998 1997
---- ----
(thousands of
Canadian dollars)
Raw materials....................................... $1,005 $1,206
Work-in-progress.................................... 902 1,331
Finished goods...................................... 2,693 2,915
---------------------
$4,600 $5,452
5. PROPERTY, PLANT AND EQUIPMENT
1998 1997
---- ----
(thousands of
Canadian dollars)
Property........................................... $275 $275
Plant.............................................. 254 250
Leasehold improvements............................. 44 44
Equipment and furniture............................ 12,428 12,058
Product support service equipment.................. 2,294 1,630
Equipment under capital leases..................... 641 867
15,936 15,124
Less accumulated depreciation...................... 11,754 10,427
$4,182 $4,697
F-25
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---- ----
(thousands of
Canadian dollars)
<S> <C> <C>
Convertible debentures with an effective interest rate of 14% are due November 15, 2001 and are convertible $2,987 $2,817
at the option of the holders into 10,135,135 Common Shares at $.37 per share...............................
Convertible promissory note with interest at 8.5% per annum, calculated and payable monthly. The principal 1,500 1,500
amount is repayable on November 30, 1998, November 30, 1999, and November 30, 2000 in installments of
$150,000, $300,000 and $1,050,000, respectively............................................................
Government contribution toward eligible market development costs. Repayable in monthly installments of 448 431
$11,648. Interest is due on delinquent payments............................................................
Agreement for sale entered into with a shareholder with respect to the Saskatoon office. Payable in monthly 430 468
installments of $7,250 to February 1, 2000 and the balance of the principal amount on that date. Interest
rate is 10.5%..............................................................................................
Capital leases with respect to equipment. The leases have terms expiring up to May 1999. Monthly payments are 34 351
$4,302 with varying interest rates until November 1998 and then reduce as the leases expire................
-------------------
5,399 5,567
Less current portion......................................................................................... 5,022 464
-------------------
$377 $5,103
-------------------
</TABLE>
On November 15, 1996, the Company issued five-year convertible
debentures for proceeds of $3,750,000 to shareholders of the Company.
The debentures bear interest at 6%, are due November 15, 2001 and will
be convertible at the option of the holders into Common Shares at an
effective conversion price of $0.37 per Common Share, subject to
adjustment in certain circumstances. These debentures were recorded, on
a discounted basis, in the amount of $2,696,000 calculated using an
estimated fair value interest rate of 14%, the rate of interest that
would have been applicable to non-convertible debt at the date of
issue. Amortization of the debenture discount to August 31, 1998 was
$291,000 and $121,000 to August 31, 1997.
The amount attributable to the value of the conversion right on the
debentures in the amount of $1,054,000, net of issue costs of $104,000,
is reflected in shareholders' equity as "other paid in capital".
The debentures are secured by a general security interest on all assets
of the Company subordinate to the holder of the promissory note.
The promissory note, which bears interest at 8.5%, is secured by a
general security interest on all assets of the Company subject to a
$500,000 charge relating to the bank operating line of credit. The
principal amount of the promissory note is convertible into Common
Shares at $1.00 per share. The note holder is a shareholder of the
Company.
Estimates of principal payments required in each of the next two years
are:
(thousands of
Canadian
dollars)
1999......................................... $5,022
2000......................................... 377
------
$5,399
At August 31, 1998, the Company was in violation of certain covenants
with respect to the convertible debentures and promissory note
including unpaid interest in the amount of $440,000. Because a default
has occurred, lenders have the option to demand the entire balance
become immediately due and payable. As such the full amount of the
convertible debentures and promissory note have been included in the
current portion of long-term debt.
F-26
<PAGE>
7. CAPITAL STOCK
(a) Authorized
An unlimited number of Common Shares.
4,600,000 Series A 1% Preferred Shares. Each Series A Share
carries the right to one vote at meetings of shareholders.
955,500 Series B 10.5% Convertible Cumulative Preferred
Shares. Each Series B Share carries the right to one vote at
meetings of shareholders. The Series B Shares are convertible
on a one-for-one basis into 955,500 Common Shares.
At the annual meeting of shareholders on February 8, 1995, a
special resolution was passed reducing the stated capital of
the Company by $29,877,443.
(b) Issued
<TABLE>
<CAPTION>
Common Shares Number Thousands Number Thousands
of Shares of Dollars of Shares of Dollars
--------- ---------- --------- ----------
1998 1997
---- ----
<S> <C> <C> <C> <C>
Balance, beginning of year......................... 44,743,776 $25,453 44,743,776 $25,453
Issued during the year............................. 342,328 86 - -
Expenses related to issue.......................... - (4) - -
--------------------------------------------------------------
Balance, end of year............................... 45,086,104 $25,535 44,743,776 $25,453
Series A 1% Preferred Shares....................... - - - -
Series B 10.5% Preferred Shares.................... - - - -
</TABLE>
During the year ended August 31, 1998, interest payable on the
convertible promissory note was converted into 342,328 Common Shares at
$0.25 per share.
8. STOCK OPTIONS/WARRANTS
During 1986 the Company adopted a Key Executive Stock Option Plan
(KESOP). The plan provides for the granting of options to purchase
Common Shares at an exercise price equal to the fair market value of
the shares at the close of business on the business day immediately
preceding the date on which the option is granted. Options may not have
a term of more than ten years and may be granted by the Compensation
Committee of the Board of Directors to eligible employees at any time
in such numbers and at such times as the Committee may determine.
During 1987 the Board of Directors adopted the Directors' Stock Option
Plan (DSOP). The plan provides for the granting of options to purchase
Common Shares to be granted to each eligible board member at a price
equal to the market value of the Common Shares on the business day
immediately preceding the date on which the option is granted.
Directors who are employees or officers of Develcon or its subsidiaries
or who own more than 1% of the outstanding Common Shares of Develcon
are not eligible to receive options under this plan. Stock option
grants to directors are at the discretion of the Compensation Committee
of the Board of Directors and may not exceed 100,000 per director.
F-27
<PAGE>
A summary of stock option transactions follows:
Option Activity Shares Available Outstanding
for Grant Options
--------- -------
Balance August 31, 1996..................... 426,750 1,830,000
Authorized KESOP and DSOP................. 2,625,000 -
Granted KESOP and DSOP.................... (1,130,000) 1,130,000
Cancelled KESOP and DSOP.................. 501,900 (501,900)
Balance August 31, 1997..................... 2,423,650 2,458,100
Granted KESOP and DSOP.................... (1,045,000) 1,045,000
Cancelled KESOP and DSOP.................. 393,500 (393,500)
Balance August 31, 1998..................... 1,772,150 3,109,600
The Company has a total of 10,170,503 warrants for the purchase of one
Common Share per warrant outstanding as of August 31, 1998 at the
following prices per Common Share and expiry dates:
Number of Warrants Price Expiry Date
- ------------------ ----- -----------
2,306,451......................................... $0.62 November 20, 1998
3,614,052......................................... $1.43 February 22, 1999
1,000,000......................................... $0.25 December 2, 2002
1,000,000......................................... $0.25 December 12, 2002
2,250,000......................................... $0.25 April 30, 2003
9. GOODWILL
1998 1997
---- ----
(thousands of
Canadian dollars)
Goodwill, beginning of year......................... $- $9,972
Amortization........................................ - (1,050)
Impairment in value................................. - (8,922)
Goodwill, end of year............................... $- $-
The value of goodwill at August 31, 1997 was assessed based on the
expected undiscounted future operating cash flows from product lines
acquired through the EDA acquisition. The market for the Company's
products is highly competitive and is characterized by rapidly changing
technology, frequent new product introductions and evolving industry
standards. Due to the rapid changes in product lines and changes to the
operation of the Company, which have resulted in a merger of operations
and technology of Develcon and EDA, the future expected cash flows
which are distinguishable as being solely from product technology
acquired from EDA indicated impairment in the net realizable value of
goodwill at August 31, 1997.
10. INCOME TAXES
The potential income tax benefits associated with operating losses
incurred by the Company are not recognized in the accounts.
F-28
<PAGE>
As of August 31, 1998, the Company has unrecorded tax loss
carryforwards available to reduce future years' income tax payable,
which expire as follows:
Canada USA Total
------ --- -----
(thousands of Canadian dollars)
2001.................................... $- $1,041 $1,041
2002.................................... - 3,062 3,062
2003.................................... 139 3,097 3,236
2004.................................... 4,068 712 4,780
2005.................................... 1,391 - 1,391
2009.................................... - 189 189
2010.................................... - 877 877
2011.................................... - 1,030 1,030
2012.................................... - 1,452 1,452
Indefinitely............................ 11,572 - 11,572
------------------------------------
$17,170 $11,460 $28,630
-------------------------------------
Investment tax credits available for application against future income
taxes payable, but not recognized for accounting purposes, will expire
if not utilized by:
(thousands of
Canadian dollars)
1999............................................ $12
2000............................................ 29
2001............................................ 12
2002............................................ 287
2003............................................ 311
2004............................................ 376
2005............................................ 266
2006............................................ 525
2007............................................ 622
----------
$2,440
----------
11. LOSS PER SHARE
Loss per share amounts are calculated using the monthly average number of Common
Shares outstanding during the respective fiscal years less repurchased shares.
The weighted monthly average number of shares outstanding, after deducting
shares repurchased and held by the Company, was 44,865,270 for fiscal 1998 and
44,694,106 for fiscal 1997.
12. SEGMENT INFORMATION
The Company's activities represent one industry segment, the design and
manufacture of sophisticated electronic data communications equipment.
The Company operates in a worldwide marketplace. The Company's revenues
are from the following areas:
1998 1997
---- ----
(thousands of
Canadian dollars)
Canada....................................... $3,943 $3,215
USA.......................................... 7,926 8,087
Other........................................ 7,289 7,605
------------------------
$19,158 $18,907
------------------------
F-29
<PAGE>
For purposes of the following table, other export sales have been included in
the Canadian segment:
<TABLE>
<CAPTION>
Canada USA Total
and Other
(thousands of Canadian dollars)
Year ended August 31, 1998
<S> <C> <C> <C>
Segment revenue.............................................. $11,232 $7,926 $19,158
Segment net loss............................................. $(3,166) $(1,607) $(4,773)
Total identifiable assets.................................... $12,795 $352 $13,147
Year ended August 31, 1997
Segment revenue.............................................. $10,820 $8,087 $18,907
Segment net loss before amortization and impairment $(1,701) $(787) $(2,488)
of goodwill....................................................
Amortization and impairment of goodwill...................... $(9,972)
Net loss..................................................... $(12,460)
Total identifiable assets.................................... $14,905 $640 $15,545
</TABLE>
Transfers between segments are at cost plus an appropriate mark-up.
13. LEASE COMMITMENTS
The Company has long-term lease agreements for offices and equipment,
the longest of which expires in 2003. Future minimum lease payments
under these operating leases in each of the next five years are:
(thousands of
Canadian dollars)
1999.......................................... $603
2000.......................................... $524
2001.......................................... $499
2002.......................................... $283
2003.......................................... $5
14. PENSION PLAN
The Company has a defined contribution pension plan for the benefit of
its employee group. The Company's contribution to the plan amounted to
$108,003 in 1998 and $113,315 in 1997 with such contributions expensed
as incurred.
15. RELATED PARTY TRANSACTIONS
The Company has long-term debt owing to various shareholders as
disclosed in note 6.
16. CHANGE IN OPERATING WORKING CAPITAL
Cash provided by (utilized by) operating working capital is computed as
follows for the years ended August 31:
1998 1997
---- ----
(thousands of
Canadian dollars)
Trade accounts receivable............................. $653 $911
Prepaids and other receivables........................ (69) 44
Investment tax credits receivable..................... 337 (10)
Inventory............................................. 852 137
Accounts payable and accrued liabilities.............. (34) (2,077)
------------------------
$1,739 $(995)
------------------------
F-30
<PAGE>
17. FINANCIAL INSTRUMENTS
The Company has significant sales outside Canada, all of which are in
US dollars, so it is exposed to currency fluctuations. The Company has
not hedged its currency risk through the purchase of foreign exchange
contracts. However, the risk associated with foreign currency
fluctuations is mitigated to some extent by the purchase of a
significant portion of its raw materials and certain labour costs in US
dollars.
The fair value of the Company's financial assets and liabilities has
been determined as follows:
The carrying value of trade accounts receivable, other receivables,
investment tax credit receivable, bank indebtedness and accounts
payable and accrued liabilities approximate fair value due to their
short term nature.
Due to the current financial position of the Company, it is not
possible to approximate the fair value of the long-term debt.
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digit rather than four to identify a year. Date sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000. If
not addressed, the impact of the Year 2000 Issue on the Company's
products, operations and financial reporting may range from minor
errors to significant systems failure which could affect the Company's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the entity,
including those efforts of customers, suppliers, or other third
parties, will be fully resolved.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Infinop Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Infinop
Holdings, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, deficiency in shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Infinop Holdings,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the consolidated results
of their operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has sustained significant
operating losses, is unable to pay its creditors within normal trade terms and
has a significant working capital deficiency. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/EDWARD ISAACS & COMPANY LLP
New York, New York
December 18, 1999
F-32
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ -- $ 116,234
Accounts receivable 146,127 --
Prepaids and other current assets 4,407 --
----------- -----------
Total Current Assets 150,534 116,234
Property and Equipment 152,878 110,358
----------- -----------
$ 303,412 $ 226,592
=========== ===========
LIABILITIES AND DEFICIENCY IN SHAREHOLDERS' EQUITY
Current Liabilities:
Cash overdraft $ 19,374 $ --
Current portion of long-term debt 70,975 28,127
Accounts payable and accrued liabilities 876,772 901,605
Payable to Vianet Technologies, Inc. 350,000 --
Convertible debentures 750,000 --
Demand loans payable 50,000 50,000
----------- -----------
Total Current Liabilities 2,117,121 979,732
----------- -----------
Long-Term Debt 15,796 46,796
----------- -----------
Convertible Debentures - noncurrent 1,125,000 875,000
----------- -----------
Deficiency in Shareholders' Equity:
Preferred stock, $0.01 par value, 200,000 shares authorized;
none, issued or outstanding -- --
Common stock, $0.01 par value, 100,000,000 shares authorized;
6,025,000 and 5,925,000 shares, issued and outstanding 60,250 59,250
Additional paid-in capital 565,750 556,750
Accumulated deficit (3,580,505) (2,290,936)
----------- -----------
Total Deficiency in Shareholders' Equity (2,954,505) (1,674,936)
----------- -----------
$ 303,412 $ 226,592
=========== ===========
</TABLE>
See Independent Auditors' Report and notes to financial statements.
F-33
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
-------------------------------
Revenue:
Services $ 1,087,563 $ 223,279
-------------------------------
Costs and Expenses:
Cost of services 493,060 54,256
Research and development 1,135,817 946,567
Selling and marketing 178,737 -
General and administrative 324,127 402,182
Depreciation and amortization 94,851 129,861
Interest 150,540 23,794
-------------------------------
2,377,132 1,556,660
-------------------------------
Net Loss $ (1,289,569) $ (1,333,381)
===============================
See Independent Auditors' Report and notes to financial statements.
F-34
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF DEFICIENCY IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Total
Common Stock Additional Deficiency in
----------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at July 1, 1997 4,100,000 $ 41,000 $ - $ (957,555) $ (916,555)
Issuance of common stock 300,000 3,000 97,000 - 100,000
Conversion of debt 1,525,000 15,250 459,750 - 475,000
Net loss for year - - - (1,333,381) (1,333,381)
----------------------------------------------------------------------------------------
Balances at June 30, 1998 5,925,000 59,250 556,750 (2,290,936) (1,674,936)
Issuance of common stock 100,000 1,000 9,000 - 10,000
Net loss for year - - - (1,289,569) (1,289,569)
----------------------------------------------------------------------------------------
Balances at June 30, 1999 6,025,000 $ 60,250 $ 565,750 $ (3,580,505) $ (2,954,505)
========================================================================================
</TABLE>
See Independent Auditors' Report and notes to financial statements.
F-35
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Operating Activities:
<S> <C> <C>
Net loss $(1,289,569) $(1,333,381)
Adjustments to reconcile net loss to net cash used
In operating activities:
Depreciation and amortization 94,851 129,861
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Accounts receivable (146,127) 16,642
Prepaids and other current assets (4,407) 12,709
Accounts payable, accruals and other (14,833) 316
----------- -----------
Net Cash Used In Operating Activities (1,360,085) (1,173,853)
----------- -----------
Cash Used In Investing Activities:
Capital expenditures (137,371) (27,507)
----------- -----------
Financing Activities:
Cash overdraft 19,374 (6,709)
Principal payments of long-term debt (28,152) (190,697)
Loans from Vianet Technologies, Inc. 350,000 --
Proceeds from long-term debt 40,000 90,000
Proceeds from convertible debentures 1,000,000 1,325,000
Issuance of common stock -- 100,000
----------- -----------
Net Cash Provided By Financing Activities 1,381,222 1,317,594
----------- -----------
Net (Decrease) Increase In Cash (116,234) 116,234
Cash Beginning of Year 116,234 --
----------- -----------
Cash End of Year
$ -- $ 116,234
=========== ===========
Supplemental Disclosure of Cash Flow information:
Interest paid $ 60,498 $ 23,794
=========== ===========
Noncash Transactions:
Issuance of common stock for consulting services $ 10,000 --
=========== ===========
Conversion of notes payable into common stock $ -- $ 475,000
=========== ===========
</TABLE>
See Independent Auditors' Report and notes to financial statements
F-36
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
1. Organization and Business
Infinop Holdings, Inc. ("Infinop") was incorporated in the State of
Delaware, U.S. on November 26, 1997 initially to acquire Infinet Op,
Inc. ("Infinet") and Computer and Information Sciences, Inc. ("CIS"),
which were companies under common ownership and control. Infinet and
CIS develop advanced compression technologies for a wide range of
software and hardware applications. Infinet and CIS are considered to
be predecessor businesses of Infinop (collectively the "Company").
Merger with Infinet Op, Inc. and Computer and Information Sciences,
Inc.:
On November 26, 1997, Infinop entered into an agreement with Infinet
and CIS under the terms of which Infinop acquired, Infinet and CIS
through an exchange of shares (the "Acquisition"). Subject to the terms
and conditions of this agreement, Infinop issued to the shareholders of
Infinet and CIS, 4,100,000, shares of fully paid and nonassessable
shares of the Infinop's common stock, $.01 par value ("Common Stock")
per share in exchange for each share of Infinet and CIS outstanding
common stock. The acquisition has been accounted for in a manner
similar to a pooling of interests since the shareholders of Infinet and
CIS were related parties to the shareholders of Infinop. These
financial statements reflect the transactions of Infinet and CIS prior
to the formation of Infinop.
2. Going Concern
The Company has sustained significant operating losses, is unable to
pay its creditors within normal trade terms and has a significant
working capital deficiency. Additionally, the Company will continue to
incur operating losses and negative cash flows for the forseeable
future until it completes development of its technologies and can
generate significant revenues. On October 12, 1999, the Company merged
into Vianet Technologies, Inc. ("Vianet") (see Note 4). The Company is
dependent on Vianet's ability to obtain additional sources of financing
to fund its working capital requirements. There is no assurance that
Vianet will be able to continue to obtain adequate funding on
acceptable terms and there is no assurance that once obtained such
additional funding will result in the Company's profitable operation.
3. Significant Accounting Policies
Basis of Consolidation:
The consolidated financial statements include the accounts of Infinop
and its wholly-owned subsidiaries, Infinet and CIS. All significant
intercompany accounts and transactions have been eliminated.
Property and Equipment:
Property and equipment are stated at cost and depreciated over their
estimated useful lives, which range from two to seven years. Leasehold
improvements are amortized over the shorter of their useful lives or
the terms of applicable leases. Long-lived assets are reviewed for
impairment whenever the facts and circumstances indicate that the
carrying amount may not be recoverable.
F-37
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
3. Significant Accounting Policies (Continued)
License and Royalty Agreements:
The Company in the normal course of business has entered into several
license and royalty agreements which generally provide for the Company
to receive payments from customers to develop certain software.
Payments are recognized as revenue when associated services are
performed. The agreements also provide for the collection of royalties
in the event software development is successful, however, the
agreements do not contain provisions for minimum royalty payments.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include
management's determination of cost of services performed. Actual
results could differ from those estimates.
Stock Option Plan:
The Company accounted for stock options issued to employees in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25 and provide pro
forma net income disclosures for employee stock option grants as if the
fair value based method, as defined in SFAS No. 123, had been applied.
The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure required by SFAS No. 123.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No.107,
Disclosures About Fair Value of Financial Instruments, requires
disclosure of the fair value of certain financial instruments for which
it is practicable to estimate fair value. For purposes of the
disclosure requirements, the fair value of a financial instrument is
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation. Fair value of financial instruments classified as current
assets or liabilities (except Convertible Debentures) approximates
carrying value due to the short-term maturity of underlying financial
instruments. It was not practical to estimate the fair value of the
Company's Convertible Debentures because quoted market prices do no
exist and comparable securities were not available.
F-38
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
3. Significant Accounting Policies (Continued)
Income Taxes:
The Company accounts for income taxes under the asset and liability
method as required by SFAS No. 109, Accounting for Income Taxes. Under
this method, deferred tax assets and liabilities are determined based
on the differences between the financial reporting and income tax bases
of assets and liabilities and are measured using the enacted tax rates
and laws expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Research and Development:
Research and development costs are expensed as incurred.
Segment Reporting:
Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 superceded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS
No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
adoption of SFAS No. 131 did not effect the results of operations,
financial position, or the disclosure of segment information because
the Company operates only in one segment.
4. Acquisition by Vianet Technologies, Inc.
On May 19, 1999, the Company entered into a letter of intent to sell
100% of the Company's shares to Vianet Technologies, Inc. ("Vianet"),
in exchange for common shares of Vianet. As part of the agreement, the
Company received advances from Vianet aggregating $784,000 ($350,000
was advanced as at June 30, 1999, and the balance was advanced
subsequently). On October 12, 1999, pursuant to the Agreement and Plan
of Merger, Vianet Labs, Inc. ("Labs") a wholly-owned subsidiary of
Vianet, effected a tax-free reverse subsidiary merger of Labs into
Infinop, which resulted in Vianet owning all of the issued and
outstanding shares of Infinop and the shareholders of Infinop receiving
1,495,454 shares of Vianet in exchange for their Infinop shares. The
Agreement also provides for additional consideration based on future
royalties earned from two existing agreements, other post closing
adjustments and assumption of the Company's stock option plans.
F-39
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
5. Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consists of:
1999 1998
------------ ---------
<S> <C> <C>
Furniture and equipment $ 491,774 $ 379,706
Leasehold improvements 27,476 2,173
----------- -----------
519,250 381,879
Less: Accumulated depreciation 366,372 271,521
----------- -----------
$ 152,878 $ 110,358
=========== ===========
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of:
1999 1998
---- ----
Accounts payable $ 484,826 $ 347,300
Accrued compensation 222,762 234,823
Accrued litigation settlement - 250,000
Accrued interest 90,042 -
Other accruals 79,142 69,482
----------- -----------
$ 876,772 $ 901,605
=========== ===========
7. Long-Term Debt
Long-term debt consists of:
1999 1998
---- ----
12% note payable to bank in equal monthly
installments, of $2,999, inclusive of interest,
maturing November 2000 $ 46,796 $ 74,923
10% note payable to bank, originally due
October 1998, extended and repaid in
in August 1999 39,975 -
----------- -----------
86,771 74,923
Less: Current maturities 70,975 28,127
----------- -----------
$ 15,796 $ 46,796
=========== =============
</TABLE>
F-40
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
8. Convertible Debentures
Convertible debentures consist of notes, with interest ranging from 6%
to 8%, which are convertible into common stock at various conversion
rates through September 30, 2004. During the year ended June 30, 1998,
$475,000 of the convertible debentures were converted into 1,525,000
shares of common stock and $50,000 of the debentures were reclassified
to demand loans payable upon reaching the expiration of conversion.
Outstanding debentures at June 30, 1999 are convertible at a ratio of
one share for every $1 of principal and accrued interest. In October
1999, $750,000 of convertible debentures (plus accrued interest) were
converted into 792,364 shares of common stock.
9. Related Party Transactions
Compensation Payable:
Compensation payable to two shareholders of the Company of $103,521 is
included in accounts payable and accrued liabilities at June 30, 1999
and 1998, respectively.
Other:
Receivables from a shareholder and a related company of $85,144 are
currently in dispute. At June 30, 1999 and 1998, the Company has
provided a reserve for the entire amount.
10. Retirement Plan
The Company maintains a defined contribution plan (SARSEP) for its
employees under which eligible employees can contribute up to 15% of
earnings, as defined, up to specified IRS allowable limits. There were
no employer contributions under the plan.
11. Income Taxes
For Federal income tax purposes, Infinop has unused net operating loss
carryforwards of approximately $3,500,000 expiring through year 2019.
The availability of the net operating loss carryforwards to offset
income in the future years, if any, may be limited by Internal Revenue
Code Section 382 as a result of certain ownership changes.
F-41
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
11. Income Taxes (Continued)
The tax effects of the temporary differences that give rise to
significant portions of deferred tax assets at June 30, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ----------
Deferred Tax Assets:
<S> <C> <C>
Federal net operating loss carryforwards $ 1,200,000 $ 422,000
Accounts payable and accrued liabilities - 283,000
Depreciation - 12,000
Receivables - 49,000
------------ ------------
1,200,000 776,000
Less: Valuation allowance (1,200,000) (776,000)
------------ ------------
Deferred Tax Asset $ - $ -
============ ============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the projected
future taxable income and tax planning strategies in making this
assessment. The valuation allowance was recorded due to the uncertainty
in the utilization of the net operating loss carryforwards and other
deferred tax assets. During the year ended June 30, 1999, the valuation
allowance increased by $424,000.
There was no provision for income taxes for years ended June 30, 1999
and 1998 due to the offset of the increase in the valuation allowance
against the related tax benefit for each of the periods.
The income tax provision varied from the statutory rate as follows for
each of the years ended June 30:
1999 1998
--------- -------
U.S. statutory rate (34.0)% (34.0)%
Valuation allowance 34.0 34.0
------- --------
0.0% 0.0%
======= ========
12. Stock Option Plan
On January 1, 1998, the Company adopted the 1998 Stock Option Plan of
Infinop Holdings, Inc. (the Plan). The Plan permits the issuance of
stock options to purchase up to 2,025,000 shares of common stock to
selected employees, consultants and directors of the Company. Options
granted may be either nonqualified or incentive stock options. Unless
terminated by the board of directors, the Plan is scheduled to
terminate on December 31, 2007.
F-42
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
12. Stock Option Plan (Continued)
The following table summarizes stock option activity (including options
issued outside the plan) for the years ended June 30, 1999 and 1998:
Number of Weighted
Shares Subject Average Exercise
Stock Option Activity to Option Price Per Share
----------------- -----------------
Outstanding, July 1, 1997
Granted 2,140,787 $ .06
Forfeited (45,045) $ .05
---------
Outstanding, June 30, 1998 2,095,742 $ .06
Granted 677,500 $ .10
Exercised (a) (100,000) $ .10
---------
Outstanding, June 30, 1999 2,673,242 $ .07
=========
(a) Issuance of common stock upon exercise was for consulting services
provided.
The following table summarizes information about stock options
outstanding and exercisable at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------
Weighted Weighted
Average Average
Exercise Remaining Exercise
Price Number of Contractual Price
Per Share Shares Life (Years) Per Share
--------- ------ ------------ ---------
<S> <C> <C> <C> <C>
$ .05 1,795,742 8.5 $ .05
$ .10 877,500 8.5 .10
---------
2,673,242 8.5 $ .07
=========
</TABLE>
The Company did not recognize any compensation expense relative to the
options for the period ended June 30, 1999 and 1998 since the option
price was in excess of fair value at the date of grant. As the Company
was only recently formed, management has determined that the fair value
of the options granted was deminimus and, therefore, has not presented
the pro forma disclosures required by SFAS No. 123 as the effect on
reported net loss is immaterial.
Subsequent to June 30, 1999, the Company issued options to purchase
55,000 shares at an average price of $1.20 per share and 20,832 options
with an exercise price of $.10 per share were forfeited.
On October 12, 1999 Vianet, pursuant to its Agreement and Plan of Merger
(the "Agreement") with the Company (see Note 4), assumed options granted
under the Company's Plan. These options were assumed by Vianet outside
its stock option plan, and they will be administered as if under their
original plans. All of these options have been adjusted to effectuate
the conversion under the Agreement with the Company and Vianet.
F-43
<PAGE>
INFINOP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
13. Concentration of Credit Risk
At June 30, 1998, revenues from two major customers represented
approximately 61% of the Company's revenues. At June 30, 1999,
receivables from two major customers constitute 89% of total
receivables.
14. Commitments and Contingencies
Leases:
The Company leases office space along with equipment under operating
leases extending to September 2000. The leases provide for payment by
the Company of other expenses. The lease for office space which expires
June 30, 2000 has no renewal option.
Minimum rental payments under noncancellable leases are $50,050 and $513
in 2000 and 2001, respectively.
Rent expense for the years ended June 30, 1999 and 1998 was $19,967 and
$29,750, respectively.
Settlement of Lawsuit:
In June 1999, the Company settled a lawsuit arising from a potential
merger. The settlement of $250,000 and related legal costs of
approximately $400,000 had been fully accrued as of June 30, 1997.
F-44
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY (VIANET)
Pro Forma Financial Information
In October 1999, the Company acquired all of the outstanding capital
stock of Infinop Holdings, Inc. ("Infinop") for approximately $12.9 million
including acquisition costs. The acquisition was accounted for as a
purchase. A significant portion of the purchase price was identified in an
appraisal as intangible assets, including approximately $11.5 million of
acquired in-process research and development. The in-process research and
development was calculated taking into consideration the expected future
revenues over the life of the technology acquired, the estimated selling
and other costs to market the products and a net present value discount
rate determined to be appropriate to the associated risks of the business.
On December 31, 1999, the Company completed the sale of Develcon, its
flexible and modular communication platform design and manufacturing
business segment, to an entity controlled by the President of Develcon,
Thorpe Bay Corporation (Thorpe Bay). Under the terms of the agreement
Thorpe Bay acquired the assets and liabilities of Develcon for $2,500,000,
thus acquiring Develcon's assets and liabilities excluding $4,836,695 owed
by Develcon to the Company. The $2,500,000 is payable at the end of five
years without interest and will be recorded at its present value with
interest imputed at 9%. The Company will be contingently liable for bank
debt of Develcon of CDN$1,500,000 (approximately US$1,000,000) and will
issue 183,333 common shares and warrants to purchase 400,000 common shares
with an aggregate fair value of $565,591 to Develcon's President.
Separately, the Company entered into a technology license agreement
("License Agreement") with Develcon for royalty free future use of certain
Develcon technology. Consideration for the License Agreement will be the
issuance by the Company of warrants to purchase 650,000 common shares with
a fair value of $536,547.
The following pro forma financial statements have been prepared as if
the acquisition of Infinop Holdings, Inc. and Subsidiaries and the
disposition of Develcon Electronics Ltd. and Subsidiaries by the Company
had occurred on the first day of the periods presented in the pro forma
statements of operations and as of September 30, 1999 in the pro forma
balance sheet. The pro forma financial information is based on the
historical financial statements of the Company and gives effect to the
acquisition of Infinop under the purchase method of accounting. The pro
forma financial statements should be read in conjunction with the
historical financial statements of the Company and should not be considered
to be a representation of actual results that would have occurred if the
transaction had occurred on the dates indicated.
F-45
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY (VIANET)
ProForma-Consolidated Balance sheets- Unaudited
September 30, 1999
<TABLE>
<CAPTION>
VIANET Pro Forma Pro Forma INFINOP Pro Forma Pro Forma
Historical) Adjustments After (Historical) Adjustments After INFINOP
(1) DEVELCON DEVELCON (12) INFINOP Acquisition
Disposition Disposition Acquisition
(7)
------------- ------------- --------------------------------------- ---------------
<S> C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,617 $ - $ 15,617 $ - $ - $ 15,617
Accounts receivable, net of
allowances - - - 29,168 - 29,168
Prepaid and other current assets - - - 17,656 - 17,656
Receivable from related party 201,084 - 201,084 - - 201,084
------------- ------------- --------------------------------------- ---------------
Total Current Assets 216,701 - 216,701 46,824 - 263,525
------------- ------------- --------------------------------------- ---------------
Property and Equipment - - - 240,551 - 240,551
------------- ------------- --------------------------------------- ---------------
Net Assets from Discontinued
Operations 5,726,577 (5,726,577) - - - -
------------- ------------- --------------------------------------- ---------------
Other Assets:
Loans to Infinop and PSI
Communications 1,024,000 - 1,024,000 - (724,000) (8) 300,000
Receivable from Develcon - 1,624,828 (4) 1,624,828 - - 1,624,828
Intangibles 159,132 - 159,132 - 920,111 (9) 1,079,243
Technology licenses 360,000 536,547 (6) 896,547 - - 896,547
Other 6,500 - 6,500 - - 6,500
------------- ------------- --------------------------------------- ---------------
Total Other Assets 1,549,632 2,161,375 3,711,007 - 196,111 3,907,118
------------- ------------- --------------------------------------- ---------------
$ 7,492,910 $ (3,565,202) $3,927,708 $ 287,375 $ 196,111 $ 4,411,194
============= ============= ======================================= ===============
Current Liabilities:
Cash overdraft $ - $ - $ - $ 22,278 $ - $ 22,278
Current portion of long-term debt - - - 23,326 - 23,326
Note payable to Vianet
Technologies, Inc. - - - 724,000 (724,000) (8) -
Accounts payable and accruals 1,346,642 - 1,346,642 928,424 163,688 (10) 2,438,754
Convertible debentures - - - 750,000 (750,000) (13) -
Loans payable-related parties 2,201,517 - 2,201,517 50,000 2,251,517
------------- ------------- --------------------------------------- ---------------
Total Current Liabilities 3,548,159 - 3,548,159 2,498,028 (1,310,312) 4,735,875
------------- ------------- --------------------------------------- ---------------
Convertible Debentures
(noncurrent) - - - 1,125,000 - 1,125,000
------------- ------------- --------------------------------------- ---------------
Long-Term Debt - - - 15,796 - 15,796
------------- ------------- --------------------------------------- ---------------
Shareholders' Equity (Deficit):
Common shares 9,141 183(3)&(5) 9,324 60,250 (58,715)(8)&(11) 10,859
Subscription receivable (500) (500) - - (500)
Additional paid-in capital 8,561,956 1,414,455(2),(5)&(6) 9,976,411 565,750 9,027,663(8)&(11) 19,569,824
Accumulated deficit (4,624,773) (4,979,840) (14) (9,604,613) (3,977,449) (7,462,525) (15) (21,044,587)
Accumulated other comprehensive
loss (1,073) (1,073) - (1,073)
------------- ------------- --------------------------------------- ---------------
Total Shareholders' Equity
(Deficit) 3,944,751 (3,565,202) 379,549 (3,351,449) 1,506,423 (1,465,477)
------------- ------------- --------------------------------------- ---------------
$ 7,492,910 $ (3,565,202) $ 3,927,708 $ 287,375 196,111 $ 4,411,194
============= ============= ======================================= ===============
</TABLE>
F-46
<PAGE>
Notes to Pro Forma Balance Sheets:
---------------------------------------------------
(1) As restated for disposition of Develcon Electronics Ltd (DEVELCON).
(2) Sale of DEVELCON's net assets at December 31, 1999 (unaudited).
(3) The Company issued 399,999 warrants valued at $565,591 using the Black
Scholes Model. Common Stock of 133,333 was issued at $1.50 per share.
(4) The receivable from Develcon is secured, interest free, due in December
2004 and subordinate to approximately $3,000,000 of other Develcon
obligations. The $2.5 million receivable is recorded at its net present
value of $1,624,828 based upon a 9% discount rate.
(5) 50,000 shares issued to the purchaser at $2.25 per share as a condition of
the Share Purchase Agreement.
(6) Issuance of warrants in consideration for the Technology license valued at
$536,547 using the Black Scholes Model.
(7) As reported on the Company's form 8K filed on January 14, 2000.
(8) Consolidation entries: elimination of intercompany balances and share
capital.
(9) Additional goodwill of $920,111, as a result of the acquisition of Infinop
Holding, Inc.
(10) Additional accrual for $163,688 in legal and accounting costs associated
with the acquisition of Infinop Holdings, Inc.
(11) 1,495,454 Shares of common stock issued as part of merger consideration and
40,000 shares of common stock issued as part of the transaction costs.
(12) Infinop Holdings, Inc. and Subsidiaries (INFINOP) historical as of
September 30, 1999 (unaudited).
(13) Conversion of convertible debentures into common stock of INFINOP.
(14) Adjustment to accumulated deficit to resulting from the pro forma effect of
the disposition of DEVELCON.
(15) Adjustment to accumulated deficit to resulting from the pro forma effect of
the acquisition of INFINOP including a one-time non-recurring transaction
attributing $11,503,336 to in-process research and development.
Note: Allocation of Purchase Price
The following table outlines the allocation of Purchase Price for the
acquisition of INFINOP:
Tangible Assets $ 330,000
Intangible Assets (Goodwill) 1,079,000
In-Process Research and Development 11,503,000
------------
Subtotal 12,912,000
Liabilities Assumed (2,994,000)
------------
$ 9,918,000
============
F-47
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
(VIANET)
Pro Forma Statement of Operations
For the Nine Months Ended September 30,1999
Unaudited
<TABLE>
<CAPTION>
(1) Pro Forma Pro Forma (4) Pro Forma
VIANET Adjustments After INFINOP Adjustments Pro Forma
(Historical) DEVELCON DEVELCON (Historical) INFINOP
Disposition Disposition Acquisition
----------------------------- ----------------------------------------- -------------
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Net sales and services $ - $ - $ - $ 768,553 $ - $ 768,553
Interest and other income 109,930 109,675(2) 219,605 - - 219,605
------ -------- -------- ------------ -------- ----------
109,930 109,675 219,605 768,553 - 988,158
------ -------- -------- ------------ -------- ----------
Costs and Expenses:
Cost of sales and services - - - 407,154 - 407,154
General and administrative 1,779,711 - 1,779,711 290,336 - 2,070,047
Selling and marketing - - - 209,236 - 209,236
Research and development - - - 864,469 - 864,469
Product support - - - 66,168 - 66,168
Depreciation and amortization 100,914 57,487(3) 158,401 101,465 269,811(5) 529,677
Interest 53,846 - 53,846 142,195 - 196,041
------ -------- -------- ------------ -------- ----------
1,934,471 57,487 1,991,958 2,081,023 269,811 4,342,792
------ -------- -------- ------------ -------- ----------
Net Loss from Continuing
Operations $ (1,824,541) $ 52,188 $(1,772,353) $(1,312,470) $ (269,811) $(3,354,634)
============ ========== =========== =========== =========== ===========
Loss per share - basic and
diluted
Net Loss from Continuing
Operations $ (0.27) $ (0.35)
=========== =============
Weighted average number of
shares outstanding 6,646,293 9,480,919
=========== =============
</TABLE>
Notes to Pro Forma Statements of Operations
For the Nine Months Ended September 30, 1999:
(1) As restated for disposition of Develcon Electronics Ltd (DEVELCON).
(2) Interest income on the receivable from DEVELCON.
(3) Amortization of technology license.
(4) Infinop Holdings, Inc. and Subsidiaries (INFINOP) historical (unaudited).
(5) Amortization of goodwill as a result of acquiring INFINOP.
F-48
<PAGE>
VIANET TECHNOLOGIES, INC. AND SUBSIDIARY
(VIANET)
Pro Forma Statements of Operations
For the Year Ended December 31, 1998
Unaudited
<TABLE>
<CAPTION>
(1) Pro Forma Pro Forma (5) Pro Forma
VIANET Adjustments After INFINOP Adjustments Pro Forma
(Historical) DEVELCON DEVELCON (Historical) INFINOP
Disposition Disposition Acquisition
--------------- ---------------- ---------------------------- --------------- ----------------
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Services $ - $ - $ - $ 916,733 $ - $ 916,733
Interest income 66,341 115,769 (2) 182,110 - - 182,110
--------------- ---------------- ---------------------------- --------------- ----------------
66,341 115,769 182,110 916,733 - 1,098,843
--------------- ---------------- ---------------------------- --------------- ----------------
Costs and Expenses:
Cost of services - - - 424,199 - 424,199
Selling, general and
administrative 557,276 - 557,276 556,095 - 1,113,371
Research and development - - - 969,597 - 969,597
Depreciation and
amortization - 60,681 (3) 60,681 70,103 284,800 (4) 415,584
Interest and other 922 - 922 95,838 - 96,760
--------------- ---------------- ---------------------------- --------------- ----------------
558,198 60,681 618,879 2,115,832 284,800 3,019,511
--------------- ---------------- ---------------------------- --------------- ----------------
Net Loss $ (491,857) $ 55,088 $ (436,769) $ (1,199,099) $ (284,800) $ (1,920,668)
=============== ================ ============================ =============== ================
Loss per share - basic and
diluted $ (0.35) $ (0.26)
========== ==========
Weighted average number of
shares outstanding 1,400,000 7,392,884
=========== ==========
</TABLE>
Notes to Pro Forma Statements of Operations
Year Ended December 31, 1998:
(1) Statement of Operations as reported in the 8KA filed previously.
(2) Interest income on the receivable from Develcon Electronics Ltd.
(3) Amortization of technology license.
(4) Amortization of goodwill as a result of acquiring INFINOP.
(5) Infinop Holdings, Inc. and Subsidiaries (INFINOP) historical (unaudited).
F-49
<PAGE>
This page is intentionally left blank
II-8
<PAGE>
================================================================================
Prospective investors may rely only on the information contained in
this prospectus. We have not authorized any dealer, salesperson or any other
person to provide prospective investors with information or representations
different from that contained in this prospectus. Prospective investors should
not rely on any unauthorized information. This prospectus is not an offer to
sell any security other than the common stock and common stock purchase warrants
offered by this prospectus, nor does this prospectus offer to buy or sell any
securities in any jurisdiction where it is unlawful. The information in this
prospectus is current as of the date of this prospectus, regardless of the time
of delivery of this prospectus or any sale of these securities.
TABLE OF CONTENTS
Page
Prospectus Summary......................................
Risk Factors............................................
Use of Proceeds.........................................
Dilution ...............................................
Dividend Policy ......................................
Capitalization..........................................
Market for Securities...................................
Selected Financial Information..........................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............................
History of the Company..................................
Business................................................
Management..............................................
Principal Stockholders..................................
Selling Stockholders....................................
Plan of Distribution....................................
Certain Transactions....................................
Description of Securities...............................
Shares Eligible for Future Sale.........................
Underwriting............................................
Legal Matters...........................................
Experts.................................................
Index to Financial Statements........................... F-1
Until _________, 2000 (25 days after date of this prospectus), all
dealers that buy, sell or trade these securities, whether or not participating
in this offering may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
VIANET
T E C H N O L O G I E S, I N C.
5,720,500
Shares of Common Stock
and
14,630,776 shares of
Common Stock Issuable
Upon Exercise of
Common Stock Purchase Warrants
------------------------------
PROSPECTUS
------------------------------
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Subsection 1 of Section 78.7302 of Chapter 78 of the Nevada General
Corporation Law ("NGCL") provides that a corporation may indemnify any person
who was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (except in an action brought by or on behalf of
the corporation) if that person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by that person in connection with
such action, suit or proceeding, if that person acted in good faith and in a
manner which that person reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, alone, does not
create a presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in, or not opposed to, the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, the person had reasonable cause to believe his action was unlawful.
Subsection 2 of Section 78.7502 of the NGCL provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit brought
by or on behalf of the corporation to procure a judgment in its favor because
the person acted in any of the capacities set forth above, against expenses,
including amounts paid in settlement and attorneys' fees, actually and
reasonably incurred by that person in connection with the defense or settlement
of such action or suit, if the person acted in accordance with the standard set
forth above, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom to be liable to
the corporation or for amounts paid in settlement to the corporation unless and
only to the extent that the court in which such action or suit was brought or
other court of competent jurisdiction determines that, in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Section 78.751 of the NGCL provides that unless indemnification is
ordered by a court, the determination to provide indemnification must be made by
the stockholders, by a majority vote of a quorum of the board of directors who
were not parties to the action, suit or proceeding, or in specified
circumstances by independent legal counsel in a written opinion. In addition,
the articles of incorporation, bylaws or an agreement made by the corporation
may provide for the payment of the expenses of a director or officer of the
expenses of defending an action as incurred upon receipt of an undertaking to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that the person is not entitled to indemnification. Section 78.751
of the NGCL further provides that, to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsection (1) and (2), or in the
defense of any claim, issue or matter therein, that person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
that person in connection therewith; that indemnification provided for by
Section 78.751 of the NGCL shall not be deemed exclusive of any other rights to
which the indemnified party may be entitled and that the scope of
indemnification shall continue as to directors, officers, employees or agents
who have ceased to hold such positions, and to their heirs, executors and
administrators.
<PAGE>
Finally, Section 78.752 of the NGCL provides that a corporation may
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or not
the corporation would have the authority to indemnify him against such
liabilities and expenses.
The Registrant's bylaws provide for indemnification of officer,
directors and others to the fullest extent permitted by the laws of the State of
Nevada.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities offered hereby.
SEC registration fee...................................... 19,576.48
Printing and engraving....................................
Accountants' fees and expenses............................
Legal fees................................................
Transfer agent's and warrant agent's fees and expenses....
Blue Sky fees and expenses................................
Miscellaneous.............................................
-------------
Total.................................
Item 26. Recent Sales of Unregistered Securities
Except as set forth below, there were no sales of unregistered securities by
Vianet during the past three (3) years:
Securities Issued For Cash Consideration
In August 1999, Vianet issued an aggregate of 110,000 shares of common
stock and warrants to purchase 55,000 shares at an exercise price of $6.60, for
an aggregate consideration of $550,000.
From December 1999 to February 2000, Vianet completed four closings of
a private placement offering, with Aegis Capital, Inc. as placement agent, in
which it sold an aggregate of 34.5 units for gross proceeds to Vianet of
approximately $3,450,000. The units consisted of an aggregate of (1) 2,302,250
shares of common stock, and (2) 2,302,250 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
closings, Aegis Capital received a placement fee equal to 10% of the aggregate
purchase price of the securities sold by it, plus a non-accountable expense
allowance of $50,000, and a warrant, granted by Vianet for $1.00 consideration,
to purchase a number of units equal to 10% of the units sold in the offering at
an exercise price equal to the offering price of the units sold. Additionally,
upon the first closing of the offering, Vianet entered into a two year
consulting agreement pursuant to which Aegis Capital was paid a fee of $60,000.
In February 2000, Vianet completed three closings of a private
placement offering in which it sold an aggregate of 17.5 units for gross
proceeds to Vianet of approximately $1,750,000. The units consisted of an
aggregate of (1) 1,163,153 shares of common stock, and (2) 1,163,153 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 closings, Aegis Capital received warrants and Donald & Co.
received warrants and a fee. In connection with such closings, Donald & Co.
received a placement fee equal to 10% of the aggregate purchase price of the
securities sold by it and a warrant, granted by Vianet for $1.00 consideration,
to purchase a number of units equal to 10% of the units sold in the offering at
an exercise price equal to the offering price of the units sold.
<PAGE>
Securities Issued For Services
In 1999, Vianet issued an aggregate of 254,500 shares of common stock
in consideration of services rendered to the company. In addition, Vianet issued
warrants to purchase an aggregate of 1,260,000 shares of common stock at
exercise prices ranging from $1.10 to $4.58.
In 1999, Vianet issued options under its employee stock option plan to
purchase an aggregate of 760,000 shares of common stock at exercise prices
ranging from $1.00 to $2.375. In addition, Vianet issued options outside the
employee stock option plan to purchase an aggregate of 350,000 shares of common
stock at an exercise price of $8.25.
In January 2000, Vianet issued warrants to purchase an aggregate of
1,200,000 shares of common stock at exercise prices ranging from $3.00 to
$12.00.
Securities Issued in Exchange For Other Securities
In addition, in 1999, Vianet issued shares of common stock and warrants
to purchase shares of common stock in connection with various mergers and
acquisitions which it completed, as follows:
o In March 1999, the company acquired all of the issued and outstanding
shares of Vianet Technologies, Inc, a Delaware corporation, in exchange
for the issuance of an aggregate of 5,139,272 shares of common stock;
o In May 1999, Vianet acquired all of the issued and outstanding shares
of common Stock of Develcon Electronics, Ltd. in exchange for the
issuance of shares of common stock. Subsequent to the completion of the
acquisition, Vianet settled certain accounts payable by issuing
additional shares of common stock to the creditors. As a result, the
total number of shares issued in connection with the Develcon
acquisition was 2,707,114;
o In October 1999, Vianet acquired of all of the issued and outstanding
stock of Infinop Holdings, Inc. in exchange for the issuance of
1,495,454 shares of common stock and options to acquire 598,467 shares
of common stock at exercise prices ranging from$.01 to $.26. In
addition, Vianet has agreed to issue an additional 177,316 shares of
common stock upon conversion of $1,125,000 principal amount outstanding
debentures;
o In December 1999, Vianet acquired of all of the issued and outstanding
stock of PSI, Inc. in exchange for the issuance of 2,500,000 shares of
common stock; and
o In December 1999, Vianet completed the sale of Develcon for $2,500,000.
In connection with such transaction, Vianet issued 183,333 common
shares and five year warrants to purchase 400,000 shares of common
stock at $2.00-$3.00 per share to Develcon's President. In addition,
Vianet and Develcon entered into a Royalty Free Non-exclusive
Technology License Agreement in consideration of Vianet issuing
warrants to purchase (a) 500,000 shares of common stock at an exercise
price of $2.00 per share: (b) 50,000 shares of common stock at $5.00
per share: (c) 50,000 shares of common stock at $6.00 per share and (d)
50,000 shares of common stock at $7.00 per share.
Each of the foregoing transactions was exempt from registration under
the Act, under either Section 3(10), or Section 4(2) and Rule 506 of Regulation
D, of the Act as not involving a public offering. The recipients of the
securities issued under Section 4(2) and Rule 506 of Regulation D of the Act
represented that such securities were being acquired for investment and not with
a view to the distribution thereof. In addition, restrictive legends were placed
on the certificates evidencing the securities issued under Section 4(2) and Rule
506 of Regulation D of the Act.
<PAGE>
Item 27. Exhibits
2.1 Merger Agreement, dated December 30, 1999, between Vianet and PSI
Communications, Inc.1
2.2 Merger Agreement, dated August 31, 1999, between Vianet and Infinop
Holdings, Inc.2
2.3 Amended and Restated Arrangement Agreement, dated April 5, 1999,
between Vianet and Develcon Electronic Ltd.3
2.4 Disposition of Develcon4
2.5 Merger Agreement, dated March 16, 1999, between Vianet and Radar
Resources, Inc.5
3.1 Articles of Incorporation 7
3.2 By-laws 7
4.1 Form of common stock certificate 7
5.1 Opinion of Sichenzia, Ross & Friedman LLP*
10.1 Stock Option Plan 7
16.1 Letter from KPMG6
21.1 List of Subsidiaries
23.1 Consent of Edward Isaacs & Company LLP, the Independent Auditors of
Vianet Technologies, Inc.
23.2 Consent of Edward Isaacs & Company LLP, the Independent Auditors of
Infinop Holdings, Inc.
23.3 Consent of KPMG LLP, the Independent Auditors of Develcon Electronics,
Ltd.
23.4 Consent of Sichenzia, Ross & Friedman LLP (included in Exhibit 5.1)*
27.1 Financial Data Schedule
- ---------------------
* To be filed by amendment
1 Incorporated by reference to the Form 8-K filed by Vianet with the SEC
on January 7, 2000 under SEC file No. 033-55254-19.
2 Incorporated by reference to the Form 8-K/A filed by Vianet with the
SEC on October 27, 1999 under SEC file No. 033-55254-19.
3 Incorporated by reference to the Form 8-K filed by Vianet with the SEC
on June 1, 1999 under SEC file No. 033-55254-19.
4 Incorporated by reference to the Form 8-K filed by Vianet with the SEC
on March 16, 1999 under SEC file No. 033-55254-19.
5 Incorporated by reference to the Form 10-QSB filed by Vianet with the
SEC on August 20, 1999 under SEC file No. 033-55254-19.
6 Incorporated by reference to the Form 8-K/A filed by Vianet with the
SEC on July 15, 1999 under SEC file No. 033-55254-19.
7 Incorporated by reference to the Form 10 filed by Vianet after the SEC
on January 26, 2000 under SEC file No. 000-29177
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during
any period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post- effective amendment thereof) which, individually,
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
((S)230.424(b) of this Chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement of any material change to such information in the
Registration Statement.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
(4) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) That, insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(6) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or Rule 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Company certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form S-1 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the State of New
York on February 11, 2000.
VIANET TECHNOLOGIES, INC.
By: /s/ Peter Leighton
------------------------------------
Peter Leighton,
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Jeremy Posner
and Peter Leighton, or either of them, his true and lawful attorney-in-fact and
agent, acting alone, with full powers of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, any Amendments thereto and any Registration Statement of the same
offering which is effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, granting unto said
attorney-in-fact and agent, each acting alone, full powers and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intends and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney-in-fact
and agent, acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ Jeremy Posner Chairman, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Jeremy Posner
/s/ Peter Leighton President and Chief Executive Officer February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Peter Leighton
/s/ Bruce Arnstein Chief Operating Officer, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Bruce Arnstein
/s/ Vincent Santivasci Chief Financial Officer, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Vincent Santivasci
/s/ Robert H. Bailey Director, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Robert H. Bailey
/s/ Darrell J. Elliot Director, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
Darrell J. Elliot
/s/ F. Paul Whitlock Director, February 11, 2000
- ------------------------------------ Vianet Technologies, Inc.
F. Paul Whitlock
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Vianet Technologies,
Inc. on Form S-1 of our report dated July 26, 1999 with respect to the
consolidated balance sheet of Vianet Technologies, Inc. as of December 31, 1998
and the related consolidated statements of operations, deficiency in
shareholders' equity and cash flows for the period from March 20, 1998
(inception) to December 31, 1998, appearing in the Prospectus, which is part of
the registration statement.
/s/ EDWARD ISAACS & COMPANY, LLP
New York, New York
February 11, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Vianet Technologies,
Inc. on Form S-1 of our report dated December 18, 1999, with respect to the
consolidated balance sheets of Infinop Holdings, Inc. as of June 30, 1999 and
1998 and the related consolidated statements of operations, deficiency in
shareholders' equity and cash flows for each of the years ended June 30, 1999
and 1998 appearing in the Prospectus, which is part of the registration
statement.
/s/ EDWARD ISAACS & COMPANY, LLP
New York, New York
February 11, 2000
<PAGE>
EXHIBIT 23.3
BOARD OF DIRECTORS
VIANET TECHNOLOGIES INC.
We consent to the inclusion of our report dated January 25, 1999, with respect
to the consolidated balance sheets of Develcon Electronics Ltd. as of August 31,
1998 and 1997 and the related consolidated statements of operations, deficit and
changes in financial position for each of the years ended August 31, 1998 and
1997 which report appears in the Registration Statement Form S-1 of Vianet
Technologies Inc. dated February 11, 2000.
/s/ KPMG LLP
- --------------------------
Saskatoon, Canada
February 11, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> MAR-20-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 14 16
<SECURITIES> 669 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 683 217
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,683 7,493
<CURRENT-LIABILITIES> 3,162 3,548
<BONDS> 0 0
0 0
1,000 0
<COMMON> 1 9
<OTHER-SE> (1,480) 3,935
<TOTAL-LIABILITY-AND-EQUITY> 2,683 7,493
<SALES> 0 0
<TOTAL-REVENUES> 0 110
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 558 1,881
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1 54
<INCOME-PRETAX> (492) (1,825)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (492) (1,825)
<DISCONTINUED> 0 (2,308)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (492) (4,133)
<EPS-BASIC> (0.35) (0.62)
<EPS-DILUTED> (0.35) (0.62)
</TABLE>
